<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 1, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM S-1
Registration Statement Under the Securities Act of 1933
------------------------------------
SCHOOL SPECIALTY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5112 39-0971239
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
See "Table of Additional Registrants" on the following page for information
relating to subsidiaries of
School Specialty, Inc. that will guarantee payments owed on the debt securities
registered hereunder.
------------------------------------
1000 NORTH BLUEMOUND DRIVE, APPLETON, WISCONSIN 54914, (920) 734-2756
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
DANIEL P. SPALDING
CHIEF EXECUTIVE OFFICER
SCHOOL SPECIALTY, INC.
1000 NORTH BLUEMOUND DRIVE
APPLETON, WISCONSIN 54914
(920) 734-2756
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------------
Copies to:
<TABLE>
<S> <C>
SCOTT A. MOEHRKE, ESQ. DUNCAN MCCURRACH, ESQ.
GODFREY & KAHN, S.C. SULLIVAN & CROMWELL
780 NORTH WATER STREET 125 BROAD STREET
MILWAUKEE, WISCONSIN 53202 NEW YORK, NY 10004
</TABLE>
------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED SHARE OR UNIT PRICE FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per share...... 3,450,000(1) $22.0625(2) $76,115,625 $21,160.14
- ---------------------------------------------------------------------------------------------------------------------------------
Senior Subordinated Notes.................... $100,000,000 100%(3) $100,000,000 $27,800.00
- ---------------------------------------------------------------------------------------------------------------------------------
Subsidiary Guarantees of Senior Subordinated
Notes...................................... N/A N/A N/A N/A(4)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 450,000 shares of Common Stock subject to sale pursuant to the
Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act based on the average high and
low sale prices of the Common Stock as reported on the Nasdaq National
Market on February 22, 1999.
(3) Estimated solely for purposes of calculating the registration fee.
(4) Pursuant to Rule 457(n) of the Securities Act, no separate fee is payable
for the Subsidiary Guarantees.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF ADDITIONAL REGISTRANTS
UNDER REGISTRATION STATEMENT ON FORM S-1
The following subsidiaries of School Specialty, Inc. are co-registrants
under this Registration Statement for the purpose of providing guarantees of
payment on debt securities registered hereunder:
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF INCORPORATION IRS EMPLOYER
SUBSIDIARY OR ORGANIZATION IDENTIFICATION NUMBER
- ---------- ----------------------------- ---------------------
<S> <C> <C>
Re-Print LLC.................................. Delaware 39-0971239
Sax Arts and Crafts, Inc...................... Delaware 39-1500254
Childcraft Education Corp..................... New York 13-5619818
Bird-in-Hand Woodworks, Inc................... New Jersey 22-2618811
</TABLE>
<PAGE> 3
EXPLANATORY NOTE
This Registration Statement contains two Prospectuses, one for an equity
offering and one for a concurrent debt offering. With the exception of the Pro
Forma Financial Statements, the financial statement pages for both Prospectuses
are identical and are included in this Registration Statement only as part of
the equity Prospectus. The Pro Forma Financial Statements, which are different
in each Prospectus, are included in both Prospectuses.
<PAGE> 4
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to Completion. Dated , 1999.
3,000,000 Shares
SCHOOL SPECIALTY, INC.
LOGO Common Stock
------------------------------
The Common Stock is quoted on the Nasdaq National Market under the symbol
"SCHS." The last reported sale price for the Common Stock on , 1999
was $ per share.
See "Risk Factors" on page 11 to read about certain factors you should
consider before buying shares of the Common Stock.
------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED ON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to School Specialty.............. $ $
</TABLE>
The underwriters may, under certain circumstances, purchase up to an
additional 450,000 shares from School Specialty at the initial public offering
price less the underwriting discount.
------------------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
PIPER JAFFRAY INC.
------------------------------
Prospectus dated , 1999.
<PAGE> 5
[MAP SHOWING GEOGRAPHIC COVERAGE AND PENETRATION
AND PICTURES OF BRANDS AND PRODUCTS]
Childcraft Education Corp.(R) is a trademark of Childcraft Education Corp.
School Specialty(R) and Education Access(R) are trademarks of School Specialty.
Gresswell is a common law trademark of School Specialty. All other trademarks,
service marks and trade names referred to in this Prospectus are the property of
their respective owners.
2
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements and pro forma financial statements
appearing elsewhere in this Prospectus. Unless the context requires otherwise,
all references to "School Specialty," "we" or "our" refers to School Specialty,
Inc. and its subsidiaries. Our fiscal year ends on the last Saturday in April in
each year. In this Prospectus, we refer to fiscal years by reference to the
calendar year in which they end (e.g., the fiscal year ended April 25, 1998 is
referred to as "fiscal 1998"). Unless otherwise indicated, the information
contained in this Prospectus assumes no exercise of the underwriters'
over-allotment option.
SCHOOL SPECIALTY
OVERVIEW
We are the largest marketer of non-textbook educational supplies and
furniture to schools for pre-kindergarten through twelfth grade. We offer more
than 60,000 items through an innovative two-pronged marketing approach that
targets both school administrators and individual teachers. Our broad product
range enables us to provide our customers with one source for virtually all of
their non-textbook school supplies and furniture needs.
We have grown significantly in recent years through both acquisitions and
internal growth. In order to expand our geographic presence and product range,
we have acquired 18 companies since May 1996. In August 1998, we purchased
Beckley-Cardy, our largest traditional and specialty school supply competitor.
After giving pro forma effect to the acquisitions that we made during the
period, our revenues for the twelve months ended January 23, 1999 were $607.3
million and our operating earnings before interest, income taxes, depreciation,
amortization and non-recurring acquisition and restructuring costs ("Adjusted
EBITDA") were $51.2 million. These results represent compound annual increases
of 48.9% in revenues and 67.7% in Adjusted EBITDA compared to our historical
results for the year ended December 31, 1994.
Our "top down" marketing approach targets school administrators at the
state, regional and local levels using our 250 sales representatives and our
School Specialty and Beckley-Cardy general supply and furniture catalogs. Our
"bottom up" approach seeks to reach individual teachers and curriculum
specialists primarily through the mailing of our ClassroomDirect.com general
supply catalog (previously known as Re-Print) and our seven different specialty
direct catalogs. During 1998, we mailed over 10.2 million catalogs to more than
three million teachers and curriculum specialists. Approximately 100 employees
assist in the sale, marketing and merchandising of our specialty direct
products. We are also exploring various ways in which we can use the Internet to
market and sell our products. As the first stage of our Internet initiative, we
recently opened a fully integrated e-commerce website under the name
"ClassroomDirect.com" which offers over 13,000 items for sale. The second stage
of our Internet initiative, which we expect to launch in May 1999, is an
education portal in the form of an education mall which will offer our products
for sale and also provide a community forum and content aimed at educators.
3
<PAGE> 7
We sell general school supplies, such as classroom and art supplies,
instructional materials, furniture and equipment. We also sell supplies and
furniture for specialized educational disciplines, including the following:
<TABLE>
<CAPTION>
BRAND PRODUCTS
----- --------
<S> <C>
Childcraft............................. Early childhood
Sax Arts and Crafts.................... Art supplies
Frey Scientific........................ Science
Sportime............................... Physical education
Education Access....................... Educational software
Brodhead Garrett....................... Industrial arts
Gresswell.............................. Library
Hammond & Stephens..................... School forms
</TABLE>
School Specialty was incorporated as a wholly owned subsidiary by U.S.
Office Products in Delaware in February 1998 to hold its Educational Supplies
and Products Division. On June 9, 1998, U.S. Office Products distributed all of
the shares of School Specialty to its shareholders. At the same time as this
distribution, School Specialty sold 2,375,000 shares of Common Stock in an
initial public offering and a concurrent offering to several of its officers and
directors. Our principal executive offices are located at 1000 North Bluemound
Drive, Appleton, Wisconsin 54914. Our telephone number is (920) 734-2756.
INDUSTRY TRENDS
The National School Supply Equipment Association estimates that annual
sales of non-textbook educational supplies and equipment to the school supply
market are approximately $6.1 billion. Of this amount, over $3.6 billion is sold
through institutional channels and the remaining $2.5 billion is sold through
retail channels. We estimate that there are over 3,400 marketers of non-textbook
school supplies and equipment, the majority of which are family or employee
owned businesses that operate in a single geographic region and have annual
revenues under $20 million. We believe the increasing demand for single source
suppliers, prompt order fulfillment and competitive prices, and the related need
for suppliers to invest in automated inventory and electronic ordering systems,
is accelerating the trend toward consolidation in our industry. As the largest
company in our industry with annual revenues which we believe are three times
greater than the next largest industry competitor, we are well positioned to
capitalize on this consolidation. Even as the industry leader, our market share
of the $6.1 billion non-textbook school supply and equipment market is less than
10%, creating substantial growth opportunities.
The demand for school supplies is driven primarily by the level of the
student population and, to a lesser extent, expenditures per student. Student
population is largely a function of demographics, while expenditures per student
are also affected by government budgets and the prevailing political and social
attitudes towards education. The U.S. Department of Education estimates that
kindergarten through twelfth grade student enrollment in public and private
schools reached a record level of 52.7 million students in 1998 and projects
that it will continue to grow to 54.5 million by the year 2006. The U.S.
Department of Education also projects that expenditures per student in public
elementary and secondary schools will continue to rise through the year 2006. We
believe that the current political and social environment is favorable for
education spending.
KEY STRENGTHS
We attribute our strong competitive position to the following key
strengths:
-- LEADING MARKET POSITION. We believe our annual revenues are three
times greater than those of our next largest industry competitor and
that our large size and brand recognition have resulted in
significant buying power, economies of scale and customer loyalty.
4
<PAGE> 8
-- BROAD PRODUCT LINE. With over 60,000 items ranging from classroom
supplies and furniture to playground equipment, we provide customers
with one source for virtually all of their non-textbook school supply
and furniture needs.
-- INNOVATIVE TWO-PRONGED MARKETING APPROACH. By marketing our products
both to school administrators and to individual teachers and
curriculum specialists, we believe we market to all of the
prospective purchasers in the school system in an efficient and
profitable manner.
-- STABLE INDUSTRY. Because the demand for educational supplies is
primarily driven by demographics and government spending, we believe
that our industry is less exposed to economic cycles than many
others.
-- ABILITY TO COMPLETE AND INTEGRATE ACQUISITIONS. We have successfully
completed the acquisition of 23 companies since 1991, including 18
since May 1996. We believe that we can rapidly improve the revenues
and gross and operating margins of the businesses we acquire by
eliminating redundant expenses, leveraging overhead costs, increasing
our purchasing power and cross merchandising their specialty products
to our general supply customers (which we sometimes refer to as our
"traditional" customers).
-- USE OF TECHNOLOGY. We believe that our use of information technology
systems allows us to turn inventory more quickly than our
competitors, offer customers more convenient and cost effective ways
of ordering products and more precisely focus our sales and marketing
campaigns.
-- EXPERIENCED AND INCENTIVISED MANAGEMENT. Our management team
provides depth and continuity of experience. Management's interests
are aligned with those of our stockholders. Management currently owns
approximately % of our shares of Common Stock on a fully-diluted
basis and purchased % of the currently outstanding shares at the
same time as our initial public offering in June 1998.
GROWTH STRATEGY
We use the following strategies to grow and enhance our position as the
leading marketer of non-textbook educational supplies and furniture:
-- AGGRESSIVELY PURSUE ACQUISITIONS. We believe that there are many
attractive acquisition opportunities in our highly fragmented
industry. As a public company, we have greater access to capital for
acquisitions than many of our competitors. We will continue to pursue
opportunities that enhance our geographic presence or which
complement our specialty direct product offerings.
-- INCREASE SALES OF SPECIALTY AND PROPRIETARY PRODUCTS. We believe we
can increase our margins by selling more specialty direct products
and products for which we are the only supplier. We believe that
specialty direct products accounted for approximately 42% of our
revenues on a pro forma basis for the twelve months ended January 23,
1999, compared to approximately 20% on an historical basis for the
year ended December 31, 1994.
-- EXPAND EXISTING TRADITIONAL BUSINESS. We believe that we can also
increase the revenues of our traditional business by adding sales
representatives in geographic markets in which we are
underrepresented and by cross merchandising our specialty products to
our traditional customers.
-- IMPROVE PROFITABILITY. We improved our operating margin (as measured
by our Adjusted EBITDA divided by our revenues) from 5.2% in 1994 on
an historical basis to 8.4% on a pro forma basis for the twelve
months ended January 23, 1999. We believe that we can further improve
our operating margins by eliminating redundant expenses of acquired
businesses, leveraging our overhead costs, increasing our purchasing
power and improving the efficiency of our warehousing and
distribution.
5
<PAGE> 9
-- PURSUE INTERNET INITIATIVE. Because more schools and teachers are
connecting to the Internet, we intend to aggressively pursue sales
opportunities through this rapidly growing channel. By establishing
an early presence on the Internet, we believe we can gain a
significant competitive advantage and valuable brand recognition. Our
goal is to become the leading marketer of school supplies and
furniture over the Internet. This may also permit us to expand our
customer base over time to include individuals and other
non-traditional customers.
THE NOTE OFFERING
Concurrently with the offering of Common Stock made by this Prospectus, we
are offering $100 million principal amount of % Senior Subordinated Notes
due , 2009. We expect to receive net proceeds of approximately $97.1
million from the Note offering, which we will combine with the net proceeds from
the Common Stock offering and use as described below. The Note offering is being
made by means of a separate prospectus and this Prospectus does not constitute
an offer to sell or the solicitation of an offer to buy the Notes. The
consummation of the offering of the Common Stock made hereby is not conditioned
on the completion of our Note offering and we cannot assure you that the Note
offering will be completed.
THE COMMON STOCK OFFERING
<TABLE>
<S> <C>
Common Stock offered by School
Specialty.......................... 3,000,000 shares
Common Stock to be outstanding after
the offering....................... 17,578,925 shares(1)
Use of proceeds...................... To repay a portion of the
indebtedness outstanding under our
Senior Credit Facility which was
incurred in connection with three
recent acquisitions. After such
repayment, we may reborrow under the
Senior Credit Facility for general
corporate purposes including working
capital, and for acquisitions.
Nasdaq National Market symbol........ SCHS
</TABLE>
- ---------------
(1) Based on the number of shares outstanding as of February 1, 1999. Excludes
2,319,313 shares of Common Stock issuable upon exercise of outstanding
options granted under our 1998 Stock Incentive Plan.
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following tables present certain historical and pro forma financial
data as of and for the periods indicated. This information should be read
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations," our consolidated financial statements and related notes
and our pro forma combined financial statements and related notes, included
elsewhere in this Prospectus.
6
<PAGE> 10
SUMMARY HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<TABLE>
<CAPTION>
HISTORICAL(1)
-----------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED FOUR
DECEMBER 31, MONTHS FISCAL YEAR ENDED NINE MONTHS ENDED TWELVE MONTHS
------------------- ENDED --------------------- ------------------------- ENDED
APRIL 30, APRIL 26, APRIL 25, JANUARY 24, JANUARY 23, JANUARY 23,
1994(2) 1995(2) 1996(2) 1997(2) 1998(2) 1998(2) 1999 1999(3)
-------- -------- --------- --------- --------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.................. $119,510 $150,482 $28,616 $191,746 $310,455 $247,880 $424,332 $486,907
Cost of revenues.......... 81,774 98,233 18,591 126,862 202,870 164,105 281,436 320,201
-------- -------- ------- -------- -------- -------- -------- --------
Gross profit.............. $ 37,736 $ 52,249 $10,025 $ 64,884 $107,585 $ 83,775 $142,896 $166,706
Selling, general and
administrative
expenses................. 33,257 47,393 11,917 53,177 87,846 63,395 108,005 132,456
Non-recurring acquisition
costs.................... -- -- 1,122 1,792 -- -- -- --
Restructuring costs....... -- 2,532 -- 194 3,491 -- 5,274 8,765
-------- -------- ------- -------- -------- -------- -------- --------
Operating income (loss)... $ 4,479 $ 2,324 $(3,014) $ 9,721 $ 16,248 $ 20,380 $ 29,617 $ 25,485
Interest expense.......... 3,007 5,536 1,461 4,197 5,505 4,100 8,942 10,347
Interest income........... -- -- (6) -- (132) (109) (114) (137)
Other (income) expense.... (86) (18) 67 (196) 156 441 -- (285)
-------- -------- ------- -------- -------- -------- -------- --------
Income (loss) before
provision for (benefit
from) income taxes....... $ 1,558 $ (3,194) $(4,536) $ 5,720 $ 10,719 $ 15,948 $ 20,789 $ 15,560
Provision for (benefit
from) income taxes(4).... 218 173 139 (2,412) 5,480 7,113 10,094 8,461
-------- -------- ------- -------- -------- -------- -------- --------
Net income (loss)......... $ 1,340 $ (3,367) $(4,675) $ 8,132 $ 5,239 $ 8,835 $ 10,695 $ 7,099
======== ======== ======= ======== ======== ======== ======== ========
Net income (loss) per
share:
Basic.................... $ 0.26 $ (0.51) $ (0.54) $ 0.81 $ 0.40 $ 0.69 $ 0.73 $ 0.48
Diluted.................. 0.26 (0.50) (0.53) 0.80 0.39 0.68 0.73 0.48
Weighted average shares
outstanding:
Basic.................... 5,062 6,562 8,611 10,003 13,284 12,751 14,625 14,714
Diluted.................. 5,078 6,669 8,789 10,196 13,547 13,020 14,665 14,744
STATEMENT OF CASH FLOWS
DATA:
Net cash provided by (used
in) operating
activities............... $ (268) $ 4,828 $(1,178) $ 918 $ 3,724 $ 15,392 $ 29,100 $ 17,432
Net cash used in investing
activities............... (2,856) (6,092) (828) (16,742) (99,742) (96,537) (98,837) (102,042)
Net cash provided by
financing activities..... 3,202 1,156 2,011 15,778 96,018 81,145 69,737 84,610
-------- -------- ------- -------- -------- -------- -------- --------
Net increase (decrease) in
cash and cash
equivalents.............. $ 78 $ (108) $ 5 $ (46) $ -- $ -- $ -- $ --
======== ======== ======= ======== ======== ======== ======== ========
OTHER DATA:
EBITDA (6)................ $ 6,210 $ 5,085 $(2,407) $ 12,023 $ 20,653 $ 23,321 $ 36,224 $ 33,556
Adjusted EBITDA(6)........ 6,210 7,617 (1,285) 14,009 24,144 23,321 41,498 42,321
Depreciation and
amortization expense..... 1,645 2,743 674 2,106 4,561 3,382 6,607 7,786
Capital expenditures...... 630 881 120 7,216 4,423 4,095 3,978 4,306
SELECTED RATIOS:
Ratio of total debt to
Adjusted EBITDA.......... 5.2x 5.2x (31.8)x 4.3x 3.5x 3.4x 4.2x 4.1x
Ratio of Adjusted EBITDA
to interest expense...... 2.1x 1.4x (0.9)x 3.3x 4.4x 5.7x 4.6x 4.1x
Ratio of earnings to fixed
charges(7)............... 1.4x 0.5x -- 2.2x 2.6x 4.2x 3.0x 2.3x
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- APRIL 30, APRIL 26, APRIL 25, JANUARY 23,
1994 1995 1996 1997 1998 1999
------ ------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)..................... $3,512 $(1,052) $(3,663) $14,491 $47,791 $90,826
Total assets.................................. 44,267 54,040 54,573 87,685 223,729 378,513
Long-term debt................................ 11,675 15,294 15,031 33,792 63,014 162,199
Total debt.................................... 32,276 39,783 40,918 60,746 83,302 172,513
Stockholders' (deficit) equity................ 1,827 (620) (4,267) 16,329 106,466 159,067
</TABLE>
7
<PAGE> 11
SUMMARY PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED FOR
PRO FORMA(8) COMMON STOCK OFFERING(8)
----------------------------------------------------- ---------------------------------------
TWELVE
FISCAL YEAR NINE MONTHS ENDED MONTHS FISCAL YEAR NINE MONTHS ENDED
ENDED ------------------------- ENDED ENDED -------------------------
APRIL 25, JANUARY 24, JANUARY 23, JANUARY 23, APRIL 25, JANUARY 24, JANUARY 23,
1998(2) 1998(2) 1999 1999(3) 1998(2) 1998(2) 1999
--------- ----------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Revenues................ $598,025 $496,941 $506,180 $607,264 $598,025 $496,941 $506,180
Cost of revenues........ 390,327 327,174 330,786 393,939 390,327 327,174 330,786
-------- -------- -------- -------- -------- -------- --------
Gross profit............ $207,698 $169,767 $175,394 $213,325 $207,698 $169,767 $175,394
Selling, general and
administrative
expenses............... 175,507 135,598 133,046 172,955 175,507 135,598 133,046
Restructuring costs..... 4,689 1,198 5,401 8,892 4,689 1,198 5,401
-------- -------- -------- -------- -------- -------- --------
Operating income........ $ 27,502 $ 32,971 $ 36,947 $ 31,478 $ 27,502 $ 32,971 $ 36,947
Interest expense........ 17,000 13,500 13,500 17,000 12,026 9,770 9,770
Other expense........... 193 536 420 77 193 536 420
-------- -------- -------- -------- -------- -------- --------
Income before provision
for income taxes....... $ 10,309 $ 18,935 $ 23,027 $ 14,401 $ 15,283 $ 22,665 $ 26,757
Provision for income
taxes.................. 5,979 10,982 11,283 6,280 7,969 12,474 12,775
-------- -------- -------- -------- -------- -------- --------
Net income.............. $ 4,330 $ 7,953 $ 11,744 $ 8,121 $ 7,314 $ 10,191 $ 13,982
======== ======== ======== ======== ======== ======== ========
Net income per share(5):
Basic.................. $ 0.28 $ 0.53 $ 0.78 $ 0.52 $ 0.39 $ 0.56 $ 0.78
Diluted................ 0.27 0.52 0.78 0.52 0.39 0.55 0.77
Weighted average shares
outstanding(5):
Basic.................. 15,659 15,126 15,025 15,608 18,659 18,126 18,025
Diluted................ 15,922 15,395 15,065 15,638 18,922 18,395 18,065
OTHER DATA:
EBITDA(6)............... $ 38,386 $ 40,943 $ 44,889 $ 42,332 $ 38,386 $ 40,943 $ 44,889
Adjusted EBITDA(6)...... 43,075 42,141 50,290 51,224 43,075 42,141 50,290
Depreciation and
amortization expense... 11,077 8,508 8,362 10,931 11,077 8,508 8,362
SELECTED RATIOS:
Ratio of total debt to
Adjusted EBITDA........ 4.5x 4.6x 3.9x 3.8x 3.1x 3.2x 2.7x
Ratio of Adjusted EBITDA
to interest expense.... 2.5x 3.1x 3.7x 3.0x 3.6x 4.3x 5.1x
Ratio of earnings to
fixed charges(7)....... 1.5x 2.2x 2.5x 1.7x 2.1x 3.0x 3.3x
<CAPTION>
PRO FORMA AS ADJUSTED FOR PRO FORMA AS ADJUSTED
COMMON STOCK OFFERING(8) FOR COMMON STOCK AND NOTE OFFERINGS(8)
------------------------- -----------------------------------------------------
TWELVE TWELVE
MONTHS FISCAL YEAR NINE MONTHS ENDED MONTHS
ENDED ENDED ------------------------- ENDED
JANUARY 23, APRIL 25, JANUARY 24, JANUARY 23, JANUARY 23,
1999(3) 1998(2) 1998(2) 1999 1999(3)
----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Revenues................ $607,264 $598,025 $496,941 $506,180 $607,264
Cost of revenues........ 393,939 390,327 327,174 330,786 393,939
-------- -------- -------- -------- --------
Gross profit............ $213,325 $207,698 $169,767 $175,394 $213,325
Selling, general and
administrative
expenses............... 172,955 175,507 135,598 133,046 172,955
Restructuring costs..... 8,892 4,689 1,198 5,401 8,892
-------- -------- -------- -------- --------
Operating income........ $ 31,478 $ 27,502 $ 32,971 $ 36,947 $ 31,478
Interest expense........ 12,026 13,512 10,885 10,885 13,512
Other expense........... 77 193 536 420 77
-------- -------- -------- -------- --------
Income before provision
for income taxes....... $ 19,375 $ 13,797 $ 21,550 $ 25,642 $ 17,889
Provision for income
taxes.................. 8,270 7,376 12,028 12,329 7,677
-------- -------- -------- -------- --------
Net income.............. $ 11,105 $ 6,421 $ 9,522 $ 13,313 $ 10,212
======== ======== ======== ======== ========
Net income per share(5):
Basic.................. $ 0.60 $ 0.34 $ 0.53 $ 0.74 $ 0.55
Diluted................ 0.60 0.34 0.52 0.74 0.55
Weighted average shares
outstanding(5):
Basic.................. 18,608 18,659 18,126 18,025 18,608
Diluted................ 18,638 18,922 18,395 18,065 18,638
OTHER DATA:
EBITDA(6)............... $ 42,332 $ 38,386 $ 40,943 $ 44,889 $ 42,332
Adjusted EBITDA(6)...... 51,224 43,075 42,141 50,290 51,224
Depreciation and
amortization expense... 10,931 11,077 8,508 8,362 10,931
SELECTED RATIOS:
Ratio of total debt to
Adjusted EBITDA........ 2.6x 3.2x 3.2x 2.7x 2.7x
Ratio of Adjusted EBITDA
to interest expense.... 4.3x 3.2x 3.9x 4.6x 3.8x
Ratio of earnings to
fixed charges(7)....... 2.4x 1.9x 2.7x 3.0x 2.1x
</TABLE>
<TABLE>
<CAPTION>
JANUARY 23, 1999(9)
---------------------------------------------------------
PRO FORMA AS ADJUSTED PRO FORMA AS ADJUSTED
FOR COMMON STOCK FOR COMMON STOCK AND
PRO FORMA OFFERING NOTE OFFERINGS
--------- --------------------- ---------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 99,339 $109,653 $109,653
Total assets................................................ 403,920 403,920 406,870
Long-term debt.............................................. 185,268 133,412 136,362
Total debt.................................................. 195,582 133,412 136,362
Stockholders' equity........................................ 159,067 221,237 221,237
</TABLE>
8
<PAGE> 12
- ---------------
(1) The historical financial information of School Specialty, Inc., a Wisconsin
corporation, and The Re-Print Corp., both of which were acquired by U.S.
Office Products in business combinations accounted for under the
pooling-of-interests method in May 1996 and July 1996, respectively, have
been combined on a historical cost basis in accordance with generally
accepted accounting principles ("GAAP") to present this financial data as
if the two companies had always been members of the same operating group.
All business acquisitions since July 1996 have been accounted for under the
purchase method. The financial information of the businesses acquired in
business combinations accounted for under the purchase method is included
from the dates of their respective acquisitions.
(2) Certain reclassifications have been made to the historical and pro forma
financial data for the fiscal years ended December 31, 1994 and 1995, the
four months ended April 30, 1996, the fiscal years ended April 26, 1997 and
April 25, 1998 and the nine months ended January 24, 1998 to conform with
the fiscal 1999 presentation. These reclassifications had no effect on net
income or net income per share.
(3) The results for the historical and pro forma twelve months ended January 23,
1999 have been calculated based upon the historical and pro forma results,
respectively, for the fiscal year ended April 25, 1998 less the historical
and pro forma results, respectively, for the nine months ended January 24,
1998 plus the historical and pro forma results, respectively, for the nine
months ended January 23, 1999.
(4) Results for the fiscal year ended April 26, 1997 include a benefit from
income taxes of $2.4 million primarily arising from the reversal of a $5.3
million valuation allowance in the quarter ended April 26, 1997. The
valuation allowance had been established in 1995 to offset the tax benefit
from net operating loss carryforwards included in our 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 our being
acquired by U.S. Office Products, because it was deemed "more likely than
not," based on improved results, that such tax benefit would be realized.
(5) For calculation of the pro forma and pro forma as adjusted weighted average
shares outstanding, see Note (k) and Note (l), respectively, of Notes to
Pro Forma Combined Financial Statements included herein.
(6) EBITDA represents operating earnings before interest, income taxes,
depreciation and amortization. Adjusted EBITDA is EBITDA plus non-recurring
acquisition costs and restructuring costs. EBITDA and Adjusted EBITDA are
provided because they are measures commonly used by analysts and investors
to determine a company's ability to incur and service its debt. EBITDA and
Adjusted EBITDA are not measurements of performance under GAAP and should
not be considered as alternatives to net income or income from operations
or as measures of operating performance or cash flow data prepared in
accordance with GAAP or as measures of liquidity. EBITDA and Adjusted
EBITDA, as calculated by School Specialty, are not necessarily comparable
with similarly titled measures of other companies.
(7) The ratio of earnings to fixed charges is computed by dividing fixed charges
into income (loss) before provision for (benefit from) income taxes and
fixed charges. Fixed charges represent interest expense, whether expensed
or capitalized, amortization of debt expenses and the estimated interest
component of rent expense. On a historical basis, as a result of the loss
incurred during the four months ended April 30, 1996, we were unable to
fully cover fixed charges by $4,536.
(8) The pro forma financial data give effect, as applicable, to all acquisitions
completed through February 9, 1999, the spin-off and the refinancing of all
amounts payable to U.S. Office Products in connection with the spin-off,
the June 1998 initial public offering and concurrent offering to certain
officers and directors and the Common Stock and Note offerings, as if all
such transactions had occurred at the beginning of the periods presented.
The pro forma statement of income data are not necessarily indicative of
the operating results that would have been
9
<PAGE> 13
achieved had these events actually then occurred and should not be
construed as representative of future operating results.
(9) The pro forma balance sheet data give effect to the purchase acquisition of
Sportime, the only acquisition completed subsequent to January 23, 1999, as
if it had occurred on January 23, 1999. This pro forma balance sheet data
is then adjusted, as indicated, to reflect the Common Stock and Note
offerings as if they had occurred on January 23, 1999. The pro forma
balance sheet data and the adjustments to that data are not necessarily
indicative of the financial position that would have been achieved had
these events actually then occurred and should not be construed as
representative of future financial position.
10
<PAGE> 14
RISK FACTORS
You should carefully consider the following risk factors and the other
information in this Prospectus before deciding to purchase shares of our Common
Stock.
WE HAVE A POTENTIAL TAX LIABILITY FROM SPIN-OFFS
We became a public company on June 9, 1998 when U.S. Office Products
distributed all of our shares and the shares of three other companies to its
shareholders and we sold additional shares of our stock in a public offering.
These distributions (known as the "spin-offs") were intended to be tax-free to
both U.S. Office Products and its shareholders. As part of the spin-offs, we and
the other three companies whose shares were distributed each agreed with U.S.
Office Products that if any of us took any action or failed to act in a way that
materially caused the distributions to be taxable, then U.S. Office Products
could require any of us to pay to it the full amount of the tax losses it
suffered as a result of the distributions. We and the three other spin-off
companies also agreed that if the distributions became taxable for any other
reason, we would each pay to U.S. Office Products a portion of its tax losses
based on the relative aggregate value of each company's common stock immediately
after the distributions. We estimate that our portion of any such tax losses
under this agreement would be approximately 14.4%. We also agreed with the other
three spin-off companies that if one or more of us materially caused the
distributions to be taxable and any of the other companies were required to pay
tax losses under the agreement to U.S. Office Products, then the company or
companies that materially caused the distributions to be taxable would reimburse
the other companies for such payments. As a result of these agreements, we could
be required to pay:
-- all of the tax losses of U.S. Office Products if we cause the
distributions to be taxable,
-- our portion of the tax losses of U.S. Office Products even if neither
we nor any of the other three companies cause the distributions to be
taxable, or
-- all of the tax losses of U.S. Office Products even if we did not
cause the distributions to be taxable and one or more of the other
companies did (while such other companies would be required to
reimburse us for such payment, we cannot be sure that we will receive
such reimbursement).
WE ARE EXPOSED TO RISKS RELATED TO OTHER LIABILITIES OF U.S. OFFICE PRODUCTS
As part of the distributions, we and the other three spin-off companies
each agreed with U.S. Office Products to pay a portion of the securities law and
general liabilities of U.S. Office Products arising prior to the distributions
and, if any of the spin-off companies fails to pay its portion, to pay a portion
of the unpaid amount. These shared liabilities do not include any liability that
relates specifically to a particular spin-off company or to the continuing
businesses of U.S. Office Products after the distributions. The portion of the
shared liabilities payable by each spin-off company is determined by the
relative aggregate market values of the common stock of the spin-off companies
immediately after the distribution. We estimate that our portion of any such
liabilities under this agreement would be approximately 14.4%, but the maximum
aggregate amount we can be required to pay for all shared liabilities is limited
by the agreement to $1.75 million (including as a result of defaults by the
other spin-off companies). U.S. Office Products has been named as a defendant in
various class action lawsuits relating to the distributions that allege, among
other things, violations of the federal securities laws. As a result of these
agreements, we may be required to pay up to $1.75 million to U.S. Office
Products for shared liabilities even though they are unrelated to our business
and operations, we have no control over such liabilities and one or more of the
other spin-off companies may be primarily responsible for such liabilities.
11
<PAGE> 15
WE HAVE A LIMITED INDEPENDENT OPERATING HISTORY
Prior to the spin-off in June 1998, we operated as a wholly owned
subsidiary of U.S. Office Products and many of our general, administrative and
financial functions (including legal, accounting, purchasing, management
information services and borrowings) were handled by U.S. Office Products. Since
the spin-off, we have operated independently of U.S. Office Products and have
been independently responsible for managing and financing all aspects of our
business and operations. Our expenses are likely to be higher than when we were
a subsidiary of U.S. Office Products and we may experience difficulties with
respect to general, administrative and financial functions that we did not
experience as part of U.S. Office Products. Because most of the financial
information included in this Prospectus relates to periods during which we were
a subsidiary of U.S. Office Products, it does not necessarily reflect what our
results of operations and financial condition would have been if we were
independent during those periods and it may not be a good indication of what our
future results of operations and financial condition will be.
WE HAVE EXPERIENCED RAPID GROWTH AND DEPEND UPON ACQUISITIONS FOR FUTURE GROWTH
Our business has grown significantly through acquisitions in recent years.
Since 1991, we have acquired 17 regional marketers of general educational
supplies and six specialty direct school supply companies. All of our specialty
direct acquisitions and 12 of our regional marketer acquisitions have occurred
since June 1996. Future growth in our revenues and earnings depends
substantially on our ability to continue to acquire and successfully integrate
and operate school supply businesses. We cannot guarantee that we will be able
to identify and acquire businesses at all or on reasonable terms. In addition,
we cannot be sure that we will be able to operate the businesses that we acquire
profitably or that our management and financial controls, personnel, computer
systems and other corporate support systems will be adequate to manage the
increased size and scope of our operations as a result of acquisitions. Managing
and integrating acquired businesses may result in substantial costs, delays or
other operating or financial problems that could materially and adversely affect
our financial condition and results of operations. These include:
-- the diversion of management's attention and other resources away from
our existing businesses,
-- significant charges and expenses relating to employee severance,
restructuring and transaction costs and other unexpected events or
liabilities,
-- the inability to retain, hire or train qualified personnel for the
acquired businesses, and
-- the amortization of goodwill and other acquired intangible assets.
We intend to pay for acquisitions in whole or in part using our shares, and
in some cases this may dilute our earnings per share. Our ability and
willingness to use our shares will depend upon their market price and the
willingness of sellers to accept our shares. In addition, our ability to issue
shares may be limited by Section 355(e) of the Internal Revenue Code of 1986.
Under that Section, U.S. Office Products will incur tax liability for the
distribution of our shares if 50% or more, by vote or value, of the capital
stock of either U.S. Office Products or School Specialty is acquired by one or
more persons acting pursuant to a plan or series of related transactions that
includes the spin-off. There is a presumption that any acquisition occurring
within two years after the spin-off is pursuant to a plan that includes the
spin-off. However, the presumption may be overcome by establishing that the
spin-off and such acquisition are not part of a plan or series of related
transactions. As noted above, we will be liable for all the tax liabilities of
U.S. Office Products if our actions cause the spin-off to be taxable and will be
liable for all or a portion of such liabilities even if our actions did not
cause the spin-off to be taxable.
12
<PAGE> 16
WE ARE UNABLE TO USE THE POOLING-OF-INTERESTS METHOD OF ACCOUNTING; WE HAVE A
MATERIAL AMOUNT OF GOODWILL
Under generally accepted accounting principles, we must be independent for
at least two years before we can use the pooling-of-interests method of
accounting for share acquisitions, which would avoid the creation and subsequent
amortization of goodwill. Because we were a wholly owned subsidiary of U.S.
Office Products until the completion of the spin-off on June 9, 1998, we will
not be eligible to use pooling-of-interest accounting until June 9, 2000. We
must use purchase accounting for any acquisitions prior to that date, which may
result in the creation of goodwill.
Approximately $197.3 million, or 48.9%, of our pro forma total assets as of
January 23, 1999 represents intangible assets, the significant majority of which
is goodwill. Goodwill is the amount by which the costs of an acquisition
accounted for using the purchase method exceeds the fair value of the net assets
we acquire. We are required to record goodwill as an intangible asset on our
balance sheet and to amortize it over a period of years. We generally amortize
goodwill for each acquisition on a straight line method over a period of 40
years, which means that in each year during the 40-year period 1/40(th) of the
goodwill is taken off our balance sheet and recorded in our income statement as
a non-cash expense (which reduces our net income). Even though it reduces our
net income for accounting purposes, amortization of goodwill may not be
deductible for tax purposes. In addition, we are required to periodically
evaluate whether we can recover our remaining goodwill from the undiscounted
future cash flows that we expect to receive from the operations of the acquired
companies. If these undiscounted future cash flows are less than the carrying
value of the associated goodwill, the goodwill is impaired and we must reduce
the carrying value of the goodwill to equal the undiscounted future cash flows
and take the amount of the reduction as a charge against our income. Reductions
in our net income caused by the amortization or write down of goodwill could
materially adversely affect our results of operations and financial condition
and the market price of our Common Stock.
OUR BUSINESS DEPENDS ON GROWTH OF STUDENT POPULATION AND SCHOOL EXPENDITURES
Our growth strategy and profitability also depend on growth in the student
population and expenditures per student in public and private elementary and
secondary schools. The level of student enrollment is largely a function of
demographics, while expenditures per student are also affected by government
budgets and the prevailing political and social attitudes towards education. Any
significant and sustained decline in student enrollment and/or expenditures per
student could have a material adverse effect on our business, financial
condition and results of operations.
OUR BUSINESS IS HIGHLY SEASONAL
Our educational supply businesses are highly seasonal. Because most of our
customers want their school supplies delivered before or shortly after the
commencement of the school year in September, we make most of our sales from May
to October. As a result, we usually earn more than 100% of our annual net income
in the first six months of our fiscal year and operate at a loss in our third
fiscal quarter. This seasonality causes our operating results to vary
considerably from quarter to quarter and these fluctuations could adversely
affect the market price of our Common Stock.
WE DEPEND ON KEY SUPPLIERS AND SERVICE PROVIDERS
We depend upon a limited number of suppliers for some of our products,
especially furniture. We also depend upon a limited number of service providers,
including United Parcel Service, for the delivery of our products. If these
suppliers or service providers are unable to provide the products or services
that we require or materially increase their costs (especially during our peak
season of June through September), this could impair our ability to deliver our
products on a timely and profitable basis and could have a material adverse
effect on our business, financial condition and results of operations. We were,
for example, adversely affected by the United Parcel Service strike
13
<PAGE> 17
during August 1997 due to the perception that we were unable to ship products.
As we seek to reduce the number of our suppliers and to minimize duplicative
lines as part of our business strategy, we are likely to increase our dependence
on remaining vendors.
WE RELY ON KEY PERSONNEL
Our business depends to a large extent on the abilities and continued
efforts of current executive officers and senior management, including Daniel P.
Spalding, our Chief Executive Officer. We are also likely to depend heavily on
the executive officers and senior management of businesses that we acquire in
the future. If any of these people become unable or unwilling to continue in his
or her present role, or if we are unable to attract and retain other qualified
employees, our business could be adversely affected. Although we have employment
contracts with some executive officers, we do not have employment agreements
with most of our executive officers and senior management. We do not have and do
not intend to obtain key man life insurance covering any of our executive
officers or other members of senior management.
OUR BUSINESS IS HIGHLY COMPETITIVE
The market for school supplies is highly competitive and fragmented. We
estimate that over 3,400 companies market educational materials to schools for
pre-kindergarten through twelfth grade as a primary focus of their business. We
also face increasing competition from alternate channel marketers, including
superstores and office product contract stationers, that have not traditionally
focused on marketing school supplies. These competitors are likely to continue
to expand their product lines and interest in school supplies. Some of these
competitors have greater financial resources and buying power than we do. We
believe that the educational supplies market will consolidate over the next
several years, which is likely to increase competition in our markets and in our
search for attractive acquisition candidates.
WE DEPEND ON OUR SYSTEMS; OUR YEAR 2000 ISSUES
We believe that one of our competitive advantages is our information
systems, including our proprietary PC-based customer Order Management System. We
have integrated the operations of almost all of our divisions and subsidiaries
and their information systems are linked to host systems located at our
headquarters in Appleton, Wisconsin and at two other locations. If any of these
links are disrupted or become unavailable, this could materially and adversely
affect our business, results of operations and financial condition.
Our Sax Arts and Crafts, Gresswell, Hammond & Stephens and Sportime
businesses currently use predecessor information systems. With the exception of
Gresswell, we intend to convert the information systems of these acquired
businesses to one of our host systems as soon as practicable. However, none of
these businesses has a backup computer system or backup extra communication
lines. Even though we have taken precautions to protect ourselves from events
that could interrupt the operations of these businesses and intend to do so for
other businesses we acquire in the future, we cannot be sure that a fire, flood
or other natural disaster affecting their systems would not disable the system
or prevent the system from communicating with our other businesses. The
occurrence of any of these events could have a material adverse effect on our
results of operations and financial condition.
The Year 2000 issue exists because many computer systems and applications,
including those embedded in equipment and facilities, use two digit rather than
four digit date fields to designate an applicable year. As a result, the systems
and applications may not properly recognize the Year 2000 or process data which
includes it, potentially causing data miscalculations or inaccuracies or
operational malfunctions or failures. Because any disruption to our computerized
order processing and inventory systems could materially and adversely affect our
operations, we have established a centrally managed, company wide plan to
identify, evaluate and address Year 2000 issues. Although
14
<PAGE> 18
we expect that most of our mission critical systems, network elements and
products will be verified for Year 2000 compliance by May 1999, our ability to
meet this target is dependent on a variety of factors. In addition, if our
suppliers, service providers and/or customers fail to resolve their Year 2000
issues in an effective and timely manner, our business could be significantly
and adversely affected. We believe that many of our school customers have not
yet addressed or resolved their Year 2000 issues.
WE DO NOT EXPECT TO PAY DIVIDENDS
We do not expect to pay cash dividends on our Common Stock in the
foreseeable future. In addition, our ability to pay dividends may be restricted
from time to time by the financial covenants contained in our credit agreements
and debt instruments. Our current Senior Credit Facility and the Indenture
relating to the Notes in the concurrent Note offering contain restrictions on,
and in some circumstances may prevent, our payment of dividends.
WE ARE HIGHLY LEVERAGED
As of January 23, 1999, we had $195.6 million of debt outstanding on a pro
forma basis. If we had issued the Common Stock in this offering (together with
the proposed concurrent offering of the Notes) and applied the proceeds from
these offerings on that date, our outstanding debt would have been $136.4
million or approximately 38% of our total capitalization. In addition, our
leverage could increase over time. Our Senior Credit Facility and the Indenture
relating to the Notes permit us to incur additional debt under certain
circumstances and we expect to reborrow under our Senior Credit Facility for
general corporate purposes, including working capital and for acquisitions.
Our ability to meet our debt service obligations depends on our future
performance. Our future performance is influenced by general economic conditions
and by financial, business and other factors affecting our operations, many of
which are beyond our control. If we are unable to service our debt, we may have
to:
-- delay our acquisition program,
-- sell our equity securities,
-- sell our assets, or
-- restructure and refinance our debt.
We cannot give you any assurance that, if we are unable to service our
debt, we will be able to sell our equity securities, sell assets or restructure
and refinance our debt. Our substantial debt could have important consequences
to you. For example, it could:
-- make it more difficult for us to obtain additional financing in the
future for our acquisitions and operations,
-- require us to dedicate a substantial portion of our cash flows from
operations to the repayment of our debt and the interest associated
with our debt,
-- limit our operating flexibility due to financial and other
restrictive covenants, including restrictions on incurring additional
debt, creating liens on our property and paying dividends,
-- subject us to risks that interest rates and our interest expense will
increase,
-- place us at a competitive disadvantage compared to our competitors
that have less debt, and
-- make us more vulnerable in the event of a downturn in our business.
15
<PAGE> 19
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The words "anticipate," "believe," "estimate," "intend," "may,"
"will" and "expect" are intended to identify forward-looking statements. There
are important factors that could cause our actual results, performance or
achievement to differ materially from the results suggested by the
forward-looking statements. Factors discussed under the captions "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" are particularly susceptible to risks
and uncertainties. Such forward-looking statements should, therefore, be
considered in light of various important factors, including those set forth in
this Prospectus and other factors set forth from time to time in our reports and
registration statements filed with the Securities and Exchange Commission (the
"SEC"). You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. We disclaim any intent or
obligation to update forward-looking statements.
USE OF PROCEEDS
We expect to receive approximately $62.2 million ($71.5 million if the
underwriters' over-allotment option is exercised in full) of net proceeds from
this offering (based on an assumed initial public offering price for the Common
Stock of $22.00 per share, which was the last reported sale price for the Common
Stock on the Nasdaq National Market on February 24, 1999, less estimated
offering expenses and underwriters' discounts). In addition, we expect to
receive approximately $97.1 million of net proceeds from the Note offering
(based on an initial public offering price for the Notes of 100%, less estimated
offering expenses and underwriters' discounts). The consummation of the offering
of Common Stock made hereby is not conditioned on the completion of our Note
offering.
We intend to use the combined net proceeds from this offering and the Note
offering to repay a portion of the approximately $195 million outstanding under
our five year secured $350 million revolving Senior Credit Facility. The Senior
Credit Facility has a $100 million term loan payable quarterly over five years
commencing in January 1999 and revolving loans which mature on September 30,
2003. As of the date of this Prospectus, $97.5 million was outstanding under the
term loan portion of the Senior Credit Facility. The net proceeds from the
combined offerings will be used first to repay amounts outstanding under the
term loan. Any remaining net proceeds will then be used to repay amounts
outstanding under the revolving loans. The Senior Credit Facility has a floating
rate of interest for borrowings thereunder. As of January 23, 1999, the
effective interest rate on borrowings under our Senior Credit Facility was
approximately 8%. Since the beginning of fiscal 1999, we borrowed under the
Senior Credit Facility to fund three acquisitions and for seasonal working
capital and capital expenditures. If the Note offering is not consummated as
expected, we will repay substantially all amounts outstanding under the term
loan, but will not be able to reduce the revolving loans.
In connection with the Common Stock and Note offerings, we intend to amend
our Senior Credit Facility to reduce the borrowing limit thereunder to $250
million and to change certain financial and other covenants. See "Description of
Senior Credit Facility." We intend to reborrow amounts under our Senior Credit
Facility for general corporate purposes including working capital, and for
acquisitions.
16
<PAGE> 20
DIVIDEND POLICY
We currently intend to retain our future earnings, if any, to finance the
growth, development and expansion of our business. Accordingly, we do not expect
to pay cash dividends on our Common Stock in the foreseeable future. In
addition, our ability to pay dividends may be restricted or prohibited from time
to time by financial covenants in our credit agreements and debt instruments.
Our current Senior Credit Facility and the Indenture relating to the Notes in
the concurrent Note offering contain restrictions on, and in some circumstances
may prevent, our payment of dividends.
PRICE RANGE OF COMMON STOCK
Our Common Stock has traded on the Nasdaq National Market since June 10,
1998 under the symbol "SCHS." There was no market for the Common Stock prior to
that date. The following table sets forth, for the periods indicated, the high
and low sale prices per share of the Common Stock as reported on the Nasdaq
National Market:
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED HIGH LOW
- -------------------- -------- --------
<S> <C> <C>
July 25, 1998............................................... $17.8750 $14.3750
October 24, 1998............................................ $17.0000 $10.6250
January 23, 1999............................................ $25.0625 $13.8750
April 24, 1999 (through February , 1999).................. $ $
</TABLE>
On , 1999, the last reported sale price of the Common Stock on
the Nasdaq National Market was $ per share. As of February 1, 1999,
there were 3,631 record holders of the Common Stock.
17
<PAGE> 21
CAPITALIZATION
The following table sets forth, as of January 23, 1999, our capitalization
(1) on a historical basis, (2) on a pro forma basis to reflect the acquisitions
we have made since January 23, 1999, (3) on a pro forma basis described in
clause (2) above as adjusted to give effect to the sale of the Common Stock and
the application of the assumed net proceeds therefrom as described herein and
(4) on a pro forma basis described in clause (2) above as adjusted to give
effect to the sale of the Common Stock and the Notes and the application of the
assumed net proceeds therefrom as described herein.
<TABLE>
<CAPTION>
JANUARY 23, 1999
----------------------------------------------------------
PRO FORMA AS PRO FORMA
ADJUSTED FOR AS ADJUSTED FOR
COMMON STOCK COMMON STOCK
HISTORICAL PRO FORMA OFFERING AND NOTE OFFERINGS
---------- --------- ------------ ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Short-term debt...................... $ 10,314 $ 10,314 $ -- $ --
Long-term debt....................... 162,199 185,268 133,412 36,362
Notes................................ -- -- -- 100,000
-------- -------- -------- --------
Total debt......................... 172,513 195,582 133,412 136,362
Stockholders' equity:
Preferred stock, $0.001 par value
(1,000,000 shares authorized; no
shares outstanding)............. -- -- -- --
Common stock, $0.001 par value
(150,000,000 shares authorized;
14,578,925 shares issued and
outstanding, historical and pro
forma; 17,578,925 shares issued
and outstanding, pro forma as
adjusted for the Common Stock
offering)(1).................... 15 15 18 18
Additional paid-in capital......... 146,768 146,768 208,935 208,935
Accumulated other comprehensive
income.......................... 6 6 6 6
Retained earnings.................. 12,278 12,278 12,278 12,278
-------- -------- -------- --------
Total stockholders' equity...... 159,067 159,067 221,237 221,237
-------- -------- -------- --------
Total capitalization............ $331,580 $354,649 $354,649 $357,599
======== ======== ======== ========
</TABLE>
- ---------------
(1) Excludes 2,319,313 shares of Common Stock issuable upon exercise of
outstanding options granted under our 1998 Stock Incentive Plan.
18
<PAGE> 22
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The selected historical financial data set forth below for the fiscal year
ended December 31, 1995, the four months ended April 30, 1996 and the fiscal
years ended April 26, 1997 and April 25, 1998 have been derived from our audited
consolidated financial statements included elsewhere in this Prospectus. The
selected historical financial data for the fiscal year ended December 31, 1994
have been derived from our audited consolidated financial statements which are
not included elsewhere in this Prospectus. The selected historical financial
data for the fiscal year ended December 31, 1993 have been derived from
unaudited consolidated financial statements which are not included elsewhere in
this Prospectus. The selected historical financial data for the nine months
ended January 24, 1998 and January 23, 1999 have been derived from our unaudited
consolidated financial statements that appear elsewhere in this Prospectus.
These unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements and, in the opinion of
management, contain all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the results of operations for the
periods presented. Because of the seasonality of our business, our results of
operations for the first nine months of our fiscal year are not representative
of our results of operations for the entire fiscal year.
The selected pro forma data, which have been derived from our unaudited pro
forma financial statements included elsewhere in this Prospectus, give effect,
as applicable, to all acquisitions completed through February 9, 1999, the
spin-off and the refinancing of all amounts payable to U.S. Office Products in
connection with the spin-off, the June 1998 initial public offering and the
Common Stock and Note offerings, as if all such transactions had occurred at the
beginning of the periods presented. The unaudited pro forma combined financial
data discussed herein do not purport to represent the results that we would have
obtained had the transactions which are the subject of the pro forma adjustments
occurred at the beginning of the applicable periods, as assumed, or our future
results. See additional disclosure regarding pro forma results in the Financial
Statements section of this Prospectus.
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," our consolidated financial statements and related notes and our pro
forma combined financial statements and related notes, included elsewhere in
this Prospectus.
19
<PAGE> 23
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<TABLE>
<CAPTION>
HISTORICAL(1)
------------------------------------------------------------------------------------------------
FOUR
MONTHS FISCAL YEAR ENDED NINE MONTHS ENDED
ENDED --------------------- -------------------------
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------- APRIL 30, APRIL 26, APRIL 25, JANUARY 24, JANUARY 23,
1993 1994(2) 1995(2) 1996(2) 1997(2) 1998(2) 1998(2) 1999
-------- --------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues....................... $76,926 $119,510 $150,482 $28,616 $191,746 $310,455 $247,880 $424,332
Cost of revenues............... 52,434 81,774 98,233 18,591 126,862 202,870 164,105 281,436
------- -------- -------- ------- -------- -------- -------- --------
Gross profit................... $24,492 $ 37,736 $ 52,249 $10,025 $ 64,884 $107,585 $ 83,775 $142,896
Selling, general and
administrative expenses...... 22,140 33,257 47,393 11,917 53,177 87,846 63,395 108,005
Non-recurring acquisition
costs........................ -- -- -- 1,122 1,792 -- -- --
Restructuring costs............ -- -- 2,532 -- 194 3,491 -- 5,274
------- -------- -------- ------- -------- -------- -------- --------
Operating income (loss)........ $ 2,352 $ 4,479 $ 2,324 $(3,014) $ 9,721 $ 16,248 $ 20,380 $ 29,617
Interest expense............... 1,845 3,007 5,536 1,461 4,197 5,505 4,100 8,942
Interest income................ -- -- -- (6) -- (132) (109) (114)
Other (income) expense......... 228 (86) (18) 67 (196) 156 441 --
------- -------- -------- ------- -------- -------- -------- --------
Income (loss) before provision
for (benefit from) income
taxes........................ $ 279 $ 1,558 $ (3,194) $(4,536) $ 5,720 $ 10,719 $ 15,948 $ 20,789
Provision for (benefit from)
income taxes(3).............. 199 218 173 139 (2,412) 5,480 7,113 10,094
------- -------- -------- ------- -------- -------- -------- --------
Net income (loss).............. $ 80 $ 1,340 $ (3,367) $(4,675) $ 8,132 $ 5,239 $ 8,835 $ 10,695
======= ======== ======== ======= ======== ======== ======== ========
Net income (loss) per share:
Basic........................ $ 0.02 $ 0.26 $ (0.51) $ (0.54) $ 0.81 $ 0.40 $ 0.69 $ 0.73
Diluted...................... 0.02 0.26 (0.50) (0.53) 0.80 0.39 0.68 0.73
Weighted average shares
outstanding:
Basic........................ 4,918 5,062 6,562 8,611 10,003 13,284 12,751 14,625
Diluted...................... 4,918 5,078 6,669 8,789 10,196 13,547 13,020 14,665
STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in)
operating activities......... $ 974 $ (268) $ 4,828 $(1,178) $ 918 $ 3,724 $ 15,392 $ 29,100
Net cash used in investing
activities................... (9,606) (2,856) (6,092) (828) (16,742) (99,742) (96,537) (98,837)
Net cash provided by financing
activities................... 8,464 3,202 1,156 2,011 15,778 96,018 81,145 69,737
------- -------- -------- ------- -------- -------- -------- --------
Net increase (decrease) in cash
and cash equivalents......... $ (168) $ 78 $ (108) $ 5 $ (46) $ -- $ -- $ --
======= ======== ======== ======= ======== ======== ======== ========
OTHER DATA:
EBITDA(5)...................... $ 3,645 $ 6,210 $ 5,085 $(2,407) $ 12,023 $ 20,653 $ 23,321 $ 36,224
Adjusted EBITDA(5)............. 3,645 6,210 7,617 (1,285) 14,009 24,144 23,321 41,498
Depreciation and amortization
expense...................... 1,521 1,645 2,743 674 2,106 4,561 3,382 6,607
Capital expenditures........... 805 630 881 120 7,216 4,423 4,095 3,978
SELECTED RATIOS:
Ratio of total debt to Adjusted
EBITDA....................... 4.5x 5.2x 5.2x (31.8)x 4.3x 3.5x 3.4x 4.2x
Ratio of Adjusted EBITDA to
interest expense............. 2.0x 2.1x 1.4x (0.9)x 3.3x 4.4x 5.7x 4.6x
Ratio of earnings to fixed
charges(6)................... 1.1x 1.4x 0.5x -- 2.2x 2.6x 4.2x 3.0x
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- APRIL 30, APRIL 26, APRIL 25, JANUARY 23,
1993 1994 1995 1996 1997 1998 1999
------- ------- ------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)..................... $ 1,140 $ 3,512 $(1,052) $(3,663) $14,491 $ 47,791 $ 90,826
Total assets.................................. 23,190 44,267 54,040 54,573 87,685 223,729 378,513
Long-term debt................................ 7,175 11,675 15,294 15,031 33,792 63,014 162,199
Total debt.................................... 16,576 32,276 39,783 40,918 60,746 83,302 172,513
Stockholders' (deficit) equity................ 545 1,827 (620) (4,267) 16,329 106,466 159,067
</TABLE>
20
<PAGE> 24
SELECTED PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED FOR
PRO FORMA(7) COMMON STOCK OFFERING(7)
--------------------------------------- ---------------------------------------
FISCAL YEAR NINE MONTHS ENDED FISCAL YEAR NINE MONTHS ENDED
ENDED ------------------------- ENDED -------------------------
APRIL 25, JANUARY 24, JANUARY 23, APRIL 25, JANUARY 24, JANUARY 23,
1998(2) 1998(2) 1999 1998(2) 1998(2) 1999
--------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues................................ $598,025 $496,941 $506,180 $598,025 $496,941 $506,180
Cost of revenues........................ 390,327 327,174 330,786 390,327 327,174 330,786
-------- -------- -------- -------- -------- --------
Gross profit............................ $207,698 $169,767 $175,394 $207,698 $169,767 $175,394
Selling, general and administrative
expenses............................... 175,507 135,598 133,046 175,507 135,598 133,046
Restructuring costs..................... 4,689 1,198 5,401 4,689 1,198 5,401
-------- -------- -------- -------- -------- --------
Operating income........................ $ 27,502 $ 32,971 $ 36,947 $ 27,502 $ 32,971 $ 36,947
Interest expense........................ 17,000 13,500 13,500 12,026 9,770 9,770
Other expense........................... 193 536 420 193 536 420
-------- -------- -------- -------- -------- --------
Income before provision for income
taxes.................................. $ 10,309 $ 18,935 $ 23,027 $ 15,283 $ 22,665 $ 26,757
Provision for income taxes.............. 5,979 10,982 11,283 7,969 12,474 12,775
-------- -------- -------- -------- -------- --------
Net income.............................. $ 4,330 $ 7,953 $ 11,744 $ 7,314 $ 10,191 $ 13,982
======== ======== ======== ======== ======== ========
Net income per share(4):
Basic.................................. $ 0.28 $ 0.53 $ 0.78 $ 0.39 $ 0.56 $ 0.78
Diluted................................ 0.27 0.52 0.78 0.39 0.55 0.77
Weighted average shares outstanding(4):
Basic.................................. 15,659 15,126 15,025 18,659 18,126 18,025
Diluted................................ 15,922 15,395 15,065 18,922 18,395 18,065
OTHER DATA:
EBITDA(5)............................... $ 38,386 $ 40,943 $ 44,889 $ 38,386 $ 40,943 $ 44,889
Adjusted EBITDA(5)...................... 43,075 42,141 50,290 43,075 42,141 50,290
Depreciation and amortization expense... 11,077 8,508 8,362 11,077 8,508 8,362
SELECTED RATIOS:
Ratio of total debt to Adjusted
EBITDA................................. 4.5x 4.6x 3.9x 3.1x 3.2x 2.7x
Ratio of Adjusted EBITDA to interest
expense................................ 2.5x 3.1x 3.7x 3.6x 4.3x 5.1x
Ratio of earnings to fixed charges(6)... 1.5x 2.2x 2.5x 2.1x 3.0x 3.3x
<CAPTION>
PRO FORMA AS ADJUSTED FOR
COMMON STOCK AND NOTE
OFFERINGS(7)
---------------------------------------
FISCAL YEAR NINE MONTHS ENDED
ENDED -------------------------
APRIL 25, JANUARY 24, JANUARY 23,
1998(2) 1998(2) 1999
--------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues................................ $598,025 $496,941 $506,180
Cost of revenues........................ 390,327 327,174 330,786
-------- -------- --------
Gross profit............................ $207,698 $169,767 $175,394
Selling, general and administrative
expenses............................... 175,507 135,598 133,046
Restructuring costs..................... 4,689 1,198 5,401
-------- -------- --------
Operating income........................ $ 27,502 $ 32,971 $ 36,947
Interest expense........................ 13,512 10,885 10,885
Other expense........................... 193 536 420
-------- -------- --------
Income before provision for income
taxes.................................. $ 13,797 $ 21,550 $ 25,642
Provision for income taxes.............. 7,376 12,028 12,329
-------- -------- --------
Net income.............................. $ 6,421 $ 9,522 $ 13,313
======== ======== ========
Net income per share(4):
Basic.................................. $ 0.34 $ 0.53 $ 0.74
Diluted................................ 0.34 0.52 0.74
Weighted average shares outstanding(4):
Basic.................................. 18,659 18,126 18,025
Diluted................................ 18,922 18,395 18,065
OTHER DATA:
EBITDA(5)............................... $ 38,386 $ 40,943 $ 44,889
Adjusted EBITDA(5)...................... 43,075 42,141 50,290
Depreciation and amortization expense... 11,077 8,508 8,362
SELECTED RATIOS:
Ratio of total debt to Adjusted
EBITDA................................. 3.2x 3.2x 2.7x
Ratio of Adjusted EBITDA to interest
expense................................ 3.2x 3.9x 4.6x
Ratio of earnings to fixed charges(6)... 1.9x 2.7x 3.0x
</TABLE>
<TABLE>
<CAPTION>
JANUARY 23, 1999(8)
--------------------------------------------
PRO FORMA AS PRO FORMA AS
ADJUSTED ADJUSTED FOR
FOR COMMON COMMON STOCK
STOCK AND
PRO FORMA OFFERING NOTE OFFERINGS
--------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 99,339 $109,653 $109,653
Total assets................................................ 403,920 403,920 406,870
Long-term debt.............................................. 185,268 133,412 136,362
Total debt.................................................. 195,582 133,412 136,362
Stockholders' equity........................................ 159,067 221,237 221,237
</TABLE>
21
<PAGE> 25
- ---------------
(1) The historical financial information of School Specialty Inc., a Wisconsin
corporation, and the Re-Print Corp., both of which were acquired by U.S.
Office Products in business combinations accounted for under the
pooling-of-interests method in May 1996 and July 1996, respectively, have
been combined on a historical cost basis in accordance with generally
accepted accounting principles ("GAAP") to present this financial data as if
the two companies had always been members of the same operating group. All
business acquisitions since July 1996 have been accounted for under the
purchase method. The financial information of the businesses acquired in
business combinations accounted for under the purchase method is included
from the dates of their respective acquisitions.
(2) Certain reclassifications have been made to the historical and pro forma
financial data for the fiscal years ended December 31, 1993, 1994 and 1995,
the four months ended April 30, 1996, the fiscal years ended April 26, 1997
and April 25, 1998 and the nine months ended January 24, 1998 to conform
with the fiscal 1999 presentation. These reclassifications had no effect on
net income or net income per share.
(3) Results for the fiscal year ended April 26, 1997 include a benefit from
income taxes of $2.4 million primarily arising from the reversal of a $5.3
million valuation allowance in the quarter ended April 26, 1997. The
valuation allowance had been established in 1995 to offset the tax benefit
from net operating loss carryforwards included in our 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 our being
acquired by U.S. Office Products, because it was deemed "more likely than
not," based on improved results, that such tax benefit would be realized.
(4) For calculation of the pro forma and pro forma as adjusted weighted average
shares outstanding, see Note (k) and Note (l), respectively, of Notes to Pro
Forma Combined Financial Statements included herein.
(5) EBITDA represents operating earnings before interest, income taxes,
depreciation and amortization. Adjusted EBITDA is EBITDA plus non-recurring
acquisition costs and restructuring costs. EBITDA and Adjusted EBITDA are
provided because they are measures commonly used by analysts and investors
to determine a company's ability to incur and service its debt. EBITDA and
Adjusted EBITDA are not measurements of performance under GAAP and should
not be considered as alternatives to net income or income from operations or
as measures of operating performance or cash flow data prepared in
accordance with GAAP or as measures of liquidity. EBITDA and Adjusted
EBITDA, as calculated by School Specialty, are not necessarily comparable
with similarly titled measures of other companies.
(6) The ratio of earnings to fixed charges is computed by dividing fixed charges
into income (loss) before provision for (benefits from) income taxes and
fixed charges. Fixed charges represent interest expense, whether expensed or
capitalized, amortization of debt expenses and the estimated interest
component of rent expense. On a historical basis, as a result of the loss
incurred during the four months ended April 30, 1996, we were unable to
fully cover fixed charges by $4,536.
(7) The pro forma financial data give effect, as applicable, to all acquisitions
completed through February 9, 1999, the spin-off and the refinancing of all
amounts payable to U.S. Office Products in connection with the spin-off, the
June 1998 initial public offering and concurrent offering to certain
officers and directors and the Common Stock and Note offerings, as if all
such transactions had occurred at the beginning of the periods presented.
The pro forma statement of income data are not necessarily indicative of the
operating results that would have been achieved had these events actually
then occurred and should not be construed as representative of future
operating results.
22
<PAGE> 26
(8) The pro forma balance sheet data give effect to the purchase acquisition of
Sportime, the only acquisition completed subsequent to January 23, 1999, as
if it had occurred on January 23, 1999. This pro forma balance sheet data is
then adjusted, as indicated, to reflect the Common Stock and Note offerings
as if they had occurred on January 23, 1999. The pro forma balance sheet
data and the adjustments to that data are not necessarily indicative of the
financial position that would have been achieved had these events actually
then occurred and should not be construed as representative of future
financial position.
23
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read this Management's Discussion and Analysis of Financial
Condition and Results of Operations together with our consolidated financial
statements and related notes and our pro forma combined financial statements and
related notes, included in this Prospectus.
OVERVIEW
We are the largest marketer of non-textbook educational supplies and
furniture to schools for pre-kindergarten through twelfth grade. We offer more
than 60,000 items through an innovative two-pronged marketing approach that
targets both school administrators and individual teachers. Our broad product
range enables us to provide our customers with one source for virtually all of
their non-textbook school supplies and furniture needs.
We have grown significantly in recent years both through acquisitions and
internal growth. In order to expand our geographic presence and product range,
we have acquired 18 companies since May 1996. In August 1998, we purchased
Beckley-Cardy, our largest traditional and specialty school supply competitor.
Revenues have increased from $119.5 million in the fiscal year ended
December 31, 1994 to $310.5 million for the fiscal year ended April 25, 1998 and
$486.9 million for the twelve months ended January 23, 1999. This increase
resulted primarily from 19 acquisitions, 15 of which occurred during fiscal 1997
and fiscal 1998, as well as internally generated growth. After giving pro forma
effect to the acquisitions that we made during the period, our revenues for the
twelve months ended January 23, 1999 were $607.3 million and our Adjusted EBITDA
was $51.2 million. These results represent compound annual increases of 48.9% in
revenues and 67.7% in Adjusted EBITDA compared to our historical results for the
year ended December 31, 1994. While acquisitions have the effect of increasing
overall revenues, there may be short-term reductions in the revenues of the
acquired businesses due to rationalization of product line and sales force
integrations and reductions.
Our gross profit margin has improved in recent years primarily due to
acquisitions. We have acquired many specialty direct businesses, which tend to
have higher gross margins than our traditional supply businesses. In addition,
our acquisitions of both specialty direct and traditional supply businesses have
increased our buying power and we have used this to reduce the cost of the
products we purchase. Acquisitions of traditional supply businesses may have a
negative impact on our gross margin, although over time we should benefit from
increased purchasing power leverage. We believe that we can continue to improve
our gross margins by acquiring specialty businesses and by leveraging increased
purchasing power.
Our operating margins have also improved significantly over the last
several years. This improvement reflects our recent acquisitions of specialty
companies which have higher operating margins than our general supply
businesses. In addition, through the integration of acquired businesses (both
specialty and general supply), we have been able to further improve our
operating margins by eliminating redundant expenses, leveraging overhead costs
and improving purchasing power. While we have already achieved significant
operating margin improvements from the acquisitions we have made to date, we
believe there are still opportunities to eliminate redundant expenses. In
addition, because our business is seasonal, the timing of our acquisitions may
affect the comparability of our operating margins in the short term. In
particular, we have historically made many of our acquisitions during our peak
selling period (the first two quarters of our fiscal year) when operating
margins are at their highest. Because they have been accounted for using the
purchase method of accounting, these acquisitions have caused our operating
margins for the year in which the acquisitions occurred to be higher than they
would have been if the results of the acquired businesses had been included for
the full year.
24
<PAGE> 28
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. An effective income tax rate of 49% is reflected in the pro forma
financial statements for the most recent interim period. Our effective tax rate
is higher than the federal statutory tax rate of 35% due primarily to
non-deductible goodwill amortization and state taxes. Our effective tax rate for
future periods may fluctuate based on the size and structure of acquisitions and
the tax deductible nature of acquired goodwill. See "-- Consolidated Historical
Results of Operations."
Our business and working capital needs are highly seasonal with peak sales
levels occurring from May through October. During this period, we receive, ship
and bill the majority of our orders so that schools and teachers receive their
merchandise by the start of each school year. Our 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. As a result, we
usually earn more than 100% of our annual net income in the first six months of
our fiscal year and operate at a loss in our third fiscal quarter.
Until June 9, 2000, we will be limited to using the purchase method of
accounting for acquisitions. Under the purchase method of accounting, the costs
of an acquisition over the fair value of the net assets acquired is goodwill,
which is recorded as an intangible asset on the balance sheet and amortized over
a period of years. We generally amortize goodwill on a straight-line basis over
a period of 40 years. In addition to the purchase price, the costs of an
acquisition generally include expenses relating to the acquisition of the
acquired company, including investment banking, legal and accounting fees and
severance and facility closing costs.
As part of the process of integrating acquisitions, we also incur costs
relating to the restructuring of various aspects of our operations, such as the
consolidation of warehouse facilities, customer service centers and sales
operations. 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. If
these costs relate solely to the operations of the acquired company and are
anticipated at the time of the acquisition, they are capitalized as part of the
acquisition costs. If these costs relate to our existing operations, even if
they result from an acquisition, such costs are recorded as restructuring
charges in the year they are incurred and have the effect of reducing net income
for that year. We expect to incur restructuring costs from time to time in the
future as we continue to acquire and integrate companies. Although we believe
that the restructuring charges we have taken to date are adequate, we cannot
predict the magnitude or timing of restructuring charges that we may take in the
future.
School Specialty was incorporated as a wholly owned subsidiary by U.S.
Office Products in Delaware in February 1998 to hold its Educational Supplies
and Products Division. School Specialty, Inc., a Wisconsin corporation ("Old
School") formed in October 1959, was acquired by U.S. Office Products in May
1996. The Re-Print Corp., the predecessor to Re-Print LLC, our wholly owned
subsidiary, has been in operation since 1921 and was acquired by U.S. Office
Products in July 1996. Our 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 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. Childcraft, Sax Arts and Crafts and
Gresswell were all acquired by U.S. Office Products in 1997 and have been in
operation since 1946, 1945 and 1938, respectively.
25
<PAGE> 29
RESULTS OF OPERATIONS
The following table sets forth certain information as a percentage of
revenues on a historical basis concerning our results of operations for the year
ended December 31, 1995, the fiscal years ended April 26, 1997 ("fiscal 1997")
and April 25, 1998 ("fiscal 1998") and the nine months ended January 24, 1998
("Interim 1998") and January 23, 1999 ("Interim 1999"), and on a pro forma basis
for fiscal 1998 and for Interim 1998 and Interim 1999, reflecting all
acquisitions completed through February 9, 1999, the spin-off and the
refinancing of all amounts payable to U.S. Office Products in connection with
the spin-off, the June 1998 initial public offering and the Common Stock and
Note offerings as if such transactions had occurred on the first day of the
period presented.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------------------------------------------------- ------------
FISCAL YEAR FISCAL YEAR ENDED NINE MONTHS ENDED FISCAL YEAR
ENDED --------------------- ------------------------- ENDED
DECEMBER 31, APRIL 26, APRIL 25, JANUARY 24, JANUARY 23, APRIL 25,
1995 1997 1998 1998 1999 1998
------------ --------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........... 65.3 66.2 65.3 66.2 66.3 65.3
----- ----- ----- ----- ----- -----
Gross profit............. 34.7 33.8 34.7 33.8 33.7 34.7
Selling, general and
administrative
expenses................. 31.5 27.7 28.3 25.6 25.5 29.3
Non-recurring acquisition
costs.................... -- 0.9 -- -- -- --
Restructuring costs........ 1.7 0.1 1.1 -- 1.2 0.8
----- ----- ----- ----- ----- -----
Operating income......... 1.5 5.1 5.3 8.2 7.0 4.6
Interest expense, net...... 3.6 2.2 1.8 1.6 2.1 2.9
Other (income) expense..... -- (0.1) 0.1 0.2 -- --
----- ----- ----- ----- ----- -----
Income (loss) before
provision for income
taxes.................... (2.1) 3.0 3.4 6.4 4.9 1.7
Provision for (benefit
from) income taxes....... 0.1 (1.3) 1.8 2.9 2.4 1.0
----- ----- ----- ----- ----- -----
Net income (loss).......... (2.2)% 4.3% 1.6% 3.5% 2.5% 0.7%
===== ===== ===== ===== ===== =====
<CAPTION>
PRO FORMA
-------------------------
NINE MONTHS ENDED
-------------------------
JANUARY 24, JANUARY 23,
1998 1999
----------- -----------
<S> <C> <C>
Revenues................... 100.0% 100.0%
Cost of revenues........... 65.8 65.3
----- -----
Gross profit............. 34.2 34.7
Selling, general and
administrative
expenses................. 27.3 26.3
Non-recurring acquisition
costs.................... -- --
Restructuring costs........ 0.3 1.1
----- -----
Operating income......... 6.6 7.3
Interest expense, net...... 2.7 2.7
Other (income) expense..... 0.1 0.1
----- -----
Income (loss) before
provision for income
taxes.................... 3.8 4.5
Provision for (benefit
from) income taxes....... 2.2 2.2
----- -----
Net income (loss).......... 1.6% 2.3%
===== =====
</TABLE>
CONSOLIDATED HISTORICAL RESULTS OF OPERATIONS
NINE MONTHS ENDED JANUARY 23, 1999 COMPARED TO NINE MONTHS ENDED JANUARY 24,
1998
Revenues increased 71.2%, from $247.9 million for Interim 1998 to $424.3
million for Interim 1999. This increase was due primarily to the inclusion in
Interim 1999 of (1) the revenues of two businesses acquired during Interim 1999
from their respective dates of acquisition and (2) all of the Interim 1999
revenues of seven businesses acquired in Interim 1998 (whose revenues were
included in Interim 1998 only from the date of acquisition). Revenues also
increased due to sales to new accounts, increased sales to existing customers
and higher pricing on certain products in response to increased product costs.
Gross profit increased 70.6%, from $83.8 million in Interim 1998 to $142.9
million in Interim 1999 primarily due to the acquisitions referred to above.
Gross margins (gross profit as a percentage of revenues) were essentially flat
at 33.8% for Interim 1998 and 33.7% for Interim 1999. Gross margins were reduced
by the acquisition of Beckley-Cardy in the second quarter of Interim 1999 (which
had a lower gross margin than our existing businesses) and an increase in lower
margin bid revenues in our traditional businesses. These reductions in gross
margins were almost entirely offset by the positive impact of increased sales of
higher margin specialty products and lower product costs due to higher vendor
purchase rebates, which reflected our increased buying power.
Selling, general and administrative expenses (including depreciation and
amortization) increased 70.4%, from $63.4 million in Interim 1998 to $108.0
million in Interim 1999 due primarily to the acquisitions referred to above. As
a percentage of revenues, these expenses were essentially
26
<PAGE> 30
flat at 25.6% for Interim 1998 and 25.5% for Interim 1999. The decrease in
selling, general and administrative expenses as a percentage of revenues
resulting from cost savings attributable to the integration of companies
acquired during fiscal 1998 and the consolidation of our warehousing under the
restructuring plan discussed below were almost offset by increases attributable
to the acquisition of Beckley-Cardy in the second quarter of Interim 1999 (which
had higher selling, general and administrative expenses as a percentage of
revenues than our existing businesses) and higher depreciation and amortization
expenses due to the acquisitions referred to above.
Restructuring charges during Interim 1999 included (1) a non-cash
restructuring charge of $1.1 million in the first quarter of Interim 1999,
consisting of compensation expense attributed to the U.S. Office Products stock
option tender offer and the sale of shares of Common Stock to some of our
executive management personnel, net of underwriting discounts and (2) a $4.2
million restructuring charge in the second quarter of Interim 1999 relating to
our plan to consolidate our existing warehousing, customer service and sales
operations following the acquisition of Beckley-Cardy. Under this restructuring
plan, we intend to reduce our distribution centers from 13 to eight and our
customer service centers from seven to two during the period from October 1998
through December 1999. The $4.2 million charge consists of $2.1 million for
employee severance and termination benefits, $1.3 million for lease termination
and facility shut-down costs and $0.8 million for write down of fixed assets and
inventories. On an after-tax basis these restructuring charges reduced net
income for Interim 1999 by $3.2 million.
Interest expense, net of interest income, increased 121%, from $4.0
million, or 1.6% of revenues, for Interim 1998 to $8.8 million, or 2.1% of
revenues, for Interim 1999 primarily due to the increase in debt attributable to
the acquisition of the three businesses since January 24, 1998 offset by the
reduction in debt from applying the net proceeds from our initial public
offering of Common Stock and private placement in June 1998 and the forgiveness
of debt from U.S. Office Products in connection with the spin-off.
Provision for income taxes increased 41.9% from $7.1 million for Interim
1998 to $10.1 million for Interim 1999, reflecting effective income tax rates of
49% for Interim 1999 and 45% for Interim 1998. The higher effective tax rate,
compared to the federal statutory rate of 35%, is primarily due to state income
taxes and nondeductible goodwill amortization.
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 65.8%, from $64.9 million, or 33.8% of revenues, for
fiscal 1997 to $107.6 million, or 34.7% 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 partially offset by
an increase in the cost of revenues as a result of the increased freight costs
caused by the United Parcel Service strike in the summer of 1997 and an increase
in the portion of revenues represented by lower margin bid revenues.
27
<PAGE> 31
Selling, general and administrative expenses include selling expenses (the
most significant component of which is sales wages and commissions), catalog
costs, occupancy costs, delivery costs, general administrative overhead (which
includes information systems and customer service) and accounting, legal, human
resources and purchasing expenses. Selling, general and administrative expenses
(including depreciation and amortization) increased 65%, from $53.2 million, or
27.7% of revenues, for fiscal 1997 to $87.8 million, or 28.3% 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. We have established a 24-month integration process for acquisitions in
which a transition team is assigned to (1) sell or discontinue incompatible
business units, (2) reduce the number of stock keeping units, (3) eliminate
redundant administrative functions, (4) integrate the acquired entity's
management information systems and (5) improve buying power. However, the length
of time it takes us to fully implement our strategy for assimilating an acquired
company can vary depending on the nature of the company acquired and the season
in which it is acquired.
We use grants of employee stock options to provide an incentive to
employees by increasing their ownership interests in our shares. This helps to
align their interests with the interests of our stockholders. In connection with
the spin-off from U.S. Office Products in June 1998, various replacement options
were issued at the prior exercise price adjusted for the spin-off in accordance
with Accounting Principles Board ("APB") Opinion No. 25. If we had recorded
compensation expense based upon the fair market value of the stock options on
the dates of grant under the methodology prescribed by Statement of Financial
Accounting Standards ("SFAS") No. 123, our net income for the fiscal year ended
April 25, 1998 would have been reduced by approximately $0.8 million or 15.3%.
In the fourth quarter of fiscal 1998, we recorded approximately $2.5
million of non-recurring costs, primarily consisting of a write-down of deferred
catalog costs, employee severance and asset impairment costs, and $1 million of
the transaction costs allocated to us under the distribution agreement entered
into with U.S. Office Products and the other spin-off companies. See
"Business -- Ongoing Spin-Off Obligations." We 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 appraisals and various regulatory fees. We are
required by GAAP to expense all acquisition costs (both those paid by us 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, we will be unable to use the pooling-of-interests
method to account for acquisitions for a period of two years from June 9, 1998.
During this period, we will not reflect any non-recurring acquisition costs in
our results of operations, as all costs incurred of this nature would be related
to acquisitions accounted for under the purchase method and would, therefore, be
capitalized as a portion of the purchase consideration. See "Risk Factors -- We
Are Unable to Use the Pooling-of-Interests Method of Accounting; We Have a
Material Amount of Goodwill."
From the time U.S. Office Products acquired the Pooled Companies, we were
allocated interest based upon our 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 a tax expense of $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%, was primarily due to state income taxes, non-
28
<PAGE> 32
deductible goodwill amortization and U.S. Office Products share of distribution
costs. In 1995, we 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 U.S. Office Products acquiring us, 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 24.2%, from $52.2 million, or 34.7% of revenues, in
1995 to $64.9 million, or 33.8% 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 our ability to take advantage of term discounts due
to improved cash flows.
Selling, general and administrative expenses increased 12.2%, from $47.4
million, or 31.5% of revenues, in 1995 to $53.2 million, or 27.7% of revenues,
in fiscal 1997. The decrease in selling, general and administrative expenses
(including depreciation and amortization) as a percentage of revenues was due
primarily to the consolidation of two warehouses into one regional facility in
the Northeastern U.S. during the 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.
We use grants of employee stock options to provide an incentive to our
employees by increasing their ownership interests in our shares. This helps to
align their interests with the interests of our stockholders. In connection with
the spin-off from U.S. Office Products in June 1998, various replacement options
were issued at their prior exercise price adjusted for the spin-off in
accordance with APB Opinion No. 25. If we 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 No. 123, our income from continuing
operations for the fiscal year ended April 26, 1997 would have been reduced by
approximately $0.7 million or 9.2%.
We 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.
We incurred restructuring costs of $2.5 million in 1995 and $194,000 in
fiscal 1997. These costs represent the external costs and liabilities to close
redundant facilities, severance costs related to our employees and other costs
associated with our restructuring plans. We expect to incur similar costs in the
future as we continue to review our operations, with the intention of continuing
to eliminate redundant facilities.
29
<PAGE> 33
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 our debt in conjunction with the
acquisition of the Pooled Companies by U.S. Office Products and lower interest
rates being charged on our 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. We incurred a tax expense in
1995, notwithstanding the fact that we reported a pre-tax loss, because one of
the Pooled Companies' earnings were not offset by the other Pooled Companies'
loss. In 1995, we 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 U.S. Office Products acquiring us, because it was deemed
"more likely than not," based on improved results, that the tax benefit from
such operating loss carryforwards would be realized.
CONSOLIDATED PRO FORMA RESULTS OF OPERATIONS
The unaudited pro forma consolidated financial data presented below does
not purport to represent the results that we would have obtained had the
transactions which are the subject of the pro forma adjustments occurred on
April 26, 1998, as assumed, and are not necessarily representative of our
results of operations in any future period.
NINE MONTHS ENDED JANUARY 23, 1999 COMPARED TO NINE MONTHS ENDED JANUARY 24,
1998
Pro forma revenues increased 1.9%, from $496.9 million for Interim 1998 to
$506.2 million for Interim 1999. This increase was primarily due to sales to new
accounts, increased sales to existing customers and higher pricing on certain
products in response to increased product costs. These revenue gains were offset
by the impact of our acquisition of Education Access and lower revenues at
Beckley-Cardy in Interim 1999 resulting from our restructuring of the sales
force and reduced bid revenues. Education Access, which we acquired out of a
bankruptcy proceeding in March 1998, had revenues of $4.6 million in Interim
1999 compared to $18.3 million in Interim 1998.
Pro forma gross profit increased 3.3%, from $169.8 million in Interim 1998
to $175.4 million in Interim 1999. Pro forma gross margins increased slightly
from 34.2% for Interim 1998 to 34.7% for Interim 1999. This increase was due
primarily to a shift in revenue mix to higher margin specialty products and our
use of increased buying power to reduce product costs, offset by increased lower
margin bid revenues from our traditional businesses.
Pro forma selling, general and administrative expenses (including
depreciation and amortization) decreased 1.9%, from $135.6 million in Interim
1998 to $133.0 million in Interim 1999. As a percentage of pro forma revenues,
these expenses decreased from 27.3% for Interim 1998 to 26.3% for Interim 1999.
The pro forma decrease in selling, general and administrative expenses as a
percentage of revenues reflects the elimination of certain redundant expenses at
the companies we acquired and integrated in fiscal 1998 and Interim 1999
(including expenses relating to general management, purchasing, accounting,
finance and information systems) and the closing of two warehouses during the
third quarter of Interim 1999.
Restructuring charges during Interim 1999 included (1) a non-cash
restructuring charge of $1.1 million in the first quarter of Interim 1999,
consisting of compensation expense attributed to the U.S. Office Products stock
option tender offer and the sale of shares of Common Stock to some of our
executive management personnel, net of underwriting discounts and (2) a $4.2
million restructuring charge in the second quarter of Interim 1999 relating to
our plan to consolidate our existing warehousing, customer service and sales
operations following the acquisition of Beckley-
30
<PAGE> 34
Cardy. Under this restructuring plan, we intend to reduce our distribution
centers from 13 to eight and our customer service centers from seven to two
during the period from October 1998 through December 1999. The $4.2 million
charge consists of $2.1 million for employee severance and termination benefits,
$1.3 million for lease termination and facility shut-down costs and $0.8 million
for write down of fixed assets and inventories. On an after-tax basis these
restructuring charges reduced net income for Interim 1999 by $3.2 million.
A $1.2 million restructuring charge was recorded in Interim 1998 by
Beckley-Cardy consisting primarily of compensation and professional services
related to a corporate management reorganization.
Provision for income taxes increased 2.7%, from $11 million for Interim
1998 to $11.3 million for Interim 1999, reflecting an effective income tax rate
of 58% for Interim 1998 and 49% for Interim 1999. The high effective income tax
rate, compared to the federal statutory rate of 35%, was primarily due to
non-deductible goodwill amortization and state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
At January 23, 1999, we had working capital of $90.8 million. Our
capitalization at January 23, 1999 was $331.6 million and consisted of debt of
$172.5 million and stockholders' equity of $159.1 million. On a pro forma basis,
at January 23, 1999, we had working capital of $99.3 million and capitalization
of $354.6 million, which consisted of debt of $195.6 million and stockholders'
equity of $159.1 million. After giving effect to the Common Stock and Note
offerings, at January 23, 1999, we had working capital of $109.7 million and
capitalization of $357.6 million, which consisted of debt of $136.4 million and
stockholders' equity of $221.2 million.
We currently have a five year secured $350 million revolving Senior Credit
Facility with NationsBank, N.A. The Senior Credit Facility has a $100 million
term loan payable quarterly over five years commencing in January 1999 and
revolving loans which mature on September 30, 2003. The amount outstanding as of
January 23, 1999 under the Senior Credit Facility was approximately $172
million. As of the date of this Prospectus, $97.5 million was outstanding under
the term loan portion of the Senior Credit Facility. Borrowings under the Senior
Credit Facility are usually significantly higher during our first and second
quarters to meet the working capital needs of our peak selling season. On
October 28, 1998, we entered into an interest rate swap agreement with the Bank
of New York covering $50 million of the outstanding Senior Credit Facility. The
agreement fixes the 30 day LIBOR interest rate at 4.37% per annum (floating
LIBOR on January 23, 1999 was 4.94%) on the $50 million notional amount and has
a three year term that may be canceled by the Bank of New York on the second
anniversary. As of January 23, 1999, the effective interest rate on borrowings
under our Senior Credit Facility was approximately 8%. Since the beginning of
fiscal 1999, we borrowed under the Senior Credit Facility to fund three
acquisitions and for seasonal working capital and capital expenditures. We
intend to use the net proceeds from the Common Stock offering together with the
Note offering to repay amounts outstanding under the Senior Credit Facility,
applying the net proceeds first to repay amounts outstanding under the term loan
and second to repay amounts outstanding under the revolving loans. We intend to
then reborrow amounts under the Senior Credit Facility for general corporate
purposes including working capital, and for acquisitions, subject to compliance
with financial covenants. In connection with the Common Stock and Note
offerings, we intend to make certain changes to our Senior Credit Facility to
reduce the borrowing limit thereunder to $250 million and to change certain
financial and other covenants. See "Description of Senior Credit Facility."
On June 9, 1998, we sold 2,125,000 shares of Common Stock in a public
offering for $30,631,875 in net proceeds. In addition, we sold 250,000 shares of
Common Stock in a private placement directly to Daniel P. Spalding, our Chairman
of the Board and Chief Executive Officer, David J. Vander Zanden, our President
and Chief Operating Officer, and Donald Ray Pate, Jr., our Executive Vice
President for ClassroomDirect.com (formerly named Re-Print), at a price of
31
<PAGE> 35
$14.415 per share for aggregate consideration of $3,603,750. In connection with
the offerings, we incurred approximately $1,500,000 of expenses. The total net
proceeds to us from the offerings were approximately $32,735,625. The net
proceeds were used to reduce indebtedness outstanding under our Senior Credit
Facility.
During the nine months ended January 23, 1999, net cash provided by
operating activities was $29.1 million. This net cash provided by operating
activities during the period is indicative of the high seasonal nature of the
business, with sales occurring in the first and second quarter of the fiscal
year and cash receipts in the second and third quarters. Net cash used in
investing activities was $98.8 million, including $95 million for acquisitions
and $3.9 million for additions to property and equipment and other. Net cash
provided by financing activities was $69.7 million. Borrowing under the Senior
Credit Facility included (1) $16.9 million used to fund the cash portion of the
purchase price of the Hammond & Stephens acquisition, (2) $134.7 million used to
fund the Beckley-Cardy acquisition consisting of $78.1 million for the cash
portion of the purchase price and $56.6 million for debt repayment, (3) $83.3
million used to repay the U.S. Office Products debt in connection with the
spin-off and (4) $67.8 million used for short-term funding of seasonal working
capital and the purchase of property and equipment. The $32.7 million net
proceeds from our initial public offering and the sale of 250,000 shares of
Common Stock to certain employees was used to repay a portion of the $302.7
million borrowed under the Senior Credit Facility. U.S. Office Products
contributed capital of $8.1 million as required under the distribution agreement
entered into with us in connection with the spin-off.
During the nine months ended January 24, 1998, net cash used in operating
activities was $15.4 million. Net cash used in investing activities was $96.5
million, including $92.1 million for acquisitions and $4.1 million for additions
to property and equipment and other. Net cash provided by financing activities
was $81.1 million, including $89.2 million provided by U.S. Office Products to
fund the cash portion of the purchase price and the repayment of debt associated
with the Fiscal 1998 Purchased Companies and to fund working capital and the
purchase of property and equipment, partially offset by $8 million used to repay
indebtedness.
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 $4.1 million for additions to property and
equipment and other. 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
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 $6.1 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.
Our anticipated capital expenditures for the next twelve months is
approximately $10 million. The largest items include software development for
our Internet initiative, computer hardware and software and warehouse equipment.
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<PAGE> 36
We are currently considering, and have hired a nationally known commercial
real estate agent to market, a sale and leaseback transaction involving six
distribution facilities in Ohio, Massachusetts, Kansas, Texas, Nevada and
Illinois. We are currently seeking bids on these properties for such a
transaction. We may sell all or any number of these facilities or could
substitute other properties we own in this transaction. We believe that the
current fair market value for these distribution facilities is approximately $26
million with net proceeds to us of approximately $25 million which would be used
to repay outstanding indebtedness under our Senior Credit Facility or for
general corporate purposes, including working capital and for acquisitions. If
we determine to proceed with this transaction, we expect that it would close in
the fourth quarter of fiscal 1999 or the first quarter of fiscal 2000.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
Our business is subject to seasonal influences. Our historical revenues and
profitability have been dramatically higher in the first two quarters of our
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 our costs for the products sold, the mix of products sold and
general economic conditions. Moreover, the operating margins of companies we
acquired may differ substantially from our own, which could contribute to
further fluctuation in quarterly operating results. Therefore, results for any
quarter are not indicative of the results that we 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 and for the nine months ended January
23, 1999 (in thousands). We derived this data from unaudited consolidated
financial statements that, in the opinion of our management, reflect all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of such quarterly information. This quarterly information is not
comparative because of the high degree of seasonality in our 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 26, 1997
--------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenues................................. $58,991 $ 71,682 $29,304 $31,769 $191,746
Gross profit............................. 19,858 23,435 9,595 11,996 64,884
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>
33
<PAGE> 37
<TABLE>
<CAPTION>
YEAR ENDED APRIL 25, 1998
--------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenues................................. $87,029 $111,460 $49,391 $62,575 $310,455
Gross profit............................. 30,337 37,225 16,213 23,810 107,585
Operating income (loss).................. 11,872 12,155 (3,647) (4,132) 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>
NINE MONTHS ENDED JANUARY 23, 1999
----------------------------------------------
FIRST SECOND THIRD TOTAL
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenues............................... $126,657 $212,316 $85,359 $424,332
Gross profit........................... 44,042 70,761 28,093 142,896
Operating income (loss)................ 13,326 18,674 (2,383) 29,617
Net income (loss)...................... 6,563 7,430 (3,298) 10,695
Per share amounts:
Basic................................ 0.45 0.51 (0.23) 0.73
Diluted.............................. 0.44 0.51 (0.23) 0.73
</TABLE>
- ---------------
(1) For the year ended April 26, 1997, fourth quarter net income was increased
by $5.3 million due to the reversal of a deferred tax asset valuation
allowance. See Note 3 to "Selected Financial Data."
INFLATION
We do not believe that inflation has had a material impact on our 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, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required. We
intend to adopt SFAS No. 130 in fiscal 1999.
Disclosures About Segments. In June 1997, FASB issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997 and will be presented in our Annual Report on
Form 10-K for the year ending April 24, 1999. Financial statement disclosures
for prior periods are required to be restated. We are in the process of
evaluating the disclosure requirements. The adoption of SFAS No. 131 will have
no impact on consolidated results of operations, financial position or cash
flow.
34
<PAGE> 38
Accounting for the Costs of Computer Software. In March 1998, the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires computer software costs associated with
internal use software to be expensed as incurred until certain capitalization
criteria are met. We will adopt SOP 98-1 during fiscal 1999. Adoption of SOP
98-1 is not expected to have a material impact on our consolidated financial
position or results of operations.
Accounting for Derivative Instruments and Hedging Activities. In June
1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities." This statement, which is required to be adopted for annual
periods beginning after June 15, 1999, establishes standards for recognition and
measurement of derivatives and hedging activities. We will implement this
statement in fiscal 2001 as required. The adoption of SFAS No. 133 is not
expected to have a material effect on our financial position or results of
operations.
YEAR 2000
The Year 2000 issue exists because many computer systems and applications,
including those embedded in equipment and facilities, use two digit rather than
four digit date fields to designate an applicable year. As a result, the systems
and applications may not properly recognize the Year 2000 or process data which
include it, potentially causing data miscalculations or inaccuracies or
operational malfunctions or failures. Because any disruption to our computerized
order processing and inventory systems could materially and adversely affect our
operations, we have established a centrally managed, company wide plan to
identify, evaluate and address Year 2000 issues. Although we expect that most of
our mission critical systems, network elements and products will be verified for
Year 2000 compliance by May 1999, our ability to meet this target is dependent
upon a variety of factors. In addition, if our suppliers, service providers
and/or customers fail to resolve their Year 2000 issues in an effective and
timely manner, our business could be significantly and adversely affected. We
believe that many of our school customers have not yet addressed or resolved
their Year 2000 issues.
We currently estimate that we will incur expenses of approximately $100,000
through 1999 in connection with our anticipated Year 2000 efforts, in addition
to approximately $50,000 in expenses incurred through January 23, 1999 for
matters historically identified as Year 2000-related. The timing of expenses may
vary and is not necessarily indicative of readiness efforts or progress to date.
We also expect to incur certain capital improvement costs (totaling
approximately $300,000) to support this project. Such capital costs are being
incurred sooner than originally planned, but, for the most part, would have been
required in the normal course of business. We expect to fund our Year 2000
efforts through operating cash flows. We will use our Senior Credit Facility for
capital improvements related to the effort.
As part of our Year 2000 initiative, we are evaluating scenarios that may
occur as a result of the century change and are in the process of developing
contingency and business continuity plans tailored for Year 2000-related
occurrences. As noted earlier, we are highly reliant on our computer order
processing and inventory systems to fill orders, bill the customer and collect
payments. A loss of either of these systems would cause long delays in filling
and shipping products, billing the customer and collecting accounts receivable.
The highly seasonal nature of our business does not allow for any delay in
shipping products to customers. Although the seasonal nature of our business
would heighten any problems encountered, the timing of the majority of our
sales, shipping, billing and collection efforts for fiscal 1999 will be complete
prior to the Year 2000. We expect that any unforeseen problems related to Year
2000 issues would be identified within the months of January and February 2000,
which is our slowest period. We have identified that we may experience certain
inconveniences or inefficiencies as a result of a supplier's failure to
remediate its Year 2000 issue. We believe, however, that most of our business
will proceed without any significant interruption.
35
<PAGE> 39
BUSINESS
OVERVIEW OF OUR BUSINESS
We are the largest marketer of non-textbook educational supplies and
furniture to schools for pre-kindergarten through twelfth grade. We offer more
than 60,000 items through an innovative two-pronged marketing approach that
targets both school administrators and individual teachers. Our broad product
range enables us to provide our customers with one source for virtually all of
their non-textbook school supplies and furniture needs.
We have grown significantly in recent years through both acquisitions and
internal growth. In order to expand our geographic presence and product range,
we have acquired 18 companies since May 1996. In August 1998, we purchased
Beckley-Cardy, our largest traditional and specialty school supply competitor.
After giving pro forma effect to the acquisitions that we made during the
period, our revenues for the twelve months ended January 23, 1999 were $607.3
million and our Adjusted EBITDA was $51.2 million. These results represent
compound annual increases of 48.9% in revenues and 67.7% in Adjusted EBITDA
compared to our results for the year ended December 31, 1994.
Our "top down" marketing approach targets school administrators at the
state, regional and local levels using our 250 sales representatives and our
School Specialty and Beckley-Cardy general supply and furniture catalogs. Our
"bottom up" approach seeks to reach individual teachers and curriculum
specialists primarily through the mailing of our ClassroomDirect.com general
supply catalog (previously known as Re-Print) and our seven different specialty
direct catalogs. During 1998, we mailed over 10.2 million catalogs to more than
three million teachers and curriculum specialists. Approximately 100 employees
assist in the sale, marketing and merchandising of our specialty direct
products. We are also exploring various ways in which we can use the Internet to
market and sell our products. As the first stage of our Internet initiative, we
recently opened a fully integrated e-commerce site under the name
"ClassroomDirect.com" which offers over 13,000 items for sale. The second stage
of our Internet initiative, which we expect to launch in May 1999, is an
education portal in the form of an education mall which will offer our products
for sale and also provide a community forum and content aimed at educators.
We have 2,605 employees in the United States and the United Kingdom,
providing service to all 50 states and the United Kingdom. Our principal offices
are located at 1000 North Bluemound Drive, Appleton, Wisconsin 54914, and our
telephone number is (920) 734-2756. Our world wide general website address is
www.schoolspecialty.com. Information contained in any of our websites is not
deemed to be a part of this Prospectus.
INDUSTRY OVERVIEW
The school supply market consists of the sale of non-textbook school
supplies, furniture and equipment to school districts, individual schools,
teachers and curriculum specialists who purchase products for school and
classroom use. The National School Supply Equipment Association estimates that
annual sales of non-textbook educational supplies and equipment to the school
supply market are approximately $6.1 billion. Of this amount, over $3.6 billion
is sold through institutional channels and the remaining $2.5 billion is sold
through retail channels.
According to the U.S. Department of Education, there are 15,996 school
districts, 108,577 public and private elementary and secondary schools and 3.1
million teachers in the United States. School supply procurement decisions are
made at the school district level by administrators and curriculum specialists,
at the school level by principals and at the classroom level by teachers. Some
school supplies are purchased directly from manufacturers while others are
purchased through marketing firms such as us. We estimate that there are over
3,400 marketers of non-textbook school supplies and equipment, the majority of
which are family or employee owned businesses that operate in a single
geographic region and have annual revenues under $20 million. Besides us, only
one other
36
<PAGE> 40
company has a measurable presence in the market. Even so, we believe we have
annual revenues that are three times greater than this industry competitor. We
believe that the increasing demand for single source suppliers, prompt order
fulfillment and competitive prices, and the related need for suppliers to invest
in automated inventory and electronic ordering systems, is accelerating the
trend toward consolidation in our industry.
The demand for school supplies is driven primarily by the level of the
student population and, to a lesser extent, expenditures per student. Student
population is a function of demographics, while expenditures per student are
also affected by government budgets and the prevailing political and social
attitudes towards education. According to U.S. Department of Education
estimates, student enrollment in kindergarten through twelfth grade public and
private schools began growing in 1986, reaching a record level of 52.7 million
students in 1998. Current projections by the U.S. Department of Education
indicate that student enrollment will continue to grow to 54.5 million by the
year 2006. The U.S. Department of Education also projects that expenditures per
student in public elementary and secondary schools will continue to rise through
the year 2006. Expenditures of $272.4 billion in 1997 are projected to increase
to $340.7 billion by the year 2001. These projected increases in expenditures
include a projected increase in total per student spending from $5,961 per
student in 1997 to $7,179 by the year 2001. We believe that the current
political and social environment is favorable for education spending.
OUR RECENT ACQUISITIONS
-- BECKLEY-CARDY. In August 1998, we acquired The National School Supply
Company ("National School Supply"), including its subsidiary Beckley-Cardy, Inc.
("Beckley-Cardy"). Prior to our acquisition of Beckley-Cardy, it was the second
largest general education supply marketer in the industry. We paid $78.1 million
in cash and refinanced $56.6 million of its debt with borrowings under our
Senior Credit Facility. National School Supply had revenues for the fiscal year
ended March 31, 1998 of $176 million.
-- SPORTIME. In February 1999, we acquired Sportime, LLC ("Sportime")
from ProTeam.com (formerly known as Genesis Direct, Inc.). Sportime is a leading
specialty company focusing on physical education, athletic and recreational
products. Sportime offers several targeted catalogs from its early childhood
offerings to a catalog focused on physically challenged children. We paid $23
million in cash for Sportime, which we financed through borrowings under our
Senior Credit Facility. Sportime had revenues for 1998 of $32.6 million.
-- HAMMOND & STEPHENS. In June 1998, we acquired the business of Hammond
& Stephens, Co. ("Hammond & Stephens"), a leading publisher of school forms,
such as grade books, record books, teacher planners, student assignment books,
school year calendars, awards and similar materials. We paid $16.9 million in
cash for Hammond & Stephens, which we financed through borrowings under our
Senior Credit Facility. Hammond & Stephens had revenues for the fiscal year
ended October 31, 1997 of $9.1 million.
OUR INTERNET INITIATIVE
Because more schools and teachers are connecting to the Internet, we intend
to aggressively pursue sales opportunities through this rapidly growing channel.
By establishing an early presence on the Internet, we believe we can gain a
significant competitive advantage and valuable brand recognition. Our goal is to
become the leading marketer of school supplies and furniture over the Internet.
This may also permit us to expand our customer base over time to include
individuals and other non-traditional customers.
In January 1999, we launched the first phase of our Internet initiative
with the opening of our fully integrated e-commerce website ClassroomDirect.com.
The site offers access to over 13,000 stock keeping units with digital pictures
of most items. Although currently teacher focused, the site could be adapted to
a more consumer based format. The increasing demand by school administrators and
teachers for more information in making supply decisions, the lack of a wide
37
<PAGE> 41
variety of educational products in stores and the growing importance of
convenience make the Internet a viable, low cost channel for the marketing of
education supplies.
The second phase of our Internet initiative, which we expect to launch in
May 1999, is to offer an education portal on the Internet. This portal will be
structured as an education mall offering our products for sale and also provide
a community forum and content aimed at educators. We believe that by providing
education related content and information, this portal will place us at the
education community's decision point for supply and content which will
strengthen our brands. We intend to enter into strategic alliances with a number
of content providers to help develop and maintain the new website and portal
with the goal to become the Internet headquarters for teachers, product
specialists and others with an interest in education. Prospective content
providers could include media, search engine and Internet service providers and
other Internet related companies. Prospective content could include product
reviews, teaching tips, education standards and related teaching products,
public policy, current events and chat rooms.
In connection with our Internet initiative, we have also signed a
non-binding letter of intent to acquire SmartStuff Development Corporation
("SmartStuff"), the developer of FoolProof(R) software, a program with an
installed customer base of 1.5 million. FoolProof(R) is a desktop software
security program which limits access by children to selected programs and
applications on desktop computers. SmartStuff is expected to introduce Internet
browser security and filtering software products for the education market. We
intend to market our brands and Internet services to SmartStuff's existing and
future customer base by including links to our website and portal and other
promotional materials in SmartStuff product upgrades and new products. Under our
letter of intent, we would pay $8.3 million for SmartStuff, with 50% of the
consideration in the form of Common Stock and 50% in cash. SmartStuff's revenues
for 1998 were approximately $4.2 million. This transaction is expected to close
in March 1999.
OUR STRENGTHS
We attribute our strong competitive position to the following key
strengths:
-- LEADING MARKET POSITION. We have developed our leading market
position over our 40 year history by emphasizing high quality products, superior
order fulfillment and exceptional customer service. We believe that our annual
revenues are three times greater than those of our next largest industry
competitor and that our large size and brand recognition have resulted in
significant buying power, economies of scale and customer loyalty.
-- BROAD PRODUCT LINE. Our strategy is to provide a full range of high
quality products to meet the complete supply needs of schools for
pre-kindergarten through twelfth grade. With over 60,000 stock keeping units
ranging from classroom supplies and furniture to playground equipment, we
provide customers with one source for virtually all of their non-textbook school
supply and furniture needs. Our specialty brands enrich our general product
offering and create opportunities to cross merchandise our specialty products to
our traditional customers. Specialty brands include the following:
<TABLE>
<CAPTION>
BRAND PRODUCTS
----- --------
<S> <C>
Childcraft........................................... Early childhood
Sax Arts and Crafts.................................. Art supplies
Frey Scientific...................................... Science
Sportime............................................. Physical education
Education Access..................................... Educational software
Brodhead Garrett..................................... Industrial arts
Gresswell............................................ Library
Hammond & Stephens................................... School forms
</TABLE>
38
<PAGE> 42
-- INNOVATIVE TWO-PRONGED MARKETING APPROACH. School supply procurement
decisions are made at the district and school levels by administrators, and at
the classroom level by curriculum specialists and teachers. We market to both of
these groups, addressing administrative decision makers with a "top down"
approach through our 250 person sales force and the School Specialty and
Beckley-Cardy general supply and furniture catalogs, and targeting teachers and
curriculum specialists with a "bottom up" approach primarily through the mailing
of over 10.2 million ClassroomDirect.com general supply catalogs and our seven
different specialty direct catalogs each year. We utilize our customer database
across our family of catalogs to maximize their effectiveness and increase our
marketing reach. We believe our new ClassroomDirect.com Internet site offers
additional marketing opportunities.
-- STABLE INDUSTRY. Because the market for educational supplies is
driven primarily by demographics and government spending, we believe that our
industry is less exposed to economic cycles than many others.
-- ABILITY TO COMPLETE AND INTEGRATE ACQUISITIONS. We have successfully
completed the acquisition of 23 companies since 1991, including 18 since May
1996. We have established a 24-month integration process in which a transition
team is assigned to:
-- sell or discontinue incompatible business units,
-- reduce the number of stock keeping units,
-- eliminate redundant expenses,
-- integrate the acquired entity's management information systems, and
-- exploit buying power.
To date, our integration efforts have focused on acquired general products
companies and certain administrative functions at our specialty divisions. We
believe that through these processes, we can rapidly improve the revenues and
gross and operating margins of the businesses we acquire.
-- USE OF TECHNOLOGY. We believe that our use of information technology
systems allows us to turn inventory more quickly than our competitors, offer
customers more convenient and cost effective ways of ordering products and more
precisely focus our sales and marketing campaigns.
-- EXPERIENCED AND INCENTIVISED MANAGEMENT. Our management team provides
depth and continuity of experience. Management's interests are aligned with
those of our shareholders. Management currently owns approximately % of our
shares of Common Stock on a fully-diluted basis and purchased % of the
currently outstanding shares at the same time as our initial public offering in
June 1998.
OUR GROWTH STRATEGY
We use the following strategies to grow and enhance our position as the
leading marketer of non-textbook educational supplies and furniture:
-- AGGRESSIVELY PURSUE ACQUISITIONS. We believe that there are many
attractive acquisition opportunities in our highly fragmented industry. As a
public company, we have greater access to capital for acquisitions than many of
our competitors. We will continue to pursue opportunities that enhance our
geographic presence or which complement our specialty direct product offerings.
We believe that we can improve the revenues and gross and operating margins of
the businesses we acquire through our efficient integration process. Although we
are the largest marketer in the industry, our share of the $6.1 billion
non-textbook school supply and furniture market is less than 10%, creating
substantial growth opportunities.
39
<PAGE> 43
-- INCREASE SALES OF SPECIALTY AND PROPRIETARY PRODUCTS. We believe we
can increase our margins by selling more specialty direct products and products
for which we are the only supplier. We believe that specialty direct products
accounted for approximately 42% of our revenues on a pro forma basis for the
twelve months ended January 23, 1999, compared to approximately 20% on an
historical basis for the year ended December 31, 1994.
-- EXPAND EXISTING TRADITIONAL BUSINESS. We believe that we can also
increase the revenues of our traditional business by adding sales
representatives in geographic markets in which we are underrepresented and by
cross merchandising our specialty products to our traditional customers.
-- IMPROVE PROFITABILITY. We improved our operating margin (as measured
by our Adjusted EBITDA divided by our revenues) from 5.2% in 1994 on an
historical basis to 8.7% on a pro forma basis for the twelve months ended
January 23, 1999. We believe that we can further improve our operating margins
by eliminating redundant expenses of acquired businesses, leveraging our
overhead costs, increasing our purchasing power and improving the efficiency of
our warehousing and distribution.
-- PURSUE INTERNET INITIATIVE. Because more schools and teachers are
connecting to the Internet, we intend to aggressively pursue sales opportunities
through this rapidly growing channel. By establishing an early presence on the
Internet, we believe we can gain a significant competitive advantage and
valuable brand recognition. Our goal is to become the leading marketer of school
supplies and furniture over the Internet. This may also permit us to expand our
customer base over time to include individuals and other non-traditional
customers.
We believe this strategy can be effective both as an offensive tool,
enhancing revenue at a low incremental cost, and as a defensive one, by
preventing other existing and prospective Internet competitors from establishing
themselves in this market. The establishment of early brand recognition will
facilitate the establishment of our educational portal as the key education
related website.
OUR PRODUCT LINES
We market two broad categories of products: general school supplies and
specialty products geared towards specific educational disciplines. Our general
school supply products are offered to school administrators by our sales force
through our School Specialty and Beckley-Cardy catalogs and to teachers and
curriculum specialists through direct mailings of our ClassroomDirect.com
catalog. Our specialty products are offered to teachers and curriculum
specialists through direct mailings of our seven specialty catalogs. Our
specialty products enrich our general supply product offering and create
opportunities to cross merchandise our specialty school supplies to our
traditional customers. With over 60,000 stock keeping units ranging from
classroom supplies and furniture to playground equipment, we provide customers
with one source for virtually all of their non-textbook school supply and
furniture needs.
Our general school supply product lines can be described as follows:
-- SCHOOL SPECIALTY/BECKLEY-CARDY. Through the School Specialty and
Beckley-Cardy catalogs, which are targeted to administrative decision makers, we
offer a comprehensive selection of classroom supplies, instructional materials,
educational games, art supplies, school forms (such as reports, planners and
academic calendars), physical education equipment, audio-visual equipment,
school furniture and indoor and outdoor equipment. Over the next year, we expect
to integrate these two general catalogs. We believe we are the largest school
furniture resale source in the United States. We have been granted exclusive
franchises for certain furniture lines in specific territories and we enjoy
significant purchasing power in open furniture lines.
-- CLASSROOMDIRECT.COM. ClassroomDirect.com offers its customers
substantially the same products as those offered through the School Specialty
catalog but focuses on reaching teachers and curriculum specialists directly
through its mail-order catalogs and new fully integrated Internet e-commerce
website. The new Internet e-commerce site targets the traditional catalog market
and
40
<PAGE> 44
other consumers interested in educational products, such as home school
families, churches and parents.
Our specialty brands offer product lines for specific educational
disciplines, as follows:
-- CHILDCRAFT. Childcraft markets early childhood education products and
materials. Childcraft also markets 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 AND CRAFTS. Sax Arts and Crafts is a leading marketer of art
supplies and art instruction materials, including paints, brushes, paper,
ceramics, art metals and glass, leather and wood crafts. Sax Arts and Crafts
offers customers a toll free "Art Savvy Hotline" staffed with 17 professional
artists to respond to customer questions.
-- FREY SCIENTIFIC. Frey Scientific is a leading marketer of laboratory
supplies, equipment and furniture for science classrooms. Frey Scientific offers
value added focus in the biology, chemistry, physics and earth science areas.
-- SPORTIME. Sportime is a leading marketer of physical education,
athletic and recreational products. Sportime's catalog product offering includes
catalogs from early childhood through middle school as well as targeted products
for physically challenged children.
-- EDUCATION ACCESS. Education Access is a reseller of technology
solutions for kindergarten through twelfth grade. This product line includes
curriculum software, productivity software, peripherals, networking products and
other related products and is offered through the ClassroomDirect.com catalog.
-- BRODHEAD GARRETT. Brodhead Garrett is the nation's oldest marketer of
industrial arts/technical materials to classrooms. Brodhead Garrett's product
line includes such various items as drill presses, sand paper, lathes and
robotic controlled arms.
-- GRESSWELL. Gresswell markets 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.
-- HAMMOND & STEPHENS. Hammond & Stephens is a leading publisher of
school forms, including student assignment books, record books, grade books,
teacher planners and other printed forms for kindergarten through twelfth grade.
Our merchandising managers, many of whom have prior experience in
education, continually review and update the product lines for each operating
division. The merchandising managers convene customer focus groups and advisory
panels to determine 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 we
offer.
OUR SALES AND MARKETING
OUR TWO-PRONGED APPROACH. We believe we have developed a substantially
different sales and marketing model from that of traditional school supply and
school furnishings distribution companies in the United States. Our strategy is
to use two separate marketing approaches to reach all the prospective purchasers
in the school system. Our 250 sales representatives focus on "top down" selling
to districts, school purchasing authorities and schools using School Specialty
and Beckley-Cardy general supply and furniture catalogs. In addition,
approximately 100 employees assist in the sale, marketing and merchandising of
our specialty direct products. We also target teachers and curriculum
specialists with a "bottom up" approach using our over 10.2 million specialty
direct catalogs which are mailed each year and our new "ClassroomDirect.com"
Internet e-commerce site.
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<PAGE> 45
TRADITIONAL SUPPLY BUSINESS. As part of the integration of Beckley-Cardy
into our School Specialty traditional supply business, we restructured our
traditional sales and marketing operations from a decentralized regional system
to a more centralized national structure. Our national marketing model has 250
sales representatives operating within 15 regions supported by regional managers
and two regional customer service and sales support call centers. The
reorganization reallocated sales territories, selectively reduced the combined
sales and management force and reduced the number of regional customer
service/sales support locations from 12 to two. We believe our new national
structure significantly improves our effectiveness through better sales
management, resulting in higher regional penetration, and achieves significant
cost savings through the reduction in number of distribution centers.
We have a broad customer base and no single customer accounted for more
than 2% of sales during fiscal 1998 or the nine months ended January 23, 1999.
Schools typically purchase school supplies and furniture based on an established
relationship with relatively few suppliers. We establish and maintain our
relationship with our traditional customers by assigning accounts within a
specific geographic territory to a local area sales representative who is
supported by a centrally located customer service team. Our customer service
representatives call on existing traditional customers frequently to ascertain
and fulfill their school supply needs. The representatives maintain contact with
these customers throughout the order cycle and assist in processing orders.
Our primary compensation program for sales representatives is based on
commissions as a percentage of gross profit on sales. For new and transitioning
sales representatives, we offer salary and expense reimbursement until the
representative is moved to a full commission compensation structure.
SPECIALTY DIRECT BUSINESS. We use direct mail catalogs to reach our
broader customer base. We distribute seven major specialty direct catalogs, one
for each of our Childcraft, Sax Arts and Crafts, Frey Scientific, Sportime,
Brodhead Garrett, Gresswell and Hammond & Stephens lines. The catalog
distribution calendar is generally the same across all product lines. For each
product line, 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.
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<PAGE> 46
The approximate number of catalogs distributed for our brands for calendar
1998 and projected catalog distribution for calendar 1999 is set out below. The
figures set forth below include all books of over 32 pages distributed (or, with
respect to 1999, expected to be distributed) during the calendar year.
<TABLE>
<CAPTION>
1998 1999
---------- ----------
(PROJECTED)
<S> <C> <C>
School Specialty............................................ 450,000 600,000
Beckley-Cardy(1)............................................ 400,000 280,000
ClassroomDirect.com (formerly named Re-Print)............... 2,700,000 3,200,000
Childcraft.................................................. 1,900,000 2,400,000
Sax Arts and Crafts......................................... 1,548,500 1,680,000
Frey Scientific............................................. 168,000 168,000
Sportime.................................................... 2,773,500 2,045,500
Brodhead Garrett............................................ 82,000 82,000
Gresswell................................................... 130,000 480,000
Hammond & Stephens.......................................... 80,000 80,000
---------- ----------
Total..................................................... 10,232,000 11,015,500
========== ==========
</TABLE>
- ---------------
(1) Excludes figures for Beckley-Cardy's early childhood and art catalogs, which
are included in the Childcraft and Sax Arts and Crafts' figures,
respectively.
PRICING. Pricing for our general and specialty direct product offerings
varies by product and channel of distribution. We generally offer a negotiated
discount from catalog prices for supplies from our School Specialty and
Beckley-Cardy catalogs and respond to quote and bid requests for furniture and
equipment. In addition, local sales representatives work with our corporate
sales force and school supply buyers to achieve an acceptable pricing structure
based upon the mix of products being purchased. The pricing structure of
specialty direct products offered through direct marketing is generally not
subject to negotiation.
DISTRIBUTION
We distribute products through our distribution centers and place customer
orders directly with our suppliers. Furniture is generally shipped directly from
the manufacturer to the customer.
We have adopted a plan to rationalize our distribution systems following
the Beckley-Cardy acquisition. Under this plan, we will close five of our 13
regional distribution centers and centrally manage the remaining eight. We have
currently closed two regional distribution centers and expect to close the
remaining three by December 31, 1999. We believe this restructuring will improve
our distribution efficiency and generate significant cost savings.
OUR PURCHASING AND INVENTORY MANAGEMENT
We manage our inventory by continually reviewing daily inventory levels
compared to a running 90-day inventory for the previous year, adjusted for
incoming orders. We constantly refine the focus of inventory products through
our automated inventory management system to pursue the optimum level of scope
and depth of product offered. Inventory forecasts are made daily for all stock
keeping units by assessing anticipated demand by adjusting historical demand
levels to account for 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 high seasonal demand while keeping off-season inventory to a
minimum. The information systems for all of our distribution centers are
connected 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. Our
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<PAGE> 47
inventory management results in inventory turnover that management believes is
higher than average industry turnover rates and reduces the level of
discontinued, excess and obsolete inventory compared to businesses that we have
acquired.
We believe our large size enhances our purchasing power with suppliers
resulting in lower product costs than most of our competitors. Further, we
believe that this purchasing power leverage will increase with additional
acquisitions which, in turn, should improve our operating margins.
We believe 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. We continue to invest in sophisticated
computer systems to automate the order taking, inventory allocation and
management, and order shipment processes. As a result, we have been able to
provide superior order fulfillment to our customers. In addition, we have
developed our Order Management System, which allows schools to customize their
orders and enter them electronically and provides historical usage reports to
schools useful for their budgeting process. While this system currently only
accounts for approximately 6% of our traditional supply sales, we believe it
will become more significant as schools upgrade their technology and use of
computers. During the academic year, we seek to fill orders within 24 hours of
receipt of the order at a 95% fill rate and a 99.5% order accuracy rate. During
the summer months, we shift to a production environment and schedule shipments
to coincide with the start of the school year. During the summer months, our
objectives are to meet a 100% fill rate at a 99.5% order accuracy rate. Our
average order fill rate for June, July and August 1998 exceeded %. We
define "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
our distribution centers contracts with local common carriers to deliver our
product to schools and school warehouses. ClassroomDirect.com 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.
OUR INFORMATION SYSTEMS
We believe that through the utilization of technology in areas such as (1)
purchasing and inventory management, (2) customer order fulfillment and (3)
database management, we are able to turn inventory more quickly than
competitors, offer customers more convenient and cost effective ways of ordering
products and more precisely focus our sales and marketing campaigns.
We use two principal information systems, one for our general and another
for our specialty product distribution. In general school supply distribution,
we use a specialized distribution software package used primarily by office
products and paper marketers. This software package is referred to as the
Software for Distributors System (the "SFD system"). This software offers a
fully integrated process from sales order entry through customer invoicing, and
inventory requirements planning through accounts payable. Our system provides
information through daily automatic posting to the general ledger and integrated
inventory control. We have made numerous enhancements to this process that allow
greater flexibility in addressing the seasonal requirements of the industry and
meeting specific customer needs.
The specialty divisions, including newly acquired companies, use either the
SFD system or a mail order and catalog 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 we have two principal information systems, both the SFD system and
MACS integrate general ledger, purchasing and inventory management functions.
The software and hardware allow
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<PAGE> 48
for continued incremental growth as well as the opportunity to integrate new
client-server and other technologies into the information systems. For
information on Year 2000 compliance of our information systems, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
INTERNET CONNECTION WITH OUR SYSTEMS
Our existing ClassroomDirect.com Internet site is fully integrated with
MACS and our education portal is currently being designed to be fully integrated
with both of our systems (i.e., the SFD system and MACS). We intend to install
Ironworks Powered Server ("IPS") on our web servers. IPS provides a secured
front-end so the customer can place an order using a JAVA-enabled web browser.
IPS communicates with the host machine (i.e., the SFD system or MACS) by means
of remote procedure calls ("RPC"). The firewall between the web server and the
host computers will be configured so that only IPS is permitted to use the RPC
to the host gateway.
All of the websites will be navigable through dynamically generated HTML
pages, generated either by using the current/extended functionality of IPS or by
accessing product information from a relational database generated and
synchronized with our information systems in real time. The product images and
their descriptions will be maintained in files residing on the web server,
synchronized with data in a Centrus system, which is a central repository for
all products and data related to those products.
At the check-out stage, new customers will fill out their personal
information, billing, shipping and credit card information, and existing
customers will enter their user password and/or account number verified through
synchronization with our information systems.
OUR COMPETITION
We operate in a highly competitive environment. Our principal competitors
are other national and regional marketers of school supplies. We also face
increasing competition from non-traditional alternate channel competitors, such
as office products contract stationers and superstores. Among traditional school
supply marketers, we believe that there is only one other company with a
measurable presence in the market. Even so, we believe that we have annual
revenues that are three times greater than this competitor and that we compete
favorably with this company on the basis of service and price.
The market is highly competitive on a regional basis, but we believe our
heaviest competition is coming from alternate channel competitors such as office
product contract stationers and superstores. Their primary advantages over us
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, our competitors do not offer special
order fulfillment software, which we believe is increasingly important to
adequately service school needs. We believe we compete favorably with these
companies on the basis of service and product offering.
OUR EMPLOYEES
As of February 1, 1999, we had 2,605 full-time employees, of whom were
employed primarily in management and administration, in regional warehouse
and distribution operations and in marketing, sales, order processing and
customer service. To meet the seasonal demands of our customers, we employ many
seasonal employees during the late spring and summer seasons. Historically, we
have been able to meet our requirements for seasonal employment. As of February
1, 1999, approximately of our employees were members of the Teamsters Labor
Union at our Sax Arts and Crafts' New Berlin, Wisconsin facility. We consider
our relations with our employees to be very good.
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<PAGE> 49
OUR FACILITIES
Our corporate headquarters are located at 1000 North Bluemound Drive,
Appleton, Wisconsin, a combined office and warehouse facility of approximately
120,000 square feet. Our lease on the Appleton headquarters expires on December
31, 2001, although we are currently negotiating with the owners of the facility
(consisting of the father and uncle of our Chief Executive Officer, Daniel P.
Spalding, and one other unrelated party) to purchase the property sometime prior
to the end of March 1999. See "Certain Transactions" for more information. We
lease or own the following principal distribution facilities:
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE OWNED/
LOCATIONS FOOTAGE LEASED LEASE EXPIRATION
- --------- ----------- ------ ------------------
<S> <C> <C> <C>
Agawam, Massachusetts......................... 163,300 Owned* --
Atlanta, Georgia.............................. 76,913 Leased January 6, 2002
Birmingham, Alabama........................... 180,365 Leased November 30, 2006
Bowling Green, Kentucky....................... 42,000 Leased June 30, 2001
Carson City, Nevada........................... 80,000 Owned* --
Fremont, Nebraska............................. 95,000 Leased June 30, 2003
Fresno, California............................ 18,480 Leased December 31, 2001
Hoddesdon, England............................ 47,500 Leased September 24, 2006
Lancaster, Pennsylvania....................... 72,947 Leased December 31, 2002
Lancaster, Pennsylvania....................... 165,750 Leased February 28, 2009
Lufkin, Texas................................. 140,000 Owned* --
Mansfield, Ohio............................... 323,000 Owned* --
New Berlin, Wisconsin......................... 97,500 Leased March 31, 2002
Oklahoma City, Oklahoma....................... 37,340 Leased July 16, 2001
Portland, Oregon.............................. 30,456 Leased May 31, 2001
Salina, Kansas................................ 123,000 Owned* --
Union City, California........................ 14,494 Leased April 7, 2000
</TABLE>
- ---------------
* We are currently considering a sale and leaseback transaction involving
certain of our owned distribution centers and other properties. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Lancaster, Pennsylvania facility is used for manufacturing and the
Salina, Kansas facility is used for production of school forms. In addition, we
have sales offices throughout the United States.
We believe that our properties are adequate to support our operations for
the foreseeable future. We regularly review the consolidation of our facilities.
OUR LEGAL PROCEEDINGS
We are, from time to time, a party to legal proceedings arising in the
normal course of business. Our management believes that none of these legal
proceedings will materially or adversely affect our financial position, results
of operations or cash flows.
OUR ONGOING SPIN-OFF OBLIGATIONS
In connection with the spin-off from U.S. Office Products in June 1998, we
entered into a series of agreements with U.S. Office Products and the other
spin-off companies, including a distribution agreement (the "Distribution
Agreement"), a tax allocation agreement (the "Tax Allocation Agreement"), a tax
indemnification agreement (the "Tax Indemnification Agreement") and an
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<PAGE> 50
employee benefits agreement (the "Employee Benefits Agreement"). These
agreements have resulted in certain contractual obligations for us.
Under the Distribution Agreement, each spin-off company, including us, will
be liable for any liabilities related to its business, its liabilities under the
Employee Benefits Agreement, Tax Allocation Agreement and the Tax
Indemnification Agreement (each discussed below), federal securities laws
liabilities relating generally to U.S. Office Products prior to the
distributions and certain other shared liabilities.
We are aware of certain lawsuits filed against U.S. Office Products that
could fall within these contractual obligations. See "Risk Factors--We Are
Exposed to Risks Related to Other Liabilities of U.S. Office Products." The
aggregate of such liabilities for which we may be liable is a maximum of $1.75
million.
The Tax Allocation Agreement provides that each spin-off company will
jointly and severally indemnify U.S. Office Products for any losses associated
with taxes related to the distributions if any of the spin-off companies take an
action or fail to take an action that results in the spin-off being taxable (an
"Adverse Tax Act"). If any of the spin-off distributions are taxable and none of
U.S. Office Products or any of the spin-off companies was responsible, 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. The Tax Indemnification Agreement provides
that the spin-off company that is responsible for the Adverse Tax Act will
indemnify the other spin-off companies for any liability to U.S. Office Products
under the Tax Allocation Agreement. As a result of these tax agreements, we
could become liable for certain amounts of the distribution taxes should there
be a finding that any or all of the distributions are taxable.
The Employee Benefits Agreement provides that the spin-off companies will
retain or assume liability for employment-related claims and severance for
persons employed or previously employed by the respective spin-off companies and
their subsidiaries at the time of the distributions, while U.S. Office Products
and its post-distribution subsidiaries will retain or assume responsibility for
their current and previous employees.
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<PAGE> 51
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our Board of Directors consists of five members. The Board is divided into
three classes, with members of each class serving a three year term. The terms
of Class I, II and III directors expire at the annual meetings of stockholders
in 1999, 2000 and 2001. The following table sets forth certain information about
our directors and executive officers as of February 1, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Daniel P. Spalding............. 44 Chairman of the Board and Chief Executive Officer (Class
III)
David J. Vander Zanden......... 44 President, Chief Operating Officer and Director (Class III)
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............... 58 Executive Vice President for Sax Arts and Crafts
Donald Ray Pate, Jr............ 35 Executive Vice President for ClassroomDirect.com
Ronald E. Suchodolski.......... 52 Executive Vice President for Childcraft
Jonathan J. Ledecky............ 41 Director (Class I)
Leo C. McKenna................. 65 Director (Class II)
Rochelle Lamm Wallach.......... 50 Director (Class II)
</TABLE>
DANIEL P. SPALDING became Chairman of the Board and Chief Executive Officer
of School Specialty in February 1998. From 1996 to February 1998, Mr. Spalding
served as President of the Educational Supplies and Products Division of U.S.
Office Products. From 1988 to 1996, he served as President, Chief Executive
Officer and a director of Old School. 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.
DAVID J. VANDER ZANDEN became the President and Chief Operating Officer of
School Specialty in March 1998. From 1992 to March 1998, he served as President
of Ariens Company, a manufacturer of outdoor lawn and garden equipment. Mr.
Vander Zanden has served as a director of School Specialty since completion of
the spin-off from U.S. Office Products in June 1998.
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 from 1994 until 1997. From 1992 to 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 spin-off from U.S. Office
Products in June 1998. Mr. Moskonas joined Old School in 1993 as Vice President
of Sales for the Valley Division. He served as General Manager for the Valley
Division from 1994 to 1996 and was appointed President of School Specialty
Divisions in 1997. Prior to joining School Specialty, Mr. Moskonas served as
Vice President of Sales for Emmons-Napp Office Products from 1979 to 1993.
MELVIN D. HILBROWN has served as Executive Vice President of School
Specialty for Gresswell since completion of the spin-off from U.S. Office
Products 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 had been Managing Director of Gresswell since 1989.
RICHARD H. NAGEL has served as Executive Vice President of School Specialty
for Sax Arts and Crafts since completion of the spin-off from U.S. Office
Products in June 1998. Mr. Nagel joined School Specialty with the acquisition of
Sax Arts and Crafts in 1997. Mr. Nagel had been with Sax
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<PAGE> 52
Arts and Crafts since 1975 when he was hired as Assistant General Manager. He
was named Vice President/General Manager of Sax Arts and Crafts in 1984 and
President of Sax Arts and Crafts in 1990.
DONALD RAY PATE, JR. has served as Executive Vice President of School
Specialty for ClassroomDirect.com since completion of the spin-off from U.S.
Office Products in June 1998. Mr. Pate joined School Specialty with the
acquisition of Re-Print in 1996, having 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 spin-off from U.S. Office
Products in June 1998. Mr. Suchodolski joined School Specialty with the
acquisition of Childcraft in 1997. Mr. Suchodolski was Vice President of
Childcraft in 1995 and 1996 and was Director of Childcraft's School Division
from 1984 to 1989. From 1989 to 1993, Mr. Suchodolski was President of the
Judy/Instructo Division of Paramount, and from 1993 to 1995, Mr. Suchodolski
served as Senior Vice President of Sales and Marketing for Paramount
Publishing's Supplementary Materials Division.
JONATHAN J. LEDECKY has served as a director and an employee of School
Specialty since completion of the spin-off from U.S. Office Products in June
1998. He founded Building One Services Corporation (formerly 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 June 1998 and served as its Chief
Executive Officer until November 1997. Mr. Ledecky also serves as a director of
Aztec Technology Partners, Inc., Navigant International, Workflow Management,
USA Floral Products, UniCapital Corporation and MicroStrategy Corporation. 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 has served as a director of School Specialty since
completion of the spin-off from U.S. Office Products in June 1998. Mr. McKenna
is a self-employed financial consultant working with personal asset management,
corporate planning, acquisitions, merger studies and negotiations. Mr. McKenna
is currently a director 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 Investment Advisory Board and the
Trust Committee. He is a director and member of the John Brown Cook Foundation
and an overseer and Chairman of the Finance Committee for the Catholic Student
Center at Dartmouth College.
ROCHELLE LAMM WALLACH has served as a director of School Specialty since
completion of the spin-off from U.S. Office Products in June 1998. Ms. Wallach
is Chairman and Chief Executive Officer of Precision Marketing Partners, LLC and
The Academy of Financial Services Studies. Ms. Wallach was associated with
Strong Advisory Services, a division of Strong Capital Management, Inc., as its
President from 1995 to March 1998. Prior to that time, she was President and the
chief operating officer of AAL Capital Management, a mutual fund manager.
COMMITTEES OF THE BOARD
The Audit Committee of the Board of Directors is charged with reviewing our
annual audit and meeting with our independent accountants to review our internal
controls and financial management practices. The following persons comprise the
Audit Committee: Mr. McKenna and Ms. Wallach.
The Compensation Committee of the Board of Directors is charged with
determining the compensation of our executive officers and administering our
1998 Stock Incentive Plan. The following persons comprise the Compensation
Committee: Mr. McKenna and Ms. Wallach.
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<PAGE> 53
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
paid by us for services rendered during the years ended April 26, 1997 and April
25, 1998 to the Chief Executive Officer and to each of our four other most
highly compensated officers (the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)(1) COMPENSATION($)
- --------------------------- ---- --------- -------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Daniel P. Spalding................. 1997 $178,846 -- -- --
Chairman of the Board and CEO 1998 212,104 $34,200 135,484 --
Ronald E. Suchodolski(2)........... 1997 $141,535 $30,000 -- --
Executive Vice President, 1998 157,646 62,633 18,065 --
Childcraft
Richard H. Nagel(2)(3)............. 1997 $118,000 $29,500 -- $32,000
Executive Vice President, Sax 1998 130,660 29,500 18,065 --
Arts and Crafts
Donald Ray Pate, Jr.(2)............ 1997 $220,901 -- -- --
Executive Vice President, 1998 117,000 -- -- --
ClassroomDirect.com
Douglas Moskonas................... 1997 $ 97,266 $44,500 13,548 --
Executive Vice President, School 1998 139,525 -- 18,065 --
Specialty Division
</TABLE>
- ---------------
(1) No options to purchase School Specialty Common Stock were granted to the
Named Officers during the years shown. Rather, the number of shares set
forth in the table represents the number of shares of Common Stock
underlying options that the Named 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 from his prior employer.
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<PAGE> 54
OPTIONS GRANTED IN FISCAL 1999
The following table sets forth certain information regarding options to
acquire Common Stock granted to certain executive officers during fiscal 1999
and the total number of shares underlying options held as of February 1, 1999.
OPTIONS GRANTED IN FISCAL 1999
<TABLE>
<CAPTION>
NUMBER OF TOTAL
SECURITIES % OF NUMBER OF
UNDERLYING TOTAL OPTIONS SECURITIES UNDERLYING
OPTIONS GRANTED IN GRANTED TO OPTIONS GRANTED
FISCAL EMPLOYEES IN AS OF FEBRUARY 1,
NAME 1999(#)(1) FISCAL 1999 1999(#)
- ---- ------------------ -------------- -------------------------
<S> <C> <C> <C>
Daniel P. Spalding...................... 228,519 % 332,520
Ronald E. Suchodolski................... 45,703 % 63,768
Richard H. Nagel........................ 45,703 % 59,750
Donald Ray Pate, Jr. ................... 45,703 % 45,703
Douglas Moskonas........................ 45,703 % 69,970
David J. Vander Zanden.................. 228,519 % 228,519
</TABLE>
- ---------------
(1) The options granted are both qualified and non-qualified stock options,
which are exercisable in full one year from the date of grant at the market
price on the date of grant and expire ten years from the date of grant. The
options become fully exercisable upon a change in control, as defined in the
1998 Stock Incentive Plan.
OPTIONS GRANTED IN FISCAL 1998
The following table sets forth certain information regarding options to
acquire Common Stock granted to the Named Officers during the year ended April
25, 1998. No options to purchase School Specialty Common Stock were granted to
Named Officers during the year. Rather, the number of shares and exercise prices
set forth below represent the number of shares of Common Stock underlying
options (and the exercise price of options) that the Named Officer would have
been granted if all U.S. Office Products options granted during the year were
replaced with School Specialty options.
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE
----------------------------------------------------------- AT ASSUMED ANNUAL
NUMBER OF % OF RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED (#)(1) FISCAL YEAR (2) ($/SH)(1) 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 $3,626,567
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 1998 Stock Incentive Plan.
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<PAGE> 55
(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.
OPTION EXERCISES IN FISCAL 1998 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information regarding unexercised
options held by the Named Officers at April 25, 1998. No options to purchase
School Specialty Common Stock had been granted as of April 25, 1998. Rather, the
number of shares set forth below represents the number of shares of Common Stock
underlying options that the Named Officer would have held at the end of the year
if all U.S. Office Products options held on that date (prior to the U.S. Office
Products tender offer (which occurred immediately prior to the spin-off), which
allowed holders of U.S. Office Products options to tender a portion of their
options to U.S. Office Products for cash) were replaced with School Specialty
options.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT FY-END (#) AT FISCAL YEAR END ($) (1)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Daniel P. Spalding........ -- $ -- -- 135,484 $ -- N/A
Ronald E. Suchodolski..... -- -- -- 18,065 -- N/A
Richard H. Nagel.......... -- -- -- 18,065 -- N/A
Donald Ray Pate, Jr....... -- -- -- -- -- N/A
Douglas Moskonas.......... -- -- -- 31,613 -- 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 Amended and Restated 1998 Stock Incentive Plan (the
"Plan") is to promote our long-term growth and profitability. The Plan does this
by providing employees, officers and non-employee directors with incentives to
improve stockholder value and contribute to our growth and financial success,
and by enabling us to attract, retain and reward highly motivated and qualified
employees, officers and non-employee directors. The maximum percentage of shares
of Common Stock that may be issued with respect to awards granted under the Plan
is 20% of the outstanding shares of Common Stock determined immediately after
the grant of the award. The maximum number of shares that may be issued with
respect to awards granted under the Plan to an individual in a calendar year may
not exceed 1.2 million shares. The Plan is administered by the Compensation
Committee of the Board of Directors. All employees of School Specialty and its
subsidiaries, as well as non-employee directors and officers of School
Specialty, are eligible to receive awards under the Plan. The Plan authorizes
the Compensation Committee to make awards of stock options, restricted stock and
other stock-based awards. The Compensation Committee determines 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.
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<PAGE> 56
As of June 10, 1998, Mr. Ledecky received options to purchase 914,079
shares of Common Stock under the Plan. The options were intended to compensate
Mr. Ledecky for his services to us as an employee. The options have a per share
exercise price equal to $15.50. Based on an exercise price of $15.50 and an
assumed trading volatility index of the Common Stock of 35%, the estimated value
of the options at the date of grant was approximately $2.6 million, net of taxes
at an assumed 40% rate. Mr. Ledecky's options are fully vested when granted but
will not be exercisable until June 10, 1999. Mr. Ledecky's options will be
exercisable immediately if Mr. Ledecky dies before the options expire or if and
to the extent that we accelerate the exercise schedule of substantially all
management options. All unexercised portions of options will expire ten years
after the date of grant or, if applicable, as of the date Mr. Ledecky violates
the non-competition agreement he entered into with us. See "-- Director
Compensation and Other Arrangements."
As of June 10, 1998, Daniel P. Spalding and David J. Vander Zanden each
received options to purchase 228,519 shares of Common Stock under the Plan.
Messrs. Spalding and Vander Zanden's options have the same terms as Mr.
Ledecky's options, including an exercise price equal to $15.50. Based on an
exercise price of $15.50 and an assumed trading volatility index of the Common
Stock of 35%, the estimated value of the options to each of Mr. Spalding and Mr.
Vander Zanden at the date of grant was approximately $0.7 million, net of taxes
at an assumed 40% rate.
In addition to the foregoing, certain of our executive officers received
options to purchase an aggregate of 274,218 shares of Common Stock on June 10,
1998, also at an exercise price of $15.50.
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
We granted non-management directors options to purchase 15,000 shares of
Common Stock upon their initial election as members of the Board of Directors.
We intend to grant options to acquire 5,000 shares of Common Stock for each
additional year of service. Non-management directors are paid an annual retainer
of $20,000 plus $1,000 for each additional special meeting attended and are
reimbursed for all out-of-pocket expenses related to their service as directors.
We entered into an employment agreement with Mr. Ledecky effective as of
June 10, 1998 that implemented certain portions of an agreement that Mr. Ledecky
had previously entered into with U.S. Office Products (the "Ledecky Services
Agreement"). Under the employment agreement, Mr. Ledecky reports to the Board of
Directors and senior management of School Specialty. In such capacity, Mr.
Ledecky provides high-level acquisition negotiation services and strategic
business advice. We can require Mr. Ledecky's performance of such services,
consistent with his other contractual obligations to Building One Services
Corporation, U.S. Office Products and the other spin-off companies. As an
employee, Mr. Ledecky is subject to our generally applicable personnel policies
and is eligible for such benefit plans in accordance with their terms. We pay
Mr. Ledecky an annual salary of $48,000 for up to two years. We may terminate
Mr. Ledecky's employment for "cause," where cause consists of (1) his conviction
of, or guilty or nolo contendere plea to, a felony demonstrably and materially
injurious to us or (2) his violation of the non-competition provision as it
relates to us.
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 our employ. These provisions generally
restrict Mr. Ledecky from, among other things, investing in or working for or on
behalf of any business selling any products or services in direct competition
with U.S. Office Products or the spin-off companies (collectively, the "U.S.
Office Products Companies"), within 100 miles of any location where the relevant
U.S. Office Products Company regularly maintains an office with employees. (For
this purpose, "products or services" are those that the U.S. Office Products
Companies offered on or before January 13, 1998.) Notwithstanding this
prohibition, Mr. Ledecky may serve in a policy making role (but not engage in
direct personal competition) with respect to the following businesses: (1) any
electrical contracting business that derives more
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<PAGE> 57
than 50% of its revenues from electrical contracting and maintenance services,
without regard to whether the business competes with certain activities of Aztec
Technology Partners, Inc. (one of the U.S. Office Products Companies) or any of
its subsidiaries (collectively, "Aztec"); (2) any business whose revenue from
certain activities that compete with Aztec is less than $15 million per year;
(3) any business engaged in computer monitoring for facilities management; (4)
businesses selling, supplying or distributing janitorial or sanitary products or
services; (5) businesses managing or servicing office equipment (other than
computers); (6) businesses providing Internet services; (7) UniCapital
Corporation's current businesses (which include equipment leasing); or (8) 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 our managerial employees or from calling upon our
customers to solicit or sell products or services in direct competition with us.
Mr. Ledecky also may not hire away for Building One Services Corporation any
person then or in the preceding one year employed by us.
EMPLOYMENT CONTRACTS AND RELATED MATTERS
We have entered into employment agreements with Daniel P. Spalding, Donald
Ray Pate, Jr., and Richard H. Nagel, each of whom is a Named Officer, and David
J. Vander Zanden, an executive 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 us 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 our part)
or within five days of a change in control of School Specialty. The contract
defines a change of control to mean: (1) the acquisition of beneficial ownership
of 50% or more of our voting securities by any person other than U.S. Office
Products; (2) a loss of majority status by the combination of members of U.S.
Office Products' Board of Directors 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; (3) 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 (4) U.S.
Office Products or more than 49% of its assets are liquidated.
Donald Ray Pate, Jr., President of ClassroomDirect.com, entered into an
employment contract with the Re-Print Corporation (now known as
ClassroomDirect.com) on July 26, 1996. The contract runs for four years but
provides for two automatic one-year extensions unless ClassroomDirect.com gives
60 days written notice of its intent not to renew. Mr. Pate's annual base salary
is $125,000. Following the termination of his employment for any reason, Mr.
Pate has agreed not to compete with ClassroomDirect.com 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 of Common
Stock with the same terms as Mr. Ledecky's options, including an exercise price
of $15.50. See "--1998 Stock Incentive Plan."
Richard H. Nagel, President of Sax Arts and Crafts, entered into a
four-year employment contract with Sax Arts and Crafts on June 27, 1997. Mr.
Nagel's annual base salary is $125,000, and he participates in an incentive
bonus plan based upon the attainment of profit and revenue objectives. Mr. Nagel
also entered into a covenant not to compete agreement with Sax Arts and
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<PAGE> 58
Crafts on June 27, 1997 for which he received consideration of $31,250 from Sax
Arts and Crafts. Pursuant to this agreement, following the termination of his
employment for any reason, Mr. Nagel has agreed not to compete with Sax Arts and
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 of Common Stock with the same terms as Mr. Ledecky's
options, including an exercise price of $15.50. See "--1998 Stock Incentive
Plan."
David J. Vander Zanden became President and Chief Operating Officer of
School Specialty in March 1998. We entered into an employment contract with Mr.
Vander Zanden on July 15, 1998. The contract has an initial term of two years,
with automatic two-year extensions unless either party gives 90 days written
notice of such 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, as defined in the agreement. Mr. Vander Zanden was
granted options on June 10, 1998 to purchase 228,519 shares of Common Stock with
the same terms as Mr. Ledecky's options, including an exercise price of $15.50.
See "--1998 Stock Incentive Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee has ever been an officer of our
company or any of our subsidiaries and none of our executive officers has served
on the compensation committee or the board of directors of any company of which
any of our directors is an executive officer.
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CERTAIN TRANSACTIONS
On April 29, 1996, U.S. Office Products acquired Old School in a business
combination accounted for under the pooling-of-interests method in which 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, a non-executive officer of School Speciality, (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)
(Patricia M. Spalding is Daniel P. Spalding's mother), Joanne Lee Killoren
(Michael J. Killoren's aunt) received 5,076 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 School Specialty or U.S. Office
Products at the time such transactions were entered into, and accordingly, we
believe that these transactions were as favorable as could be negotiated with
third parties.
U.S. Office Products acquired ClassroomDirect.com (formerly 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. received 269,007 shares (as adjusted) of U.S. Office Products
common stock for his interest in ClassroomDirect.com. 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 School Specialty or U.S. Office Products at
the time such transactions were entered into, and accordingly, we believe 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, a former executive officer of School
Specialty, owned 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.
ClassroomDirect.com leases an office and warehouse facility in Birmingham,
Alabama from Donald Ray Pate, Jr. The lease provides for annual payments of
$69,600 through December 31, 2003. We believe that this transaction was as
favorable as could be negotiated with third parties.
Our 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 Directors of Old School and the father
of Daniel P. Spalding, holds a one-third stake in Bluemound. Donald Killoren,
father of Michael J. Killoren, a non-executive 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. We believe that this transaction was as
favorable as could be negotiated with third parties. We are currently
negotiating a transaction to acquire this facility from Bluemound. It is
expected that this transaction would be effected at fair market value as
determined by an independent appraisal, net of any indebtedness assumed. We
believe the net value of any such transaction would be approximately $2 million.
For a discussion of transactions between School Specialty and Mr. Ledecky,
see "Management--Director Compensation and Other Arrangements."
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PRINCIPAL STOCKHOLDERS
The following table sets forth, as of February 1, 1999 (unless otherwise
indicated), the number and percentage of Common Stock beneficially owned by the
following persons, after giving effect to the Common Stock offering: (1) all
persons known by us to own beneficially more than 5% of the Common Stock, (2)
each director and Named Officer and (3) all directors and executive officers as
a group. All persons listed below have sole voting and investment power with
respect to their shares, unless otherwise indicated. Except as otherwise
indicated, the business address of each of the following is 1000 North Bluemound
Drive, Appleton, Wisconsin 54914.
<TABLE>
<CAPTION>
PRIOR TO THE OFFERING AFTER THE OFFERING
--------------------------- ---------------------------
PERCENT OF PERCENT OF
NUMBER OF OUTSTANDING NUMBER OF OUTSTANDING
NAME AND ADDRESS SHARES OWNED SHARES(5) SHARES OWNED SHARES(6)
- ---------------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Daniel P. Spalding(1).............. 149,607 1% 149,607 *
Ronald E. Suchodolski(1)........... 4,530 * 4,530 *
Richard H. Nagel(1)................ 358 * 358 *
Donald Ray Pate, Jr.(2)............ 162,944 1.1% 162,944 *
Douglas Moskonas(1)................ 5,243 * 5,243 *
David J. Vander Zanden............. 50,000 * 50,000 *
Jonathan J. Ledecky................ -- -- -- --
Leo C. McKenna..................... 6,239 * 6,239 *
Rochelle Lamm Wallach.............. 1,950 * 1,950 *
All executive officers and
directors as a group (11
persons)(1)...................... 386,561 2.7% 386,561 2.2%
Dresdner RCM Global Investors
LLC(3)
Dresdner RCM Global Investors US
Holdings LLC
Dresdner Bank AG
Four Embarcadero Center
San Francisco, California
94111............................ 1,084,900 7.4% 1,084,900 6.2%
AXA Conseil Vie Assurance
Mutuelle(4)
AXA Assurances I.A.R.D. Mutuelle
and AXA Assurances Vie Mutuelle
AXA Courtage Assurance Mutuelle
AXA
The Equitable Companies
Incorporated
1290 Avenues of the Americas
New York, New York 10104......... 768,601 5.3% 768,601 4.4%
</TABLE>
- ---------------
* Less than 1%.
(1) Share amounts include options currently exercisable, or exercisable within
60 days after February 1, 1999, in the amount of 2,389 for Mr. Spalding,
4,516 for Mr. Suchodolski, 318 for Mr. Nagel, 3,943 for Mr. Moskonas and
13,612 for all executive officers and directors as a group.
(2) Mr. Pate has entered into hedging arrangements that place a ceiling and a
floor on the price of certain of his shares of Common Stock.
(3) Dresdner RCM Global Investors LLC ("Dresdner RCM"), Dresdner RCM Global
Investors US Holdings LLC ("Dresdner RCM Global") and Dresdner Bank AG
("Dresdner Bank") have jointly filed a Schedule 13G with the SEC reporting
that they had, as of December 31, 1998, sole
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<PAGE> 61
voting power over 928,900 shares of Common Stock (including 904,900 shares
beneficially owned by Dresdner RCM and Dresdner RCM Global) and sole
dispositive power over 1,084,900 (including 1,060,900 shares beneficially
owned by Dresdner RCM and Dresdner RCM Global). Dresdner Bank's principal
business office is located at Jurgen-Ponto-Platz 1, 60301 Frankfurt,
Germany. The principal business address of both Dresdner RCM and Dresdner
RCM Global is as indicated in the table.
(4) AXA Conseil Vie Assurance Mutuelle ("AXA Conseil"), AXA Assurances I.A.R.D.
Mutuelle ("AXA Assurances"), AXA Assurances Vie Mutuelle ("AXA Assurances
Vie"), AXA Courtage Assurance Mutuelle ("AXA Courtage"), AXA ("AXA") and
The Equitable Companies Incorporated ("Equitable") have jointly filed a
Schedule 13G with the SEC reporting that they had, as of December 31, 1998,
sole voting power over 625,000 shares of Common Stock, shared voting power
over 139,600 shares of Common Stock and sole dispositive power over 768,601
shares of Common Stock. AXA Conseil's principal business office is located
at 100-101 Terrasse Boieldieu, 92042 Paris, La Defense, France; AXA
Assurances' principal business office, which is the same as AXA Assurances
Vie's principal business office, is located at 21 Rue de Chateaudun, 75009
Paris, France; AXA Courtage's principal business office is located at 25
Rue Louis le Grand, 75002 Paris, France; AXA's principal business office is
located at 9 Place Vendome, 75001 Paris, France; and Equitable's principal
business address is as indicated in the table.
(5) Based on 14,578,925 shares of Common Stock outstanding as of February 1,
1999.
(6) Based on 17,578,925 shares of Common Stock outstanding after the offering.
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DESCRIPTION OF SENIOR CREDIT FACILITY
OVERVIEW
Our Senior Credit Facility is among School Specialty, our subsidiaries,
NationsBank, N.A., as administrative agent, Bank One, Wisconsin and U.S. Bank
National Association, as documentation agents, and other lending institutions
(the "Lenders") named in the Senior Credit Facility. The Senior Credit Facility
generally provides for a revolving loan facility of up to $250 million and a
term loan in the amount of $100 million, subject to certain covenants and
restrictions. In connection with the Common Stock and Note offerings, we are
negotiating certain changes to the Senior Credit Facility, including the
reduction in the loan facility from $350 million to $250 million after using the
net proceeds to reduce amounts as described under "Use of Proceeds."
Our subsidiaries have jointly and severally guaranteed our obligations
under the Senior Credit Facility.
SECURITY
Our indebtedness under the Senior Credit Facility is secured by (1) the
pledge of most of the capital stock in all of our subsidiaries and (2) liens on
substantially all of our other assets (other than real estate). The Senior
Credit Facility contemplates that if the proposed sale leaseback transaction
involving our properties does not occur by September 1999, we must provide
mortgages on these properties as additional security to the Lenders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- Our Facilities."
INTEREST
Indebtedness under the revolving Senior Credit Facility bears interest at a
floating rate based (at our option) on (1) the base rate for base rate loans,
plus a margin percentage or (2) LIBOR, plus a margin percentage. The margin
percentage varies after the third quarter of fiscal 1999 from 0% to .75% for
base rate loans and 1% to 2% for LIBOR loans based on our consolidated leverage
ratio. Our consolidated leverage ratio is calculated on the last day of each
fiscal quarter and is the ratio of our funded debt to Adjusted EBITDA. The term
loan bears interest at the rate of %.
On October 28, 1998, we entered into an interest rate swap agreement with
the Bank of New York covering $50 million of the outstanding Senior Credit
Facility. The agreement fixes the 30 day LIBOR interest rate at 4.37% per annum
on the $50 million notional amount and has a three year term that may be
canceled by the Bank of New York on the second anniversary.
MATURITY
The revolving Senior Credit Facility matures on September 30, 2003. The
term loan amortizes quarterly beginning in January 1999 and requires payments of
$10 million in the first year, $15 million in each of the second and third
years, and $30 million in each of the fourth and fifth years. Prepayments may be
made in whole or in part without penalty, subject to certain minimums. Amounts
prepaid may be reborrowed under the revolving facility but not the term
facility.
CONDITIONS TO EXTENSIONS OF CREDIT
The obligation of the Lenders to make subsequent loans is subject to the
satisfaction of certain customary conditions including, but not limited to, the
absence of a default or event of default under the Senior Credit Facility, all
representations and warranties under the Senior Credit Facility and the other
related loan documents being true and correct in all material respects and that
there has been no material adverse change in our properties or business.
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COVENANTS
The Senior Credit Facility requires us to meet certain financial tests,
including meeting a minimum net worth test and leverage ratio and fixed charge
coverage ratio tests. The Senior Credit Facility also contains covenants which,
among other things, limit the incurrence of additional indebtedness, the nature
of our business, investments, leases of assets, creation and ownership of
subsidiaries, dividends, transactions with affiliates, mergers, consolidations
and acquisitions and dispositions of assets, liens and encumbrances and other
matters customarily restricted in credit agreements of this type. The Senior
Credit Facility also contains additional covenants that require us to maintain
our properties, together with insurance thereon, to provide certain information
to Nationsbank and the Lenders, including financial statements, notices and
reports, to permit inspections of our books and records and to comply with
applicable laws.
EVENTS OF DEFAULT
The Senior Credit Facility contains customary events of default, including
payment defaults, breach of representations, warranties and covenants (subject
to certain cure periods), cross-defaults to certain other indebtedness in excess
of $5 million, certain events of bankruptcy and insolvency, judgment defaults in
excess of $1 million and the failure of any of the loan documents to be in full
force and effect.
AMENDMENT
As noted above, in connection with the Common Stock and Note offerings, we
are negotiating certain changes to the Senior Credit Facility. These changes
include the following: (1) the reduction in the loan facility from $350 million
to $250 million and (2) certain changes to the financial and other covenants.
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DESCRIPTION OF OUR CAPITAL STOCK
GENERAL
Our authorized capital stock consists of 150,000,000 shares of Common
Stock, par value $.001 per share, and 1,000,000 shares of Preferred Stock, par
value $.001 per share. As of February 1, 1999, there were 14,578,925 shares of
Common Stock outstanding and no shares of Preferred Stock outstanding. All of
our currently outstanding shares of Common Stock are validly issued, fully paid
and non-assessable, and upon completion of the Common Stock offering, all of our
outstanding shares of Common Stock will be validly issued, fully paid and
non-assessable.
The following summary of our capital stock is qualified in its entirety by
reference to our Restated Certificate of Incorporation (the "Certificate of
Incorporation") and Amended and Restated Bylaws (the "Bylaws"), which are
incorporated by reference as exhibits to the registration statement of which
this Prospectus is a part.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors.
Subject to the rights of any then outstanding shares of Preferred Stock,
the holders of Common Stock are entitled to such dividends as may be declared in
the discretion of the Board of Directors out of funds legally available
therefor. See "Dividend Policy." Holders of Common Stock are entitled to share
ratably in our net assets upon liquidation after payment or provision for all
liabilities and any preferential liquidation rights of any Preferred Stock then
outstanding. Holders of Common Stock have no preemptive rights to purchase
shares of our stock. Shares of Common Stock are not subject to any redemption
provisions and are not convertible into any other securities of School
Specialty.
PREFERRED STOCK
The Board of Directors has the authority from time to time to issue
Preferred Stock as shares of one or more classes or series. Subject to the
provisions of our Certificate of Incorporation and limitations prescribed by
law, the Board of Directors is expressly authorized to adopt resolutions to
issue the shares, to fix the number of shares and to change the number of shares
constituting any series and to provide for or change the voting powers,
designations, preferences and relative, participating, optional or other special
rights, qualifications, limitations or restrictions thereof, including dividend
rights (including whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), redemption prices, conversion
rights and liquidation preferences of the shares constituting any class or
series of the Preferred Stock, in each case without any further action or vote
by the stockholders. We have no current plans to issue any shares of Preferred
Stock of any class or series.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of School Specialty by means of a tender offer, proxy contest,
merger or otherwise, and thereby to protect the continuity of our management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock may rank prior to Common
Stock as to dividend rights, liquidation preference or both, may have full or
limited voting rights and may be convertible into shares of Common Stock.
Accordingly, the issuance of shares of Preferred Stock may discourage bids for
Common Stock or may otherwise adversely affect the market price of Common Stock.
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STATUTORY BUSINESS COMBINATION PROVISION
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or an affiliate, or associate of such person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (1) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the board of directors of the corporation before the person becomes an
interested stockholder; (2) the interested stockholder acquired 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes such person an interested stockholder (excluding shares owned by persons
who are both officers and directors of the corporation, and shares held by
certain employee stock ownership plans); or (3) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined as any person who is: (1) the owner of 15%
or more of the outstanding voting stock of the corporation; or (2) an affiliate
or associate of the corporation if such affiliate or associate was the owner of
15% or more of the outstanding voting stock of the corporation at any time
within the three-year period immediately prior to the date on which it is sought
to be determined whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws, by action of
its stockholders, to exempt itself from coverage, provided that such bylaws or
certificate of incorporation amendment shall not become effective until 12
months after the date it is adopted. We have not adopted such an amendment to
our Certificate of Incorporation or Bylaws. Under our Certificate of
Incorporation, the affirmative vote of a majority of the directors is required
to approve an interested stockholder transaction except for certain statutory
business combinations governed by Section 203, which require the affirmative
vote of 66 2/3% of the directors to approve such transactions.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS AFFECTING CHANGE OF
CONTROL
The Board of Directors has adopted certain amendments to the Certificate of
Incorporation or Bylaws that may provide the Board of Directors with more
negotiating leverage by delaying or making more difficult unsolicited
acquisitions or changes of control of School Specialty. We believe that such
provisions will enable us to develop our business in a manner that will foster
our long-term growth without disruption caused by the threat of a takeover not
deemed by the Board of Directors to be in our best interests and the best
interests of our stockholders. Such provisions could have the effect of
discouraging third parties from making proposals involving an unsolicited
acquisition or change of control, although such proposals, if made, might be
considered desirable by a majority of our stockholders. Such provisions may also
have the effect of making it more difficult for third parties to cause the
replacement of our management without concurrence of the Board of Directors.
These provisions include: (1) the availability of capital stock for issuance
from time to time at the discretion of the Board of Directors (see "-- Preferred
Stock" above); (2) the classification of the Board of Directors into three
classes, each of which serves for a term of three years; (3) prohibition on
stockholders acting by written consent in lieu of a meeting; (4) limitation on
stockholders calling a special meeting of stockholders; (5) requirements for
advance notice for raising business or making nominations at stockholders'
meetings; and (6) the requirement of a supermajority vote to amend the Bylaws.
CLASSIFIED BOARD. Our Certificate of Incorporation includes provisions
dividing the Board of Directors' membership into three classes, each of which
serves until the third succeeding annual meeting with one class being elected at
each annual meeting of stockholders. Under Delaware law, each class will be as
nearly equal in number as possible. As a result, at least two annual meetings of
62
<PAGE> 66
stockholders may be required for our stockholders to change a majority of the
members of the Board of Directors. We believe that a classified board of
directors will assure continuity and stability of our management and policies,
without diminishing accountability to stockholders. A classified Board of
Directors will ensure that a majority of directors at any given time will have
experience in our business and competitive affairs.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS. The
Certificate of Incorporation and Bylaws provide that stockholder action can be
taken only at an annual or special meeting and cannot be taken by written
consent in lieu of a meeting. The Certificate of Incorporation and Bylaws also
provide that special meetings of the stockholders can be called only by the
Chairman of the Board, the Chief Executive Officer, a vote of the majority of
the entire board or by holders of at least 33 1/3% of the outstanding shares of
our stock entitled to vote generally for the election of directors.
ADVANCE NOTICE FOR RAISING BUSINESS OR MAKING NOMINATIONS AT MEETINGS. The
Bylaws establish an advance notice procedure for stockholder proposals to be
brought before an annual meeting of stockholders and for nominations by
stockholders of candidates for election as directors at an annual or special
meeting at which directors are to be elected. Only such business may be
conducted at an annual meeting of stockholders as has been brought before the
meeting by, or at the direction of, the Board of Directors, or by a stockholder
who has given to the Secretary of School Specialty timely written notice, in
proper form, of the stockholder's intention to bring that business before the
meeting. The chairman of such meeting has the authority to make the
determination of whether business has been properly brought before such meeting.
Only persons who are nominated by, or at the direction of, the Board, or who are
nominated by a stockholder who has given timely written notice, in proper form,
to the Secretary prior to a meeting at which directors are to be elected will be
eligible for election as directors. These provisions are intended to establish
orderly procedures for the conduct of our business and to allow the Board of
Directors adequate time to evaluate and respond to stockholder initiatives. They
may have the effect of impeding the ability of a stockholder to present
proposals or make nominations in a change of control context if the requisite
notice provisions cannot be satisfied.
AMENDMENT OF BYLAWS. The Certificate of Incorporation requires a vote of
at least 66 2/3% of the outstanding Common Stock for the stockholders to amend
the Bylaws. This super-majority requirement could make it more difficult for
stockholders to compel the Board of Directors to act by amending the Bylaws to
require actions not presently permitted by the Bylaws.
LIMITATION ON DIRECTORS' LIABILITIES
Pursuant to our Certificate of Incorporation and under Delaware law,
directors are not liable to us or our stockholders for monetary damages for
breach of fiduciary duty, except for liability in connection with a breach of
duty of loyalty, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for dividend payments or
stock repurchases illegal under Delaware law or any transaction in which a
director has derived an improper personal benefit.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer and Trust Company.
63
<PAGE> 67
EXPERTS
The consolidated financial statements of School Specialty as of April 26,
1997 and April 25, 1998, for the four months ended April 30, 1996 and for the
years ended April 26, 1997 and April 25, 1998, included in this Prospectus, have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of School Specialty for the year
ended December 31, 1995, included in this Prospectus, except as they relate to
The Re-Print Corporation for the year ended December 31, 1995, have been so
included in reliance on the February 2, 1996 report of Ernst & Young LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting. Insofar as the consolidated financial statements for
the year ended December 31, 1995 relate to The Re-Print Corporation, such
financial statements have been audited by BDO Seidman, LLP, independent
accountants, whose report dated February 8, 1996 thereon appears herein.
The consolidated financial statements of American Academic Suppliers
Holding Corporation and Subsidiary as of December 31, 1995 and December 31, 1996
and for the years then ended, included in this Prospectus, have been so included
in reliance on the February 24, 1997 report of Altschuler, Melvoin and Glasser
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of Sax Arts and Crafts, Inc. as of
December 16, 1995 and December 25, 1996, and for the three years in the period
ended December 25, 1996, included in this Prospectus, have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of the National School Supply Company as of March 31, 1998
and March 31, 1997, and for each of the three years in the period ended March
31, 1998, included in this Prospectus and registration statement, as set forth
in their report, which is included elsewhere in this Prospectus and registration
statement. The consolidated financial statements of The National School Supply
Company are included in reliance on their report, given on their authority as
experts in accounting and auditing.
The financial statements of Hammond & Stephens Company as of and for the
year ended October 31, 1997, included in the Prospectus, have been so included
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
VALIDITY OF SHARES
The validity of the shares of Common Stock offered hereby will be passed
upon on behalf of School Specialty by Godfrey & Kahn, S.C., Milwaukee, Wisconsin
and on behalf of the Underwriters by Sullivan & Cromwell, New York, New York.
64
<PAGE> 68
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 (including
exhibits, schedules and amendments thereto) pursuant to the Securities Act with
respect to the Common Stock and Note offerings. This Prospectus, while forming a
part of the registration statement, does not contain all of the information set
forth in the registration statement. Reference is made to the registration
statement and the exhibits thereto for further information. Statements contained
in this Prospectus concerning the provisions of documents filed as exhibits to
the registration statement are necessarily summaries of such documents, and each
such statement is qualified in its entirety by reference to the copy of the
applicable document filed with the SEC.
The registration statement and the exhibits thereto are available for
inspection and copying at the public reference facilities maintained by the SEC
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as the
regional offices of the SEC at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such information can also be obtained
at prescribed rates by writing to the SEC's Public Reference Section at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for information relating to the operation of the Public Reference
Section. Such information may also be accessed electronically by means of the
SEC's website on the Internet at http://www.sec.gov.
We are subject to the reporting requirements of the Securities Exchange Act
of 1934, as amended, and, in accordance therewith, file annual and quarterly
reports, proxy statements and other information with the SEC. Such periodic
reports, proxy statements and other information can be inspected and copied at
the SEC's public reference facilities referred to above. Copies of such material
can be obtained by mail at prescribed rates by writing to the SEC's Public
Reference Section at the address referred to above or by calling the SEC at the
toll-free telephone number noted above. In addition, reports, proxy statements
and other information concerning School Specialty may be inspected at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street,
NW, Washington, D.C. 20006.
We furnish to our stockholders annual reports containing audited
consolidated financial statements examined by our independent public accountants
and quarterly reports containing unaudited consolidated financial statements for
each of the first three fiscal quarters of each fiscal year.
65
<PAGE> 69
SCHOOL SPECIALTY, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SCHOOL SPECIALTY, INC.
Historical Financial Statements
Report of PricewaterhouseCoopers LLP, Independent
Accountants........................................... F-3
Report of Ernst & Young LLP, Independent Auditors...... F-4
Report of BDO Seidman, LLP, Independent Auditors....... F-5
Consolidated Balance Sheet as of April 26, 1997, April
25, 1998 and January 23, 1999 (unaudited)............. F-6
Consolidated Statement of Operations for the year ended
December 31, 1995, the four months ended April 30,
1996 and the years ended April 26, 1997 and April 25,
1998, and for the nine months ended January 24, 1998
(unaudited) and January 23, 1999 (unaudited).......... F-7
Consolidated Statement of Stockholders' (Deficit)
Equity for the year ended December 31, 1995, the four
months ended April 30, 1996 and the fiscal years ended
April 26, 1997 and April 25, 1998, and for the nine
months ended January 23, 1999 (unaudited)............. F-8
Consolidated Statement of Cash Flows for the year ended
December 31, 1995, the four months ended April 30,
1996, and the fiscal years ended April 26, 1997 and
April 25, 1998, and for the nine months ended January
24, 1998 (unaudited) and January 23, 1999
(unaudited)........................................... F-9
Notes to Consolidated Financial Statements............. F-11
Pro Forma Financial Statements (Unaudited)
Introduction to Pro Forma Financial Information........ F-31
Pro Forma Combined Balance Sheet as of January 23,
1999.................................................. F-33
Pro Forma Combined Statement of Income for the nine
months ended January 23, 1999......................... F-34
Pro Forma Combined Statement of Income for the nine
months ended January 24, 1998......................... F-35
Pro Forma Combined Statement of Income for the fiscal
year ended April 25, 1998............................. F-36
Notes to Pro Forma Combined Financial Statements....... F-37
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION AND
SUBSIDIARY
Report of Altschuler, Melvoin and Glasser LLP, Independent
Accountants............................................ F-39
Consolidated Balance Sheet as of December 31, 1995,
December 31, 1996 and September 30, 1997 (unaudited)... F-40
Consolidated Statement of Operations for the years ended
December 31, 1995 and December 31, 1996, and for the
nine months ended September 30, 1996 (unaudited) and
September 30, 1997 (unaudited)......................... F-41
Consolidated Statement of Changes in Shareholders' Equity
for the years ended December 31, 1995 and December 31,
1996, and for the nine months ended September 30, 1997
(unaudited)............................................ F-42
Consolidated Statement of Cash Flows for the years ended
December 31, 1995 and December 31, 1996, and for the
nine months ended September 30, 1996 (unaudited) and
September 30, 1997 (unaudited)......................... F-43
Notes to Consolidated Financial Statements................ F-44
</TABLE>
F-1
<PAGE> 70
<TABLE>
<CAPTION>
Page
----
<S> <C>
SAX ARTS AND CRAFTS, INC.
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................ F-49
Balance Sheets as of December 16, 1995, December 25, 1996
and June 29, 1997 (unaudited).......................... F-50
Statements of Operations for the years ended December 17,
1994, December 16, 1995 and December 25, 1996, and for
the six months ended June 30, 1996 (unaudited) and June
29, 1997 (unaudited)................................... F-51
Statements of Shareholders' Equity for the years ended
December 17, 1994, December 16, 1995 and December 25,
1996, and for the six months ended
June 29, 1997 (unaudited).............................. F-52
Statements of Cash Flows for the years ended December 17,
1994, December 16, 1995 and December 25, 1996, and for
the six months ended June 30, 1996 (unaudited) and June
29, 1997 (unaudited)................................... F-53
Notes to Financial Statements............................. F-54
NATIONAL SCHOOL SUPPLY COMPANY
Report of Ernst & Young LLP, Independent Auditors......... F-60
Consolidated Balance Sheets as of March 31, 1997, March
31, 1998 and June 30, 1998 (unaudited)................. F-61
Consolidated Statement of Operations for the years ended
March 31, 1996,
March 31, 1997 and March 31, 1998, and for the three
months ended June 30, 1997 (unaudited) and June 30,
1998 (unaudited)....................................... F-62
Consolidated Statement of Stockholders' Equity for the
years ended March 31, 1996, March 31, 1997 and March
31, 1998, and for the three months ended June 30, 1998
(unaudited)............................................ F-63
Consolidated Statement of Cash Flows for the years ended
March 31, 1996,
March 31, 1997 and March 31, 1998, and for the three
months ended June 30, 1997 (unaudited) and June 30,
1998 (unaudited)....................................... F-64
Notes to Consolidated Financial Statements................ F-65
HAMMOND & STEPHENS COMPANY
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................ F-75
Balance Sheet as of October 31, 1997 and April 30, 1998
(unaudited)............................................ F-76
Statement of Income for the year ended October 31, 1997,
and for the six months ended April 30, 1997 (unaudited)
and April 30, 1998 (unaudited)......................... F-77
Statement of Stockholders' Equity for the year ended
October 31, 1997 and for the six months ended April 30,
1998 (unaudited)....................................... F-78
Statement of Cash Flows for the year ended October 31,
1997 and for the six months ended April 30, 1997
(unaudited) and April 30, 1998 (unaudited)............. F-79
Notes to Financial Statements............................. F-80
</TABLE>
F-2
<PAGE> 71
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of School Specialty, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of School
Specialty, Inc. (the "Company") and its subsidiaries at April 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
F-3
<PAGE> 72
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
School Specialty, Inc.
We have audited the accompanying consolidated statement of operations 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
F-4
<PAGE> 73
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 audit provides 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
year then ended, in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Atlanta, Georgia
February 8, 1996
F-5
<PAGE> 74
SCHOOL SPECIALTY, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 26, APRIL 25, JANUARY 23,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ -- $ -- $ --
Accounts receivable, less allowance for doubtful accounts
of $471, $716 and $1,778, respectively................ 17,232 38,719 84,843
Inventories.............................................. 24,461 49,307 46,799
Prepaid expenses and other current assets................ 10,331 13,503 16,219
-------- -------- --------
Total current assets............................. 52,024 101,529 147,861
Property and equipment, net................................ 14,478 22,553 39,781
Intangible assets, net..................................... 20,824 99,613 183,693
Other assets............................................... 359 34 7,178
-------- -------- --------
Total assets..................................... $ 87,685 $223,729 $378,513
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.......................................... $ 262 $ 11 $ 10,314
Short-term payable to U.S. Office Products............... 26,692 20,277 --
Accounts payable......................................... 9,091 23,788 15,485
Accrued compensation..................................... 860 4,458 11,945
Accrued income taxes..................................... -- -- 5,596
Accrued restructuring.................................... 151 472 3,638
Other accrued liabilities................................ 477 4,732 10,057
-------- -------- --------
Total current liabilities........................ 37,533 53,738 57,035
Long-term debt............................................. 566 315 162,199
Long-term payable to U.S. Office Products.................. 33,226 62,699 --
Other...................................................... 31 511 212
-------- -------- --------
Total liabilities................................ 71,356 117,263 219,446
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.001 par value per share, 1,000,000
shares authorized; none outstanding................... -- -- --
Common Stock, $0.001 par value per share, 150,000,000
shares authorized and 14,578,925 shares issued and
outstanding (unaudited)............................... -- -- 15
Capital paid in excess of par value...................... -- -- 146,768
Divisional equity........................................ 19,985 104,883 --
Accumulated other comprehensive income................... -- -- 6
Retained earnings (deficit).............................. (3,656) 1,583 12,278
-------- -------- --------
Total stockholders' equity....................... 16,329 106,466 159,067
-------- -------- --------
Total liabilities and stockholders' equity....... $ 87,685 $223,729 $378,513
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 75
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOUR NINE MONTHS ENDED
MONTHS FISCAL YEAR ENDED JANUARY 24,
YEAR ENDED ENDED ---------------------- --------------------------
DECEMBER 31, APRIL 30, APRIL 26, APRIL 25, JANUARY 24, JANUARY 23,
1995 1996 1997 1998 1998 1999
------------ --------- --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues................. $150,482 $28,616 $191,746 $310,455 $247,880 $424,332
Cost of revenues......... 98,233 18,591 126,862 202,870 164,105 281,436
-------- ------- -------- -------- -------- --------
Gross profit........... 52,249 10,025 64,884 107,585 83,775 142,896
Selling, general and
administrative
expenses............... 47,393 11,917 53,177 87,846 63,395 108,005
Restructuring costs...... 2,532 -- 194 2,491 -- 4,200
Strategic restructuring
costs.................. -- -- -- 1,000 -- 1,074
Non-recurring acquisition
costs.................. -- 1,122 1,792 -- -- --
-------- ------- -------- -------- -------- --------
Operating income
(loss).............. 2,324 (3,014) 9,721 16,248 20,380 29,617
Other (income) expense:
Interest expense....... 5,536 1,461 4,197 5,505 4,100 8,942
Interest income........ -- (6) -- (132) (109) (114)
Other.................... (18) 67 (196) 156 441 --
-------- ------- -------- -------- -------- --------
Income (loss) before
provision for (benefit
from) income taxes..... (3,194) (4,536) 5,720 10,719 15,948 20,789
Provision for (benefit
from) income taxes..... 173 139 (2,412) 5,480 7,113 10,094
-------- ------- -------- -------- -------- --------
Net income (loss)........ $ (3,367) $(4,675) $ 8,132 $ 5,239 $ 8,835 $ 10,695
======== ======= ======== ======== ======== ========
Weighted average shares
outstanding:
Basic.................. 6,562 8,611 10,003 13,284 12,751 14,625
Diluted................ 6,669 8,789 10,196 13,547 13,020 14,665
Net income (loss) per
share:
Basic.................. $ (0.51) $ (0.54) $ 0.81 $ 0.40 $ 0.69 $ 0.73
Diluted................ $ (0.50) $ (0.53) $ 0.80 $ 0.39 $ 0.68 $ 0.73
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 76
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CAPITAL ACCUMULATED
COMMON STOCK PAID IN OTHER RETAINED STOCKHOLDER'S TOTAL
---------------- EXCESS OF DIVISIONAL COMPREHENSIVE (DEFICIT) (DEFICIT) COMPREHENSIVE
SHARES DOLLARS PAR VALUE EQUITY INCOME EARNINGS EQUITY INCOME (LOSS)
------ ------- --------- ---------- ------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <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) (3,367)
------ ---- -------- -------- ---- ------- -------- -------
Total
comprehensive
income.......... (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) (4,675)
------ ---- -------- -------- ---- ------- -------- -------
Total
comprehensive
income.......... (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 8,132
------ ---- -------- -------- ---- ------- -------- -------
Total
comprehensive
income.......... 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 5,239
------ ---- -------- -------- ---- ------- -------- -------
Total
comprehensive
income.......... 5,239
Balance at April 25,
1998.................... -- -- -- 104,883 -- 1,583 106,466
Unaudited data:
Shares distributed in
spin off from U.S.
Office Products....... 12,204 12 104,867 (104,883) 4 -- --
Shares issued in June
1998.................. 2,375 3 32,732 -- -- -- 32,735
Capital contribution by
U.S. Office
Products.............. -- -- 8,095 -- -- -- 8,095
Compensation expense
from office stock
purchase.............. -- -- 1,074 -- -- -- 1,074
Cumulative translation
adjustment............ -- -- -- -- 2 -- 2 $ 2
Net Income.............. -- -- -- -- -- 10,695 10,695 10,695
------ ---- -------- -------- ---- ------- -------- -------
Total
comprehensive
income.......... $10,697
=======
Balance at January 23,
1999 (unaudited)........ 14,579 $ 15 $146,768 $ -- $ 6 $12,278 $159,067
====== ==== ======== ======== ==== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 77
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOUR MONTHS FISCAL YEAR ENDED NINE MONTHS ENDED
YEAR ENDED ENDED --------------------- -------------------------
DECEMBER 31, APRIL 30, APRIL 26, APRIL 25, JANUARY 24, JANUARY 23,
1995 1996 1997 1998 1998 1999
------------ ----------- --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................... $(3,367) $(4,675) $ 8,132 $ 5,239 $ 8,835 $ 10,695
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization
expense.............................. 2,927 674 2,106 4,561 3,382 6,607
Non-recurring acquisition costs........ -- 1,122 1,792 -- -- --
Restructuring costs.................... 2,532 -- 194 2,491 -- 5,274
Amortization of loan fees.............. 420
Other.................................. 277 118 115 78 43 --
Change in current assets and
liabilities (net of assets acquired
and liabilities assumed in business
combinations accounted for under the
purchase method):
Accounts receivable................ 2,666 3,727 1,277 (3,586) (6,450) (1,971)
Inventory.......................... (2,523) (4,376) 2,737 (6,666) 9,590 27,208
Prepaid expenses and other current
assets........................... (338) (443) (2,361) (717) 3,844 1,722
Accounts payable................... 2,642 3,459 (6,969) 5,256 (6,593) (31,924)
Accrued liabilities................ 12 (784) (6,105) (2,932) 2,741 11,069
------- ------- -------- -------- -------- ---------
Net cash provided by (used in)
operating activities......... 4,828 (1,178) 918 3,724 15,392 29,100
------- ------- -------- -------- -------- ---------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash
received................................. (5,389) -- (7,734) (95,670) (92,076) (95,030)
Additions to property and equipment, net of
disposals................................ (881) (120) (7,216) (3,558) (4,095) (3,978)
Other...................................... 178 414 (514) (366) 171
Payments of non-recurring acquisition
costs.................................... -- (1,122) (1,792) -- -- --
------- ------- -------- -------- -------- ---------
Net cash used in investing
activities................... (6,092) (828) (16,742) (99,742) (96,537) (98,837)
------- ------- -------- -------- -------- ---------
Cash flows from financing activities:
Payments of long-term debt................. (1,488) (194) (16,962) (6,270) (6,200) (187,857)
Proceeds from (payments of) short-term
debt, net................................ 655 1,263 (29,908) (2,102) (1,841) (20,277)
Advances from (repayments to) U.S. Office
Products Company......................... -- -- 59,919 23,058 19,424 (62,699)
Capital contribution by U.S. Office
Products................................. -- -- -- 81,332 69,762 8,095
Proceeds from issuance of common stock..... 500 1,080 1,979 -- -- 32,735
Proceeds from issuance of long-term debt... 1,715 -- 750 -- -- 302,700
Capitalized loan fees...................... -- -- -- -- -- (2,960)
Payments of dividends at Pooled Companies.. (134) (138) -- -- -- --
Purchase of treasury stock at Pooled
Company.................................. (92) -- -- -- -- --
------- ------- -------- -------- -------- ---------
Net cash provided by financing
activities................... 1,156 2,011 15,778 96,018 81,145 69,737
------- ------- -------- -------- -------- ---------
Net increase (decrease) in cash and cash
equivalents.............................. (108) 5 (46) -- -- --
Cash and cash equivalents at beginning of
period................................... 149 41 46 -- -- --
------- ------- -------- -------- -------- ---------
Cash and cash equivalents at end of
period................................... $ 41 $ 46 $ -- $ -- $ -- $ --
======= ======= ======== ======== ======== =========
Supplemental disclosures of cash flow
information:
Interest paid.............................. $ 5,564 $ 1,461 $ 456 $ 35 $ 27 $ 7,153
Income taxes paid (refunded)............... $ 9 $ (3) $ (132) $ 1,148 $ -- $ 3,429
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 78
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 year ended
December 31, 1995, the fiscal years ended April 26, 1997 and April 25, 1998 and
the nine months ended January 24, 1998 and January 23, 1999. The fair values of
the assets and liabilities of the acquired companies at the dates of the
acquisitions are presented as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEAR ENDED FISCAL YEAR ENDED ENDED
------------ ---------------------- --------------------------
DECEMBER 31, APRIL 26, APRIL 25, JANUARY 24, JANUARY 23,
1995 1997 1998 1998 1999
------------ --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Accounts receivable.................. $1,589 $ 5,381 $17,900 $ 17,848 $ 44,153
Inventories.......................... 1,823 6,922 18,180 18,075 24,701
Prepaid expenses and other current
assets............................. 502 2,371 2,431 2,431 3,251
Property and equipment............... 4,536 1,155 6,379 6,667 17,312
Intangible assets.................... 3,268 14,248 80,359 74,741 85,312
Other assets......................... 156 29 346 210 7,223
Short-term debt...................... (191) (4,283) (1,850) (1,850) --
Accounts payable..................... (274) (4,012) (9,400) (9,410) (23,621)
Accrued liabilities.................. (225) (1,846) (9,089) (7,050) (6,303)
Long-term debt....................... (5,795) (1,746) (6,020) (6,020) (56,998)
------ ------- ------- -------- --------
Net assets acquired................ $5,389 $18,219 $99,236 $ 95,642 $ 95,030
====== ======= ======= ======== ========
The acquisitions were funded as
follows:
U.S. Office Products common stock.... $ -- $10,485 $ 3,566 $ 3,566 $ --
Cash paid, net of cash acquired...... 5,389 7,734 95,670 92,076 95,030
------ ------- ------- -------- --------
Total................................ $5,389 $18,219 $99,236 $ 95,642 $ 95,030
====== ======= ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE> 79
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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 2.125 million shares in an initial
public offering (the "IPO") and 250,000 shares in a private placement to certain
of its officers and directors.
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 through April 1998, 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 allocated to the Company at
the time of the Distribution. The consolidated statement of operations does not
include an allocation of interest expense on all debt allocated to the Company
up to the date of the Distribution on June 9, 1998. See Note 9 for further
discussion of interest expense.
F-11
<PAGE> 80
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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
F-12
<PAGE> 81
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
estimated useful lives range from 25 to 40 years for buildings and its
components and 3 to 15 years for furniture, fixtures and equipment. Property and
equipment leased under capital leases is being amortized over the lesser of its
useful life or its lease terms.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, which represents the
excess of cost over the fair value of assets acquired in business combinations
accounted for under the purchase method and non-compete 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 did not file separate
federal income tax returns but rather was 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. Subsequent to the Distribution, the
Company does file separate federal income tax returns.
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 operations as a
component of selling, general and administrative expenses.
F-13
<PAGE> 82
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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 operations 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, the nine months ending January 24, 1998 and January 23, 1999 was
$4,395, $832, $3,621, $6,934, $5,430 (unaudited) and $9,847 (unaudited),
respectively.
INTERNALLY DEVELOPED SOFTWARE
Internal costs related to internally developed software, such as internal
salaries and supplies, are expensed as incurred as a component of selling,
general and administrative expenses. External costs related to internally
developed software, such as fees for outside programmers and consultants, are
capitalized and expensed over the expected useful life of the software, normally
three to five years.
NON-RECURRING ACQUISITION COSTS
Non-recurring acquisition costs represent acquisition costs incurred by the
Company in business combinations accounted for under the pooling-of-interests
method. These costs include accounting, legal, and investment banking fees, real
estate and environmental assessments and appraisals, and various regulatory
fees. Generally accepted accounting principles require the Company to expense
all acquisition costs (both those paid by the Company and those paid by the
sellers of the acquired companies) related to business combinations accounted
for under the pooling-of-interests method.
RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance and relocation costs related to the
Company's employees in accordance with EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in Restructuring)."
STRATEGIC RESTRUCTURING COSTS
Strategic restructuring costs represent the Company's portion of the costs
incurred by U.S. Office Products as a result of the U.S. Office Products'
comprehensive restructuring.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 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
F-14
<PAGE> 83
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company adopted SFAS No. 130 in fiscal 1999. Implementation of this
disclosure standard did 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.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the costs of
computer software developed or obtained for internal use" ("SOP 98-1"). SOP 98-1
requires computer software costs associated with internal use software to be
expensed as incurred until certain capitalization criteria are met. The Company
will adopt SOP 98-1 during fiscal 1999. Adoption of this Statement is not
expected to have a material impact on the Company's consolidated financial
position or results of operations.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement, which is required to be
adopted for annual periods beginning after June 15, 1999, establishes standards
for recognition and measurement of derivatives and hedging activities. The
Company will implement this statement in fiscal 2001 as required. The adoption
of SFAS No. 133 is not expected to have a material effect on the Company's
financial position or results of operations.
UNAUDITED INTERIM FINANCIAL DATA
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of January 23, 1999 and the results
of operations and of cash flows for the nine months ended January 24, 1998 and
January 23, 1999, as presented in the accompanying unaudited consolidated
financial data.
DISTRIBUTION RATIO
On May 14, 1998, the U.S. Office Products Board of Directors approved the
distribution ratio for the Company in connection with the Distribution. At the
date of Distribution, the Company 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 up to the date of the Distribution on June 9, 1998, retroactively
adjusted to give effect to the one for nine distribution ratio.
F-15
<PAGE> 84
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 4 -- BUSINESS COMBINATIONS
POOLING-OF-INTERESTS METHOD
In fiscal 1997, the Company issued 4,257,693 shares of U.S. Office Products
common stock to acquire the Pooled Companies. The Pooled Companies and the
number of shares issued are as follows:
<TABLE>
<CAPTION>
NUMBER OF
COMPANY NAME SHARES ISSUED
------------ -------------
<S> <C>
School Specialty, Inc....................................... 2,307,693
Re-Print.................................................... 1,950,000
---------
Total shares issued.................................... 4,257,693
=========
</TABLE>
The Company's consolidated financial statements give retroactive effect to
the acquisitions of the Pooled Companies for all periods presented. Prior to
being acquired by U.S. Office Products, the Pooled Companies reported on years
ending on December 31. Upon completion of the acquisitions of the Pooled
Companies, their year-ends were changed to U.S. Office Products' year-end of the
last Saturday in April.
The following presents the separate results, in each of the periods
presented, of the Company (excluding the results of Pooled Companies prior to
the dates on which they were acquired), and the Pooled Companies up to the dates
on which they were acquired:
<TABLE>
<CAPTION>
SCHOOL POOLED
SPECIALTY COMPANIES COMBINED
--------- --------- --------
<S> <C> <C> <C>
For the year ended December 31, 1995
Revenues................................................. $ $150,482 $150,482
Net loss................................................. $ $ (3,367) $ (3,367)
For the four months ended April 30, 1996
Revenues................................................. $ $ 28,616 $ 28,616
Net loss................................................. $ $ (4,675) $ (4,675)
For the year ended April 26, 1997
Revenues................................................. $181,420 $ 10,326 $191,746
Net income............................................... $ 7,791 $ 341 $ 8,132
</TABLE>
PURCHASE METHOD
In 1995, one of the Pooled Companies made one acquisition accounted for
under the purchase method for an aggregate cash purchase price of $5,389. The
total assets related to the acquisition were $11,874, including goodwill of
$3,268. The results of the acquisition have been included in the Company's
results from its date of acquisition.
In fiscal 1997, the Company made six acquisitions accounted for under the
purchase method for an aggregate purchase price of $18,219, consisting of $7,734
of cash and U.S. Office Products common stock with a market value of $10,485.
The total assets related to these six acquisitions were $30,106, including
goodwill of $14,248. The results of these acquisitions have been included in the
Company's results from their respective dates of acquisition.
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
F-16
<PAGE> 85
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 4 -- BUSINESS COMBINATIONS (CONTINUED)
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.
The following presents the unaudited pro forma results of operations of the
Company for the fiscal years ended April 26, 1997 and April 25, 1998 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 of $124
and $573 for the fiscal years ended April 26, 1997 and April 25, 1998,
respectively, and the inclusion of a federal income tax provision on all
earnings:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED
----------------------
APRIL 26, APRIL 25,
1997 1998
--------- ---------
<S> <C> <C>
Revenues................................................ $350,760 $381,242
Net income.............................................. 11,714 7,538
Net income per share:
Basic................................................. $1.17 $0.57
Diluted............................................... 1.15 0.56
</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 fiscal years ended April 30, 1996, April 26, 1997
and April 25, 1998, and the nine months ended January 23, 1999:
<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 1,549 2,491
Utilizations............................... (728) -- (1,442) (2,170)
------ ------ ------- -------
Balance at April 25, 1998.................... -- 214 258 472
Additions (unaudited)...................... 1,300 2,100 800 4,200
Utilizations (unaudited)................... -- (931) (103) (1,034)
------ ------ ------- -------
Balance at January 23, 1999 (unaudited)...... $1,300 $1,383 $ 955 $ 3,638
====== ====== ======= =======
</TABLE>
F-17
<PAGE> 86
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 6 -- PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
APRIL 26, APRIL 25,
1997 1998
--------- ---------
<S> <C> <C>
Deferred catalog costs.................................... $ 5,740 $ 7,206
Deferred income taxes..................................... 2,055 1,886
Notes Receivable.......................................... 1,643 1,558
Other..................................................... 893 2,853
------- -------
Total prepaid expenses and other current assets...... $10,331 $13,503
======= =======
</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 26, APRIL 25, JANUARY 23,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land........................................... $ 729 $ 1,144 $ 1,921
Buildings...................................... 6,488 10,064 22,659
Furniture and fixtures......................... 6,502 6,725 11,358
Warehouse equipment............................ 3,163 7,052 9,984
Leasehold improvements......................... 2,185 3,341 4,409
------- ------- --------
19,067 28,326 50,331
Less: Accumulated depreciation................. (4,589) (5,773) (10,550)
------- ------- --------
Net property and equipment..................... $14,478 $22,553 $ 39,781
======= ======= ========
</TABLE>
Depreciation expense (which includes capital lease amortization) 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 and the nine months ended January
24, 1998 and January 23, 1999 was $1,645, $470, $1,540, $2,499, $1,971
(unaudited) and $2,880 (unaudited), respectively.
NOTE 8 -- INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
APRIL 26, APRIL 25, JANUARY 23,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill.................................... $ 22,128 $102,487 $186,723
Other....................................... 2,020 2,487 5,287
-------- -------- --------
24,148 104,974 192,010
Less: Accumulated amortization.............. (3,324) (5,361) (8,317)
-------- -------- --------
Net intangible assets..................... $ 20,824 $ 99,613 $183,693
======== ======== ========
</TABLE>
F-18
<PAGE> 87
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 8 -- INTANGIBLE ASSETS (CONTINUED)
Amortization expense for the year ended December 31, 1995, the four months
ended April 30, 1996 and the fiscal years ended April 26, 1997 and April 25,
1998 and the nine months ended January 24, 1998 and January 23, 1999 was $1,098,
$204, $566, $2,061, $1,411 (unaudited) and $3,184 (unaudited), respectively.
NOTE 9 -- CREDIT FACILITIES
SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 26, APRIL 25, JANUARY 23,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current maturities of long-term debt............ $232 $ 11 $10,000
Other........................................... 30 314
---- ---- -------
Total short-term debt......................... $262 $ 11 $10,314
==== ==== =======
</TABLE>
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 26, APRIL 25, JANUARY 23,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Bank debt....................................... $ -- $ -- $172,000
Capital lease obligations....................... 315 16 199
Other........................................... 483 310 --
----- ----- --------
798 326 172,199
Less: Current maturities of long-term debt...... (232) (11) (10,000)
----- ----- --------
Total long-term debt.......................... $ 566 $ 315 $162,199
===== ===== ========
</TABLE>
MATURITIES OF LONG-TERM DEBT
Maturities on long-term debt as of April 25, 1998, 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 Products at or soon after
the respective dates of acquisition and through the centralized
F-19
<PAGE> 88
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 9 -- CREDIT FACILITIES (CONTINUED)
cash management system, which involved 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 26, 1997 and April 25, 1998 was $27,269 and
$52,207, 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 $3,839 and $5,414 during the fiscal years ended April
26, 1997 and April 25, 1998, 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.
F-20
<PAGE> 89
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 10 -- INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
FOR THE FOR THE FISCAL YEAR
FOR THE FOUR MONTHS ENDED
YEAR ENDED ENDED ----------------------
DECEMBER 31, APRIL 30, APRIL 26, APRIL 25,
1995 1996 1997 1998
------------ ----------- --------- ---------
<S> <C> <C> <C> <C>
Income taxes currently payable:
Federal....................................... $(66) $ -- $ 71 $3,646
State......................................... -- -- 99 907
---- ---- ------- ------
(66) -- 170 4,553
---- ---- ------- ------
Deferred income tax expense (benefit)........... 239 139 (2,582) 927
---- ---- ------- ------
Total provision for (benefit from) income
taxes................................. $173 $139 $(2,412) $5,480
==== ==== ======= ======
</TABLE>
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
APRIL 26, APRIL 25,
1997 1998
--------- ---------
<S> <C> <C>
Current deferred tax assets:
Inventory................................................. $ 265 $ 743
Allowance for doubtful accounts........................... 193 164
Net operating loss carryforward........................... 3,069 851
Accrued liabilities....................................... 421 128
Prepaid catalog advertising/restructuring................. (1,893) --
------- ------
Total current deferred tax assets.................... 2,055 1,886
------- ------
Long-term deferred tax assets (liabilities):
Property and equipment...................................... (289) (591)
Intangible assets........................................... 258 80
------- ------
Total long-term deferred tax liabilities............. (31) (511)
------- ------
Net deferred tax assets.............................. $ 2,024 $1,375
======= ======
</TABLE>
At April 30, 1996, the valuation allowance of $5.3 million 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 in
fiscal 1997, resulting in a benefit from income taxes.
F-21
<PAGE> 90
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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
FOR THE FOUR MONTHS ENDED
YEAR ENDED ENDED ---------------------
DECEMBER 31, APRIL 30, APRIL 26, APRIL 25,
1995 1996 1997 1998
------------ ----------- --------- ---------
<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....................... 1.0 6.6
Net benefit for current year net operating
loss.......................................... (34.0) (32.8)
Reversal of valuation allowance................. (84.8)
Nondeductible goodwill.......................... (2.2) 1.6 6.0
Nondeductible acquisition costs................. 5.0 3.3
Tax on separate company income not offset
against other company's loss.................. (5.4) (3.0)
Other........................................... 1.2
----- ----- ----- ----
Effective income tax rate....................... (5.4)% (3.0)% (42.2)% 51.1%
===== ===== ===== ====
</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 carryforwards 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 year ended December 31, 1995, the four months ended
April 30, 1996 and the fiscal years ended April 26, 1997 and April 25, 1998 was
$1,947, $600, $1,817 and $3,389, respectively.
F-22
<PAGE> 91
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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.
AGREEMENTS WITH USOP
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 year ended December 31,
F-23
<PAGE> 92
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 13 -- EMPLOYEE BENEFIT PLANS (CONTINUED)
1995 and the four months ended April 30, 1996, the subsidiaries incurred
expenses totaling $105 and $6, 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
F-24
<PAGE> 93
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 14 -- STOCKHOLDER'S EQUITY (CONTINUED)
presents the Company's computations of basic and diluted EPS for the periods
presented in the consolidated statement of operations.
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
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)
======= ========== ======
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)
======= ========== ======
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
======= ========== ======
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
======= ========== ======
Nine months ended January 24, 1998 (unaudited):
Basic EPS............................................. $ 8,835 12,750,931 $ 0.69
======
Effect of dilutive employee stock options............. 269,571
------- ----------
Diluted EPS........................................... $ 8,835 13,020,502 $ 0.68
======= ========== ======
Nine months ended January 23, 1999 (unaudited):
Basic EPS............................................. $10,695 14,624,672 $ 0.73
======
Effect of dilutive employee stock options............. 40,379
------- ----------
Diluted EPS........................................... $10,695 14,665,051 $ 0.73
======= ========== ======
</TABLE>
CAPITAL CONTRIBUTION BY U.S. OFFICE PRODUCTS
During the fiscal year ended April 25, 1998 and the nine month period ended
January 23, 1999, U.S. Office Products contributed $81,332 and $8,095
(unaudited), respectively, 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 would become subsidiaries of School Specialty.
F-25
<PAGE> 94
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 14 -- STOCKHOLDER'S EQUITY (CONTINUED)
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
----------------------
APRIL 26, APRIL 25,
1997 1998
--------- ---------
<S> <C> <C>
Net income:
As reported............................................... $8,132 $5,239
Pro Forma................................................. 7,383 4,436
Net income per share:
As reported:
Basic.................................................. 0.81 0.40
Diluted................................................ 0.80 0.39
Pro Forma:
Basic.................................................. 0.74 0.33
Diluted................................................ 0.72 0.33
</TABLE>
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
----------------------
APRIL 26, APRIL 25,
1997 1998
--------- ---------
<S> <C> <C>
Expected life of option.................................... 7 years 7 years
Risk free interest rate.................................... 6.66% 6.35%
Expected volatility of stock............................... 44.00% 44.10%
</TABLE>
The weighted-average fair value of options granted was $15.31 and $9.75 for
fiscal 1997 and 1998, respectively.
F-26
<PAGE> 95
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 14 -- STOCKHOLDER'S EQUITY (CONTINUED)
A summary of option transactions follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------- --------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- --------- ------- ---------
<S> <C> <C> <C> <C>
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>
The following table summarizes information about stock options outstanding
at April 25, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- --------------------
WEIGHTED- WEIGHTED-
WEIGHTED- AVERAGE AVERAGE
AVERAGE EXERCISE EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE
------------------------ ------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
$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 intended 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). Immediately following the date of the Distribution, Mr.
Ledecky received options for 914,079 shares of School Specialty common stock.
The options have a per share exercise price of $15.50, equal to the IPO price.
As of June 10, 1998, 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 of $15.50, equal to the IPO price.
F-27
<PAGE> 96
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 14 -- STOCKHOLDER'S EQUITY (CONTINUED)
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 grant
of the award, including the options granted to Mr. Ledecky on that date.
NOTE 15 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data for the
fiscal years ended April 26, 1997 and April 25, 1998 and the nine months ended
January 23, 1999:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 26, 1997
-----------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Revenues................................. $58,991 $71,682 $29,304 $31,769 $191,746
Gross profit............................. 19,858 23,435 9,595 11,996 64,884
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>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 25, 1998
-----------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Revenues................................. $87,029 $111,460 $49,391 $62,575 $310,455
Gross profit............................. 30,337 37,225 16,213 23,810 107,585
Operating income (loss).................. 11,872 12,155 (3,647) (4,132) 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>
NINE MONTHS ENDED JANUARY 23, 1999
-------------------------------------------
FIRST SECOND THIRD TOTAL
----- ------ ----- -----
<S> <C> <C> <C> <C>
Revenues.......................................... $126,657 $212,316 $85,359 $424,332
Gross profit...................................... 44,042 70,761 28,093 142,896
Operating income (loss)........................... 13,326 18,674 (2,383) 29,617
Net income (loss)................................. 6,563 7,430 (3,298) 10,695
Per share amounts:
Basic........................................... 0.45 0.51 (0.23) 0.73
Diluted......................................... 0.44 0.51 (0.23) 0.73
</TABLE>
NOTE 16 -- SUBSEQUENT EVENTS (UNAUDITED)
SENIOR CREDIT FACILITY
On September 30, 1998, the Company entered into a five year secured
$350,000 credit facility consisting of a $250,000 revolving loan and $100,000
term loan. Interest on borrowings under the senior credit facility accrued
through the third quarter of fiscal 1999 at a rate of, at the Company's option,
either (i) LIBOR plus 2.375% or (ii) the lender's base rate plus a margin of
.75%, plus an unused fee of .475 on the unborrowed amount under the revolving
credit facility. Thereafter, interest
F-28
<PAGE> 97
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 16 -- SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
will accrue at a rate of (i) LIBOR plus a range of 1.000% to 2.000%, or (ii) the
lender's base rate plus a range of .000% to .750%, plus an unused fee ranging
from .275 to .475 on the unborrowed amount under the revolving credit facility
(depending on the Company's leverage ratio of funded debt to earnings before
interest, income taxes, depreciation and amortization). 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 borrowed under the credit facility to
repay the U.S. Office Products' debt outstanding on June 10, 1998 in accordance
with the terms of the U.S. Office Products Strategic Restructuring Plan, to fund
the two companies acquired in the first three quarters of fiscal 1999 and for
seasonal working capital. The balance of the credit facility will be available
for working capital, capital expenditures and acquisitions, subject to
compliance with financial covenants. The amount outstanding as of January 23,
1999 under the credit facility was approximately $172,000.
On October 28, 1998 the Company entered into an interest rate swap
agreement with the Bank of New York covering $50,000 of the outstanding credit
facility. The agreement fixes the 30 day LIBOR interest rate at 4.37% per annum
on the $50,000 notional amount and has a three year term that may be canceled by
the Bank of New York on the second anniversary. The floating LIBOR interest rate
at January 23, 1999 was 4.9%.
The term loan will amortize quarterly over five years under the following
amortization schedule with the first principal payment due January 30, 1999:
<TABLE>
<S> <C>
Year 1................................................... $ 10,000
Year 2................................................... 15,000
Year 3................................................... 15,000
Year 4................................................... 30,000
Year 5................................................... 30,000
--------
$100,000
========
</TABLE>
PURCHASE BUSINESS COMBINATIONS
In the nine months ended January 23, 1999, the Company made two
acquisitions which were accounted for under the purchase method of accounting
for an aggregate cash purchase price of approximately $95,000, resulting in
goodwill of approximately $85,000 which will be amortized over 40 years. The
results of these acquisitions have been included in the Company's results from
their respective dates of acquisition.
On February 9, 1999 the Company purchased Sportime, LLC, the physical
education, athletic and recreation products business of Genesis Direct Inc. for
approximately $23 million in cash, resulting in goodwill of approximately
$13,587 which will be amortized over 40 years.
The following presents the unaudited pro forma results of operations of the
Company for the fiscal year ended April 25, 1998, and the nine month periods
ended January 23, 1999 and January 24, 1998, and includes the Company's
consolidated financial statements, which give retroactive effect to the
acquisitions as if all fiscal year 1998 and fiscal year 1999 purchase
acquisitions had been made at the beginning of fiscal 1998. The results
presented below include certain pro forma adjustments to reflect the
amortization of intangible assets, adjustments to interest expense, adjustments
to depreciation, and the inclusion of a federal income tax provision on
F-29
<PAGE> 98
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 16 -- SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
all earnings for the periods ended April 25, 1998, January 23, 1999 and January
24, 1998, respectively:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------
FISCAL YEAR ENDED JANUARY 24, JANUARY 23,
APRIL 25, 1998 1998 1999
----------------- ----------- -----------
<S> <C> <C> <C>
Revenues...................................... $598,025 $496,941 $506,180
Net income.................................... 4,330 7,953 11,744
Net income per share
Basic......................................... $ 0.28 $ 0.53 $ 0.78
Diluted....................................... $ 0.27 $ 0.52 $ 0.78
</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 1998 or the
results which may occur in the future.
NON-RECURRING CHARGES AND RESTRUCTURING COSTS
The Company incurred non-recurring charges in the quarters ended July 25,
1998 and October 24, 1999. The first quarter non-cash strategic restructuring
plan cost of $1,074 consisted of compensation expense attributed to the U.S.
Office Products stock option tender offer and the sale of shares of stock to
certain executive management personnel of the Company, net of underwriting
discounts. The second quarter restructuring costs of $4,200 is related to the
consolidation of School Specialty, Inc.'s existing warehousing, customer service
and sales operations resulting from the acquisition of National School Supply
Company. The $4,200 charge included $2,100 for employee severance and
termination benefits, $1,300 for lease termination and facility shut-down costs
and $800 for write down of fixed assets and inventories.
F-30
<PAGE> 99
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma financial statements give effect to, where
applicable, all acquisitions completed through February 9, 1999, the spin-off
and the refinancing of all amounts payable to U.S. Office Products in connection
with the spin-off and the June 1998 initial public offering. The pro forma
Common Stock offering and Note offering adjustments further adjust such pro
forma financial statements to give effect to such offerings.
The pro forma combined balance sheet gives effect to the acquisition
completed after February 9, 1999.
The pro forma combined statement of income for the fiscal year ended April
25, 1998 gives effect to (i) the spin-off and the refinancing of all amounts
payable to U.S. Office Products in connection with the spin-off; (ii) the June
1998 initial public offering; (iii) the acquisitions of Sax Arts and Crafts,
American Academic and six other individually insignificant companies in business
combinations accounted for under the purchase method completed during the fiscal
year ended April 25, 1998 (the "Fiscal 1998 Purchase Acquisitions"); and (iv)
the acquisitions of Hammond & Stephens, National School Supply and Sportime in
business combinations accounted for under the purchase method completed during
the fiscal year ending April 24, 1999 (the "Fiscal 1999 Purchase Acquisitions"),
as if all such transactions had occurred on April 27, 1997. The pro forma
combined statement of income for the year ended April 25, 1998 includes (i) our
audited financial information for the year ended April 25, 1998; (ii) the
unaudited financial information of the Fiscal 1998 Purchase Acquisitions for the
period from April 27, 1997 through their respective dates of acquisitions; and
(iii) the unaudited financial information of the Fiscal 1999 Purchase
Acquisitions for the period from April 27, 1997 through April 25, 1998.
The pro forma combined statement of income for the nine months ended
January 23, 1999 gives effect to (i) the spin-off and the refinancing of all
amounts payable to U.S. Office Products in connection with the spin-off; (ii)
the June 1998 initial public offering; and (iii) the Fiscal 1999 Purchase
Acquisitions, as if all such transactions had occurred on April 26, 1998. The
pro forma combined statement of income for the nine months ended January 23,
1999 includes our unaudited financial information for the nine months ended
January 23, 1999 and the unaudited financial information of the Fiscal 1999
Purchase Acquisitions for the period from April 26, 1998 through the earlier of
their respective dates of acquisition or January 23, 1999.
The pro forma combined statement of income for the nine months ended
January 24, 1998 gives effect to (i) the spin-off and the refinancing of all
amounts payable to U.S. Office Products in connection with the spin-off; (ii)
the June 1998 initial public offering; (iii) the Fiscal 1998 Purchase
Acquisitions; and (iv) the Fiscal 1999 Purchase Acquisitions, as if all such
transactions had occurred on April 27, 1997. The pro forma combined statement of
income for the nine months ended January 24, 1998 includes (i) our unaudited
financial information for the nine months ended January 24, 1998; (ii) the
unaudited financial information of the Fiscal 1998 Purchase Acquisitions for the
period from April 27, 1997 through the earlier of their respective dates of
acquisition or January 24, 1998; and (iii) the unaudited financial information
of the Fiscal 1999 Purchase Acquisitions for the period from April 27, 1997
through January 24, 1998.
Our historical financial statements reflect an allocated portion of general
and administrative costs and interest expense incurred by U.S. Office Products.
The allocated costs include expenses such as: certain corporate executives'
salaries, accounting and legal fees, departmental costs for accounting, finance,
legal, purchasing, marketing and human resources, as well as other general
overhead costs. These corporate overheads have been allocated to us using one of
several factors, dependent on the nature of the costs being allocated,
including, revenues, number and size of acquisitions and number of employees.
Interest expense incurred by U.S. Office Products has been
F-31
<PAGE> 100
allocated to us based upon our average outstanding intercompany balances with
U.S. Office Products at U.S. Office Products' weighted average interest rate
during such period.
The pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma combined financial data presented herein does not purport to
represent what our financial position or results of operations would have been
had the transactions which are the subject of pro forma adjustments occurred on
those dates, as assumed, and are not necessarily representative of our financial
position or results of operations in any future period. The pro forma combined
financial statements should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this Prospectus.
F-32
<PAGE> 101
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED BALANCE SHEET
JANUARY 23, 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
POST COMMON
JANUARY 23, 1999 STOCK
SCHOOL PURCHASE PRO FORMA OFFERING
SPECIALTY, INC. ACQUISITION ADJUSTMENTS SUBTOTAL ADJUSTMENTS
--------------- ---------------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash & cash equivalents.......... $ -- $ -- $ -- $ -- $ 62,170(b)
(62,170)(b)
Accounts receivable, net......... 84,843 3,432 -- 88,275 --
Inventories...................... 46,799 4,371 -- 51,170 --
Prepaid and other current
assets....................... 16,219 2,820 -- 19,039 --
-------- ------- -------- -------- --------
Total current assets......... 147,861 10,623 -- 158,484 --
Property and equipment, net...... 39,781 1,185 -- 40,966 --
Intangible assets, net........... 183,693 14,689 (1,102)(a) 197,280 --
Other assets..................... 7,178 12 -- 7,190 --
-------- ------- -------- -------- --------
Total assets................. $378,513 $26,509 $ (1,102) $403,920 $ --
======== ======= ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current portion of long-term
debt......................... $ 10,314 $ -- $ -- $ 10,314 $(10,314)(b)
Accounts payable............... 15,485 1,063 -- 16,548 --
Accrued compensation........... 11,945 303 -- 12,248 --
Accrued income taxes........... 5,596 6 -- 5,602 --
Accrued restructuring.......... 3,638 -- -- 3,638 --
Other accrued liabilities...... 10,057 738 -- 10,795 --
-------- ------- -------- -------- --------
Total current liabilities.... 57,035 2,110 -- 59,145 (10,314)
Long-term debt................... 162,199 69 23,000(a) 185,268 (51,856)(b)
Other............................ 212 228 -- 440 --
-------- ------- -------- -------- --------
Total liabilities............ 219,446 2,407 23,000 244,853 (62,170)
Stockholders' equity:
Common stock................... 15 -- -- 15 3(b)
Capital paid in excess of par
value........................ 146,768 -- -- 146,768 62,167(b)
Accumulated other comprehensive
income....................... 6 -- -- 6 --
Retained earnings.............. 12,278 -- -- 12,278 --
Equity of purchased company.... -- 24,102 (24,102)(a) -- --
-------- ------- -------- -------- --------
Total stockholders' equity... 159,067 24,102 (24,102) 159,067 62,170
-------- ------- -------- -------- --------
Total liabilities and
stockholders' equity....... $378,513 $26,509 $ (1,102) $403,920 $ --
======== ======= ======== ======== ========
<CAPTION>
PRO FORMA
PRO FORMA AS ADJUSTED
AS ADJUSTED PRO FORMA FOR COMMON
FOR COMMON NOTE OFFERING STOCK AND
STOCK OFFERING ADJUSTMENTS NOTE OFFERINGS
-------------- ------------- --------------
<S> <C> <C> <C>
ASSETS
Cash & cash equivalents.......... $ -- $ 97,050(c) $ --
(97,050)(c)
Accounts receivable, net......... 88,275 -- 88,275
Inventories...................... 51,170 -- 51,170
Prepaid and other current
assets....................... 19,039 -- 19,039
-------- -------- --------
Total current assets......... 158,484 -- 158,484
Property and equipment, net...... 40,966 -- 40,966
Intangible assets, net........... 197,280 -- 197,280
Other assets..................... 7,190 2,950 10,140
-------- -------- --------
Total assets................. $403,920 $ 2,950 $406,870
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current portion of long-term
debt......................... $ -- $ -- $ --
Accounts payable............... 16,548 -- 16,548
Accrued compensation........... 12,248 -- 12,248
Accrued income taxes........... 5,602 -- 5,602
Accrued restructuring.......... 3,638 -- 3,638
Other accrued liabilities...... 10,795 -- 10,795
-------- -------- --------
Total current liabilities.... 48,831 -- 48,831
Long-term debt................... 133,412 100,000(c) 136,362
(97,050)(c)
Other............................ 440 -- 440
-------- -------- --------
Total liabilities............ 182,683 2,950 185,633
Stockholders' equity:
Common stock................... 18 -- 18
Capital paid in excess of par
value........................ 208,935 -- 208,935
Accumulated other comprehensive
income....................... 6 -- 6
Retained earnings.............. 12,278 -- 12,278
Equity of purchased company.... -- -- --
-------- -------- --------
Total stockholders' equity... 221,237 -- 221,237
-------- -------- --------
Total liabilities and
stockholders' equity....... $403,920 $ 2,950 $406,870
======== ======== ========
</TABLE>
F-33
<PAGE> 102
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 23, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
NATIONAL COMMON STOCK
SCHOOL SCHOOL HAMMOND & PRO FORMA OFFERING
SPECIALTY, INC. SUPPLY STEPHENS SPORTIME ADJUSTMENTS SUBTOTAL ADJUSTMENTS
--------------- -------- --------- -------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............................ $424,332 $53,690 $2,380 $25,778 $ -- $506,180 $ --
Cost of revenues.................... 281,436 36,122 1,181 12,047 -- 330,786 --
-------- ------- ------ ------- ------- -------- -------
Gross profit.................... 142,896 17,568 1,199 13,731 -- 175,394 --
Selling, general and administrative
expenses.......................... 108,005 12,948 476 11,625 24(e) 133,046 --
(32)(f)
Restructuring costs................. 5,274 127 -- -- -- 5,401 --
-------- ------- ------ ------- ------- -------- -------
Operating income.................. 29,617 4,493 723 2,106 8 36,947 --
Other (income) expense:
Interest expense.................. 8,942 1,265 -- 3 3,290(g) 13,500 (3,730)(i)
Interest income................... (114) -- -- -- 114(g) -- --
Other............................. 235 (15) 200 -- 420 --
-------- ------- ------ ------- ------- -------- -------
Income before provision for income
taxes............................. 20,789 2,993 738 1,903 (3,396) 23,027 3,730
Provision for income taxes.......... 10,094 4 -- -- 1,185(h) 11,283 1,492
-------- ------- ------ ------- ------- -------- -------
Net income.......................... $ 10,695 $ 2,989 $ 738 $ 1,903 $(4,581) $ 11,744 $ 2,238
======== ======= ====== ======= ======= ======== =======
Weighted average shares:
Basic............................. 14,625 15,025(k)
Diluted........................... 14,665 15,065(k)
Net income per share:
Basic............................. $ 0.73 $ 0.78
Diluted........................... $ 0.73 $ 0.78
<CAPTION>
PRO FORMA
PRO FORMA PRO FORMA AS ADJUSTED
AS ADJUSTED NOTE FOR COMMON
FOR COMMON OFFERING STOCK
STOCK OFFERING ADJUSTMENTS AND NOTE OFFERINGS
-------------- ----------- ------------------
<S> <C> <C> <C>
Revenues............................ $506,180 $ -- $506,180
Cost of revenues.................... 330,786 -- 330,786
-------- ------- --------
Gross profit.................... 175,394 -- 175,394
Selling, general and administrative
expenses.......................... 133,046 -- 133,046
Restructuring costs................. 5,401 -- 5,401
-------- ------- --------
Operating income.................. 36,947 -- 36,947
Other (income) expense:
Interest expense.................. 9,770 1,115(j) 10,885
Interest income................... -- -- --
Other............................. 420 -- 420
-------- ------- --------
Income before provision for income
taxes............................. 26,757 (1,115) 25,642
Provision for income taxes.......... 12,775 (446) 12,329
-------- ------- --------
Net income.......................... $ 13,982 $ (669) $ 13,313
======== ======= ========
Weighted average shares:
Basic............................. 18,025(l) 18,025(l)
Diluted........................... 18,065(l) 18,065(l)
Net income per share:
Basic............................. $ 0.78 $ 0.74
Diluted........................... $ 0.77 $ 0.74
</TABLE>
F-34
<PAGE> 103
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 24, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
INDIVIDUALLY
INSIGNIFICANT
SAX NATIONAL FISCAL 1998
SCHOOL ARTS AND AMERICAN SCHOOL HAMMOND & PURCHASE
SPECIALTY, INC.(D) CRAFTS(D) ACADEMIC(D) SUPPLY STEPHENS SPORTIME ACQUISITIONS(D)
------------------ --------- ----------- -------- --------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............... $247,880 $5,421 $36,423 $146,526 $7,782 $23,966 $28,943
Cost of revenues....... 164,105 3,196 24,382 100,819 3,764 11,043 19,865
-------- ------ ------- -------- ------ ------- -------
Gross profit.......... 83,775 2,225 12,041 45,707 4,018 12,923 9,078
Selling, general and
administrative
expenses.............. 63,395 1,722 8,789 40,024 2,019 10,533 7,873
Restructuring costs.... -- -- -- 1,198 -- -- --
-------- ------ ------- -------- ------ ------- -------
Operating income...... 20,380 503 3,252 4,485 1,999 2,390 1,205
Other (income) expense:
Interest expense...... 4,100 18 441 3,927 -- -- 38
Interest income....... (109) (3) -- -- (109) -- (4)
Other................. 441 -- 24 -- -- 13 58
-------- ------ ------- -------- ------ ------- -------
Income before provision
for income taxes...... 15,948 488 2,787 558 2,108 2,377 1,113
Provision for income
taxes................. 7,113 189 892 15 -- -- 140
-------- ------ ------- -------- ------ ------- -------
Net income............. $ 8,835 $ 299 $ 1,895 $ 543 $2,108 $ 2,377 $ 973
======== ====== ======= ======== ====== ======= =======
Weighted average
shares:
Basic................. 12,751
Diluted............... 13,020
Net income per share:
Basic................. $ 0.69
Diluted............... $ 0.68
<CAPTION>
PRO FORMA PRO FORMA
PRO FORMA AS ADJUSTED AS ADJUSTED
COMMON FOR PRO FORMA FOR COMMON
STOCK COMMON NOTE STOCK AND
PRO FORMA OFFERING STOCK OFFERING NOTE
ADJUSTMENTS SUBTOTAL ADJUSTMENTS OFFERING ADJUSTMENTS OFFERINGS
----------- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues............... $ -- $496,941 $ -- $496,941 $ -- $496,941
Cost of revenues....... -- 327,174 -- 327,174 -- 327,174
------- -------- ------- -------- ------- --------
Gross profit.......... -- 169,767 -- 169,767 -- 169,767
Selling, general and
administrative
expenses.............. 224(e) 135,598 -- 135,598 -- 135,598
1,019(f)
Restructuring costs.... -- 1,198 -- 1,198 -- 1,198
------- -------- ------- -------- ------- --------
Operating income...... (1,243) 32,971 -- 32,971 -- 32,971
Other (income) expense:
Interest expense...... 4,976(g) 13,500 (3,730)(i) 9,770 1,115(j) 10,885
Interest income....... 225(g) -- -- -- -- --
Other................. -- 536 -- 536 -- 536
------- -------- ------- -------- ------- --------
Income before provision
for income taxes...... (6,444) 18,935 3,730 22,665 (1,115) 21,550
Provision for income
taxes................. 2,633(h) 10,982 1,492 12,474 (446) 12,028
------- -------- ------- -------- ------- --------
Net income............. $(9,077) $ 7,953 $ 2,238 $ 10,191 $ (669) $ 9,522
======= ======== ======= ======== ======= ========
Weighted average
shares:
Basic................. 15,126(k) 18,126(l) 18,126(l)
Diluted............... 15,395(k) 18,395(l) 18,395(l)
Net income per share:
Basic................. $ 0.53 $ 0.56 $ 0.53
Diluted............... $ 0.52 $ 0.55 $ 0.52
</TABLE>
F-35
<PAGE> 104
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED APRIL 25, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
INDIVIDUALLY
INSIGNIFICANT
SAX NATIONAL FISCAL 1998
SCHOOL ARTS AND AMERICAN SCHOOL HAMMOND & PURCHASE
SPECIALTY, INC.(D) CRAFTS(D) ACADEMIC(D) SUPPLY STEPHENS SPORTIME ACQUISITIONS(D)
------------------ --------- ----------- -------- --------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $310,455 $5,421 $36,423 $176,774 $9,028 $30,981 $28,943
Cost of revenues.............. 202,870 3,196 24,382 121,161 4,386 14,467 19,865
-------- ------ ------- -------- ------ ------- -------
Gross profit................. 107,585 2,225 12,041 55,613 4,642 16,514 9,078
Selling, general and
administrative
expenses..................... 87,846 1,722 8,789 50,936 2,555 14,367 7,873
Restructuring costs........... 3,491 -- -- 1,198 -- -- --
-------- ------ ------- -------- ------ ------- -------
Operating income............. 16,248 503 3,252 3,479 2,087 2,147 1,205
Other (income) expense:
Interest expense............. 5,505 18 441 5,047 -- -- 38
Interest income.............. (132) (3) -- -- (154) -- (4)
Other........................ 156 -- 24 -- -- (45) 58
-------- ------ ------- -------- ------ ------- -------
Income before provision for
income taxes................. 10,719 488 2,787 (1,568) 2,241 2,192 1,113
Provision for income
taxes........................ 5,480 189 892 18 -- -- 140
-------- ------ ------- -------- ------ ------- -------
Net income.................... $ 5,239 $ 299 $ 1,895 $ (1,586) $2,241 $ 2,192 $ 973
======== ====== ======= ======== ====== ======= =======
Weighted average shares:
Basic........................ 13,284
Diluted...................... 13,547
Net income per share:
Basic........................ $ 0.40
Diluted...................... $ 0.39
<CAPTION>
PRO FORMA PRO FORMA
PRO FORMA AS ADJUSTED AS ADJUSTED
COMMON FOR PRO FORMA FOR COMMON
STOCK COMMON NOTE STOCK AND
PRO FORMA OFFERING STOCK OFFERING NOTE
ADJUSTMENTS SUBTOTAL ADJUSTMENTS OFFERING ADJUSTMENTS OFFERINGS
----------- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... $ -- $598,025 $ -- $598,025 $ -- $598,025
Cost of revenues.............. -- 390,327 -- 390,327 -- 390,327
------- -------- ------- -------- ------- --------
Gross profit................. -- 207,698 -- 207,698 -- 207,698
Selling, general and
administrative
expenses..................... 295(e) 175,507 -- 175,507 -- 175,507
1,124(f)
Restructuring costs........... -- 4,689 -- 4,689 -- 4,689
------- -------- ------- -------- ------- --------
Operating income............. (1,419) 27,502 -- 27,502 -- 27,502
Other (income) expense:
Interest expense............. 5,951(g) 17,000 (4,974)(i) 12,026 1,486(j) 13,512
Interest income.............. 293(g) -- -- -- -- --
Other........................ -- 193 -- 193 -- 193
------- -------- ------- -------- ------- --------
Income before provision for
income taxes................. (7,663) 10,309 4,974 15,283 (1,486) 13,797
Provision for income
taxes........................ (740)(h) 5,979 1,990 7,969 (593) 7,376
------- -------- ------- -------- ------- --------
Net income.................... $(6,923) $ 4,330 $ 2,984 $ 7,314 $ (893) $ 6,421
======= ======== ======= ======== ======= ========
Weighted average shares:
Basic........................ 15,659(k) 18,659(l) 18,659(l)
Diluted...................... 15,922(k) 18,922(l) 18,922(l)
Net income per share:
Basic........................ $ 0.28 $ 0.39 $ 0.34
Diluted...................... $ 0.27 $ 0.39 $ 0.34
</TABLE>
F-36
<PAGE> 105
SCHOOL SPECIALTY, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)
NOTE 1 -- UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
(a) Adjustment to reflect purchase price adjustments associated with the
acquisition of Sportime. The portion of the consideration assigned to
goodwill ($13,587) in the transaction accounted for under the purchase
method represents the excess of the cost over the fair market value of the
net assets acquired. We amortize goodwill over a period of 40 years. The
recoverability of the unamortized goodwill will be assessed on an ongoing
basis by comparing anticipated undiscounted future cash flows from
operations to net book value.
(b) Adjustment to reflect $62,170 of net proceeds from the sale of 3,000 shares
of Common Stock as part of the Common Stock Offering (net of expenses and
underwriting discount) and the utilization of the proceeds to repay $10,314
of short-term debt and $51,856 of long-term debt.
(c) Adjustment to reflect $97,050 of net proceeds from the sale of the $100,000
of Notes as part of the Note offering (net of expenses and underwriters
discount) and the utilization of the proceeds to repay $97,050 of long-term
debt.
NOTE 2 -- UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS
(d) Certain reclassifications have been made to our historical results and the
results of the Fiscal 1998 Purchase Acquisitions for the period prior to
their respective dates of acquisition for the nine months ended January 24,
1998 and the fiscal year ended April 25, 1998 to conform with the fiscal
1999 presentation. These reclassifications had no effect on net income or
net income per share.
(e) Adjustment to reflect additional corporate overhead expenses to be incurred
as a stand-alone, publicly traded, entity, rather than as a division of
U.S. Office Products.
(f) Adjustment to reflect the increase (decrease) in amortization expense
relating to goodwill recorded in purchase accounting related to the Fiscal
1998 and Fiscal 1999 Purchase Acquisitions for the periods prior to the
respective dates of acquisition. We have recorded goodwill amortization in
the historical financial statements from the respective dates of
acquisition forward. The goodwill is being amortized over an estimated life
of 40 years.
(g) Adjustment to reflect an increase in interest expense. Interest expense is
being calculated on the average pro forma debt outstanding during the
applicable periods at a weighted average interest rate of approximately
8.0%. The adjustment also reflects a reduction in interest income to zero
as we generally expect to use available cash to repay debt. Pro forma
interest expense will fluctuate approximately $272 on an annual basis for
each 0.125% change in interest rates.
(h) Adjustment to calculate the provision for income taxes on the combined pro
forma results at an effective income tax rate of approximately 49% for the
nine months ended January 23, 1999 and 58% for the nine months ended
January 24, 1998 and the fiscal year ended April 25, 1998. The difference
between the effective tax rates and the statutory tax rate of 35% relates
primarily to state income taxes and nondeductible goodwill.
(i) Adjustment to reflect a decrease in interest expense as a result of the
utilization of the net proceeds from the Common Stock offering to repay
$10,314 of short-term debt and $51,856 of long-term debt at an annual
interest rate of 8%.
F-37
<PAGE> 106
SCHOOL SPECIALTY, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)
NOTE 2 -- UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
ADJUSTMENTS(CONTINUED)
(j) Adjustment to reflect a net increase in interest expense as a result of the
higher average interest rate resulting from the utilization of the net
proceeds from the Note offering to repay $97,050 of long-term debt at an
annual interest rate of 8%.
(k) The weighted average shares outstanding used to calculate pro forma
earnings per share is calculated based upon our weighted average shares,
adjusted to reflect the shares sold in the June 1998 initial public
offering, as if the June 1998 initial public offering had occurred on April
27, 1997.
(l) The weighted average shares outstanding used to calculate pro forma as
adjusted for the Common Stock offering and as adjusted for the Common Stock
and Note offerings earnings per share is calculated based upon the pro
forma weighted average shares described in note (k), adjusted to reflect
the 3,000 shares to be sold in the Common Stock offering, as if the Common
Stock offering had occurred on April 27, 1997.
F-38
<PAGE> 107
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
American Academic Suppliers Holding Corporation
We have audited the accompanying consolidated balance sheets of AMERICAN
ACADEMIC SUPPLIERS HOLDING CORPORATION AND SUBSIDIARY as of December 31, 1995
and 1996, and the related consolidated statements of operations, changes in
shareholders' equity and of cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of American
Academic Suppliers Holding Corporation and Subsidiary as of December 31, 1995
and 1996, and the consolidated results of their operations and their cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
ALTSCHULER, MELVOIN AND GLASSER LLP
Chicago, Illinois
February 24,1997
F-39
<PAGE> 108
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
---- ---- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash............................................. $ 7,228 $ 21,507 $ 9,841
Trade accounts receivable (net of allowance for
doubtful accounts of $25,000)................. 4,525,451 3,656,546 13,476,228
Inventories (Note 1)............................. 1,805,731 1,599,140 2,398,435
Other current assets and prepaid expenses........ 127,673 173,549 269,234
----------- ----------- -----------
6,466,083 5,450,742 16,153,738
----------- ----------- -----------
Property, Plant and Equipment (less accumulated
depreciation -- Notes 1 and 2)................... 3,081,784 2,949,000 2,845,858
----------- ----------- -----------
Other Assets:
Excess of cost over the fair value of net assets
acquired (less accumulated amortization of
$320,322, $433,022, $509,311, respectively --
Note 1........................................ 4,187,938 4,075,238 4,030,878
Deferred financing costs (less accumulated
amortization of $21,729, $42,729, and $50,965
respectively -- Note 1)....................... 40,544 19,544
Deposits......................................... 37,581 64,211
----------- ----------- -----------
4,266,063 4,158,993 4,030,878
----------- ----------- -----------
$13,813,930 $12,558,735 $23,030,474
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................. $ 1,476,312 $ 1,636,969 $ 4,281,450
Current portion of long-term debt (Note 4)....... 168,673 3,135 10,772,516
Other current liabilities and accrued expenses
(Notes 3 and 9)............................... 1,968,780 736,374 2,391,544
----------- ----------- -----------
3,613,765 2,376,478 17,445,510
----------- ----------- -----------
Long-term Liabilities:
Long-term debt (Note 4).......................... 7,712,187 6,407,152
----------- ----------- -----------
Shareholders' Equity:
Common stock, (10,000 shares of $.01 par value
authorized 1,209, 1,232 and 1,232 shares
issued and outstanding at December 31, 1995,
1996, and September 30, 1997, respectively --
Note 8)....................................... 12 12 12
Additional paid-in capital....................... 5,528,073 5,648,073 5,648,073
Retained earnings (Accumulated deficit).......... (1,463,356) (296,229) 1,513,630
----------- ----------- -----------
4,064,729 5,351,856 7,161,715
Excess of Purchase Price over Predecessor Basis
(Note 1)......................................... (1,576,751) (1,576,751) (1,576,751)
----------- ----------- -----------
2,487,978 3,775,105 5,584,964
----------- ----------- -----------
$13,813,930 $12,558,735 $23,030,474
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-40
<PAGE> 109
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------------------
1995 1996 1996 1997
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Net Sales............................ $38,596,316 $39,290,879 $32,578,366 $38,497,843
Cost of Goods Sold................... 27,050,924 26,667,961 21,985,703 25,916,417
----------- ----------- ----------- -----------
Gross Profit......................... 11,545,392 12,622,918 10,592,663 12,581,426
Selling, General and Administrative
Expenses........................... 9,522,851 9,995,206 7,229,895 8,932,382
----------- ----------- ----------- -----------
Income from Operations............... 2,022,541 2,627,712 3,362,768 3,649,044
----------- ----------- ----------- -----------
Other Expense:
Interest........................... 1,002,199 856,223 660,753 543,089
Guarantee fees (Note 4)............ 305,384 148,996 148,996 0
Executive severance (Note 9)....... 168,750 0 0 0
Amortization of intangibles (Note
1).............................. 133,700 133,700 100,275 120,516
Management fee (Note 8)............ 112,000 182,000 121,500 198,000
Other.............................. 104,574 128,908 81,115 126,523
----------- ----------- ----------- -----------
1,826,607 1,449,827 1,112,639 988,128
----------- ----------- ----------- -----------
Income before Income Taxes........... 195,934 1,177,885 2,250,129 2,660,916
Income Tax Provision -- Current...... 26,000 10,758 8,069 851,057
----------- ----------- ----------- -----------
Net Income........................... $ 169,934 $ 1,167,127 $ 2,242,060 $ 1,809,859
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-41
<PAGE> 110
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995 AND 1996
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
EXCESS OF
RETAINED PURCHASE
SHARES ADDITIONAL EARNINGS PRICE OVER TOTAL
ISSUED AND PAID-IN (ACCUMULATED PREDECESSOR SHAREHOLDERS'
OUTSTANDING PAR VALUE CAPITAL DEFICIT) BASIS EQUITY
----------- --------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1994................. 1,209 $12 $5,528,073 $(1,633,290) $(1,576,751) $2,318,044
Net Income, Year Ended
December 31, 1995.... 169,934 169,934
----- --- ---------- ----------- ----------- ----------
Balances, December 31,
1995................. 1,209 12 5,528,073 (1,463,356) (1,576,751) 2,487,978
Issuance of Common
Stock (Note 8)....... 23 120,000 120,000
Net Income, Year Ended
December 31, 1996.... 1,167,127 1,167,127
----- --- ---------- ----------- ----------- ----------
Balances, December 31,
1996................. 1,232 12 5,648,073 (296,229) (1,576,751) 3,775,105
Unaudited data:
Net Income, Nine Months
Ended September 30,
1997................. 1,809,859 1,809,859
----- --- ---------- ----------- ----------- ----------
Balances September 30,
1997 (unaudited)..... 1,232 $12 $5,648,073 $ 1,513,630 $(1,576,751) $5,584,964
===== === ========== =========== =========== ==========
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-42
<PAGE> 111
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------------------
1995 1996 1996 1997
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income.................................. $ 169,934 $ 1,167,127 $ 2,242,060 $ 1,809,859
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............. 404,222 381,791 281,842 292,031
Change in assets and liabilities:
Accounts receivable (net)............... 643,826 868,905 (6,575,016) (9,819,682)
Inventories............................. 172,680 206,591 (523,208) (799,296)
Other assets............................ (56,950) (72,506) (95,646) (89,177)
Accounts payable........................ (140,915) 160,657 2,010,499 2,643,464
Other liabilities and accrued
expenses............................. 968,782 (1,232,406) (1,530,288) 1,652,036
----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities.................................. 2,161,579 1,480,159 (4,189,757) (4,310,765)
----------- ----------- ----------- -----------
Cash Flows Used in Investing Activities:
Purchases of property and equipment......... (197,298) (115,307) (108,329) (67,282)
----------- ----------- ----------- -----------
Cash Flows from Financing Activities:
Repayment of revolving line of credit
(net)..................................... (1,929,681) (1,305,935) 4,227,957 5,766,671
Repayment of term loans and mortgage........ (96,046) (107,306) (81,277) (1,400,290)
Principal payment on capital lease
obligation................................ (1,305) (3,496)
Repayment of promissory note payable to
shareholder............................... (53,836)
Proceeds from sale of common stock.......... 120,000 120,000
----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities................................ (2,027,032) (1,350,573) 4,266,680 4,366,381
----------- ----------- ----------- -----------
Net Increase (Decrease) in Cash............... (62,751) 14,279 (31,406) (11,666)
Cash, Beginning of Year....................... 69,979 7,228 7,228 21,507
----------- ----------- ----------- -----------
Cash, End of Year............................. $ 7,228 $ 21,507 $ (24,178) $ 9,841
=========== =========== =========== ===========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the year for:
Interest.................................. $ 977,000 $ 864,134 $ 660,753 $ 543,089
=========== =========== =========== ===========
Income taxes.............................. $ 4,900 $ 11,046 $ $ 85,000
=========== =========== =========== ===========
Supplemental Schedule of Noncash Operating,
Investing and Financing Activities:
Acquisition of equipment financed through
capital lease obligation.................... $ 8,953 $ $ $
=========== =========== =========== ===========
Conversion of portion of accrued guaranteed
fees to a note payable (Note 4)............. $ 53,836 $ $ $
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-43
<PAGE> 112
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
American Academic Suppliers Holding Corporation ("AASHC") and its wholly
owned subsidiary, American Academic Suppliers, Inc. ("AASI") (collectively
referred to as the "Company"), is a direct distributor of school supplies,
supplementary educational materials, furniture, and equipment to educational
institutions, school systems and administrative offices located throughout the
United States. Operations are conducted from owned and leased premises located
in Cary, Illinois and from leased premises located in Mt. Laurel, New Jersey
(Note 7).
On February 28, 1993, AASHC acquired all of the outstanding common stock of
AASI for $8,000,000. The acquisition was accounted for using the purchase method
of accounting. Since the former shareholders of AASI acquired an equity interest
in AASHC, the purchase price allocation has been adjusted by $1,576,751 to
reflect the excess of the purchase price over the predecessor basis in the net
assets acquired which, under generally accepted accounting principles, may not
be recognized as an asset. Such excess of purchase price over predecessor basis
was recorded as a reduction of the excess of cost over the fair value of net
assets acquired and as a decrease in shareholders' equity as of the date of
acquisition.
The Company primarily sells its products to separate schools or school
systems. As such, the majority of trade accounts receivable relate primarily to
these customers. Management believes that the recorded allowance for doubtful
accounts is adequate to cover potential losses associated with these customers.
In the opinion of management, the Company has made all adjustments
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of September 30, 1997 and the
results of its operations and its cash flows for the nine months ended September
30, 1996 and 1997, as presented in the accompanying unaudited interim financial
statements.
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
A summary of significant accounting policies is as follows:
Principles of Consolidation -- The consolidated financial statements
include the accounts of AASHC and its wholly owned subsidiary, AASI. All
intercompany accounts and balances have been eliminated in the
consolidation.
Inventories -- lnventories are valued at the lower of cost or market, with
cost determined under the first-in, first-out ("FIFO") basis.
Depreciation and Amortization -- Depreciation of property, plant and
equipment is computed under both accelerated and straight-line methods
for financial reporting purposes, based on the estimated useful lives of
the assets. For income tax reporting purposes, provisions for
depreciation are computed principally under accelerated methods, as
permitted by the Internal Revenue Code.
The excess of cost over fair value of net assets acquired is being
amortized under the straight-line method over a period of 40 years.
F-44
<PAGE> 113
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Costs incurred in connection with obtaining long-term financing are
amortized, on a straight-line basis, over the term of the financing
commitment.
Income Taxes -- The Company accounts for income taxes under the
provisions of Financial Accounting Standard No. 109. Under this standard,
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized.
NOTE 2 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at December 31, 1995 and 1996, stated at
acquisition cost, consisted of the following:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Land................................................ $ 415,000 $ 415,000
Buildings........................................... 2,333,828 2,335,258
Warehouse equipment................................. 603,590 638,976
Office furniture and equipment...................... 249,060 255,613
Computer equipment.................................. 173,285 245,223
---------- ----------
Total owned assets............................. 3,774,763 3,890,070
Equipment capitalized under lease obligation........ 8,953 8,953
---------- ----------
3,783,716 3,899,023
Less accumulated depreciation....................... (701,932) (950,023)
---------- ----------
$3,081,784 $2,949,000
========== ==========
</TABLE>
Depreciation of property, plant, and equipment, for the years ended
December 31, 1995 and 1996, amounted to approximately $270,500 and $248,000,
respectively.
NOTE 3 -- OTHER CURRENT LIABILITIES AND ACCRUED EXPENSES
Other current liabilities and accrued expenses, at December 31, 1995 and
1996, consisted of the following:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Compensation and commissions.......................... $1,037,714 $390,037
Guarantor's fee (Note 4).............................. 305,383 0
Severance pay (Note 9)................................ 170,442 0
Real estate taxes..................................... 77,253 80,385
Interest.............................................. 67,971 60,060
Other................................................. 310,017 205,892
---------- --------
$1,968,780 $736,374
========== ========
</TABLE>
F-45
<PAGE> 114
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- LONG-TERM DEBT
Long-term debt, at December 31, 1995 and 1996, consisted of the following:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Borrowings from Harris Trust and Savings Bank ("Harris")
pursuant to a Credit Agreement ("Agreement") (see below):
Revolving credit loan borrowings.......................... $5,787,922 $4,481,987
Term loan borrowings...................................... 521,422 467,231
Mortgage note payable to Harris Bank Barrington, N.A.
(secured by real estate occupied by the Company; payable
in monthly installments, inclusive of interest at prime
plus 1 1/2%, of $16,600; final maturity on December 16,
1999. Fully paid subsequent to year-end).................. 1,510,032 1,456,917
Promissory note payable to Pfingsten Executive Fund, L.P.
(bearing interest at 10% per annum; paid in full during
1996)..................................................... 53,836
Capitalized lease obligation (payable in monthly
installments of $291, inclusive of interest at 10%; final
maturity June 7, 1998).................................... 7,648 4,152
---------- ----------
7,880,860 6,410,287
Less current portion........................................ 168,673 3,135
---------- ----------
Long-term portion, due in 1998.............................. $7,712,187 $6,407,152
========== ==========
</TABLE>
At December 31, 1996, the Harris Agreement provided maximum aggregate
borrowings of $12,077,500. Interest on outstanding borrowings was payable
monthly, at the prime rate (8.25% at December 31, 1996) plus 1%. The Company had
availability under the Agreement of $1,100,000 at December 31, 1996. Pfingsten
Executive Fund, L.P. (the Company's majority shareholder) had guaranteed
$1,500,000 of the borrowings (reduced from $3,000,000 effective December 31,
1995) under the Agreement. Guarantee fees are charged to the Company at 10% per
annum, which amounted to $305,384 and $148,996 for the years ended December 31,
1995 and 1996. The guarantees were released by Harris on October 31, 1996.
On February 4, 1997, the Agreement with Harris was amended ("Amended
Agreement") to provide maximum aggregate borrowings of $16,800,000 from June 1
through October 31, and $11,800,000 at all other times. Revolving credit loan
borrowings, under the Amended Agreement which expires March 31, 1998, are
limited to a computed "Borrowing Base" amount and bear interest at the Company's
option at the prime rate or LIBOR plus 1.75%. The Amended Agreement requires the
Company to pay .25% per annum on the average daily unused portion of the
Revolving Credit Commitment and to pay a prepayment penalty in certain
situations.
The Amended Agreement contains covenants restricting certain corporate
acts, such as restricting dividend and management fee payments, and requiring
the maintenance of net worth levels and a financial ratio.
Borrowings under the agreement with Harris are secured by all of the
Company's assets.
On February 4, 1997, the Company repaid the mortgage note and term loan
from borrowings under the revolving credit loan.
Borrowings under the revolving credit, term loan and mortgage note at
December 31, 1996 have been reported as long-term liabilities at December 31,
1996 as a result of the Amended Agreement and repayment of the mortgage note and
term loan.
F-46
<PAGE> 115
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- INCOME TAXES
AASHC and its wholly owned subsidiary file a consolidated federal income
tax return.
The primary differences between the statutory and effective tax rates for
1995 and 1996 relate to the use of net operating loss carryforwards not
previously recognized.
Gross deferred income tax assets consist primarily of (a) net operating
loss carryforwards, (b) accrued expenses not paid within two and one-half months
after the end of the Company's year which are deductible for tax reporting
purposes when paid, and (c) uniform capitalization rules (for additional
inventory costs) reflected for tax reporting purposes only. The gross deferred
income tax liability consists of the variation in the book and tax bases of
property, plant and equipment.
At December 31, 1995 and 1996, the Company's net deferred income tax asset
and related valuation allowance consisted of:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Gross deferred tax asset.............................. $828,000 $262,000
Less valuation allowance.............................. 517,000 84,000
-------- --------
Deferred tax asset, net of valuation allowance........ 311,000 178,000
Less deferred tax liability........................... 311,000 178,000
-------- --------
$ -- $ --
======== ========
</TABLE>
The valuation allowance decreased by $112,799 and $433,000 during 1995 and
1996, respectively.
At December 31, 1996, the Company has available, as a carryforward to
future years, a federal net operating loss carryforward of approximately
$560,000, expiring in 2008 and 2009.
NOTE 6 -- EMPLOYEE BENEFIT PLAN
The Company is a participant in a Pfingsten Partners, L.P. master employee
benefit plan. The plan, established under the provisions of Section 401(k) of
the Internal Revenue Code provides, among other things, for the Company to make
discretionary contributions. Such employer contributions to the plan, for the
years ended December 31, 1995 and 1996, amounted to $43,427 and $24,534,
respectively.
Certain professionals of Pfingsten Partners, L.P. (Note 8) serve as the
trustees of the plan.
NOTE 7 -- LEASES
The Company leases an office building and a warehouse under various
operating agreements which expire in 1998. The office building lease is
renewable at the Company's option for 36 additional months with an escalated
monthly payment. Rent expense incurred under these leases, for the years ended
December 31, 1995 and 1996, totalled approximately $253,000 and $251,000,
respectively.
F-47
<PAGE> 116
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- LEASES (CONTINUED)
Future minimum lease payments under the aforementioned operating leases, at
December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997........................................................ $258,000
1998........................................................ 73,000
--------
$331,000
========
</TABLE>
NOTE 8 -- SHAREHOLDERS' EQUITY AND RELATED-PARTY TRANSACTIONS
During the year ended December 31, 1996, the Company issued 23 shares of
common stock to certain officers for $120,000 in cash.
For the years ended December 31, 1995 and 1996, the Company incurred
$112,000 and 182,000, respectively, in fees pursuant to a management agreement
with Pfingsten Partners, L.P., which entity is an affiliate of the Company's
majority shareholder, Pfingsten Executive Fund, L.P.
During the years ended December 31, 1995 and 1996, approximately $15,300
and $6,900, respectively, in consulting services were paid by Pfingsten
Partners, L.P., on behalf of the Company, and charged to the Company.
Additionally, at December 31, 1995, $12,000 was owed to a shareholder of the
Company for services rendered during 1995.
See Notes 3 and 4 for additional related-party transactions.
NOTE 9 -- SEVERANCE AGREEMENTS
During December 1995, the Company terminated its employment agreement with
its president and recognized a $168,750 charge to operations to cover the cost
associated with this termination. The related amount owed pertaining to the
aforementioned charge, as well as a 1993 termination, at December 31, 1995, was
$170,442. There were no outstanding amounts at December 31, 1996.
NOTE 10 -- SUBSEQUENT EVENT (UNAUDITED)
Effective December 15, 1997, the Company and its stockholders entered into
a definitive agreement with U.S. Office Products Company ("U.S. Office
Products") pursuant to which U.S. Office Products acquired all outstanding
shares of the Company's common stock in exchange for cash.
F-48
<PAGE> 117
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Sax Arts and Crafts, Inc.
In our opinion, the accompanying balance sheets and related statements of
operations, of shareholder's equity and of cash flows present fairly, in all
material respects, the financial position of Sax Arts and Crafts, Inc. at
December 16, 1995 and December 25, 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 25, 1996
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the accounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
February 3, 1998
F-49
<PAGE> 118
SAX ARTS AND CRAFTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 16, DECEMBER 25, JUNE 29,
1995 1996 1997
------------ ------------ --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................. $ 102,900 $ 114,492 $ 109,544
Accounts receivable -- trade, less allowance for
doubtful accounts of $31,860,$49,860 and
$37,448, respectively......................... 4,656,651 4,383,464 4,114,798
Inventories...................................... 5,591,557 5,441,664 7,145,216
Prepaid expenses and other current assets........ 856,943 429,741 747,466
----------- ----------- -----------
Total current assets.......................... 11,208,051 10,369,361 12,117,024
Net property, plant and equipment.................. 1,034,648 820,827 658,356
Other assets....................................... 42,477 26,506 26,506
----------- ----------- -----------
Total assets.................................. $12,285,176 $11,216,694 $12,801,886
=========== =========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable -- trade........................ $ 4,210,593 $ 1,947,833 $ 3,403,006
Affiliate payable, net........................... 3,212,473 1,806,645 3,130,496
Accrued income taxes............................. 1,802,399 1,814,139 401,063
Other accrued expenses........................... 684,089 806,241 856,057
----------- ----------- -----------
Total current liabilities..................... 9,909,554 6,374,858 7,790,622
Deferred income taxes.............................. 42,256 16,202 16,202
Other liabilities.................................. 69,195 69,197 92,000
----------- ----------- -----------
Total liabilities............................. 10,021,005 6,460,257 7,898,824
Shareholder's equity:
Common stock, $1.00 par value, 1,000 shares
authorized, issued and outstanding............... 1,000 1,000 1,000
Capital surplus -- additional paid-in capital.... 1,507,597 1,507,597 1,507,597
Retained earnings................................ 755,574 3,247,840 3,394,465
----------- ----------- -----------
Total shareholder's equity.................... 2,264,171 4,756,437 4,903,062
----------- ----------- -----------
Total liabilities and shareholder's equity.... $12,285,176 $11,216,694 $12,801,886
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-50
<PAGE> 119
SAX ARTS AND CRAFTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
------------------------------------------ -------------------------
DECEMBER 17, DECEMBER 16, DECEMBER 25, JUNE 30, JUNE 29,
1994 1995 1996 1996 1997
------------ ------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................. $29,169,879 $33,239,883 $34,350,947 $11,125,967 $13,009,456
Cost of sales............. 16,369,453 19,029,918 20,078,806 6,562,838 8,286,522
----------- ----------- ----------- ----------- -----------
Gross profit............ 12,800,426 14,209,965 14,272,141 4,563,129 4,722,934
Selling, administrative
and other expenses... 8,401,463 9,169,667 9,734,256 4,379,178 4,427,608
----------- ----------- ----------- ----------- -----------
Operating earnings... 4,398,963 5,040,298 4,537,885 183,951 295,326
Other income (expense),
net..................... (510,508) (545,302) (476,886) (222,759) (52,971)
----------- ----------- ----------- ----------- -----------
Earnings before income
taxes................... 3,888,455 4,494,996 4,060,999 (38,808) 242,355
Income taxes.............. 1,502,315 1,738,191 1,568,733 (14,351) 95,730
----------- ----------- ----------- ----------- -----------
Net earnings (loss)....... $ 2,386,140 $ 2,756,805 $ 2,492,266 $ (24,457) $ 146,625
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-51
<PAGE> 120
SAX ARTS AND CRAFTS, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED SHAREHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 18, 1993................. 1,000 $1,000 $1,507,597 $ 512,629 $ 2,021,226
Dividends................................ (2,400,000) (2,400,000)
Net income............................... 2,386,140 2,386,140
----- ------ ---------- ----------- -----------
Balance, December 17, 1994................. 1,000 1,000 1,507,597 498,769 2,007,366
Dividends................................ (2,500,000) (2,500,000)
Net income............................... 2,756,805 2,756,805
----- ------ ---------- ----------- -----------
Balance, December 16, 1995................. 1,000 1,000 1,507,597 755,574 2,264,171
Net income............................... 2,492,266 2,492,266
----- ------ ---------- ----------- -----------
Balance, December 25, 1996................. 1,000 1,000 1,507,597 3,247,840 4,756,437
Net income (unaudited)................... 146,625 146,625
----- ------ ---------- ----------- -----------
Balance, June 29, 1997 (unaudited)......... 1,000 $1,000 $1,507,597 $ 3,394,465 $ 4,903,062
===== ====== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-52
<PAGE> 121
SAX ARTS AND CRAFTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
-------------------------------------------- --------------------------
DECEMBER 17, DECEMBER 16, DECEMBER 25, JUNE 30, JUNE 29,
1994 1995 1996 1996 1997
------------ ------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net earnings (loss)............. $ 2,386,140 $ 2,756,805 $ 2,492,266 $ (24,457) $ 146,625
Adjustments to reconcile net
earnings (loss) to cash
provided by operating
activities:
Depreciation and
amortization................ 327,489 340,556 371,516 178,529 153,891
Deferred income taxes......... 599 (30,302) (26,054) -- --
Gain on disposal of fixed
assets...................... (5,350) (21,505) (6,578) (6,205) (23,234)
Impact on cash flow from
changes in working capital:
Accounts receivable......... (185,934) (734,239) 273,187 1,403,353 268,666
Inventory................... (659,936) 144 149,893 (2,287,194) (1,703,552)
Other current assets........ (632,521) (56,442) 427,202 (109,614) (317,726)
Accounts payable............ 155,519 2,590,011 (2,262,760) (2,172,326) 1,455,174
Affiliates payable.......... 942,481 (2,521,286) (1,405,828) 2,927,060 1,323,851
Accrued expenses............ (212,673) 656,493 133,894 27,125 (1,340,457)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used
in) operating
activities.............. 2,115,814 2,980,235 146,738 (63,729) (36,762)
----------- ----------- ----------- ----------- -----------
Cash flows from investing
activities:
Purchased property, plant and
equipment..................... (196,752) (473,305) (157,695) (9,789) (27,006)
Proceeds from sales of assets... 5,350 21,505 6,578 11,450 58,820
Increase in other assets........ -- -- 15,971 15,971 --
----------- ----------- ----------- ----------- -----------
Net cash provided by (used
in) investing
activities.............. (191,402) (451,800) (135,146) 17,632 31,814
----------- ----------- ----------- ----------- -----------
Cash flows from financing
activities:
Dividend payment................ (2,400,000) (2,500,000) -- -- --
----------- ----------- -----------
Net cash used in financing
activities.............. (2,400,000) (2,500,000) -- -- --
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash... (475,588) 28,435 11,592 (46,097) (4,948)
Cash at beginning of period....... 550,053 74,465 102,900 102,900 114,492
----------- ----------- ----------- ----------- -----------
Cash at end of period............. $ 74,465 $ 102,900 $ 114,492 $ 56,803 $ 109,544
=========== =========== =========== =========== ===========
Supplemental disclosures of cash
flow information:
Cash paid for interest.......... $ 91,585 $ 390 $ -- $ -- $ 23
Cash paid for taxes............. $ 1,540,000 $ 1,480,000 $ 1,780,000 $ 141,000 $ 95,000
</TABLE>
See accompanying notes to financial statements.
F-53
<PAGE> 122
SAX ARTS AND CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND OPERATIONS
Sax Arts and Crafts, Inc. (the "Company") is a national mail order
distributor of art and craft supplies to schools and educational institutions.
Sax Arts and Crafts, Inc. is a wholly-owned subsidiary of Day-Timers, Inc. (the
"Parent"). The Parent is owned by ACCO World Corporation ("ACCO"), which is a
wholly-owned subsidiary of Fortune Brands International ("Fortune Brands"). On
June 30, 1997, the Company and its shareholder entered into a definitive
agreement with U.S. Office Products Company ("U.S. Office Products") pursuant to
which the Company was acquired by U.S. Office Products. All outstanding shares
of the Company were exchanged for cash.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company's fiscal year ends on the third Saturday in December. Fiscal
year 1994 ended on December 17, 1994 and fiscal year 1995 ended on December 16,
1995. In 1996, the Company's fiscal year end was changed to December 25, 1996 in
order to comply with the closing date of the Parent. As a result, fiscal 1996
has 53 weeks.
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the Company has made all adjustments
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of June 29, 1997 and the results of
its operations and its cash flows for the six months ended June 30, 1996 and
June 29, 1997, as presented in the accompanying unaudited interim financial
statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of the product as obligations
subsequent to delivery are not significant.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of accounts receivable. The
Company provides products to a wide range of customers who primarily operate in
the education sector. The Company does not believe it is exposed to any undue
concentration of credit risk based on the strong credit history of the Company's
customer base.
INCOME TAXES
The Company is part of a consolidated tax group with its Parent. For
purposes of these financial statements, income taxes have been provided as if
the Company filed a separate tax return. Income taxes are calculated in
accordance with the liability method of accounting for income taxes as
F-54
<PAGE> 123
SAX ARTS AND CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
provided by Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Deferred taxes are provided on temporary differences between book
and tax basis of assets and liabilities which will have a future impact on
taxable income.
NOTE 3 -- INVENTORIES
Inventories are recorded at cost (not in excess of market value) as
determined by the weighted average cost method. Inventories are comprised as
follows:
<TABLE>
<CAPTION>
DECEMBER 16, DECEMBER 25,
1995 1996
------------ ------------
<S> <C> <C>
Finished goods..................................... $5,647,290 $5,493,859
Less -- Reserves................................... 55,733 52,195
---------- ----------
Total inventory............................... $5,591,557 $5,441,664
========== ==========
</TABLE>
NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT
The major classes are:
<TABLE>
<CAPTION>
DECEMBER 16, DECEMBER 25,
1995 1996
------------ ------------
<S> <C> <C>
Buildings and improvements........................ $ 129,302 $ 120,045
Automobiles....................................... 251,382 245,403
Machinery and equipment........................... 1,463,156 1,482,480
Computer hardware and software.................... 806,755 982,415
Construction in progress.......................... 157,534 58,544
----------- -----------
Total cost................................... 2,808,129 2,888,887
Less -- Accumulated depreciation.................. (1,773,481) (2,068,060)
----------- -----------
Net property, plant and equipment................. $ 1,034,648 $ 820,827
=========== ===========
</TABLE>
Depreciation is generally computed on a straight-line method over the
estimated useful lives of the assets including assets acquired by capital
leases. Accelerated depreciation is used for income tax purposes where
permitted. Depreciation expense recorded for the years ended December 17, 1994,
December 16, 1995 and December 25, 1996 was $327,489, $340,556 and $371,516,
respectively.
F-55
<PAGE> 124
SAX ARTS AND CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- INCOME TAXES
The income tax provision consists of the following components:
<TABLE>
<CAPTION>
DECEMBER 17, DECEMBER 16, DECEMBER 25,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current portion:
Federal............................................ $1,292,616 $1,522,247 $1,372,728
State.............................................. 209,100 246,246 222,059
---------- ---------- ----------
1,501,716 1,768,493 1,594,787
---------- ---------- ----------
Deferred portion:
Federal............................................ 516 (26,083) (22,426)
State.............................................. 83 (4,219) (3,628)
---------- ---------- ----------
599 (30,302) (26,054)
---------- ---------- ----------
Income tax provision................................. $1,502,315 $1,738,191 $1,568,733
========== ========== ==========
</TABLE>
Deferred tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
DECEMBER 16, DECEMBER 25,
1995 1996
------------ ------------
<S> <C> <C>
Accruals.................................................... $ 58,944 $ 64,186
Asset reserves.............................................. 12,585 19,693
Inventories................................................. 17,370 15,610
Pension..................................................... 41,828 39,066
--------- ---------
Gross deferred tax assets................................. 130,727 138,555
Depreciation................................................ (172,983) (154,757)
--------- ---------
Gross deferred tax liabilities............................ (172,983) (154,757)
--------- ---------
Net deferred tax liability................................ $ (42,256) $ (16,202)
========= =========
</TABLE>
The effective rate for income taxes differs from the statutory rate as
follows:
<TABLE>
<CAPTION>
DECEMBER 17, DECEMBER 16, DECEMBER 25,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
U.S. federal statutory tax rate...................... 34.0% 34.0% 34.0%
Non-deductible expenses.............................. 0.1 0.2 0.1
State income taxes, net of federal benefit........... 5.5 5.5 5.5
Other................................................ (1.0) (1.0) (1.0)
---- ---- ----
38.6% 38.7% 38.6%
==== ==== ====
</TABLE>
F-56
<PAGE> 125
SAX ARTS AND CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- RELATED PARTY TRANSACTIONS
The affiliates payable component on the balance sheet represents the net
balance payable to the Parent and its affiliates. Interest is charged to the
Company on the outstanding balance. An analysis of the activity in this account
is as follows:
<TABLE>
<CAPTION>
DECEMBER 17, DECEMBER 16, DECEMBER 25,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period..................... $(4,791,279) $(5,733,759) $(3,212,473)
Cost allocations and direct charges from Parent.... (59,981) (24,414) (73,569)
Interest charged by Parent......................... (421,370) (602,674) (528,324)
Intercompany sales................................. -- 273,106 471,794
Cash transfers..................................... (461,129) 2,875,268 1,535,927
----------- ----------- -----------
Balance at end of period........................... $(5,733,759) $(3,212,473) $(1,806,645)
=========== =========== ===========
</TABLE>
The Company has the following affiliated receivables and payables:
<TABLE>
<CAPTION>
DECEMBER 16, DECEMBER 25,
1995 1996
------------ ------------
<S> <C> <C>
Receivable from:
Day-Timers Canada......................................... $ 11,054 $ 186,581
Fortune Brands............................................ -- 648,932
----------- -----------
Total................................................ $ 11,054 $ 835,513
=========== ===========
Payable to:
ACCO...................................................... $(2,089,941) $(2,618,265)
Parent.................................................... (21,202) (23,893)
Fortune Brands............................................ (1,112,384) --
----------- -----------
Total................................................ $(3,223,527) $(2,642,158)
=========== ===========
</TABLE>
Services provided to the Company by the Parent and its affiliates include
expenses incurred and paid by the Parent on the Company's behalf and charges for
accounting and payroll functions provided by the Parent. The primary components
of cost allocations and direct charges from the Parent and affiliates are as
follows:
<TABLE>
<CAPTION>
DECEMBER 17, DECEMBER 16, DECEMBER 25,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Payroll and accounting function...................... $38,950
Employee benefits.................................... $34,922
Insurance............................................ 21,009 $21,202 29,222
Bank charges......................................... 4,050 3,212 5,397
------- ------- -------
$59,981 $24,414 $73,569
======= ======= =======
</TABLE>
F-57
<PAGE> 126
SAX ARTS AND CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- LEASE COMMITMENTS
<TABLE>
<CAPTION>
DECEMBER 25,
FISCAL YEAR 1996
----------- ------------
<S> <C>
1997........................................................ $ 506,847
1998........................................................ 417,091
1999........................................................ 334,447
2000........................................................ 319,545
2001 and thereafter......................................... 399,431
----------
Total minimum lease payments........................... $1,977,361
==========
</TABLE>
Rental expense for all operating leases charged against earnings amounted
to $553,198, $546,603 and $559,830 for the years ended December 17, 1994,
December 16, 1995 and December 25, 1996, respectively.
NOTE 8 -- RETIREMENT PLAN
Nonunion employees of the Company participate in a noncontributory defined
benefit plan established by the Parent. Benefits for the plan are based
primarily on years of service and employees' average monthly earnings. The
Parent's funding policy is consistent with the funding requirements of federal
law and regulations. Plan assets consist principally of listed equity
securities. Participants are fully vested in the plan after completing five
years of service.
As of the most recent actuarial valuation, the total pension costs for the
Parent for the year ended December 25, 1996 consisted of the following:
<TABLE>
<CAPTION>
TOTAL
PARENT'S
PLAN
--------
<S> <C>
Service cost -- benefits earned during the period........... $1,479,787
Interest cost on projected benefit obligation............... 1,640,620
Expected return on plan assets.............................. (1,783,635)
Amortization of unrecognized prior service cost............. (6,752)
All other cost components................................... 40,302
----------
Net pension costs........................................... $1,370,322
==========
</TABLE>
The net pension costs of the plan for the years ended December 17, 1994,
December 16, 1995 and December 25, 1996 allocated to the Company by the Parent
were $86,000, $94,000 and $108,000, respectively.
F-58
<PAGE> 127
SAX ARTS AND CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- RETIREMENT PLAN (CONTINUED)
As of the most recent actuarial valuation, the funded status of the plan
for the Parent as of December 25, 1996 is as follows:
<TABLE>
<CAPTION>
TOTAL
PARENT'S
PLAN
--------
<S> <C>
Actuarial present value of benefit obligations:
Vested benefits........................................... $17,629,613
Non-vested benefit........................................ 1,458,142
-----------
Accumulated benefit obligation.............................. 19,087,755
Effect of projected future compensation increases........... 5,300,546
-----------
Projected benefit obligation................................ 24,388,301
Plan assets at fair value................................... 22,052,322
-----------
Projected benefit obligation in excess of plan assets....... (2,335,979)
Unrecognized prior service cost............................. (32,672)
Unrecognized net gain....................................... (60,338)
-----------
Accrued pension costs....................................... $(2,428,989)
===========
</TABLE>
The accrued pension costs at December 16, 1995 and December 31, 1996
attributed to the Company were $183,000 and $177,000, respectively.
Upon being acquired by U.S. Office Products, the plan was terminated for
the Company's plan participants and the net assets will be distributed for their
benefit.
NOTE 9 -- OTHER POSTRETIREMENT PLAN
The Parent provides health care and life insurance benefits for eligible
retired employees and their eligible dependents. The cost of these benefits was
determined by application of actuarial assumptions and healthcare trend rates.
Based on the actuarial valuations performed for the years ended December 17,
1994, December 16, 1995 and December 25, 1996, the total net periodic
postretirement costs (benefit) allocated by the Parent to the Company were
$10,000, $2,000 and $(1,000), respectively.
The accrued other postretirement costs as of the years ended December 16,
1995 and December 25, 1996 attributed to the Company were $141,000 and $129,000,
respectively.
Upon being acquired by U.S. Office Products, the plan was terminated for
the Company's plan participants and the net assets will be distributed for their
benefit.
F-59
<PAGE> 128
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The National School Supply Company
We have audited the accompanying consolidated balance sheets of The
National School Supply Company and Subsidiaries as of March 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended March 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The National School Supply Company and Subsidiaries as of March 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended March 31, 1998, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
/s/ Ernst & Young LLP
Cleveland, Ohio
June 11, 1998, except for Note C,
as to which the date is June 17, 1998
F-60
<PAGE> 129
THE NATIONAL SCHOOL SUPPLY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
-------------------- JUNE 30,
1998 1997 1998
---- ---- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 1,235 $ 5,207 $ 1,517
Accounts receivable, less allowance of $1,352 at June 30,
1998 and $1,386 and $1,410 at March 31, 1998 and 1997,
respectively.......................................... 21,965 18,846 26,205
Inventories.............................................. 22,745 14,362 30,532
Prepaid catalog costs.................................... 5,286 4,486 4,577
Prepaid and other........................................ 864 149 592
-------- -------- --------
Total current assets....................................... 52,095 43,050 63,423
Property, plant and equipment -- Notes A, B, C and G:
Land and improvements.................................... 1,316 1,295 1,335
Building and improvements................................ 14,452 14,303 14,469
Machinery, equipment and furniture....................... 12,059 11,301 12,419
-------- -------- --------
27,827 26,899 28,223
Less accumulated depreciation and amortization............. 9,283 7,097 9,865
-------- -------- --------
Total property, plant and equipment........................ 18,544 19,802 18,358
Intangible assets, net -- Notes B and C.................... 13,266 14,799 12,886
Other long-term assets..................................... 221 221 221
-------- -------- --------
Total assets............................................... $ 84,126 $ 77,872 $ 94,888
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 15,787 $ 8,318 $ 20,578
Accrued expenses -- Note A............................... 6,263 7,059 5,889
Current portion of long-term obligations -- Notes C and
G..................................................... 3,084 4,036 3,085
-------- -------- --------
Total current liabilities 25,134 19,413 29,552
Long-term obligations -- Notes C and G
Long-term debt:
Due to bank and others................................... 22,360 20,193 29,464
Due to affiliated companies.............................. 20,225 19,929 20,295
-------- -------- --------
42,585 40,122 49,759
Other.................................................... 1,165 1,411 1,110
-------- -------- --------
Total long-term obligations................................ 43,750 41,533 50,869
Stockholders' equity -- Notes D and E: Common Stock, $0.01
par value per share:
Class A:
Authorized shares -- 4,175,000
Issued and outstanding shares -- 3,230,300............ 32 32 32
Class B:
Authorized shares -- 1,548,000
Issued and outstanding shares -- 1,500,042............ 15 15 15
Class C:
Authorized shares -- 550,000
Issued and outstanding shares -- 427,487.............. 4 4 4
Capital in excess of par value........................... 45,690 45,690 45,690
Accumulated deficit...................................... (30,499) (28,815) (31,274)
-------- -------- --------
Total stockholders' equity................................. 15,242 16,926 14,467
-------- -------- --------
Total liabilities and stockholders' equity................. $ 84,126 $ 77,872 $ 94,888
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-61
<PAGE> 130
THE NATIONAL SCHOOL SUPPLY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------ -------------------
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................... $176,034 $174,637 $164,994 $38,772 $34,896
Cost of goods sold...................... 115,134 111,054 106,293 24,914 22,569
-------- -------- -------- ------- -------
Gross profit............................ 60,900 63,583 58,701 13,858 12,327
Selling, general and administrative
expenses.............................. 52,398 50,879 54,419 12,393 12,226
Depreciation............................ 2,419 2,735 2,889 582 621
Amortization............................ 1,533 1,525 3,194 380 379
Restructuring costs -- Note A........... 1,198 1,381 4,343 76 62
Goodwill write-down..................... 1,864
-------- -------- -------- ------- -------
Operating income (loss)................. 3,352 7,063 (8,008) 427 (961)
Interest expense, net................... 5,036 7,375 8,685 1,202 1,097
-------- -------- -------- ------- -------
Loss before income taxes and
extraordinary gain.................... (1,684) (312) (16,693) (775) (2,058)
Provision for income taxes -- Note F.... -- -- -- -- --
-------- -------- -------- ------- -------
Loss before extraordinary gain.......... (1,684) (312) (16,693) (775) (2,058)
Extraordinary gain from debt
restructuring, net of income taxes --
Note C................................ -- 564 -- -- --
-------- -------- -------- ------- -------
Net (loss) income....................... (1,684) 252 (16,693) (775) (2,058)
======== ======== ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-62
<PAGE> 131
THE NATIONAL SCHOOL SUPPLY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN TOTAL
--------------------------- EXCESS OF ACCUMULATED STOCKHOLDERS'
CLASS A CLASS B CLASS C PAR VALUE DEFICIT EQUITY
------- ------- ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1995......... $ 1 $15 $4 $15,271 $(12,374) $ 2,917
Net loss......................... -- -- -- -- (16,693) (16,693)
--- --- -- ------- -------- --------
Balance at March 31, 1996........ 1 15 4 15,271 (29,067) (13,776)
Net income....................... 252 252
Stock issued -- Note A........... 31 -- -- 30,419 -- 30,450
--- --- -- ------- -------- --------
Balance at March 31, 1997........ 32 15 4 45,690 (28,815) 16,926
Net loss......................... -- -- -- -- (1,684) (1,684)
--- --- -- ------- -------- --------
Balance at March 31, 1998........ 32 15 4 45,690 (30,499) 15,242
Net loss (unaudited)............. -- -- -- -- (775) (775)
--- --- -- ------- -------- --------
Balance at June 30, 1998
(unaudited).................... $32 $15 $4 $45,690 $(31,274) $ 14,467
=== === == ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-63
<PAGE> 132
THE NATIONAL SCHOOL SUPPLY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------- -------------------
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows for operating activities
Net (loss) income................................ $(1,684) $ 252 $(16,693) $ (775) $ (2,058)
Adjustments to reconcile net (loss) income to net
cash (used) provided by operating activities:
Extraordinary gain............................. -- (564) -- -- --
Depreciation and amortization................ 3,952 4,260 6,083 962 1,000
Compensation expense from issuance of
stock...................................... -- 450 -- -- --
Loss on sale of property, plant and
equipment.................................. -- -- 600 -- --
Write-down of assets held for sale........... -- -- 1,012 -- --
Goodwill write-down.......................... -- -- 1,864 -- --
Provision for losses on accounts
receivable................................. -- -- 2,806 -- --
Other........................................ 295 635 545 70 80
Change in operating assets and liabilities:
Accounts receivable........................ (3,119) 7,131 (5,258) (4,240) (4,456)
Inventories................................ (8,383) 7,313 4,309 (7,787) (13,084)
Prepaid and other current assets........... (1,515) 349 (488) 981 (901)
Accounts payable........................... 7,469 (8,697) (3,290) 4,791 13,354
Accrued expenses........................... (796) (610) 878 (374) (1,754)
Other non-current assets and liabilities... (246) (794) (287) -- --
------- -------- -------- ------- --------
Net cash (used) provided by operating
activities..................................... (4,027) 9,725 (7,919) (6,372) (7,819)
Cash flows used in investing activities
Additions to property, plant and equipment,
net............................................ (1,168) (1,551) (4,890) (396) (510)
Proceeds from sale of property and equipment..... 7 1,353 1,842 -- --
Net cash used in investing activities............ (1,161) (198) (3,048) (396) (510)
Cash flows provided (used) by financing
activities.....................................
Net borrowings (payments) on revolving credit.... 5,191 (7,000) 7,000 7,372 4,173
Proceeds from issuance of long-term debt......... -- 937 4,489
Payments on long-term debt....................... (3,966) (28,400) -- (250) (251)
Prepayment penalties on long-term debt........... -- (983) -- -- --
Net payments on capital leases................... (9) (570) (663) (72) (15)
Proceeds from issuance of stock.................. -- 30,000 -- -- --
------- -------- -------- ------- --------
Net cash provided (used) by financing
activities..................................... 1,216 (6,016) 10,826 7,050 3,907
------- -------- -------- ------- --------
Net (decrease) increase in cash and cash
equivalents.................................... (3,972) 3,511 (141) 282 (4,422)
Cash and cash equivalents at beginning of year... 5,207 1,696 1,837 1,235 5,207
------- -------- -------- ------- --------
Cash and cash equivalents at end of year......... $ 1,235 $ 5,207 $ 1,696 $ 1,517 $ 785
======= ======== ======== ======= ========
Supplemental disclosure of cash flow information
Interest paid.................................... $ 5,026 $ 8,481 $ 7,183 $ 1,173 $ 955
======= ======== ======== ======= ========
Properties acquired under capital leases......... $ 377
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-64
<PAGE> 133
THE NATIONAL SCHOOL SUPPLY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
NOTE A -- ORGANIZATION AND NATURE OF THE BUSINESS
The National School Supply Company and its subsidiaries ("the Company") are
engaged in the distribution of educational supplies and equipment, teaching
aids, school furniture and instructional materials for science, art and
technology education. The Company sells primarily to elementary, secondary and
vocational schools and early learning centers throughout the United States. The
products are marketed through catalogs which carry the names of Beckley-Cardy,
Frey Scientific, Pyramid Art Supply and Brodhead-Garrett.
The Company's business is seasonal in nature, corresponding to the
purchasing cycle of school systems. Because of seasonality, a substantial part
of annual revenues and operating income is realized in the second quarter of the
fiscal year.
Effective November 5, 1992, certain limited partnerships affiliated with
Butler Capital Corporation (Butler) formed Beckley-Cardy, Inc. (Beckley) to
acquire a subsidiary of Advanstar Communications, Inc., a company which had
recently emerged from Chapter 11 bankruptcy. The acquisition was accounted for
as a purchase and, accordingly, the purchase price of $49,000,000 was allocated
to the underlying assets and liabilities based on their estimated fair values as
of the acquisition date. The excess of the purchase price over the estimated
fair value of the net assets acquired ($21,430,000) was classified as intangible
assets.
Effective September 14, 1993, the Company (which was 60% owned by Butler at
that date), Butler, Beckley and certain individual stockholders of the Company
entered into an Agreement of Merger and Plan of Reorganization whereby Beckley
became a wholly-owned subsidiary of the Company. Because of Butler's common
ownership interests in the Company and Beckley, the merger was accounted for as
if it were a pooling-of-interests.
Effective at the close of business on March 31, 1995, one of the Company's
subsidiaries, FSC Educational, Inc., was merged into another subsidiary,
Beckley.
Effective October 31, 1996, the Company issued 1,327,588 shares of Class A
Common Stock to Butler Capital Corporation, an existing investor, (at a price of
$9.50 per share), 1,777,676 shares to Fenway Partners, Inc., a new investor (at
a price of $9.50 per share) and another 100,000 shares to an executive of the
Company (at a price of $5.00 per share) as part of his executive employment
agreement. Net proceeds from the stock issuance were used to pay down
outstanding long-term debt.
Restructuring costs related to various organizational changes have been
charged to expense as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Direct compensation................................. $ 924 $ 225 $2,181
Professional services............................... 198 485 255
Facilities closing expense.......................... -- -- 1,636
Stock compensation expense.......................... -- 450 --
Other............................................... 76 221 271
------ ------ ------
$1,198 $1,381 $4,343
====== ====== ======
</TABLE>
In a prior year, the Company consolidated certain warehouse facilities. In
1996, the Company recorded a provision of $1,012,000 to adjust the carrying
value of these assets based on expected
F-65
<PAGE> 134
THE NATIONAL SCHOOL SUPPLY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
NOTE A -- ORGANIZATION AND NATURE OF THE BUSINESS (CONTINUED)
losses on the impending sales. During 1997, the assets were sold and the Company
recognized proceeds approximately equal to the net carrying value as of March
31, 1996.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements as of June 30,
1998 and for the three months ended June 30, 1998 and 1997 have been prepared in
accordance with generally accepted accounting principles for interim financial
information and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month
period ended June 30, 1998 are not necessarily indicative of the results that
may be expected for the year ending March 31, 1999.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three
months or less to be cash equivalents, which are stated at cost.
INVENTORY
The Company values its inventory at the lower of cost or market on a
first-in, first-out (FIFO) basis. Substantially all inventory is finished
products purchased for resale.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Provisions for
depreciation and amortization are computed by the straight-line method over the
following estimated useful lives:
<TABLE>
<S> <C>
Building and improvements................................... 15-30 years
Machinery, equipment and furniture.......................... 3-10 years
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
At March 31, 1998 and 1997, the carrying value of the Company's financial
instruments, which include cash and cash equivalents, accounts receivable and
accounts payable, approximate their fair value. The estimated fair value of the
Company's long-term debt was $47,961,000 at March 31, 1998 and $47,665,000 at
March 31, 1997 as compared with the carrying value of $45,669,000 and
$44,158,000 included in the balance sheet at year-end 1998 and 1997,
respectively.
REVENUE RECOGNITION
Revenue from the sale of the Company's products is recognized upon shipment
to the customer.
F-66
<PAGE> 135
THE NATIONAL SCHOOL SUPPLY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING EXPENSE
Advertising costs are expensed as incurred except for catalog costs, which
are deferred and expensed as revenue from the respective catalog is realized.
Advertising expenditures including catalog costs for the years ended March 31,
1998, 1997 and 1996 were $7,101,00, $4,824,000 and $4,927,000, respectively.
Deferred catalog costs as of March 31, 1998 and 1997 were $5,286,000 and
$4,486,000, respectively.
CONCENTRATION OF CREDIT RISK
Credit is extended based on an evaluation of the customer's financial
condition and generally collateral is not required. Credit terms are consistent
with the industry and losses from credit sales are provided for in the financial
statements.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATION
Certain amounts have been reclassified in 1996 and 1997 to conform with the
1998 presentation.
INTANGIBLE ASSETS
Intangible assets consist of the following at March 31 (in thousands):
<TABLE>
<CAPTION>
ACCUMULATED
COST AMORTIZATION NET
------------------ ---------------- ------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Customer lists...................... $14,300 $14,300 $5,150 $4,197 $ 9,150 $10,103
Goodwill............................ 5,673 5,673 2,044 1,665 3,629 4,008
Debt issuance costs................. 1,781 1,781 1,294 1,093 487 688
------- ------- ------ ------ ------- -------
$21,754 $21,754 $8,488 $6,955 $13,266 $14,799
======= ======= ====== ====== ======= =======
</TABLE>
Intangible assets are amortized on a straight-line basis over periods
ranging generally from 5 to 15 years.
The ongoing value and remaining useful lives of intangible assets are
subject to periodic evaluation and the Company currently expects the carrying
amounts to be fully recoverable. When the events or circumstances indicate that
intangible assets might be impaired, an undiscounted cash flow methodology would
be used to determine whether an impairment loss would be recognized.
As a result of a periodic evaluation during the year ended March 31, 1996,
the Company wrote-off net intangible assets of $1,864,000 which consisted
primarily of goodwill associated with a
F-67
<PAGE> 136
THE NATIONAL SCHOOL SUPPLY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
specific business unit. Other fully amortized intangible assets were also
written off in 1997 and 1996 as a result of the merger with Beckley.
NOTE C -- FINANCING ARRANGEMENTS
Long-term debt consisted of the following at March 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revolving credit, due in fiscal year 2000................... $ 5,192 $ --
Supplemental term loan with an interest rate of 8.25%
payable quarterly, principal payments due annually in
fiscal years 1998 through 2002............................ 10,200 12,200
Subordinated debt with an interest rate of 11.25% payable
quarterly, entire principal due in fiscal year 2000....... 6,458 6,458
Subordinated debt (net of original issue discount of $462
and $757 at March 31, 1998 and 1997, respectively) with an
effective interest rate of 15.4% payable quarterly, entire
principal due in fiscal year 2000......................... 5,961 5,666
Subordinated debt with an effective interest rate of 9.0%
payable quarterly, entire principal due in fiscal year
2003...................................................... 7,804 7,804
Construction term loans with interest ranging from 8.25% to
8.31% payable quarterly, principal payments due quarterly
in fiscal years 1997 through 2002......................... 9,371 11,154
Capital lease obligations................................... 311 320
Other notes payable......................................... 372 556
------- -------
45,669 44,158
Less current portion 3,084 4,036
------- -------
$42,585 $40,122
======= =======
</TABLE>
In September 1994, the Company and its subsidiaries entered into a combined
Revolving Credit, Term Loan and Guaranty Agreement (the "Credit Agreement") with
a bank. Maximum borrowings under the Revolving Credit facility and Term Loan are
$30,000,000 ($10,000,000 during the period February 15 through April 1 each year
and $33,000,000 from June 17, 1998 through October 31, 1998) and $15,000,000,
respectively. The agreement also provides for the bank to issue Letters of
Credit in amounts which will not exceed $10,000,000 in the aggregate. The face
amount of the Letters of Credit issued shall reduce the amount of funds
available under the Revolving Credit facility. As of March 31, 1998, Letters of
Credit of $500,000 were outstanding. The Revolving Credit facility expires on
June 30, 1999.
Advances under the Credit Agreement bear interest at a CD Rate, a
Eurodollar Rate or a Reference Rate plus an applicable margin as specified in
the Credit Agreement. A fee of 3/8% per annum is applied to the unused portion
of the Revolving Credit facility.
The Credit Agreement is secured by accounts receivable, inventory, certain
property, plant and equipment and general intangible assets. As of March 31,
1996, funds under the Term Loan Agreement had been advanced for construction of
a new facility. Upon completion of the new facility, in fiscal 1997, the funds
advanced under the Term Loan Agreement were converted to a five year term loan
under a fifteen year amortization schedule, with the final payment due on June
30, 2001. The Term Loan Agreement also provides for restrictions on payments of
subordinated debt
F-68
<PAGE> 137
THE NATIONAL SCHOOL SUPPLY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
NOTE C -- FINANCING ARRANGEMENTS (CONTINUED)
and accelerated principal payments on the Term Loan based upon a calculation of
"excess cash flows" on an annual basis.
On October 29, 1996, an amendment was made to the Credit Agreement which
included revisions to certain financial covenants and certain provisions for a
restructuring of a portion of the Company's debt. The debt restructuring
included a Supplemental Term Loan under the Credit Agreement of $12,200,000.
Substantially all of the proceeds from the sale of stock (see Note A) and the
Supplemental Term Loan were used to repay the entire amount outstanding under a
former senior notes agreement, repay approximately $24,325,000 (net of
$1,200,000 of unamortized original issue discount) of the amounts outstanding
under the subordinated debt instruments, and to pay related accrued interest,
prepayment penalties and refinancing costs. The Company recorded an
extraordinary gain of $564,000 from the debt restructuring due to the write-off
of deferred interest less prepayment penalties. No income tax expense was
recorded for the extraordinary gain due to the use of available net operating
loss carryforwards.
As a result of the Company's recapitalization in October 1996, subordinated
debt instruments are now payable to Butler (60.76%) and Fenway (39.24%). The
percentages are based on the investor's pro rata equity ownership. All
subordinated debt is fully subordinated to the Credit Agreement. Amortization of
the original issue discount is provided over the period the subordinated debt is
outstanding using the effective interest rate method. Such amortization was
approximately $295,000, $635,000 and $545,000 for the years ended March 31,
1998, 1997 and 1996, respectively. Interest is also provided using the effective
interest rate method for the interest-free period on certain subordinated debt.
At the Bank's request, the Company must prepay all or any portion of the
Supplemental Term Loan if the Company arranges for refinancing. Additionally,
the Company may be required to prepay certain portions of the Credit Agreement
in an amount equal to the Excess Cash Flow (as defined) on an annual basis. Any
prepayments under the Excess Cash Flow provision would apply first to the Term
Loan, then to the Supplemental Term Loan and would not affect scheduled
maturities. No amounts are required to be prepaid under the Excess Cash Flow
provision for fiscal year 1998. $1,000,000 was required to be paid for fiscal
year 1997.
All long-term debt agreements contain certain restrictive covenants and
provisions which, among other matters, place limitations on indebtedness,
dividends and certain other payments, changes in control, certain investments
and capital expenditures. Other covenants require the maintenance of minimum
working capital and net worth levels and interest coverage and debt service
coverage ratios.
As of March 31, 1998, the Company was in violation of a financial covenant
under the Credit Agreement as the result of planned acceleration of inventory
receipts to improve service levels. Effective June 17, 1998, an amendment was
made to the Credit Agreement which included a waiver by the bank of the covenant
violation that occurred and revisions to certain financial covenants through
March 31, 1999, including the leverage, interest coverage, debt service
coverage, net worth and current ratios.
F-69
<PAGE> 138
THE NATIONAL SCHOOL SUPPLY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
NOTE C -- FINANCING ARRANGEMENTS (CONTINUED)
Aggregate principal payments due on long-term debt are as follows (in
thousands):
<TABLE>
<CAPTION>
Years ending March 31:
----------------------
<S> <C>
1999........................................................ $ 3,084
2000........................................................ 20,669
2001........................................................ 3,880
2002........................................................ 10,231
2003........................................................ 7,805
-------
$45,669
=======
</TABLE>
Scheduled principal payments under the subordinated debt agreements were
deferred in fiscal year 1996 according to the Credit Agreement. Payments were
made concurrent with the debt and equity restructuring in October 1996.
Subordinated debt principal payments are permitted out of excess cash flow,
provided certain covenant calculations are met.
Other long-term liabilities represent interest at March 31, 1998 and 1997.
NOTE D -- STOCKHOLDERS' EQUITY
The Company has three classes of common stock authorized. Class A and B
stock have equal voting rights of one vote per share outstanding. Each holder of
Class C stock is entitled to a number of votes equal to a conversion factor for
each Class C share outstanding. Class C shares may be converted into the number
of Class A shares as is equal to the conversion factor in effect at the time of
such conversion.
NOTE E -- STOCK OPTIONS AND WARRANTS
The Company maintains two stock option plans. The 1987 Stock Plan has three
remaining participants who hold fully vested options to purchase shares of the
Company's Class A or Class C Common Stock at an exercise price of $1.73 per
share. There are no remaining grants under the 1987 Stock Plan.
The 1997 Performance Accelerated Stock Option Plan (the 1997 Plan) succeeds
a previous plan which originated in 1993. All options issued under the 1993 Plan
have been cancelled. The 1997 Plan granted 721,792 options in 1997 to employees
to purchase shares of the Company's Class A Common Stock. The options vest over
time, with vesting accelerated if certain financial objectives are met. All
options under the 1997 Plan are exercisable at $9.50 per share, which was the
market price at the time of the grant. Generally, options under the 1997 Plan
expire ten years from the date of grant.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APBO No. 25), and related
interpretations in accounting for its employee stock options, because as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123) requires the use of highly subjective assumptions
in option valuation models. Under APBO No. 25, because the exercise price of the
Company's employee stock options is not less than the fair market price of the
shares at the date of the grant and the number of options is known, no
compensation expense is recognized in the financial statements.
F-70
<PAGE> 139
THE NATIONAL SCHOOL SUPPLY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
NOTE E -- STOCK OPTIONS AND WARRANTS (CONTINUED)
Pro forma information regarding net income determined as if the Company had
accounted for the 1997 Performance Accelerated Stock Option Plan under the fair
value method of SFAS No. 123 is required to be disclosed for the year ended
March 31, 1997 as options were granted in that year. The fair value for these
options was estimated at the date of the grant using the Minimum Value Model
which is typically used for non-public companies. The following input
assumptions were used in determining the fair value.
<TABLE>
<CAPTION>
1997
----
<S> <C>
Risk-free interest rate..................................... 5.0%
Expected life of option..................................... 10 years
Expected dividend yield..................................... 0.0%
</TABLE>
Because the Company's employee stock options have several unique
characteristics, and because changes in the subjective input assumptions can
materially affect the fair value estimate, it is management's opinion that the
existing model does not necessarily provide a reliable single measure of the
fair value of its employees stock options.
The amounts below represent the pro forma information calculated through
the use of the Minimum Value Model.
<TABLE>
<CAPTION>
1997
----
<S> <C>
Reported net income......................................... $ 252,000
Pro forma net loss.......................................... (115,000)
</TABLE>
The weighted average fair value of the Company's stock options used to
compute the pro forma net loss disclosure is $3.38.
Due to the required phase-in provisions, the effects of applying SFAS No.
123 to arrive at the above pro forma amounts are not representative of the
expected effects on pro forma net income in future years.
A summary of the Company's stock option activity and related information
for the years ended March 31 is shown in the following table.
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONED EXERCISE OPTIONED EXERCISE OPTIONED EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning of year..... 743,542 $9.43 130,496 $17.91 190,196 $18.58
Granted........................... -- -- 721,792 9.50 30,800 20.04
Exercised......................... -- -- -- -- -- --
Cancelled......................... 310,958 9.50 108,746 20.04 90,500 20.04
------- ----- ------- ------ ------- ------
Outstanding end of year........... 432,584 $9.11 743,542 $ 9.43 130,496 $17.91
======= ======= =======
Exercisable end of year........... 223,787 $8.75 265,178 $ 8.86 55,623 $12.88
</TABLE>
At March 31, 1998 and 1997, the weighted average remaining contractual life
of the Company's stock options was 7.62 years and 9.74 years, respectively.
As of March 31, 1998 and 1997, there were 36,261 shares available for
future grants.
F-71
<PAGE> 140
THE NATIONAL SCHOOL SUPPLY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
NOTE E -- STOCK OPTIONS AND WARRANTS (CONTINUED)
In addition, effective October 29, 1996, the Company amended and restated
its warrant agreement with BCC Industrial Services (BCC), an affiliate of
Butler. The new agreement entitles BCC to purchase, at any time, 22,819 duly
authorized, validly issued, fully paid and nonassessable shares of the Company's
Class A Common Stock at a purchase price of $9.50 per share.
NOTE F -- INCOME TAXES
The Company uses the liability method in measuring the provision for income
taxes and recognizing deferred tax assets and liabilities in the balance sheet.
The liability method requires that deferred income taxes reflect the tax
consequences of currently enacted rates for differences between the tax and
financial reporting bases of assets and liabilities.
There was no income tax expense or benefit recorded in 1998, 1997 or 1996.
The Company has available net operating loss carryforwards of approximately $24
million. These carryforwards, if not utilized, expire in varying amounts from
2009 to 2013.
The significant components of deferred tax assets and liabilities were as
follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 31, 1997
------------------------- -------------------------
DEFERRED DEFERRED
DEFERRED TAX DEFERRED TAX
TAX ASSETS LIABILITIES TAX ASSETS LIABILITIES
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net operating loss carryforwards.................. $ 8,276 $ -- $ 6,846 $ --
Inventory......................................... 635 -- 705 --
Catalog costs..................................... -- 1,719 -- 1,363
Accrued liabilities and other..................... 3,763 2,361 2,055 16
------- ------ ------- ------
12,674 4,080 9,606 1,379
Valuation allowance............................... (8,594) -- (8,227) --
------- ------ ------- ------
$ 4,080 $4,080 $ 1,379 $1,379
======= ====== ======= ======
</TABLE>
The provision for income taxes differs from the amounts computed by
applying the federal statutory rate as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income tax expense (credit) at federal statutory rate....... (34.0)% (34.0)% (34.0)%
Non-deductible intangible amortization...................... 9.3 49.3 2.5
Other, net.................................................. 2.1 (43.8) 0.6
Valuation allowance......................................... 22.6 28.5 30.9
----- ----- -----
0.0 0.0 0.0
===== ===== =====
</TABLE>
NOTE G -- LEASES
The Company leases equipment under agreements accounted for as capital
leases. The cost of equipment recorded under capital leases was $457,035 and
$377,000 as of March 31, 1998 and 1997, respectively.
F-72
<PAGE> 141
THE NATIONAL SCHOOL SUPPLY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
NOTE G -- LEASES (CONTINUED)
The Company has operating leases for certain machinery and computer
equipment. Rent expense for all operating leases amounted to approximately
$412,000 in 1998, $329,000 in 1997 and $476,000 in 1996.
At March 31, 1998, future minimum lease payments under non-cancellable
operating and capital leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Years ending March 31:
1999...................................................... $127 $ 550
2000...................................................... 127 499
2001...................................................... 108 189
2002...................................................... 9 17
2003...................................................... -- --
---- ------
Total minimum lease payments................................ $371 $1,255
======
Less amount representing interest........................... 60
----
Present value of total obligation under capital leases...... 311
Less current portion........................................ 98
----
Long-term obligation under capital leases................... $213
====
</TABLE>
NOTE H -- BENEFIT PLANS
The Company sponsors defined contribution employee savings plans covering
substantially all of its salaried and hourly employees. During fiscal 1997, the
Company merged these plans into one plan covering all eligible employees. Under
the plan, the Company contributes a matching amount based upon the employees'
deferred salary contribution. Company contributions were approximately $403,000,
$414,000 and $405,000 for the years ended March 31, 1998, 1997 and 1996,
respectively.
NOTE I -- CONTINGENCIES
The Company is subject to legal proceedings and claims arising in the
ordinary course of its business. Management evaluates each claim and provides
for any potential loss when the claim is probable and estimable. In the opinion
of management, the ultimate liability with respect to these actions will not
materially affect the financial position, results of operations and cash flows
of the Company.
NOTE J -- YEAR 2000 (UNAUDITED)
In fiscal 1998, the Company completed an upgrade of its J.D. Edwards (JDE)
software which, through testing and implementation, has addressed the Year 2000
date conversion issue. Additionally, the Company uses software from large
national vendors with a broad base of active users in all other software
applications, therefore, the Year 2000 date conversion was accomplished through
the JDE and other software upgrades at no significant cost to the Company.
However, there can be no assurance that the systems of other companies on which
the Company's systems rely also will
F-73
<PAGE> 142
THE NATIONAL SCHOOL SUPPLY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
NOTE J -- YEAR 2000 (UNAUDITED)(CONTINUED)
be timely converted or that any such failure to convert by another company would
not have an adverse effect on the Company's systems.
NOTE K -- SUBSEQUENT EVENT (UNAUDITED)
Effective August 14, 1998, the Company and its stockholders entered into an
Agreement and Plan of Merger with School Specialty, Inc. to sell all of its
outstanding common stock for total consideration of approximately $138 million.
F-74
<PAGE> 143
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
Hammond & Stephens Company
In our opinion, the accompanying balance sheet and the related statements
of income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Hammond & Stephens Company at
October 31, 1997, and the results of its operations and its cash flows for the
year 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
September 3, 1998
F-75
<PAGE> 144
HAMMOND & STEPHENS COMPANY
BALANCE SHEET
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
1997 1998
----------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $2,930,710 $ 226,749
Accounts receivable....................................... 732,334 720,778
Inventories............................................... 2,025,849 3,467,382
Employees' advances....................................... 12,319 1,049
Prepaid expenses.......................................... 36,255 47,555
Income tax deposit........................................ 151,032 151,032
---------- ----------
Total current assets................................... 5,888,499 4,614,545
---------- ----------
Property and equipment:
Fixtures and equipment.................................... 2,071,181 2,077,916
Transportation equipment.................................. 28,364 28,364
Leasehold improvements.................................... 62,337 62,337
---------- ----------
2,161,882 2,168,617
Less: Accumulated depreciation............................ 1,470,219 1,557,838
---------- ----------
Total property and equipment........................... 691,663 610,779
---------- ----------
Investments and other assets:
Cash value of life insurance.............................. 423,882 456,382
---------- ----------
Total assets........................................... $7,004,044 $5,681,706
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 238,247 $ 295,939
Accrued sales commissions................................. 578,880 30,689
Other accrued expenses.................................... 198,657 112,309
---------- ----------
Total current liabilities............................ 1,015,784 438,937
---------- ----------
Stockholders' equity:
Common stock; authorized 1,500 shares, $100 par value;
issued and outstanding 1,500 shares.................... 150,000 150,000
Retained earnings......................................... 6,966,073 6,220,582
---------- ----------
7,116,073 6,370,582
Less: Treasury stock, 1,050 shares at cost................ 1,127,813 1,127,813
---------- ----------
Total stockholders' equity............................. 5,988,260 5,242,769
---------- ----------
Total liabilities and stockholders' equity............. $7,004,044 $5,681,706
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-76
<PAGE> 145
HAMMOND & STEPHENS COMPANY
STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE FOR THE SIX MONTHS ENDED
YEAR ENDED ------------------------
OCTOBER 31, APRIL 30, APRIL 30,
1997 1997 1998
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Net sales............................................. $9,082,852 $1,800,254 $1,744,600
Cost of goods sold.................................... 4,372,852 867,461 842,341
---------- ---------- ----------
Gross profit..................................... 4,710,000 932,793 902,259
Selling, general and administrative expenses.......... 2,466,670 846,996 925,104
---------- ---------- ----------
Operating income (loss).......................... 2,243,330 85,797 (22,845)
Other income:
Interest income..................................... 70,838 45,823 61,091
Other............................................... 56,456 28,438 26,263
---------- ---------- ----------
Net income....................................... $2,370,624 $ 160,058 $ 64,509
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-77
<PAGE> 146
HAMMOND & STEPHENS COMPANY
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON TOTAL
CAPITAL RETAINED STOCK HELD STOCKHOLDERS'
STOCK EARNINGS IN TREASURY EQUITY
------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at October 31, 1996............. $150,000 $ 6,575,449 $(1,127,183) $ 5,598,266
-------- ----------- ----------- -----------
Net income.............................. 2,370,624 2,370,624
Cash dividends paid on common stock,
$4,400 per share...................... (1,980,000) (1,980,000)
-------- ----------- ----------- -----------
Balance at October 31, 1997............. 150,000 6,966,073 (1,127,183) 5,988,890
Net income (unaudited).................. 64,509 64,509
Cash dividends paid on common stock,
$1,800 per share (unaudited).......... (810,000) (810,000)
-------- ----------- ----------- -----------
Balance at April 30, 1998 (unaudited)... $150,000 $ 6,220,582 $(1,127,183) $ 5,243,399
======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-78
<PAGE> 147
HAMMOND & STEPHENS COMPANY
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE SIX MONTHS ENDED
YEAR ENDED --------------------------
OCTOBER 31, APRIL 30, APRIL 30,
1997 1997 1998
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 2,370,624 $ 160,058 $ 64,509
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation.................................. 192,676 89,384 87,619
Cash surrender value of officers' life
insurance................................... (24,186) 2,424 524
Gain on sale of assets........................ (4,000)
Changes in assets and liabilities:
Accounts receivable........................... (83,559) (115,124) 22,827
Inventories................................... (39,299) (1,561,561) (1,441,533)
Employees' advances........................... (8,605)
Prepaid expenses.............................. (2,701) (7,146) (11,300)
Income tax deposit............................ (16,570)
Accounts payable.............................. (9,930) (47,279) 60,058
Accrued expenses.............................. (19,386) (647,068) (636,905)
----------- ----------- -----------
Net cash provided by (used in) operating
activities............................. 2,355,064 (2,126,312) (1,854,201)
Cash flows from investing activities:
Purchases of property and equipment.............. (153,496) (15,507) (6,736)
Purchase of officers' life insurance............. (40,731) (33,024) (33,024)
Proceeds from sale of assets..................... 4,000
----------- ----------- -----------
Net cash used in investing activities.... (190,227) (48,531) (39,760)
Cash flows from financing activities:
Dividends paid................................... (1,980,000) (810,000)
----------- ----------- -----------
Net cash used in financing activities.... 1,980,000 810,000
Net increase (decrease) in cash and cash
equivalents...................................... 184,837 (2,174,843) (2,703,961)
Cash and cash equivalents at beginning of period... 2,745,873 2,745,873 2,930,710
----------- ----------- -----------
Cash and cash equivalents at end of period......... $ 2,930,710 $ 571,030 $ 226,749
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-79
<PAGE> 148
HAMMOND & STEPHENS COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company is primarily engaged in the printing and sales of educational
materials to schools nationwide.
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of billing,
which is completed within one day of shipment. All goods shipped on the last day
of the year are billed on the last day of the year and have been properly
included in current year revenues.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
ACCOUNTS RECEIVABLE
Doubtful accounts are written off as deemed uncollectible. It is
management's opinion that all accounts represented on the balance sheet at
October 31, 1997 are collectible.
INVENTORY VALUATION
Inventory is valued at the lower of cost, using the first-in, first-out
method, or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Expenditures for maintenance
and repairs are charged to expense as incurred. Major expenditures for
improvements are capitalized. The Company computes depreciation on its property
and equipment using the straight-line method.
Rates used for depreciation are based on the following estimated useful
lives: fixtures and equipment -- 3 to 20 years; transportation equipment -- 5
years; and leasehold improvements -- 10 to 31 years.
Upon sale or retirement of property and equipment, the related costs and
accumulated depreciation are removed from the accounts and any gain or loss is
included in the determination of income.
ADVERTISING EXPENSE
Advertising costs are expensed as incurred except for catalog costs, which
are deferred and expensed as distributed. Advertising expense including catalog
costs for the year ended October 31, 1997 was $219,486. Deferred catalog costs
as of October 31, 1997 were $12,674.
INCOME TAXES
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code by unanimous consent of its stockholders. Under those
provisions, the Company does not pay Federal corporate income taxes on its
taxable income. Instead, the stockholders are liable for individual income taxes
on their respective shares of the Company's taxable income.
F-80
<PAGE> 149
HAMMOND & STEPHENS COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL DATA
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of April 30, 1998 and the results
of operations and of cash flows for the six months ended April 30, 1997 and
April 30, 1998, as presented in the accompanying unaudited financial data.
NOTE 2 -- CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at one financial institution located in
Fremont, Nebraska. The accounts are secured by the Federal Deposit Insurance
Corporation up to $100,000. Uninsured balances aggregate $2,936,020 at October
31, 1997.
NOTE 3 -- INVENTORIES
Inventories consist of the following components:
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
1997 1998
----------- ---------
<S> <C> <C>
Raw material........................................ $ 311,483 $ 693,476
Work in process..................................... 669,697 1,144,236
Finished goods...................................... 1,044,669 1,629,670
---------- ----------
$2,025,849 $3,467,382
========== ==========
</TABLE>
NOTE 4 -- PROPERTY AND EQUIPMENT
For the year ending October 31, 1997, depreciation expense was $192,676.
NOTE 5 -- BUILDING LEASE
The Company's operations are conducted in facilities leased form the
Company's president. The lease was for a two-year term, through December 31,
1997 and provided for monthly rental payments of $9,900 through October 31, 1997
and $14,700 for November and December 1997, with the Company paying all
maintenance and executory costs. The Company has determined the building to be
an operating lease and it is recorded as such in the financial statements. The
future minimum rental payments excluding maintenance and executory costs
required under this lease are as follows:
<TABLE>
<S> <C>
Year ended October 31, 1998................................. $29,400
=======
</TABLE>
Building lease expense for the year ending October 31, 1997 was $118,800.
F-81
<PAGE> 150
HAMMOND & STEPHENS COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- BUILDING LEASE (CONTINUED)
The building lease was renewed for a two year term on January 1, 1998 for a
fixed monthly rental payment of $14,700.
NOTE 6 -- EMPLOYEE BENEFIT PLAN
The Company maintains a profit sharing plan which includes provisions from
the Internal Revenue Code, Section 401-(K). The plan covers substantially all
the employees. Profit sharing expense for the year ended October 31, 1997 was
$42,290.
NOTE 7 -- SUBSEQUENT EVENTS
On June 30, 1998, the Company was acquired by School Specialty, Inc. a
supplier of non-textbook education products to schools and educators. Total
consideration for the acquisition was approximately $16.5 million, payable in a
cash transaction structured as an asset purchase for certain assets and
liabilities of the Company. The acquisition has been accounted for under the
purchase method of accounting.
F-82
<PAGE> 151
UNDERWRITING
School Specialty and the underwriters for the offering (the "Underwriters")
named below have entered into an underwriting agreement with respect to the
shares of Common Stock being offered. Subject to certain conditions, each
Underwriter has severally agreed to purchase the number of shares indicated in
the following table. Goldman, Sachs & Co., Salomon Smith Barney Inc. and Piper
Jaffray Inc. are the representatives of the Underwriters (the
"Representatives").
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Goldman, Sachs & Co.........................................
Salomon Smith Barney Inc....................................
Piper Jaffray Inc...........................................
---------
Total..................................................... 3,000,000
=========
</TABLE>
------------------------------
If the Underwriters sell more than the total number set forth in the table
above, the Underwriters have an option to buy up to an additional 450,000 shares
from us to cover such sales. They may exercise that option for 30 days. If any
shares are purchased pursuant to this option, the Underwriters will severally
purchase shares in approximately the same proportion as set forth in the table
above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the Underwriters by us. Such amounts are shown
assuming both no exercise and full exercise of the Underwriters' option to
purchase additional shares.
PAID BY SCHOOL SPECIALTY
------------------------------
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per Share........................................ $ $
Total............................................ $ $
</TABLE>
------------------------------
Shares sold by the Underwriters to the initial public will initially be
offered at the initial public offering price set forth on the cover of this
Prospectus. Any shares sold by the Underwriters to securities dealers may be
sold at a discount of up to $ per share from the initial public
offering price. Any such securities dealers may resell any shares purchased from
the Underwriters to certain other brokers or dealers at a discount of up to
$ per share from the initial public offering price. If all the shares
are not sold at the initial public offering price, the Representatives may
change the offering price and the other selling terms.
School Specialty has agreed, along with certain of its directors and
executive officers, not to dispose of or hedge any of their Common Stock or
securities convertible into or exchangeable for shares of Common Stock during
the period from the date of this Prospectus continuing through the date 90 days
after the date of this Prospectus, except with the prior written consent of the
Representatives. This agreement does not apply to any existing employee benefit
plans, including the 1998 Stock Incentive Plan, or shares of Common Stock used
as consideration for acquisitions (up to an aggregate of shares if
holders of shares deliver a lock-up letter to the Representatives).
In connection with the offering, the Underwriters may purchase and sell
shares of Common Stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the Underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the Common Stock while
the offering is in progress.
U-1
<PAGE> 152
The Underwriters also may impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the underwriting
discount received by it because the Representatives have repurchased shares sold
by or for the account of such Underwriter in stabilizing or short covering
transactions.
These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the Common Stock. As a result, the price of the
Common Stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
Underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
School Specialty has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act").
School Specialty estimates that its share of the total expenses of the
offering, excluding underwriting discounts and commissions, will be
approximately $ .
U-2
<PAGE> 153
[PICTURES OF THE COMPANY'S VARIOUS CATALOGS]
<PAGE> 154
- ---------------------------------------------------------
- ---------------------------------------------------------
No dealer, salesperson or other person is authorized to give you any
information or to represent anything not contained in this Prospectus. You must
not rely on any unauthorized information or representations. This Prospectus is
an offer to sell or to buy only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The information
contained in this Prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................... 3
Risk Factors............................. 11
Disclosure Regarding Forward-Looking
Statements............................. 16
Use of Proceeds.......................... 16
Dividend Policy.......................... 17
Price Range of Common Stock.............. 17
Capitalization........................... 18
Selected Historical and Pro Forma
Financial Data......................... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 24
Business................................. 36
Management............................... 48
Certain Transactions..................... 56
Principal Stockholders................... 57
Description of Senior Credit Facility.... 59
Description of Our Capital Stock......... 61
Experts.................................. 64
Validity of Shares....................... 64
Additional Information................... 65
Index to Financial Statements............ F-1
Underwriting............................. U-1
</TABLE>
- ---------------------------------------------------------
- ---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
3,000,000 Shares
SCHOOL SPECIALTY, INC.
Common Stock
------------------
LOGO
------------------
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
PIPER JAFFRAY INC.
Representatives of the Underwriters
---------------------------------------------------------
---------------------------------------------------------
<PAGE> 155
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell nor does it seek an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion. Dated , 1999.
$100,000,000
SCHOOL SPECIALTY, INC.
% Senior Subordinated Notes Due 2009
LOGO
------------------------------
School Specialty will pay interest on the Notes on and of
each year. The first such payment will be made on , 1999. The Notes
will be issued only in denominations of $1,000 and integral multiples of $1,000.
On or after , 2004, School Specialty has the option to redeem all
or a portion of the Notes at the redemption prices set forth in this Prospectus.
Before , 2002, School Specialty has the option to redeem up to 35% of
the original aggregate principal amount of the Notes and any Additional Notes
with the proceeds of certain public offerings of School Specialty Common Stock
at a redemption price of % plus accrued interest to the redemption date.
School Specialty must offer to purchase all of the Notes at a price of 101%
plus accrued interest to the purchase date in the event of a change of control.
The Notes are subordinated in right of payment to all senior debt of School
Specialty. The Notes will be fully and unconditionally guaranteed by all of
School Specialty's current subsidiaries other than one foreign subsidiary and
one recently acquired subsidiary. These subsidiary guarantees are subordinated
in right of payment to the senior debt of the subsidiary guarantors.
See "Risk Factors" on page 14 to read about certain factors you should
consider before buying Notes.
------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED ON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------------
<TABLE>
<CAPTION>
Per Note Total
-------- ------------
<S> <C> <C>
Initial public offering price............................... % $
Underwriting discount....................................... % $
Proceeds, before expenses, to School Specialty.............. % $
</TABLE>
The initial public offering price set forth above does not include accrued
interest, if any. Interest on the Notes will accrue from , 1999 and
must be paid by the purchaser if the Notes are delivered after , 1999.
------------------------------
The underwriters expect to deliver the Notes in book-entry form only through
the facilities of The Depository Trust Company against payment in New York, New
York on , 1999.
GOLDMAN, SACHS & CO. SALOMON SMITH BARNEY
------------------------------
Prospectus dated , 1999.
<PAGE> 156
[MAPS SHOWING GEOGRAPHIC COVERAGE AND
PENETRATION AND PICTURES OF BRANDS AND PRODUCTS]
Childcraft Education Corp.(R) is a trademark of Childcraft Education Corp.
School Specialty(R) and Education Access(R) are trademarks of School Specialty.
Gresswell is a common law trademark of School Specialty. All other trademarks,
service marks and trade names referred to in this Prospectus are the property of
their respective owners.
2
<PAGE> 157
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements and pro forma financial statements
appearing elsewhere in this Prospectus. Unless the context requires otherwise,
all references to "School Specialty," "we" or "our" refers to School Specialty,
Inc. and its subsidiaries. Our fiscal year ends on the last Saturday in April in
each year. In this Prospectus, we refer to fiscal years by reference to the
calendar year in which they end (e.g., the fiscal year ended April 25, 1998 is
referred to as "fiscal 1998"). Unless otherwise indicated, the information
contained in this Prospectus assumes no exercise of the over-allotment option
granted to the underwriters in the Common Stock offering discussed herein.
SCHOOL SPECIALTY
OVERVIEW
We are the largest marketer of non-textbook educational supplies and
furniture to schools for pre-kindergarten through twelfth grade. We offer more
than 60,000 items through an innovative two-pronged marketing approach that
targets both school administrators and individual teachers. Our broad product
range enables us to provide our customers with one source for virtually all of
their non-textbook school supplies and furniture needs.
We have grown significantly in recent years through both acquisitions and
internal growth. In order to expand our geographic presence and product range,
we have acquired 18 companies since May 1996. In August 1998, we purchased
Beckley-Cardy, our largest traditional and specialty school supply competitor.
After giving pro forma effect to the acquisitions that we made during the
period, our revenues for the twelve months ended January 23, 1999 were $607.3
million and our operating earnings before interest, income taxes, depreciation,
amortization and non-recurring acquisition and restructuring costs ("Adjusted
EBITDA") were $51.2 million. These results represent compound annual increases
of 48.9% in revenues and 67.7% in Adjusted EBITDA compared to our historical
results for the year ended December 31, 1994.
Our "top down" marketing approach targets school administrators at the
state, regional and local levels using our 250 sales representatives and our
School Specialty and Beckley-Cardy general supply and furniture catalogs. Our
"bottom up" approach seeks to reach individual teachers and curriculum
specialists primarily through the mailing of our ClassroomDirect.com general
supply catalog (previously known as Re-Print) and our seven different specialty
direct catalogs. During 1998, we mailed over 10.2 million catalogs to more than
three million teachers and curriculum specialists. Approximately 100 employees
assist in the sale, marketing and merchandising of our specialty direct
products. We are also exploring various ways in which we can use the Internet to
market and sell our products. As the first stage of our Internet initiative, we
recently opened a fully integrated e-commerce website under the name
"ClassroomDirect.com" which offers over 13,000 items for sale. The second stage
of our Internet initiative, which we expect to launch in May 1999, is an
education portal in the form of an education mall which will offer our products
for sale and also provide a community forum and content aimed at educators.
3
<PAGE> 158
We sell general school supplies, such as classroom and art supplies,
instructional materials, furniture and equipment. We also sell supplies and
furniture for specialized educational disciplines, including the following:
<TABLE>
<CAPTION>
BRAND PRODUCTS
----- --------
<S> <C>
Childcraft............................. Early childhood
Sax Arts and Crafts.................... Art supplies
Frey Scientific........................ Science
Sportime............................... Physical education
Education Access....................... Educational software
Brodhead Garrett....................... Industrial arts
Gresswell.............................. Library
Hammond & Stephens..................... School forms
</TABLE>
School Specialty was incorporated as a wholly owned subsidiary by U.S.
Office Products in Delaware in February 1998 to hold its Educational Supplies
and Products Division. On June 9, 1998, U.S. Office Products distributed all of
the shares of School Specialty to its shareholders. At the same time as this
distribution, School Specialty sold 2,375,000 shares of Common Stock in an
initial public offering and a concurrent offering to several of its officers and
directors. Our principal executive offices are located at 1000 North Bluemound
Drive, Appleton, Wisconsin 54914. Our telephone number is (920) 734-2756.
INDUSTRY TRENDS
The National School Supply Equipment Association estimates that annual
sales of non-textbook educational supplies and equipment to the school supply
market are approximately $6.1 billion. Of this amount, over $3.6 billion is sold
through institutional channels and the remaining $2.5 billion is sold through
retail channels. We estimate that there are over 3,400 marketers of non-textbook
school supplies and equipment, the majority of which are family or employee
owned businesses that operate in a single geographic region and have annual
revenues under $20 million. We believe the increasing demand for single source
suppliers, prompt order fulfillment and competitive prices, and the related need
for suppliers to invest in automated inventory and electronic ordering systems,
is accelerating the trend toward consolidation in our industry. As the largest
company in our industry with annual revenues which we believe are three times
greater than the next largest industry competitor, we are well positioned to
capitalize on this consolidation. Even as the industry leader, our market share
of the $6.1 billion non-textbook school supply and equipment market is less than
10%, creating substantial growth opportunities.
The demand for school supplies is driven primarily by the level of the
student population and, to a lesser extent, expenditures per student. Student
population is largely a function of demographics, while expenditures per student
are also affected by government budgets and the prevailing political and social
attitudes towards education. The U.S. Department of Education estimates that
kindergarten through twelfth grade student enrollment in public and private
schools reached a record level of 52.7 million students in 1998 and projects
that it will continue to grow to 54.5 million by the year 2006. The U.S.
Department of Education also projects that expenditures per student in public
elementary and secondary schools will continue to rise through the year 2006. We
believe that the current political and social environment is favorable for
education spending.
KEY STRENGTHS
We attribute our strong competitive position to the following key
strengths:
-- LEADING MARKET POSITION. We believe our annual revenues are three
times greater than those of our next largest industry competitor and
that our large size and brand recognition have resulted in
significant buying power, economies of scale and customer loyalty.
4
<PAGE> 159
-- BROAD PRODUCT LINE. With over 60,000 items ranging from classroom
supplies and furniture to playground equipment, we provide customers
with one source for virtually all of their non-textbook school supply
and furniture needs.
-- INNOVATIVE TWO-PRONGED MARKETING APPROACH. By marketing our products
both to school administrators and to individual teachers and
curriculum specialists, we believe we market to all of the
prospective purchasers in the school system in an efficient and
profitable manner.
-- STABLE INDUSTRY. Because the demand for educational supplies is
primarily driven by demographics and government spending, we believe
that our industry is less exposed to economic cycles than many
others.
-- ABILITY TO COMPLETE AND INTEGRATE ACQUISITIONS. We have successfully
completed the acquisition of 23 companies since 1991, including 18
since May 1996. We believe that we can rapidly improve the revenues
and gross and operating margins of the businesses we acquire by
eliminating redundant expenses, leveraging overhead costs, increasing
our purchasing power and cross merchandising their specialty products
to our general supply customers (which we sometimes refer to as our
"traditional" customers).
-- USE OF TECHNOLOGY. We believe that our use of information technology
systems allows us to turn inventory more quickly than our
competitors, offer customers more convenient and cost effective ways
of ordering products and more precisely focus our sales and marketing
campaigns.
-- EXPERIENCED AND INCENTIVISED MANAGEMENT. Our management team
provides depth and continuity of experience. Management's interests
are aligned with those of our stockholders. Management currently owns
approximately % of our shares of Common Stock on a fully-diluted
basis and purchased % of the currently outstanding shares at the
same time as our initial public offering in June 1998.
GROWTH STRATEGY
We use the following strategies to grow and enhance our position as the
leading marketer of non-textbook educational supplies and furniture:
-- AGGRESSIVELY PURSUE ACQUISITIONS. We believe that there are many
attractive acquisition opportunities in our highly fragmented
industry. As a public company, we have greater access to capital for
acquisitions than many of our competitors. We will continue to pursue
opportunities that enhance our geographic presence or which
complement our specialty direct product offerings.
-- INCREASE SALES OF SPECIALTY AND PROPRIETARY PRODUCTS. We believe we
can increase our margins by selling more specialty direct products
and products for which we are the only supplier. We believe that
specialty direct products accounted for approximately 42% of our
revenues on a pro forma basis for the twelve months ended January 23,
1999, compared to approximately 20% on an historical basis for the
year ended December 31, 1994.
-- EXPAND EXISTING TRADITIONAL BUSINESS. We believe that we can also
increase the revenues of our traditional business by adding sales
representatives in geographic markets in which we are
underrepresented and by cross merchandising our specialty products to
our traditional customers.
-- IMPROVE PROFITABILITY. We improved our operating margin (as measured
by our Adjusted EBITDA divided by our revenues) from 5.2% in 1994 on
an historical basis to 8.4% on a pro forma basis for the twelve
months ended January 23, 1999. We believe that we can further improve
our operating margins by eliminating redundant expenses of acquired
businesses, leveraging our overhead costs, increasing our purchasing
power and improving the efficiency of our warehousing and
distribution.
5
<PAGE> 160
-- PURSUE INTERNET INITIATIVE. Because more schools and teachers are
connecting to the Internet, we intend to aggressively pursue sales
opportunities through this rapidly growing channel. By establishing
an early presence on the Internet, we believe we can gain a
significant competitive advantage and valuable brand recognition. Our
goal is to become the leading marketer of school supplies and
furniture over the Internet. This may also permit us to expand our
customer base over time to include individuals and other
non-traditional customers.
6
<PAGE> 161
THE COMMON STOCK OFFERING
Concurrently with the offering of Notes made by this Prospectus, we are
offering 3,000,000 shares of our Common Stock (plus up to an additional 450,000
shares that may be sold pursuant to the underwriters' over-allotment option). We
expect to receive net proceeds of approximately $62.2 million from the Common
Stock offering (excluding the underwriters' over-allotment option), based on the
last reported sale price of our Common Stock on February 24, 1999, after
deducting the estimated underwriting discount and offering expenses. We will
combine the net proceeds from the Common Stock offering with the net proceeds
from the Note offering and use the combined net proceeds as described below. The
Common Stock offering is being made by means of a separate prospectus and this
Prospectus does not constitute an offer to sell or the solicitation of an offer
to buy the Common Stock. The consummation of the offering of the Notes made
hereby is not conditioned on the completion of our Common Stock offering and we
cannot assure you that the Common Stock offering will be completed.
7
<PAGE> 162
THE NOTE OFFERING
Issuer..................... School Specialty, Inc.
Securities offered......... $100 million aggregate principal amount of %
Senior Subordinated Notes due , 2009.
Additional Notes........... Up to $50 million aggregate principal amount of
Additional Notes with the same terms as the Notes
may be issued in future offerings, subject to
certain conditions.
Maturity date.............. , 2009.
Interest payment dates..... and . The first payment date
will be , 1999.
Subsidiary guarantees...... Our payment obligations under the Notes will be
fully and unconditionally guaranteed by certain of
our current and future subsidiaries. With the
exception of one foreign subsidiary and one
recently acquired subsidiary, all of our
subsidiaries will be guarantors when the Notes are
first issued.
Optional redemption........ On or after , 2004, we may redeem all or
a portion of the Notes at any time at the
redemption prices set forth in the section
"Description of Notes" under the heading "Optional
Redemption."
Before , 2002, we may redeem up to 35% of
the original aggregate principal amount of the
Notes and any Additional Notes with the proceeds of
certain public offerings of our Common Stock at a
redemption price equal to % of their principal
amount plus accrued interest to the redemption
date.
Change of control.......... We must offer to purchase all of the Notes at a
price of 101% of the principal amount plus accrued
interest to the purchase date in the event of a
change of control.
Ranking.................... The Notes and the subsidiary guarantees are senior
subordinated obligations. The Notes rank behind our
current and future senior debt and the subsidiary
guarantee of each subsidiary guarantor ranks behind
the senior debt of that subsidiary guarantor.
After we issue the Notes and apply the proceeds as
intended, as of January 23, 1999, we would have had
approximately $198.5 million ($136.4 million if the
Common Stock offering is also completed) of
indebtedness outstanding including the Notes. The
Notes and the subsidiary guarantees will be
subordinated to the entire amount of that
outstanding indebtedness.
Restrictive covenants...... The Indenture governing the Notes will, among other
things, limit our ability and the ability of our
subsidiaries to:
-- become liable for additional indebtedness;
-- pay dividends on stock or repurchase stock;
-- make certain investments;
-- sell certain assets;
-- use assets to secure subordinated
indebtedness;
8
<PAGE> 163
-- engage in transactions with affiliated
persons or businesses; and
-- engage in mergers and consolidations.
Use of proceeds............ To repay a portion of the indebtedness outstanding
under our Senior Credit Facility which was incurred
in connection with three recent acquisitions. After
such repayment, we may reborrow under the Senior
Credit Facility for general corporate purposes
including working capital, and for acquisitions.
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following tables present certain historical and pro forma financial
data as of and for the periods indicated. This information should be read
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations," our consolidated financial statements and related notes
and our combined pro forma financial statements and related notes, included
elsewhere in this Prospectus.
9
<PAGE> 164
SUMMARY HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<TABLE>
<CAPTION>
HISTORICAL(1)
-------------------------------------------------------------------------------------------------
FOUR FISCAL YEAR ENDED NINE MONTHS ENDED TWELVE
FISCAL YEAR ENDED MONTHS --------------------- ------------------------- MONTHS
DECEMBER 31, ENDED ENDED
------------------- APRIL 30, APRIL 26, APRIL 25, JANUARY 24, JANUARY 23, JANUARY 23,
1994(2) 1995(2) 1996(2) 1997(2) 1998(2) 1998(2) 1999 1999(3)
------- ------- --------- --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues..................... $119,510 $150,482 $28,616 $191,746 $310,455 $247,880 $424,332 $486,907
Cost of revenues............. 81,774 98,233 18,591 126,862 202,870 164,105 281,436 320,201
-------- -------- ------- -------- -------- -------- -------- --------
Gross profit................. $ 37,736 $ 52,249 $10,025 $ 64,884 $107,585 $ 83,775 $142,896 $166,706
Selling, general and
administrative expenses.... 33,257 47,393 11,917 53,177 87,846 63,395 108,005 132,456
Non-recurring acquisition
costs...................... -- -- 1,122 1,792 -- -- -- --
Restructuring costs.......... -- 2,532 -- 194 3,491 -- 5,274 8,765
-------- -------- ------- -------- -------- -------- -------- --------
Operating income (loss)...... $ 4,479 $ 2,324 $(3,014) $ 9,721 $ 16,248 $ 20,380 $ 29,617 $ 25,485
Interest expense............. 3,007 5,536 1,461 4,197 5,505 4,100 8,942 10,347
Interest income.............. -- -- (6) -- (132) (109) (114) (137)
Other (income) expense....... (86) (18) 67 (196) 156 441 -- (285)
-------- -------- ------- -------- -------- -------- -------- --------
Income (loss) before
provision for (benefit
from) income taxes......... $ 1,558 $ (3,194) $(4,536) $ 5,720 $ 10,719 $ 15,948 $ 20,789 $ 15,560
Provision for (benefit from)
income taxes(4)............ 218 173 139 (2,412) 5,480 7,113 10,094 8,461
-------- -------- ------- -------- -------- -------- -------- --------
Net income (loss)............ $ 1,340 $ (3,367) $(4,675) $ 8,132 $ 5,239 $ 8,835 $ 10,695 $ 7,099
======== ======== ======= ======== ======== ======== ======== ========
Net income (loss) per share:
Basic...................... $ 0.26 $ (0.51) $ (0.54) $ 0.81 $ 0.40 $ 0.69 $ 0.73 $ 0.48
Diluted.................... 0.26 (0.50) (0.53) 0.80 0.39 0.68 0.73 0.48
Weighted average shares
outstanding:
Basic...................... 5,062 6,562 8,611 10,003 13,284 12,751 14,625 14,714
Diluted.................... 5,078 6,669 8,789 10,196 13,547 13,020 14,665 14,744
STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used
in) operating activities... $ (268) $ 4,828 $(1,178) $ 918 $ 3,724 $ 15,392 $ 29,100 $ 17,432
Net cash used in investing
activities................. (2,856) (6,092) (828) (16,742) (99,742) (96,537) (98,837) (102,042)
Net cash provided by
financing activities....... 3,202 1,156 2,011 15,778 96,018 81,145 69,737 84,610
-------- -------- ------- -------- -------- -------- -------- --------
Net increase (decrease) in
cash and cash equivalents.. $ 78 $ (108) $ 5 $ (46) $ -- $ -- $ -- $ --
======== ======== ======= ======== ======== ======== ======== ========
OTHER DATA:
EBITDA(6).................... $ 6,210 $ 5,085 $(2,407) $ 12,023 $ 20,653 $ 23,321 $ 36,224 $ 33,556
Adjusted EBITDA(6)........... 6,210 7,617 (1,285) 14,009 24,144 23,321 41,498 42,321
Depreciation and amortization
expense.................... 1,645 2,743 674 2,106 4,561 3,382 6,607 7,786
Capital expenditures......... 630 881 120 7,216 4,423 4,095 3,978 4,306
SELECTED RATIOS:
Ratio of total debt to
Adjusted EBITDA............ 5.2x 5.2x (31.8)x 4.3x 3.5x 3.4x 4.2x 4.1x
Ratio of Adjusted EBITDA to
interest expense........... 2.1x 1.4x (0.9)x 3.3x 4.4x 5.7x 4.6x 4.1x
Ratio of earnings to fixed
charges(7)................. 1.4x 0.5x -- 2.2x 2.6x 4.2x 3.0x 2.3x
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- APRIL 30, APRIL 26, APRIL 25, JANUARY 23,
1994 1995 1996 1997 1998 1999
---- ---- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)......................... $ 3,512 $(1,052) $(3,663) $14,491 $ 47,791 $ 90,826
Total assets...................................... 44,267 54,040 54,573 87,685 223,729 378,513
Long-term debt.................................... 11,675 15,294 15,031 33,792 63,014 162,199
Total debt........................................ 32,276 39,783 40,918 60,746 83,302 172,513
Stockholders' (deficit) equity.................... 1,827 (620) (4,267) 16,329 106,466 159,067
</TABLE>
10
<PAGE> 165
SUMMARY PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<TABLE>
<CAPTION>
PRO FORMA(8)
-----------------------------------------------------
TWELVE
FISCAL YEAR NINE MONTHS ENDED MONTHS
ENDED ------------------------- ENDED
APRIL 25, JANUARY 24, JANUARY 23, JANUARY 23,
1998(2) 1998(2) 1999 1999(3)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues........................ $598,025 $496,941 $506,180 $607,264
Cost of revenues................ 390,327 327,174 330,786 393,939
-------- -------- -------- --------
Gross profit.................... $207,698 $169,767 $175,394 $213,325
Selling, general and
administrative expenses........ 175,507 135,598 133,046 172,955
Restructuring costs............. 4,689 1,198 5,401 8,892
-------- -------- -------- --------
Operating income................ $ 27,502 $ 32,971 $ 36,947 $ 31,478
Interest expense................ 17,000 13,500 13,500 17,000
Other expense................... 193 536 420 77
-------- -------- -------- --------
Income before provision for
income taxes................... $ 10,309 $ 18,935 $ 23,027 $ 14,401
Provision for income taxes...... 5,979 10,982 11,283 6,280
-------- -------- -------- --------
Net income...................... $ 4,330 $ 7,953 $ 11,744 $ 8,121
======== ======== ======== ========
Net income per share(5):
Basic.......................... $ 0.28 $ 0.53 $ 0.78 $ 0.52
Diluted........................ 0.27 0.52 0.78 0.52
Weighted average shares
outstanding(5):
Basic.......................... 15,659 15,126 15,025 15,608
Diluted........................ 15,922 15,395 15,065 15,638
OTHER DATA:
EBITDA(6)....................... $ 38,386 $ 40,943 $ 44,889 $ 42,332
Adjusted EBITDA(6).............. 43,075 42,141 50,290 51,224
Depreciation and amortization
expense........................ 11,077 8,508 8,362 10,931
SELECTED RATIOS:
Ratio of total debt to Adjusted
EBITDA......................... 4.5x 4.6x 3.9x 3.8x
Ratio of Adjusted EBITDA to
interest expense............... 2.5x 3.1x 3.7x 3.0x
Ratio of earnings to fixed
charges(7)..................... 1.5x 2.2x 2.5x 1.7x
<CAPTION>
PRO FORMA AS ADJUSTED FOR NOTE OFFERING(8)
-----------------------------------------------------
TWELVE
FISCAL YEAR NINE MONTHS ENDED MONTHS
ENDED ------------------------- ENDED
APRIL 25, JANUARY 24, JANUARY 23, JANUARY 23,
1998(2) 1998(2) 1999 1999(3)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues........................ $598,025 $496,941 $506,180 $607,264
Cost of revenues................ 390,327 327,174 330,786 393,939
-------- -------- -------- --------
Gross profit.................... $207,698 $169,767 $175,394 $213,325
Selling, general and
administrative expenses........ 175,507 135,598 133,046 172,955
Restructuring costs............. 4,689 1,198 5,401 8,892
-------- -------- -------- --------
Operating income................ $ 27,502 $ 32,971 $ 36,947 $ 31,478
Interest expense................ 18,486 14,615 14,615 18,486
Other expense................... 193 536 420 77
-------- -------- -------- --------
Income before provision for
income taxes................... $ 8,823 $ 17,820 $ 21,912 $ 12,915
Provision for income taxes...... 5,385 10,536 10,837 5,686
-------- -------- -------- --------
Net income...................... $ 3,438 $ 7,284 $ 11,075 $ 7,229
======== ======== ======== ========
Net income per share(5):
Basic.......................... $ 0.22 $ 0.48 $ 0.74 $ 0.46
Diluted........................ 0.22 0.47 0.74 0.46
Weighted average shares
outstanding(5):
Basic.......................... 15,659 15,126 15,025 15,608
Diluted........................ 15,922 15,395 15,065 15,638
OTHER DATA:
EBITDA(6)....................... $ 38,386 $ 40,943 $ 44,889 $ 42,332
Adjusted EBITDA(6).............. 43,075 42,141 50,290 51,224
Depreciation and amortization
expense........................ 11,077 8,508 8,362 10,931
SELECTED RATIOS:
Ratio of total debt to Adjusted
EBITDA......................... 4.6x 4.7x 3.9x 3.9x
Ratio of Adjusted EBITDA to
interest expense............... 2.3x 2.9x 3.4x 2.8x
Ratio of earnings to fixed
charges(7)..................... 1.4x 2.1x 2.3x 1.6x
<CAPTION>
PRO FORMA AS ADJUSTED
FOR NOTE AND COMMON STOCK OFFERINGS(8)
-----------------------------------------------------
TWELVE
FISCAL YEAR NINE MONTHS ENDED MONTHS
ENDED ------------------------- ENDED
APRIL 25, JANUARY 24, JANUARY 23, JANUARY 23,
1998(2) 1998(2) 1999 1999(3)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues........................ $598,025 $496,941 $506,180 $607,264
Cost of revenues................ 390,327 327,174 330,786 393,939
-------- -------- -------- --------
Gross profit.................... $207,698 $169,767 $175,394 $213,325
Selling, general and
administrative expenses........ 175,507 135,598 133,046 172,955
Restructuring costs............. 4,689 1,198 5,401 8,892
-------- -------- -------- --------
Operating income................ $ 27,502 $ 32,971 $ 36,947 $ 31,478
Interest expense................ 13,512 10,885 10,885 13,512
Other expense................... 193 536 420 77
-------- -------- -------- --------
Income before provision for
income taxes................... $ 13,797 $ 21,550 $ 25,642 $ 17,889
Provision for income taxes...... 7,376 12,028 12,329 7,677
-------- -------- -------- --------
Net income...................... $ 6,421 $ 9,522 $ 13,313 $ 10,212
======== ======== ======== ========
Net income per share(5):
Basic.......................... $ 0.34 $ 0.53 $ 0.74 $ 0.55
Diluted........................ 0.34 0.52 0.74 0.55
Weighted average shares
outstanding(5):
Basic.......................... 18,659 18,126 18,025 18,608
Diluted........................ 18,922 18,395 18,065 18,638
OTHER DATA:
EBITDA(6)....................... $ 38,386 $ 40,943 $ 44,849 $ 42,332
Adjusted EBITDA(6).............. 43,075 42,141 50,290 51,224
Depreciation and amortization
expense........................ 11,077 8,508 8,362 10,931
SELECTED RATIOS:
Ratio of total debt to Adjusted
EBITDA......................... 3.2x 3.2x 2.7x 2.7x
Ratio of Adjusted EBITDA to
interest expense............... 3.2x 3.9x 4.6x 3.8x
Ratio of earnings to fixed
charges(7)..................... 1.9x 2.7x 3.0x 2.1x
</TABLE>
<TABLE>
<CAPTION>
JANUARY 23, 1999(9)
----------------------------------------
PRO FORMA AS
ADJUSTED FOR
PRO FORMA AS NOTE AND
ADJUSTED FOR COMMON STOCK
PRO FORMA NOTE OFFERING OFFERINGS
--------- ------------- ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 99,339 $109,653 $109,653
Total assets................................................ 403,920 406,870 406,870
Long-term debt.............................................. 185,268 198,532 136,362
Total debt.................................................. 195,582 198,532 136,362
Stockholders' equity........................................ 159,067 159,067 221,237
</TABLE>
11
<PAGE> 166
- ---------------
(1) The historical financial information of School Speciality, Inc., a Wisconsin
corporation, and The Re-Print Corp., both of which were acquired by U.S.
Office Products in business combinations accounted for under the
pooling-of-interests method in May 1996 and July 1996, respectively, have
been combined on a historical cost basis in accordance with generally
accepted accounting principles ("GAAP") to present this financial data as if
the two companies had always been members of the same operating group. All
business acquisitions since July 1996 have been accounted for under the
purchase method. The financial information of the businesses acquired in
business combinations accounted for under the purchase method is included
from the dates of their respective acquisitions.
(2) Certain reclassifications have been made to the historical and pro forma
financial data for the fiscal years ended December 31, 1994 and 1995, the
four months ended April 30, 1996, the fiscal years ended April 26, 1997 and
April 25, 1998 and the nine months ended January 24, 1998 to conform with
the fiscal 1999 presentation. These reclassifications had no effect on net
income or net income per share.
(3) The results for the historical and pro forma twelve months ended January 23,
1999 have been calculated based upon the historical and pro forma results,
respectively, for the fiscal year ended April 25, 1998 less the historical
and pro forma results, respectively, for the nine months ended January 24,
1998 plus the historical and pro forma results, respectively, for the nine
months ended January 23, 1999.
(4) Results for the fiscal year ended April 26, 1997 include a benefit from
income taxes of $2.4 million primarily arising from the reversal of a $5.3
million valuation allowance in the quarter ended April 26, 1997. The
valuation allowance had been established in 1995 to offset the tax benefit
from net operating loss carryforwards included in our 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 our being
acquired by U.S. Office Products, because it was deemed "more likely than
not," based on improved results, that such tax benefit would be realized.
(5) For calculation of the pro forma and pro forma as adjusted weighted average
shares outstanding, see Note (k) and Note (l), respectively, of Notes to Pro
Forma Combined Financial Statements included herein.
(6) EBITDA represents operating earnings before interest, income taxes,
depreciation and amortization. Adjusted EBITDA is EBITDA plus non-recurring
acquisition costs and restructuring costs. EBITDA and Adjusted EBITDA are
provided because they are measures commonly used by analysts and investors
to determine a company's ability to incur and service its debt. EBITDA and
Adjusted EBITDA are not measurements of performance under GAAP and should
not be considered as alternatives to net income or income from operations or
as measures of operating performance or cash flow data prepared in
accordance with GAAP or as measures of liquidity. EBITDA and Adjusted
EBITDA, as calculated by School Specialty, are not necessarily comparable
with similarly titled measures of other companies.
(7) The ratio of earnings to fixed charges is computed by dividing fixed charges
into income (loss) before provision for (benefit from) income taxes and
fixed charges. Fixed charges represent interest expense, whether expensed or
capitalized, amortization of debt expenses and the estimated interest
component of rent expense. On a historical basis, as a result of the loss
incurred during the four months ended April 30, 1996, we were unable to
fully cover fixed charges by $4,536.
(8) The pro forma financial data give effect, as applicable, to all acquisitions
completed through February 9, 1999, the spin-off and the refinancing of all
amounts payable to U.S. Office Products in connection with the spin-off, the
June 1998 initial public offering and concurrent offering to certain
officers and directors and the Common Stock and Note offerings, as if all
such
12
<PAGE> 167
transactions had occurred at the beginning of the periods presented. The
pro forma statement of income data are not necessarily indicative of the
operating results that would have been achieved had these events actually
then occurred and should not be construed as representative of future
operating results.
(9) The pro forma balance sheet data give effect to the purchase acquisition of
Sportime, the only acquisition completed subsequent to January 23, 1999, as
if it had occurred on January 23, 1999. This pro forma balance sheet data is
then adjusted, as indicated, to reflect the Common Stock and Note offerings
as if they had occurred on January 23, 1999. The pro forma balance sheet
data and the adjustments to that data are not necessarily indicative of the
financial position that would have been achieved had these events actually
then occurred and should not be construed as representative of future
financial position.
13
<PAGE> 168
RISK FACTORS
You should carefully consider the following risk factors and the other
information in this Prospectus before deciding to purchase the Notes.
WE ARE HIGHLY LEVERAGED
As of January 23, 1999, we had $195.6 million of debt outstanding on a pro
forma basis. If we had issued the Notes being offered in the Note offering
(together with the proposed concurrent offering of the Common Stock) and applied
the proceeds from these offerings on that date, our outstanding debt would have
been $136.4 million or approximately 38% of our total capitalization. In
addition, our leverage could increase over time. Our Senior Credit Facility and
the Indenture relating to the Notes permit us to incur additional debt under
certain circumstances and we expect to reborrow under our Senior Credit Facility
for general corporate purposes, including working capital and for acquisitions.
Our ability to meet our debt service obligations depends on our future
performance. Our future performance is influenced by general economic conditions
and by financial, business and other factors affecting our operations, many of
which are beyond our control. If we are unable to service our debt, we may have
to:
- delay our acquisition program,
- sell our equity securities,
- sell our assets, or
- restructure and refinance our debt.
We cannot give you any assurance that, if we are unable to service our
debt, we will be able to sell our equity securities, sell assets or restructure
and refinance our debt. Our substantial debt could have important consequences
to you. For example, it could:
- make it more difficult for us to obtain additional financing in the
future for our acquisitions and operations,
- require us to dedicate a substantial portion of our cash flows from
operations to the repayment of our debt and the interest associated with
our debt,
- limit our operating flexibility due to financial and other restrictive
covenants, including restrictions on incurring additional debt, creating
liens on our property and paying dividends,
- subject us to risks that interest rates and our interest expense will
increase,
- place us at a competitive disadvantage compared to our competitors that
have less debt, and
- make us more vulnerable in the event of a downturn in our business.
THE NOTES ARE SUBORDINATED TO OUR SENIOR DEBT AND OUR SECURED DEBT
The Notes will be subordinated to our current and future senior debt and
the guarantees of the Notes by our subsidiaries will be subordinated to their
guarantees of indebtedness under our Senior Credit Facility. Upon any
distribution to our creditors in a liquidation, dissolution, bankruptcy or
similar proceeding, the holders of senior debt will be entitled to be paid in
full before any payment may be made to the holders of the Notes. Similarly, upon
any distribution to the creditors of one of the subsidiary guarantors in such a
proceeding, the banks under our Senior Credit Facility will be entitled to be
paid in full before any payment may be made to the holders of the Notes (other
than payments solely in junior securities). In addition, all payments on the
Notes and the subsidiary guarantees will be blocked if a payment default on
senior debt occurs and may be blocked for up to
14
<PAGE> 169
179 days if certain non-payment defaults on senior debt occur. In any of these
events, we cannot guarantee that we will have sufficient assets to pay the
amounts due on the Notes. As a result, holders of Notes may receive less,
proportionately, than the holders of senior debt.
If we had issued the Notes and applied the proceeds on January 23, 1999,
our outstanding senior debt would have been $198.5 million on a pro forma basis.
If we had also issued the Common Stock being offered in the Common Stock
offering and applied the proceeds on that date, our outstanding senior debt
would have been $136.4 million. In addition, the Indenture relating to the Notes
and our Senior Credit Facility permit us to incur additional senior debt in the
future, including the entire amount that will be available for borrowing under
our Senior Credit Facility. While the Indenture limits the amount of debt we can
incur, it does not limit how much of that debt can be senior debt. The Indenture
also permits us to issue up to $50 million of additional senior subordinated
notes in the future which would further increase our borrowings.
In addition to the subordination provisions described above, the Notes will
not be secured by any of our assets. As a result, the Notes will be effectively
subordinated to our secured debt to the extent of the value of the assets
securing such debt. Upon any distribution to our creditors or the creditors of
one of our subsidiary guarantors in a liquidation, dissolution, bankruptcy or
other similar proceeding, the holders of our secured debt or the secured debt of
our subsidiaries may assert rights against the secured assets in order to
receive payment in full of such debt before such assets may be used to pay the
holders of the Notes. Borrowings under our Senior Credit Facility are secured by
(1) the pledge of most of the capital stock in all of our subsidiaries and (2)
liens on substantially all our other assets (other than our properties). The
Senior Credit Facility contemplates that if the proposed sale leaseback
transaction involving our properties does not occur by September 1999, we must
provide mortgages on these properties as additional security.
YOU SHOULD CONSIDER CERTAIN FRAUDULENT CONVEYANCE ISSUES RELATING TO THE
SUBSIDIARY GUARANTEES
Various applicable fraudulent conveyance laws have been enacted for the
protection of creditors. A court may use these laws to subordinate or avoid the
subsidiary guarantees of the Notes issued by any of our subsidiary guarantors.
It is also possible that in certain circumstances, a court could hold that the
direct obligations of a subsidiary guaranteeing the Notes could be superior to
its obligations under that guarantee.
A court could avoid or subordinate the guarantee of the Notes by any of our
subsidiaries in favor of that subsidiary's other debts or liabilities to the
extent that the court determined that either of the following were true at the
time the subsidiary issued the guarantee:
- that subsidiary issued the guarantee with the intent to hinder, delay or
defraud any of its present or future creditors or that such subsidiary
contemplated the insolvency with a design to favour one or more
creditors to the total or partial exclusion of the others, or
- that subsidiary did not receive fair consideration or reasonable
equivalent value for issuing the guarantee and, at the time it issued
the guarantee, that subsidiary:
- was insolvent or rendered insolvent by reason of the issuance of the
guarantee
- was engaged or about to engage in a business or transaction for which
the remaining assets of that subsidiary constituted unreasonably
small capital, or
- intended to incur, or believed that it would incur, debt beyond its
ability to pay such debts as they matured.
Among other things, a legal challenge of a subsidiary's guarantee of the
Notes on fraudulent conveyance grounds may focus on the benefits, if any,
realized by that subsidiary as a result of our issuance of the Notes. To the
extent a subsidiary's guarantee of the Notes is avoided as a result of a
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<PAGE> 170
fraudulent conveyance or held unenforceable for any other reason, the Note
holders would crease to have any claim in respect of that guarantee and would be
creditors solely of us.
WE HAVE A POTENTIAL TAX LIABILITY FROM SPIN-OFFS
We became a public company on June 9, 1998 when U.S. Office Products
distributed all of our shares and the shares of three other companies to its
shareholders and we sold additional shares of our stock in a public offering.
These distributions (known as the "spin-offs") were intended to be tax-free to
both U.S. Office Products and its shareholders. As part of the spin-offs, we and
the other three companies whose shares were distributed each agreed with U.S.
Office Products that if any of us took any action or failed to act in a way that
materially caused the distributions to be taxable, then U.S. Office Products
could require any of us to pay to it the full amount of the tax losses it
suffered as a result of the distributions. We and the three other spin-off
companies also agreed that if the distributions became taxable for any other
reason, we would each pay to U.S. Office Products a portion of its tax losses
based on the relative aggregate value of each company's common stock immediately
after the distributions. We estimate that our portion of any such tax losses
under this agreement would be approximately 14.4%. We also agreed with the other
three spin-off companies that if one or more of us materially caused the
distributions to be taxable and any of the other companies were required to pay
tax losses under the agreement to U.S. Office Products, then the company or
companies that materially caused the distributions to be taxable would reimburse
the other companies for such payments. As a result of these agreements, we could
be required to pay:
- all of the tax losses of U.S. Office Products if we cause the
distributions to be taxable,
- our portion of the tax losses of U.S. Office Products even if neither we
nor any of the other three companies cause the distributions to be
taxable, or
- all of the tax losses of U.S. Office Products even if we did not cause
the distributions to be taxable and one or more of the other companies
did (while such other companies would be required to reimburse us for
such payment, we cannot be sure that we will receive such
reimbursement).
WE ARE EXPOSED TO RISKS RELATED TO OTHER LIABILITIES OF U.S. OFFICE PRODUCTS
As part of the distributions, we and the other three spin-off companies
each agreed with U.S. Office Products to pay a portion of the securities law and
general liabilities of U.S. Office Products arising prior to the distributions
and, if any of the spin-off companies fails to pay its portion, to pay a portion
of the unpaid amount. These shared liabilities do not include any liability that
relates specifically to a particular spin-off company or to the continuing
businesses of U.S. Office Products after the distributions. The portion of the
shared liabilities payable by each spin-off company is determined by the
relative aggregate market values of the common stock of the spin-off companies
immediately after the distribution. We estimate that our portion of any such
liabilities under this agreement would be approximately 14.4%, but the maximum
aggregate amount we can be required to pay for all shared liabilities is limited
by the agreement to $1.75 million (including as a result of defaults by the
other spin-off companies). U.S. Office Products has been named as a defendant in
various class action lawsuits relating to the distributions that allege, among
other things, violations of the federal securities laws. As a result of these
agreements, we may be required to pay up to $1.75 million to U.S. Office
Products for shared liabilities even though they are unrelated to our business
and operations, we have no control over such liabilities and one or more of the
other spin-off companies may be primarily responsible for such liabilities.
WE HAVE A LIMITED INDEPENDENT OPERATING HISTORY
Prior to the spin-off in June 1998, we operated as a wholly owned
subsidiary of U.S. Office Products and many of our general, administrative and
financial functions (including legal, accounting, purchasing, management
information services and borrowings) were handled by U.S. Office
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<PAGE> 171
Products. Since the spin-off, we have operated independently of U.S. Office
Products and have been independently responsible for managing and financing all
aspects of our business and operations. Our expenses are likely to be higher
than when we were a subsidiary of U.S. Office Products and we may experience
difficulties with respect to general, administrative and financial functions
that we did not experience as part of U.S. Office Products. Because most of the
financial information included in this Prospectus relates to periods during
which we were a subsidiary of U.S. Office Products, it does not necessarily
reflect what our results of operations and financial condition would have been
if we were independent during those periods and it may not be a good indication
of what our future results of operations and financial condition will be.
WE HAVE EXPERIENCED RAPID GROWTH AND DEPEND UPON ACQUISITIONS FOR FUTURE GROWTH
Our business has grown significantly through acquisitions in recent years.
Since 1991, we have acquired 17 regional marketers of general educational
supplies and six specialty direct school supply companies. All of our specialty
direct acquisitions and 12 of our regional marketer acquisitions have occurred
since June 1996. Future growth in our revenues and earnings depends
substantially on our ability to continue to acquire and successfully integrate
and operate school supply businesses. We cannot guarantee that we will be able
to identify and acquire businesses at all or on reasonable terms. In addition,
we cannot be sure that we will be able to operate the businesses that we acquire
profitably or that our management and financial controls, personnel, computer
systems and other corporate support systems will be adequate to manage the
increased size and scope of our operations as a result of acquisitions. Managing
and integrating acquired businesses may result in substantial costs, delays or
other operating or financial problems that could materially and adversely affect
our financial condition and results of operations. These include:
- the diversion of management's attention and other resources away from
our existing businesses,
- significant charges and expenses relating to employee severance,
restructuring and transaction costs and other unexpected events or
liabilities,
- the inability to retain, hire or train qualified personnel for the
acquired businesses, and
- the amortization of goodwill and other acquired intangible assets.
We intend to pay for acquisitions in whole or in part using our shares, and
in some cases this may dilute our earnings per share. Our ability and
willingness to use our shares will depend upon their market price and the
willingness of sellers to accept our shares. In addition, our ability to issue
shares may be limited by Section 355(e) of the Internal Revenue Code of 1986.
Under that Section, U.S. Office Products will incur tax liability for the
distribution of our shares if 50% or more, by vote or value, of the capital
stock of either U.S. Office Products or School Specialty is acquired by one or
more persons acting pursuant to a plan or series of related transactions that
includes the spin-off. There is a presumption that any acquisition occurring
within two years after the spin-off is pursuant to a plan that includes the
spin-off. However, the presumption may be overcome by establishing that the
spin-off and such acquisition are not part of a plan or series of related
transactions. As noted above, we will be liable for all the tax liabilities of
U.S. Office Products if our actions cause the spin-off to be taxable and will be
liable for all or a portion of such liabilities even if our actions did not
cause the spin-off to be taxable.
WE ARE UNABLE TO USE THE POOLING-OF-INTERESTS METHOD OF ACCOUNTING; WE HAVE A
MATERIAL AMOUNT OF GOODWILL
Under generally accepted accounting principles, we must be independent for
at least two years before we can use the pooling-of-interests method of
accounting for share acquisitions, which would avoid the creation and subsequent
amortization of goodwill. Because we were a wholly
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<PAGE> 172
owned subsidiary of U.S. Office Products until the completion of the spin-off on
June 9, 1998, we will not be eligible to use pooling-of-interest accounting
until June 9, 2000. We must use purchase accounting for any acquisitions prior
to that date, which may result in the creation of goodwill.
Approximately $197.3 million, or 48.9%, of our pro forma total assets as of
January 23, 1999 represents intangible assets, the significant majority of which
is goodwill. Goodwill is the amount by which the costs of an acquisition
accounted for using the purchase method exceeds the fair value of the net assets
we acquire. We are required to record goodwill as an intangible asset on our
balance sheet and to amortize it over a period of years. We generally amortize
goodwill for each acquisition on a straight line method over a period of 40
years, which means that in each year during the 40-year period 1/40th of the
goodwill is taken off our balance sheet and recorded in our income statement as
a non-cash expense (which reduces our net income). Even though it reduces our
net income for accounting purposes, amortization of goodwill may not be
deductible for tax purposes. In addition, we are required to periodically
evaluate whether we can recover our remaining goodwill from the undiscounted
future cash flows that we expect to receive from the operations of the acquired
companies. If these undiscounted future cash flows are less than the carrying
value of the associated goodwill, the goodwill is impaired and we must reduce
the carrying value of the goodwill to equal the undiscounted future cash flows
and take the amount of the reduction as a charge against our income. Reductions
in our net income caused by the amortization or write down of goodwill could
materially adversely affect on results of operations and financial condition and
the market price of our Common Stock.
OUR BUSINESS DEPENDS ON GROWTH OF STUDENT POPULATION AND SCHOOL EXPENDITURES
Our growth strategy and profitability also depend on growth in the student
population and expenditures per student in public and private elementary and
secondary schools. The level of student enrollment is largely a function of
demographics, while expenditures per student are also affected by government
budgets and the prevailing political and social attitudes towards education. Any
significant and sustained decline in student enrollment and/or expenditures per
student could have a material adverse effect on our business, financial
condition and results of operations.
OUR BUSINESS IS HIGHLY SEASONAL
Our educational supply businesses are highly seasonal. Because most of our
customers want their school supplies delivered before or shortly after the
commencement of the school year in September, we make most of our sales from May
to October. As a result, we usually earn more than 100% of our annual net income
in the first six months of our fiscal year and operate at a loss in our third
fiscal quarter. This seasonality causes our operating results to vary
considerably from quarter to quarter and these fluctuations could adversely
affect the market price of our Common Stock.
WE DEPEND ON KEY SUPPLIERS AND SERVICE PROVIDERS
We depend upon a limited number of suppliers for some of our products,
especially furniture. We also depend upon a limited number of service providers,
including United Parcel Service, for the delivery of our products. If these
suppliers or service providers are unable to provide the products or services
that we require or materially increase their costs (especially during our peak
season of June through September), this could impair our ability to deliver our
products on a timely and profitable basis and could have a material adverse
effect on our business, financial condition and results of operations. We were,
for example, adversely affected by the United Parcel Service strike during
August 1997 due to the perception that we were unable to ship products. As we
seek to reduce the number of our suppliers and to minimize duplicative lines as
part of our business strategy, we are likely to increase our dependence on
remaining vendors.
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WE RELY ON KEY PERSONNEL
Our business depends to a large extent on the abilities and continued
efforts of current executive officers and senior management, including Daniel P.
Spalding, our Chief Executive Officer. We are also likely to depend heavily on
the executive officers and senior management of businesses that we acquire in
the future. If any of these people become unable or unwilling to continue in his
or her present role, or if we are unable to attract and retain other qualified
employees, our business could be adversely affected. Although we have employment
contracts with some executive officers, we do not have employment agreements
with most of our executive officers and senior management. We do not have and do
not intend to obtain key man life insurance covering any of our executive
officers or other members of senior management.
OUR BUSINESS IS HIGHLY COMPETITIVE
The market for school supplies is highly competitive and fragmented. We
estimate that over 3,400 companies market educational materials to schools for
pre-kindergarten through twelfth grade as a primary focus of their business. We
also face increasing competition from alternate channel marketers, including
superstores and office product contract stationers, that have not traditionally
focused on marketing school supplies. These competitors are likely to continue
to expand their product lines and interest in school supplies. Some of these
competitors have greater financial resources and buying power than we do. We
believe that the educational supplies market will consolidate over the next
several years, which is likely to increase competition in our markets and in our
search for attractive acquisition candidates.
WE DEPEND ON OUR SYSTEMS; OUR YEAR 2000 ISSUES
We believe that one of our competitive advantages is our information
systems, including our proprietary PC-based customer Order Management System. We
have integrated the operations of almost all of our divisions and subsidiaries
and their information systems are linked to host systems located at our
headquarters in Appleton, Wisconsin and at two other locations. If any of these
links are disrupted or become unavailable, this could materially and adversely
affect our business, results of operations and financial condition.
Our Sax Art and Crafts, Gresswell, Hammond & Stephens and Sportime
businesses currently use predecessor information systems. With the exception of
Gresswell, we intend to convert the information systems of these acquired
businesses to one of our host systems as soon as practicable. However, none of
these businesses has a backup computer system or backup extra communication
lines. Even though we have taken precautions to protect ourselves from events
that could interrupt the operations of these businesses and intend to do so for
other businesses we acquire in the future, we cannot be sure that a fire, flood
or other natural disaster affecting their systems would not disable the system
or prevent the system from communicating with our other businesses. The
occurrence of any of these events could have a material adverse effect on our
results of operations and financial condition.
The Year 2000 issue exists because many computer systems and applications,
including those embedded in equipment and facilities, use two digit rather than
four digit date fields to designate an applicable year. As a result, the systems
and applications may not properly recognize the Year 2000 or process data which
includes it, potentially causing data miscalculations or inaccuracies or
operational malfunctions or failures. Because any disruption to our computerized
order processing and inventory systems could materially and adversely affect our
operations, we have established a centrally managed, company wide plan to
identify, evaluate and address Year 2000 issues. Although we expect that most of
our mission critical systems, network elements and products will be verified for
Year 2000 compliance by May 1999, our ability to meet this target is dependent
on a variety of factors. In addition, if our suppliers, service providers and/or
customers fail to resolve their Year 2000 issues in an effective and timely
manner, our business could be significantly and adversely
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affected. We believe that many of our school customers have not yet addressed or
resolved their Year 2000 issues.
WE MAY NOT BE ABLE TO FUND A CHANGE OF CONTROL OFFER
Upon a change of control, we must offer to purchase all of the outstanding
Notes at 101% of their principal amount plus accrued and unpaid interest to the
date of purchase. We cannot guarantee that sufficient funds will be available at
the time of any change of control to make any required purchases of Notes
tendered or that restrictions in our Senior Credit Facility or other debt
instruments entered into in the future will allow us to make such required
purchases. In addition, we could enter into certain transactions, including
certain recapitalizations, that would increase the amount of our debt but would
not constitute a change of control.
THERE IS NO TRADING MARKET FOR THE NOTES
The Notes will be new securities for which there is currently no trading
market. We do not currently intend to apply for listing of the Notes on any
securities exchange or stock market. Although the Underwriters have informed us
that they currently intend to make a market in the Notes, they are not obligated
to do so. In addition, they may discontinue any such market making at any time
without notice. The liquidity of any market for the Notes will depend on the
number of holders of Notes, the interest of securities dealers in making a
market in those securities and other factors. Accordingly, we cannot guarantee
that a market will develop for the Notes or that, even if one does, that the
market will continue and be liquid. Historically, non-investment grade debt has
been subject to disruptions that have caused substantial volatility in the price
of securities similar to the Notes. We cannot assure you that the market, if
any, for the Notes will be free from similar disruptions.
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The words "anticipate," "believe," "estimate," "intend," "may,"
"will" and "expect" are intended to identify forward-looking statements. There
are important factors that could cause our actual results, performance or
achievement to differ materially from the results suggested by the
forward-looking statements. Factors discussed under the captions "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" are particularly susceptible to risks
and uncertainties. Such forward-looking statements should, therefore, be
considered in light of various important factors, including those set forth in
this Prospectus and other factors set forth from time to time in our reports and
registration statements filed with the Securities and Exchange Commission (the
"SEC"). You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. We disclaim any intent or
obligation to update forward-looking statements.
USE OF PROCEEDS
We expect to receive approximately $97.1 million of net proceeds from this
offering (based on an initial public offering price of 100%, less estimated
offering expenses and underwriters' discounts). In addition, we expect to
receive approximately $62.2 million ($71.5 million if the underwriters'
over-allotment option is exercised in full) of net proceeds from the Common
Stock offering (based on an assumed initial public offering price for the Common
Stock of $22.00 per share, which was the last reported sale price for the Common
Stock on the Nasdaq National Market on February 24, 1999, less estimated
offering expenses and underwriters' discounts). The consummation of the offering
of the Notes made hereby is not conditioned on the completion of the Common
Stock offering.
We intend to use the combined net proceeds from this offering and the
Common Stock offering to repay a portion of the approximately $195 million
outstanding under our five year secured $350 million revolving Senior Credit
Facility. The Senior Credit Facility has a $100 million term loan payable
quarterly over five years commencing in January 1999 and revolving loans which
mature on September 30, 2003. As of the date of this Prospectus, $97.5 million
was outstanding under the term loan portion of the Senior Credit Facility. The
net proceeds from the combined offerings will be used first to repay amounts
outstanding under the term loan. Any remaining net proceeds will then be used to
repay amounts outstanding under the revolving loans. The Senior Credit Facility
has a floating rate of interest for borrowings thereunder. As of January 23,
1999, the effective interest rate on borrowings under our Senior Credit Facility
was approximately 8%. Since the beginning of fiscal 1999, we borrowed under the
Senior Credit Facility to fund three acquisitions and for seasonal working
capital and capital expenditures. If the Common Stock offering is not
consummated as expected, we will repay substantially all amounts outstanding
under the term loan, but will not be able to reduce the revolving loans.
In connection with the Note and Common Stock offerings, we intend to amend
our Senior Credit Facility to reduce the borrowing limit thereunder to $250
million and to change certain financial and other covenants. See "Description of
Senior Credit Facility." We intend to reborrow amounts under our Senior Credit
Facility for general corporate purposes including working capital, and for
acquisitions.
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CAPITALIZATION
The following table sets forth, as of January 23, 1999, our capitalization
(1) on a historical basis, (2) on a pro forma basis to reflect the acquisitions
we have made since January 23, 1999, (3) on a pro forma basis described in
clause (2) above as adjusted to give effect to the sale of the Notes and the
application of the assumed net proceeds therefrom as described herein and (4) on
a pro forma basis described in clause (2) above as adjusted to give effect to
the sale of the Notes and the Common Stock and the application of the assumed
net proceeds therefrom as described herein.
<TABLE>
<CAPTION>
JANUARY 23, 1999
-----------------------------------------------------
PRO FORMA
AS ADJUSTED
PRO FORMA AS FOR NOTE AND
ADJUSTED FOR COMMON STOCK
HISTORICAL PRO FORMA NOTE OFFERING OFFERINGS
---------- --------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Short-term debt.............................. $ 10,314 $ 10,314 $ -- $ --
Long-term debt............................... 162,199 185,268 98,532 36,362
Notes........................................ -- -- 100,000 100,000
-------- -------- -------- --------
Total debt................................. 172,513 195,582 198,532 136,362
Stockholders' equity:
Preferred stock, $0.001 par value
(1,000,000 shares authorized; no shares
outstanding)............................ -- -- -- --
Common stock, $0.001 par value (150,000,000
shares authorized; 14,578,925 shares
issued and outstanding, historical and
pro forma; 17,578,925 shares issued and
outstanding, pro forma as adjusted for
the Common Stock offering)(1)........... 15 15 15 18
Additional paid-in capital................. 146,768 146,768 146,768 208,935
Accumulated other comprehensive income..... 6 6 6 6
Retained earnings.......................... 12,278 12,278 12,278 12,278
-------- -------- -------- --------
Total stockholders' equity.............. 159,067 159,067 159,067 221,237
-------- -------- -------- --------
Total capitalization.................... $331,580 $354,649 $357,599 $357,599
======== ======== ======== ========
</TABLE>
- ---------------
(1) Excludes 2,319,313 of Common Stock issuable upon exercise of outstanding
options granted under our 1998 Stock Incentive Plan.
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SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The selected historical financial data set forth below for the fiscal year
ended December 31, 1995, the four months ended April 30, 1996 and the fiscal
years ended April 26, 1997 and April 25, 1998 have been derived from our audited
consolidated financial statements included elsewhere in this Prospectus. The
selected historical financial data for the fiscal year ended December 31, 1994
have been derived from our audited consolidated financial statements which are
not included elsewhere in this Prospectus. The selected historical financial
data for the fiscal year ended December 31, 1993 have been derived from
unaudited consolidated financial statements which are not included elsewhere in
this Prospectus. The selected historical financial data for the nine months
ended January 24, 1998 and January 23, 1999 have been derived from our unaudited
consolidated financial statements that appear elsewhere in this Prospectus.
These unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements and, in the opinion of
management, contain all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the results of operations for the
periods presented. Because of the seasonality of our business, our results of
operations for the first nine months of our fiscal year are not representative
of our results of operations for the entire fiscal year.
The selected pro forma data, which have been derived from our unaudited pro
forma financial statements included elsewhere in this Prospectus, give effect,
as applicable, to all acquisitions completed through February 9, 1999, the
spin-off and the refinancing of all amounts payable to U.S. Office Products in
connection with the spin-off, the June 1998 initial public offering and the
Common Stock and Note offerings, as if all such transactions had occurred at the
beginning of the periods presented. The unaudited pro forma combined financial
data discussed herein do not purport to represent the results that we would have
obtained had the transactions which are the subject of the pro forma adjustments
occurred at the beginning of the applicable periods, as assumed, or our future
results. See additional disclosure regarding pro forma results in the Financial
Statements section of this Prospectus.
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," our consolidated financial statements and related notes and our
combined pro forma financial statements and related notes, included elsewhere in
this Prospectus.
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SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<TABLE>
<CAPTION>
HISTORICAL(1)
---------------------------------------------------------------------------------------------
FOUR FISCAL YEAR ENDED NINE MONTHS ENDED
FISCAL YEAR ENDED MONTHS --------------------- -------------------------
DECEMBER 31, ENDED
----------------------------- APRIL 30, APRIL 26, APRIL 25, JANUARY 24, JANUARY 23,
1993 1994(2) 1995(2) 1996(2) 1997(2) 1998(2) 1998(2) 1999
------- -------- -------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.......................... $76,926 $119,510 $150,482 $ 28,616 $191,746 $310,455 $247,880 $424,332
Cost of revenues.................. 52,434 81,774 98,233 18,591 126,862 202,870 164,105 281,436
------- -------- -------- -------- -------- -------- -------- --------
Gross profit...................... $24,492 $ 37,736 $ 52,249 $ 10,025 $ 64,884 $107,585 $ 83,775 $142,896
Selling, general and
administrative expenses.......... 22,140 33,257 47,393 11,917 53,177 87,846 63,395 108,005
Non-recurring acquisition costs... -- -- -- 1,122 1,792 -- -- --
Restructuring costs............... -- -- 2,532 -- 194 3,491 -- 5,274
------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss)........... $ 2,352 $ 4,479 $ 2,324 $ (3,014) $ 9,721 $ 16,248 $ 20,380 $ 29,617
Interest expense.................. 1,845 3,007 5,536 1,461 4,197 5,505 4,100 8,942
Interest income................... -- -- -- (6) -- (132) (109) (114)
Other (income) expense............ 228 (86) (18) 67 (196) 156 441 --
------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before provision for
(benefit from) income taxes...... $ 279 $ 1,558 $ (3,194) $ (4,536) $ 5,720 $ 10,719 $ 15,948 $ 20,789
Provision for (benefit from)
income taxes(3).................. 199 218 173 139 (2,412) 5,480 7,113 10,094
------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)................. $ 80 $ 1,340 $ (3,367) $ (4,675) $ 8,132 $ 5,239 $ 8,835 $ 10,695
======= ======== ======== ======== ======== ======== ======== ========
Net income (loss) per share:
Basic............................ $ 0.02 $ 0.26 $ (0.51) $ (0.54) $ 0.81 $ 0.40 $ 0.69 $ 0.73
Diluted.......................... 0.02 0.26 (0.50) (0.53) 0.80 0.39 0.68 0.73
Weighted average shares
outstanding:
Basic............................ 4,918 5,062 6,562 8,611 10,003 13,284 12,751 14,625
Diluted.......................... 4,918 5,078 6,669 8,789 10,196 13,547 13,020 14,665
STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in)
operating activities............. $ 974 $ (268) $ 4,828 $ (1,178) $ 918 $ 3,724 $ 15,392 $ 29,100
Net cash used in investing
activities....................... (9,606) (2,856) (6,092) (828) (16,742) (99,742) (96,537) (98,837)
Net cash provided by financing
activities....................... 8,464 3,202 1,156 2,011 15,778 96,018 81,145 69,737
------- -------- -------- -------- -------- -------- -------- --------
Net increase (decrease) in cash
and cash equivalents............. $ (168) $ 78 $ (108) $ 5 $ (46) $ -- $ -- $ --
======= ======== ======== ======== ======== ======== ======== ========
OTHER DATA:
EBITDA(5)......................... $ 3,645 $ 6,210 $ 5,085 $ (2,407) $ 12,023 $ 20,653 $ 23,321 $ 36,224
Adjusted EBITDA(5)................ 3,645 6,210 7,617 (1,285) 14,009 24,144 23,321 41,498
Depreciation and amortization
expense.......................... 1,521 1,645 2,743 674 2,106 4,561 3,382 6,607
Capital expenditures.............. 805 630 881 120 7,216 4,423 4,095 3,978
SELECTED RATIOS:
Ratio of total debt to Adjusted
EBITDA........................... 4.5x 5.2x 5.2x (31.8)x 4.3x 3.5x 3.4x 4.2x
Ratio of Adjusted EBITDA to
interest expense................. 2.0x 2.1x 1.4x (0.9)x 3.3x 4.4x 5.7x 4.6x
Ratio of earnings to fixed
charges(6)....................... 1.1x 1.4x 0.5x -- 2.2x 2.6x 4.2x 3.0x
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- APRIL 30, APRIL 26, APRIL 25, JANUARY 23,
1993 1994 1995 1996 1997 1998 1999
------- ------- ------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)......................... $ 1,140 $ 3,512 $(1,052) $(3,663) $ 14,491 $ 47,791 $ 90,826
Total assets...................................... 23,190 44,267 54,040 54,573 87,685 223,729 378,513
Long-term debt.................................... 7,175 11,675 15,294 15,031 33,792 63,014 162,199
Total debt........................................ 16,576 32,276 39,783 40,918 60,746 83,302 172,513
Stockholders' (deficit) equity.................... 545 1,827 (620) (4,267) 16,329 106,466 159,067
</TABLE>
24
<PAGE> 179
SELECTED PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED FOR
PRO FORMA(7) NOTE OFFERING(7)
------------------------------------- -------------------------------------
FISCAL FISCAL
YEAR NINE MONTHS ENDED YEAR NINE MONTHS ENDED
ENDED ------------------------- ENDED -------------------------
APRIL 25, JANUARY 24, JANUARY 23, APRIL 25, JANUARY 24, JANUARY 23,
1998(2) 1998(2) 1999 1998(2) 1998(2) 1999
--------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.............................. $598,025 $496,941 $506,180 $598,025 $496,941 $506,180
Cost of revenues...................... 390,327 327,174 330,786 390,327 327,174 330,786
-------- -------- -------- -------- -------- --------
Gross profit.......................... $207,698 $169,767 $175,394 $207,698 $169,767 $175,394
Selling, general and administrative
expenses............................. 175,507 135,598 133,046 175,507 135,598 133,046
Restructuring costs................... 4,689 1,198 5,401 4,689 1,198 5,401
-------- -------- -------- -------- -------- --------
Operating income...................... $ 27,502 $ 32,971 $ 36,947 $ 27,502 $ 32,971 $ 36,947
Interest expense...................... 17,000 13,500 13,500 18,486 14,615 14,615
Other expense......................... 193 536 420 193 536 420
-------- -------- -------- -------- -------- --------
Income before provision for income
taxes................................ $ 10,309 $ 18,935 $ 23,027 $ 8,823 $ 17,820 $ 21,912
Provision for income taxes............ 5,979 10,982 11,283 5,385 10,536 10,837
-------- -------- -------- -------- -------- --------
Net income............................ $ 4,330 $ 7,953 $ 11,744 $ 3,438 $ 7,284 $ 11,075
======== ======== ======== ======== ======== ========
Net income per share(4):
Basic................................ $ 0.28 $ 0.53 $ 0.78 $ 0.22 $ 0.48 $ 0.74
Diluted.............................. 0.27 0.52 0.78 0.22 0.47 0.74
Weighted average shares
outstanding(4):
Basic................................ 15,659 15,126 15,025 15,659 15,126 15,025
Diluted.............................. 15,922 15,395 15,065 15,922 15,395 15,065
OTHER DATA:
EBITDA(5)............................. $ 38,386 $ 40,943 $ 44,889 $ 38,386 $ 40,943 $ 44,889
Adjusted EBITDA(5).................... 43,075 42,141 50,290 43,075 42,141 50,290
Depreciation and amortization
expense.............................. 11,077 8,508 8,362 11,077 8,508 8,362
SELECTED RATIOS:
Ratio of total debt to Adjusted
EBITDA............................... 4.5x 4.6x 3.9x 4.6x 4.7x 3.9x
Ratio of Adjusted EBITDA to interest
expense.............................. 2.5x 3.1x 3.7x 2.3x 2.9x 3.4x
Ratio of earnings to fixed
charges(6)........................... 1.5x 2.2x 2.5x 1.4x 2.1x 2.3x
<CAPTION>
PRO FORMA AS ADJUSTED FOR
NOTE AND COMMON STOCK
OFFERINGS(7)
-------------------------------------
FISCAL
YEAR NINE MONTHS ENDED
ENDED -------------------------
APRIL 25, JANUARY 24, JANUARY 23,
1998(2) 1998(2) 1999
--------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.............................. $598,025 $496,941 $506,180
Cost of revenues...................... 390,327 327,174 330,786
-------- -------- --------
Gross profit.......................... $207,698 $169,767 $175,394
Selling, general and administrative
expenses............................. 175,507 135,598 133,046
Restructuring costs................... 4,689 1,198 5,401
-------- -------- --------
Operating income...................... $ 27,502 $ 32,971 $ 36,947
Interest expense...................... 13,512 10,885 10,885
Other expense......................... 193 536 420
-------- -------- --------
Income before provision for income
taxes................................ $ 13,797 $ 21,550 $ 25,642
Provision for income taxes............ 7,376 12,028 12,329
-------- -------- --------
Net income............................ $ 6,421 $ 9,522 $ 13,313
======== ======== ========
Net income per share(4):
Basic................................ $ 0.34 $ 0.53 $ 0.74
Diluted.............................. 0.34 0.52 0.74
Weighted average shares
outstanding(4):
Basic................................ 18,659 18,126 18,025
Diluted.............................. 18,922 18,395 18,065
OTHER DATA:
EBITDA(5)............................. $ 38,386 $ 40,943 $ 44,889
Adjusted EBITDA(5).................... 43,075 42,141 50,290
Depreciation and amortization
expense.............................. 11,077 8,508 8,362
SELECTED RATIOS:
Ratio of total debt to Adjusted
EBITDA............................... 3.2x 3.2x 2.7x
Ratio of Adjusted EBITDA to interest
expense.............................. 3.2x 3.9x 4.6x
Ratio of earnings to fixed
charges(6)........................... 1.9x 2.7x 3.0x
</TABLE>
<TABLE>
<CAPTION>
JANUARY 23, 1999(8)
-------------------------------------------------------------
PRO FORMA
PRO FORMA AS ADJUSTED FOR
AS ADJUSTED FOR NOTE AND
PRO FORMA NOTE OFFERING COMMON STOCK OFFERINGS
------------ ---------------- -------------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................... $ 99,339 $109,653 $109,653
Total assets.................................. 403,920 406,870 406,870
Long-term debt................................ 185,268 198,532 136,362
Total debt.................................... 195,582 198,532 136,362
Stockholders' equity.......................... 159,067 159,067 221,237
</TABLE>
25
<PAGE> 180
- ---------------
(1) The historical financial information of School Specialty, Inc., a Wisconsin
corporation, and The Re-Print Corp., both of which were acquired by U.S.
Office Products in business combinations accounted for under the
pooling-of-interests method in May 1996 and July 1996, respectively, have
been combined on a historical cost basis in accordance with generally
accepted accounting principles ("GAAP") to present this financial data as if
the two companies had always been members of the same operating group. All
business acquisitions since July 1996 have been accounted for under the
purchase method. The financial information of the businesses acquired in
business combinations accounted for under the purchase method is included
from the dates of their respective acquisitions.
(2) Certain reclassifications have been made to the historical and pro forma
financial data for the fiscal years ended December 31, 1993, 1994 and 1995,
the four months ended April 30, 1996, the fiscal years ended April 26, 1997
and April 25, 1998 and the nine months ended January 24, 1998 to conform
with the fiscal 1999 presentation. These reclassifications had no effect on
net income or net income per share.
(3) Results for the fiscal year ended April 26, 1997 include a benefit from
income taxes of $2.4 million primarily arising from the reversal of a $5.3
million valuation allowance in the quarter ended April 26, 1997. The
valuation allowance had been established in 1995 to offset the tax benefit
from net operating loss carryforwards included in our 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 our being
acquired by U.S. Office Products, because it was deemed "more likely than
not," based on improved results, that such tax benefit would be realized.
(4) For calculation of the pro forma and pro forma as adjusted weighted average
shares outstanding, see Note (k) and Note (l), respectively, of Notes to Pro
Forma Combined Financial Statements included herein.
(5) EBITDA represents operating earnings before interest, income taxes,
depreciation and amortization. Adjusted EBITDA is EBITDA plus non-recurring
acquisition costs and restructuring costs. EBITDA and Adjusted EBITDA are
provided because they are measures commonly used by analysts and investors
to determine a company's ability to incur and service its debt. EBITDA and
Adjusted EBITDA are not measurements of performance under GAAP and should
not be considered as alternatives to net income or income from operations or
as measures of operating performance or cash flow data prepared in
accordance with GAAP or as measures of liquidity. EBITDA and Adjusted
EBITDA, as calculated by School Specialty, are not necessarily comparable
with similarly titled measures of other companies.
(6) The ratio of earnings to fixed charges is computed by dividing fixed charges
into income (loss) before provision for (benefits from) income taxes and
fixed charges. Fixed charges represent interest expense, whether expensed or
capitalized, amortization of debt expenses and the estimated interest
component of rent expense. On a historical basis, as a result of the loss
incurred during the four months ended April 30, 1996, we were unable to
fully cover fixed charges by $4,536.
(7) The pro forma financial data give effect, as applicable, to all acquisitions
completed through February 9, 1999, the spin-off and the refinancing of all
amounts payable to U.S. Office Products in connection with the spin-off, the
June 1998 initial public offering and concurrent offering to certain
officers and directors and the Common Stock and Note offerings, as if all
such transactions had occurred at the beginning of the periods presented.
The pro forma statement of income data are not necessarily indicative of the
operating results that would have been achieved had these events actually
then occurred and should not be construed as representative of future
operating results.
26
<PAGE> 181
(8) The pro forma balance sheet data give effect to the purchase acquisition of
Sportime, the only acquisition completed subsequent to January 23, 1999, as
if it had occurred on January 23, 1999. This pro forma balance sheet data is
then adjusted, as indicated, to reflect the Common Stock and Note offerings
as if they had occurred on January 23, 1999. The pro forma balance sheet
data and the adjustments to that data are not necessarily indicative of the
financial position that would have been achieved had these events actually
then occurred and should not be construed as representative of future
financial position.
27
<PAGE> 182
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read this Management's Discussion and Analysis of Financial
Condition and Results of Operations together with our consolidated financial
statements and related notes and our pro forma combined financial statements and
related notes, included in this Prospectus.
OVERVIEW
We are the largest marketer of non-textbook educational supplies and
furniture to schools for pre-kindergarten through twelfth grade. We offer more
than 60,000 items through an innovative two-pronged marketing approach that
targets both school administrators and individual teachers. Our broad product
range enables us to provide our customers with one source for virtually all of
their non-textbook school supplies and furniture needs.
We have grown significantly in recent years both through acquisitions and
internal growth. In order to expand our geographic presence and product range,
we have acquired 18 companies since May 1996. In August 1998, we purchased
Beckley-Cardy, our largest traditional and specialty school supply competitor.
Revenues have increased from $119.5 million in the fiscal year ended
December 31, 1994 to $310.5 million for the fiscal year ended April 25, 1998 and
$486.9 million for the twelve months ended January 23, 1999. This increase
resulted primarily from 19 acquisitions, 15 of which occurred during fiscal 1997
and fiscal 1998, as well as internally generated growth. After giving pro forma
effect to the acquisitions that we made during the period, our revenues for the
twelve months ended January 23, 1999 were $607.3 million and our Adjusted EBITDA
was $51.2 million. These results represent compound annual increases of 48.9% in
revenues and 67.7% in Adjusted EBITDA compared to our historical results for the
year ended December 31, 1994. While acquisitions have the effect of increasing
overall revenues, there may be short-term reductions in the revenues of the
acquired businesses due to rationalization of product line and sales force
integrations and reductions.
Our gross profit margin has improved in recent years primarily due to
acquisitions. We have acquired many specialty direct businesses, which tend to
have higher gross margins than our traditional supply businesses. In addition,
our acquisitions of both specialty direct and traditional supply businesses have
increased our buying power and we have used this to reduce the cost of the
products we purchase. Acquisitions of traditional supply businesses may have a
negative impact on our gross margin, although over time we should benefit from
increased purchasing power leverage. We believe that we can continue to improve
our gross margins by acquiring specialty businesses and by leveraging increased
purchasing power.
Our operating margins have also improved significantly over the last
several years. This improvement reflects our recent acquisitions of specialty
companies which have higher operating margins than our general supply
businesses. In addition, through the integration of acquired businesses (both
specialty and general supply), we have been able to further improve our
operating margins by eliminating redundant expenses, leveraging overhead costs
and improving purchasing power. While we have already achieved significant
operating margin improvements from the acquisitions we have made to date, we
believe there are still opportunities to eliminate redundant expenses. In
addition, because our business is seasonal, the timing of our acquisitions may
affect the comparability of our operating margins in the short term. In
particular, we have historically made many of our acquisitions during our peak
selling period (the first two quarters of our fiscal year) when operating
margins are at their highest. Because they have been accounted for using the
purchase method of accounting, these acquisitions have caused our operating
margins for the year in which the acquisitions occurred to be higher than they
would have been if the results of the acquired businesses had been included for
the full year.
28
<PAGE> 183
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. An effective income tax rate of 49% is reflected in the pro forma
financial statements for the most recent interim period. Our effective tax rate
is higher than the federal statutory tax rate of 35% due primarily to
non-deductible goodwill amortization and state taxes. Our effective tax rate for
future periods may fluctuate based on the size and structure of acquisitions and
the tax deductible nature of acquired goodwill. See "-- Consolidated Historical
Results of Operations."
Our business and working capital needs are highly seasonal with peak sales
levels occurring from May through October. During this period, we receive, ship
and bill the majority of our orders so that schools and teachers receive their
merchandise by the start of each school year. Our 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. As a result, we
usually earn more than 100% of our annual net income in the first six months of
our fiscal year and operate at a loss in our third fiscal quarter.
Until June 9, 2000, we will be limited to using the purchase method of
accounting for acquisitions. Under the purchase method of accounting, the costs
of an acquisition over the fair value of the net assets acquired is goodwill,
which is recorded as an intangible asset on the balance sheet and amortized over
a period of years. We generally amortize goodwill on a straight-line basis over
a period of 40 years. In addition to the purchase price, the costs of an
acquisition generally include expenses relating to the acquisition of the
acquired company, including investment banking, legal and accounting fees and
severance and facility closing costs.
As part of the process of integrating acquisitions, we also incur costs
relating to the restructuring of various aspects of our operations, such as the
consolidation of warehouse facilities, customer service centers and sales
operations. 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. If
these costs relate solely to the operations of the acquired company and are
anticipated at the time of the acquisition, they are capitalized as part of the
acquisition costs. If these costs relate to our existing operations, even if
they result from an acquisition, such costs are recorded as restructuring
charges in the year they are incurred and have the effect of reducing net income
for that year. We expect to incur restructuring costs from time to time in the
future as we continue to acquire and integrate companies. Although we believe
that the restructuring charges we have taken to date are adequate, we cannot
predict the magnitude or timing of restructuring charges that we may take in the
future.
School Specialty was incorporated as a wholly owned subsidiary by U.S.
Office Products in Delaware in February 1998 to hold its Educational Supplies
and Products Division. School Specialty, Inc., a Wisconsin corporation ("Old
School") formed in October 1959, was acquired by U.S. Office Products in May
1996. The Re-Print Corp., the predecessor to Re-Print LLC, our wholly owned
subsidiary, has been in operation since 1921 and was acquired by U.S. Office
Products in July 1996. Our 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 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. Childcraft, Sax Arts and Crafts and
Gresswell were all acquired by U.S. Office Products in 1997 and have been in
operation since 1946, 1945 and 1938, respectively.
29
<PAGE> 184
RESULTS OF OPERATIONS
The following table sets forth certain information as a percentage of
revenues on a historical basis concerning our results of operations for the year
ended December 31, 1995, the fiscal years ended April 26, 1997 ("fiscal 1997")
and April 25, 1998 ("fiscal 1998") and the nine months ended January 24, 1998
("Interim 1998") and January 23, 1999 ("Interim 1999"), and on a pro forma basis
for fiscal 1998 and for Interim 1998 and Interim 1999, reflecting all
acquisitions completed through February 9, 1999, the spin-off and the
refinancing of all amounts payable to U.S. Office Products in connection with
the spin-off, the June 1998 initial public offering and the Common Stock and
Note offerings as if such transactions had occurred on the first day of the
period presented.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------------------------------------------------- ------------
FISCAL YEAR FISCAL YEAR ENDED NINE MONTHS ENDED FISCAL YEAR
ENDED --------------------- ------------------------- ENDED
DECEMBER 31, APRIL 26, APRIL 25, JANUARY 24, JANUARY 23, APRIL 25,
1995 1997 1998 1998 1999 1998
------------ --------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........... 65.3 66.2 65.3 66.2 66.3 65.3
----- ----- ----- ----- ----- -----
Gross profit............. 34.7 33.8 34.7 33.8 33.7 34.7
Selling, general and
administrative
expenses................. 31.5 27.7 28.3 25.6 25.5 29.3
Non-recurring acquisition
costs.................... -- 0.9 -- -- -- --
Restructuring costs........ 1.7 0.1 1.1 -- 1.2 0.8
----- ----- ----- ----- ----- -----
Operating income......... 1.5 5.1 5.3 8.2 7.0 4.6
Interest expense, net...... 3.6 2.2 1.8 1.6 2.1 2.9
Other (income) expense..... -- (0.1) 0.1 0.2 -- --
----- ----- ----- ----- ----- -----
Income (loss) before
provision for income
taxes.................... (2.1) 3.0 3.4 6.4 4.9 1.7
Provision for (benefit
from) income taxes....... 0.1 (1.3) 1.8 2.9 2.4 1.0
----- ----- ----- ----- ----- -----
Net income (loss).......... (2.2)% 4.3% 1.6% 3.5% 2.5% 0.7%
===== ===== ===== ===== ===== =====
<CAPTION>
PRO FORMA
-------------------------
NINE MONTHS ENDED
-------------------------
JANUARY 24, JANUARY 23,
1998 1999
----------- -----------
<S> <C> <C>
Revenues................... 100.0% 100.0%
Cost of revenues........... 65.8 65.3
----- -----
Gross profit............. 34.2 34.7
Selling, general and
administrative
expenses................. 27.3 26.3
Non-recurring acquisition
costs.................... -- --
Restructuring costs........ 0.3 1.1
----- -----
Operating income......... 6.6 7.3
Interest expense, net...... 2.7 2.7
Other (income) expense..... 0.1 0.1
----- -----
Income (loss) before
provision for income
taxes.................... 3.8 4.5
Provision for (benefit
from) income taxes....... 2.2 2.2
----- -----
Net income (loss).......... 1.6% 2.3%
===== =====
</TABLE>
CONSOLIDATED HISTORICAL RESULTS OF OPERATIONS
NINE MONTHS ENDED JANUARY 23, 1999 COMPARED TO NINE MONTHS ENDED JANUARY 24,
1998
Revenues increased 71.2%, from $247.9 million for Interim 1998 to $424.3
million for Interim 1999. This increase was due primarily to the inclusion in
Interim 1999 of (1) the revenues of two businesses acquired during Interim 1999
from their respective dates of acquisition and (2) all of the Interim 1999
revenues of seven businesses acquired in Interim 1998 (whose revenues were
included in Interim 1998 only from the date of acquisition). Revenues also
increased due to sales to new accounts, increased sales to existing customers
and higher pricing on certain products in response to increased product costs.
Gross profit increased 70.6%, from $83.8 million in Interim 1998 to $142.9
million in Interim 1999 primarily due to the acquisitions referred to above.
Gross margins (gross profit as a percentage of revenues) were essentially flat
at 33.8% for Interim 1998 and 33.7% for Interim 1999. Gross margins were reduced
by the acquisition of Beckley-Cardy in the second quarter of Interim 1999 (which
had a lower gross margin than our existing businesses) and an increase in lower
margin bid revenues in our traditional businesses. These reductions in gross
margins were almost entirely offset by the positive impact of increased sales of
higher margin specialty products and lower product costs due to higher vendor
purchase rebates, which reflected our increased buying power.
Selling, general and administrative expenses (including depreciation and
amortization) increased 70.4%, from $63.4 million in Interim 1998 to $108.0
million in Interim 1999 due primarily to the acquisitions referred to above. As
a percentage of revenues, these expenses were essentially
30
<PAGE> 185
flat at 25.6% for Interim 1998 and 25.5% for Interim 1999. The decrease in
selling, general and administrative expenses as a percentage of revenues
resulting from cost savings attributable to the integration of companies
acquired during fiscal 1998 and the consolidation of our warehousing under the
restructuring plan discussed below were almost offset by increases attributable
to the acquisition of Beckley-Cardy in the second quarter of Interim 1999 (which
had higher selling, general and administrative expenses as a percentage of
revenues than our existing businesses) and higher depreciation and amortization
expenses due to the acquisitions referred to above.
Restructuring charges during Interim 1999 included (1) a non-cash
restructuring charge of $1.1 million in the first quarter of Interim 1999,
consisting of compensation expense attributed to the U.S. Office Products stock
option tender offer and the sale of shares of Common Stock to some of our
executive management personnel, net of underwriting discounts and (2) a $4.2
million restructuring charge in the second quarter of Interim 1999 relating to
our plan to consolidate our existing warehousing, customer service and sales
operations following the acquisition of Beckley-Cardy. Under this restructuring
plan, we intend to reduce our distribution centers from 13 to eight and our
customer service centers from seven to two during the period from October 1998
through December 1999. The $4.2 million charge consists of $2.1 million for
employee severance and termination benefits, $1.3 million for lease termination
and facility shut-down costs and $0.8 million for write down of fixed assets and
inventories. On an after-tax basis these restructuring charges reduced net
income for Interim 1999 by $3.2 million.
Interest expense, net of interest income, increased 121%, from $4.0
million, or 1.6% of revenues, for Interim 1998 to $8.8 million, or 2.1% of
revenues, for Interim 1999 primarily due to the increase in debt attributable to
the acquisition of the three businesses since January 24, 1998 offset by the
reduction in debt from applying the net proceeds from our initial public
offering of Common Stock and private placement in June 1998 and the forgiveness
of debt from U.S. Office Products in connection with the spin-off.
Provision for income taxes increased 41.9% from $7.1 million for Interim
1998 to $10.1 million for Interim 1999, reflecting effective income tax rates of
49% for Interim 1999 and 45% for Interim 1998. The higher effective tax rate,
compared to the federal statutory rate of 35%, is primarily due to state income
taxes and nondeductible goodwill amortization.
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 65.8%, from $64.9 million, or 33.8% of revenues, for
fiscal 1997 to $107.6 million, or 34.7% 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 partially offset by
an increase in the cost of revenues as a result of the increased freight costs
caused by the United Parcel Service strike in the summer of 1997 and an increase
in the portion of revenues represented by lower margin bid revenues.
31
<PAGE> 186
Selling, general and administrative expenses include selling expenses (the
most significant component of which is sales wages and commissions), catalog
costs, occupancy costs, delivery costs, general administrative overhead (which
includes information systems and customer service) and accounting, legal, human
resources and purchasing expenses. Selling, general and administrative expenses
(including depreciation and amortization) increased 65%, from $53.2 million, or
27.7% of revenues, for fiscal 1997 to $87.8 million, or 28.3% 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. We have established a 24-month integration process for acquisitions in
which a transition team is assigned to (1) sell or discontinue incompatible
business units, (2) reduce the number of stock keeping units, (3) eliminate
redundant administrative functions, (4) integrate the acquired entity's
management information systems and (5) improve buying power. However, the length
of time it takes us to fully implement our strategy for assimilating an acquired
company can vary depending on the nature of the company acquired and the season
in which it is acquired.
We use grants of employee stock options to provide an incentive to
employees by increasing their ownership interests in our shares. This helps to
align their interests with the interests of our stockholders. In connection with
the spin-off from U.S. Office Products in June 1998, various replacement options
were issued at the prior exercise price adjusted for the spin-off in accordance
with Accounting Principles Board ("APB") Opinion No. 25. If we had recorded
compensation expense based upon the fair market value of the stock options on
the dates of grant under the methodology prescribed by Statement of Financial
Accounting Standards ("SFAS") No. 123, our net income for the fiscal year ended
April 25, 1998 would have been reduced by approximately $0.8 million or 15.3%.
In the fourth quarter of fiscal 1998, we recorded approximately $2.5
million of non-recurring costs, primarily consisting of a write-down of deferred
catalog costs, employee severance and asset impairment costs, and $1 million of
the transaction costs allocated to us under the distribution agreement entered
into with U.S. Office Products and the other spin-off companies. See
"Business -- Ongoing Spin-Off Obligations." We 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 appraisals and various regulatory fees. We are
required by GAAP to expense all acquisition costs (both those paid by us 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, we will be unable to use the pooling-of-interests
method to account for acquisitions for a period of two years from June 9, 1998.
During this period, we will not reflect any non-recurring acquisition costs in
our results of operations, as all costs incurred of this nature would be related
to acquisitions accounted for under the purchase method and would, therefore, be
capitalized as a portion of the purchase consideration. See "Risk Factors -- We
Are Unable to Use the Pooling-of-Interests Method of Accounting; We Have a
Material Amount of Goodwill."
From the time U.S. Office Products acquired the Pooled Companies, we were
allocated interest based upon our 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 a tax expense of $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%, was primarily due to state income taxes, non-
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<PAGE> 187
deductible goodwill amortization and U.S. Office Products share of distribution
costs. In 1995, we 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 U.S. Office Products acquiring us, 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 24.2%, from $52.2 million, or 34.7% of revenues, in
1995 to $64.9 million, or 33.8% 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 our ability to take advantage of term discounts due
to improved cash flows.
Selling, general and administrative expenses increased 12.2%, from $47.4
million, or 31.5% of revenues, in 1995 to $53.2 million, or 27.7% of revenues,
in fiscal 1997. The decrease in selling, general and administrative expenses
(including depreciation and amortization) as a percentage of revenues was due
primarily to the consolidation of two warehouses into one regional facility in
the Northeastern U.S. during the 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.
We use grants of employee stock options to provide an incentive to our
employees by increasing their ownership interests in our shares. This helps to
align their interests with the interests of our stockholders. In connection with
the spin-off from U.S. Office Products in June 1998, various replacement options
were issued at their prior exercise price adjusted for the spin-off in
accordance with APB Opinion No. 25. If we 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 No. 123, our income from continuing
operations for the fiscal year ended April 26, 1997 would have been reduced by
approximately $0.7 million or 9.2%.
We 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.
We incurred restructuring costs of $2.5 million in 1995 and $194,000 in
fiscal 1997. These costs represent the external costs and liabilities to close
redundant facilities, severance costs related to our employees and other costs
associated with our restructuring plans. We expect to incur similar costs in the
future as we continue to review our operations, with the intention of continuing
to eliminate redundant facilities.
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<PAGE> 188
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 our debt in conjunction with the
acquisition of the Pooled Companies by U.S. Office Products and lower interest
rates being charged on our 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. We incurred a tax expense in
1995, notwithstanding the fact that we reported a pre-tax loss, because one of
the Pooled Companies' earnings were not offset by the other Pooled Companies'
loss. In 1995, we 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 U.S. Office Products acquiring us, because it was deemed
"more likely than not," based on improved results, that the tax benefit from
such operating loss carryforwards would be realized.
CONSOLIDATED PRO FORMA RESULTS OF OPERATIONS
The unaudited pro forma consolidated financial data presented below does
not purport to represent the results that we would have obtained had the
transactions which are the subject of the pro forma adjustments occurred on
April 26, 1998, as assumed, and are not necessarily representative of our
results of operations in any future period.
NINE MONTHS ENDED JANUARY 23, 1999 COMPARED TO NINE MONTHS ENDED JANUARY 24,
1998
Pro forma revenues increased 1.9%, from $496.9 million for Interim 1998 to
$506.2 million for Interim 1999. This increase was primarily due to sales to new
accounts, increased sales to existing customers and higher pricing on certain
products in response to increased product costs. These revenue gains were offset
by the impact of our acquisition of Education Access and lower revenues at
Beckley-Cardy in Interim 1999 resulting from our restructuring of the sales
force and reduced bid revenues. Education Access, which we acquired out of a
bankruptcy proceeding in March 1998, had revenues of $4.6 million in Interim
1999 compared to $18.3 million in Interim 1998.
Pro forma gross profit increased 3.3%, from $169.8 million in Interim 1998
to $175.4 million in Interim 1999. Pro forma gross margins increased slightly
from 34.2% for Interim 1998 to 34.7% for Interim 1999. This increase was due
primarily to a shift in revenue mix to higher margin specialty products and our
use of increased buying power to reduce product costs, offset by increased lower
margin bid revenues from our traditional businesses.
Pro forma selling, general and administrative expenses (including
depreciation and amortization) decreased 1.9%, from $135.6 million in Interim
1998 to $133.0 million in Interim 1999. As a percentage of pro forma revenues,
these expenses decreased from 27.3% for Interim 1998 to 26.3% for Interim 1999.
The pro forma decrease in selling, general and administrative expenses as a
percentage of revenues reflects the elimination of certain redundant expenses at
the companies we acquired and integrated in fiscal 1998 and Interim 1999
(including expenses relating to general management, purchasing, accounting,
finance and information systems) and the closing of two warehouses during the
third quarter of Interim 1999.
Restructuring charges during Interim 1999 included (1) a non-cash
restructuring charge of $1.1 million in the first quarter of Interim 1999,
consisting of compensation expense attributed to the U.S. Office Products stock
option tender offer and the sale of shares of Common Stock to some of our
executive management personnel, net of underwriting discounts and (2) a $4.2
million restructuring charge in the second quarter of Interim 1999 relating to
our plan to consolidate our existing warehousing, customer service and sales
operations following the acquisition of Beckley-
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Cardy. Under this restructuring plan, we intend to reduce our distribution
centers from 13 to eight and our customer service centers from seven to two
during the period from October 1998 through December 1999. The $4.2 million
charge consists of $2.1 million for employee severance and termination benefits,
$1.3 million for lease termination and facility shut-down costs and $0.8 million
for write down of fixed assets and inventories. On an after-tax basis these
restructuring charges reduced net income for Interim 1999 by $3.2 million.
A $1.2 million restructuring charge was recorded in Interim 1998 by
Beckley-Cardy consisting primarily of compensation and professional services
related to a corporate management reorganization.
Provision for income taxes increased 2.7%, from $11 million for Interim
1998 to $11.3 million for Interim 1999, reflecting an effective income tax rate
of 58% for Interim 1998 and 49% for Interim 1999. The high effective income tax
rate, compared to the federal statutory rate of 35%, was primarily due to
non-deductible goodwill amortization and state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
At January 23, 1999, we had working capital of $90.8 million. Our
capitalization at January 23, 1999 was $331.6 million and consisted of debt of
$172.5 million and stockholders' equity of $159.1 million. On a pro forma basis,
at January 23, 1999, we had working capital of $99.3 million and capitalization
of $354.6 million, which consisted of debt of $195.6 million and stockholders'
equity of $159.1 million. After giving effect to the Common Stock and Note
offerings, at January 23, 1999, we had working capital of $109.7 million and
capitalization of $357.6 million, which consisted of debt of $136.4 million and
stockholders' equity of $221.2 million.
We currently have a five year secured $350 million revolving Senior Credit
Facility with NationsBank, N.A. The Senior Credit Facility has a $100 million
term loan payable quarterly over five years commencing in January 1999 and
revolving loans which mature on September 30, 2003. The amount outstanding as of
January 23, 1999 under the Senior Credit Facility was approximately $172
million. As of the date of this Prospectus, $97.5 million was outstanding under
the term loan portion of the Senior Credit Facility. Borrowings under the Senior
Credit Facility are usually significantly higher during our first and second
quarters to meet the working capital needs of our peak selling season. On
October 28, 1998, we entered into an interest rate swap agreement with the Bank
of New York covering $50 million of the outstanding Senior Credit Facility. The
agreement fixes the 30 day LIBOR interest rate at 4.37% per annum (floating
LIBOR on January 23, 1999 was 4.94%) on the $50 million notional amount and has
a three year term that may be canceled by the Bank of New York on the second
anniversary. As of January 23, 1999, the effective interest rate on borrowings
under our Senior Credit Facility was approximately 8%. Since the beginning of
fiscal 1999, we borrowed under the Senior Credit Facility to fund three
acquisitions and for seasonal working capital and capital expenditures. We
intend to use the net proceeds from the Common Stock offering together with the
Note offering to repay amounts outstanding under the Senior Credit Facility,
applying the net proceeds first to repay amounts outstanding under the term loan
and second to repay amounts outstanding under the revolving loans. We intend to
then reborrow amounts under the Senior Credit Facility for general corporate
purposes including working capital, and for acquisitions, subject to compliance
with financial covenants. In connection with the Common Stock and Note
offerings, we intend to make certain changes to our Senior Credit Facility to
reduce the borrowing limit thereunder to $250 million and to change certain
financial and other covenants. See "Description of Senior Credit Facility."
On June 9, 1998, we sold 2,125,000 shares of Common Stock in a public
offering for $30,631,875 in net proceeds. In addition, we sold 250,000 shares of
Common Stock in a private placement directly to Daniel P. Spalding, our Chairman
of the Board and Chief Executive Officer, David J. Vander Zanden, our President
and Chief Operating Officer, and Donald Ray Pate, Jr., our Executive Vice
President for ClassroomDirect.com (formerly named Re-Print), at a price of
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<PAGE> 190
$14.415 per share for aggregate consideration of $3,603,750. In connection with
the offerings, we incurred approximately $1,500,000 of expenses. The total net
proceeds to us from the offerings were approximately $32,735,625. The net
proceeds were used to reduce indebtedness outstanding under our Senior Credit
Facility.
During the nine months ended January 23, 1999, net cash provided by
operating activities was $29.1 million. This net cash provided by operating
activities during the period is indicative of the high seasonal nature of the
business, with sales occurring in the first and second quarter of the fiscal
year and cash receipts in the second and third quarters. Net cash used in
investing activities was $98.8 million, including $95 million for acquisitions
and $3.9 million for additions to property and equipment and other. Net cash
provided by financing activities was $69.7 million. Borrowing under the Senior
Credit Facility included (1) $16.9 million used to fund the cash portion of the
purchase price of the Hammond & Stephens acquisition, (2) $134.7 million used to
fund the Beckley-Cardy acquisition consisting of $78.1 million for the cash
portion of the purchase price and $56.6 million for debt repayment, (3) $83.3
million used to repay the U.S. Office Products debt in connection with the
spin-off and (4) $67.8 million used for short-term funding of seasonal working
capital and the purchase of property and equipment. The $32.7 million net
proceeds from our initial public offering and the sale of 250,000 shares of
Common Stock to certain employees was used to repay a portion of the $302.7
million borrowed under the Senior Credit Facility. U.S. Office Products
contributed capital of $8.1 million as required under the distribution agreement
entered into with us in connection with the spin-off.
During the nine months ended January 24, 1998, net cash used in operating
activities was $15.4 million. Net cash used in investing activities was $96.5
million, including $92.1 million for acquisitions and $4.1 million for additions
to property and equipment and other. Net cash provided by financing activities
was $81.1 million, including $89.2 million provided by U.S. Office Products to
fund the cash portion of the purchase price and the repayment of debt associated
with the Fiscal 1998 Purchased Companies and to fund working capital and the
purchase of property and equipment, partially offset by $8 million used to repay
indebtedness.
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 $4.1 million for additions to property and
equipment and other. 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
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 $6.1 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.
Our anticipated capital expenditures for the next twelve months is
approximately $10 million. The largest items include software development for
our Internet initiative, computer hardware and software and warehouse equipment.
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We are currently considering, and have hired a nationally known commercial
real estate agent to market, a sale and leaseback transaction involving six
distribution facilities in Ohio, Massachusetts, Kansas, Texas, Nevada and
Illinois. We are currently seeking bids on these properties for such a
transaction. We may sell all or any number of these facilities or could
substitute other properties we own in this transaction. We believe that the
current fair market value for these distribution facilities is approximately $26
million with net proceeds to us of approximately $25 million which would be used
to repay outstanding indebtedness under our Senior Credit Facility or for
general corporate purposes, including working capital and for acquisitions. If
we determine to proceed with this transaction, we expect that it would close in
the fourth quarter of fiscal 1999 or the first quarter of fiscal 2000.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
Our business is subject to seasonal influences. Our historical revenues and
profitability have been dramatically higher in the first two quarters of our
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 our costs for the products sold, the mix of products sold and
general economic conditions. Moreover, the operating margins of companies we
acquired may differ substantially from our own, which could contribute to
further fluctuation in quarterly operating results. Therefore, results for any
quarter are not indicative of the results that we 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 and for the nine months ended January
23, 1999 (in thousands). We derived this data from unaudited consolidated
financial statements that, in the opinion of our management, reflect all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of such quarterly information. This quarterly information is not
comparative because of the high degree of seasonality in our 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 26, 1997
--------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenues................................. $58,991 $ 71,682 $29,304 $31,769 $191,746
Gross profit............................. 19,858 23,435 9,595 11,996 64,884
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>
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<TABLE>
<CAPTION>
YEAR ENDED APRIL 25, 1998
--------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenues................................. $87,029 $111,460 $49,391 $62,575 $310,455
Gross profit............................. 30,337 37,225 16,213 23,810 107,585
Operating income (loss).................. 11,872 12,155 (3,647) (4,132) 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>
NINE MONTHS ENDED JANUARY 23, 1999
----------------------------------------------
FIRST SECOND THIRD TOTAL
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenues............................... $126,657 $212,316 $85,359 $424,332
Gross profit........................... 44,042 70,761 28,093 142,896
Operating income (loss)................ 13,326 18,674 (2,383) 29,617
Net income (loss)...................... 6,563 7,430 (3,298) 10,695
Per share amounts:
Basic................................ 0.45 0.51 (0.23) 0.73
Diluted.............................. 0.44 0.51 (0.23) 0.73
</TABLE>
- ---------------
(1) For the year ended April 26, 1997, fourth quarter net income was increased
by $5.3 million due to the reversal of a deferred tax asset valuation
allowance. See Note 3 to "Selected Financial Data."
INFLATION
We do not believe that inflation has had a material impact on our 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, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required. We
intend to adopt SFAS No. 130 in fiscal 1999.
Disclosures About Segments. In June 1997, FASB issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997 and will be presented in our Annual Report on
Form 10-K for the year ending April 24, 1999. Financial statement disclosures
for prior periods are required to be restated. We are in the process of
evaluating the disclosure requirements. The adoption of SFAS No. 131 will have
no impact on consolidated results of operations, financial position or cash
flow.
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Accounting for the Costs of Computer Software. In March 1998, the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires computer software costs associated with
internal use software to be expensed as incurred until certain capitalization
criteria are met. We will adopt SOP 98-1 during fiscal 1999. Adoption of SOP
98-1 is not expected to have a material impact on our consolidated financial
position or results of operations.
Accounting for Derivative Instruments and Hedging Activities. In June
1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities." This statement, which is required to be adopted for annual
periods beginning after June 15, 1999, establishes standards for recognition and
measurement of derivatives and hedging activities. We will implement this
statement in fiscal 2001 as required. The adoption of SFAS No. 133 is not
expected to have a material effect on our financial position or results of
operations.
YEAR 2000
The Year 2000 issue exists because many computer systems and applications,
including those embedded in equipment and facilities, use two digit rather than
four digit date fields to designate an applicable year. As a result, the systems
and applications may not properly recognize the Year 2000 or process data which
include it, potentially causing data miscalculations or inaccuracies or
operational malfunctions or failures. Because any disruption to our computerized
order processing and inventory systems could materially and adversely affect our
operations, we have established a centrally managed, company wide plan to
identify, evaluate and address Year 2000 issues. Although we expect that most of
our mission critical systems, network elements and products will be verified for
Year 2000 compliance by May 1999, our ability to meet this target is dependent
upon a variety of factors. In addition, if our suppliers, service providers
and/or customers fail to resolve their Year 2000 issues in an effective and
timely manner, our business could be significantly and adversely affected. We
believe that many of our school customers have not yet addressed or resolved
their Year 2000 issues.
We currently estimate that we will incur expenses of approximately $100,000
through 1999 in connection with our anticipated Year 2000 efforts, in addition
to approximately $50,000 in expenses incurred through January 23, 1999 for
matters historically identified as Year 2000-related. The timing of expenses may
vary and is not necessarily indicative of readiness efforts or progress to date.
We also expect to incur certain capital improvement costs (totaling
approximately $300,000) to support this project. Such capital costs are being
incurred sooner than originally planned, but, for the most part, would have been
required in the normal course of business. We expect to fund our Year 2000
efforts through operating cash flows. We will use our Senior Credit Facility for
capital improvements related to the effort.
As part of our Year 2000 initiative, we are evaluating scenarios that may
occur as a result of the century change and are in the process of developing
contingency and business continuity plans tailored for Year 2000-related
occurrences. As noted earlier, we are highly reliant on our computer order
processing and inventory systems to fill orders, bill the customer and collect
payments. A loss of either of these systems would cause long delays in filling
and shipping products, billing the customer and collecting accounts receivable.
The highly seasonal nature of our business does not allow for any delay in
shipping products to customers. Although the seasonal nature of our business
would heighten any problems encountered, the timing of the majority of our
sales, shipping, billing and collection efforts for fiscal 1999 will be complete
prior to the Year 2000. We expect that any unforeseen problems related to Year
2000 issues would be identified within the months of January and February 2000,
which is our slowest period. We have identified that we may experience certain
inconveniences or inefficiencies as a result of a supplier's failure to
remediate its Year 2000 issue. We believe, however, that most of our business
will proceed without any significant interruption.
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BUSINESS
OVERVIEW OF OUR BUSINESS
We are the largest marketer of non-textbook educational supplies and
furniture to schools for pre-kindergarten through twelfth grade. We offer more
than 60,000 items through an innovative two-pronged marketing approach that
targets both school administrators and individual teachers. Our broad product
range enables us to provide our customers with one source for virtually all of
their non-textbook school supplies and furniture needs.
We have grown significantly in recent years through both acquisitions and
internal growth. In order to expand our geographic presence and product range,
we have acquired 18 companies since May 1996. In August 1998, we purchased
Beckley-Cardy, our largest traditional and specialty school supply competitor.
After giving pro forma effect to the acquisitions that we made during the
period, our revenues for the twelve months ended January 23, 1999 were $607.3
million and our Adjusted EBITDA was $51.2 million. These results represent
compound annual increases of 48.9% in revenues and 67.7% in Adjusted EBITDA
compared to our results for the year ended December 31, 1994.
Our "top down" marketing approach targets school administrators at the
state, regional and local levels using our 250 sales representatives and our
School Specialty and Beckley-Cardy general supply and furniture catalogs. Our
"bottom up" approach seeks to reach individual teachers and curriculum
specialists primarily through the mailing of our ClassroomDirect.com general
supply catalog (previously known as Re-Print) and our seven different specialty
direct catalogs. During 1998, we mailed over 10.2 million catalogs to more than
three million teachers and curriculum specialists. Approximately 100 employees
assist in the sale, marketing and merchandising of our specialty direct
products. We are also exploring various ways in which we can use the Internet to
market and sell our products. As the first stage of our Internet initiative, we
recently opened a fully integrated e-commerce site under the name
"ClassroomDirect.com" which offers over 13,000 items for sale. The second stage
of our Internet initiative, which we expect to launch in May 1999, is an
education portal in the form of an education mall which will offer our products
for sale and also provide a community forum and content aimed at educators.
We have 2,605 employees in the United States and the United Kingdom,
providing service to all 50 states and the United Kingdom. Our principal offices
are located at 1000 North Bluemound Drive, Appleton, Wisconsin 54914, and our
telephone number is (920) 734-2756. Our world wide general website address is
www.schoolspecialty.com. Information contained in any of our websites is not
deemed to be a part of this Prospectus.
INDUSTRY OVERVIEW
The school supply market consists of the sale of non-textbook school
supplies, furniture and equipment to school districts, individual schools,
teachers and curriculum specialists who purchase products for school and
classroom use. The National School Supply Equipment Association estimates that
annual sales of non-textbook educational supplies and equipment to the school
supply market are approximately $6.1 billion. Of this amount, over $3.6 billion
is sold through institutional channels and the remaining $2.5 billion is sold
through retail channels.
According to the U.S. Department of Education, there are 15,996 school
districts, 108,577 public and private elementary and secondary schools and 3.1
million teachers in the United States. School supply procurement decisions are
made at the school district level by administrators and curriculum specialists,
at the school level by principals and at the classroom level by teachers. Some
school supplies are purchased directly from manufacturers while others are
purchased through marketing firms such as us. We estimate that there are over
3,400 marketers of non-textbook school supplies and equipment, the majority of
which are family or employee owned businesses that operate in a single
geographic region and have annual revenues under $20 million. Besides us, only
one other
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company has a measurable presence in the market. Even so, we believe we have
annual revenues that are three times greater than this industry competitor. We
believe that the increasing demand for single source suppliers, prompt order
fulfillment and competitive prices, and the related need for suppliers to invest
in automated inventory and electronic ordering systems, is accelerating the
trend toward consolidation in our industry.
The demand for school supplies is driven primarily by the level of the
student population and, to a lesser extent, expenditures per student. Student
population is a function of demographics, while expenditures per student are
also affected by government budgets and the prevailing political and social
attitudes towards education. According to U.S. Department of Education
estimates, student enrollment in kindergarten through twelfth grade public and
private schools began growing in 1986, reaching a record level of 52.7 million
students in 1998. Current projections by the U.S. Department of Education
indicate that student enrollment will continue to grow to 54.5 million by the
year 2006. The U.S. Department of Education also projects that expenditures per
student in public elementary and secondary schools will continue to rise through
the year 2006. Expenditures of $272.4 billion in 1997 are projected to increase
to $340.7 billion by the year 2001. These projected increases in expenditures
include a projected increase in total per student spending from $5,961 per
student in 1997 to $7,179 by the year 2001. We believe that the current
political and social environment is favorable for education spending.
OUR RECENT ACQUISITIONS
-- BECKLEY-CARDY. In August 1998, we acquired The National School Supply
Company ("National School Supply"), including its subsidiary Beckley-Cardy, Inc.
("Beckley-Cardy"). Prior to our acquisition of Beckley-Cardy, it was the second
largest general education supply marketer in the industry. We paid $78.1 million
in cash and refinanced $56.6 million of its debt with borrowings under our
Senior Credit Facility. National School Supply had revenues for the fiscal year
ended March 31, 1998 of $176 million.
-- SPORTIME. In February 1999, we acquired Sportime, LLC ("Sportime")
from ProTeam.com (formerly known as Genesis Direct, Inc.). Sportime is a leading
specialty company focusing on physical education, athletic and recreational
products. Sportime offers several targeted catalogs from its early childhood
offerings to a catalog focused on physically challenged children. We paid $23
million in cash for Sportime, which we financed through borrowings under our
Senior Credit Facility. Sportime had revenues for 1998 of $32.6 million.
-- HAMMOND & STEPHENS. In June 1998, we acquired the business of Hammond
& Stephens, Co. ("Hammond & Stephens"), a leading publisher of school forms,
such as grade books, record books, teacher planners, student assignment books,
school year calendars, awards and similar materials. We paid $16.9 million in
cash for Hammond & Stephens, which we financed through borrowings under our
Senior Credit Facility. Hammond & Stephens had revenues for the fiscal year
ended October 31, 1997 of $9.1 million.
OUR INTERNET INITIATIVE
Because more schools and teachers are connecting to the Internet, we intend
to aggressively pursue sales opportunities through this rapidly growing channel.
By establishing an early presence on the Internet, we believe we can gain a
significant competitive advantage and valuable brand recognition. Our goal is to
become the leading marketer of school supplies and furniture over the Internet.
This may also permit us to expand our customer base over time to include
individuals and other non-traditional customers.
In January 1999, we launched the first phase of our Internet initiative
with the opening of our fully integrated e-commerce website ClassroomDirect.com.
The site offers access to over 13,000 stock keeping units with digital pictures
of most items. Although currently teacher focused, the site could be adapted to
a more consumer based format. The increasing demand by school administrators and
teachers for more information in making supply decisions, the lack of a wide
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variety of educational products in stores and the growing importance of
convenience make the Internet a viable, low cost channel for the marketing of
education supplies.
The second phase of our Internet initiative, which we expect to launch in
May 1999, is to offer an education portal on the Internet. This portal will be
structured as an education mall offering our products for sale and also provide
a community forum and content aimed at educators. We believe that by providing
education related content and information, this portal will place us at the
education community's decision point for supply and content which will
strengthen our brands. We intend to enter into strategic alliances with a number
of content providers to help develop and maintain the new website and portal
with the goal to become the Internet headquarters for teachers, product
specialists and others with an interest in education. Prospective content
providers could include media, search engine and Internet service providers and
other Internet related companies. Prospective content could include product
reviews, teaching tips, education standards and related teaching products,
public policy, current events and chat rooms.
In connection with our Internet initiative, we have also signed a
non-binding letter of intent to acquire SmartStuff Development Corporation
("SmartStuff"), the developer of FoolProof(R) software, a program with an
installed customer base of 1.5 million. FoolProof(R) is a desktop software
security program which limits access by children to selected programs and
applications on desktop computers. SmartStuff is expected to introduce Internet
browser security and filtering software products for the education market. We
intend to market our brands and Internet services to SmartStuff's existing and
future customer base by including links to our website and portal and other
promotional materials in SmartStuff product upgrades and new products. Under our
letter of intent, we would pay $8.3 million for SmartStuff, with 50% of the
consideration in the form of Common Stock and 50% in cash. SmartStuff's revenues
for 1998 were approximately $4.2 million. This transaction is expected to close
in March 1999.
OUR STRENGTHS
We attribute our strong competitive position to the following key
strengths:
-- LEADING MARKET POSITION. We have developed our leading market
position over our 40 year history by emphasizing high quality products, superior
order fulfillment and exceptional customer service. We believe that our annual
revenues are three times greater than those of our next largest industry
competitor and that our large size and brand recognition have resulted in
significant buying power, economies of scale and customer loyalty.
-- BROAD PRODUCT LINE. Our strategy is to provide a full range of high
quality products to meet the complete supply needs of schools for
pre-kindergarten through twelfth grade. With over 60,000 stock keeping units
ranging from classroom supplies and furniture to playground equipment, we
provide customers with one source for virtually all of their non-textbook school
supply and furniture needs. Our specialty brands enrich our general product
offering and create opportunities to cross merchandise our specialty products to
our traditional customers. Specialty brands include the following:
<TABLE>
<CAPTION>
BRAND PRODUCTS
----- --------
<S> <C>
Childcraft........................................... Early childhood
Sax Arts and Crafts.................................. Art supplies
Frey Scientific...................................... Science
Sportime............................................. Physical education
Education Access..................................... Educational software
Brodhead Garrett..................................... Industrial arts
Gresswell............................................ Library
Hammond & Stephens................................... School forms
</TABLE>
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-- INNOVATIVE TWO-PRONGED MARKETING APPROACH. School supply procurement
decisions are made at the district and school levels by administrators, and at
the classroom level by curriculum specialists and teachers. We market to both of
these groups, addressing administrative decision makers with a "top down"
approach through our 250 person sales force and the School Specialty and
Beckley-Cardy general supply and furniture catalogs, and targeting teachers and
curriculum specialists with a "bottom up" approach primarily through the mailing
of over 10.2 million ClassroomDirect.com general supply catalogs and our seven
different specialty direct catalogs each year. We utilize our customer database
across our family of catalogs to maximize their effectiveness and increase our
marketing reach. We believe our new ClassroomDirect.com Internet site offers
additional marketing opportunities.
-- STABLE INDUSTRY. Because the market for educational supplies is
driven primarily by demographics and government spending, we believe that our
industry is less exposed to economic cycles than many others.
-- ABILITY TO COMPLETE AND INTEGRATE ACQUISITIONS. We have successfully
completed the acquisition of 23 companies since 1991, including 18 since May
1996. We have established a 24-month integration process in which a transition
team is assigned to:
-- sell or discontinue incompatible business units,
-- reduce the number of stock keeping units,
-- eliminate redundant expenses,
-- integrate the acquired entity's management information systems, and
-- exploit buying power.
To date, our integration efforts have focused on acquired general products
companies and certain administrative functions at our specialty divisions. We
believe that through these processes, we can rapidly improve the revenues and
gross and operating margins of the businesses we acquire.
-- USE OF TECHNOLOGY. We believe that our use of information technology
systems allows us to turn inventory more quickly than our competitors, offer
customers more convenient and cost effective ways of ordering products and more
precisely focus our sales and marketing campaigns.
-- EXPERIENCED AND INCENTIVISED MANAGEMENT. Our management team provides
depth and continuity of experience. Management's interests are aligned with
those of our shareholders. Management currently owns approximately % of our
shares of Common Stock on a fully-diluted basis and purchased % of the
currently outstanding shares at the same time as our initial public offering in
June 1998.
OUR GROWTH STRATEGY
We use the following strategies to grow and enhance our position as the
leading marketer of non-textbook educational supplies and furniture:
-- AGGRESSIVELY PURSUE ACQUISITIONS. We believe that there are many
attractive acquisition opportunities in our highly fragmented industry. As a
public company, we have greater access to capital for acquisitions than many of
our competitors. We will continue to pursue opportunities that enhance our
geographic presence or which complement our specialty direct product offerings.
We believe that we can improve the revenues and gross and operating margins of
the businesses we acquire through our efficient integration process. Although we
are the largest marketer in the industry, our share of the $6.1 billion
non-textbook school supply and furniture market is less than 10%, creating
substantial growth opportunities.
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-- INCREASE SALES OF SPECIALTY AND PROPRIETARY PRODUCTS. We believe we
can increase our margins by selling more specialty direct products and products
for which we are the only supplier. We believe that specialty direct products
accounted for approximately 42% of our revenues on a pro forma basis for the
twelve months ended January 23, 1999, compared to approximately 20% on an
historical basis for the year ended December 31, 1994.
-- EXPAND EXISTING TRADITIONAL BUSINESS. We believe that we can also
increase the revenues of our traditional business by adding sales
representatives in geographic markets in which we are underrepresented and by
cross merchandising our specialty products to our traditional customers.
-- IMPROVE PROFITABILITY. We improved our operating margin (as measured
by our Adjusted EBITDA divided by our revenues) from 5.2% in 1994 on an
historical basis to 8.7% on a pro forma basis for the twelve months ended
January 23, 1999. We believe that we can further improve our operating margins
by eliminating redundant expenses of acquired businesses, leveraging our
overhead costs, increasing our purchasing power and improving the efficiency of
our warehousing and distribution.
-- PURSUE INTERNET INITIATIVE. Because more schools and teachers are
connecting to the Internet, we intend to aggressively pursue sales opportunities
through this rapidly growing channel. By establishing an early presence on the
Internet, we believe we can gain a significant competitive advantage and
valuable brand recognition. Our goal is to become the leading marketer of school
supplies and furniture over the Internet. This may also permit us to expand our
customer base over time to include individuals and other non-traditional
customers.
We believe this strategy can be effective both as an offensive tool,
enhancing revenue at a low incremental cost, and as a defensive one, by
preventing other existing and prospective Internet competitors from establishing
themselves in this market. The establishment of early brand recognition will
facilitate the establishment of our educational portal as the key education
related website.
OUR PRODUCT LINES
We market two broad categories of products: general school supplies and
specialty products geared towards specific educational disciplines. Our general
school supply products are offered to school administrators by our sales force
through our School Specialty and Beckley-Cardy catalogs and to teachers and
curriculum specialists through direct mailings of our ClassroomDirect.com
catalog. Our specialty products are offered to teachers and curriculum
specialists through direct mailings of our seven specialty catalogs. Our
specialty products enrich our general supply product offering and create
opportunities to cross merchandise our specialty school supplies to our
traditional customers. With over 60,000 stock keeping units ranging from
classroom supplies and furniture to playground equipment, we provide customers
with one source for virtually all of their non-textbook school supply and
furniture needs.
Our general school supply product lines can be described as follows:
-- SCHOOL SPECIALTY/BECKLEY-CARDY. Through the School Specialty and
Beckley-Cardy catalogs, which are targeted to administrative decision makers, we
offer a comprehensive selection of classroom supplies, instructional materials,
educational games, art supplies, school forms (such as reports, planners and
academic calendars), physical education equipment, audio-visual equipment,
school furniture and indoor and outdoor equipment. Over the next year, we expect
to integrate these two general catalogs. We believe we are the largest school
furniture resale source in the United States. We have been granted exclusive
franchises for certain furniture lines in specific territories and we enjoy
significant purchasing power in open furniture lines.
-- CLASSROOMDIRECT.COM. ClassroomDirect.com offers its customers
substantially the same products as those offered through the School Specialty
catalog but focuses on reaching teachers and curriculum specialists directly
through its mail-order catalogs and new fully integrated Internet e-commerce
website. The new Internet e-commerce site targets the traditional catalog market
and
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other consumers interested in educational products, such as home school
families, churches and parents.
Our specialty brands offer product lines for specific educational
disciplines, as follows:
-- CHILDCRAFT. Childcraft markets early childhood education products and
materials. Childcraft also markets 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 AND CRAFTS. Sax Arts and Crafts is a leading marketer of art
supplies and art instruction materials, including paints, brushes, paper,
ceramics, art metals and glass, leather and wood crafts. Sax Arts and Crafts
offers customers a toll free "Art Savvy Hotline" staffed with 17 professional
artists to respond to customer questions.
-- FREY SCIENTIFIC. Frey Scientific is a leading marketer of laboratory
supplies, equipment and furniture for science classrooms. Frey Scientific offers
value added focus in the biology, chemistry, physics and earth science areas.
-- SPORTIME. Sportime is a leading marketer of physical education,
athletic and recreational products. Sportime's catalog product offering includes
catalogs from early childhood through middle school as well as targeted products
for physically challenged children.
-- EDUCATION ACCESS. Education Access is a reseller of technology
solutions for kindergarten through twelfth grade. This product line includes
curriculum software, productivity software, peripherals, networking products and
other related products and is offered through the ClassroomDirect.com catalog.
-- BRODHEAD GARRETT. Brodhead Garrett is the nation's oldest marketer of
industrial arts/technical materials to classrooms. Brodhead Garrett's product
line includes such various items as drill presses, sand paper, lathes and
robotic controlled arms.
-- GRESSWELL. Gresswell markets 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.
-- HAMMOND & STEPHENS. Hammond & Stephens is a leading publisher of
school forms, including student assignment books, record books, grade books,
teacher planners and other printed forms for kindergarten through twelfth grade.
Our merchandising managers, many of whom have prior experience in
education, continually review and update the product lines for each operating
division. The merchandising managers convene customer focus groups and advisory
panels to determine 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 we
offer.
OUR SALES AND MARKETING
OUR TWO-PRONGED APPROACH. We believe we have developed a substantially
different sales and marketing model from that of traditional school supply and
school furnishings distribution companies in the United States. Our strategy is
to use two separate marketing approaches to reach all the prospective purchasers
in the school system. Our 250 sales representatives focus on "top down" selling
to districts, school purchasing authorities and schools using School Specialty
and Beckley-Cardy general supply and furniture catalogs. In addition,
approximately 100 employees assist in the sale, marketing and merchandising of
our specialty direct products. We also target teachers and curriculum
specialists with a "bottom up" approach using our over 10.2 million specialty
direct catalogs which are mailed each year and our new "ClassroomDirect.com"
Internet e-commerce site.
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TRADITIONAL SUPPLY BUSINESS. As part of the integration of Beckley-Cardy
into our School Specialty traditional supply business, we restructured our
traditional sales and marketing operations from a decentralized regional system
to a more centralized national structure. Our national marketing model has 250
sales representatives operating within 15 regions supported by regional managers
and two regional customer service and sales support call centers. The
reorganization reallocated sales territories, selectively reduced the combined
sales and management force and reduced the number of regional customer
service/sales support locations from 12 to two. We believe our new national
structure significantly improves our effectiveness through better sales
management, resulting in higher regional penetration, and achieves significant
cost savings through the reduction in number of distribution centers.
We have a broad customer base and no single customer accounted for more
than 2% of sales during fiscal 1998 or the nine months ended January 23, 1999.
Schools typically purchase school supplies and furniture based on an established
relationship with relatively few suppliers. We establish and maintain our
relationship with our traditional customers by assigning accounts within a
specific geographic territory to a local area sales representative who is
supported by a centrally located customer service team. Our customer service
representatives call on existing traditional customers frequently to ascertain
and fulfill their school supply needs. The representatives maintain contact with
these customers throughout the order cycle and assist in processing orders.
Our primary compensation program for sales representatives is based on
commissions as a percentage of gross profit on sales. For new and transitioning
sales representatives, we offer salary and expense reimbursement until the
representative is moved to a full commission compensation structure.
SPECIALTY DIRECT BUSINESS. We use direct mail catalogs to reach our
broader customer base. We distribute seven major specialty direct catalogs, one
for each of our Childcraft, Sax Arts and Crafts, Frey Scientific, Sportime,
Brodhead Garrett, Gresswell and Hammond & Stephens lines. The catalog
distribution calendar is generally the same across all product lines. For each
product line, 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.
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The approximate number of catalogs distributed for our brands for calendar
1998 and projected catalog distribution for calendar 1999 is set out below. The
figures set forth below include all books of over 32 pages distributed (or, with
respect to 1999, expected to be distributed) during the calendar year.
<TABLE>
<CAPTION>
1998 1999
---------- ----------
(PROJECTED)
<S> <C> <C>
School Specialty............................................ 450,000 600,000
Beckley-Cardy(1)............................................ 400,000 280,000
ClassroomDirect.com (formerly named Re-Print)............... 2,700,000 3,200,000
Childcraft.................................................. 1,900,000 2,400,000
Sax Arts and Crafts......................................... 1,548,500 1,680,000
Frey Scientific............................................. 168,000 168,000
Sportime.................................................... 2,773,500 2,045,500
Brodhead Garrett............................................ 82,000 82,000
Gresswell................................................... 130,000 480,000
Hammond & Stephens.......................................... 80,000 80,000
---------- ----------
Total..................................................... 10,232,000 11,015,500
========== ==========
</TABLE>
- ---------------
(1) Excludes figures for Beckley-Cardy's early childhood and art catalogs, which
are included in the Childcraft and Sax Arts and Crafts' figures,
respectively.
PRICING. Pricing for our general and specialty direct product offerings
varies by product and channel of distribution. We generally offer a negotiated
discount from catalog prices for supplies from our School Specialty and
Beckley-Cardy catalogs and respond to quote and bid requests for furniture and
equipment. In addition, local sales representatives work with our corporate
sales force and school supply buyers to achieve an acceptable pricing structure
based upon the mix of products being purchased. The pricing structure of
specialty direct products offered through direct marketing is generally not
subject to negotiation.
DISTRIBUTION
We distribute products through our distribution centers and place customer
orders directly with our suppliers. Furniture is generally shipped directly from
the manufacturer to the customer.
We have adopted a plan to rationalize our distribution systems following
the Beckley-Cardy acquisition. Under this plan, we will close five of our 13
regional distribution centers and centrally manage the remaining eight. We have
currently closed two regional distribution centers and expect to close the
remaining three by December 31, 1999. We believe this restructuring will improve
our distribution efficiency and generate significant cost savings.
OUR PURCHASING AND INVENTORY MANAGEMENT
We manage our inventory by continually reviewing daily inventory levels
compared to a running 90-day inventory for the previous year, adjusted for
incoming orders. We constantly refine the focus of inventory products through
our automated inventory management system to pursue the optimum level of scope
and depth of product offered. Inventory forecasts are made daily for all stock
keeping units by assessing anticipated demand by adjusting historical demand
levels to account for 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 high seasonal demand while keeping off-season inventory to a
minimum. The information systems for all of our distribution centers are
connected 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. Our
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inventory management results in inventory turnover that management believes is
higher than average industry turnover rates and reduces the level of
discontinued, excess and obsolete inventory compared to businesses that we have
acquired.
We believe our large size enhances our purchasing power with suppliers
resulting in lower product costs than most of our competitors. Further, we
believe that this purchasing power leverage will increase with additional
acquisitions which, in turn, should improve our operating margins.
We believe 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. We continue to invest in sophisticated
computer systems to automate the order taking, inventory allocation and
management, and order shipment processes. As a result, we have been able to
provide superior order fulfillment to our customers. In addition, we have
developed our Order Management System, which allows schools to customize their
orders and enter them electronically and provides historical usage reports to
schools useful for their budgeting process. While this system currently only
accounts for approximately 6% of our traditional supply sales, we believe it
will become more significant as schools upgrade their technology and use of
computers. During the academic year, we seek to fill orders within 24 hours of
receipt of the order at a 95% fill rate and a 99.5% order accuracy rate. During
the summer months, we shift to a production environment and schedule shipments
to coincide with the start of the school year. During the summer months, our
objectives are to meet a 100% fill rate at a 99.5% order accuracy rate. Our
average order fill rate for June, July and August 1998 exceeded %. We
define "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
our distribution centers contracts with local common carriers to deliver our
product to schools and school warehouses. ClassroomDirect.com 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.
OUR INFORMATION SYSTEMS
We believe that through the utilization of technology in areas such as (1)
purchasing and inventory management, (2) customer order fulfillment and (3)
database management, we are able to turn inventory more quickly than
competitors, offer customers more convenient and cost effective ways of ordering
products and more precisely focus our sales and marketing campaigns.
We use two principal information systems, one for our general and another
for our specialty product distribution. In general school supply distribution,
we use a specialized distribution software package used primarily by office
products and paper marketers. This software package is referred to as the
Software for Distributors System (the "SFD system"). This software offers a
fully integrated process from sales order entry through customer invoicing, and
inventory requirements planning through accounts payable. Our system provides
information through daily automatic posting to the general ledger and integrated
inventory control. We have made numerous enhancements to this process that allow
greater flexibility in addressing the seasonal requirements of the industry and
meeting specific customer needs.
The specialty divisions, including newly acquired companies, use either the
SFD system or a mail order and catalog 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 we have two principal information systems, both the SFD system and
MACS integrate general ledger, purchasing and inventory management functions.
The software and hardware allow
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\for continued incremental growth as well as the opportunity to integrate new
client-server and other technologies into the information systems. For
information on Year 2000 compliance of our information systems, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
INTERNET CONNECTION WITH OUR SYSTEMS
Our existing ClassroomDirect.com Internet site is fully integrated with
MACS and our education portal is currently being designed to be fully integrated
with both of our systems (i.e., the SFD system and MACS). We intend to install
Ironworks Powered Server ("IPS") on our web servers. IPS provides a secured
front-end so the customer can place an order using a JAVA-enabled web browser.
IPS communicates with the host machine (i.e., the SFD system or MACS) by means
of remote procedure calls ("RPC"). The firewall between the web server and the
host computers will be configured so that only IPS is permitted to use the RPC
to the host gateway.
All of the websites will be navigable through dynamically generated HTML
pages, generated either by using the current/extended functionality of IPS or by
accessing product information from a relational database generated and
synchronized with our information systems in real time. The product images and
their descriptions will be maintained in files residing on the web server,
synchronized with data in a Centrus system, which is a central repository for
all products and data related to those products.
At the check-out stage, new customers will fill out their personal
information, billing, shipping and credit card information, and existing
customers will enter their user password and/or account number verified through
synchronization with our information systems.
OUR COMPETITION
We operate in a highly competitive environment. Our principal competitors
are other national and regional marketers of school supplies. We also face
increasing competition from non-traditional alternate channel competitors, such
as office products contract stationers and superstores. Among traditional school
supply marketers, we believe that there is only one other company with a
measurable presence in the market. Even so, we believe that we have annual
revenues that are three times greater than this competitor and that we compete
favorably with this company on the basis of service and price.
The market is highly competitive on a regional basis, but we believe our
heaviest competition is coming from alternate channel competitors such as office
product contract stationers and superstores. Their primary advantages over us
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, our competitors do not offer special
order fulfillment software, which we believe is increasingly important to
adequately service school needs. We believe we compete favorably with these
companies on the basis of service and product offering.
OUR EMPLOYEES
As of February 1, 1999, we had 2,605 full-time employees, of whom were
employed primarily in management and administration, in regional warehouse
and distribution operations and in marketing, sales, order processing and
customer service. To meet the seasonal demands of our customers, we employ many
seasonal employees during the late spring and summer seasons. Historically, we
have been able to meet our requirements for seasonal employment. As of February
1, 1999, approximately of our employees were members of the Teamsters Labor
Union at our Sax Arts and Crafts' New Berlin, Wisconsin facility. We consider
our relations with our employees to be very good.
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<PAGE> 204
OUR FACILITIES
Our corporate headquarters are located at 1000 North Bluemound Drive,
Appleton, Wisconsin, a combined office and warehouse facility of approximately
120,000 square feet. Our lease on the Appleton headquarters expires on December
31, 2001, although we are currently negotiating with the owners of the facility
(consisting of the father and uncle of our Chief Executive Officer, Daniel P.
Spalding, and one other unrelated party) to purchase the property sometime prior
to the end of March 1999. See "Certain Transactions" for more information. We
lease or own the following principal distribution facilities:
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE OWNED/
LOCATIONS FOOTAGE LEASED LEASE EXPIRATION
- --------- ----------- ------ ------------------
<S> <C> <C> <C>
Agawam, Massachusetts......................... 163,300 Owned* --
Atlanta, Georgia.............................. 76,913 Leased January 6, 2002
Birmingham, Alabama........................... 180,365 Leased November 30, 2006
Bowling Green, Kentucky....................... 42,000 Leased June 30, 2001
Carson City, Nevada........................... 80,000 Owned* --
Fremont, Nebraska............................. 95,000 Leased June 30, 2003
Fresno, California............................ 18,480 Leased December 31, 2001
Hoddesdon, England............................ 47,500 Leased September 24, 2006
Lancaster, Pennsylvania....................... 72,947 Leased December 31, 2002
Lancaster, Pennsylvania....................... 165,750 Leased February 28, 2009
Lufkin, Texas................................. 140,000 Owned* --
Mansfield, Ohio............................... 323,000 Owned* --
New Berlin, Wisconsin......................... 97,500 Leased March 31, 2002
Oklahoma City, Oklahoma....................... 37,340 Leased July 16, 2001
Portland, Oregon.............................. 30,456 Leased May 31, 2001
Salina, Kansas................................ 123,000 Owned* --
Union City, California........................ 14,494 Leased April 7, 2000
</TABLE>
- ---------------
* We are currently considering a sale and leaseback transaction involving
certain of our owned distribution centers and other properties. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Lancaster, Pennsylvania facility is used for manufacturing and the
Salina, Kansas facility is used for production of school forms. In addition, we
have sales offices throughout the United States.
We believe that our properties are adequate to support our operations for
the foreseeable future. We regularly review the consolidation of our facilities.
OUR LEGAL PROCEEDINGS
We are, from time to time, a party to legal proceedings arising in the
normal course of business. Our management believes that none of these legal
proceedings will materially or adversely affect our financial position, results
of operations or cash flows.
OUR ONGOING SPIN-OFF OBLIGATIONS
In connection with the spin-off from U.S. Office Products in June 1998, we
entered into a series of agreements with U.S. Office Products and the other
spin-off companies, including a distribution agreement (the "Distribution
Agreement"), a tax allocation agreement (the "Tax Allocation Agreement"), a tax
indemnification agreement (the "Tax Indemnification Agreement") and an
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<PAGE> 205
employee benefits agreement (the "Employee Benefits Agreement"). These
agreements have resulted in certain contractual obligations for us.
Under the Distribution Agreement, each spin-off company, including us, will
be liable for any liabilities related to its business, its liabilities under the
Employee Benefits Agreement, Tax Allocation Agreement and the Tax
Indemnification Agreement (each discussed below), federal securities laws
liabilities relating generally to U.S. Office Products prior to the
distributions and certain other shared liabilities.
We are aware of certain lawsuits filed against U.S. Office Products that
could fall within these contractual obligations. See "Risk Factors--We Are
Exposed to Risks Related to Other Liabilities of U.S. Office Products." The
aggregate of such liabilities for which we may be liable is a maximum of $1.75
million.
The Tax Allocation Agreement provides that each spin-off company will
jointly and severally indemnify U.S. Office Products for any losses associated
with taxes related to the distributions if any of the spin-off companies take an
action or fail to take an action that results in the spin-off being taxable (an
"Adverse Tax Act"). If any of the spin-off distributions are taxable and none of
U.S. Office Products or any of the spin-off companies was responsible, 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. The Tax Indemnification Agreement provides
that the spin-off company that is responsible for the Adverse Tax Act will
indemnify the other spin-off companies for any liability to U.S. Office Products
under the Tax Allocation Agreement. As a result of these tax agreements, we
could become liable for certain amounts of the distribution taxes should there
be a finding that any or all of the distributions are taxable.
The Employee Benefits Agreement provides that the spin-off companies will
retain or assume liability for employment-related claims and severance for
persons employed or previously employed by the respective spin-off companies and
their subsidiaries at the time of the distributions, while U.S. Office Products
and its post-distribution subsidiaries will retain or assume responsibility for
their current and previous employees.
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<PAGE> 206
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our Board of Directors consists of five members. The Board is divided into
three classes, with members of each class serving a three year term. The terms
of Class I, II and III directors expire at the annual meetings of stockholders
in 1999, 2000 and 2001. The following table sets forth certain information about
our directors and executive officers as of February 1, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Daniel P. Spalding............. 44 Chairman of the Board and Chief Executive Officer (Class
III)
David J. Vander Zanden......... 44 President, Chief Operating Officer and Director (Class III)
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............... 58 Executive Vice President for Sax Arts and Crafts
Donald Ray Pate, Jr............ 35 Executive Vice President for ClassroomDirect.com
Ronald E. Suchodolski.......... 52 Executive Vice President for Childcraft
Jonathan J. Ledecky............ 41 Director (Class I)
Leo C. McKenna................. 65 Director (Class II)
Rochelle Lamm Wallach.......... 50 Director (Class II)
</TABLE>
DANIEL P. SPALDING became Chairman of the Board and Chief Executive Officer
of School Specialty in February 1998. From 1996 to February 1998, Mr. Spalding
served as President of the Educational Supplies and Products Division of U.S.
Office Products. From 1988 to 1996, he served as President, Chief Executive
Officer and a director of Old School. 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.
DAVID J. VANDER ZANDEN became the President and Chief Operating Officer of
School Specialty in March 1998. From 1992 to March 1998, he served as President
of Ariens Company, a manufacturer of outdoor lawn and garden equipment. Mr.
Vander Zanden has served as a director of School Specialty since completion of
the spin-off from U.S. Office Products in June 1998.
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 from 1994 until 1997. From 1992 to 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 spin-off from U.S. Office
Products in June 1998. Mr. Moskonas joined Old School in 1993 as Vice President
of Sales for the Valley Division. He served as General Manager for the Valley
Division from 1994 to 1996 and was appointed President of School Specialty
Divisions in 1997. Prior to joining School Specialty, Mr. Moskonas served as
Vice President of Sales for Emmons-Napp Office Products from 1979 to 1993.
MELVIN D. HILBROWN has served as Executive Vice President of School
Specialty for Gresswell since completion of the spin-off from U.S. Office
Products 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 had been Managing Director of Gresswell since 1989.
RICHARD H. NAGEL has served as Executive Vice President of School Specialty
for Sax Arts and Crafts since completion of the spin-off from U.S. Office
Products in June 1998. Mr. Nagel joined School Specialty with the acquisition of
Sax Arts and Crafts in 1997. Mr. Nagel had been with Sax
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<PAGE> 207
Arts and Crafts since 1975 when he was hired as Assistant General Manager. He
was named Vice President/General Manager of Sax Arts and Crafts in 1984 and
President of Sax Arts and Crafts in 1990.
DONALD RAY PATE, JR. has served as Executive Vice President of School
Specialty for ClassroomDirect.com since completion of the spin-off from U.S.
Office Products in June 1998. Mr. Pate joined School Specialty with the
acquisition of Re-Print in 1996, having 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 spin-off from U.S. Office
Products in June 1998. Mr. Suchodolski joined School Specialty with the
acquisition of Childcraft in 1997. Mr. Suchodolski was Vice President of
Childcraft in 1995 and 1996 and was Director of Childcraft's School Division
from 1984 to 1989. From 1989 to 1993, Mr. Suchodolski was President of the
Judy/Instructo Division of Paramount, and from 1993 to 1995, Mr. Suchodolski
served as Senior Vice President of Sales and Marketing for Paramount
Publishing's Supplementary Materials Division.
JONATHAN J. LEDECKY has served as a director and an employee of School
Specialty since completion of the spin-off from U.S. Office Products in June
1998. He founded Building One Services Corporation (formerly 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 June 1998 and served as its Chief
Executive Officer until November 1997. Mr. Ledecky also serves as a director of
Aztec Technology Partners, Inc., Navigant International, Workflow Management,
USA Floral Products, UniCapital Corporation and MicroStrategy Corporation. 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 has served as a director of School Specialty since
completion of the spin-off from U.S. Office Products in June 1998. Mr. McKenna
is a self-employed financial consultant working with personal asset management,
corporate planning, acquisitions, merger studies and negotiations. Mr. McKenna
is currently a director 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 Investment Advisory Board and the
Trust Committee. He is a director and member of the John Brown Cook Foundation
and an overseer and Chairman of the Finance Committee for the Catholic Student
Center at Dartmouth College.
ROCHELLE LAMM WALLACH has served as a director of School Specialty since
completion of the spin-off from U.S. Office Products in June 1998. Ms. Wallach
is Chairman and Chief Executive Officer of Precision Marketing Partners, LLC and
The Academy of Financial Services Studies. Ms. Wallach was associated with
Strong Advisory Services, a division of Strong Capital Management, Inc., as its
President from 1995 to March 1998. Prior to that time, she was President and the
chief operating officer of AAL Capital Management, a mutual fund manager.
COMMITTEES OF THE BOARD
The Audit Committee of the Board of Directors is charged with reviewing our
annual audit and meeting with our independent accountants to review our internal
controls and financial management practices. The following persons comprise the
Audit Committee: Mr. McKenna and Ms. Wallach.
The Compensation Committee of the Board of Directors is charged with
determining the compensation of our executive officers and administering our
1998 Stock Incentive Plan. The following persons comprise the Compensation
Committee: Mr. McKenna and Ms. Wallach.
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<PAGE> 208
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
paid by us for services rendered during the years ended April 26, 1997 and April
25, 1998 to the Chief Executive Officer and to each of our four other most
highly compensated officers (the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)(1) COMPENSATION($)
- --------------------------- ---- --------- -------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Daniel P. Spalding................. 1997 $178,846 -- -- --
Chairman of the Board and CEO 1998 212,104 $34,200 135,484 --
Ronald E. Suchodolski(2)........... 1997 $141,535 $30,000 -- --
Executive Vice President, 1998 157,646 62,633 18,065 --
Childcraft
Richard H. Nagel(2)(3)............. 1997 $118,000 $29,500 -- $32,000
Executive Vice President, Sax
Arts 1998 130,660 29,500 18,065 --
and Crafts
Donald Ray Pate, Jr.(2)............ 1997 $220,901 -- -- --
Executive Vice President, 1998 117,000 -- -- --
ClassroomDirect.com
Douglas Moskonas................... 1997 $ 97,266 $44,500 13,548 --
Executive Vice President, School 1998 139,525 -- 18,065 --
Specialty Division
</TABLE>
- ---------------
(1) No options to purchase School Specialty Common Stock were granted to the
Named Officers during the years shown. Rather, the number of shares set
forth in the table represents the number of shares of Common Stock
underlying options that the Named 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 from his prior employer.
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<PAGE> 209
OPTIONS GRANTED IN FISCAL 1999
The following table sets forth certain information regarding options to
acquire Common Stock granted to certain executive officers during fiscal 1999
and the total number of shares underlying options held as of February 1, 1999.
OPTIONS GRANTED IN FISCAL 1999
<TABLE>
<CAPTION>
NUMBER OF TOTAL
SECURITIES % OF NUMBER OF
UNDERLYING TOTAL OPTIONS SECURITIES UNDERLYING
OPTIONS GRANTED IN GRANTED TO OPTIONS GRANTED
FISCAL EMPLOYEES IN AS OF FEBRUARY 1,
NAME 1999(#)(1) FISCAL 1999 1999(#)
- ---- ------------------ -------------- -------------------------
<S> <C> <C> <C>
Daniel P. Spalding...................... 228,519 % 332,520
Ronald E. Suchodolski................... 45,703 % 63,768
Richard H. Nagel........................ 45,703 % 59,750
Donald Ray Pate, Jr. ................... 45,703 % 45,703
Douglas Moskonas........................ 45,703 % 69,970
David J. Vander Zanden.................. 228,519 % 228,519
</TABLE>
- ---------------
(1) The options granted are both qualified and non-qualified stock options,
which are exercisable in full one year from the date of grant at the market
price on the date of grant and expire ten years from the date of grant. The
options become fully exercisable upon a change in control, as defined in the
1998 Stock Incentive Plan.
OPTIONS GRANTED IN FISCAL 1998
The following table sets forth certain information regarding options to
acquire Common Stock granted to the Named Officers during the year ended April
25, 1998. No options to purchase School Specialty Common Stock were granted to
Named Officers during the year. Rather, the number of shares and exercise prices
set forth below represent the number of shares of Common Stock underlying
options (and the exercise price of options) that the Named Officer would have
been granted if all U.S. Office Products options granted during the year were
replaced with School Specialty options.
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE
----------------------------------------------------------- AT ASSUMED ANNUAL
NUMBER OF % OF RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED (#)(1) FISCAL YEAR (2) ($/SH)(1) 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 $3,626,567
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 1998 Stock Incentive Plan.
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<PAGE> 210
(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.
OPTION EXERCISES IN FISCAL 1998 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information regarding unexercised
options held by the Named Officers at April 25, 1998. No options to purchase
School Specialty Common Stock had been granted as of April 25, 1998. Rather, the
number of shares set forth below represents the number of shares of Common Stock
underlying options that the Named Officer would have held at the end of the year
if all U.S. Office Products options held on that date (prior to the U.S. Office
Products tender offer (which occurred immediately prior to the spin-off), which
allowed holders of U.S. Office Products options to tender a portion of their
options to U.S. Office Products for cash) were replaced with School Specialty
options.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT FY-END (#) AT FISCAL YEAR END ($) (1)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Daniel P. Spalding........ -- $ -- -- 135,484 $ -- N/A
Ronald E. Suchodolski..... -- -- -- 18,065 -- N/A
Richard H. Nagel.......... -- -- -- 18,065 -- N/A
Donald Ray Pate, Jr....... -- -- -- -- -- N/A
Douglas Moskonas.......... -- -- -- 31,613 -- 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 Amended and Restated 1998 Stock Incentive Plan (the
"Plan") is to promote our long-term growth and profitability. The Plan does this
by providing employees, officers and non-employee directors with incentives to
improve stockholder value and contribute to our growth and financial success,
and by enabling us to attract, retain and reward highly motivated and qualified
employees, officers and non-employee directors. The maximum percentage of shares
of Common Stock that may be issued with respect to awards granted under the Plan
is 20% of the outstanding shares of Common Stock determined immediately after
the grant of the award. The maximum number of shares that may be issued with
respect to awards granted under the Plan to an individual in a calendar year may
not exceed 1.2 million shares. The Plan is administered by the Compensation
Committee of the Board of Directors. All employees of School Specialty and its
subsidiaries, as well as non-employee directors and officers of School
Specialty, are eligible to receive awards under the Plan. The Plan authorizes
the Compensation Committee to make awards of stock options, restricted stock and
other stock-based awards. The Compensation Committee determines 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.
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<PAGE> 211
As of June 10, 1998, Mr. Ledecky received options to purchase 914,079
shares of Common Stock under the Plan. The options were intended to compensate
Mr. Ledecky for his services to us as an employee. The options have a per share
exercise price equal to $15.50. Based on an exercise price of $15.50 and an
assumed trading volatility index of the Common Stock of 35%, the estimated value
of the options at the date of grant was approximately $2.6 million, net of taxes
at an assumed 40% rate. Mr. Ledecky's options are fully vested when granted but
will not be exercisable until June 10, 1999. Mr. Ledecky's options will be
exercisable immediately if Mr. Ledecky dies before the options expire or if and
to the extent that we accelerate the exercise schedule of substantially all
management options. All unexercised portions of options will expire ten years
after the date of grant or, if applicable, as of the date Mr. Ledecky violates
the non-competition agreement he entered into with us. See "-- Director
Compensation and Other Arrangements."
As of June 10, 1998, Daniel P. Spalding and David J. Vander Zanden each
received options to purchase 228,519 shares of Common Stock under the Plan.
Messrs. Spalding and Vander Zanden's options have the same terms as Mr.
Ledecky's options, including an exercise price equal to $15.50. Based on an
exercise price of $15.50 and an assumed trading volatility index of the Common
Stock of 35%, the estimated value of the options to each of Mr. Spalding and Mr.
Vander Zanden at the date of grant was approximately $0.7 million, net of taxes
at an assumed 40% rate.
In addition to the foregoing, certain of our executive officers received
options to purchase an aggregate of 274,218 shares of Common Stock on June 10,
1998, also at an exercise price of $15.50.
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
We granted non-management directors options to purchase 15,000 shares of
Common Stock upon their initial election as members of the Board of Directors.
We intend to grant options to acquire 5,000 shares of Common Stock for each
additional year of service. Non-management directors are paid an annual retainer
of $20,000 plus $1,000 for each additional special meeting attended and are
reimbursed for all out-of-pocket expenses related to their service as directors.
We entered into an employment agreement with Mr. Ledecky effective as of
June 10, 1998 that implemented certain portions of an agreement that Mr. Ledecky
had previously entered into with U.S. Office Products (the "Ledecky Services
Agreement"). Under the employment agreement, Mr. Ledecky reports to the Board of
Directors and senior management of School Specialty. In such capacity, Mr.
Ledecky provides high-level acquisition negotiation services and strategic
business advice. We can require Mr. Ledecky's performance of such services,
consistent with his other contractual obligations to Building One Services
Corporation, U.S. Office Products and the other spin-off companies. As an
employee, Mr. Ledecky is subject to our generally applicable personnel policies
and is eligible for such benefit plans in accordance with their terms. We pay
Mr. Ledecky an annual salary of $48,000 for up to two years. We may terminate
Mr. Ledecky's employment for "cause," where cause consists of (1) his conviction
of, or guilty or nolo contendere plea to, a felony demonstrably and materially
injurious to us or (2) his violation of the non-competition provision as it
relates to us.
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 our employ. These provisions generally
restrict Mr. Ledecky from, among other things, investing in or working for or on
behalf of any business selling any products or services in direct competition
with U.S. Office Products or the spin-off companies (collectively, the "U.S.
Office Products Companies"), within 100 miles of any location where the relevant
U.S. Office Products Company regularly maintains an office with employees. (For
this purpose, "products or services" are those that the U.S. Office Products
Companies offered on or before January 13, 1998.) Notwithstanding this
prohibition, Mr. Ledecky may serve in a policy making role (but not engage in
direct personal competition) with respect to the following businesses: (1) any
electrical contracting business that derives more
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<PAGE> 212
than 50% of its revenues from electrical contracting and maintenance services,
without regard to whether the business competes with certain activities of Aztec
Technology Partners, Inc. (one of the U.S. Office Products Companies) or any of
its subsidiaries (collectively, "Aztec"); (2) any business whose revenue from
certain activities that compete with Aztec is less than $15 million per year;
(3) any business engaged in computer monitoring for facilities management; (4)
businesses selling, supplying or distributing janitorial or sanitary products or
services; (5) businesses managing or servicing office equipment (other than
computers); (6) businesses providing Internet services; (7) UniCapital
Corporation's current businesses (which include equipment leasing); or (8) 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 our managerial employees or from calling upon our
customers to solicit or sell products or services in direct competition with us.
Mr. Ledecky also may not hire away for Building One Services Corporation any
person then or in the preceding one year employed by us.
EMPLOYMENT CONTRACTS AND RELATED MATTERS
We have entered into employment agreements with Daniel P. Spalding, Donald
Ray Pate, Jr., and Richard H. Nagel, each of whom is a Named Officer, and David
J. Vander Zanden, an executive 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 us 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 our part)
or within five days of a change in control of School Specialty. The contract
defines a change of control to mean: (1) the acquisition of beneficial ownership
of 50% or more of our voting securities by any person other than U.S. Office
Products; (2) a loss of majority status by the combination of members of U.S.
Office Products' Board of Directors 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; (3) 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 (4) U.S.
Office Products or more than 49% of its assets are liquidated.
Donald Ray Pate, Jr., President of ClassroomDirect.com, entered into an
employment contract with the Re-Print Corporation (now known as
ClassroomDirect.com) on July 26, 1996. The contract runs for four years but
provides for two automatic one-year extensions unless ClassroomDirect.com gives
60 days written notice of its intent not to renew. Mr. Pate's annual base salary
is $125,000. Following the termination of his employment for any reason, Mr.
Pate has agreed not to compete with ClassroomDirect.com 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 of Common
Stock with the same terms as Mr. Ledecky's options, including an exercise price
of $15.50. See "--1998 Stock Incentive Plan."
Richard H. Nagel, President of Sax Arts and Crafts, entered into a
four-year employment contract with Sax Arts and Crafts on June 27, 1997. Mr.
Nagel's annual base salary is $125,000, and he participates in an incentive
bonus plan based upon the attainment of profit and revenue objectives. Mr. Nagel
also entered into a covenant not to compete agreement with Sax Arts and
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<PAGE> 213
Crafts on June 27, 1997 for which he received consideration of $31,250 from Sax
Arts and Crafts. Pursuant to this agreement, following the termination of his
employment for any reason, Mr. Nagel has agreed not to compete with Sax Arts and
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 of Common Stock with the same terms as Mr. Ledecky's
options, including an exercise price of $15.50. See "--1998 Stock Incentive
Plan."
David J. Vander Zanden became President and Chief Operating Officer of
School Specialty in March 1998. We entered into an employment contract with Mr.
Vander Zanden on July 15, 1998. The contract has an initial term of two years,
with automatic two-year extensions unless either party gives 90 days written
notice of such 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, as defined in the agreement. Mr. Vander Zanden was
granted options on June 10, 1998 to purchase 228,519 shares of Common Stock with
the same terms as Mr. Ledecky's options, including an exercise price of $15.50.
See "--1998 Stock Incentive Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee has ever been an officer of our
company or any of our subsidiaries and none of our executive officers has served
on the compensation committee or the board of directors of any company of which
any of our directors is an executive officer.
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CERTAIN TRANSACTIONS
On April 29, 1996, U.S. Office Products acquired Old School in a business
combination accounted for under the pooling-of-interests method in which 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, a non-executive officer of School Speciality, (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)
(Patricia M. Spalding is Daniel P. Spalding's mother), Joanne Lee Killoren
(Michael J. Killoren's aunt) received 5,076 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 School Specialty or U.S. Office
Products at the time such transactions were entered into, and accordingly, we
believe that these transactions were as favorable as could be negotiated with
third parties.
U.S. Office Products acquired ClassroomDirect.com (formerly 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. received 269,007 shares (as adjusted) of U.S. Office Products
common stock for his interest in ClassroomDirect.com. 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 School Specialty or U.S. Office Products at
the time such transactions were entered into, and accordingly, we believe 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, a former executive officer of School
Specialty, owned 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.
ClassroomDirect.com leases an office and warehouse facility in Birmingham,
Alabama from Donald Ray Pate, Jr. The lease provides for annual payments of
$69,600 through December 31, 2003. We believe that this transaction was as
favorable as could be negotiated with third parties.
Our 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 Directors of Old School and the father
of Daniel P. Spalding, holds a one-third stake in Bluemound. Donald Killoren,
father of Michael J. Killoren, a non-executive 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. We believe that this transaction was as
favorable as could be negotiated with third parties. We are currently
negotiating a transaction to acquire this facility from Bluemound. It is
expected that this transaction would be effected at fair market value as
determined by an independent appraisal, net of any indebtedness assumed. We
believe the net value of any such transaction would be approximately $2 million.
For a discussion of transactions between School Specialty and Mr. Ledecky,
see "Management--Director Compensation and Other Arrangements."
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PRINCIPAL STOCKHOLDERS
The following table sets forth, as of February 1, 1999 (unless otherwise
indicated), the number and percentage of Common Stock beneficially owned by the
following persons, after giving effect to the Common Stock offering: (1) all
persons known by us to own beneficially more than 5% of the Common Stock, (2)
each director and Named Officer and (3) all directors and executive officers as
a group. All persons listed below have sole voting and investment power with
respect to their shares, unless otherwise indicated. Except as otherwise
indicated, the business address of each of the following is 1000 North Bluemound
Drive, Appleton, Wisconsin 54914.
<TABLE>
<CAPTION>
PRIOR TO THE OFFERING AFTER THE OFFERING
--------------------------- ---------------------------
PERCENT OF PERCENT OF
NUMBER OF OUTSTANDING NUMBER OF OUTSTANDING
NAME AND ADDRESS SHARES OWNED SHARES(5) SHARES OWNED SHARES(6)
- ---------------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Daniel P. Spalding(1).............. 149,607 1% 149,607 *
Ronald E. Suchodolski(1)........... 4,530 * 4,530 *
Richard H. Nagel(1)................ 358 * 358 *
Donald Ray Pate, Jr.(2)............ 162,944 1.1% 162,944 *
Douglas Moskonas(1)................ 5,243 * 5,243 *
David J. Vander Zanden............. 50,000 * 50,000 *
Jonathan J. Ledecky................ -- -- -- --
Leo C. McKenna..................... 6,239 * 6,239 *
Rochelle Lamm Wallach.............. 1,950 * 1,950 *
All executive officers and
directors as a group (11
persons)(1)...................... 386,561 2.7% 386,561 2.2%
Dresdner RCM Global Investors
LLC(3)
Dresdner RCM Global Investors US
Holdings LLC
Dresdner Bank AG
Four Embarcadero Center
San Francisco, California
94111............................ 1,084,900 7.4% 1,084,900 6.2%
AXA Conseil Vie Assurance
Mutuelle(4)
AXA Assurances I.A.R.D. Mutuelle
and AXA Assurances Vie Mutuelle
AXA Courtage Assurance Mutuelle
AXA
The Equitable Companies
Incorporated
1290 Avenues of the Americas
New York, New York 10104......... 768,601 5.3% 768,601 4.4%
</TABLE>
- ---------------
* Less than 1%.
(1) Share amounts include options currently exercisable, or exercisable within
60 days after February 1, 1999, in the amount of 2,389 for Mr. Spalding,
4,516 for Mr. Suchodolski, 318 for Mr. Nagel, 3,943 for Mr. Moskonas and
13,612 for all executive officers and directors as a group.
(2) Mr. Pate has entered into hedging arrangements that place a ceiling and a
floor on the price of certain of his shares of Common Stock.
(3) Dresdner RCM Global Investors LLC ("Dresdner RCM"), Dresdner RCM Global
Investors US Holdings LLC ("Dresdner RCM Global") and Dresdner Bank AG
("Dresdner Bank") have jointly filed a Schedule 13G with the SEC reporting
that they had, as of December 31, 1998, sole
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<PAGE> 216
voting power over 928,900 shares of Common Stock (including 904,900 shares
beneficially owned by Dresdner RCM and Dresdner RCM Global) and sole
dispositive power over 1,084,900 (including 1,060,900 shares beneficially
owned by Dresdner RCM and Dresdner RCM Global). Dresdner Bank's principal
business office is located at Jurgen-Ponto-Platz 1, 60301 Frankfurt,
Germany. The principal business address of both Dresdner RCM and Dresdner
RCM Global is as indicated in the table.
(4) AXA Conseil Vie Assurance Mutuelle ("AXA Conseil"), AXA Assurances I.A.R.D.
Mutuelle ("AXA Assurances"), AXA Assurances Vie Mutuelle ("AXA Assurances
Vie"), AXA Courtage Assurance Mutuelle ("AXA Courtage"), AXA ("AXA") and
The Equitable Companies Incorporated ("Equitable") have jointly filed a
Schedule 13G with the SEC reporting that they had, as of December 31, 1998,
sole voting power over 625,000 shares of Common Stock, shared voting power
over 139,600 shares of Common Stock and sole dispositive power over 768,601
shares of Common Stock. AXA Conseil's principal business office is located
at 100-101 Terrasse Boieldieu, 92042 Paris, La Defense, France; AXA
Assurances' principal business office, which is the same as AXA Assurances
Vie's principal business office, is located at 21 Rue de Chateaudun, 75009
Paris, France; AXA Courtage's principal business office is located at 25
Rue Louis le Grand, 75002 Paris, France; AXA's principal business office is
located at 9 Place Vendome, 75001 Paris, France; and Equitable's principal
business address is as indicated in the table.
(5) Based on 14,578,925 shares of Common Stock outstanding as of February 1,
1999.
(6) Based on 17,578,925 shares of Common Stock outstanding after the offering.
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DESCRIPTION OF SENIOR CREDIT FACILITY
OVERVIEW
Our Senior Credit Facility is among School Specialty, our subsidiaries,
NationsBank, N.A., as administrative agent, Bank One, Wisconsin and U.S. Bank
National Association, as documentation agents, and other lending institutions
(the "Lenders") named in the Senior Credit Facility. The Senior Credit Facility
generally provides for a revolving loan facility of up to $250 million and a
term loan in the amount of $100 million, subject to certain covenants and
restrictions. In connection with the Common Stock and Note offerings, we are
negotiating certain changes to the Senior Credit Facility, including the
reduction in the loan facility from $350 million to $250 million after using the
net proceeds to reduce amounts as described under "Use of Proceeds."
Our subsidiaries have jointly and severally guaranteed our obligations
under the Senior Credit Facility.
SECURITY
Our indebtedness under the Senior Credit Facility is secured by (1) the
pledge of most of the capital stock in all of our subsidiaries and (2) liens on
substantially all of our other assets (other than real estate). The Senior
Credit Facility contemplates that if the proposed sale leaseback transaction
involving our properties does not occur by September 1999, we must provide
mortgages on these properties as additional security to the Lenders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- Our Facilities."
INTEREST
Indebtedness under the revolving Senior Credit Facility bears interest at a
floating rate based (at our option) on (1) the base rate for base rate loans,
plus a margin percentage or (2) LIBOR, plus a margin percentage. The margin
percentage varies after the third quarter of fiscal 1999 from 0% to .75% for
base rate loans and 1% to 2% for LIBOR loans based on our consolidated leverage
ratio. Our consolidated leverage ratio is calculated on the last day of each
fiscal quarter and is the ratio of our funded debt to Adjusted EBITDA. The term
loan bears interest at the rate of %.
On October 28, 1998, we entered into an interest rate swap agreement with
the Bank of New York covering $50 million of the outstanding Senior Credit
Facility. The agreement fixes the 30 day LIBOR interest rate at 4.37% per annum
on the $50 million notional amount and has a three year term that may be
canceled by the Bank of New York on the second anniversary.
MATURITY
The revolving Senior Credit Facility matures on September 30, 2003. The
term loan amortizes quarterly beginning in January 1999 and requires payments of
$10 million in the first year, $15 million in each of the second and third
years, and $30 million in each of the fourth and fifth years. Prepayments may be
made in whole or in part without penalty, subject to certain minimums. Amounts
prepaid may be reborrowed under the revolving facility but not the term
facility.
CONDITIONS TO EXTENSIONS OF CREDIT
The obligation of the Lenders to make subsequent loans is subject to the
satisfaction of certain customary conditions including, but not limited to, the
absence of a default or event of default under the Senior Credit Facility, all
representations and warranties under the Senior Credit Facility and the other
related loan documents being true and correct in all material respects and that
there has been no material adverse change in our properties or business.
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COVENANTS
The Senior Credit Facility requires us to meet certain financial tests,
including meeting a minimum net worth test and leverage ratio and fixed charge
coverage ratio tests. The Senior Credit Facility also contains covenants which,
among other things, limit the incurrence of additional indebtedness, the nature
of our business, investments, leases of assets, creation and ownership of
subsidiaries, dividends, transactions with affiliates, mergers, consolidations
and acquisitions and dispositions of assets, liens and encumbrances and other
matters customarily restricted in credit agreements of this type. The Senior
Credit Facility also contains additional covenants that require us to maintain
our properties, together with insurance thereon, to provide certain information
to Nationsbank and the Lenders, including financial statements, notices and
reports, to permit inspections of our books and records and to comply with
applicable laws.
EVENTS OF DEFAULT
The Senior Credit Facility contains customary events of default, including
payment defaults, breach of representations, warranties and covenants (subject
to certain cure periods), cross-defaults to certain other indebtedness in excess
of $5 million, certain events of bankruptcy and insolvency, judgment defaults in
excess of $1 million and the failure of any of the loan documents to be in full
force and effect.
AMENDMENT
As noted above, in connection with the Common Stock and Note offerings, we
are negotiating certain changes to the Senior Credit Facility. These changes
include the following: (1) the reduction in the loan facility from $350 million
to $250 million and (2) certain changes to the financial and other covenants.
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DESCRIPTION OF NOTES
The Notes are to be issued under an Indenture, to be dated as of
, 1999 (the "Indenture"), among School Specialty, all of its
subsidiaries other than its one foreign subsidiary and the recently acquired
subsidiary Sportime, LLC (collectively, the "Subsidiary Guarantors") and
, as trustee (the "Trustee"). The statements under this caption
relating to the Notes and the Indenture are qualified in their entirety by
reference to all the provisions of the Indenture, including the definitions of
certain terms therein. A copy of the Indenture is filed as an exhibit to the
registration statement of which this Prospectus forms a part. Unless otherwise
indicated, references under this caption to sections, "sec." or articles are
references to the Indenture. Where reference is made to particular provisions of
the Indenture or to defined terms not otherwise defined herein, such provisions
or defined terms are incorporated herein by reference.
GENERAL
School Specialty will sell $100 million in aggregate principal amount of
the Notes which will be unsecured obligations of School Specialty and will
mature on , 2009. The Notes will be unconditionally Guaranteed on a
senior subordinated basis by the Subsidiary Guarantors. See "-- Subsidiary
Guarantees." The Indenture will permit School Specialty to issue up to $50
million aggregate principal amount of additional notes with the same terms
(including interest rate, maturity, redemption and other terms) as the Notes
being issued under this Prospectus ("Additional Notes") except that no
Additional Notes may be issued at a price that would cause such Additional Notes
to have "original issue discount" within the meaning of Section 1273 of the
Internal Revenue Code.
The Notes will bear interest at the rate per annum shown on the front cover
of this Prospectus from , 1999 or from the most recent Interest
Payment Date to which interest has been paid or provided for, payable
semi-annually on and of each year, commencing ,
1999, to the Person in whose name the Note (or any predecessor Note) is
registered at the close of business on the preceding or , as
the case may be. Settlement for the Notes will be made in immediately available
funds and payments by School Specialty in respect of the Notes (including
principal, premium, if any, and interest) will be made in immediately available
funds. Interest on the Notes will be computed on the basis of a 360-day year
comprised of twelve 30-day months. (sections 301, 307 and 310)
Principal of and premium, if any, and interest on the Notes will be
payable, and the Notes may be presented for registration of transfer and
exchange, at the office or agency of School Specialty maintained for that
purpose in the Borough of Manhattan, The City of New York, provided that at the
option of School Specialty, payment of interest on the Notes may be made by
check mailed to the address of the Person entitled thereto as it appears in the
Note Register. Until otherwise designated by School Specialty, such office or
agency will be the corporate trust office of the Trustee, as Paying Agent and
Registrar. (sections 301, 305 and 1002)
Notes will be issued only in fully registered form, without interest
coupons, in denominations of $1,000 and integral multiples thereof. (sec. 302)
No service charge will be made for any registration of transfer or exchange of
Notes, but School Specialty may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith. (sec. 305)
OPTIONAL REDEMPTION
The Notes will be subject to redemption, at the option of School Specialty,
in whole or in part, at any time on or after , 2004 and prior to
maturity, upon not less than 30 nor more than 60 days' notice mailed to each
Holder of Notes to be redeemed at such Holder's address appearing in the Note
Register, in amounts of $1,000 or an integral multiple of $1,000, at the
following Redemption Prices (expressed as percentages of the principal amount)
plus accrued interest to but excluding the Redemption Date (subject to the right
of Holders of record on the relevant Regular Record Date to receive interest due
on an Interest Payment Date that is on or prior to the
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Redemption Date), if redeemed during the 12-month period beginning of
the years indicated:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
2004........................................................ %
2005........................................................ %
2006........................................................ %
2007 and thereafter......................................... 100%
</TABLE>
(sections 203, 1101, 1105 and 1107)
In addition, if on or before , 2002 School Specialty receives net
proceeds from the sale of its Common Stock in one or more Public Equity
Offerings, School Specialty may, at its option, use all or a portion of any such
net proceeds to redeem Notes in an aggregate principal amount of up to 35% of
the original aggregate principal amount of the Notes and any Additional Notes,
provided, however, that Notes having a principal amount equal to at least 65% of
the original aggregate principal amount of the Notes and any Additional Notes
remain outstanding after such redemption. Such redemption must occur on a
Redemption Date within 75 days of such sale and upon not less than 30 nor more
than 60 days' notice mailed to each Holder of Notes to be redeemed at such
Holder's address appearing in the Note Register, in amounts of $1,000 or an
integral multiple of $1,000, at a redemption price of % of the principal
amount of the Notes plus accrued interest to but excluding the Redemption Date
(subject to the right of Holders of record on the relevant Regular Record Date
to receive interest due on an Interest Payment Date that is on or prior to the
Redemption Date).
If less than all the Notes are to be redeemed, the Trustee shall select, in
such manner as it shall deem fair and appropriate, the particular Notes to be
redeemed or any portion thereof that is an integral multiple of $1,000.
(sec. 1104)
The Notes will not have the benefit of any sinking fund.
SUBSIDIARY GUARANTEES
Subject to the limitations described below, the Subsidiary Guarantors will,
jointly and severally, unconditionally guarantee on a senior subordinated basis
the performance and punctual payment when due, whether at Stated Maturity, by
acceleration or otherwise, of all obligations of School Specialty under the
Indenture and the Notes, whether for principal of, premium, if any, or interest
on the Notes or otherwise (the "Subsidiary Guarantees"). The Subsidiary
Guarantors will initially be all but two of the existing Restricted Subsidiaries
of School Specialty. In addition, School Specialty will agree to cause any
future Restricted Subsidiaries to enter into a Subsidiary Guarantee and become a
Subsidiary Guarantor. Each Subsidiary Guarantee will be subordinated in right of
payment to the Senior Debt of the relevant Subsidiary Guarantor on the same
basis as the Notes are subordinated to the Senior Debt of School Specialty. No
payment will be made by any Subsidiary Guarantor under its Subsidiary Guarantee
during any period in which payments by School Specialty on the Notes are
suspended by the subordination provisions of the Indenture.
Although by its terms each Subsidiary Guarantee will be limited in an
amount not to exceed the maximum amount that can be Guaranteed by the relevant
Restricted Subsidiary Guarantor without rendering such Subsidiary Guarantee
voidable under applicable law relating to fraudulent conveyance or fraudulent
transfer or similar laws affecting the rights of creditors generally, the
ranking and effectiveness of the Subsidiary Guarantees are subject to certain
legal considerations and are therefore uncertain. See "Risk Factors -- You
Should Consider Certain Fraudulent Conveyance Issues Relating to the Subsidiary
Guarantees."
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In the event a Subsidiary Guarantor ceases to be a Restricted Subsidiary,
whether as a result of a disposition of all the assets or all of the Capital
Stock of such Subsidiary Guarantor, by way of sale, merger, consolidation or
otherwise, such Subsidiary Guarantor will be deemed released and relieved of its
obligations under its Subsidiary Guarantee without any action required on the
part of the Trustee or any Holder. In any such event, except as otherwise
provided under "Mergers, Consolidations and Sales of Assets" below, no other
Person acquiring or owning the assets or the Capital Stock of such Subsidiary
Guarantor (if not otherwise a Restricted Subsidiary) will be required to enter
into a Subsidiary Guarantee.
SUBORDINATION
The indebtedness evidenced by the Notes will, to the extent set forth in
the Indenture, be subordinate in right of payment to the prior payment in full
of all Senior Debt.
Upon any payment or distribution of assets to creditors upon any
liquidation, dissolution, winding-up, reorganization, assignment for the benefit
of creditors or marshaling of assets of School Specialty, whether voluntary or
involuntary, or any bankruptcy, insolvency, receivership or similar proceedings
of School Specialty, the holders of all Senior Debt will first be entitled to
receive payment in full of such Senior Debt, or provision made for such payment,
before the Holders of the Notes will be entitled to receive any payment in
respect of the principal of or premium, if any, or interest on, or any
obligation to repurchase, the Notes. In the event that notwithstanding the
foregoing, the Trustee or the Holder of any Note receives any payment or
distribution of assets of School Specialty of any kind or character (including
any such payment or distribution which may be payable or deliverable by the
reason of the payment of any other indebtedness of School Specialty being
subordinated to the payment of the Notes), before all the Senior Debt is so paid
in full, then such payment or distribution will be required to be paid over or
delivered forthwith to the trustee in bankruptcy or other person making payment
or distribution of assets of School Specialty for application to the payment of
all Senior Debt remaining unpaid, to the extent necessary to pay the Senior Debt
in full. However, notwithstanding the foregoing, Holders of the Notes may
receive shares of stock of School Specialty or securities of School Specialty
which are subordinate in right of payment to all Senior Debt of School Specialty
to substantially the same extent as, or greater than, the Notes are so
subordinated ("subordinated consideration").
No payments on account of principal of, premium, if any, or interest on, or
in respect of the purchase or other acquisition of, the Notes (except for
subordinated consideration), and no defeasance of the Notes, may be made if
there shall have occurred and be continuing a Senior Payment Default. "Senior
Payment Default" means any default in the payment of any principal of or
premium, if any, or interest on Senior Debt when due, whether at the stated
maturity of any such payment or by declaration of acceleration, call for
redemption or otherwise.
Upon the occurrence of a Senior Nonmonetary Default and receipt of written
notice by School Specialty and the Trustee of the occurrence of such Senior
Nonmonetary Default from any holder of Senior Debt (or any trustee, agent or
other representative for such holder) which is the subject of such Senior
Nonmonetary Default, no payments on account of principal of, premium, if any, or
interest on, or in respect of the purchase or other acquisition of, the Notes
(except for subordinated consideration), and no defeasance of the Notes, may be
made for a period (the "Payment Blockage Period") commencing on the date of the
receipt of such notice and ending the earlier of:
(1) the date on which such Senior Nonmonetary Default shall have been
cured or waived or ceased to exist or all Senior Debt the subject of such
Senior Nonmonetary Default shall have been discharged, and
(2) the 179th day after the date of the receipt of such notice;
provided that in no event may more than one Payment Blockage Period be commenced
during any 360-day period and there shall be a period of at least 181 days
during each 360-day period when no
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Payment Blockage Period is in effect. In addition, no Senior Nonmonetary Default
that existed or was continuing on the date of the commencement of a Payment
Blockage Period may be made the basis of the commencement of a subsequent
Payment Blockage Period whether or not within a period of 360 consecutive days,
unless such Senior Nonmonetary Default shall have been cured for a period of not
less than 90 consecutive days.
"Senior Nonmonetary Default" means the occurrence or existence and
continuance of an event of default with respect to Senior Debt, other than a
Senior Payment Default, permitting the holders of the Senior Debt (or a trustee
or other agent on behalf of the holders thereof) then to declare such Senior
Debt due and payable prior to the date on which it would otherwise become due
and payable.
The failure to make any payment on the Notes by reason of the provisions of
the Indenture described under this caption "Subordination" will not be construed
as preventing the occurrence of an Event of Default with respect to the Notes
arising from any such failure to make payment. Upon termination of any period of
payment blockage School Specialty shall resume making any and all required
payments in respect of the Notes, including any missed payments.
By reason of such subordination, in the event of insolvency, creditors of
School Specialty or the Subsidiary Guarantors who are not holders of Senior Debt
of School Specialty or the Subsidiary Guarantors or of the Notes may recover
less, ratably, than holders of Senior Debt of School Specialty or the Subsidiary
Guarantors and more, ratably, than Holders of the Notes.
The subordination provisions described above will not be applicable to
payments in respect of the Notes from a defeasance trust established in
connection with any defeasance or covenant defeasance of the Notes as described
under "-- Defeasance." (Article Thirteen)
After giving effect to the Notes and the application of the net proceeds
therefrom, as of , 199 School Specialty would have had approximately
$ (or $ million if the Common Stock offering is consummated)
of outstanding Debt other than the Notes, all of which constitutes Senior Debt.
COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON CONSOLIDATED DEBT
School Specialty may not, and may not permit any of its Restricted
Subsidiaries to, Incur any Debt (including Acquired Debt) except that School
Specialty and any Subsidiary Guarantor (but not any Restricted Subsidiary that
is not a Subsidiary Guarantor) may Incur Debt (including Acquired Debt) if
immediately after giving pro forma effect to the Incurrence of such Debt (and
Acquired Debt) and the receipt and application of the proceeds thereof, the
Consolidated Cash Flow Coverage Ratio of School Specialty would be greater than
2.0 to 1.
Notwithstanding the foregoing limitation, the following Debt may be
Incurred:
(1) Debt of School Specialty or any Subsidiary Guarantor under the
Senior Bank Facility in an aggregate principal amount at any one time not
to exceed $250 million, less any amounts by which any revolving credit
facility commitments under the Senior Bank Facility are permanently reduced
pursuant to the provisions of the Indenture described under "Limitation on
Asset Dispositions" below (so long as and to the extent that any required
payments in connection therewith are actually made), and any renewal,
extension, refinancing or refunding thereof in an amount which, together
with any amount remaining outstanding or available under the Senior Bank
Facility, does not exceed the amount permitted under this clause (1);
(2) Debt owed by School Specialty to any Wholly Owned Restricted
Subsidiary of School Specialty for which fair value has been received or
Debt owed by a Subsidiary of School
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Specialty to School Specialty or a Wholly Owned Restricted Subsidiary of
School Specialty; provided, however, that:
(a) if School Specialty or any Subsidiary Guarantor is the obligor
on such Debt, any such Debt shall be Subordinated Debt evidenced by an
intercompany promissory note, and
(b) upon either:
(i) the transfer or other disposition by such Wholly Owned
Restricted Subsidiary or School Specialty of any Debt so permitted to
a Person other than School Specialty or another Wholly Owned
Restricted Subsidiary of School Specialty, or
(ii) the issuance (other than directors' qualifying shares),
sale, lease, transfer or other disposition of shares of Capital Stock
(including by consolidation or merger) of such Wholly Owned
Restricted Subsidiary to a Person other than School Specialty or
another such Wholly Owned Restricted Subsidiary,
the provisions of this clause (2) shall no longer be applicable to such
Debt and such Debt shall be deemed to have been Incurred at the time of
such transfer or other disposition;
(3) Debt consisting of the Notes, the Subsidiary Guarantees and any
Guarantees by Restricted Subsidiaries of any Debt Incurred to refinance or
refund the Notes;
(4) Debt consisting of Permitted Interest Rate or Currency Price
Agreements;
(5) Debt which is exchanged for or the proceeds of which are used to
refinance or refund, or any extension or renewal of (each of the foregoing,
a "refinancing"):
(a) in the case of a refinancing by School Specialty or a
Subsidiary Guarantor only, the Notes,
(b) any Debt that is not described in any other clause hereof that
was outstanding on the date of original issuance of the Notes,
(c) outstanding Debt Incurred pursuant to the provisions of the
Indenture described under the first paragraph of this "Limitation on
Debt," or
(d) any Debt incurred under this clause (5) or clause (6) below,
in each case in an aggregate principal amount not to exceed the
principal amount of the Debt so refinanced plus the amount of any
premium required to be paid in connection with such refinancing pursuant
to the terms of the Debt so refinanced or the amount of any premium
reasonably determined by School Specialty as necessary to accomplish
such refinancing by means of a tender offer or privately negotiated
repurchase, plus the expenses of School Specialty or the Restricted
Subsidiary, as the case may be, incurred in connection with such
refinancing; provided, however, that:
(i) Debt the proceeds of which are used to refinance the Notes
or Debt which is pari passu with or subordinate in right of payment
to the Notes shall only be permitted if (x) in the case of any
refinancing of the Notes or Debt which is pari passu to the Notes,
the refinancing Debt is made pari passu to the Notes or subordinated
to the Notes, and (y) in the case of any refinancing of Debt which is
subordinated to the Notes, the refinancing Debt constitutes
Subordinated Debt; and
(ii) in the case of any refinancing of Debt Incurred by School
Specialty, the refinancing Debt may be Incurred only by School
Specialty, and in the case of any refinancing of Debt Incurred by a
Restricted Subsidiary, the refinancing Debt may be Incurred only by
such Restricted Subsidiary;
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and provided, further, that Debt Incurred pursuant to this clause (5)
may not be Incurred more than 45 days prior to the application of the
proceeds to repay the Debt to be refinanced; and
(6) Debt of School Specialty or any Subsidiary Guarantor not otherwise
permitted to be Incurred pursuant to clauses (1) through (5) above, which,
together with any other outstanding Debt Incurred pursuant to this clause
(6), has an aggregate principal amount not in excess of $15 million at any
time outstanding. (sec. 1007)
For purposes of determining compliance with this "Limitation on
Consolidated Debt" covenant, in the event that an item of proposed Debt meets
the criteria of more than one of the categories of Debt described in clauses (1)
through (6) above, or is entitled to be incurred pursuant to the first paragraph
of this covenant, School Specialty will be permitted to classify such item of
Debt in any manner that complies with this covenant.
LIMITATION ON SENIOR SUBORDINATED DEBT
School Specialty may not Incur any Debt which by its terms is (1)
subordinated in right of payment to any Senior Debt and (2) senior in right of
payment to the Notes. School Specialty may not permit any of its Subsidiary
Guarantors to incur any Debt which by its terms is (1) subordinated in right of
payment to any Senior Debt of such Subsidiary Guarantor and (2) senior in right
of payment to such Subsidiary Guarantor's Subsidiary Guarantee. (sec. 1009)
LIMITATION ON ISSUANCE OF GUARANTEES OF SUBORDINATED DEBT
School Specialty may not permit any Restricted Subsidiary, directly or
indirectly, to assume, Guarantee or in any other manner become liable with
respect to any Debt of School Specialty that by its terms is subordinate or
junior in right of payment to the Notes. (sec. 1010)
LIMITATION ON LIENS SECURING SUBORDINATED DEBT
School Specialty may not, and may not permit of its Restricted Subsidiaries
to, create, incur, assume or suffer to exist any Lien on or with respect to any
property or assets of School Specialty or any Restricted Subsidiary now owned or
hereafter acquired to secure any Debt of School Specialty or any Restricted
Subsidiary that is expressly by its terms pari passu or subordinate in right of
payment to any other Debt of School Specialty or such Restricted Subsidiary,
without making, or causing such Restricted Subsidiary to make, effective
provision for securing the Notes or, in the case of a Subsidiary Guarantor, its
Subsidiary Guarantee (1) equally and ratably with such Debt as to such property
or assets for so long as such Debt will be so secured or (2) if such Debt is
subordinate in right of payment to the Notes or such Subsidiary Guarantee, prior
to such Debt as to such property or assets for so long as such Debt will be so
secured. (sec. 1011)
LIMITATION ON RESTRICTED PAYMENTS
School Specialty:
(1) may not, directly or indirectly, declare or pay any dividend or
make any distribution (including any payment in connection with any merger
or consolidation derived from assets of School Specialty or any Restricted
Subsidiary) in respect of its Capital Stock or to the holders thereof,
excluding any dividends or distributions by School Specialty payable solely
in shares of its Capital Stock (other than Redeemable Stock) or in options,
warrants or other rights to acquire its Capital Stock (other than
Redeemable Stock),
(2) may not, and may not permit any Restricted Subsidiary to,
purchase, redeem, or otherwise acquire or retire for value:
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(a) any Capital Stock of School Specialty or any Related Person of
School Specialty, or
(b) any options, warrants or other rights to acquire shares of
Capital Stock of School Specialty or any Related Person of School
Specialty or any securities convertible or exchangeable into shares of
Capital Stock of School Specialty or any Related Person of School
Specialty,
(3) may not make, or permit any Restricted Subsidiary to make, any
Investment other than a Permitted Investment, and
(4) may not, and may not permit any Restricted Subsidiary to, redeem,
repurchase, defease or otherwise acquire or retire for value prior to any
scheduled maturity, repayment or sinking fund payment Debt of School
Specialty which is subordinate in right of payment to the Notes.
(each of clauses (1) through (4) being a "Restricted Payment") unless:
(a) no Event of Default, or an event that with the passing of time or
the giving of notice, or both, would constitute an Event of Default, shall
have occurred and is continuing or would result from such Restricted
Payment,
(b) after giving pro forma effect to such Restricted Payment as if
such Restricted Payment had been made at the beginning of the applicable
four-fiscal-quarter period, School Specialty could Incur at least $1.00 of
additional Debt pursuant to the terms of the Indenture described in the
first paragraph of "Limitation on Consolidated Debt" above, and
(c) upon giving effect to such Restricted Payment, the aggregate of
all Restricted Payments from the date of issuance of the Notes does not
exceed the sum of:
(i) 50% of cumulative Consolidated Net Income (or, in the case
Consolidated Net Income shall be negative, less 100% of such deficit) of
School Specialty from and after the first day of the first full fiscal
quarter commencing after the date of issuance of the Notes through the
last day of the last full fiscal quarter ending immediately preceding
the date of such Restricted Payment for which quarterly or annual
financial statements are available (taken as a single accounting
period), plus
(ii) 100% of the aggregate net proceeds received by School
Specialty after the date of original issuance of the Notes, including
the fair market value of property other than cash (determined in good
faith by the Board of Directors as evidenced by a resolution of the
Board of Directors filed with the Trustee), from contributions of
capital or the issuance and sale (other than to a Restricted Subsidiary)
of Capital Stock (other than Redeemable Stock) of School Specialty,
options, warrants or other rights to acquire Capital Stock (other than
Redeemable Stock) of School Specialty and Debt of School Specialty that
has been converted into or exchanged for Capital Stock (other than
Redeemable Stock and other than by or from a Restricted Subsidiary) of
School Specialty after the date of original issuance of the Notes,
provided that any such net proceeds received by School Specialty from an
employee stock ownership plan financed by loans from School Specialty or
a Restricted Subsidiary of School Specialty shall be included only to
the extent such loans have been repaid with cash on or prior to the date
of determination, plus
(iii) the aggregate Investments previously made by School Specialty
and its Restricted Subsidiaries (without duplication) in any
Unrestricted Subsidiary that is redesignated as, and remains, a
Restricted Subsidiary,
Prior to the making of any Restricted Payment, School Specialty shall deliver to
the Trustee an Officers' Certificate setting forth the computations by which the
determinations required by clauses (b) and (c) above were made and stating that
no Event of Default, or event that with the
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passing of time or the giving of notice, or both, would constitute an Event of
Default, has occurred and is continuing or will result from such Restricted
Payment.
Notwithstanding the foregoing, so long as no Event of Default, or event
that with the passing of time or the giving of notice, or both, would constitute
an Event of Default, shall have occurred and is continuing or would result
therefrom:
(1) School Specialty may pay any dividend on Capital Stock of any
class within 60 days after the declaration thereof if, on the date when the
dividend was declared, School Specialty could have paid such dividend in
accordance with the foregoing provisions,
(2) School Specialty may refinance any Debt otherwise permitted by the
provision of the Indenture described in clause (5) of the second paragraph
under "Limitation on Consolidated Debt" above or redeem, repurchase or
otherwise acquire and retire for value any Debt solely in exchange for or
out of the net proceeds of the substantially concurrent sale (other than
from or to a Restricted Subsidiary or from or to an employee stock
ownership plan financed by loans from School Specialty or a Restricted
Subsidiary of School Specialty) of shares of Capital Stock (other than
Redeemable Stock) of School Specialty, provided that the amount of net
proceeds from such exchange or sale shall be excluded from the calculation
of the amount available for Restricted Payments pursuant to the preceding
paragraph,
(3) School Specialty may purchase, redeem, acquire or retire any
shares of Capital Stock of School Specialty solely in exchange for or out
of the net proceeds of the substantially concurrent sale (other than from
or to a Restricted Subsidiary or from or to an employee stock ownership
plan financed by loans from School Specialty or a Restricted Subsidiary of
School Specialty) of shares of Capital Stock (other than Redeemable Stock)
of School Specialty,
(4) School Specialty or a Restricted Subsidiary may purchase or redeem
any Debt from Net Available Proceeds to the extent permitted under
"Limitation on Asset Dispositions," and
(5) School Specialty or any Restricted Subsidiary may make Restricted
Payments, in addition to Restricted Payments permitted by clauses (1)
through (4) above, not in excess of $10 million in the aggregate after the
date of the Indenture.
Any payment made pursuant to clause (1) or (3) of this paragraph shall be a
Restricted Payment for purposes of calculating aggregate Restricted Payments
pursuant to the preceding paragraph. (sec. 1012)
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
School Specialty may not, and may not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary of School Specialty:
(1) to pay dividends (in cash or otherwise) or make any other
distributions in respect of its Capital Stock or pay any Debt or other
obligation owed to School Specialty or any other Restricted Subsidiary,
(2) to make loans or advances to School Specialty or any other
Restricted Subsidiary, or
(3) to transfer any of its property or assets to School Specialty or
any other Restricted Subsidiary.
Notwithstanding the foregoing, School Specialty may, and may permit any
Restricted Subsidiary to, suffer to exist any such encumbrance or restriction:
(a) pursuant to any agreement in effect on the date of original
issuance of the Notes as described in a schedule to the Indenture,
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(b) pursuant to an agreement relating to any Debt Incurred by a Person
(other than a Restricted Subsidiary of School Specialty existing on the
date of original issuance of the Notes or any Restricted Subsidiary
carrying on any of the businesses of any such Restricted Subsidiary) prior
to the date on which such Person became a Restricted Subsidiary of School
Specialty and outstanding on such date and not Incurred in anticipation of
becoming a Restricted Subsidiary, which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other
than the Person so acquired,
(c) pursuant to an agreement effecting a renewal, refunding or
extension of Debt Incurred pursuant to an agreement referred to in clause
(a) or (b) above, provided, however, that the provisions contained in such
renewal, refunding or extension agreement relating to such encumbrance or
restriction are no more restrictive in any material respect than the
provisions contained in the agreement the subject thereof, as determined in
good faith by the Board of Directors and evidenced by a resolution of the
Board of Directors filed with the Trustee,
(d) in the case of clause (3) above, restrictions contained in any
security agreement (including a capital lease) securing Debt of a
Restricted Subsidiary otherwise permitted under the Indenture, but only to
the extent such restrictions restrict the transfer of the property subject
to such security agreement,
(e) in the case of clause (3) above, customary nonassignment
provisions entered into in the ordinary course of business consistent with
past practices in leases and other contracts to the extent such provisions
restrict the transfer or subletting of any such lease or the assignment of
rights under any such contract,
(f) any restriction with respect to a Restricted Subsidiary of School
Specialty imposed pursuant to an agreement which has been entered into for
the sale or disposition of all or substantially all of the Capital Stock or
assets of such Restricted Subsidiary, provided that consummation of such
transaction would not result in an Event of Default or an event that, with
the passing of time or the giving of notice or both, would constitute an
Event of Default, that such restriction terminates if such transaction is
closed or abandoned and that the closing or abandonment of such transaction
occurs within one year of the date such agreement was entered into, or
(g) such encumbrance or restriction is the result of applicable
corporate law or regulation relating to the payment of dividends or
distributions. (sec. 1013)
LIMITATION ON ASSET DISPOSITIONS
School Specialty may not, and may not permit any of its Restricted
Subsidiaries to, make any Asset Disposition in one or more related transactions
unless:
(1) School Specialty or the Restricted Subsidiary, as the case may be,
receives consideration for such disposition at least equal to the fair
market value for the assets sold or disposed of as determined by the Board
of Directors in good faith and evidenced by a resolution of the Board of
Directors filed with the Trustee,
(2) at least 75% of the consideration for such disposition consists of
cash or readily marketable cash equivalents or the assumption of Debt
(other than Debt that is subordinated to the Notes) relating to such assets
and release from all liability on the Debt assumed, and
(3) all Net Available Proceeds, less any amounts invested within 270
days of such disposition in assets related to the business of School
Specialty, are applied within 270 days of such disposition:
(a) first, to the permanent repayment or reduction of Senior Debt
then outstanding under any agreements or instruments which would require
such application or prohibit payments pursuant to clause (b) following,
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(b) second, to the extent of remaining Net Available Proceeds, to
make an Offer to Purchase outstanding Notes at 100% of their principal
amount plus accrued interest to the date of purchase and, to the extent
required by the terms thereof, any other Debt of School Specialty that
is pari passu with the Notes at a price no greater than 100% of the
principal amount thereof plus accrued interest to the date of purchase,
and
(c) third, to the extent of any remaining Net Available Proceeds,
to any other use as determined by School Specialty which is not
otherwise prohibited by the Indenture. (sec. 1014)
Pending final application of the Net Available Proceeds, the Company may
use the proceeds in any manner not prohibited by the Indenture and may
temporarily reduce Senior Debt then outstanding, provided that this temporary
use will not affect its obligations hereunder.
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS
School Specialty may not, and may not permit any of its Restricted
Subsidiaries to, enter into any Sale and Leaseback Transaction unless the Sale
and Leaseback Transaction is treated as an Asset Disposition and all of the
conditions of the Indenture described under "Limitation on Asset Dispositions"
(including the provisions concerning the application of Net Available Proceeds)
are satisfied with respect to such Sale and Leaseback Transaction, treating all
of the consideration received in such Sale and Leaseback Transaction as Net
Available Proceeds for purposes of such covenant. (sec. 1015)
LIMITATION ON OWNERSHIP OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
School Specialty may not, and may not permit any of its Restricted
Subsidiaries to, issue, transfer, convey, lease or otherwise dispose of any
shares of Capital Stock of a Restricted Subsidiary of School Specialty (other
than, if necessary, shares of its Capital Stock constituting directors'
qualifying shares) or securities convertible or exchangeable into, or options,
warrants, rights or any other interest with respect to, Capital Stock of a
Restricted Subsidiary of School Specialty to any person other than School
Specialty or a Wholly Owned Restricted Subsidiary of School Specialty except in
a transaction consisting of a sale of all of the Capital Stock of such
Restricted Subsidiary owned by School Specialty and any Restricted Subsidiary of
School Specialty and that complies with the provisions described under
"-- Limitation on Asset Dispositions" above to the extent such provisions apply.
(sec. 1016)
TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS
School Specialty may not, and may not permit any of its Restricted
Subsidiaries to, enter into any transaction (or series of related transactions)
with an Affiliate or Related Person of School Specialty (other than School
Specialty or a Wholly Owned Restricted Subsidiary of School Specialty),
including any Investment, either directly or indirectly, unless such transaction
is on terms no less favorable to School Specialty or such Restricted Subsidiary
than those that could be obtained in a comparable arm's-length transaction with
an entity that is not an Affiliate or Related Person and is in the best
interests of School Specialty or such Restricted Subsidiary.
For any transaction that involves:
(1) in excess of $500,000 but less than or equal to $1,000,000, the
Chief Executive Officer of School Specialty shall determine that the
transaction satisfies the above criteria and shall evidence such a
determination by a certificate filed with the Trustee,
(2) in excess of $1,000,000, a majority of the disinterested members
of the Board of Directors shall determine that the transaction satisfies
the above criteria and shall evidence such a determination by a Board
Resolution filed with the Trustee, or
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(3) in excess of $5,000,000, School Specialty shall also obtain an
opinion from a nationally recognized expert with experience in appraising
the terms and conditions of the type of transaction (or series of related
transactions) for which the opinion is required stating that such
transaction (or series of related transactions) is on terms no less
favorable to School Specialty or such Restricted Subsidiary than those that
could be obtained in a comparable arm's-length transaction with an entity
that is not an Affiliate or Related Person of School Specialty, which
opinion shall be filed with the Trustee. (sec. 1017)
The foregoing requirements shall not apply to:
(1) Any employment agreement or employee benefit arrangement with any
officer or director entered into in the ordinary course of business and
consistent with past practice;
(2) Payment of reasonable directors' fees to directors who are not
employees of School Specialty;
(3) Reasonable and customary indemnification of officers and directors
of School Specialty or any Restricted Subsidiary pursuant to bylaws,
statutory provisions or indemnification agreements;
(4) Any Restricted Payment that is permitted to be paid under the
provisions of the Indenture described under "Limitation on Restricted
Payments";
(5) Purchases and sales of goods and services in the ordinary course
of business on terms customary in the industry; and
(6) Acquisitions by an Affiliate or Related Person of School Specialty
of Capital Stock (other than Redeemable Stock) of School Specialty at the
fair market value thereof.
CHANGE OF CONTROL
Within 30 days of the occurrence of a Change of Control, School Specialty
will be required to make an Offer to Purchase all Outstanding Notes at a
purchase price equal to 101% of their principal amount plus accrued interest to
the date of purchase. A "Change of Control" will be deemed to have occurred at
such time as:
(1) any Person or any Persons acting together that would constitute a
"group" (a "Group") for purposes of Section 13(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or any successor
provision thereto, together with any Affiliates or Related Persons thereof,
shall beneficially own (within the meaning of Rule 13d-3 under the Exchange
Act, or any successor provision thereto), directly or indirectly, at least
50% of the aggregate voting power of all classes of Voting Stock of School
Specialty (for the purposes of this clause (1) a person shall be deemed to
beneficially own the Voting Stock of a corporation that is beneficially
owned (as defined above) by another corporation (a "parent corporation") if
such person beneficially owns (as defined above) at least 50% of the
aggregate voting power of all classes of Voting Stock of such parent
corporation), or
(2) any Person or Group, together with any Affiliates or Related
Persons thereof, shall succeed in having a sufficient number of its
nominees elected to the Board of Directors of School Specialty such that
such nominees, when added to any existing director remaining on the Board
of Directors of School Specialty after such election who was a nominee of
or is an Affiliate or Related Person of such Person or Group, will
constitute a majority of the Board of Directors of School Specialty, or
(3) School Specialty shall, directly or indirectly, transfer, sell,
lease or otherwise dispose of all or substantially all of its assets, or
(4) there shall be adopted a plan of liquidation or dissolution of
School Specialty.
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Notwithstanding the foregoing, a transaction effected to create a holding
company of School Specialty shall not be deemed to involve a "Change of Control"
if (1) pursuant to such transaction School Specialty becomes a wholly owned
Subsidiary of such holding company and (2) as a result of such transaction the
holders of Capital Stock of such holding company are substantially the same as
the holders of Capital Stock of School Specialty immediately prior to such
transaction; provided that following any such holding company transaction, this
covenant shall apply to both School Specialty and such holding company, and
references in this definition of "Change of Control" to School Specialty shall
thereafter be treated as references to either School Specialty or such holding
company, as applicable. (sec. 1018)
In the event that School Specialty makes an Offer to Purchase the Notes,
School Specialty intends to comply with any applicable securities laws and
regulations, including any applicable requirements of Section 14(e) of, and Rule
14e-1 under, the Exchange Act.
PROVISION OF FINANCIAL INFORMATION
For so long as any of the Notes are outstanding, School Specialty shall
file with the Commission the annual reports, quarterly reports and other
documents which a reporting company is required to file with the Commission
pursuant to Section 13(a) or 15(d) of the Exchange Act or any successor
provisions thereto. (sec. 1019)
UNRESTRICTED SUBSIDIARIES
School Specialty may designate any of its Subsidiaries to be an
"Unrestricted Subsidiary" as provided below in which event such Subsidiary and
each other Person that is then or thereafter becomes a Subsidiary of such
Subsidiary will be deemed to be an Unrestricted Subsidiary.
An "Unrestricted Subsidiary" means:
(1) any Subsidiary designated as such by the Board of Directors as set
forth below where:
(a) neither School Specialty nor any of its other Subsidiaries
(other than another Unrestricted Subsidiary):
(i) provides credit support for, or any Guarantee of, any Debt
of such Subsidiary or any Subsidiary of such Subsidiary (including
any undertaking, agreement or instrument evidencing such Debt), or
(ii) is directly or indirectly liable for any Debt of such
Subsidiary or any Subsidiary of such Subsidiary, and
(b) no default with respect to any Debt of such Subsidiary or any
Subsidiary of such Subsidiary (including any right which the holders
thereof may have to take enforcement action against such Subsidiary)
would permit (upon notice, lapse of time or both) any holder of any
other Debt of School Specialty and its Subsidiaries (other than another
Unrestricted Subsidiary) to declare a default on such other Debt or
cause the payment thereof to be accelerated or payable prior to its
final scheduled maturity, and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary to be an Unrestricted
Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds
any Lien on any property of, any other Subsidiary of School Specialty which is
not a Subsidiary of the Subsidiary to be so designated or otherwise an
Unrestricted Subsidiary, provided that either (1) the Subsidiary to be so
designated has total assets of $1,000 or less or (2) immediately after giving
effect to such designation, School Specialty could Incur at least $1.00 of
additional Debt pursuant to the first paragraph under "-- Limitation on
Consolidated Debt" and provided, further, that School Specialty could make a
Restricted Payment in an amount equal to the greater of the fair market value
and book value of
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such Subsidiary pursuant to the "Limitation on Restricted Payments" and such
amount is thereafter treated as a Restricted Payment for the purpose of
calculating the aggregate amount available for Restricted Payments thereunder.
(sec. 101)
MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS
School Specialty may not, in a single transaction or a series of related
transactions, consolidate with or merge into any other Person or permit any
other Person to consolidate with or merge into School Specialty or directly or
indirectly, transfer, sell, lease or otherwise dispose of all or substantially
all of its assets unless:
(1) in a transaction in which School Specialty does not survive or in
which School Specialty sells, leases or otherwise disposes of all or
substantially all of its assets, the successor entity to School Specialty
is organized under the laws of the United States of America or any State
thereof or the District of Columbia and shall expressly assume, by a
supplemental indenture executed and delivered to the Trustee in form
satisfactory to the Trustee, all of School Specialty's obligations under
the Indenture,
(2) immediately before and after giving effect to such transaction and
treating any Debt which becomes an obligation of School Specialty or a
Restricted Subsidiary as a result of such transaction as having been
Incurred by School Specialty or such Restricted Subsidiary at the time of
the transaction, no Event of Default or event that with the passing of time
or the giving of notice, or both, would constitute an Event of Default
shall have occurred and be continuing,
(3) immediately after giving effect to such transaction, the
Consolidated Net Worth of School Specialty (or other successor entity to
School Specialty) is equal to or greater than that of School Specialty
immediately prior to the transaction,
(4) immediately after giving effect to such transaction and treating
any Debt which becomes an obligation of School Specialty or a Restricted
Subsidiary as a result of such transaction as having been Incurred by
School Specialty or such Restricted Subsidiary at the time of the
transaction, School Specialty (including any successor entity to School
Specialty) could Incur at least $1.00 of additional Debt pursuant to the
provisions of the Indenture described in the first paragraph under
"Limitation on Consolidated Debt" above, and
(5) certain other conditions are met. (sec. 801)
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture:
(1) failure to pay principal of (or premium, if any, on) any Note when
due,
(2) failure to pay any interest on any Note when due, continued for 30
days,
(3) default in the payment of principal and interest on Notes required
to be purchased pursuant to an Offer to Purchase as described under "Change
of Control" or "Limitation on Certain Asset Dispositions" when due and
payable,
(4) failure to perform or comply with the provisions described under
"Merger, Consolidation and Certain Sales of Assets,"
(5) failure to perform any other covenant or agreement of School
Specialty or the Subsidiary Guarantors under the Indenture or the Notes
continued for 60 days after written notice to School Specialty by the
Trustee or Holders of at least 25% in aggregate principal amount of
Outstanding Notes,
(6) default under the terms of any instrument evidencing or securing
Debt for money borrowed by School Specialty or any Restricted Subsidiary
having an outstanding principal
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amount of $10 million individually or in the aggregate which default
results in the acceleration of the payment of such indebtedness or
constitutes the failure to pay such indebtedness when due,
(7) the rendering of a final judgment or judgments (not subject to
appeal) against School Specialty or any Restricted Subsidiary in an amount
in excess of $5 million which remains undischarged or unstayed for a period
of 60 days after the date on which the right to appeal has expired,
(8) the Subsidiary Guarantee of any Subsidiary Guarantor is held by a
final non-appealable order or judgment of a court of competent jurisdiction
to be unenforceable or invalid or ceases for any reason to be in full force
and effect (other than in accordance with the terms of the Indenture) or
any Subsidiary Guarantor or any Person acting on behalf of any Subsidiary
Guarantor denies or disaffirms such Subsidiary Guarantor's obligations
under its Subsidiary Guarantee (other than by reason of a release of such
Subsidiary Guarantor from its Subsidiary Guarantee in accordance with the
terms of the Indenture), and
(9) certain events of bankruptcy, insolvency or reorganization
affecting School Specialty or any Restricted Subsidiary. (sec. 501)
Subject to the provisions of the Indenture relating to the duties of the
Trustee in case an Event of Default (as defined) shall occur and be continuing,
the Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any of the Holders, unless
such Holders shall have offered to the Trustee reasonable indemnity. (sec. 603)
Subject to such provisions for the indemnification of the Trustee, the Holders
of a majority in aggregate principal amount of the Outstanding Notes will have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or exercising any trust or power conferred
on the Trustee. (sec. 512)
If an Event of Default (other than an Event of Default described in Clause
(9) above) shall occur and be continuing, either the Trustee or the Holders of
at least 25% in aggregate principal amount of the Outstanding Notes may
accelerate the maturity of all Notes; provided, however, that after such
acceleration, but before a judgment or decree based on acceleration, the Holders
of a majority in aggregate principal amount of Outstanding Notes may, under
certain circumstances, rescind and annul such acceleration if all Events of
Default, other than the non-payment of accelerated principal, have been cured or
waived as provided in the Indenture. If an Event of Default specified in Clause
(9) above occurs, the Outstanding Notes will ipso facto become immediately due
and payable without any declaration or other act on the part of the Trustee or
any Holder. (sec. 502) For information as to waiver of defaults, see
"-- Modification and Waiver."
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holder shall
have previously given to the Trustee written notice of a continuing Event of
Default (as defined) and unless also the Holders of at least 25% in aggregate
principal amount of the Outstanding Notes shall have made written request, and
offered reasonable indemnity, to the Trustee to institute such proceeding as
trustee, and the Trustee shall not have received from the Holders of a majority
in aggregate principal amount of the Outstanding Notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. (sec. 507) However, such limitations do not apply to a suit instituted by
a Holder of a Note for enforcement of payment of the principal of or premium, if
any, or interest on such Note on or after the respective due dates expressed in
such Note. (sec. 508)
School Specialty will be required to furnish to the Trustee quarterly a
statement as to the performance by School Specialty of certain of its
obligations under the Indenture and as to any default in such performance. (sec.
1020)
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SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture will cease to be of further effect as to all outstanding
Notes, if:
(1) School Specialty will have paid or caused to be paid the principal
of and interest on the Notes as and when the same will have become due and
payable, or
(2) all outstanding Notes (except lost, stolen or destroyed Notes
which have been replaced or paid) have been delivered to the Trustee for
cancellation;
provided, that notwithstanding the foregoing the Indenture shall remain in
effect with respect to:
(a) rights of registration of transfer and exchange and School
Specialty's right of optional redemption,
(b) substitution of apparently mutilated, defaced, destroyed, lost or
stolen Notes,
(c) rights of Holders to receive payment of principal of and interest
on the Notes,
(d) rights, obligations and immunities of the Trustee under the
Indenture, and
(e) rights of the Holders of the Notes as beneficiaries of the
Indenture with respect to any property deposited with the Trustee payable
to all or any of them.
DEFEASANCE
The Indenture will provide that, at the option of School Specialty, (1) if
applicable, School Specialty and the Subsidiary Guarantors will be discharged
from any and all obligations in respect of the Outstanding Notes ("Legal
Defeasance") or (2) if applicable, School Specialty may omit to comply with
certain restrictive covenants, and that such omission shall not be deemed to be
an Event of Default under the Indenture and the Notes ("Covenant Defeasance"),
in either case upon irrevocable deposit with the Trustee, in trust, of money
and/or U.S. government obligations which will provide money in an amount
sufficient in the opinion of a nationally recognized firm of independent
certified public accountants to pay the principal of and premium, if any, and
each installment of interest, if any, on the Outstanding Notes. In the case of
Covenant Defeasance, the obligations under the Indenture other than with respect
to such covenants and the Events of Default other than the Events of Default
relating to such covenants shall remain in full force and effect.
Such trust may only be established if, among other things:
(1) (a) in the case of Legal Defeasance, School Specialty has received
from, or there has been published by, the Internal Revenue Service a
ruling or there has been a change in law, which in the Opinion of
Counsel provides that Holders of the Notes will not recognize gain or
loss for Federal income tax purposes as a result of such deposit,
defeasance and discharge and will be subject to Federal income tax on
the same amounts, in the same manner and at the same times as would have
been the case if such deposit, defeasance and discharge had not
occurred, or
(b) in the case of Covenant Defeasance, School Specialty has
delivered to the Trustee an Opinion of Counsel to the effect that the
Holders of the Notes will not recognize gain or loss for Federal income
tax purposes as a result of such deposit and defeasance and will be
subject to Federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such deposit and
defeasance had not occurred;
(2) no Event of Default or event that with the passing of time or the
giving of notice, or both, shall constitute an Event of Default shall have
occurred or be continuing;
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(3) School Specialty has delivered to the Trustee an Opinion of
Counsel to the effect that such deposit shall not cause the Trustee or the
trust so created to be subject to the Investment Company Act of 1940; and
(4) certain other customary conditions precedent are satisfied.
(sec. )
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by School
Specialty and the Trustee with the consent of the Holders of a majority in
aggregate principal amount of the Outstanding Notes; provided, however, that no
such modification or amendment may, without the consent of the Holder of each
Outstanding Note affected thereby:
(1) change the Stated Maturity of the principal of, or any installment
of interest on, any Note,
(2) reduce the principal amount of, or the premium or interest on, any
Note,
(3) change the place or currency of payment of principal of or premium
or interest on any Note,
(4) impair the right to institute suit for the enforcement of any
payment on or with respect to any Note or Subsidiary Guarantee,
(5) reduce the above-stated percentage of Outstanding Notes necessary
to modify or amend the Indenture,
(6) reduce the percentage of aggregate principal amount of Outstanding
Notes necessary for waiver of compliance with certain provisions of the
Indenture or for waiver of certain defaults,
(7) modify any provisions of the Indenture relating to the
modification and amendment of the Indenture or the waiver of past defaults
or covenants, except as otherwise specified,
(8) modify any of the provisions of the Indenture relating to the
subordination of the Notes or the Subsidiary Guarantees in a manner adverse
to the Holders, or
(9) following the mailing of any Offer to Purchase, modify any Offer
to Purchase for the Notes required under the "Limitation on Asset
Dispositions" or the "Change of Control" covenants contained in the
Indenture in a manner materially adverse to the Holders thereof. (sec. 902)
The Holders of a majority in aggregate principal amount of the Outstanding
Notes, on behalf of all Holders of Notes, may waive compliance by School
Specialty with certain restrictive provisions of the Indenture. (sec. 1021)
Subject to certain rights of the Trustee, as provided in the Indenture, the
Holders of a majority in aggregate principal amount of the Outstanding Notes, on
behalf of all Holders of Notes, may waive any past default under the Indenture,
except a default in the payment of principal, premium or interest or a default
arising from failure to purchase any Note tendered pursuant to an Offer to
Purchase. (sec. 513)
GOVERNING LAW
The Indenture and the Notes will be governed by the laws of the State of
New York.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it under the Indenture
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and use the same degree of care and skill in its exercise as a prudent person
would exercise under the circumstances in the conduct of such person's own
affairs. (sections )
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of School Specialty, to obtain payment of claims in certain
cases or to realize on certain property received by it in respect of any such
claim as security or otherwise. The Trustee is permitted to engage in other
transactions with School Specialty or any Affiliate, provided, however, that if
it acquires any conflicting interest (as defined in the Indenture or in the
Trust Indenture Act), it must eliminate such conflict or resign. (sec.
)
BOOK-ENTRY SYSTEM
The Notes will be issued in the form of one or more fully registered global
notes (collectively, the "Global Note"), which will be deposited with, or on
behalf of, The Depositary Trust Company, New York, New York (the "Depositary")
and registered in the name of the Depository's nominee. Except as set forth
below, the Global Note may be transferred, in whole and not in part, only to the
Depositary or another nominee of the Depositary.
The Depositary has advised School Specialty as follows: The Depositary is a
limited-purpose trust company organized under the laws of the State of New York,
a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. The Depositary
was created to hold securities of institutions that have accounts with the
Depositary ("participants") and to facilitate the clearance and settlement of
securities transactions among its participants in such securities through
electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depository's participants include securities brokers and dealers (including the
Underwriters), banks, trust companies, clearing corporations and certain other
organizations, some of whom (and/or their representatives) own the Depositary.
Access to the Depository's book-entry system is also available to others such as
banks, brokers, dealers, and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly. The
Depositary agrees with and represents to its participants that it will
administer its book-entry system in accordance with its rules and bylaws and
requirements of law.
Upon the issuance of the Global Note, the Depositary will credit, on its
book-entry registration and transfer system, the respective principal amounts of
the Notes represented by the Global Note to the accounts of participants. The
accounts to be credited shall be designated by the Underwriters. Ownership of
beneficial interest in the Global Note will be limited to participants or
persons that may hold interests through participants. Ownership of interests in
the Global Note will be shown on, and the transfer of those ownership interests
will be effected only through, records maintained by the Depositary (with
respect to participants' interests) and such participants (with respect to the
owners of beneficial interest in the Global Note through such participants). The
laws of some jurisdictions may require that certain purchasers of securities
take physical delivery of such securities in definitive form. Such limits and
laws may impair the ability to transfer beneficial interests in the Global Note.
So long as the Depositary, or its nominee, is the registered holder and
owner of the Global Note, the Depositary or such nominee, as the case may be,
will be considered the sole owner and the holder thereof for all purposes of
such Notes and under the Indenture. Except as set forth below, owners of
beneficial interests in the Global Note will not be entitled to have the Notes
represented by the Global Note registered in their names, will not receive or be
entitled to receive physical delivery of Certificated Notes in definitive form
and will not be considered to be the owners or holders of any Notes under the
Indenture. Accordingly, each person owning a beneficial interest in the Global
Note
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must rely on the procedures of the Depositary and, if such person is not a
participant, on the procedures of the participant through which such person owns
its interest, to exercise any rights of a holder of Notes under the Indenture or
the Global Note. School Specialty understands that under existing industry
practice, in the event School Specialty requests any action that the Depositary,
as the holder of the Global Note, is entitled to take, the Depositary would
authorize the participants to take such action, and that the participants would
authorize beneficial owners owning through such participants to take such action
or would otherwise act upon the instructions of beneficial owners owning through
them.
Payment of principal of and premium, if any, and interest on Notes
represented by the Global Note will be made to the Depositary or its nominee as
the registered owner and holder of the Global Note.
School Specialty expects that the Depositary, upon receipt of any payment
of principal (and premium, if any) or interest in respect of the Global Note,
will credit immediately participants' accounts with payment in amounts
proportionate to their respective beneficial interests in the principal amount
of the Global Note as shown on the records of the Depositary. School Specialty
also expects that payments by participants to owners of beneficial interests in
the Global Note held through such participants will be governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in "street name," and
will be the responsibility of such participants. None of School Specialty, the
Trustee, any agent of School Specialty or the Trustee or the Underwriters will
have any responsibility or liability for any aspect of the records relating to,
or payments made on account of, beneficial ownership interests in the Global
Note or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests or for any other aspect of the relationship
between the Depositary and its participants or the relationship between such
participants and the owners of beneficial interests in the Global Note owning
through such participants.
Unless and until it is exchanged in whole or in part for certificated Notes
in definitive form, the Global Note may not be transferred except as a whole by
the Depositary to a nominee of the Depositary or by a nominee of the Depositary
to the Depositary or another nominee of the Depositary.
The Notes represented by a Global Note are exchangeable for certificated
Notes in definitive registered form in denominations of $1,000 and in any
greater amount that is an integral multiple thereof if (1) the Depositary
notifies School Specialty that it is unwilling or unable to continue as
Depositary for the Global Note or if at any time the Depositary ceases to be a
clearing agency registered under the Exchange Act, (2) School Specialty in its
discretion at any time determines not to have all of the Notes represented by
the Global Note and notifies the Trustee thereof or (3) an Event of Default with
respect to the Notes has occurred and is continuing. Any Notes that are
exchangeable pursuant to the preceding sentence are exchangeable for
certificated Notes issuable in authorized denominations and registered in such
names as the Depositary shall direct. Subject to the foregoing, the Global Note
is not exchangeable except for a Global Note or Global Notes of the same
aggregate denominations to be registered in the name of the Depositary or its
nominee.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided. (sec. 101)
"Acquired Debt" of any particular Person means Debt of any other Person
existing at the time such other Person merged with or into or became a
Subsidiary of such Particular Person or assumed by such particular Person in
connection with the acquisition of assets from any other Person, and not
Incurred by such other Person in connection with, or in contemplation of, such
other
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Person merging with or into such particular Person or becoming a Subsidiary of
such particular Person or such acquisition.
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the 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.
"Asset Disposition" by any Person means any transfer, conveyance, sale,
lease or other disposition by such Person or any of its Restricted Subsidiaries
(including any issuance or sale by a Restricted Subsidiary of Capital Stock of
such Restricted Subsidiary and including a consolidation or merger or other sale
of any such Restricted Subsidiary with, into or to another Person in a
transaction in which such Restricted Subsidiary ceases to be a Restricted
Subsidiary, but excluding a disposition by a Restricted Subsidiary of such
Person to such Person or a Wholly Owned Restricted Subsidiary of such Person or
by such Person to a Wholly Owned Restricted Subsidiary of such Person) of:
(1) shares of Capital Stock (other than directors' qualifying shares)
or other ownership interests of a Restricted Subsidiary of such Person,
(2) substantially all of the assets of such Person or any of its
Restricted Subsidiaries representing a division or line of business, or
(3) other assets or rights of such Person or any of its Restricted
Subsidiaries outside of the ordinary course of business;
provided in each case that the aggregate consideration for such transfer,
conveyance, sale, lease or other disposition is equal to $1 million or more.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Debt arrangements conveying
the right to use) real or personal property of such Person which is required to
be classified and accounted for as a capital lease or a liability on the face of
a balance sheet of such Person in accordance with generally accepted accounting
principles. The stated maturity of such obligation shall be the date of the last
payment of rent or any other amount due under such lease prior to the first date
upon which such lease may be terminated by the lessee without payment of a
penalty. The principal amount of such obligation shall be the capitalized amount
thereof that would appear on the face of a balance sheet of such Person in
accordance with generally accepted accounting principles.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock or
other equity participations, including partnership interests, whether general or
limited, of such Person.
"Cash Equivalents" means:
(1) direct obligations of the United States of America or any agency
thereof having maturities of not more than one year from the date of
acquisition,
(2) time deposits and certificates of deposit of any domestic
commercial bank of recognized standing having capital and surplus in excess
of $500 million, with maturities of not more than one year from the date of
acquisition,
(3) repurchase obligations issued by any bank described in clause (2)
above with a term not to exceed 30 days,
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(4) commercial paper rated at least A-1 or the equivalent thereof by
S&P or at least P-1 or the equivalent thereof by Moody's, in each case
maturing within one year after the date of acquisition, and
(5) shares of any money market mutual fund, or similar fund, in each
case having assets in excess of $500 million, which invests predominantly
in investments of the types describes in clauses (1) through (4) above.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated Cash Flow Available for Fixed Charges" for any period means
the Consolidated Net Income of School Specialty and its Restricted Subsidiaries
for such period increased by the sum of:
(1) Consolidated Interest Expense of School Specialty and its
Restricted Subsidiaries for such period,
(2) Consolidated Income Tax Expense of School Specialty and its
Restricted Subsidiaries for such period,
(3) the consolidated depreciation and amortization expense included in
the income statement of School Specialty and its Restricted Subsidiaries
for such period, and
(4) all other non-cash items reducing Consolidated Net Income of
School Specialty and its Restricted Subsidiaries, less all non-cash items
increasing Consolidated Net Income of School Specialty and its Restricted
Subsidiaries;
provided, however, that there shall be excluded therefrom the Consolidated Cash
Flow Available for Fixed Charges (if positive) of any Restricted Subsidiary of
School Specialty (calculated separately for such Restricted Subsidiary in the
same manner as provided above for School Specialty) that is subject to a
restriction which prevents the payment of dividends or the making of
distributions to School Specialty or another Restricted Subsidiary of School
Specialty to the extent of such restriction.
"Consolidated Cash Flow Coverage Ratio" as of any date of determination
means the ratio of:
(1) Consolidated Cash Flow Available for Fixed Charges of School
Specialty and its Restricted Subsidiaries for the period of the most
recently completed four consecutive fiscal quarters for which quarterly or
annual financial statements are available to
(2) Consolidated Fixed Charges of School Specialty and its Restricted
Subsidiaries for such period;
provided, however, that Consolidated Fixed Charges shall be adjusted to give
effect on a pro forma basis to any Debt that has been Incurred by School
Specialty or any Restricted Subsidiary since the beginning of such period that
remains outstanding and to any Debt that is proposed to be Incurred by School
Specialty or any Restricted Subsidiary as if in each case such Debt had been
Incurred on the first day of such period and as if any Debt that (1) is or will
no longer be outstanding as the result of the Incurrence of any such Debt or (2)
had been repaid or retired during such period had not been outstanding as of the
first day of such period; provided further, however, that in making such
computation, the Consolidated Interest Expense of School Specialty and its
Restricted Subsidiaries attributable to interest on any proposed Debt bearing a
floating interest rate shall be computed on a pro forma basis as if the rate in
effect on the date of computation had been the applicable rate for the entire
period; and provided further that, in the event School Specialty or any of its
Restricted Subsidiaries has made Asset Dispositions or acquisitions of assets
not in the ordinary course of business (including acquisitions of other Persons
by merger, consolidation or
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purchase of Capital Stock) during or after such period, such computation shall
be made on a pro forma basis in accordance with Regulation S-X promulgated under
the Securities Act of 1933, as amended (the "Securities Act"), as if the Asset
Dispositions or acquisitions had taken place on the first day of such period.
"Consolidated Fixed Charges" for any period means the sum of:
(1) Consolidated Interest Expense, and
(2) the consolidated amount of interest capitalized by School
Specialty and its Restricted Subsidiaries during such period calculated in
accordance with generally accepted accounting principles.
"Consolidated Income Tax Expense" for any period means the consolidated
provision for income taxes of School Specialty and its Restricted Subsidiaries
for such period calculated on a consolidated basis in accordance with generally
accepted accounting principles.
"Consolidated Interest Expense" means for any period the consolidated
interest expense included in a consolidated income statement (without deduction
of interest income) of School Specialty and its Restricted Subsidiaries for such
period calculated on a consolidated basis in accordance with generally accepted
accounting principles, including without limitation or duplication (or, to the
extent not so included, with the addition of):
(1) the amortization of Debt discounts,
(2) the amortization of any payments or fees with respect to letters
of credit, bankers' acceptances or similar facilities,
(3) the amortization of fees with respect to interest rate swap or
similar agreements or foreign currency hedge, exchange or similar
agreements,
(4) Preferred Stock dividends of School Specialty or Restricted
Subsidiaries of School Specialty (other than such dividends (a) in respect
of Redeemable Stock or (b) payable in Capital Stock other than Redeemable
Stock) declared and paid or payable,
(5) accrued dividends on Redeemable Stock of School Specialty or its
Restricted Subsidiaries (other than such dividends payable solely in
Capital Stock other than Redeemable Stock), whether or not declared or
paid,
(6) interest on Debt Guaranteed by School Specialty and its Restricted
Subsidiaries, and
(7) the portion of any rental obligation allocable to interest
expense.
"Consolidated Net Income" for any period means the consolidated net income
(or loss) of School Specialty and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with generally accepted
accounting principles; provided that there shall be excluded therefrom:
(1) the net income (or loss) of any Person acquired by of School
Specialty or a Restricted Subsidiary of School Specialty in a
pooling-of-interests transaction for any period prior to the date of such
transaction,
(2) the net income (or loss) of any Person that is not a Subsidiary of
School Specialty except to the extent of the amount of dividends or other
distributions actually paid to School Specialty or a Subsidiary of School
Specialty by such Person during such period,
(3) gains or losses on Asset Dispositions by School Specialty or its
Restricted Subsidiaries,
(4) all extraordinary gains and extraordinary losses,
(5) the cumulative effect of changes in accounting principles, and
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(6) the tax effect of any of the items described in clauses (1)
through (5) above;
provided, further, that for purposes of any determination pursuant to the
provisions of the Indenture described under "Limitation on Restricted Payments,"
there shall further be excluded therefrom the net income (but not net loss) of
any Restricted Subsidiary of School Specialty that is subject to a restriction
which prevents the payment of dividends or the making of distributions to School
Specialty or another Restricted Subsidiary of School Specialty to the extent of
such restriction.
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
generally accepted accounting principles, less amounts attributable to
Redeemable Stock of such Person; provided that, with respect to School
Specialty, adjustments following the date of the Indenture to the accounting
books and records of School Specialty in accordance with Accounting Principles
Board Opinions Nos. 16 and 17 (or successor opinions thereto) or otherwise
resulting from the acquisition of control of School Specialty by another Person
shall not be given effect to.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or not
contingent:
(1) every obligation of such Person for money borrowed,
(2) every obligation of such Person evidenced by bonds, debentures,
notes or other similar instruments, including obligations Incurred in
connection with the acquisition of property, assets or businesses,
(3) every reimbursement obligation of such Person with respect to
letters of credit, bankers' acceptances or similar facilities issued for
the account of such Person,
(4) every obligation of such Person issued or assumed as the deferred
purchase price of property or services (including securities repurchase
agreements but excluding trade accounts payable or accrued liabilities
arising in the ordinary course of business which are not overdue or which
are being contested in good faith),
(5) every Capital Lease Obligation of such Person,
(6) all Receivables Sales of such Person, together with any obligation
of such Person to pay any discount, interest, fees, indemnities, penalties,
recourse, expenses or other amounts in connection therewith,
(7) all Redeemable Stock issued by such Person,
(8) Preferred Stock of Restricted Subsidiaries of such Person held by
Persons other than such Person or one of its Wholly Owned Restricted
Subsidiaries,
(9) every obligation under Interest Rate or Currency Agreements of
such Person, and
(10) every obligation of the type referred to in clauses (1) through
(9) of another Person and all dividends of another Person the payment of
which, in either case, such Person has Guaranteed or is responsible or
liable for, directly or indirectly, as obligor, Guarantor or otherwise.
Debt shall not include any obligation to pay contingent purchase price
payments, earn-outs, indemnification obligations or similar items to the buyer
or seller of any business or assets acquired or sold by School Specialty or a
Restricted Subsidiary to the extent such obligations are not required to be
reflected on the balance sheet of School Specialty or such Restricted Subsidiary
in accordance with generally accepted accounting principles (footnote disclosure
of such obligations shall not be deemed to be reflected on the balance sheet for
this purpose).
The "amount" or "principal amount" of Debt at any time of determination as
used herein represented by (1) any Receivables Sale, shall be the amount of the
unrecovered capital or
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<PAGE> 241
principal investment of the purchaser (other than School Specialty or a Wholly
Owned Restricted Subsidiary of School Specialty) thereof (excluding amounts
representative of yield or interest earned on such investment) with respect to
which such purchaser has recourse to the seller and (2) any Redeemable Stock,
shall be the maximum fixed redemption or repurchase price in respect thereof.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person guaranteeing, or having the economic effect of guaranteeing, any
Debt of any other Person (the "primary obligor") in any manner, whether directly
or indirectly, and including, without limitation, any obligation of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Debt or to purchase (or to advance or supply funds for the
purchase of) any security for the payment of such Debt,
(2) to purchase property, securities or services for the purpose of
assuring the holder of such Debt of the payment of such Debt, or
(3) to maintain working capital, equity capital or other financial
statement condition or liquidity of the primary obligor so as to enable the
primary obligor to pay such Debt (and "Guaranteed," "Guaranteeing" and
"Guarantor" shall have meanings correlative to the foregoing);
provided, however, that the Guarantee by any Person shall not include
endorsements by such Person for collection or deposit, in either case, in the
ordinary course of business.
"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other obligation
or the recording, as required pursuant to generally accepted accounting
principles or otherwise, of any such Debt or other obligation on the balance
sheet of such Person (and "Incurrence," "Incurred," "Incurrable" and "Incurring"
shall have meanings correlative to the foregoing); provided, however, that a
change in generally accepted accounting principles that results in an obligation
of such Person that exists at such time becoming Debt shall not be deemed an
Incurrence of such Debt.
"Interest Rate or Currency Agreement" of any Person means any forward
contract, futures contract, swap, option or other financial agreement or
arrangement (including, without limitation, caps, floors, collars and similar
agreements) relating to, or the value of which is dependent upon, interest rates
or currency exchange rates or indices.
"Investment" by any Person means any direct or indirect loan, advance or
other extension of credit or capital contribution (by means of transfers of cash
or other property to others or payments for property or services for the account
or use of others, or otherwise) to, or purchase or acquisition of Capital Stock,
bonds, notes, debentures or other securities or evidence of Debt issued by, any
other Person, including any payment on a Guarantee of any obligation of such
other Person.
"Lien" means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, Receivables Sale, deposit
arrangement, security interest, lien, charge, easement (other than any easement
not materially impairing usefulness or marketability), encumbrance, preference,
priority or other security agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such property or assets (including,
without limitation, any conditional sale or other title retention agreement
having substantially the same economic effect as any of the foregoing).
"Moody's" means Moody's Investors Services, Inc.
"Net Available Proceeds" from any Asset Disposition by any Person means
cash or readily marketable cash equivalents received (including by way of sale
or discounting of a note, installment
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receivable or other receivable, but excluding any other consideration received
in the form of assumption by the acquired of Debt or other obligations relating
to such properties or assets) therefrom by such Person, net of:
(1) all legal, title and recording tax expenses, commissions and other
fees and expenses Incurred and all federal, state, provincial, foreign and
local taxes required to be accrued as a liability as a consequence of such
Asset Disposition,
(2) all payments made by such Person or its Restricted Subsidiaries on
any Debt which is secured by such assets in accordance with the terms of
any Lien upon or with respect to such assets or which must by the terms of
such Lien, or in order to obtain a necessary consent to such Asset
Disposition or by applicable law, be repaid out of the proceeds from such
Asset Disposition,
(3) all distributions and other payments made to minority interest
holders in Restricted Subsidiaries of such Person or joint ventures as a
result of such Asset Disposition, and
(4) appropriate amounts to be provided by such Person or any
Restricted Subsidiary thereof, as the case may be, as a reserve in
accordance with generally accepted accounting principles against any
liabilities associated with such assets and retained by such Person or any
Restricted Subsidiary thereof, as the case may be, after such Asset
Disposition, including, without limitation, liabilities under any
indemnification obligations and severance and other employee termination
costs associated with such Asset Disposition, in each case as determined by
the Board of Directors, in its reasonable good faith judgment evidenced by
a resolution of the Board of Directors filed with the Trustee; provided,
however, that any reduction in such reserve following the consummation of
such Asset Disposition will be treated for all purposes of the Indenture
and the Notes as a new Asset Disposition at the time of such reduction with
Net Available Proceeds equal to the amount of such reduction.
"Offer to Purchase" means a written offer (the "Offer") sent by School
Specialty by first class mail, postage prepaid, to each Holder at his address
appearing in the Note Register on the date of the Offer describing the
transaction or transactions necessitating the Offer and offering to purchase up
to the principal amount of Notes specified in such Offer at the purchase price
specified in such Offer (as determined pursuant to the Indenture). Unless
otherwise required by applicable law, the Offer shall specify an expiration date
(the "Expiration Date") of the Offer to Purchase which shall be, subject to any
contrary requirements of applicable law, not less than 30 days or more than 60
days after the date of such Offer and a settlement date (the "Purchase Date")
for purchase of Notes within five Business Days after the Expiration Date. The
Offer shall contain all instructions and materials necessary to enable such
Holders to tender Notes pursuant to the Offer to Purchase.
"Permitted Interest Rate or Currency Agreement" of any Person means any
Interest Rate or Currency Agreement entered into with one or more financial
institutions in the ordinary course of business that is designed to protect such
Person against fluctuations in interest rates or currency exchange rates with
respect to Debt Incurred and which shall have a notional amount no greater than
the payments due with respect to the Debt being hedged thereby, or in the case
of currency protection agreements, against currency exchange rate fluctuations
in the ordinary course of business relating to then existing financial
obligations or then existing or sold production and not for purposes of
speculation.
"Permitted Investments" means:
(1) an Investment in School Specialty or a Wholly Owned Restricted
Subsidiary of School Specialty,
(2) an Investment in a Person, if such Person or a Subsidiary of such
Person will, as a result of the making of such Investment and all other
contemporaneous related transactions, become a Wholly Owned Restricted
Subsidiary of School Specialty or be merged or consoli-
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dated with or into or transfer or convey all or substantially all its
assets to School Specialty or a Wholly Owned Restricted Subsidiary of
School Specialty,
(3) a Temporary Cash Investment,
(4) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses
in accordance with generally accepted accounting principles,
(5) stock, obligations or securities received in settlement of debts
owing to School Specialty or a Restricted Subsidiary of School Specialty as
a result of bankruptcy or insolvency proceedings or upon the foreclosure,
perfection, enforcement or agreement in lieu of foreclosure of any Lien in
favor of School Specialty or a Restricted Subsidiary of School Specialty,
(6) any consolidation or merger of a Wholly Owned Restricted
Subsidiary of School Specialty to the extent otherwise permitted under the
Indenture,
(7) any Investment in any Person other than a Person that is, or as a
result of such Investment will become, a Restricted Subsidiary,
Unrestricted Subsidiary, Affiliate or Related Person of School Specialty
not to exceed, together with all other Investments made pursuant to this
clause (7), $10 million in the aggregate at any time,
(8) trade accounts arising in the ordinary course of business and any
commercially reasonable refinancing or restructuring thereof undertaken in
good faith,
(9) any Investment made as a result of the receipt of non-cash
consideration from an Asset Disposition that was made pursuant to and in
compliance with the covenant described under "Limitation on Asset
Dispositions,"
(10) any acquisition of assets solely in exchange for the issuance of
Capital Stock (other than Redeemable Stock) of School Specialty.
(11) Investments in Permitted Interest Rate or Currency Agreements.
"Preferred Stock" of any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person.
"Public Equity Offering" means an underwritten primary public offering of
Common Stock of School Specialty pursuant to an effective registration statement
under the Securities Act, other than the Common Stock offering.(1)
"Receivables" means receivables, chattel paper, instruments, documents or
intangibles evidencing or relating to the right to payment of money.
"Receivables Sale" of any Person means any sale of Receivables of such
Person (pursuant to a purchase facility or otherwise), other than in connection
with a disposition of the business operations of such Person relating thereto or
a disposition of defaulted Receivables for purpose of collection and not as a
financing arrangement.
"Redeemable Stock" of any Person means any Capital Stock of such Person
that by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or otherwise (including upon the occurrence of
an event) matures or is required to be redeemed (pursuant to any sinking fund
obligation or otherwise) or is convertible into or exchangeable for
- ---------------
(1) This will be defined as the Common Stock offering being conducted
concurrently with the Note offering.
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Debt or is redeemable at the option of the holder thereof, in whole or in part,
at any time prior to the final Stated Maturity of the Notes.
"Related Person" of any Person means any other Person directly or
indirectly owning (1) 10% or more of the Outstanding Common Stock of such Person
(or, in the case of a Person that is not a corporation, 10% or more of the
equity interest in such Person) or (2) 10% or more of the combined voting power
of the Voting Stock of such Person.
"Restricted Subsidiary" means any Subsidiary, whether existing on or after
the date of the Indenture, unless such Subsidiary is an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Rating Group, a division of MacGraw-Hill,
Inc.
"Sale and Leaseback Transaction" of any person means an arrangement with
any lender or investor or to which such lender or investor is a party providing
for the leasing by such Person of any property or asset of such Person which has
been or is being sold or transferred by such Person more than 365 days after the
acquisition thereof or the completion of construction or commencement of
operation thereof to such lender or investor or to any person to whom funds have
been or are to be advanced by such lender or investor on the security of such
property or asset. The stated maturity of such arrangement shall be the date of
the last payment of rent or any other amount due under such arrangement prior to
the first date on which such arrangement may be terminated by the lessee without
payment of a penalty.
"Senior Bank Facility" means our Senior Credit Facility, as it may be
amended or restated from time to time.
"Senior Debt," with respect to any Person, means:
(1) the principal of (and premium, if any) and interest (including
interest accruing on or after the filing of any petition in bankruptcy or
for reorganization relating to such Person whether or not such claim for
post-petition interest is allowed in such proceeding) on, and penalties and
any obligation of such Person for reimbursement, indemnities and fees
relating to, the Senior Bank Facility,
(2) the principal of (and premium, if any) and interest on Debt of
such Person for money borrowed, whether Incurred on or prior to the date of
original issuance of the Notes or thereafter, and any amendments, renewals,
extensions, modifications, refinancings and refundings of any such Debt,
(3) any reimbursement obligation of such Person with respect to
letters of credit, bankers' acceptances or similar facilities issued for
the account of such Person, and
(4) Permitted Interest Rate or Currency Agreements entered into with
respect to Debt described in clauses (1), (2) and (3) above.
Notwithstanding the foregoing, none of the following shall constitute Senior
Debt of any Person:
(a) any Debt as to which the terms of the instrument creating or
evidencing the same provide that such Debt is on a parity with, or not
superior in right of payment to, the Notes or, in the case of a Subsidiary
Guarantor, its Subsidiary Guarantee,
(b) any Debt which is subordinated in right of payment in any respect
to any other Debt of such Person,
(c) Debt evidenced by the Notes or, in the case of a Subsidiary
Guarantor, its Subsidiary Guarantee,
(d) any Debt owed to School Specialty or to a Person when such Person
is a Subsidiary of School Specialty,
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<PAGE> 245
(e) any obligation of such Person arising from Redeemable Stock of
such Person,
(f) that portion of any Debt which is Incurred in violation of the
Indenture, and
(g) Debt which, when Incurred and without respect to any election
under Section 1111(b) of Title 11, United States Code, is without recourse
to such Person.
"Subordinated Debt" means Debt of School Specialty or a Subsidiary
Guarantor, as applicable, as to which the payment of principal of (and premium,
if any) and interest and other payment obligations in respect of such Debt shall
be subordinate to the prior payment in full of the Notes or, in the case of a
Subsidiary Guarantor, its Subsidiary Guarantee, to at least the following
extent:
(1) no payments of principal of (or premium, if any) or interest on or
otherwise due in respect of such Debt may be permitted for so long as any
default in the payment of principal of (or premium, if any) or interest on
the Notes exists,
(2) in the event that any other default that with the passing of time
or the giving of notice, or both, would constitute an Event of Default
exists with respect to the Notes, upon notice by 25% or more in principal
amount of the Notes to the Trustee, the Trustee shall have the right to
give notice to School Specialty and the holders of such Debt (or trustees
or agents therefor) of a payment blockage, and thereafter no payments of
principal of (or premium, if any) or interest on or otherwise due in
respect of such Debt may be made for a period of 179 days from the date of
such notice, and
(3) such Debt may not:
(a) provide for payments of principal of such Debt at the stated
maturity thereof or by way of a sinking fund applicable thereto or by
way of any mandatory redemption, defeasance, retirement or repurchase
thereof by School Specialty or, in the case of a Subsidiary Guarantor,
such Subsidiary Guarantor (including any redemption, retirement or
repurchase which is contingent upon events or circumstances, but
excluding any retirement required by virtue of acceleration of such Debt
upon an event of default thereunder), in each case prior to the final
Stated Maturity of the Notes, or
(b) permit redemption or other retirement (including pursuant to an
offer to purchase made by School Specialty) of such other Debt at the
option of the holder thereof prior to the final Stated Maturity of the
Notes, other than a redemption or other retirement at the option of the
holder of such Debt (including pursuant to an offer to purchase made by
School Specialty) which is conditioned upon a change of control of
School Specialty pursuant to provisions substantially similar to those
described under "Change of Control" (and which shall provide that such
Debt will not be repurchased pursuant to such provisions prior to School
Specialty's repurchase of the Notes required to be repurchased by School
Specialty pursuant to the provisions described under "Change of
Control").
"Subsidiary" of any Person means (1) a corporation more than 50% of the
combined voting power of the outstanding Voting Stock of which is owned,
directly or indirectly, by such Person or by one or more other Subsidiaries of
such Person or by such Person and one or more Subsidiaries thereof or (2) any
other Person (other than a corporation) in which such Person, or one or more
other Subsidiaries of such Person or such Person and one or more other
Subsidiaries thereof, directly or indirectly, has at least a majority ownership
and power to direct the policies, management and affairs thereof.
"Temporary Cash Investments" means any Investment in the following kinds of
instruments:
(1) readily marketable obligations issued or unconditionally
Guaranteed as to principal and interest by the United States of America or
by any agency or authority controlled or supervised by and acting as an
instrumentality of the United States of America if, on the date of purchase
or other acquisition of any such instrument by School Specialty or any
Restricted
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Subsidiary of School Specialty, the remaining term to maturity or interest
rate adjustment is not more than two years;
(2) obligations (including, but not limited to, demand or time
deposits, bankers' acceptances and certificates of deposit) issued or
Guaranteed by a depository institution or trust company incorporated under
the laws of the United States of America, any state thereof or the District
of Columbia, provided that:
(a) such instrument has a final maturity nor more than one year
from the date of purchase thereof by School Specialty or any Restricted
Subsidiary of School Specialty, and
(b) such depository institution or trust company has at the time of
School Specialty's or such Restricted Subsidiary's Investment therein or
contractual commitment providing for such Investment:
(i) capital, surplus and undivided profits (as of the date such
institution's most recently published financial statements) in excess
of $100 million, and
(ii) the long-term unsecured debt obligations (other than such
obligations rated on the basis of the credit of a Person other than
such institution) of such institution, at the time of School
Specialty's or such Restricted Subsidiary's Investment therein or
contractual commitment providing for such Investment, are rated in
the highest rating category of both S&P and Moody's;
(3) commercial paper issued by any corporation, if such commercial
paper has, at the time of School Specialty's or any Restricted Subsidiary's
Investment therein or contractual commitment providing for such Investment
credit ratings of at least A-1 by S&P and P-1 by Moody's;
(4) money market mutual or similar funds having assets in excess of
$100 million;
(5) readily marketable debt obligations issued by any corporation, if
at the time of School Specialty's or and Restricted Subsidiary's Investment
therein or contractual commitment providing for such Investment:
(a) the remaining term to maturity is not more than two years, and
(b) such debt obligations are rated in one of the two highest
rating categories of both S&P and Moody's;
(6) demand or time deposit accounts used in the ordinary course of
business with commercial banks the balances in which are at all times fully
insured as to principal and interest by the Federal Deposit Insurance
Corporation or any successor thereto; and
(7) to the extent not otherwise included herein, Cash Equivalents. In
the event that either S&P or Moody's ceases to publish ratings of the type
provided herein, a replacement rating agency shall be selected by School
Specialty with the consent of the Trustee, and in each case the rating of
such replacement rating agency most nearly equivalent to the corresponding
S&P or Moody's rating, as the case may be, shall be used for purposes
hereof.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or by such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
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EXPERTS
The consolidated financial statements of School Specialty as of April 26,
1997 and April 25, 1998, for the four months ended April 30, 1996 and for the
years ended April 26, 1997 and April 25, 1998, included in this Prospectus, have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of School Specialty for the year
ended December 31, 1995, included in this Prospectus, except as they relate to
The Re-Print Corporation for the year ended December 31, 1995, have been so
included in reliance on the February 2, 1996 report of Ernst & Young LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting. Insofar as the consolidated financial statements for
the year ended December 31, 1995 relate to The Re-Print Corporation, such
financial statements have been audited by BDO Seidman, LLP, independent
accountants, whose report dated February 8, 1996 thereon appears herein.
The consolidated financial statements of American Academic Suppliers
Holding Corporation and Subsidiary as of December 31, 1995 and December 31, 1996
and for the years then ended, included in this Prospectus, have been so included
in reliance on the February 24, 1997 report of Altschuler, Melvoin and Glasser
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of Sax Arts and Crafts, Inc. as of
December 16, 1995 and December 25, 1996, and for the three years in the period
ended December 25, 1996, included in this Prospectus, have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of the National School Supply Company as of March 31, 1998
and March 31, 1997, and for each of the three years in the period ended March
31, 1998, included in this Prospectus and registration statement, as set forth
in their report, which is included elsewhere in this Prospectus and registration
statement. The consolidated financial statements of The National School Supply
Company are included in reliance on their report, given on their authority as
experts in accounting and auditing.
The financial statements of Hammond & Stephens Company as of and for the
year ended October 31, 1997, included in the Prospectus, have been so included
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
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VALIDITY OF NOTES
The validity of the Notes offered hereby will be passed upon on behalf of
School Specialty by Godfrey & Kahn, S.C., Milwaukee, Wisconsin and on behalf of
the Underwriters by Sullivan & Cromwell, New York, New York.
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ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 (including
exhibits, schedules and amendments thereto) pursuant to the Securities Act with
respect to the Common Stock and Note offerings. This Prospectus, while forming a
part of the registration statement, does not contain all of the information set
forth in the registration statement. Reference is made to the registration
statement and the exhibits thereto for further information. Statements contained
in this Prospectus concerning the provisions of documents filed as exhibits to
the registration statement are necessarily summaries of such documents, and each
such statement is qualified in its entirety by reference to the copy of the
applicable document filed with the SEC.
The registration statement and the exhibits thereto are available for
inspection and copying at the public reference facilities maintained by the SEC
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as the
regional offices of the SEC at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such information can also be obtained
at prescribed rates by writing to the SEC's Public Reference Section at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for information relating to the operation of the Public Reference
Section. Such information may also be accessed electronically by means of the
SEC's website on the Internet at http://www.sec.gov.
We are subject to the reporting requirements of the Securities Exchange Act
of 1934, as amended, and, in accordance therewith, file annual and quarterly
reports, proxy statements and other information with the SEC. Such periodic
reports, proxy statements and other information can be inspected and copied at
the SEC's public reference facilities referred to above. Copies of such material
can be obtained by mail at prescribed rates by writing to the SEC's Public
Reference Section at the address referred to above or by calling the SEC at the
toll-free telephone number noted above. In addition, reports, proxy statements
and other information concerning School Specialty may be inspected at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street,
NW, Washington, D.C. 20006.
We furnish to our stockholders annual reports containing audited
consolidated financial statements examined by our independent public accountants
and quarterly reports containing unaudited consolidated financial statements for
each of the first three fiscal quarters of each fiscal year.
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SCHOOL SPECIALTY, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SCHOOL SPECIALTY, INC.
Historical Financial Statements
Report of PricewaterhouseCoopers LLP, Independent
Accountants........................................... F-3
Report of Ernst & Young LLP, Independent Auditors...... F-4
Report of BDO Seidman, LLP, Independent Auditors....... F-5
Consolidated Balance Sheet as of April 26, 1997, April
25, 1998 and January 23, 1999 (unaudited)............. F-6
Consolidated Statement of Operations for the year ended
December 31, 1995, the four months ended April 30,
1996 and the years ended April 26, 1997 and April 25,
1998, and for the nine months ended January 24, 1998
(unaudited) and January 23, 1999 (unaudited).......... F-7
Consolidated Statement of Stockholders' (Deficit)
Equity for the year ended December 31, 1995, the four
months ended April 30, 1996 and the fiscal years ended
April 26, 1997 and April 25, 1998, and for the nine
months ended January 23, 1999 (unaudited)............. F-8
Consolidated Statement of Cash Flows for the year ended
December 31, 1995, the four months ended April 30,
1996, and the fiscal years ended April 26, 1997 and
April 25, 1998, and for the nine months ended January
24, 1998 (unaudited) and January 23, 1999
(unaudited)........................................... F-9
Notes to Consolidated Financial Statements............. F-11
Pro Forma Financial Statements (Unaudited)
Introduction to Pro Forma Financial Information........ F-30
Pro Forma Combined Balance Sheet as of January 23,
1999.................................................. F-32
Pro Forma Combined Statement of Income for the nine
months ended January 23, 1999......................... F-33
Pro Forma Combined Statement of Income for the nine
months ended January 24, 1998......................... F-34
Pro Forma Combined Statement of Income for the fiscal
year ended April 25, 1998............................. F-35
Notes to Pro Forma Combined Financial Statements....... F-36
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION AND
SUBSIDIARY
Report of Altschuler, Melvoin and Glasser LLP, Independent
Accountants............................................ F-38
Consolidated Balance Sheet as of December 31, 1995,
December 31, 1996 and September 30, 1997 (unaudited)... F-39
Consolidated Statement of Operations for the years ended
December 31, 1995 and December 31, 1996, and for the
nine months ended September 30, 1996 (unaudited) and
September 30, 1997 (unaudited)......................... F-40
Consolidated Statement of Changes in Shareholders' Equity
for the years ended December 31, 1995 and December 31,
1996, and for the nine months ended September 30, 1997
(unaudited)............................................ F-41
Consolidated Statement of Cash Flows for the years ended
December 31, 1995 and December 31, 1996, and for the
nine months ended September 30, 1996 (unaudited) and
September 30, 1997 (unaudited)......................... F-42
Notes to Consolidated Financial Statements................ F-43
</TABLE>
F-1
<PAGE> 251
<TABLE>
<CAPTION>
Page
----
<S> <C>
SAX ARTS AND CRAFTS, INC.
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................ F-48
Balance Sheets as of December 16, 1995, December 25, 1996
and June 29, 1997 (unaudited).......................... F-49
Statements of Operations for the years ended December 17,
1994, December 16, 1995 and December 25, 1996, and for
the six months ended June 30, 1996 (unaudited) and June
29, 1997 (unaudited)................................... F-50
Statements of Shareholders' Equity for the years ended
December 17, 1994, December 16, 1995 and December 25,
1996, and for the six months ended
June 29, 1997 (unaudited).............................. F-51
Statements of Cash Flows for the years ended December 17,
1994, December 16, 1995 and December 25, 1996, and for
the six months ended June 30, 1996 (unaudited) and June
29, 1997 (unaudited)................................... F-52
Notes to Financial Statements............................. F-53
NATIONAL SCHOOL SUPPLY COMPANY
Report of Ernst & Young LLP, Independent Auditors......... F-59
Consolidated Balance Sheets as of March 31, 1997, March
31, 1998 and June 30, 1998 (unaudited)................. F-60
Consolidated Statement of Operations for the years ended
March 31, 1996,
March 31, 1997 and March 31, 1998, and for the three
months ended June 30, 1997 (unaudited) and June 30,
1998 (unaudited)....................................... F-61
Consolidated Statement of Stockholders' Equity for the
years ended March 31, 1996, March 31, 1997 and March
31, 1998, and for the three months ended June 30, 1998
(unaudited)............................................ F-62
Consolidated Statement of Cash Flows for the years ended
March 31, 1996,
March 31, 1997 and March 31, 1998, and for the three
months ended June 30, 1997 (unaudited) and June 30,
1998 (unaudited)....................................... F-63
Notes to Consolidated Financial Statements................ F-64
HAMMOND & STEPHENS COMPANY
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................ F-74
Balance Sheet as of October 31, 1997 and April 30, 1998
(unaudited)............................................ F-75
Statement of Income for the year ended October 31, 1997,
and for the six months ended April 30, 1997 (unaudited)
and April 30, 1998 (unaudited)......................... F-76
Statement of Stockholders' Equity for the year ended
October 31, 1997 and for the six months ended April 30,
1998 (unaudited)....................................... F-77
Statement of Cash Flows for the year ended October 31,
1997 and for the six months ended April 30, 1997
(unaudited) and April 30, 1998 (unaudited)............. F-78
Notes to Financial Statements............................. F-79
</TABLE>
F-2
<PAGE> 252
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma financial statements give effect to, where
applicable, all acquisitions completed through February 9, 1999, the spin-off
and the refinancing of all amounts payable to U.S. Office Products in connection
with the spin-off and the June 1998 initial public offering. The pro forma
Common Stock offering and Note offering adjustments further adjust such pro
forma financial statements to give effect to such offerings.
The pro forma combined balance sheet gives effect to the acquisition
completed after February 9, 1999.
The pro forma combined statement of income for the fiscal year ended April
25, 1998 gives effect to (i) the spin-off and the refinancing of all amounts
payable to U.S. Office Products in connection with the spin-off; (ii) the June
1998 initial public offering; (iii) the acquisitions of Sax Arts and Crafts,
American Academic and six other individually insignificant companies in business
combinations accounted for under the purchase method completed during the fiscal
year ended April 25, 1998 (the "Fiscal 1998 Purchase Acquisitions"); and (iv)
the acquisitions of Hammond & Stephens, National School Supply and Sportime in
business combinations accounted for under the purchase method completed during
the fiscal year ending April 24, 1999 (the "Fiscal 1999 Purchase Acquisitions"),
as if all such transactions had occurred on April 27, 1997. The pro forma
combined statement of income for the year ended April 25, 1998 includes (i) our
audited financial information for the year ended April 25, 1998; (ii) the
unaudited financial information of the Fiscal 1998 Purchase Acquisitions for the
period from April 27, 1997 through their respective dates of acquisitions; and
(iii) the unaudited financial information of the Fiscal 1999 Purchase
Acquisitions for the period from April 27, 1997 through April 25, 1998.
The pro forma combined statement of income for the nine months ended
January 23, 1999 gives effect to (i) the spin-off and the refinancing of all
amounts payable to U.S. Office Products in connection with the spin-off; (ii)
the June 1998 initial public offering; and (iii) the Fiscal 1999 Purchase
Acquisitions, as if all such transactions had occurred on April 26, 1998. The
pro forma combined statement of income for the nine months ended January 23,
1999 includes our unaudited financial information for the nine months ended
January 23, 1999 and the unaudited financial information of the Fiscal 1999
Purchase Acquisitions for the period from April 26, 1998 through the earlier of
their respective dates of acquisition or January 23, 1999.
The pro forma combined statement of income for the nine months ended
January 24, 1998 gives effect to (i) the spin-off and the refinancing of all
amounts payable to U.S. Office Products in connection with the spin-off; (ii)
the June 1998 initial public offering; (iii) the Fiscal 1998 Purchase
Acquisitions; and (iv) the Fiscal 1999 Purchase Acquisitions, as if all such
transactions had occurred on April 27, 1997. The pro forma combined statement of
income for the nine months ended January 24, 1998 includes (i) our unaudited
financial information for the nine months ended January 24, 1998; (ii) the
unaudited financial information of the Fiscal 1998 Purchase Acquisitions for the
period from April 27, 1997 through the earlier of their respective dates of
acquisition or January 24, 1998; and (iii) the unaudited financial information
of the Fiscal 1999 Purchase Acquisitions for the period from April 27, 1997
through January 24, 1998.
Our historical financial statements reflect an allocated portion of general
and administrative costs and interest expense incurred by U.S. Office Products.
The allocated costs include expenses such as: certain corporate executives'
salaries, accounting and legal fees, departmental costs for accounting, finance,
legal, purchasing, marketing and human resources, as well as other general
overhead costs. These corporate overheads have been allocated to us using one of
several factors, dependent on the nature of the costs being allocated,
including, revenues, number and size of acquisitions and number of employees.
Interest expense incurred by U.S. Office Products has been
F-30
<PAGE> 253
allocated to us based upon our average outstanding intercompany balances with
U.S. Office Products at U.S. Office Products' weighted average interest rate
during such period.
The pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma combined financial data presented herein does not purport to
represent what our financial position or results of operations would have been
had the transactions which are the subject of pro forma adjustments occurred on
those dates, as assumed, and are not necessarily representative of our financial
position or results of operations in any future period. The pro forma combined
financial statements should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this Prospectus.
F-31
<PAGE> 254
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED BALANCE SHEET
JANUARY 23, 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
POST PRO FORMA
JANUARY 23, 1999 NOTE
SCHOOL PURCHASE PRO FORMA OFFERING
SPECIALTY, INC. ACQUISITION ADJUSTMENTS SUBTOTAL ADJUSTMENTS
--------------- ---------------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents.......... $ -- $ -- $ -- $ -- $ 97,050(b)
(97,050)(b)
Accounts receivable, net......... 84,843 3,432 -- 88,275 --
Inventories...................... 46,799 4,371 -- 51,170 --
Prepaid and other current
assets....................... 16,219 2,820 -- 19,039 --
-------- ------- -------- -------- --------
Total current assets......... 147,861 10,623 -- 158,484 --
Property and equipment, net...... 39,781 1,185 -- 40,966 --
Intangible assets, net........... 183,693 14,689 (1,102)(a) 197,280 --
Other assets..................... 7,178 12 -- 7,190 2,950(b)
-------- ------- -------- -------- --------
Total assets................. $378,513 $26,509 $ (1,102) $403,920 $ 2,950
======== ======= ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current portion of long-term
debt......................... $ 10,314 $ -- $ -- $ 10,314 $(10,314)(b)
Accounts payable............... 15,485 1,063 -- 16,548 --
Accrued compensation........... 11,945 303 -- 12,248 --
Accrued income taxes........... 5,596 6 -- 5,602 --
Accrued restructuring.......... 3,638 -- -- 3,638 --
Other accrued liabilities...... 10,057 738 -- 10,795 --
-------- ------- -------- -------- --------
Total current liabilities.... 57,035 2,110 -- 59,145 (10,314)
Long-term debt................... 162,199 69 23,000(a) 185,268 100,000(b)
Other............................ 212 228 -- 440 (86,736)(b)
-------- ------- -------- -------- --------
Total liabilities............ 219,446 2,407 23,000 244,853 2,950
Stockholders' equity:
Common stock................... 15 -- -- 15 --
Capital paid in excess of par
value........................ 146,768 -- -- 146,768 --
Accumulated other comprehensive
income....................... 6 -- -- 6 --
Retained earnings.............. 12,278 -- -- 12,278 --
Equity of purchased company.... -- 24,102 (24,102)(a) -- --
-------- ------- -------- -------- --------
Total stockholders' equity... 159,067 24,102 (24,102) 159,067 --
-------- ------- -------- -------- --------
Total liabilities and
stockholders' equity....... $378,513 $26,509 $ (1,102) $403,920 $ 2,950
======== ======= ======== ======== ========
<CAPTION>
PRO FORMA PRO FORMA
PRO FORMA COMMON AS ADJUSTED
AS ADJUSTED STOCK FOR COMMON
FOR NOTE OFFERING STOCK AND
OFFERING ADJUSTMENTS NOTE OFFERINGS
----------- ----------- --------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents.......... $ -- $ 62,170(c) $ --
(62,170)(c)
Accounts receivable, net......... 88,275 -- 88,275
Inventories...................... 51,170 -- 51,170
Prepaid and other current
assets....................... 19,039 -- 19,039
-------- -------- --------
Total current assets......... 158,484 -- 158,484
Property and equipment, net...... 40,966 -- 40,966
Intangible assets, net........... 197,280 -- 197,280
Other assets..................... 10,140 -- 10,140
-------- -------- --------
Total assets................. $406,870 $ -- $406,870
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current portion of long-term
debt......................... $ -- $ -- $ --
Accounts payable............... 16,548 -- 16,548
Accrued compensation........... 12,248 -- 12,248
Accrued income taxes........... 5,602 -- 5,602
Accrued restructuring.......... 3,638 -- 3,638
Other accrued liabilities...... 10,795 -- 10,795
-------- -------- --------
Total current liabilities.... 48,831 -- 48,831
Long-term debt................... 198,532 (62,170)(c) 136,362
Other............................ 440 -- 440
-------- -------- --------
Total liabilities............ 247,803 (62,170) 185,633
Stockholders' equity:
Common stock................... 15 3(c) 18
Capital paid in excess of par
value........................ 146,768 62,167(c) 208,935
Accumulated other comprehensive
income....................... 6 -- 6
Retained earnings.............. 12,278 -- 12,278
Equity of purchased company.... -- -- --
-------- -------- --------
Total stockholders' equity... 159,067 62,170 221,237
-------- -------- --------
Total liabilities and
stockholders' equity....... $406,870 $ -- $406,870
======== ======== ========
</TABLE>
F-32
<PAGE> 255
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 23, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
NATIONAL NOTE
SCHOOL SCHOOL HAMMOND & PRO FORMA OFFERING
SPECIALTY, INC. SUPPLY STEPHENS SPORTIME ADJUSTMENTS SUBTOTAL ADJUSTMENTS
--------------- -------- --------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $424,332 $53,690 $2,380 $25,778 $ -- $506,180 $ --
Cost of revenues..................... 281,436 36,122 1,181 12,047 -- 330,786 --
-------- ------- ------ ------- ------- -------- -------
Gross profit..................... 142,896 17,568 1,199 13,731 -- 175,394 --
Selling, general and administrative
expenses........................... 108,005 12,948 476 11,625 24(e) 133,046 --
(32)(f)
Restructuring costs.................. 5,274 127 -- -- -- 5,401 --
-------- ------- ------ ------- ------- -------- -------
Operating income................... 29,617 4,493 723 2,106 8 36,947 --
Other (income) expense:
Interest expense................... 8,942 1,265 -- 3 3,290(g) 13,500 1,115(i)
Interest income.................... (114) -- -- -- 114(g) -- --
Other.............................. 235 (15) 200 -- 420 --
-------- ------- ------ ------- ------- -------- -------
Income before provision for income
taxes.............................. 20,789 2,993 738 1,903 (3,396) 23,027 (1,115)
Provision for income taxes........... 10,094 4 -- -- 1,185(h) 11,283 (446)
-------- ------- ------ ------- ------- -------- -------
Net income........................... $ 10,695 $ 2,989 $ 738 $ 1,903 $(4,581) $ 11,744 $ (669)
======== ======= ====== ======= ======= ======== =======
Weighted average shares:
Basic.............................. 14,625 15,025(k)
Diluted............................ 14,665 15,065(k)
Net income per share:
Basic.............................. $ 0.73 $ 0.78
Diluted............................ $ 0.73 $ 0.78
<CAPTION>
PRO FORMA
PRO FORMA PRO FORMA AS ADJUSTED
AS ADJUSTED COMMON STOCK FOR COMMON
FOR NOTE OFFERING STOCK
OFFERING ADJUSTMENTS AND NOTE OFFERINGS
----------- ------------ ------------------
<S> <C> <C> <C>
Revenues............................. $506,180 $ -- $506,180
Cost of revenues..................... 330,786 -- 330,786
-------- ------- --------
Gross profit..................... 175,394 -- 175,394
Selling, general and administrative
expenses........................... 133,046 -- 133,046
Restructuring costs.................. 5,401 -- 5,401
-------- ------- --------
Operating income................... 36,947 -- 36,947
Other (income) expense:
Interest expense................... 14,615 (3,730) (j) 10,885
Interest income.................... -- -- --
Other.............................. 420 -- 420
-------- ------- --------
Income before provision for income
taxes.............................. 21,912 3,730 25,642
Provision for income taxes........... 10,837 1,492 12,329
-------- ------- --------
Net income........................... $ 11,075 $ 2,238 $ 13,313
======== ======= ========
Weighted average shares:
Basic.............................. 15,025(k) 18,025(l)
Diluted............................ 15,065(k) 18,065(l)
Net income per share:
Basic.............................. $ 0.74 $ 0.74
Diluted............................ $ 0.74 $ 0.74
</TABLE>
F-33
<PAGE> 256
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 24, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
INDIVIDUALLY
INSIGNIFICANT
SAX NATIONAL FISCAL 1998
SCHOOL ARTS AND AMERICAN SCHOOL HAMMOND & PURCHASE
SPECIALTY, INC.(D) CRAFTS(D) ACADEMIC(D) SUPPLY STEPHENS SPORTIME ACQUISITIONS(D)
------------------ --------- ----------- -------- --------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............... $247,880 $5,421 $36,423 $146,526 $7,782 $23,966 $28,943
Cost of revenues....... 164,105 3,196 24,382 100,819 3,764 11,043 19,865
-------- ------ ------- -------- ------ ------- -------
Gross profit.......... 83,775 2,225 12,041 45,707 4,018 12,923 9,078
Selling, general and
administrative
expenses.............. 63,395 1,722 8,789 40,024 2,019 10,533 7,873
Restructuring costs.... -- -- -- 1,198 -- -- --
-------- ------ ------- -------- ------ ------- -------
Operating income...... 20,380 503 3,252 4,485 1,999 2,390 1,205
Other (income) expense:
Interest expense...... 4,100 18 441 3,927 -- -- 38
Interest income....... (109) (3) -- -- (109) -- (4)
Other................. 441 -- 24 -- -- 13 58
-------- ------ ------- -------- ------ ------- -------
Income before provision
for income taxes...... 15,948 488 2,787 558 2,108 2,377 1,113
Provision for income
taxes................. 7,113 189 892 15 -- -- 140
-------- ------ ------- -------- ------ ------- -------
Net income............. $ 8,835 $ 299 $ 1,895 $ 543 $2,108 $ 2,377 $ 973
======== ====== ======= ======== ====== ======= =======
Weighted average
shares:
Basic................. 12,751
Diluted............... 13,020
Net income per share:
Basic................. $ 0.69
Diluted............... $ 0.68
<CAPTION>
PRO FORMA
PRO FORMA AS ADJUSTED
PRO FORMA PRO FORMA COMMON FOR COMMON
NOTE AS ADJUSTED STOCK STOCK AND
PRO FORMA OFFERING FOR NOTE OFFERING NOTE
ADJUSTMENTS SUBTOTAL ADJUSTMENTS OFFERING ADJUSTMENTS OFFERINGS
----------- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues............... $ -- $496,941 $ -- $496,941 $ -- $496,941
Cost of revenues....... -- 327,174 -- 327,174 -- 327,174
------- -------- ------- -------- ------- --------
Gross profit.......... -- 169,767 -- 169,767 -- 169,767
Selling, general and
administrative
expenses.............. 224(e) 135,598 -- 135,598 -- 135,598
1,019(f)
Restructuring costs.... -- 1,198 -- 1,198 -- 1,198
------- -------- ------- -------- ------- --------
Operating income...... (1,243) 32,971 -- 32,971 -- 32,971
Other (income) expense:
Interest expense...... 4,976(g) 13,500 1,115(i) 14,615 (3,730)(j) 10,885
Interest income....... 225(g) -- -- -- -- --
Other................. -- 536 -- 536 -- 536
------- -------- ------- -------- ------- --------
Income before provision
for income taxes...... (6,444) 18,935 (1,115) 17,820 3,730 21,550
Provision for income
taxes................. 2,633(h) 10,982 (446) 10,536 1,492 12,028
------- -------- ------- -------- ------- --------
Net income............. $(9,077) $ 7,953 $ (669) $ 7,284 $ 2,238 $ 9,522
======= ======== ======= ======== ======= ========
Weighted average
shares:
Basic................. 15,126(k) 15,126(k) 18,126(l)
Diluted............... 15,395(k) 15,395(k) 18,395(l)
Net income per share:
Basic................. $ 0.53 $ 0.48 $ 0.53
Diluted............... $ 0.52 $ 0.47 $ 0.52
</TABLE>
F-34
<PAGE> 257
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED APRIL 25, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
INDIVIDUALLY
INSIGNIFICANT
SAX NATIONAL FISCAL 1998
SCHOOL ARTS AND AMERICAN SCHOOL HAMMOND & PURCHASE
SPECIALTY, INC.(D) CRAFTS(D) ACADEMIC(D) SUPPLY STEPHENS SPORTIME ACQUISITIONS(D)
------------------ --------- ----------- -------- --------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $310,455 $5,421 $36,423 $176,774 $9,028 $30,981 $28,943
Cost of revenues.............. 202,870 3,196 24,382 121,161 4,386 14,467 19,865
-------- ------ ------- -------- ------ ------- -------
Gross profit................. 107,585 2,225 12,041 55,613 4,642 16,514 9,078
Selling, general and
administrative
expenses..................... 87,846 1,722 8,789 50,936 2,555 14,367 7,873
Restructuring costs........... 3,491 -- -- 1,198 -- -- --
-------- ------ ------- -------- ------ ------- -------
Operating income............. 16,248 503 3,252 3,479 2,087 2,147 1,205
Other (income) expense:
Interest expense............. 5,505 18 441 5,047 -- -- 38
Interest income.............. (132) (3) -- -- (154) -- (4)
Other........................ 156 -- 24 -- -- (45) 58
-------- ------ ------- -------- ------ ------- -------
Income before provision for
income taxes................. 10,719 488 2,787 (1,568) 2,241 2,192 1,113
Provision for income
taxes........................ 5,480 189 892 18 -- -- 140
-------- ------ ------- -------- ------ ------- -------
Net income.................... $ 5,239 $ 299 $ 1,895 $ (1,586) $2,241 $ 2,192 $ 973
======== ====== ======= ======== ====== ======= =======
Weighted average shares:
Basic........................ 13,284
Diluted...................... 13,547
Net income per share:
Basic........................ $ 0.40
Diluted...................... $ 0.39
<CAPTION>
PRO FORMA
PRO FORMA AS ADJUSTED
PRO FORMA PRO FORMA COMMON FOR COMMON
NOTE AS ADJUSTED STOCK STOCK AND
PRO FORMA OFFERING FOR NOTE OFFERING NOTE
ADJUSTMENTS SUBTOTAL ADJUSTMENTS OFFERING ADJUSTMENTS OFFERINGS
----------- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... $ -- $598,025 $ -- $598,025 $ -- $598,025
Cost of revenues.............. -- 390,327 -- 390,327 -- 390,327
------- -------- ------- -------- ------- --------
Gross profit................. -- 207,698 -- 207,698 -- 207,698
Selling, general and
administrative
expenses..................... 295(e) 175,507 -- 175,507 -- 175,507
1,124(f)
Restructuring costs........... -- 4,689 -- 4,689 -- 4,689
------- -------- ------- -------- ------- --------
Operating income............. (1,419) 27,502 -- 27,502 -- 27,502
Other (income) expense:
Interest expense............. 5,951(g) 17,000 1,486(i) 18,486 (4,974)(j) 13,512
Interest income.............. 293(g) -- -- -- -- --
Other........................ -- 193 -- 193 -- 193
------- -------- ------- -------- ------- --------
Income before provision for
income taxes................. (7,663) 10,309 (1,486) 8,823 4,974 13,797
Provision for income
taxes........................ (740)(h) 5,979 (594) 5,385 1,990 7,376
------- -------- ------- -------- ------- --------
Net income.................... $(6,923) $ 4,330 $ (892) $ 3,438 $ 2,984 $ 6,421
======= ======== ======= ======== ======= ========
Weighted average shares:
Basic........................ 15,659(k) 15,659(k) 18,659(l)
Diluted...................... 15,922(k) 15,922(k) 18,922(l)
Net income per share:
Basic........................ $ 0.28 $ 0.22 $ 0.34
Diluted...................... $ 0.27 $ 0.22 $ 0.34
</TABLE>
F-35
<PAGE> 258
SCHOOL SPECIALTY, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)
NOTE 1 -- UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
(a) Adjustment to reflect purchase price adjustments associated with the
acquisition of Sportime. The portion of the consideration assigned to
goodwill ($13,587) in the transaction accounted for under the purchase
method represents the excess of the cost over the fair market value of the
net assets acquired. We amortize goodwill over a period of 40 years. The
recoverability of the unamortized goodwill will be assessed on an ongoing
basis by comparing anticipated undiscounted future cash flows from
operations to net book value.
(b) Adjustment to reflect $97,050 of net proceeds from the sale of the $100,000
of Notes as part of the Note offering (net of expenses and underwriters
discount) and the utilization of the proceeds to repay $10,314 of
short-term debt and $86,736 of long-term debt.
(c) Adjustment to reflect $62,170 of net proceeds from the sale of 3,000 shares
of Common Stock as part of the Common Stock Offering (net of expenses and
underwriting discount) and the utilization of the proceeds to repay $62,170
of long-term debt.
NOTE 2 -- UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS
(d) Certain reclassifications have been made to our historical results and the
results of the Fiscal 1998 Purchase Acquisitions for the period prior to
their respective dates of acquisition for the nine months ended January 24,
1998 and the fiscal year ended April 25, 1998 to conform with the fiscal
1999 presentation. These reclassifications had no effect on net income or
net income per share.
(e) Adjustment to reflect additional corporate overhead expenses to be incurred
as a stand-alone, publicly traded, entity, rather than as a division of
U.S. Office Products.
(f) Adjustment to reflect the increase (decrease) in amortization expense
relating to goodwill recorded in purchase accounting related to the Fiscal
1998 and Fiscal 1999 Purchase Acquisitions for the periods prior to the
respective dates of acquisition. We have recorded goodwill amortization in
the historical financial statements from the respective dates of
acquisition forward. The goodwill is being amortized over an estimated life
of 40 years.
(g) Adjustment to reflect an increase in interest expense. Interest expense is
being calculated on the average pro forma debt outstanding during the
applicable periods at a weighted average interest rate of approximately
8.0%. The adjustment also reflects a reduction in interest income to zero
as we generally expect to use available cash to repay debt. Pro forma
interest expense will fluctuate approximately $272 on an annual basis for
each 0.125% change in interest rates.
(h) Adjustment to calculate the provision for income taxes on the combined pro
forma results at an effective income tax rate of approximately 49% for the
nine months ended January 23, 1999 and 58% for the nine months ended
January 24, 1998 and the fiscal year ended April 25, 1998. The difference
between the effective tax rates and the statutory tax rate of 35% relates
primarily to state income taxes and nondeductible goodwill.
(i) Adjustment to reflect a net increase in interest expense as a result of the
higher average interest rate resulting from the utilization of the net
proceeds from the Note offering to repay $10,314 of short-term debt and
$86,736 of long-term debt at an annual interest rate of 8%.
F-36
<PAGE> 259
SCHOOL SPECIALTY, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)
NOTE 2 -- UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
ADJUSTMENTS(CONTINUED)
(j) Adjustment to reflect a decrease in interest expense as a result of the
utilization of the net proceeds from the Common Stock offering to repay
$62,170 of long-term debt at an annual interest rate of 8%.
(k) The weighted average shares outstanding used to calculate pro forma and pro
forma as adjusted for the Note Offering earnings per share is calculated
based upon our weighted average shares, adjusted to reflect the shares sold
in the June 1998 initial public offering, as if the June 1998 initial
public offering had occurred on April 27, 1997.
(l) The weighted average shares outstanding used to calculate pro forma as
adjusted for the Common Stock offering and as adjusted for the Common Stock
and Note offerings earnings per share is calculated based upon the pro
forma weighted average shares described in note (k), adjusted to reflect
the 3,000 shares to be sold in the Common Stock offering, as if the Common
Stock offering had occurred on April 27, 1997.
F-37
<PAGE> 260
UNDERWRITING
School Specialty and the underwriters for the offering (the "Underwriters")
named below have entered into an underwriting agreement with respect to the
Notes being offered. Subject to certain conditions, each Underwriter has
severally agreed to purchase the principal amount of Notes indicated in the
following table.
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITERS AMOUNT OF NOTES
------------ ---------------
<S> <C>
Goldman, Sachs & Co......................................... $
Salomon Smith Barney Inc....................................
------------
Total..................................................... $100,000,000
============
</TABLE>
Notes sold by the Underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this Prospectus. Any
Notes sold by the Underwriters to securities dealers may be sold at a discount
from the initial public offering price of up to % of the principal amount
of the Notes. Any such securities dealers may resell any Notes purchased from
the Underwriters to certain other brokers or dealers at a discount from the
initial public offering price of up to % of the principal amount of the
Notes. If all the Notes are not sold at the initial public offering price, the
Underwriters may change the offering price and the other selling terms.
The Notes are a new issue of securities with no established trading market.
School Specialty has been advised by the Underwriters that the Underwriters
intend to make a market in the Notes but are not obligated to do so and may
discontinue market making at any time without notice. No assurance can be given
as to the liquidity of the trading market for the Notes.
In connection with the offering, the Underwriters may purchase and sell the
Notes in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the Underwriters of a greater amount of
Notes than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the Notes while the
offering is in progress.
The Underwriters also may impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the underwriting
discount received by it because the representatives have repurchased Notes sold
by or for the account of such Underwriter in stabilizing or short covering
transactions.
These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the Notes. As a result, the price of the Notes may be
higher than the price that otherwise might exist in the open market. If these
activities are commenced, they may be discontinued by the Underwriters at any
time. These transactions may be effected in the over-the-counter market or
otherwise.
School Specialty has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act.
School Specialty estimates that its share of the total expenses of the
offering, excluding underwriting discounts and commissions, will be
approximately $ .
U-1
<PAGE> 261
[PICTURES OF THE COMPANY'S VARIOUS CATALOGS]
<PAGE> 262
- ---------------------------------------------------------
- ---------------------------------------------------------
No dealer, salesperson or other person is authorized to give you any
information or to represent anything not contained in this Prospectus. You must
not rely on any unauthorized information or representations. This Prospectus is
an offer to sell or to buy only the Notes offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The information
contained in this Prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................... 3
Risk Factors............................. 14
Disclosure Regarding Forward-Looking
Statements............................. 21
Use of Proceeds.......................... 21
Capitalization........................... 22
Selected Historical and Pro Forma
Financial Data......................... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 28
Business................................. 40
Management............................... 52
Certain Transactions..................... 60
Principal Stockholders................... 61
Description of Senior Credit Facility.... 63
Description of Notes..................... 65
Experts.................................. 93
Validity of Notes........................ 94
Additional Information................... 95
Index to Financial Statements............ F-1
Underwriting............................. U-1
</TABLE>
- ---------------------------------------------------------
- ---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
$100,000,000
SCHOOL SPECIALTY, INC.
% Senior Subordinated Notes
Due 2009
------------------
LOGO
------------------
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
---------------------------------------------------------
---------------------------------------------------------
<PAGE> 263
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized statement of the estimated amounts of all
expenses payable by School Specialty in connection with the issuance and
distribution of the Common Stock and the Notes being registered hereunder, other
than underwriting discounts and commissions. All of such expenses (except the
SEC registration fee) are estimated.
<TABLE>
<S> <C>
SEC registration fee........................................ $48,960.14
NASD filing fee............................................. *
Nasdaq National Market listing fee.......................... *
Accounting fees and expenses................................ *
Legal fees and expenses..................................... *
Rating agency fees.......................................... *
Printing and engraving expenses............................. *
Transfer Agent and Registrar fees........................... *
Blue sky fees and expenses.................................. *
Miscellaneous............................................... *
----------
Total.................................................. $ *
==========
</TABLE>
- ---------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Eight of School Specialty's Certificate of Incorporation provides
that School Specialty shall indemnify its directors and officers to the fullest
extent permitted by the General Corporation Law of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware permits
a corporation, under specified circumstances, to indemnify its directors,
officers, employees or agents against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties by reason of the fact that they were or are directors, officers,
employees or agents of the corporation, if such directors, officers, employees
or agents acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action (i.e., one by or in the right of the
corporation), indemnification may be made only for expenses actually and
reasonably incurred by directors, officers, employees or agents in connection
with the defense or settlement of an action or suit, and only with respect to a
matter as to which they shall have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent that
the court in which the action or suit was brought shall determine upon
application that the defendant directors, officers, employees or agents are
fairly and reasonably entitled to indemnity for such expenses despite such
adjudication of liability.
Article Seven of School Specialty's Certificate of Incorporation states
that directors of School Specialty will not be liable to School Specialty or its
stockholders for monetary damages for any breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to School Specialty or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the General
II-1
<PAGE> 264
Corporation Law of the State of Delaware, which makes directors liable for
unlawful dividends or unlawful stock repurchases or redemptions or (iv) for any
transaction from which the director derived an improper personal benefit.
Article IV of School Specialty's Bylaws provides that School Specialty
shall indemnify its officers and directors (and those serving at the request of
School Specialty as an officer or director of another corporation, partnership,
joint venture, trust or other enterprise), and may indemnify its employees and
agents (and those serving at the request of School Specialty as an employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise), against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred, if such officer,
director, employee or agent acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of School Specialty, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. In a derivative action, indemnification shall
be limited to expenses (including attorneys' fees) actually and reasonably
incurred by such officer, director, employee or agent in the defense or
settlement of such action or suit, and no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to School Specialty unless and only to the extent that the
Delaware Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Delaware Court of
Chancery or such other court shall deem proper.
Unless the Board of Directors of School Specialty otherwise determines in a
specific case, expenses incurred by an officer or director in defending a civil
or criminal action, suit or proceeding shall be paid by School Specialty in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of the officer or director to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by School Specialty.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information is furnished as to securities of School Specialty
sold within the past three years that were not registered under the Securities
Act:
On June 9, 1998, School Specialty sold 250,000 shares of Common Stock to
Daniel P. Spalding, the Chairman 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 ClassroomDirect.com (formerly
named Re-Print). These shares were sold at a price of $14.415 per share 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.
ITEM 16. EXHIBITS AND FINANCIAL SCHEDULES
(a) EXHIBITS
See "Index to Exhibits."
(b) FINANCIAL STATEMENT SCHEDULES
See "Index to Exhibits."
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in
II-2
<PAGE> 265
reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this Registration Statement as of the
time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-3
<PAGE> 266
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
School Specialty, Inc. has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Appleton, State of Wisconsin, on February 26, 1999.
SCHOOL SPECIALTY, INC.
By: /s/ DANIEL P. SPALDING
--------------------------------------
Daniel P. Spalding,
Chief Executive Officer
Each person whose signature appears below hereby constitutes and appoints
Donald J. Noskowiak and Daniel P. Spalding, and each of them, as his or her true
and lawful attorney-in-fact and agent, with full power of substitution, to sign
on his or her behalf individually and in the capacity stated below and to
perform any acts necessary to be done in order to file all amendments and post-
effective amendments to this Registration Statement, and any and all instruments
or documents filed as part of or in connection with this Registration Statement
or the amendments thereto and each of the undersigned does hereby ratify and
confirm all that said attorney-in-fact and agent, or his substitutes, shall do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ DANIEL P. SPALDING Chief Executive Officer (Principal February 26, 1999
- --------------------------------------------- Executive Officer) and Director
Daniel P. Spalding
/s/ DONALD J. NOSKOWIAK Chief Financial Officer (Principal February 26, 1999
- --------------------------------------------- Financial and Accounting Officer)
Donald J. Noskowiak
/s/ DAVID J. VANDER ZANDEN President, Chief Operating Officer February 26, 1999
- --------------------------------------------- and Director
David J. Vander Zanden
/s/ JONATHAN J. LEDECKY Director February 26, 1999
- ---------------------------------------------
Jonathan J. Ledecky
/s/ ROCHELLE LAMM WALLACH Director February 26, 1999
- ---------------------------------------------
Rochelle Lamm Wallach
/s/ LEO C. MCKENNA Director February 26, 1999
- ---------------------------------------------
Leo C. McKenna
</TABLE>
II-4
<PAGE> 267
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Re-Print LLC has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Appleton,
State of Wisconsin, on February 26, 1999.
RE-PRINT LLC
By: School Specialty, Inc.,
Sole Member
By: /s/ DANIEL P. SPALDING
--------------------------------------
Daniel P. Spalding,
Chief Executive Officer of
School Specialty, Inc.
Each person whose signature appears below hereby constitutes and appoints
Donald J. Noskowiak and Daniel P. Spalding, and each of them, as his or her true
and lawful attorney-in-fact and agent, with full power of substitution, to sign
on his or her behalf individually and in the capacity stated below and to
perform any acts necessary to be done in order to file all amendments and post-
effective amendments to this Registration Statement, and any and all instruments
or documents filed as part of or in connection with this Registration Statement
or the amendments thereto and each of the undersigned does hereby ratify and
confirm all that said attorney-in-fact and agent, or his substitutes, shall do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ DONALD RAY PATE, JR. President of Re-Print LLC February 26, 1999
- --------------------------------------------- (Principal Executive Officer)
Donald Ray Pate, Jr.
/s/ DONALD J. NOSKOWIAK Vice President and Treasurer February 26, 1999
- --------------------------------------------- (Principal Financial and
Donald J. Noskowiak Accounting Officer) of Re-Print
LLC
</TABLE>
II-5
<PAGE> 268
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, Sax
Arts and Crafts, Inc. has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Appleton, State of Wisconsin, on February 26, 1999.
SAX ARTS AND CRAFTS, INC.
By: /s/ RICHARD H. NAGEL
--------------------------------------
Richard H. Nagel,
President
Each person whose signature appears below hereby constitutes and appoints
Donald J. Noskowiak and Daniel P. Spalding, and each of them, as his or her true
and lawful attorney-in-fact and agent, with full power of substitution, to sign
on his or her behalf individually and in the capacity stated below and to
perform any acts necessary to be done in order to file all amendments and post-
effective amendments to this Registration Statement, and any and all instruments
or documents filed as part of or in connection with this Registration Statement
or the amendments thereto and each of the undersigned does hereby ratify and
confirm all that said attorney-in-fact and agent, or his substitutes, shall do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ RICHARD H. NAGEL President (Principal Executive February 26, 1999
- --------------------------------------------- Officer)
Richard H. Nagel
/s/ DONALD J. NOSKOWIAK Vice President, Treasurer February 26, 1999
- --------------------------------------------- (Principal Financial and
Donald J. Noskowiak Accounting Officer) and Director
/s/ DAVID J. VANDER ZANDEN Director February 26, 1999
- ---------------------------------------------
David J. Vander Zanden
/s/ DANIEL P. SPALDING Director February 26, 1999
- ---------------------------------------------
Daniel P. Spalding
</TABLE>
II-6
<PAGE> 269
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Childcraft Education Corp. has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Appleton, State of Wisconsin, on February 26, 1999.
CHILDCRAFT EDUCATION CORP.
By: /s/ RONALD E. SUCHODOLSKI
--------------------------------------
Ronald E. Suchodolski, President
Each person whose signature appears below hereby constitutes and appoints
Donald J. Noskowiak and Daniel P. Spalding, and each of them, as his or her true
and lawful attorney-in-fact and agent, with full power of substitution, to sign
on his or her behalf individually and in the capacity stated below and to
perform any acts necessary to be done in order to file all amendments and post-
effective amendments to this Registration Statement, and any and all instruments
or documents filed as part of or in connection with this Registration Statement
or the amendments thereto and each of the undersigned does hereby ratify and
confirm all that said attorney-in-fact and agent, or his substitutes, shall do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ RONALD E. SUCHODOLSKI President (Principal Executive February 26, 1999
- --------------------------------------------- Officer)
Ronald E. Suchodolski
/s/ DONALD J. NOSKOWIAK Vice President, Treasurer February 26, 1999
- --------------------------------------------- (Principal Financial and
Donald J. Noskowiak Accounting Officer) and Director
/s/ DAVID J. VANDER ZANDEN Director February 26, 1999
- ---------------------------------------------
David J. Vander Zanden
/s/ DANIEL P. SPALDING Director February 26, 1999
- ---------------------------------------------
Daniel P. Spalding
</TABLE>
II-7
<PAGE> 270
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Bird-in-Hand Woodworks, Inc. has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Appleton, State of Wisconsin, on February 26, 1999.
BIRD-IN-HAND WOODWORKS, INC.
By: /s/ RONALD E. SUCHODOLSKI
--------------------------------------
Ronald E. Suchodolski, President
Each person whose signature appears below hereby constitutes and appoints
Donald J. Noskowiak and Daniel P. Spalding, and each of them, as his or her true
and lawful attorney-in-fact and agent, with full power of substitution, to sign
on his or her behalf individually and in the capacity stated below and to
perform any acts necessary to be done in order to file all amendments and post-
effective amendments to this Registration Statement, and any and all instruments
or documents filed as part of or in connection with this Registration Statement
or the amendments thereto and each of the undersigned does hereby ratify and
confirm all that said attorney-in-fact and agent, or his substitutes, shall do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ RONALD E. SUCHODOLSKI President (Principal Executive February 26, 1999
- --------------------------------------------- Officer)
Ronald E. Suchodolski
/s/ DONALD J. NOSKOWIAK Vice President, Treasurer February 26, 1999
- --------------------------------------------- (Principal Financial and
Donald J. Noskowiak Accounting Officer) and Director
/s/ DAVID J. VANDER ZANDEN Director February 26, 1999
- ---------------------------------------------
David J. Vander Zanden
/s/ DANIEL P. SPALDING Director February 26, 1999
- ---------------------------------------------
Daniel P. Spalding
</TABLE>
II-8
<PAGE> 271
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------- --------------------
<C> <S>
1.1 Form of Underwriting Agreement for Common Stock Offering
1.2 Form of Underwriting Agreement for Note Offering
3.1 Restated Certificate of Incorporation(1)
3.2 Amended and Restated Bylaws(1)
4.1 Indenture between School Specialty, Inc. and *
4.2 Form of Senior Subordinated Note*
5.1 Opinion of Godfrey & Kahn, S.C.*
10.1 Distribution Agreement among U.S. Office Products Company,
Workflow Management, Inc., Aztec Consulting, Inc., Navigant
International, Inc. and School Specialty, Inc.(2)
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.(1)
10.3 Tax Indemnification Agreement among Workflow Management,
Inc., Aztec Technology Partners, Inc., Navigant
International, Inc. and School Specialty, Inc.(2)
10.4 Employee Benefits Agreement among Workflow Management, Inc.,
Aztec Technology Partners, Inc., Navigant International,
Inc. and School Specialty, Inc.(2)
10.5 Employment Agreement dated April 29, 1996, between Daniel P.
Spalding and School Specialty, Inc.(3)
10.6 Employment Agreement dated July 26, 1996, between Donald Ray
Pate, Jr. and The Re-Print Corp.(3)
10.7.a Employment Agreement dated June 27, 1997, between Richard H.
Nagel and Sax Arts and Crafts, Inc.(3)
10.7.b Covenant Not to Compete Agreement dated June 27, 1997,
between Richard H. Nagel and Sax Arts and Crafts, Inc.
10.8 Employment Agreement between David Vander Zanden and School
Specialty, Inc.(4)
10.9 Employment Agreement between School Specialty, Inc. and
Jonathan J. Ledecky(4)
10.10 Amended Services Agreement dated as of June 8, 1998 between
U.S. Office Products and Jonathan J. Ledecky(5)
10.11 Amended and Restated 1998 Stock Incentive Plan(6)
10.12 Amended and Restated Credit Agreement dated as of September
30, 1998 among School Specialty, Inc., certain subsidiaries
and affiliates of School Specialty, Inc., the lenders named
therein, Nationsbank, N.A., Bank One, Wisconsin and U.S.
Bank National Association(6)
12.1 Statement Re: Computation of Ratios to Fixed Charges
21.1 Subsidiaries of School Specialty, Inc.
23.1 Consent of Godfrey & Kahn, S.C. (included in Exhibit No.
5.1)*
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Ernst & Young, LLP
23.4 Consent of BDO Siedman, LLP
23.5 Consent of Altschuler, Melvoin and Glasser LLP
23.6 Consent of PricewaterhouseCoopers LLP
</TABLE>
<PAGE> 272
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------- --------------------
<C> <S>
23.7 Consent of Ernst & Young LLP
23.8 Consent of PricewaterhouseCoopers LLP
24.1 Powers of Attorney (included on signature page)
25.1 Statement of Eligibility of Trustee*
27.1 Financial Data Schedule
99.1 Schedule II -- Valuation and Qualifying Accounts
</TABLE>
- ---------------
* To be filed by amendment.
(1) Incorporated by reference to the Registrant's Pre-Effective Amendment No. 3
to the Registration Statement on Form S-1 filed with the SEC on June 4,
1998; Registration No. 333-47509.
(2) Incorporated by reference to the Registrant's Pre-Effective Amendment No. 2
to the Registration Statement on Form S-1 filed with the SEC on May 18,
1998; Registration No. 333-47509.
(3) Incorporated by reference to the Registrant's Pre-Effective Amendment No. 1
to the Registration Statement on Form S-1 filed with the SEC on May 6, 1998;
Registration No. 333-46537.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-K
filed with the SEC on July 24, 1998.
(5) Incorporated by reference to the Registrant's Pre-Effective Amendment No. 4
to the Registration Statement on Form S-1 filed with the SEC on June 9,
1998; Registration No. 333-47509.
(6) Incorporated by reference to the Registrant's Form 10-Q for the period ended
January 23, 1999, as filed with the SEC on March 1, 1999.
<PAGE> 1
EXHIBIT 1.1
SCHOOL SPECIALTY, INC.
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
------------------
UNDERWRITING AGREEMENT
_________, 1999
Goldman, Sachs & Co.,
Salomon Smith Barney Inc.,
Piper Jaffray Inc.,
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
School Specialty, Inc., a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate
of ........ shares (the "Firm Shares") and, at the election of the Underwriters,
up to ........ additional shares (the "Optional Shares") of Common Stock, par
value $.001 per share ("Stock"), of the Company (the Firm Shares and the
Optional Shares that the Underwriters elect to purchase pursuant to Section 2
hereof being collectively called the "Shares").
1. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(a) A registration statement on Form S-1 (File No. 33-....) (the
"Initial Registration Statement") in respect of the Shares has been filed with
the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in the
form heretofore delivered to you, and, excluding exhibits thereto, to you for
each of the other Underwriters, have been declared effective by the Commission
in such form; other than a registration statement, if any, increasing the size
of the offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule
462(b) under the Securities Act of 1933, as amended (the "Act"), which became
effective upon filing, no other document with respect to the Initial
Registration Statement has heretofore been filed with the Commission; and no
stop order suspending the effectiveness of the Initial Registration Statement,
any post-effective amendment thereto or the Rule 462(b) Registration Statement,
if any, has been issued and no proceeding for that purpose
<PAGE> 2
has been initiated or threatened by the Commission (any preliminary prospectus
included in the Initial Registration Statement or filed with the Commission
pursuant to Rule 424(a) of the rules and regulations of the Commission under the
Act is hereinafter called a "Preliminary Prospectus"; the various parts of the
Initial Registration Statement and the Rule 462(b) Registration Statement, if
any, including all exhibits thereto and including the information contained in
the form of final prospectus filed with the Commission pursuant to Rule 424(b)
under the Act in accordance with Section 5(a) hereof and deemed by virtue of
Rule 430A under the Act to be part of the Initial Registration Statement at the
time it was declared effective, each as amended at the time such part of the
Initial Registration Statement became effective or such part of the Rule 462(b)
Registration Statement, if any, became or hereafter becomes effective, are
hereinafter collectively called the "Registration Statement"; and such final
prospectus, in the form first filed pursuant to Rule 424(b) under the Act, is
hereinafter called the "Prospectus";
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder, and did not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and the statements made therein within the coverage of
Rule 175(b) under the Act were made by the Company with a reasonable basis and
in good faith; provided, however, that this representation and warranty shall
not apply to any statements or omissions made in reliance upon and in conformity
with information furnished in writing to the Company by an Underwriter through
Goldman, Sachs & Co. expressly for use therein;
(c) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the Act
and the rules and regulations of the Commission thereunder and do not and will
not, as of the applicable effective date as to the Registration Statement and
any amendment thereto, and as of the applicable filing date as to the Prospectus
and any amendment or supplement thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; and the statements made
therein within the coverage of Rule 175(b) under the Act were made by the
Company with a reasonable basis and in good faith; provided, however, that this
representation and warranty shall not apply to any statements or omissions made
in reliance upon and in conformity with information furnished in writing to the
Company by an Underwriter through Goldman, Sachs & Co. expressly for use
therein;
(d) Neither the Company nor any of its subsidiaries has sustained since
the date of the latest audited financial statements included in the Prospectus
any material loss or interference with its business from fire, explosion, flood
or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the Prospectus,
there has not been any change in the capital stock, short-term debt or long-term
debt (other than changes to short-term and long-term debt not in excess of $30
million in the aggregate) of the Company or any of its subsidiaries or any
material adverse change, or any development involving a prospective material
adverse change, in or affecting the general affairs, management, financial
position, stockholders' equity or results of operations of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the Prospectus;
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<PAGE> 3
(e) The Company and its subsidiaries have good and marketable title in
fee simple to all real property and good and marketable title to all personal
property owned by them, in each case free and clear of all liens, encumbrances
and defects except such as are described in the Prospectus or such as do not
materially affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its subsidiaries;
(f) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with power
and authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus, and has been duly qualified as a
foreign corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases properties
or conducts any business so as to require such qualification, or is subject to
no material liability or disability by reason of the failure to be so qualified
in any such jurisdiction; and each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation; and each subsidiary organized as a
limited liability company has been duly organized and is validly existing as a
limited liability company in good standing under the laws of its jurisdiction of
organization;
(g) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and conform to the description of the Stock contained in the Prospectus; and all
of the issued shares of capital stock of each subsidiary of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and (except for directors' qualifying shares) are owned directly or indirectly
by the Company, free and clear of all liens, encumbrances, equities or claims,
except as may be pledged as security for the $350.0 million credit facility (the
"Credit Facility") as described in the Prospectus;
(h) The unissued Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when issued
and delivered against payment therefor as provided herein, will be duly and
validly issued and fully paid and non-assessable and will conform to the
description of the Stock contained in the Prospectus;
(i) The issue and sale of the Shares by the Company and the compliance
by the Company with all of the provisions of this Agreement and the consummation
of the transactions herein contemplated will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, sale/leaseback agreement,
loan agreement or other similar financing agreement or instrument or other
agreement or instrument to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries is bound or to which
any of the property or assets of the Company or any of its subsidiaries is
subject, except where such conflict, breach, violation or default would not,
individually or in the aggregate, have a material adverse effect on the current
consolidated financial position, stockholders' equity or results of operations
of the Company and its subsidiaries considered as a whole (a "Material Adverse
Effect"), nor will such action result in any violation of the provisions of the
Certificate of Incorporation or By-laws of the Company or any statute or any
order, rule or regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
properties; and no consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency
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<PAGE> 4
or body is required for the issue and sale of the Shares or the consummation by
the Company of the transactions contemplated by this Agreement, except the
registration under the Act of the Shares and such consents, approvals,
authorizations, registrations or qualifications as may be required under state
securities or Blue Sky laws in connection with the purchase and distribution of
the Shares by the Underwriters;
(j) Neither the Company nor any of its subsidiaries is in violation of
its Certificate of Incorporation or By-laws or other organization documents or
in default in the performance or observance of any material obligation,
agreement, or covenant or condition contained in any indenture, mortgage, deed
of trust, loan agreement, lease or other agreement or instrument to which it is
a party or by which it or any of its properties may be bound except where such
violation or default would not have a Material Adverse Effect;
(k) The statements set forth in the Prospectus under the caption
"Description of Our Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock, and under the caption "Underwriting", insofar
as they purport to describe the provisions of the laws and documents referred to
therein, are accurate, complete and fair;
(l) Other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its subsidiaries
is a party or of which any property of the Company or any of its subsidiaries is
the subject which, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a Material Adverse
Effect; and, to the best of the Company's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened by others;
(m) The Company is not and, after giving effect to the offering and
sale of the Shares, will not be an "investment company", as such term is defined
in the Investment Company Act of 1940, as amended (the "Investment Company
Act");
(n) PricewaterhouseCoopers LLP, who has certified certain financial
statements of the Company and its subsidiaries, and Ernst & Young LLP, BDO
Seidman LLP and Altschuler, Melvoin and Glasser LLP, who have certified certain
financial statements of The Re-Print Corporation and American Academic Suppliers
Holding Corporation and Subsidiary are each independent public accountants as
required by the Act and the rules and regulations of the Commission thereunder.
(o) The Company has reviewed its operations and that of its
subsidiaries to evaluate the extent to which the business or operations of the
Company or any of its subsidiaries will be affected by the Year 2000 Problem. As
a result of such review, the Company has no reason to believe, and does not
believe, that the Year 2000 Problem will have a Material Adverse Effect or
result in any material loss or interference with the Company's business or
operations. The "Year 2000 Problem" as used herein means any significant risk
that computer hardware or software used in the receipt, transmission,
processing, manipulation, storage, retrieval, retransmission or other
utilization of data or in the operation of mechanical or electrical systems of
any kind will not, in the case of dates or time periods occurring after December
31, 1999, function at least as effectively as in the case of dates or time
periods occurring prior to January 1, 2000.
2. Subject to the terms and conditions herein set forth, (a) the
Company agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company, at
a purchase price per share of $................, the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule I hereto and (b) in the
event and to the extent that the Underwriters shall exercise the election to
purchase Optional
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<PAGE> 5
Shares as provided below, the Company agrees to issue and sell to each of the
Underwriters, and each of the Underwriters agrees, severally and not jointly, to
purchase from the Company, at the purchase price per share set forth in clause
(a) of this Section 2, that portion of the number of Optional Shares as to which
such election shall have been exercised (to be adjusted by you so as to
eliminate fractional shares) determined by multiplying such number of Optional
Shares by a fraction, the numerator of which is the maximum number of Optional
Shares which such Underwriter is entitled to purchase as set forth opposite the
name of such Underwriter in Schedule I hereto and the denominator of which is
the maximum number of Optional Shares that all of the Underwriters are entitled
to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to Optional Shares, at the purchase price per share set forth
in the paragraph above, for the sole purpose of covering overallotments in the
sale of the Firm Shares. Any such election to purchase Optional Shares may be
exercised only by written notice from you to the Company, given within a period
of 30 calendar days after the date of this Agreement, setting forth the
aggregate number of Optional Shares to be purchased and the date on which such
Optional Shares are to be delivered, as determined by you but in no event
earlier than the First Time of Delivery (as defined in Section 4 hereof) or,
unless you and the Company otherwise agree in writing, earlier than two or later
than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company shall be delivered by or on behalf of the Company to
Goldman, Sachs & Co., through the facilities of the Depository Trust Company
("DTC"), for the account of such Underwriter, against payment by or on behalf of
such Underwriter of the purchase price therefor by wire transfer of Federal
(same-day) funds to the account specified by the Company to Goldman, Sachs & Co.
at least forty-eight hours in advance. The Company will cause the certificates
representing the Shares to be made available for checking and packaging at least
twenty-four hours prior to the Time of Delivery (as defined below) with respect
thereto at the office of [DTC or its designated custodian][Goldman, Sachs & Co.,
85 Broad Street, New York, New York 10004] (the "Designated Office"). The time
and date of such delivery and payment shall be, with respect to the Firm Shares,
9:30 a.m., New York City time, on ............., 1999 or such other time and
date as Goldman, Sachs & Co. and the Company may agree upon in writing, and,
with respect to the Optional Shares, 9:30 a.m., New York time, on the date
specified by Goldman, Sachs & Co. in the written notice given by Goldman, Sachs
& Co. of the Underwriters' election to purchase such Optional Shares, or such
other time and date as Goldman, Sachs & Co. and the Company may agree upon in
writing. Such time and date for delivery of the Firm Shares is herein called the
"First Time of Delivery", such time and date for delivery of the Optional
Shares, if not the First Time of Delivery, is herein called the "Second Time of
Delivery", and each such time and date for delivery is herein called a "Time of
Delivery".
(b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 7 hereof, including the cross
receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(k) hereof, will be delivered at the offices
of Sullivan & Cromwell, 125 Broad Street, New York, New York 10004 (the "Closing
Location"), and the Shares will be delivered at the Designated Office, all at
such Time of
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<PAGE> 6
Delivery. A meeting will be held at the Closing Location at 4:00 p.m., New York
City time, on the New York Business Day next preceding such Time of Delivery, at
which meeting the final drafts of the documents to be delivered pursuant to the
preceding sentence will be available for review by the parties hereto. For the
purposes of this Section 4, "New York Business Day" shall mean each Monday,
Tuesday, Wednesday, Thursday and Friday which is not a day on which banking
institutions in New York are generally authorized or obligated by law or
executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus which
shall be disapproved by you promptly after reasonable notice thereof; to advise
you, promptly after it receives notice thereof, of the time when any amendment
to the Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed and to
furnish you with copies thereof; to advise you, promptly after it receives
notice thereof, of the issuance by the Commission of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or
prospectus, of the suspension of the qualification of the Shares for offering or
sale in any jurisdiction, of the initiation or threatening of any proceeding for
any such purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for additional
information; and, in the event of the issuance of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus or prospectus or
suspending any such qualification, promptly to use its best efforts to obtain
the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with such
laws so as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution of
the Shares, provided that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction;
(c) Prior to 10:00 A.M., New York City time, on the New York Business
Day next succeeding the date of this Agreement and from time to time, to furnish
the Underwriters with copies of the Prospectus in New York City in such
quantities as you may reasonably request, and, if the delivery of a prospectus
is required at any time prior to the expiration of nine months after the time of
issue of the Prospectus in connection with the offering or sale of the Shares
and if at such time any event shall have occurred as a result of which the
Prospectus as then amended or supplemented would include an untrue statement of
a material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made when such Prospectus is delivered, not misleading, or, if for any other
reason it shall be necessary during such period to amend or supplement the
Prospectus in order to comply with the Act, to notify you and upon your request
to prepare and furnish without charge to each Underwriter and to any dealer in
securities as many copies as you may from time to time reasonably request of an
amended Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance, and in case any Underwriter is
required to deliver a prospectus in connection with sales of any of the Shares
at any time nine months or more after the time of issue of the Prospectus, upon
your request but at the expense
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<PAGE> 7
of such Underwriter, to prepare and deliver to such Underwriter as many copies
as you may request of an amended or supplemented Prospectus complying with
Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the effective
date of the Registration Statement (as defined in Rule 158(c) under the Act), an
earnings statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Act and the rules and regulations
thereunder (including, at the option of the Company, Rule 158);
(e) During the period beginning from the date hereof and continuing to
and including the date 90 days after the date of the Prospectus, not to offer,
sell, contract to sell or otherwise dispose of, except as provided hereunder any
securities of the Company that are substantially similar to the Shares,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or any such
substantially similar securities (other than (i) pursuant to acquisitions where
the Company uses shares of Stock as all or a portion of the consideration for
the acquisitions up to an aggregate of __ million shares of Stock, if holders of
__ million of such shares of Stock execute and deliver a lock-up letter to you
in the form attached hereto as Exhibit A or another agreement approved by you,
and (ii) pursuant to employee stock option plans existing on, or upon the
conversion or exchange of convertible or exchangeable securities outstanding as
of, the date of this Agreement), without your prior written consent;
(f) To furnish to its stockholders as soon as practicable after the end
of each fiscal year an annual report (including a balance sheet and statements
of income, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries certified by independent public accountants) and, as
soon as practicable after the end of each of the first three quarters of each
fiscal year (beginning with the fiscal quarter ending after the effective date
of the Registration Statement), to make available to its stockholders
consolidated summary financial information of the Company and its subsidiaries
for such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to deliver to
you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the Company is listed; and (ii)
such additional information concerning the business and financial condition of
the Company as you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement in the manner specified in the Prospectus under the
caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the Shares on the
National Association of Securities Dealers Automated Quotations National Market
System ("NASDAQ"); and
(j) If the Company elects to rely upon Rule 462(b), the Company shall
file a Rule 462(b) Registration Statement with the Commission in compliance with
Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement,
and the Company shall at the time of filing either pay to the Commission the
filing fee for the Rule 462(b) Registration Statement or give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
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<PAGE> 8
6. The Company covenants and agrees with the several Underwriters that
the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum,
closing documents (including any compilations thereof) and any other documents
in connection with the offering, purchase, sale and delivery of the Shares;
(iii) all expenses in connection with the qualification of the Shares for
offering and sale under state securities laws as provided in Section 5(b)
hereof, including the fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky survey;
(iv) all fees and expenses in connection with listing the Shares on the NASDAQ;
(v) the filing fees incident to, and the fees and disbursements of counsel for
the Underwriters in connection with, securing any required review by the
National Association of Securities Dealers, Inc. of the terms of the sale of the
Shares; (vi) the cost of preparing stock certificates; (vii) the cost and
charges of any transfer agent or registrar; and (viii) all other costs and
expenses incident to the performance of its obligations hereunder which are not
otherwise specifically provided for in this Section. It is understood, however,
that, except as provided in this Section, and Sections 8 and 11 hereof, the
Underwriters will pay all of their own costs and expenses, including the fees of
their counsel, stock transfer taxes on resale of any of the Shares by them, and
any advertising expenses connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to
be delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company herein are, at and as of such Time of Delivery, true and correct,
the condition that the Company shall have performed all of its obligations
hereunder theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) within the applicable time period prescribed for such filing by
the rules and regulations under the Act and in accordance with Section 5(a)
hereof; if the Company has elected to rely upon Rule 462(b), the Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., Washington,
D.C. time, on the date of this Agreement; no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Sullivan & Cromwell, counsel for the Underwriters, shall have
furnished to you such written opinion or opinions, dated such Time of Delivery,
with respect to the incorporation of the Company, the Registration Statement and
the Prospectus and such other related matters as you may reasonably request, and
such counsel shall have received such papers and information as they may
reasonably request to enable them to pass upon such matters;
(c) Godfrey & Kahn, counsel for the Company, shall have furnished to
you their written opinion, dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with power
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<PAGE> 9
and authority (corporate and other) to own its properties and conduct
its business as described in the Prospectus;
(ii) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of the
Company (including the Shares being delivered at such Time of Delivery)
have been duly and validly authorized and issued and are fully paid and
non-assessable; and the Shares conform to the description of the Stock
contained in the Prospectus;
(iii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases
properties or conducts any business so as to require such
qualification, except where the failure to be so qualified or in good
standing would not have a Material Adverse Effect (such counsel being
entitled to rely in respect of the opinion in this clause upon opinions
of local counsel and in respect of matters of fact upon certificates of
officers of the Company, provided that such counsel shall state that
they believe that both you and they are justified in relying upon such
opinions and certificates);
(iv) Each subsidiary of the Company has been duly incorporated
and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation; and each subsidiary
organized as a limited liability company has been duly organized and is
validly existing as a limited liability company in good standing under
the laws of its jurisdiction of organization; and all of the issued
shares of capital stock of each such subsidiary have been duly and
validly authorized and issued, are fully paid and non-assessable, and
(except for directors' qualifying shares) are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances,
equities or claims, except as may be pledged as security for the Credit
Facility described in the Prospectus (such counsel being entitled to
rely in respect of the opinion in this clause upon opinions of local
counsel and in respect to matters of fact upon certificates of officers
of the Company or its subsidiaries, provided that such counsel shall
state that they believe that both you and they are justified in relying
upon such opinions and certificates);
(v) To the best of such counsel's knowledge and other than as
set forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its subsidiaries is
a party or of which any property of the Company or any of its
subsidiaries is the subject which, if determined adversely to the
Company or any of its subsidiaries, would individually or in the
aggregate have a Material Adverse Effect; and, to the best of such
counsel's knowledge, no such proceedings are threatened or contemplated
by governmental authorities or threatened by others;
(vi) This Agreement has been duly authorized, executed and
delivered by the Company;
(vii) The issue and sale of the Shares being delivered at such
Time of Delivery by the Company and the compliance by the Company with
all of the provisions of this Agreement and the consummation of the
transactions herein contemplated will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute
a default under, any indenture, mortgage, deed
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<PAGE> 10
of trust, sale/leaseback agreement, loan agreement or other material
financing agreement or any other material agreement or instrument known
to such counsel to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries is bound or to
which any of the property or assets of the Company or any of its
subsidiaries is subject, except where such conflict, breach or
violation or default would not have a Material Adverse Effect, nor will
such action result in any violation of the provisions of the
Certificate of Incorporation or By-laws of the Company or any statute
or any order, rule or regulation known to such counsel of any court or
governmental agency or body having jurisdiction over the Company or any
of its subsidiaries or any of their properties;
(viii) No consent, approval, authorization, order,
registration or qualification of or with any such court or governmental
agency or body is required for the issue and sale of the Shares or the
consummation by the Company of the transactions contemplated by this
Agreement, except the registration under the Act of the Shares, and
such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or Blue Sky
laws in connection with the purchase and distribution of the Shares by
the Underwriters;
(ix) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or By-laws or in default
in the performance or observance of any material obligation, agreement,
covenant or condition contained in any indenture, mortgage, deed of
trust, loan agreement, material lease or other material agreement or
instrument to which it is a party or by which it or any of its
properties may be bound except where such conflict, breach, violation
or default would not have a Material Adverse Effect;
(x) The statements set forth in the Prospectus under the
caption "Description of Our Capital Stock", insofar as they purport to
constitute a summary of the terms of the Stock, and under the caption
"Underwriting", insofar as they purport to describe the provisions of
the laws and documents referred to therein, are accurate, complete and
fair;
(xi) The Company is not an "investment company", as such term
is defined in the Investment Company Act; and
(xii) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior to
such Time of Delivery (other than the financial statements, related
schedules and financial data therein, as to which such counsel need
express no opinion) comply as to form in all material respects with the
requirements of the Act and the rules and regulations thereunder;
although they do not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, except for those referred to
in the opinion in subsection (xi) of this section 7(c), they have no
reason to believe that, as of its effective date, the Registration
Statement or any further amendment thereto made by the Company prior to
such Time of Delivery (other than the financial statements, related
schedules and financial data therein, as to which such counsel need
express no opinion) contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that, as of
its date, the Prospectus or any further
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<PAGE> 11
amendment or supplement thereto made by the Company prior to such Time
of Delivery (other than the financial statements, related schedules and
financial data therein, as to which such counsel need express no
opinion) contained an untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading
or that, as of such Time of Delivery, either the Registration Statement
or the Prospectus or any further amendment or supplement thereto made
by the Company prior to such Time of Delivery (other than the financial
statements, related schedules and financial data therein, as to which
such counsel need express no opinion) contains an untrue statement of a
material fact or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; and they do not know of any amendment to the
Registration Statement required to be filed or of any contracts or
other documents of a character required to be filed as an exhibit to
the Registration Statement or required to be described in the
Registration Statement or the Prospectus which are not filed or
described as required;
(d) On the date of the Prospectus at a time prior to the execution of
this Agreement, at 9:30 a.m., New York City time, on the effective date of any
post-effective amendment to the Registration Statement filed subsequent to the
date of this Agreement and also at each Time of Delivery, Pricewaterhouse
Coopers LLP, Ernst & Young LLP, BDO Seidman LLP and Altschuler, Melvoin and
Glasser LLP shall have furnished to you a letter or letters, dated the
respective dates of delivery thereof, in form and substance satisfactory to you,
to the effect set forth in Annex I hereto;
(e) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included in
the Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus, and (ii) since the respective dates as
of which information is given in the Prospectus there shall not have been any
change in the capital stock, short-term debt or long-term debt (other than
changes short-term or long-term debt not in excess of $30 million in the
aggregate) of the Company or any of its subsidiaries or any change, or any
development involving a prospective change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of operations of
the Company and its subsidiaries, otherwise than as set forth or contemplated in
the Prospectus, the effect of which, in any such case described in Clause (i) or
(ii), is in the judgment of the Representatives so material and adverse as to
make it impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered at such Time of Delivery on the terms and
in the manner contemplated in the Prospectus;
(f) On or after the date hereof (i) no downgrading shall have occurred
in the rating accorded the Company's debt securities by any "nationally
recognized statistical rating organization", as that term is defined by the
Commission for purposes of Rule 436(g)(2) under the Act, and (ii) no such
organization shall have publicly announced that it has under surveillance or
review, with possible negative implications, its rating of any of the Company's
debt securities;
(g) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange or NASDAQ; (ii) a suspension or
material limitation in trading in the Company's securities on NASDAQ; (iii) a
general moratorium on commercial banking activities declared by either Federal
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<PAGE> 12
or New York State authorities; or (iv) the outbreak or escalation of hostilities
involving the United States or the declaration by the United States of a
national emergency or war, if the effect of any such event specified in this
Clause (iv) in the judgment of the Representatives makes it impracticable or
inadvisable to proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(h) The Shares to be sold at such Time of Delivery shall have been duly
listed for quotation on NASDAQ;
(i) The Company has obtained and delivered to the Underwriters executed
copies of an agreement from the persons named in Schedule II hereto,
substantially to the effect set forth in Subsection 5(e) hereof in form and
substance satisfactory to you;
(j) The Company shall have complied with the provisions of Section 5(c)
hereof with respect to the furnishing of prospectuses on the New York Business
Day next succeeding the date of this Agreement; and
(k) The Company shall have furnished or caused to be furnished to you
at such Time of Delivery certificates of officers of the Company satisfactory to
you as to the accuracy of the representations and warranties of the Company
herein at and as of such Time of Delivery, as to the performance by the Company
of all of its obligations hereunder to be performed at or prior to such Time of
Delivery, as to the matters set forth in subsections (a) and (e) of this Section
and as to such other matters as you may reasonably request.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any such
amendment or
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<PAGE> 13
supplement in reliance upon and in conformity with written information furnished
to the Company by such Underwriter through Goldman, Sachs & Co. expressly for
use therein; and will reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or defending
any such action or claim as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the written consent
of the indemnified party, effect the settlement or compromise of, or consent to
the entry of any judgment with respect to, any pending or threatened action or
claim in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified party is an actual or potential party
to such action or claim) unless such settlement, compromise or judgment (i)
includes an unconditional release of the indemnified party from all liability
arising out of such action or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act, by or on behalf of
any indemnified party.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law or if the indemnified party failed to give the notice required under
subsection (c) above, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or the Underwriters on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company and the Underwriters agree that it would not be just and
equitable if
-13-
<PAGE> 14
contributions pursuant to this subsection (d) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this subsection (d). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions in respect thereof) referred to above in this
subsection (d) shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any such action or claim. Notwithstanding the provisions of this subsection (d),
no Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company and to each
person, if any, who controls the Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within thirty-six hours
after such default by any Underwriter you do not arrange for the purchase of
such Shares, then the Company shall be entitled to a further period of
thirty-six hours within which to procure another party or other parties
satisfactory to you to purchase such Shares on such terms. In the event that,
within the respective prescribed periods, you notify the Company that you have
so arranged for the purchase of such Shares, or the Company notifies you that it
has so arranged for the purchase of such Shares, you or the Company shall have
the right to postpone such Time of Delivery for a period of not more than seven
days, in order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion may thereby be
made necessary. The term "Underwriter" as used in this Agreement shall include
any person substituted under this Section with like effect as if such person had
originally been a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one-eleventh of the aggregate number of all
the Shares to be purchased at such Time of Delivery, then the Company shall have
the right to require each non-defaulting Underwriter to purchase the number of
shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
-14-
<PAGE> 15
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased exceeds one-eleventh of the aggregate number of all the
Shares to be purchased at such Time of Delivery, or if the Company shall not
exercise the right described in subsection (b) above to require non-defaulting
Underwriters to purchase Shares of a defaulting Underwriter or Underwriters,
then this Agreement (or, with respect to the Second Time of Delivery, the
obligations of the Underwriters to purchase and of the Company to sell the
Optional Shares) shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Company, except for the expenses to be borne
by the Company and the Underwriters as provided in Section 6 hereof and the
indemnity and contribution agreements in Section 8 hereof; but nothing herein
shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Underwriters, as set forth
in this Agreement or made by or on behalf of them, respectively, pursuant to
this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter, or the Company,
or any officer or director or controlling person of the Company, and shall
survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
the Company shall not then be under any liability to any Underwriter except as
provided in Sections 6 and 8 hereof; but, if for any other reason, any Shares
are not delivered by or on behalf of the Company as provided herein, the Company
will reimburse the Underwriters through you for all out-of-pocket expenses
approved in writing by you, including fees and disbursements of counsel,
reasonably incurred by the Underwriters in making preparations for the purchase,
sale and delivery of the Shares not so delivered, but the Company shall then be
under no further liability to any Underwriter except as provided in Sections 6
and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.
All statements, requests, notices and agreements hereunder
shall be in writing, and if to the Underwriters shall be delivered or sent by
mail, telex or facsimile transmission to you as the representatives in care of
Goldman, Sachs & Co., 32 Old Slip, 9th Floor, New York, New York 10005,
Attention: Registration Department; and if to the Company shall be delivered or
sent by mail to the address of the Company set forth in the Registration
Statement, Attention: Chief Executive Officer; provided, however, that any
notice to an Underwriter pursuant to Section 8(c) hereof shall be delivered or
sent by mail, telex or facsimile transmission to such Underwriter at its address
set forth in its Underwriters' Questionnaire, or telex constituting such
Questionnaire, which address will be supplied to the Company by you upon
request. Any such statements, requests, notices or agreements shall take effect
upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and, to the extent provided in
Sections 8 and 10 hereof, the officers and directors of the Company and each
person who controls the Company or any Underwriter, and their respective heirs,
executors, administrators, successors and assigns, and no other person shall
-15-
<PAGE> 16
acquire or have any right under or by virtue of this Agreement. No purchaser of
any of the Shares from any Underwriter shall be deemed a successor or assign by
reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign
and return to us hereof, and upon the acceptance hereof by the Representatives,
on behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement between each of the Underwriters and the
Company. It is understood that the Representatives' acceptance of this letter on
behalf of each of the Underwriters is pursuant to the authority set forth in a
form of Agreement among Underwriters, the form of which shall be submitted to
the Company for examination upon request, but without warranty on the part of
the Representatives as to the authority of the signers thereof.
Very truly yours,
School Specialty, Inc.
By:
-------------------------------------
Name: Daniel Spalding
Title: Chief Executive Officer
Accepted as of the date hereof:
Goldman, Sachs & Co.
Salomon Smith Barney Inc.
Piper Jaffray Inc.
By:
-------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
-16-
<PAGE> 17
SCHEDULE I
<TABLE>
<CAPTION>
Number of Optional
Shares to be
Total Number of Purchased if
Firm Shares Maximum Option
UNDERWRITER to be Purchased Exercised
----------- --------------- ------------------
<S> <C> <C>
Goldman, Sachs & Co........................................
Salomon Smith Barney Inc...................................
Piper Jaffray Inc..........................................
--------------- ------------------
Total....................................
=============== ==================
</TABLE>
-17-
<PAGE> 1
EXHIBIT 1.2
SCHOOL SPECIALTY, INC.
% SENIOR SUBORDINATED NOTES DUE
UNDERWRITING AGREEMENT
_____________,1999
Goldman, Sachs & Co.,
Salomon Smith Barney Inc.
As representatives (the "Representatives")
of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
School Specialty Inc., a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate
of $.......... principal amount of the % Senior Subordinated Notes due specified
above (the "Securities").
1. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(a) A registration statement on Form S-1, (File No. 33-.....)
(the "Initial Registration Statement") in respect of the Securities has
been filed with the Securities and Exchange Commission (the
"Commission"); the Initial Registration Statement and any
post-effective amendment thereto, each in the form heretofore delivered
to you, have been declared effective by the Commission in such form;
other than a registration statement, if any, increasing the size of the
offering (a "Rule 462(b) Registration Statement"), filed pursuant to
Rule 462(b) under the Securities Act of 1933, as amended (the "Act"),
which
<PAGE> 2
became effective upon filing, no other document with respect to the
Initial Registration Statement has heretofore been filed with the
Commission; and no stop order suspending the effectiveness of the
Initial Registration Statement, any post-effective amendment thereto or
the Rule 462(b) Registration Statement, if any, has been issued and no
proceeding for that purpose has been initiated or threatened by the
Commission (any preliminary prospectus included in the Initial
Registration Statement or filed with the Commission pursuant to Rule
424(a) of the rules and regulations of the Commission under the Act, is
hereinafter called a "Preliminary Prospectus"; the various parts of the
Initial Registration Statement and the Rule 462(b) Registration
Statement, if any, including all exhibits thereto but excluding Form
T-1 and including the information contained in the form of final
prospectus filed with the Commission pursuant to Rule 424(b) under the
Act in accordance with Section 5(a) hereof and deemed by virtue of Rule
430A under the Act to be part of the Initial Registration Statement at
the time it was declared effective, each as amended at the time such
part of the Initial Registration Statement became effective or such
part of the Rule 462(b) Registration Statement, if any, became
effective or hereafter becomes effective, are hereinafter collectively
called the "Registration Statement"; and such form of final prospectus,
in the form first filed pursuant to Rule 424(b) under the Act, is
hereinafter called the "Prospectus";
(b) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and each
Preliminary Prospectus, at the time of filing thereof, conformed in all
material respects to the requirements of the Act and the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"), and the
rules and regulations of the Commission thereunder, and did not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; and the statements made therein within the coverage of
Rule 175(b) under the Act were made by the Company with a reasonable
basis and in good faith; provided, however, that this representation
and warranty shall not apply to any statements or omissions made in
reliance upon and in conformity with information furnished in writing
to the Company by the Underwriters through Goldman, Sachs & Co.
expressly for use therein;
(c) The Registration Statement conforms, and the Prospectus
and any further amendments or supplements to the Registration Statement
or the Prospectus will conform, in all material respects to the
requirements of the Act and the Trust Indenture Act and the rules and
regulations of the Commission thereunder and do not and will not, as of
the applicable effective date as to the Registration Statement and any
amendment thereto and as of the applicable filing date as to the
Prospectus and any amendment or supplement thereto, contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading;
-2-
<PAGE> 3
and the statements made therein within the coverage of Rule 175(b)
under the Act were made by the Company with a reasonable basis and in
good faith; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon
and in conformity with information furnished in writing to the Company
by the Underwriters through Goldman, Sachs & Co. expressly for use
therein;
(d) Neither the Company nor any of its subsidiaries has
sustained since the date of the latest audited financial statements
included in the Prospectus any material loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the
Prospectus, there has not been any change in the capital stock,
short-term debt or long-term debt (other than changes to short-term and
long-term not in excess of $30 million in the aggregate) of the Company
or any of its subsidiaries or any material adverse change, or any
development involving a prospective material adverse change, in or
affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the
Prospectus;
(e) The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title
to all personal property owned by them, in each case free and clear of
all liens, encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such
property and do not interfere with the use made and proposed to be made
of such property by the Company and its subsidiaries; and any real
property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries;
(f) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus, and
has been duly qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties or conducts any
business so as to require such qualification, or is subject to no
material liability or disability by reason of the failure to be so
qualified in any such jurisdiction; and each subsidiary of the Company
has been duly incorporated and is validly existing as a corporation in
good standing under the laws of its jurisdiction of
-3-
<PAGE> 4
incorporation and each subsidiary organized as a limited liability
company has been duly organized and is validly existing as a limited
liability company in good standing under the laws of its jurisdiction
of organization;
(g) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued and are fully
paid and non-assessable; and all of the issued shares of capital stock
of each subsidiary of the Company have been duly and validly authorized
and issued, are fully paid and non-assessable and (except for
directors' qualifying shares) are owned directly or indirectly by the
Company, free and clear of all liens, encumbrances, equities or claims
except as may be pledged as security for the $350.0 million credit
facility (the "Credit Facility") described in the Prospectus;
(h) The Securities have been duly authorized and, when issued
and delivered pursuant to this Agreement, will have been duly executed,
authenticated, issued and delivered and will constitute valid and
legally binding obligations of the Company entitled to the benefits
provided by the Indenture to be dated as of ................, 1999 (the
"Indenture") between the Company and ............, as Trustee (the
"Trustee"), under which they are to be issued, which will be
substantially in the form filed as an exhibit to the Registration
Statement; the Indenture has been duly authorized and duly qualified
under the Trust Indenture Act and, when executed and delivered by the
Company and the Trustee, will constitute a valid and legally binding
instrument, enforceable in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization and other laws
of general applicability relating to or affecting creditors' rights and
to general equity principles; and the Securities and the Indenture will
conform to the descriptions thereof in the Prospectus;
(i) The Company has reviewed its operations and that of its
subsidiaries to evaluate the extent to which the business or operations
of the Company or any of its subsidiaries will be affected by the Year
2000 Problem. As a result of such review, the Company has no reason to
believe, and does not believe, that the Year 2000 Problem will have a
material adverse effect on the general affairs, management, the current
or future consolidated financial position, business prospects,
stockholders' equity or results of operations of the Company and its
subsidiaries or result in any material loss or interference with the
Company's business or operations. The "Year 2000 Problem" as used
herein means any significant risk that computer hardware or software
used in the receipt, transmission, processing, manipulation, storage,
retrieval, retransmission or other utilization of data or in the
operation of mechanical or electrical systems of any kind will not, in
the case of dates or time periods occurring after December 31, 1999,
function at least as effectively as in the case of dates or time
periods occurring prior to January 1, 2000;
-4-
<PAGE> 5
(j) The issue and sale of the Securities and the compliance by
the Company with all of the provisions of the Securities, the Indenture
and this Agreement and the consummation of the transactions herein and
therein contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, sale/leaseback
agreement, loan agreement or other similar financing agreement or
instrument or other agreement or instrument to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the
Company or any of its subsidiaries is subject, except where such
conflict, breach, violation or default would not, individually or in
the aggregate, have a material adverse effect on the current
consolidated financial position, stockholders' equity or results of
operations of the Company and its subsidiaries considered as a whole (a
"Material Adverse Effect"), nor will such action result in any
violation of the provisions of the Certificate of Incorporation or
By-laws of the Company or any statute or any order, rule or regulation
of any court or governmental agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their properties; and
no consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body
is required for the issue and sale of the Securities or the
consummation by the Company of the transactions contemplated by this
Agreement or the Indenture, except the registration under the Act of
the Securities, such as have been obtained under the Trust Indenture
Act and such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or Blue Sky
laws in connection with the purchase and distribution of the Securities
by the Underwriters;
(k) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or By-laws or other
organization document or in default in the performance or observance of
any material obligation, covenant or condition contained in any
indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument to which it is a party or by which it or any of
its properties may be bound except where such violation or default
would not have a Material Adverse Effect;
(l) The statements set forth in the Prospectus under the
caption "Description of Notes", insofar as they purport to constitute a
summary of the terms of the Securities, and under the caption
"Underwriting", insofar as they purport to describe the provisions of
the laws and documents referred to therein, are accurate, complete and
fair;
(m) Other than as set forth in the Prospectus, there are no
legal or governmental proceedings pending to which the Company or any
of its subsidiaries is a party or of which any property of the Company
or any of its subsidiaries is the subject which, if determined
adversely to the Company or any of its subsidiaries, would individually
or in the aggregate
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<PAGE> 6
have a Material Adverse Effect; and, to the best of the Company's
knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others;
(n) The Company is not and, after giving effect to the
offering and sale of the Securities, will not be an "investment
company", as such term is defined in the Investment Company Act of
1940, as amended (the "Investment Company Act");
(o) PricewaterhouseCoopers LLP, who have certified certain
financial statements of the Company and its subsidiaries, Ernst &
Young, LLP, BDO Seidman and Altschuler, Melvoin and Glasser LLP, who
have certified certain financial statements of The Re-Print Corporation
and American Academic Suppliers Holding Corporation are each
independent public accountants as required by the Act and the rules and
regulations of the Commission thereunder.
2. Subject to the terms and conditions herein set forth, the Company
agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company, at
a purchase price of ....% of the principal amount thereof, plus accrued
interest, if any, from . . . . . . . . . . . . . , 1999 to the Time of Delivery
hereunder, the principal amount of Securities set forth opposite the name of
such Underwriter in Schedule I hereto.
3. Upon the authorization by the Representatives of the release of the
Securities, the several Underwriters propose to offer the Securities for sale
upon the terms and conditions set forth in the Prospectus.
4. (a) The Securities to be purchased by each Underwriter hereunder
will be represented by one or more definitive global Securities in book-entry
form which will be deposited by or on behalf of the Company with The Depository
Trust Company ("DTC") or its designated custodian. The Company will deliver the
Securities to Goldman, Sachs & Co., for the account of each Underwriter, against
payment by or on behalf of such Underwriter of the purchase price therefor by
wire transfer of Federal (same-day) funds to the account specified by the
Company to Goldman, Sachs & Co. at least forty-eight hours in advance, by
causing DTC to credit the Securities to the account of Goldman, Sachs & Co. at
DTC. The Company will cause the certificates representing the Securities to be
made available to Goldman, Sachs & Co. for checking at least twenty-four hours
prior to the Time of Delivery (as defined below) at the office of DTC or its
designated custodian (the "Designated Office"). The time and date of such
delivery and payment shall be 9:30 a.m., New York City time, on
....................., 1999 or such other time and date as Goldman, Sachs & Co.
and the Company may agree upon in writing. Such time and date are herein called
the "Time of Delivery".
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<PAGE> 7
(b) The documents to be delivered at the Time of Delivery by or on
behalf of the parties hereto pursuant to Section 7 hereof, including the
cross-receipt for the Securities and any additional documents requested by the
Underwriters pursuant to Section 7(i) hereof, will be delivered at the offices
of Sullivan & Cromwell, 125 Broad Street, New York, New York, 10004 (the
"Closing Location"), and the Securities will be delivered at the Designated
Office, all at the Time of Delivery. A meeting will be held at the Closing
Location at 4:00 p.m., New York City time, on the New York Business Day next
preceding the Time of Delivery, at which meeting the final drafts of the
documents to be delivered pursuant to the preceding sentence will be available
for review by the parties hereto. For the purposes of this Section 4, "New York
Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York are generally
authorized or obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to
file such Prospectus pursuant to Rule 424(b) under the Act not later
than the Commission's close of business on the second business day
following the execution and delivery of this Agreement, or, if
applicable, such earlier time as may be required by Rule 430A(a)(3)
under the Act; to make no further amendment or any supplement to the
Registration Statement or Prospectus which shall be disapproved by the
Representatives promptly after reasonable notice thereof; to advise the
Representatives promptly after it receives notice thereof, of the time
when the Registration Statement, or any amendment thereto, has been
filed or becomes effective or any supplement to the Prospectus or any
amended Prospectus has been filed and to furnish the Representatives
with copies thereof; to advise the Representatives promptly after it
receives notice thereof, of the issuance by the Commission of any stop
order or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus, of the suspension of the
qualification of the Securities for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for
any such purpose, or of any request by the Commission for the amending
or supplementing of the Registration Statement or Prospectus or for
additional information; and, in the event of the issuance of any stop
order or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus or suspending any such
qualification, to promptly use its best efforts to obtain the
withdrawal of such order;
(b) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Securities for
offering and sale under the securities laws of such jurisdictions as
the Representatives may request and to comply with such laws so as to
permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the
distribution of the Securities, provided that in
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<PAGE> 8
connection therewith the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process
in any jurisdiction;
(c) Prior to 10:00 a.m., New York City time, on the New York
Business Day next succeeding the date of this Agreement and from time
to time, to furnish the Underwriters with copies of the Prospectus in
New York City in such quantities as the Representatives may reasonably
request, and, if the delivery of a prospectus is required at any time
in connection with offering or sale of the Securities and if at such
time any event shall have occurred as a result of which the Prospectus
as then amended or supplemented would include an untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in light of the circumstances under which
they were made when such Prospectus is delivered, not misleading, or,
if for any other reason it shall be necessary to amend or supplement
the Prospectus in order to comply with the Act or the Trust Indenture
Act, to notify the Representatives and upon the request of the
Representatives to prepare and furnish without charge to each
Underwriter and to any dealer in securities as many copies as the
Representatives may from time to time reasonably request of an amended
Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance; and in case any
Underwriter is required to deliver a prospectus in connection with
sales of any of the Securities at any time nine months or more after
the time of issue of the Prospectus, upon request of the
Representatives but at the expense of such Underwriter to prepare and
deliver to such Underwriter as many copies as the Representatives may
request of an amended or supplemented Prospectus complying with Section
10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon
as practicable, but in any event not later than eighteen months after
the effective date of the Registration Statement (as defined in Rule
158(c) under the Act), an earnings statement of the Company and its
subsidiaries (which need not be audited) complying with Section 11(a)
of the Act and the rules and regulations of the Commission thereunder
(including, at the option of the Company, Rule 158);
(e) During the period beginning from the date hereof and
continuing to and including the earlier of the Time of Delivery and
such earlier time as you may notify the Company, not to offer, sell,
contract to sell or otherwise dispose of, except as provided hereunder
any securities of the Company that are substantially similar to the
Securities;
(f) To furnish to the holders of the Securities as soon as
practicable after the end of each fiscal year an annual report
(including a balance sheet and statements of income, stockholders'
equity and cash flows of the Company and its consolidated subsidiaries
certified by independent public accountants) and, as soon as
practicable after
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<PAGE> 9
the end of each of the first three quarters of each fiscal year
(beginning with the fiscal quarter ending after the effective date of
the Registration Statement), to make available to its stockholders
consolidated summary financial information of the Company and its
subsidiaries for such quarter in reasonable detail; and to furnish to
the holders of the Securities all other documents specified in
Section[s] ...... [and ..... ] of the Indenture, all in the manner so
specified;
(g) During a period of five years from the effective date of
the Registration Statement, to furnish to the Representatives copies of
all reports or other communications (financial or other) furnished to
stockholders, and to deliver to the Representatives (i) as soon as they
are available, (A) copies of any reports and financial statements
furnished to or filed with the Commission or any national securities
exchange on which the Securities or any class of securities of the
Company is listed and (B) the documents specified in Section[s] ...
[and ......] of the Indenture, as in effect at the Time of Delivery;
and (ii) such additional information concerning the business and
financial condition of the Company as the Representatives may from time
to time reasonably request (such financial statements to be on a
consolidated basis to the extent the accounts of the Company and its
subsidiaries are consolidated in reports furnished to its stockholders
generally or to the Commission);
(h) To use the net proceeds received by it from the sale of
the Securities pursuant to this Agreement in the manner specified in
the Prospectus under the caption "Use of Proceeds";
(i) If the Company elects to rely upon Rule 462(b), the
Company shall file a Rule 462(b) Registration Statement with the
Commission in compliance with Rule 462(b) by 10:00 P.M., Washington,
D.C. time, on the date of this Agreement, and the Company shall at the
time of filing either pay to the Commission the filing fee for the Rule
462(b) Registration Statement or give irrevocable instructions for the
payment of such fee pursuant to Rule 111(b) under the Act.
6. The Company covenants and agrees with the several Underwriters that
the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Securities under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Indenture, the Blue Sky
and Legal Investment Memoranda, closing documents (including any compilations
thereof) and any other documents in connection with the offering, purchase, sale
and delivery of the Securities; (iii) all expenses in connection with the
qualification of the Securities for
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<PAGE> 10
offering and sale under state securities laws as provided in Section 5 (b)
hereof, including the fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky and legal
investment surveys; (iv) any fees charged by securities rating services for
rating the Securities; (v) the filing fees incident to, and fees and the
disbursements of counsel for the Underwriters in connection with, any required
review by the National Association of Securities Dealers, Inc. of the terms of
the sale of the Securities; (vi) the cost of preparing the Securities; (vii) the
fees and expenses of the Trustee and any agent of the Trustee and the fees and
disbursements of counsel for the Trustee in connection with the Indenture and
the Securities; and (vii) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this Section. It is understood, however, that, except as
provided in this Section, and Sections 8 and 11 hereof, the Underwriters will
pay all of their own costs and expenses, including the fees of their counsel,
transfer taxes on resale of any of the Securities by them, and any advertising
expenses connected with any offers they may make.
7. The obligations of the Underwriters hereunder shall be subject, in
the sole discretion of the Representatives to the condition that all
representations and warranties and other statements of the Company herein are,
at and as of the Time of Delivery, true and correct, the condition that the
Company shall have performed all of its obligations hereunder theretofore to be
performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed
for such filing by the rules and regulations under the Act and in
accordance with Section 5 (a) hereof; if the Company has elected to
rely upon Rule 462(b), the Rule 462(b) Registration Statement shall
have become effective by 10:00 P.M., Washington, D.C. time, on the date
of this Agreement; no stop order suspending the effectiveness of the
Registration Statement or any part thereof shall have been issued and
no proceeding for that purpose shall have been initiated or threatened
by the Commission; and all requests for additional information on the
part of the Commission shall have been complied with to the reasonable
satisfaction of the Representatives;
(b) Sullivan & Cromwell, counsel for the Underwriters, shall
have furnished to the Representatives such written opinion or opinions,
dated the Time of Delivery, with respect to the incorporation of the
Company, the Securities, the Registration Statement and the Prospectus
and such other related matters as the Representatives may reasonably
request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon
such matters;
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<PAGE> 11
(c) Godfrey & Kahn, counsel for the Company, shall have
furnished to the Representatives their written opinion, dated the Time
of Delivery, in form and substance satisfactory to the Representatives,
to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the State of Delaware, with power and authority
(corporate and other) to own its properties and conduct its
business as described in the Prospectus;
(ii) The Company has an authorized capitalization as
set forth in the Prospectus, and all of the issued shares of
capital stock of the Company have been duly and validly
authorized and issued and are fully paid and non-assessable;
(iii) The Company has been duly qualified as a
foreign corporation for the transaction of business and is in
good standing under the laws of each other jurisdiction in
which it owns or leases properties or conducts any business so
as to require such qualification, except where the failure to
be so qualified or in good standing would not have a Material
Adverse Effect (such counsel being entitled to rely in respect
of the opinion in this clause upon opinions of local counsel
and in respect of matters of fact upon certificates of
officers of the Company, provided that such counsel shall
state that they believe that both the Representatives and they
are justified in relying upon such opinions and certificates);
(iv) Each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation;
and all of the issued shares of capital stock of each such
subsidiary have been duly and validly authorized and issued,
are fully paid and non-assessable, and (except for directors'
qualifying shares are owned directly or indirectly by the
Company, free and clear of all liens, encumbrances, equities
or claims except as may be pledged as security for the Credit
Facility as described in the Prospectus (such counsel being
entitled to rely in respect of the opinion in this clause upon
opinions of local counsel and in respect of matters of fact
upon certificates of officers of the Company or its
subsidiaries, provided that such counsel shall state that they
believe that both the Representatives and they are justified
in relying upon such opinions and certificates);
(v) To the best of such counsel's knowledge and other
than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any
of its subsidiaries is a party or of which any property of the
Company or any of its subsidiaries is the subject which, if
determined adversely to
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<PAGE> 12
the Company or any of its subsidiaries, would individually or
in the aggregate have a Material Adverse Effect; and, to the
best of such counsel's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or
threatened by others;
(vi) This Agreement has been duly authorized,
executed and delivered by the Company;
(vii) The Securities have been duly authorized,
executed, authenticated, issued and delivered and constitute
valid and legally binding obligations of the Company entitled
to the benefits provided by the Indenture; and the Securities
and the Indenture conform to the descriptions thereof in the
Prospectus;
(viii) The Indenture has been duly authorized,
executed and delivered by the parties thereto and constitutes
a valid and legally binding instrument, enforceable in
accordance with its terms, subject, as to enforcement, to
bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors'
rights and to general equity principles; and the Indenture has
been duly qualified under the Trust Indenture Act;
(ix) The issue and sale of the Securities and the
compliance by the Company with all of the provisions of the
Securities, the Indenture and this Agreement and the
consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute
a default under, any indenture, mortgage, deed of trust,
sale/leaseback agreement, loan agreement or other material
financing agreement or any other material agreement or
instrument known to such counsel to which the Company or any
of its subsidiaries is a party or by which the Company or any
of its subsidiaries is bound or to which any of the property
or assets of the Company or any of its subsidiaries is
subject, except where such conflict, breach or violation or
default would have a Material Adverse Effect, nor will such
action result in any violation of the provisions of the
Certificate of Incorporation or By-laws of the Company or any
statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their properties;
(x) No consent, approval, authorization, order,
registration or qualification of or with any such court or
governmental agency or body is required for the issue and sale
of the Securities or the consummation by the Company of the
transactions contemplated by this Agreement or the Indenture
except such as have
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<PAGE> 13
been obtained under the Act and the Trust Indenture Act and
such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or
Blue Sky laws in connection with the purchase and distribution
of the Securities by the Underwriters;
(xi) Neither the Company nor any of its subsidiaries
is in violation of its Certificate of Incorporation or By-laws
or in default in the performance or observance of any material
obligation, covenant or condition contained in any indenture,
mortgage, deed of trust, loan agreement, material lease or
other material agreement or instrument to which it is a party
or by which it or any of its properties may be bound except
where such conflict, breach, violation or default would not
have a Material Adverse Effect;
(xii) The statements set forth in the Prospectus
under the caption "Description of Notes," insofar as they
purport to constitute a summary of the terms of the
Securities, and under the caption "Underwriting", insofar as
they purport to describe the provisions of the laws and
documents referred to therein, are accurate, complete and
fair;
(xiii) The Company is not an "investment company", as
such term is defined in the Investment Company Act; and
(xiv) The Registration Statement and the Prospectus
and any further amendments and supplements thereto made by the
Company prior to the Time of Delivery (other than the
financial statements, related schedules and financial data
therein, as to which such counsel need express no opinion)
comply as to form in all material respects with the
requirements of the Act and the Trust Indenture Act and the
rules and regulations thereunder; although they do not assume
any responsibility for the accuracy, completeness or fairness
of the statements contained in the Registration Statement or
the Prospectus, except for those referred to in the opinion in
subsection (xiii) of this Section 7(c), they have no reason to
believe that, as of its effective date, the Registration
Statement or any further amendment thereto made by the Company
prior to the Time of Delivery (other than the financial
statements, related schedules and financial data therein, as
to which such counsel need express no opinion) contained
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<PAGE> 14
an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading or that, as of its
date, the Prospectus or any further amendment or supplement
thereto made by the Company prior to the Time of Delivery
(other than the financial statements, related schedules and
financial data therein, as to which such counsel need express
no opinion) contained an untrue statement of a material fact
or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under
which they were made, not misleading or that, as of the Time
of Delivery, either the Registration Statement or the
Prospectus or any further amendment or supplement thereto made
by the Company prior to the Time of Delivery (other than the
financial statements and related schedules and financial data
therein, as to which such counsel need express no opinion)
contains an untrue statement of a material fact or omits to
state a material fact necessary to make the statements
therein, in the light of the circumstances under which they
were made, not misleading; and they do not know of any
amendment to the Registration Statement required to be filed
or of any contracts or other documents of a character required
to be filed as an exhibit to the Registration Statement or
required to be described in the Registration Statement or the
Prospectus which are not filed or described as required;
(d) On the date of the Prospectus at a time prior to the
execution of this Agreement, at 9:30 a.m., New York City time, on the
effective date of any post-effective amendment to the Registration
Statement filed subsequent to the date of this Agreement and also at
the Time of Delivery, Price Waterhouse Coopers LLP, Ernst & Young LLP,
BDO Seidman, LLP and Altschuler, Melvoin and Glasser LLP shall have
furnished to the Representatives a letter or letters, dated the
respective dates of delivery thereof, in form and substance
satisfactory to the Representatives, to the effect set forth in Annex I
hereto (the executed copies of the letters delivered prior to the
execution of this Agreement are attached as Annex I(a) hereto and
drafts of the forms of letters to be delivered on the effective date of
any post-effective amendment to the Registration Statement and as of
each Time of Delivery are attached as Annex I(b) hereto);
(e) (i) Neither the Company nor any of its subsidiaries shall
have sustained since the date of the latest audited financial
statements included in the Prospectus any loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus, and (ii) since the respective dates as
of which information is given in the Prospectus there shall not have
been any change in the capital stock, short-term debt or long-term debt
(other than changes to short-term and long-term debt not in excess of
$30 million in the aggregate) of the Company or any of its subsidiaries
or any change, or any development involving a prospective change, in or
affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in Clause
(i) or (ii), is in the judgment of the Representatives so material and
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<PAGE> 15
adverse as to make it impracticable or inadvisable to proceed with the
public offering or the delivery of the Securities on the terms and in
the manner contemplated in the Prospectus;
(f) On or after the date hereof (i) no downgrading shall have
occurred in the rating accorded the Company's debt securities by any
"nationally recognized statistical rating organization", as that term
is defined by the Commission for purposes of Rule 436(g)(2) under the
Act, and (ii) no such organization shall have publicly announced that
it has under surveillance or review, with possible negative
implications, its rating of any of the Company's debt securities;
(g) On or after the date hereof there shall not have occurred
any of the following: (i) a suspension or material limitation in
trading in securities generally on the New York Stock Exchange or on
NASDAQ; (ii) a suspension or material limitation in trading in the
Company's securities on NASDAQ; (iii) a general moratorium on
commercial banking activities declared by either Federal or New York
State authorities; or (iv) the outbreak or escalation of hostilities
involving the United States or the declaration by the United States of
a national emergency or war, if the effect of any such event specified
in this Clause (iv) in the judgment of the Representatives makes it
impracticable or inadvisable to proceed with the public offering or the
delivery of the Securities on the terms and in the manner contemplated
in the Prospectus; or (v) the occurrence of any material adverse change
in the existing financial, political or economic conditions in the
United States or elsewhere which, in the judgment of the
Representatives, would materially and adversely affect the financial
markets or the market for the Securities and other debt securities;
(h) The Company shall have complied with the provisions of
Section 5(c) hereof with respect to the furnishing of prospectuses on
the New York Business Day next succeeding the date of this Agreement;
and
(i) The Company shall have furnished or caused to be furnished
to the Representatives at the Time of Delivery certificates of officers
of the Company satisfactory to the Representatives as to the accuracy
of the representations and warranties of the Company herein at and as
of such Time of Delivery, as to the performance by the Company of all
of its obligations hereunder to be performed at or prior to such Time
of Delivery, as to the matters set forth in subsections (a) and (e) of
this Section and as to such other matters as the Representatives may
reasonably request.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue
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<PAGE> 16
statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse each Underwriter for
any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such action or claim as such
expenses are incurred; provided, however, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any such amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through Goldman, Sachs & Co. expressly for use
therein.
(b) Each Underwriter will indemnify and hold harmless the
Company against any losses, claims, damages or liabilities to which the
Company may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus,
the Registration Statement or the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission
was made in any Preliminary Prospectus, the Registration Statement or
the Prospectus or any such amendment or supplement in reliance upon and
in conformity with written information furnished to the Company by such
Underwriter through Goldman, Sachs & Co. expressly for use therein; and
will reimburse the Company for any legal or other expenses reasonably
incurred by the Company in connection with investigating or defending
any such action or claim as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any
action, such indemnified party shall, if a claim in respect thereof is
to be made against the indemnifying party under such subsection, notify
the indemnifying party in writing of the commencement thereof; but the
omission so to notify the indemnifying party shall not relieve it from
any liability which it may have to any indemnified party otherwise than
under such subsection. In case any such action shall be brought against
any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall
not, except with the consent of the indemnified party, be counsel to
the indemnifying party), and, after notice from the indemnifying party
to such indemnified party of its election so to
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<PAGE> 17
assume the defense thereof, the indemnifying party shall not be liable
to such indemnified party under such subsection for any legal expenses
of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense
thereof other than reasonable costs of investigation. No indemnifying
party shall, without the written consent of the indemnified party,
effect the settlement or compromise of, or consent to the entry of any
judgment with respect to, any pending or threatened action or claim in
respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified party is an actual or
potential party to such action or claim) unless such settlement,
compromise or judgment (i) includes an unconditional release of the
indemnified party from all liability arising out of such action or
claim and (ii) does not include a statement as to or an admission of
fault, culpability or a failure to act, by or on behalf of any
indemnified party.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party
under subsection (a) or (b) above in respect of any losses, claims,
damages or liabilities (or actions in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount
paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the Underwriters on the other from
the offering of the Securities. If, however, the allocation provided by
the immediately preceding sentence is not permitted by applicable law
or if the indemnified party failed to give the notice required under
subsection (c) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits
but also the relative fault of the Company on the one hand and the
Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities
(or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company
on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Underwriters, in
each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material
fact relates to information supplied by the Company on the one hand or
the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this
subsection (d) were determined by pro rata allocation (even if the
Underwriters were treated as one entity
-17-
<PAGE> 18
for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this
subsection (d). The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions in
respect thereof) referred to above in this subsection (d) shall be
deemed to include any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending
any such action or claim. Notwithstanding the provisions of this
subsection (d), no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the
Securities underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue
or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(e) The obligations of the Company under this Section 8 shall
be in addition to any liability which the Company may otherwise have
and shall extend, upon the same terms and conditions, to each person,
if any, who controls any Underwriter within the meaning of the Act; and
the obligations of the Underwriters under this Section 8 shall be in
addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to
each officer and director of the Company and to each person, if any,
who controls the Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase
the Securities which it has agreed to purchase hereunder, the Representatives
may in their discretion arrange for the Representatives or another party or
other parties to purchase such Securities on the terms contained herein. If
within thirty-six hours after such default by any Underwriter the
Representatives do not arrange for the purchase of such Securities, then the
Company shall be entitled to a further period of thirty-six hours within which
to procure another party or other parties satisfactory to the Representatives to
purchase such Securities on such terms. In the event that, within the respective
prescribed periods, the Representatives notify the Company that they have so
arranged for the purchase of such Securities, or the Company notifies the
Representatives that it has so arranged for the purchase of such Securities, the
Representatives or the Company shall have the right to postpone the Time of
Delivery for a period of not more than seven days, in order to effect whatever
changes may thereby be made necessary in the Registration Statement or the
Prospectus, or in any other documents or arrangements, and the Company agrees to
file promptly any amendments to the Registration Statement or the Prospectus
which in the opinion of the Representatives may thereby be made necessary. The
term "Underwriter" as used in this Agreement shall include any person
substituted under this Section with like effect as if such person had originally
been a party to this Agreement with respect to such Securities.
-18-
<PAGE> 19
(b) If, after giving effect to any arrangements for the
purchase of the Securities of a defaulting Underwriter or Underwriters
by the Representatives and the Company as provided in subsection (a)
above, the aggregate principal amount of such Securities which remains
unpurchased does not exceed one-eleventh of the aggregate principal
amount of all the Securities, then the Company shall have the right to
require each non-defaulting Underwriter to purchase the principal
amount of Securities which such Underwriter agreed to purchase
hereunder and, in addition, to require each non-defaulting Underwriter
to purchase its pro rata share (based on the principal amount of
Securities which such Underwriter agreed to purchase hereunder) of the
Securities of such defaulting Underwriter or Underwriters for which
such arrangements have not been made; but nothing herein shall relieve
a defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the
purchase of the Securities of a defaulting Underwriter or Underwriters
by the Representatives and the Company as provided in subsection (a)
above, the aggregate principal amount of Securities which remains
unpurchased exceeds one-eleventh of the aggregate principal amount of
all the Securities, or if the Company shall not exercise the right
described in subsection (b) above to require non-defaulting
Underwriters to purchase Securities of a defaulting Underwriter or
Underwriters, then this Agreement shall thereupon terminate, without
liability on the part of any non-defaulting Underwriter or the Company,
except for the expenses to be borne by the Company and the Underwriters
as provided in Section 6 hereof and the indemnity and contribution
agreements in Section 8 hereof; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Underwriters, as set forth
in this Agreement or made by or on behalf of them, respectively, pursuant to
this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter or the Company,
or any officer or director or controlling person of the Company, and shall
survive delivery of and payment for the Securities.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
the Company shall not then be under any liability to any Underwriter except as
provided in Sections 6 and 8 hereof; but, if for any other reason, the
Securities are not delivered by or on behalf of the Company as provided herein,
the Company will reimburse the Underwriters through the Representatives for all
out-of-pocket expenses approved in writing by the Representatives, including
fees and disbursements of counsel, reasonably incurred by the Underwriters in
making preparations for the purchase, sale and delivery of the Securities, but
the Company shall then be under no further liability to any Underwriter except
as provided in Sections 6 and 8 hereof.
-19-
<PAGE> 20
12. In all dealings hereunder, the Representatives shall act on behalf
of each of the Underwriters, and the parties hereto shall be entitled to act and
rely upon any statement, request, notice or agreement on behalf of any
Underwriter made or given by the Representatives jointly or by Goldman, Sachs &
Co. on behalf of the Representatives.
All statements, requests, notices, and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to the Representatives in care of Goldman, Sachs & Co.,
32 Old Slip, 9th Floor, New York, New York 10005, Attention: Registration
Department; and if to the Company shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: Chief Executive Officer; provided, however,
that any notice to an Underwriter pursuant to Section 8 (c) hereof shall be
delivered or sent by mail, telex or facsimile transmission to such Underwriter
at its address set forth in its Underwriters' Questionnaire, or telex
constituting such Questionnaire, which address will be supplied to the Company
by the Representatives upon request. Any such statements, requests, notices or
agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and, to the extent provided in
Sections 8 and 10 hereof, the officers and directors of the Company and each
person who controls the Company or any Underwriter, and their respective heirs,
executors, administrators, successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. No purchaser of
any of the Securities from any Underwriter shall be deemed a successor or assign
by reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such respective counterparts shall together constitute one and
the same instrument.
If the foregoing is in accordance with your understanding, please sign
and return to us counterparts hereof, and upon the acceptance hereof by the
Representatives, on behalf of each of the Underwriters, this letter and such
acceptance hereof shall constitute a binding agreement between each of the
Underwriters and the Company. It is understood that the Representatives'
acceptance of this letter on behalf of each of the Underwriters is pursuant to
the authority set forth in a form of Agreement among Underwriters, the form of
which shall be submitted to the Company
-20-
<PAGE> 21
for examination, upon request, but without warranty on the part of the
Representatives as to the authority of the signers thereof.
Very truly yours,
School Specialty, Inc.
By:
-------------------------------------
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
Salomon Smith Barney Inc.
By:
-------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
-21-
<PAGE> 22
SCHEDULE I
<TABLE>
<CAPTION>
Principal
Amount of
Securities
to be
UNDERWRITER Purchased
----------- ---------
<S> <C>
Goldman, Sachs & Co. $
Salomon Smith Barney Inc.
----------
Total
==========
</TABLE>
-22-
<PAGE> 1
Exhibit 10.7.b
COVENANT NOT TO COMPETE AGREEMENT
THIS AGREEMENT dated this 27 day of June, 1997, by and between RICHARD
H. NAGEL (hereinafter referred to as "Nagel") and SAX ARTS AND CRAFTS, INC., a
Delaware corporation (hereinafter referred to as the "Company").
W I T N E S S E T H:
WHEREAS, Nagel has been in the business of the sale and distribution of
arts and craft supplies and equipment (hereinafter the "Business"); and
WHEREAS, Nagel is currently employed by the Company pursuant to the
terms of an employment agreement executed by and between Nagel and the Company
on even date herewith (the "Employment Agreement"); and
WHEREAS, it is intended by the parties hereto that the restrictive
covenants in this Agreement shall become effective upon the date of the
termination of Nagel's employment with the Company for reasons other than death
(the "Effective Date") [and during the term of his employment with the Company];
and
WHEREAS, Nagel, in the absence of this Agreement, could compete with
the Company in the market and during the time which are the subject of this
Agreement; and
WHEREAS, the Company desires to restrict Nagel's competitive activities
pursuant to the terms of this Agreement.
IT IS NOW THEREFORE agreed as follows:
1. Restriction on Competition.
(a) During the term of his employment with the Company and for
one (1) year from the Effective Date, Nagel shall not,
directly or indirectly, for himself or on
<PAGE> 2
behalf of or in conjunction with any other person, company,
partnership, corporation, business, group, or other
entity:
(i) engage, as an officer, director, shareholder, owner,
partner, joint venturer, or in any capacity which
utilizes non-public information learned by or involves
customer contacts developed by Nagel during the term of
his employment with the Company, whether as an employee,
independent contractor, consultant, advisor, or manager,
in any business selling any products or services in
direct competition with the Company (other than an
affiliate of the Company), within the 48 continental
states of the United States of America (the "Territory");
(ii) call upon any person who is, at that time, within the
Territory, an employee of the Company or School
Specialty, Inc., a Wisconsin corporation or any
subsidiary or affiliate of School Specialty, Inc.
(hereinafter collectively "School") for the purpose
or with the intent of enticing such employee to
terminate or otherwise limit his/her employment with
of the Company or School; or
(iii)on Nagel's own behalf or on behalf of any
competitor, contact any person or entity who or that,
during Nagel's employment by the Company or School,
was either contacted by or engaged in discussions
with the Company or School as a prospective
acquisition candidate or was the subject of an
acquisition analysis conducted by the Company or
School within the two (2) year period prior to the
termination of the Nagel's employment with the
Company.
(b) The foregoing covenants shall not be deemed to prohibit
Nagel from acquiring as an investment not more than one
percent of the capital stock of a competing business,
whose stock is traded on a national securities exchange or
through the automated quotation system of a registered
securities association.
(c) It is further agreed that, in the event that Nagel shall
cease to be employed by the Company or School and enters
into a business or pursues other activities that, at such
time, are not in competition with the Company or School,
Nagel shall not be chargeable with a violation of this
Section 1 if the Company or School subsequently enters the
same (or a similar) competitive business or activity or
commences competitive operations within 100 miles of
Nagel's new business or activities.
(d) Nagel has carefully read and considered the provisions of
this Section 1 and, having done so, agrees that the
restrictive covenants in this Section 1 impose a fair and
reasonable restraint on Nagel and are reasonably required
to protect the interests of the Company and School, and
their respective officers, directors, employees, and
stockholders. It is further agreed that the Company
2
<PAGE> 3
and Nagel intend that such covenants be construed and enforced
in accordance with the changing activities, business, and
locations of the Company and School throughout the term of
these covenants.
2. Consideration. Nagel's execution of this Agreement is a condition of
his employment with the Company. As additional consideration, the Company agrees
that within ten (10) days of the Effective Date, the Company shall pay to Nagel
the sum of Thirty One Thousand Two Hundred Fifty Dollars ($31,250.00). Based
upon such consideration, Nagel does agree to be bound to the terms and
conditions of this Agreement. Further, Nagel does agree that said consideration
is adequate to bind it to this Agreement.
3. Equitable Remedy. Because of the difficulty of measuring economic
losses to the Company and/or School as a result of a breach of the restrictive
covenants set forth in Section 1, and because of the immediate and irreparable
damage that would be caused to the Company and/or School for which monetary
damages would not be a sufficient remedy, it is hereby agreed that in addition
to all other remedies that may be available to the Company or School at law or
in equity, the Company and School shall be entitled to specific performance and
any injunctive or other equitable relief as a remedy for any breach or
threatened breach of the aforementioned restrictive covenants.
4. Arbitration. Any unresolved dispute or controversy arising under or
in connection with this Agreement may be settled exclusively by arbitration
conducted in accordance with the rules of the American Arbitration Association
then in effect unless the Company shall elect to pursue equitable relief as
provided under Section 3 above. The Company shall have the right to pursue money
damages in addition to equitable relief pursuant to the terms of this section 4.
The arbitrators shall not have the authority to add to, detract from, or modify
any provision hereof nor to award punitive damages to any injured party. A
decision by a majority of the arbitration panel shall be final and binding.
Judgment may be entered on the arbitrators' award in any court having
jurisdiction. The direct expense of any arbitration proceeding shall be borne by
the Company. Each party shall bear its own counsel fees. The arbitration
proceeding shall be held in Milwaukee, Wisconsin. Notwithstanding the foregoing,
the Company and/or School shall be entitled to seek injunctive or other
equitable relief, as contemplated by Section 3 above, from any court of
competent jurisdiction, without the need to resort to arbitration.
5. Notices. All notices, statements, and other communications given
hereunder shall be made in writing by telegraph, telex, fax, personal delivery,
or by mailing the same by certified mail, return receipt requested, by express
delivery be a nationally recognized express delivery service or by next day
express mail delivery in a postpaid wrapper, addressed to the other as
aforesaid, and the date of such personal delivery, telegraphing, telexing,
faxing, the next day if by express delivery, or the date five (5) days after
such mailing shall be deemed the date on which such notice is effective. Except
as otherwise specified herein, all notices sent to the Company hereunder shall
be directed to the attention of Daniel P. Spalding, Executive-Vice President at
the corporate offices of School Specialty, Inc., with an additional copy
directed to Mark Director, Executive-Vice President of School sent to him at
U.S. Office Products Company 1025 Thomas Jefferson Street, NW, Washington, D.C.
20007 (Telefax: (202) 339-6733).
3
<PAGE> 4
6. Modifications. This agreement may not be changed orally, but only by
an agreement in writing signed by the party against whom enforcement of any
waiver, change, modification, or discharge is sought.
7. Descriptive Headings. The descriptive headings of the several
sections of this agreement are inserted for convenience only and do not
constitute a part of this agreement.
8. Counterparts. This agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original, and it shall
not be necessary in making proof of this agreement to produce or account for
more than one such counterpart.
9. Severability. In the event that this agreement is in part found
invalid by a court of competent jurisdiction, the remaining portions of this
agreement shall continue to be in full force and effect, provided, however, that
nothing in this Section 9 shall be construed to contemplate any equitable
reformation or "blue penciling" of the restrictive covenants contained herein.
This agreement shall represent the complete understanding of the parties hereto
relating to the subject matter herein.
10. Jurisdiction. This Agreement and the rights and obligations of the
parties hereunder shall be governed by and construed in accordance with the laws
of the State of Wisconsin applicable to contracts entered into and fully
performed therein. The parties hereby (i) agree that, subject to the provisions
of Section 4, any litigation, action or proceeding arising out of or relating to
this Agreement be instituted in a state or federal court in the City of
Appleton, Wisconsin for state actions and the Milwaukee, Wisconsin for federal
actions, both within the State of Wisconsin, (ii) waive any objection which the
parties might have now or hereafter to the venue of any such litigation, action
or proceeding, (iii) irrevocably submit to the jurisdiction of any such court in
any such litigation, action, or proceedings and (iv) hereby waive any claim or
defense of inconvenient forum. For all purposes of this Agreement the parties
hereby submit to the venue and jurisdiction of the Courts in the State of
Wisconsin (Federal and State), irrevocably consent to personal jurisdiction by
such courts, and further agree that service of process upon they may be effected
pursuant to paragraph 5 above.
11. Assignment and Parties Bound. Nagel agrees, that he cannot assign
all or any portion of his performance under this Agreement. This Agreement may
be assigned or transferred by the Company without the prior written consent of
Nagel. This Agreement shall be binding upon, inure to the benefit of, and be
enforceable by the parties hereto and their respective heirs, legal
representatives, successors, and assigns. It is intended that the Company,
School or its assign will be a third-party beneficiary of the rights of the
Company under this Agreement. No other person shall be a third-party
beneficiary.
12. Pronouns. For purposes of this Agreement, the neuter shall include
the masculine and the feminine and the singular shall include the plural and the
plural the singular, as the context may require.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
/s/ Richard H. Nagel
---------------------------------------------
Richard H. Nagel, Individually
SAX ARTS AND CRAFTS, INC.
/s/ Daniel P. Spalding
---------------------------------------------
Daniel P. Spalding, Executive Vice President
5
<PAGE> 1
Exhibit 12.1
SCHOOL SPECIALTY, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(AMOUNTS IN THOUSANDS)
[CAPTION]
<TABLE>
Historical
----------------------------------------------------------------------------------------------
Four Twelve
Fiscal Year Ended Months Fiscal Year Ended Nine Months Ended Months
December 31, Ended --------------------- ------------------------ Ended
------------------------ April 30, April 26, April 25, January 24, January 23, January 23,
1993 1994 1995 1996 1997 1998 1998 1999 1999
------ ------ -------- -------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pre-tax income.................... $ 279 $1,558 $(3,194) $(4,536) $ 5,720 $10,719 $15,948 20,789 $15,560
Fixed charges:
Interest expense and
amortization of debt
issue costs................... 1,845 3,007 5,536 1,461 4,197 5,505 4,100 8,942 10,347
Rentals......................... 110 495 649 200 606 1,130 927 1,247 1,449
------ ------ ------- ------- ------- ------- ------- ------- -------
Total fixed charges .............. 1,955 3,502 6,185 1,661 4,803 6,635 5,027 10,189 11,796
------ ------ ------- ------- ------- ------- ------- ------- -------
Earnings before income taxes and
fixed charges .................. $2,234 $5,060 $ 2,991 $(2,875) $10,523 $17,354 $20,975 $30,978 $27,356
====== ====== ======= ======= ======= ======= ======= ======= =======
Ratio of earnings to fixed charges 1.1x 1.4x 0.5x (A) 2.2x 2.6x 4.2x 3.0x 2.3x
====== ====== ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ------------------
(A) As a result of the loss incurred during the four months ended April 30,
1996, School Specialty was unable to fully cover the indicated fixed
charges by 4.536.
<PAGE> 2
SCHOOL SPECIALTY, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(AMOUNTS IN THOUSANDS)
[CAPTION]
<TABLE>
Pro Forma as Adjusted
Pro Forma for Common Stock Offering
------------------------------------------------ -------------------------------------------------
Fiscal Twelve Fiscal Twelve
Year Nine Months Ended Months Year Nine Months Ended Months
Ended ------------------------ Ended Ended ------------------------ Ended
April 25, January 24, January 23, January 23, April 25, January 24, January 23, January 23,
1998 1998 1999 1999 1998 1998 1999 1999
---------- ----------- ----------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pre-tax income ................ $10,309 $18,935 $23,027 $14,401 $15,283 $22,665 $26,757 $19,375
Fixed charges:
Interest expense and
amortization of debt
issue costs................ 17,000 13,500 13,500 17,000 12,026 9,770 9,770 12,026
Rentals ..................... 2,176 1,839 1,873 2,210 2,176 1,839 1,873 2,210
------- ------- ------- ------- ------- ------- ------- -------
Total fixed charges ........... 19,176 15,339 15,373 19,210 14,202 11,609 11,643 14,236
------- ------- ------- ------- ------- ------- ------- -------
Earnings before income taxes
and fixed charges............ $29,485 $34,274 $38,400 $33,611 $29,485 $34,274 $38,400 $33,611
======= ======= ======= ======= ======= ======= ======= =======
Ratio of earnings to
fixed charges................ 1.5x 2.2x 2.5x 1.7x 2.1x 3.0x 3.3x 2.4x
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
[CAPTION]
<TABLE>
Pro Forma as Adjusted Pro Forma as Adjusted
for Note Offering for Common Stock and Note Offerings
------------------------------------------------ -------------------------------------------------
Fiscal Twelve Fiscal Twelve
Year Nine Months Ended Months Year Nine Months Ended Months
Ended ------------------------ Ended Ended ------------------------ Ended
April 25, January 24, January 23, January 23, April 25, January 24, January 23, January 23,
1998 1998 1999 1999 1998 1998 1999 1999
---------- ----------- ----------- ---------- ---------- ----------- ----------- -----------
<C> <C> <C> <C> <C> <C> <C> <C>
Pre-tax income................. $ 8,823 $17,820 $21,912 $12,915 $13,797 $21,550 $25,642 $17,889
Fixed charges:
Interest expense and
amortization of debt
issue costs................ 18,486 14,615 14,615 18,486 13,512 10,885 10,885 13,512
Rentals...................... 2,176 1,839 1,873 2,210 2,176 1,839 1,873 2,210
------- ------- ------- ------- ------- ------- ------- -------
Total fixed charges............ 20,662 16,454 16,488 20,696 15,688 12,724 12,758 15,722
------- ------- ------- ------- ------- ------- ------- -------
Earnings before income taxes
and fixed charges .......... $29,485 $34,274 $38,400 $33,611 $29,485 $34,274 $38,400 $33,611
======= ======= ======= ======= ======= ======= ======= =======
Ratio of earnings to
fixed charges............... 1.4x 2.1x 2.3x 1.6x 1.9x 2.7x 3.0x 2.1x
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
STATE OR OTHER JURISDICTION
OF INCORPORATION OR
ORGANIZATION
NAME
1. Re-Print LLC Delaware
2. Sax Arts and Crafts, Inc. Delaware
3. Childcraft Education Corp. New York
4. Bird-in-Hand Woodworks, Inc. New Jersey
5. Don Gresswell, Ltd. United Kingdom
6. Sportime Acquisition, Inc. Delaware
7. Sportime, LLC Delaware
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of
this Registration Statement on Form S-1 of our report dated June 24, 1998,
relating to the financial statements of School Specialty, Inc., as of April 26,
1997 and April 25, 1998 and for the four months ended April 30, 1996 and for the
fiscal years ended April 26, 1997 and April 25, 1998, which appears in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
February 24, 1999
<PAGE> 1
Exhibit 23.3
CONSENT OF ERNST OF YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 2, 1996, with respect to the financial
statements of School Specialty Inc. for the year ended December 31, 1995
included in the Registration Statement on Form S-1 and related Prospectus of
School Specialty, Inc. (formerly known as School Specialty, Inc. and Re-Print
Corporation) for the registration of 3,450,000 shares of its common stock and
$100,000,000 subordinated notes.
Milwaukee, Wisconsin /s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
February 24, 1999
<PAGE> 1
Exhibit 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of
this Registration Statement on Form S-1 of our report dated February 8, 1996,
relating to the financial statements of The Re-Print Corporation, which is
contained in that Prospectus.
We also consent to the references to us under the heading "Experts" in
that Prospectus.
/s/ BDO SEIDMAN
BDO SEIDMAN, LLP
Atlanta, Georgia
February 24, 1999
<PAGE> 1
Exhibit 23.5
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the use in this Prospectus constituting part of
this Registration Statement on Form S-1 of our report dated February 24, 1997,
relating to the consolidated financial statements of American Academic Suppliers
Holding Corporation and Subsidiary, which appears in such Prospectus. We also
consent to the references to us under the heading "Experts".
/s/ ALTSCHULER, MELVOIN AND GLASSER LLP
ALTSCHULER, MELVOIN AND GLASSER LLP
Chicago, Illinois
February 24, 1999
<PAGE> 1
Exhibit 23.6
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of
this Registration Statement on Form S-1 of our report dated February 3, 1998,
relating to the financial statements of Sax Arts and Crafts, Inc., as of
December 16, 1995 and December 25, 1996 and for each of the three years in the
period ended December 25, 1996, which appears in such Prospectus. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
February 24, 1999
<PAGE> 1
Exhibit 23.7
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
to the use of our report dated June 11, 1998 (except for Note C, as to which the
date is June 17, 1998), with respect to the consolidated financial statements of
The National School Supply Company and Subsidiaries included in the Registration
Statement on Form S-1 and related Prospectus of School Specialty, Inc. for the
registration of 3,450,000 shares of its common stock and $100,000,000 in senior
subordinated notes.
Cleveland, Ohio /s/ ERNST & YOUNG LLP
----------------------
February 24, 1999 ERNST & YOUNG LLP
<PAGE> 1
Exhibit 23.8
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of
this Registration Statement on Form S-1 of our report dated September 3, 1998,
relating to the financial statements of Hammond & Stephens Company, as of
October 31, 1997 and for the fiscal year then ended which appears in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
February 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY INCLUDED IN THE REGISTRATION
STATEMENT ON FORM S-1 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-24-1999
<PERIOD-START> APR-27-1998
<PERIOD-END> JAN-23-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 86,621
<ALLOWANCES> 1,778
<INVENTORY> 46,799
<CURRENT-ASSETS> 147,861
<PP&E> 50,331
<DEPRECIATION> (10,550)
<TOTAL-ASSETS> 378,513
<CURRENT-LIABILITIES> 57,035
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 159,052
<TOTAL-LIABILITY-AND-EQUITY> 378,513
<SALES> 424,332
<TOTAL-REVENUES> 424,332
<CGS> 281,436
<TOTAL-COSTS> 281,436
<OTHER-EXPENSES> 113,165
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,942
<INCOME-PRETAX> 20,789
<INCOME-TAX> 10,094
<INCOME-CONTINUING> 10,695
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,695
<EPS-PRIMARY> .73
<EPS-DILUTED> .73
</TABLE>
<PAGE> 1
EXHIBIT 99.1
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER
DATE OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS DATE
---------- ---------- ---------- ---------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts...................... January 1, 1994 $ 137,000 $ 121,000 $ -- $ (19,000)(a) December 31, 1994
January 1, 1995 239,000 2,000 (30,000)(a) December 31, 1995
January 1, 1996 211,000 10,000 (19,000)(a) April 30, 1996
May 1, 1996 202,000 27,000 243,000(b) (1,000)(a) April 26, 1997
April 27, 1997 471,000 274,000 293,000(b) (322,000)(a) April 25, 1996
April 25, 1996 716,000 232,000 1,148,000(b) (318,000)(a) January 23, 1999
Accumulated amortization of
intangibles................... January 1, 1994 1,540,000 757,000 December 31, 1994
January 1, 1995 2,297,000 1,098,000 (781,000)(c) December 31, 1995
January 1, 1996 2,614,000 203,000 -- (c) April 30, 1996
May 1, 1996 2,817,000 566,000 (59,000)(c) April 26, 1997
April 27, 1997 3,324,000 2,061,000 (24,000)(c) April 25, 1998
April 25, 1998 5,361,000 3,604,000 (648,000)(c) January 23, 1999
<CAPTION>
BALANCE
AT END OF
PERIOD
----------
<S> <C>
Allowance for doubtful
accounts...................... $ 239,000
211,000
202,000
471,000
716,000
1,778,000
Accumulated amortization of
intangibles................... 2,297,000
2,614,000
2,617,000
3,324,000
5,361,000
8,317,000
</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.
2
