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<SEC-DOCUMENT>/in/edgar/work/20000727/0000892712-00-000105/0000892712-00-000105.txt : 20000921
<SEC-HEADER>0000892712-00-000105.hdr.sgml : 20000921
ACCESSION NUMBER: 0000892712-00-000105
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 9
CONFORMED PERIOD OF REPORT: 20000429
FILED AS OF DATE: 20000727
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: SCHOOL SPECIALTY INC
CENTRAL INDEX KEY: 0001055454
STANDARD INDUSTRIAL CLASSIFICATION: [5110
] IRS NUMBER: 390971239
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0430
</COMPANY-DATA>
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 000-24385
FILM NUMBER: 679837
</FILING-VALUES>
BUSINESS ADDRESS:
STREET 1: 1000 NORTH BLUEMOUND DRIVE
CITY: APPLETON
STATE: WI
ZIP: 54914
BUSINESS PHONE: 9207342756
</BUSINESS-ADDRESS>
MAIL ADDRESS:
STREET 1: 1000 NORTH BLUEMOUND DRIVE
CITY: APPLETON
STATE: WI
ZIP: 54914
</MAIL-ADDRESS>
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<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>0001.txt
<DESCRIPTION>FORM 10-K
<TEXT>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-K
______________________________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934: For the
fiscal year ended April 29, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 000-24385
SCHOOL SPECIALTY, INC.
(Exact name of Registrant as specified in its charter)
Delaware 39-0971239
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 North Bluemound Drive
Appleton, Wisconsin 54914
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (920) 734-5712
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of class)
Indicate by check mark whether the Registrant (1)
has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter
period that the Registrant was required to file such
reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock
held by nonaffiliates of the Registrant, as of July 1,
2000, was approximately $314,659,898. As of such date,
there were 17,464,505 of the Registrant's shares of
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III is incorporated by reference from the
Proxy Statement for the Annual Meeting of Stockholders
to be held on August 29, 2000.
<PAGE>
PART I
Item 1. Business
Unless the context requires otherwise, all
references to "School Specialty," "we" or "our" refer
to School Specialty, Inc. and its subsidiaries. Our
fiscal year ends on the last Saturday in April in each
year. In this Annual Report on Form 10-K ("Annual
Report"), we refer to fiscal years by reference to the
calendar year in which they end (e.g. the fiscal year
ended April 29, 2000 is referred to as "fiscal 2000").
Note that fiscal 2000 had 53 weeks, while all other
fiscal years reported and referenced represent 52
weeks.
Overview
School Specialty is the largest marketer of non-
textbook educational supplies and furniture to schools
for pre-kindergarten through twelfth grade. We offer
more than 72,000 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 internal growth and acquisitions. For the
fiscal year ended April 29, 2000, our revenues were
$639.3 million and our operating income was $48.6
million, a 38% increase over fiscal 1999.
Our "top down" marketing approach targets school
administrators at the state, regional and local levels
using our network of over 300 sales representatives and
our School Specialty 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 and our
seven different specialty catalogs. In January 2000,
we mailed over 13 million catalogs to more than three
million teachers and curriculum specialists.
We also use the Internet to market and sell our
products, building on the proven two-pronged marketing
approach. "ClassroomDirect.com" is a fully integrated
e-commerce website targeted to teachers and offering
over 13,000 items for sale. "JuneBox.com" offers one-
stop shopping for all of School Specialty's products
on-line and also provides a community forum and content
aimed at educators. In the summer of 2000, JuneBox.com
will be open to unrelated vendors creating a purchasing
portal for schools.
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. The predecessor to this business
was incorporated in 1959 and acquired by U.S. Office
Products in 1996. In June, 1998, U.S. Office Products
distributed to its shareholders all of the Common Stock
of School Specialty in a "spin-off" transaction. At
the same time as this spin-off, 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. On April 16, 1999, School
Specialty sold 2,400,000 shares of Common Stock in a
secondary public offering, and sold an additional
151,410 shares on May 17, 1999 to cover over-
allotments. Our Common Stock is listed on the Nasdaq
National Market under the symbol "SCHS." 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
Annual Report.
<PAGE>
Industry Overview
The school supply market consists of the sale of
non-textbook school supplies, furniture and equipment
to school districts, individual schools, teachers and
curriculum specialists who purchase products for school
and classroom use. The 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 approximately 16,000 school districts,
110,000 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 building 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. 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 nearly 53 million
students in 1998. Current projections by the U.S.
Department of Education indicate that student
enrollment will continue to grow to nearly 55 million
within three years. The U.S. Department of Education
also projects that expenditures per student in public
elementary and secondary schools will continue to rise.
Expenditures of $272 billion in 1997 are projected to
increase to $341 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.
Recent Acquisitions
Audio Graphic Systems. In May, 1999, we acquired
Audio Graphic Systems (Audio Graphics). Audio Graphics
is a business that specializes in the sale of audio-
visual equipment to schools. We paid $2.4 million for
Audio Graphics, of which $1.2 million was paid in cash
and $1.2 million in shares of Common Stock (an
aggregate of 57,151shares were issued). The cash
portion of the purchase price was financed through
borrowings under our credit facility. During calendar
1999, Audio Graphics had revenues of approximately $13
million.
Internet Initiative
Because more schools and teachers are connecting
to the Internet, we have aggressively pursued sales
opportunities through this rapidly growing channel. By
establishing an early presence on the Internet, we
believe we have gained 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.
<PAGE>
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. In February 2000, we
signed an agreement with America Online, Inc. (AOL) for
placement in the Shop@AOL on-line shopping destination
with the goal to increase visibility with both teachers
and consumers. The increasing demand by school
administrators and teachers for more information in
making supply decisions, the lack of a wide 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,
launched in August 1999, JuneBox.com, offers an
education portal on the Internet. This portal is
structured as an education mall offering our products
for sale and also provides 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. In March 2000 we signed an
agreement with Ariba, Inc., one of the world's leading
providers of business-to-business e-commerce solutions,
to power JuneBox.com and facilitate the e-commerce
marketplace for the procurement of school materials.
This site will eventually be expanded to include
additional vendors offering one-stop on-line shopping
for all products purchased by schools and will also
provide a community forum educators can visit to find
teaching tips, lesson plan help, product reviews and
updates on current events affecting the education
market.
Strengths
We attribute our strong competitive position to
the following key attributes:
Leading Market Position. We have developed our
leading market position by emphasizing high quality
products, superior order fulfillment and exceptional
customer service. We believe 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 72,000 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:
Brand Products
----- --------
Childcraft Early childhood
Sax Arts and Crafts Art supplies
Frey Scientific Science
Sportime Physical education
Brodhead Garrett Industrial arts
Gresswell Library
Hammond & Stephens School forms
SmartStuff Software
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
<PAGE>
down" approach through our 300 person sales force and the
School Specialty general supply and furniture catalogs,
and targeting teachers and curriculum specialists with
a "bottom up" approach primarily through the mailing of
ClassroomDirect.com general supply catalogs and our
seven different specialty catalogs to over three
million teachers each year. We utilize our customer
database across our family of catalogs to maximize
their effectiveness and increase our marketing reach.
Internet Offering. Our primary e-commerce sites,
JuneBox.com for administrative purchase decisions and
ClassroomDirect.com for teacher-based decisions,
establish an early yet comprehensive presence on the
Internet which, we believe, will be a significant
competitive advantage.
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 over 20 acquisitions of
companies since May 1996. We have established a
12-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 traditional companies and certain
administrative and warehousing functions at our
specialty divisions. We believe that through these
processes, we can rapidly improve the 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. In addition, management's interests are
aligned with those of our stockholders, as many members
of management own shares of our Common Stock and/or
have been granted options to purchase such Common
Stock.
Growth Strategy
We use the following strategies to grow and
enhance our position as the leading marketer of non-
textbook educational supplies and furniture:
Increase Revenues of Specialty and Proprietary
Products. We believe we can increase our margins by
selling more specialty products and products for which
we are the only supplier. Specialty products accounted
for approximately 40% of our revenues in fiscal 2000,
compared to approximately 35% in fiscal 1999.
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
<PAGE>
underrepresented and
by cross merchandising our specialty products to our
traditional customers. During the September to December
1999 recruiting season, we added approximately 25 sales
representatives to select geographic locations to
improve market penetration.
Leverage the Internet Channel. Because more
schools and teachers are connecting to the Internet, we
are aggressively pursuing 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.
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 complement our specialty product
offerings.
Improve Profitability. We improved our operating
margin (as measured by our operating income before non-
recurring acquisition and restructuring costs divided
by our revenues) from 3.2% in 1995 to 7.6% in fiscal
2000. We believe that we can further improve our
operating margins in the traditional and specialty
segments by eliminating redundant expenses of acquired
businesses, leveraging our overhead costs, increasing
our purchasing power and improving the efficiency of
our warehousing and distribution.
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 catalog 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 products to our
traditional customers. With over 72,000 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. Through the School Specialty
catalog, which is 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), educational software, physical
education equipment, audio-visual equipment, school
furniture and indoor and outdoor equipment. 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. We enhance our furniture
offering with a custom design and contract management
service called Projects by Design. Projects by Design
is a rapidly growing segment of our traditional
business.
<PAGE>
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 fully
integrated Internet e-commerce website. The Internet
site targets the traditional catalog market and 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 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.
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.
SmartStuff. SmartStuff is the developer of
FoolProofr Internet, a comprehensive Internet security
and web management solution for schools and FoolProofr
security software, a desktop software security program
which limits access by children to selected programs
and applications on desktop computers.
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.
<PAGE>
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 marketing companies in the United States.
Our strategy is to use two separate marketing
approaches ("top down" and "bottom up") to reach all
the prospective purchasers in the school system.
Traditional Business. Our national marketing
model has over 300 sales representatives operating
within 17 regions supported by regional managers and
two regional customer service and sales support call
centers. We believe our national structure provides
for effective sales management, resulting in higher
regional penetration, and achieves significant cost
savings through focused distribution and call centers.
We have a broad customer base and no single
customer accounted for more than 2% of sales during
fiscal 2000, 1999 and 1998. 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 Business. We generally use direct mail
catalogs to reach our broader customer base. We
distribute seven major specialty catalogs, one for each
of our Childcraft, Sax Arts and Crafts, Frey
Scientific, Sportime, Brodhead Garrett, Gresswell and
Hammond & Stephens 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
start of school in the fall. Our SmartStuff brand uses
a combination of marketing brochures, outside field
sales and telemarketing to reach its customer base.
Internet Business. We offer two e-commerce sites,
JuneBox.com and ClassroomDirect.com to facilitate on-
line purchases and shorten the order cycle for
administrators and teachers. Both traditional and
specialty products are available on these sites.
Pricing. Pricing for our general and specialty
product offerings varies by product and market channel.
We generally offer a negotiated discount from catalog
prices for supplies from our School Specialty catalog
and respond to quote and bid requests. The pricing
structure of specialty products offered through direct
marketing is generally not subject to negotiation.
Distribution
We aggregate and distribute products through
seven primary distribution centers (DCs). Each DC has
specific primary and back-up geographic responsibility and
carries all traditional stock items. The distribution
system is designed to minimize split shipments and freight
charges as well as manage seasonal peaks.
<PAGE>
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 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 an order
management system, JuneBox Off-Line, 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 1999 exceeded 98%.
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 and Crafts rely on
carriers such as Roadway Package Service, United Parcel
Service and the U.S. Postal Service for distribution to
customers.
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. In the
traditional and certain specialty businesses, 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
<PAGE>
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 remaining specialty divisions use 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.
Our software and hardware allow for continued
incremental growth as well as the opportunity to
integrate new client-server and other technologies into
the information systems.
Competition
We operate in a highly competitive environment.
The market is especially 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.
Employees
As of July 1, 2000, we had approximately 2,400
full-time employees. 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 July 1, 2000, approximately 35 full-
time 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.
Forward-Looking Statements
Statements in this Annual Report which are not
strictly historical are "forward-looking" statements.
In accordance with the Private Securities Litigation
Reform Act of 1995, we can obtain a "safe-harbor" for
forward-looking statements by identifying those
statements and by accompanying those statements with
cautionary statements which identify factors that could
cause actual results to differ materially from those in
the forward-looking statements. Accordingly, the
following information contains or may contain forward-
looking statements: (1) information included or
incorporated by reference in this Annual Report,
including, without limitation, statements made under
Item 1, Business and Item 7, Management's Discussion
and Analysis of Financial Condition and Results of
Operations, including, without limitation, statements
with respect to growth plans and projected revenues,
operating profits, earnings and costs; (2) information
included or incorporated by reference in our future
filings with the Securities and Exchange Commission
including, without limitation, statements with respect
to growth plans and projected revenues, operating
profits, earnings and costs; and (3) information
contained in written material, releases and oral
statements issued by, or on behalf of, School Specialty
including, without limitation, statements with respect
to growth plans and projected revenues, operating
profits, earnings and costs. Our actual results may
differ materially from those contained in the forward-looking
<PAGE>
statements identified above. Factors which may
cause such a difference to occur include, but are not
limited to, the following:
Potential Liabilities Related to Spin-Offs. We
became a public company in June 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. In connection with these distributions
(known as 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 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.
In addition, 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. 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.
Material Amount of Goodwill. Approximately $192.7
million, or 42%, of our total assets as of April 29,
2000 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. 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 discounted 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.
Dependence 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.
Seasonality of Our Business. Our educational
supply businesses are highly seasonal. Because most of
our customers want their school supplies delivered
before or shortly after the commencement of
<PAGE>
the school year, 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 and fourth
fiscal quarters. This seasonality causes our operating
results to vary considerably from quarter to quarter.
Dependence 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 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. 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.
Reliance 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 most executive officers, we
do not have employment agreements with our 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.
Competition. 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.
Dependence on Our Systems. We believe that one of
our competitive advantages is our information systems,
including our proprietary PC-based customer order
management system, JuneBox Off-Line. 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 disrupted or become
unavailable, this could materially and adversely affect
our business, results of operations and financial
condition.
Several of our recently-acquired divisions and/or
subsidiaries as well as Gresswell (our U.K. subsidiary)
use predecessor information systems. With the
exception of Gresswell, we intend to convert the
information systems of these 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.
<PAGE>
Absence of 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 credit facility contains
restrictions on, and in some circumstances may prevent,
our payment of dividends.
Leverage. As of April 29, 2000, we had $161.9
million of bank debt outstanding. In addition, our
leverage could increase over time. Our credit facility
permits us to incur additional debt under certain
circumstances and we expect to borrow under our 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 our stockholders any assurance that, if
we are unable to service our debt, it is likely to have
a material adverse effect on the company.
Item 2. Properties
Our corporate headquarters are located in an owned
facility at 1000 North Bluemound Drive, Appleton,
Wisconsin, a combined office and warehouse facility of
approximately 120,000 square feet. We lease or own the
following principal facilities:
Approximate
Square Owned/
Locations Footage Leased Lease Expiration
Agawam, Massachusetts 163,300 Owned -
Atlanta, Georgia 77,000 Leased January 6, 2002
Birmingham, Alabama 180,365 Leased November 30, 2006
Bowling Green, Kentucky 42,000 Leased June 30, 2001
Fremont, Nebraska 95,000 Leased June 30, 2003
Fresno, California 163,200 Leased November 1, 2009
Hoddesdon, England 47,500 Leased September 24, 2006
Lancaster, Pennsylvania 73,000 Leased December 31, 2002
Lancaster, Pennsylvania 204,000 Leased February 28, 2009
Lufkin, Texas 140,000 Owned -
Mansfield, Ohio 323,000 Owned -
New Berlin, Wisconsin 97,500 Leased March 31, 2002
Salina, Kansas 123,000 Owned -
__________
The 73,000 square foot Lancaster, Pennsylvania
facility is used for manufacturing and the Fremont,
Nebraska facility is used for production of school
forms.
We believe that our properties, as enhanced for
our ongoing expansion, are adequate to support our
operations for the foreseeable future. We regularly
review the utilization and consolidation of our
facilities.
<PAGE>
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted during the quarter
ended April 29, 2000 to a vote of our security holders.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of July 10, 2000, the record date of our 2000
Annual Meeting of Stockholders, the following persons
served as executive officers of School Specialty:
Name and Age
of Officer
Daniel P. Spalding Mr. Spalding became Chairman of the Board and
Age 45 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 School Specialty's predecessor.
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 Mr. Vander Zanden became the President and Chief
Age 45 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.
Mary M. Kabacinski Ms. Kabacinski, a Certified Public Accountant,
Age 51 has served as Executive Vice President and Chief
Financial Officer since August 1999. From 1989
to 1999, she served as Executive Vice President
and Chief Financial Officer for Marquette
Medical Systems, a manufacturer of medical
devices.
<PAGE>
Donald J. Noskowiak Mr. Noskowiak has served as Vice President
Age 42 Finance/Business Development since August 1999.
Mr. Noskowiak has been with School Specialty
since 1992, and served as Chief Financial
Officer from 1997 to August 1999.
Melvin D. Hilbrown Mr. Hilbrown has served as Executive Vice
Age 52 President of School Specialty and Managing
Director 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 Mr. Nagel has served as Executive Vice President
Age 59 of School Specialty for Sax Arts and Crafts
since June 1998. Mr. Nagel joined School
Specialty with the acquisition of Sax Arts and
Crafts in 1997. Mr. Nagel has been with Sax
Arts and Crafts since 1975.
Donald Ray Pate, Jr. Mr. Pate has served as Executive Vice President
Age 37 of School Specialty for ClassroomDirect.com
since 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 Mr. Suchodolski has served as Executive Vice
Age 54 President of School Specialty for Childcraft
since 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.
Michael J. Killoren Mr. Killoren has served as Executive Vice
Age 43 President and Chief Information Officer of
JuneBox.com, Inc., since June 2000. From 1999
through June 2000, Mr. Killoren served as Vice
President and Chief Information Officer of
School Specialty. Mr. Killoren was Chief
Operating Officer of School Specialty
Distribution from 1997 to 1999 and Vice
President Operations from 1992 to 1997. Mr.
Killoren joined School Specialty in 1980.
Brian E. Chapin Mr. Chapin has served as Executive Vice
Age 48 President of School Specialty for SmartStuff
since School Specialty acquired SmartStuff in
March 1999. Mr. Chapin served as President of
SmartStuff since he founded it in 1993.
Peter S. Savitz Mr. Savitz has served as Executive Vice
Age 51 President of School Specialty for Sportime since
School Specialty acquired Sportime in February
1999. Mr. Savitz has been with Sportime since
1972.
Garett H.D. Reid Mr. Reid has served as Executive Vice President
Age 60 of School Specialty for Frey Scientific since
School Specialty acquired National School Supply
Company (Beckley-Cardy) in August 1998. Mr.
Reid served as Vice President of Marketing and
Sales in Science & Media with the Beckley-Cardy
Group since 1989.
<PAGE>
Joseph F. Franzoi IV Mr. Franzoi has served as Corporate Counsel
Age 45 since June 1998 and became a part-time employee
of JuneBox.com, Inc., in June 2000. Mr. Franzoi
has practiced corporate law with Franzoi and
Franzoi, S.C., from 1980 to the present,
concentrating in the area of mergers and
acquisitions.
Daniel P. Spalding and Michael J. Killoren are
cousins.
The term of office of each executive officer is
from one annual meeting of the Board of Directors until
the next annual meeting of the Board of Directors or
until a successor for each is selected.
There are no arrangements or understandings
between any of our executive officers and any other
person (not an officer or director of School Specialty
acting as such) pursuant to which any of our executive
officers were selected as an officer of School
Specialty.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
Our Common Stock has traded under the symbol
"SCHS" on the Nasdaq National Market since June 10,
1998. There was no market for the Common Stock prior
to that date. The table below sets forth the reported
high and low closing sale prices for shares of the
Common Stock on the Nasdaq National Market during the
indicated quarters.
High Low
Fiscal quarter ended ---- ---
--------------------
July 24, 1999 $19.3125 $14.3125
October 23, 1999 17.3750 11.8750
January 22, 2000 16.6250 12.1250
April 29, 2000 23.1250 14.1250
High Low
Fiscal quarter ended ---- ---
--------------------
July 25, 1998 $17.8750 $14.3750
October 24, 1998 17.0000 10.6250
January 23, 1999 25.0625 13.8750
April 24, 1999 25.8750 17.7500
Holders
As of July 1, 2000, there were 2,609 record
holders of the Common Stock.
Historical Dividends
We have not declared or paid any cash dividends on
our Common Stock to date. 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 credit facility contains
restrictions on, and in some circumstances may prevent,
our payment of dividends.
<PAGE>
Item 6. Selected Financial Data
SELECTED HISTORICAL FINANCIAL DATA
(in thousands, except per share data) (1)(2)
<TABLE>
Fiscal Year Ended Four Fiscal Year
------------------------------------------- Months Ended
(53 Weeks) (52 Weeks) (52 Weeks) (52 Weeks) Ended (52 Weeks)
April 29, April 24, April 25, April 26, April 30, December 31,
2000 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues $639,271 $521,704 $310,455 $191,746 $ 28,616 $150,482
Cost of revenues 406,043 341,783 202,870 126,862 18,591 98,233
-------- -------- -------- -------- -------- --------
Gross profit 233,228 179,921 107,585 64,884 10,025 52,249
Selling, general and
administrative expenses 184,586 144,659 87,846 53,177 11,917 47,393
Non-recurring acquisition
costs - - - 1,792 1,122 -
Restructuring costs - 5,274 3,491 194 - 2,532
-------- -------- -------- -------- -------- --------
Operating income (loss) 48,642 29,988 16,248 9,721 (3,014) 2,324
Interest expense (net) 13,151 12,601 5,373 4,197 1,455 5,536
Other (income) expense 1,856 (228) 156 (196) 67 (18)
-------- -------- -------- -------- -------- --------
Income (loss) before
provision for (benefit
from) income taxes 33,635 17,615 10,719 5,720 (4,536) (3,194)
Provision for (benefit
from) income taxes (3) 15,120 8,719 5,480 (2,412) 139 173
-------- -------- -------- -------- -------- --------
Net income (loss) $ 18,515 $ 8,896 $ 5,239 $ 8,132 $ (4,675) $ (3,367)
======== ======== ======== ======== ======== ========
Net income (loss)
per share:
Basic $ 1.06 $ 0.61 $ 0.40 $ 0.81 $ (0.54) $ (0.51)
Diluted $ 1.06 $ 0.60 $ 0.39 $ 0.80 $ (0.53) $ (0.50)
Weighted average
shares outstanding:
Basic 17,429 14,690 13,284 10,003 8,611 6,562
Diluted 17,480 14,840 13,547 10,196 8,789 6,669
April 29, April 24, April 25, April 26, April 30, December 31,
2000 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
Balance Sheet Data:
Working capital (deficit) $117,018 $115,853 $ 47,791 $ 14,491 $ (3,663) $ (1,052)
Total assets 454,849 437,708 223,729 87,685 54,573 54,040
Long-term debt 144,789 161,691 63,014 33,792 15,031 15,294
Total debt 162,180 173,285 83,302 60,746 40,918 39,783
Stockholders' equity
(deficit) 224,993 202,687 106,466 16,329 (4,267) (620)
</TABLE>
__________
(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 amounts previously reported have been
reclassified to conform with the fiscal 2000
presentation. These reclassifications have no effect on
net income or net income per share.
<PAGE>
(3) Results for the fiscal year ended April 26,
1997 include a benefit from income taxes of $2.4
million which primarily resulted 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.
Item 7. 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 the consolidated financial
statements and related notes, included elsewhere in
this Annual Report.
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
72,000 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 internal
growth and acquisitions.
Revenues have increased from $150.5 million in
fiscal 1995 to $639.3 million in fiscal 2000. This
increase is driven primarily by internal growth and
acquisitions. Our revenues for fiscal 2000 were $639.3
million and our operating income before restructuring
costs was $48.6 million, which represented compound
annual increases of 40% and 70%, respectively, compared
to our historical results for fiscal 1995.
Our gross margin has improved in recent years
primarily due to acquisitions and increased buying
power. We have acquired many specialty businesses,
which tend to have higher gross margins than our
traditional business. In addition, our acquisitions of
both specialty and traditional businesses have
increased our buying power, resulting in reduced costs
of the products we purchase.
Our operating margins have also improved
significantly over the last several years. This
improvement reflects our recent acquisitions of
specialty companies which typically have higher
operating margins than our traditional businesses. In
addition, through the integration of acquired
businesses, 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.
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 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 May
through June in anticipation of the peak shipping
season. The majority of shipments are made between May
and October and 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 and fourth fiscal
quarters.
<PAGE>
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 fiscal 2000,
fiscal 1999, and fiscal 1998.
Fiscal Year Ended
April 29, 2000 April 24, 1999 April 24, 1998
(53 Weeks) (52 Weeks) (52 Weeks)
-------------- -------------- -------------
Revenues 100.0% 100.0% 100.0%
Cost of revenues 63.5 65.5 65.3
------- ------- -------
Gross profit 36.5 34.5 34.7
Selling, general and
administrative expenses 28.9 27.7 28.3
Restructuring and strategic
restructuring acquisition costs - 1.0 1.1
------- ------- -------
Operating income 7.6 5.8 5.3
Interest expense, net 2.1 2.4 1.8
Other expense 0.2 - 0.1
Income before provision for ------- ------- -------
income taxes 5.3 3.4 3.4
Provision for income taxes 2.4 1.7 1.8
------- ------- -------
Net income 2.9% 1.7% 1.6%
======= ======= =======
Consolidated Historical Results of Operations
Year Ended April 29, 2000 (53 weeks) Compared to Year
Ended April 24, 1999 (52 weeks)
Revenues
Revenues increased 22.5% from $521.7 million for
fiscal 1999 to $639.3 million for fiscal 2000. This
increase is primarily due to internal growth on
existing business and the inclusion of revenues from
the six companies acquired in business combinations
accounted for under the purchase method of accounting
since the beginning of fiscal 1999.
Gross Profit
Gross profit increased 29.6% from $179.9 million,
or 34.5% of revenues, in fiscal 1999 to $233.2 million,
or 36.5% of revenues, in fiscal 2000. The increase in
gross profit as a percentage of revenues was due
primarily to (1) a shift in product mix to increased
revenue from the specialty business, where proprietary
products generate higher gross margins than the
traditional business, (2) an improvement in traditional
business gross margins, driven primarily by more
favorable pricing and the elimination of less
profitable products from our product offering, and (3)
an improvement in specialty business gross margin,
which was driven by more favorable product mix and
contributions from Sportime, which was acquired in
February of fiscal 1999, and has higher gross margins
than most of our other businesses. These increases
were slightly offset by contributions from the Internet
business, which as a group has lower gross margins than
our other businesses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
include selling expenses (the most significant
component of which is sales wages and commissions),
operations expenses (which includes customer service,
warehouse and outbound transportation costs), catalog
costs, general administrative overhead (which includes
information systems, accounting, legal, and human
resources) and depreciation and amortization expense.
<PAGE>
Selling, general and administrative expenses
increased 27.6% from $144.7 million, or 27.7% of
revenues, in fiscal 1999 to $184.6 million, or 28.9% of
revenues, in fiscal 2000. The increase in selling,
general and administrative expense is primarily due to
an increase in revenue. The increase in selling,
general and administrative expense as a percent of
revenue is primarily due to (1) a shift in revenue mix
to the specialty business, which has higher selling,
general and administrative expenses than the
traditional business, (2) higher amortization expense
due to goodwill amortization related to the six
acquisitions we have completed since the beginning of
fiscal 1999, and (3) expenses related to expanding the
Internet business, which are incremental in fiscal
2000. These increases are offset by reduced selling,
general and administrative expenses in the traditional
business, which is primarily due to the integration of
Beckley-Cardy and the restructuring of the traditional
business, which began in the second quarter of fiscal
1999.
Restructuring Costs
During fiscal 1999, we recorded a strategic
restructuring charge of $1.1 million in the first
quarter and $4.2 million in the second quarter, for a
total of $5.3 million during fiscal 1999. The $1.1
million charge related to a one-time, non-cash charge
for compensation expense attributed to U.S. Office
Product's stock option tender offer and the sale of
shares of Common Stock to some of our executive
management personnel. The $4.2 million charge was to
consolidate existing warehousing, customer service and
sales operations. Further details of the restructuring
charge are discussed in the notes to consolidated
financial statements.
Net Interest Expense and Other Expenses
Net interest expense increased $0.6 million from
$12.6 million, or 2.4% of revenues, in fiscal 1999, to
$13.2 million, or 2.1% of revenues in fiscal 2000. The
increase in net interest expense is primarily
attributed to the debt assumed and cash paid for the
six companies acquired since the beginning of fiscal
1999, partially offset by debt repaid from the net
proceeds from our secondary offering in April 1999.
Other expenses of $1.9 million for fiscal 2000
primarily represents the loss on the disposal of a
facility donated to a municipality and a non-cash
impairment charge on a minority investment.
Provision for Income Taxes
Provision for income taxes for fiscal 2000
increased 73.4% or $6.4 million over fiscal 1999,
reflecting income tax rates of 45.0% and 49.5% in
fiscal 2000 and fiscal 1999, respectively. The
decrease in the effective tax rate is primarily due to
a decline in the effective state tax rate and a
reduction in the amount of non-deductible goodwill
amortization. The higher effective tax rate, as
compared to the federal statutory rate of 35.0%, is
primarily due to state income taxes and non-deductible
goodwill amortization.
Fiscal Year Ended April 24, 1999 Compared to Fiscal Year Ended April 25, 1998
Revenues
Consolidated revenues increased 68.0%, from $310.5
million for fiscal 1998 to $521.7 million for fiscal
1999. This increase was due primarily to the inclusion
of revenues of thirteen businesses acquired since the
beginning of fiscal l998 and internal growth on
existing businesses.
<PAGE>
Gross Profit
Gross profit increased 67.2%, from $107.6 million
in fiscal 1998 to $179.9 million in fiscal 1999
primarily due to the acquisitions referred to above.
Gross profit as a percent of revenues declined slightly
from 34.7% in fiscal 1998 to 34.5% in fiscal 1999.
This decline was due primarily to a reduction in
traditional business gross margin, driven by the
acquisition of Beckley-Cardy, which had lower gross
margins than our existing traditional business and an
increase in lower margin bid revenues. These
reductions were offset by an increase in specialty
business revenue, which typically has higher gross
margins than the traditional business.
Selling, General and Administrative Expense
Selling, general and administrative expenses
increased 64.7%, from $87.8 million in fiscal 1998 to
$144.7 million in fiscal 1999, due primarily to the
acquisitions referred to above. As a percentage of
revenues, these expenses declined 0.6% from 28.3% for
fiscal 1998 to 27.7% for fiscal 1999. The decrease in
selling, general and administrative expenses as a
percentage of revenues was the result of cost savings
attributable to the integration of companies acquired
during fiscal 1998 and the consolidation of our
warehousing, sales and customer service operations
under the restructuring of the traditional business
which began in the second quarter of fiscal 1999.
These decreases were offset by increases attributable
to the acquisition of Beckley-Cardy in the second
quarter of fiscal 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
thirteen companies acquired since the beginning of
fiscal 1998.
Restructuring Costs
During fiscal 1999, we recorded a strategic
restructuring charge of $1.1 million in the first
quarter and $4.2 million in the second quarter, for a
total of $5.3 million during fiscal 1999. The $1.1
million charge related to a one-time, non-cash charge
for compensation expense attributed to U.S. Office
Product's stock option tender offer and the sale of
shares of Common Stock to some of our executive
management personnel, net of underwriting discounts.
The $4.2 million charge was to consolidate existing
warehousing, customer service and sales operations.
Further details of the restructuring charge are
discussed in the notes to consolidated financial
statements.
Net Interest Expense
Net interest expense increased 134.5%, from $5.4
million, or 1.8% of revenues, for fiscal 1998 to $12.6
million, or 2.4% of revenues, for fiscal 1999. The
increase in net interest expense is primarily
attributed to the debt assumed and cash paid for the
thirteen companies acquired since the beginning of
fiscal 1998, offset by debt repaid from the proceeds
from our secondary public offering in April 1999, our
initial public offering in June 1998, and the
forgiveness of debt from U.S. Office Products in
connection with the spin-off.
Provision for Income Taxes
Provision for income taxes increased 59.1% from
$5.5 million for fiscal 1998 to $8.7 million for fiscal
1999, reflecting effective income tax rates of 49.5%
and 51.1% for fiscal 1999 and fiscal 1998,
respectively. The higher effective tax rate, compared
to the federal statutory rate of 35%, is primarily due
to state income taxes and non-deductible goodwill
amortization.
<PAGE>
Liquidity and Capital Resources
At April 29, 2000, we had working capital of
$117.0 million. Our capitalization at April 29, 2000
was $386.9 million and consisted of bank debt of $161.9
million and stockholders' equity of $225.0 million.
We currently have a five year secured $350 million
revolving credit facility with Bank of America, N.A.
The 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 April 29, 2000
under the credit facility was approximately $161.9
million, consisting of $75.6 million outstanding under
the revolving loan portion of the facility and $86.3
million outstanding under the term loan portion of the
facility. Borrowings under the 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 credit facility. The agreement fixes the
30 day LIBOR interest rate at 4.37% per annum (floating
LIBOR on April 29, 2000 was 6.18%) 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 April 29, 2000, the effective
interest rate on borrowings under our credit facility
was approximately 8.3% excluding the effect of the swap
agreement and 7.8% including the effect of the swap
agreement. In fiscal 2000, we borrowed under the
credit facility primarily for seasonal working capital
and capital expenditures. During fiscal 2000, we made
certain immaterial changes to certain financial and
other covenants under our credit facility.
On April 16, 1999, we sold 2,400,000 shares of
Common Stock in a public offering for $40.8 million in
net proceeds. On May 17, 1999, we sold an additional
151,410 shares of Common Stock to cover over-allotments
for $2.2 million in net proceeds. The total proceeds
were used to reduce indebtedness outstanding under our
credit facility.
On June 9, 1998, we sold 2,125,000 shares of
Common Stock in a public offering for $30.6 million in
net proceeds and we sold 250,000 shares of Common Stock
in a concurrent offering directly to certain executive
officers of School Specialty for aggregate
consideration of $3.6 million. In connection with the
offerings, we incurred approximately $1.5 million of
expenses. The total net proceeds to us from the
offerings were $32.7 million. The net proceeds were
used to reduce indebtedness outstanding under our
credit facility.
During fiscal 2000, net cash provided by operating
activities was $31.1 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
$27.3 million, including $1.3 million for acquisitions,
$17.3 million for additions to property and equipment
and $8.7 million for other long term assets.
Investments in other long term assets include $3.0
million for a minority interest in A Better Way of
Learning which is an e-commerce fulfillment partner of
School Specialty, $2.8 million for software licensing
to power JuneBox.com, our purchasing portal for
schools, $1.7 million to purchase the net assets of a
division of a furniture manufacturer and a compilation
of other long term investments.
Net payments of $9.4 million were made to reduce
indebtedness under the credit facility, using $2.2
million in proceeds from the issuance of Common Stock,
as well as cash from operations and cash on hand.
<PAGE>
During fiscal 1999, net cash provided by operating
activities was $27.6 million. Net cash used in
investing activities was $127.2 million, including
$122.3 million for acquisitions and $4.9 million for
additions to property and equipment and other. Net
cash provided by financing activities was $109.4
million. Borrowing under the credit facility included
(1) $0.8 million used to fund the cash portion of the
purchase price of the Holsinger acquisition, (2) $3.7
million used to fund the purchase price of the
SmartStuff acquisition, (3) $23 million used to fund
the purchase price of the Sportime acquisition, (4)
$16.5 million used to fund the cash portion of the
purchase price of the Hammond & Stephens acquisition,
(5) $134.7 million used to fund the Beckley-Cardy
acquisition consisting of $78.1 million for the
purchase price and $56.6 million for debt repayment,
(6) $83.3 million used to repay the U.S. Office
Products debt in connection with the spin-off and (7)
$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 concurrent offering to
certain officers and directors and $40.6 million of the
net proceeds from our public offering in April 1999
were used to repay a portion of the funds borrowed
under the credit facility. U.S. Office Products
contributed capital of $7.2 million as required under
the distribution agreement entered into with us in
connection with the spin-off.
During fiscal 1998, net cash provided by operating
activities was $3.7 million. Net cash used in
investing activities was $99.7 million, including $95.7
million for acquisitions and $4.0 million for additions
to property and equipment and other. Net cash provided
by financing activities was $96.0 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.
Our anticipated capital expenditures for the next
twelve months are expected to be $13 million. The
largest items include software development for our
Internet initiative, computer hardware and software and
warehouse equipment.
We anticipate that our cash flow from operations
and borrowings available from our existing credit
facility will be sufficient to meet our liquidity
requirements for operations, including capital
expenditures, and our debt service obligations.
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 acquire 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 2000
(53 weeks) and fiscal 1999 (52 weeks). We derived this
data from unaudited consolidated financial statements.
<PAGE>
Year Ended April 29, 2000
------------------------------------------------------
First Second Third Fourth Total
---------- ---------- ---------- ---------- ----------
(13 weeks) (13 weeks) (13 weeks) (14 weeks) (53 weeks)
Revenues $194,299 $231,588 $ 97,244 $116,140 $639,271
Gross profit 72,879 82,913 33,429 44,007 233,228
Operating income (loss) 24,564 26,701 (2,245) (378) 48,642
Net income (loss) 11,364 12,184 (3,032) (2,001) 18,515
Per share amounts:
Basic $ 0.65 $ 0.70 $ (0.17) $ (0.11) $ 1.06
Diluted $ 0.65 $ 0.70 $ (0.17) $ (0.11) $ 1.06
Year Ended April 24, 1999
------------------------------------------------------
First Second Third Fourth Total
---------- ---------- ---------- ---------- ----------
(13 weeks) (13 weeks) (13 weeks) (13 weeks) (52 weeks)
Revenues $126,657 $212,316 $ 85,359 $ 97,372 $521,704
Gross profit 44,042 70,761 28,093 37,025 179,921
Operating income (loss) 13,326 18,674 (2,383) 371 29,988
Net income (loss) 6,563 7,430 (3,298) (1,799) 8,896
Per share amounts:
Basic $ .45 $ .51 $ (.23) $ (.12) $ .61
Diluted $ .44 $ .51 $ (.23) $ (.12) $ .60
Inflation
Inflation has and is expected to have only a minor
affect on our results of operations and our internal
and external sources of liquidity.
Recent Accounting Pronouncements
In June, 1998, the Financial Accounting
Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133
"Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 137, which
delays the adoption date of SFAS No. 133 and
was issued in July, 1999, requires adoption
of SFAS No. 133 for annual periods beginning
after June 15, 2000. SFAS No. 133
establishes standards for recognition and
measurement of derivatives and hedging
activities. The Company will implement this
statement in fiscal year 2002 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.
The SEC issued Staff Accounting Bulletin No.
101, "Revenue Recognition" ("SAB No. 101"),
in December 1999, which provides guidance on
the recognition, presentation, and disclosure
of revenue in financial statements. On June
26, 2000, the SEC issued SAB No. 101B, which
delayed implementation of SAB No. 101. The
Company will implement SAB No. 101 in the
fourth quarter of fiscal year 2001 as
required by SAB No. 101B. The company is
reviewing the requirements of SAB No. 101 and
has not yet determined the impact of this
standard on its consolidated financial
statements. It is not expected, however,
that SAB No. 101 will have a material effect
on the Company's financial position or
results of operations.
<PAGE>
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.
Our systems, as well as those of our third party
suppliers, made an uneventful transition from 1999 to
2000. No material disruptions occurred and operations
continued without interruption in the new year. While
initial indications suggest that Year 2000 issues will
not adversely affect our operations, we will continue
to monitor our systems, as well as those of our third
party suppliers, to ensure Year 2000 compliance.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Our financial instruments include cash and cash
equivalents, accounts receivable, accounts payable,
equity securities and long-term debt. Market risks
relating to our operations result primarily from
changes in interest rates. Our borrowings are
primarily dependent upon LIBOR rates. The estimated
fair value of long-term debt approximates its carrying
value at April 29, 2000.
We do not hold or issue derivative financial
instruments for trading purposes. To manage interest
rate risk on the variable rate borrowings under the
revolving portion of our credit facility, we entered
into an interest rate swap agreement during fiscal
1999. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -
Liquidity and Capital Resources." This interest rate
swap agreement has the effect of locking in, for a
specified period, the base interest rate we will pay on
the $50 million notional principal amount established
in the swap. As a result, while this hedging
arrangement is structured to reduce our exposure to
interest rate increases, it also limits the benefit we
might otherwise have received from any interest rate
decreases. This swap is usually cash settled monthly,
with interest expense adjusted for amounts paid or
received. Effects of this swap have been minor for the
year ending April 29, 2000.
<PAGE>
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of School Specialty, Inc.
In our opinion, the consolidated financial
statements listed in the index appearing under Item
14(a)(1) on page 52 present fairly, in all material
respects, the financial position of School Specialty,
Inc. and its subsidiaries at April 29, 2000, and April
24, 1999, and the results of their operations and
their cash flows for each of the three years in the
period ended April 29, 2000, in conformity with
accounting principles generally accepted in the United
States. In addition, in our opinion, the financial
statement schedule listed in the accompanying index
appearing under Item 14(a)(2) on page 52 presents
fairly, in all material respects, the information set
forth therein when read in conjunction with the
related consolidated financial statements. These
financial statements and the financial statement
schedule are the responsibility of the Company's
management; our responsibility is to express an
opinion on these financial statements and the
financial statement schedule based on our audits. We
conducted our audits of these statements in accordance
with auditing standards generally accepted in the
United States, 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.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
June 9, 2000
<PAGE>
FINANCIAL STATEMENTS
SCHOOL SPECIALTY, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Data)
April 29, April 24,
2000 1999
ASSETS
Current assets:
Cash and cash equivalents $ 4,151 $ 9,779
Accounts receivable, less allowance for doubtful
accounts of $1,744 and $2,234, respectively 76,028 74,781
Inventories 86,117 78,783
Prepaid expenses and other current assets 28,664 17,332
Deferred taxes 6,964 8,371
-------- --------
Total current assets 201,924 189,046
Property and equipment, net 51,725 42,305
Intangible assets, net 192,744 198,710
Deferred taxes 1,861 3,810
Other 6,595 3,837
-------- --------
Total assets $454,849 $437,708
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities - long-term debt $ 17,391 $ 11,594
Accounts payable 48,874 37,050
Accrued compensation 8,634 8,410
Accrued restructuring 65 2,752
Other accrued liabilities 9,942 13,387
-------- --------
Total current liabilities 84,906 73,193
Long-term debt 144,789 161,691
Other 161 137
-------- --------
Total liabilities 229,856 235,021
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 17,464,505
and 17,229,197 shares issued and outstanding 17 17
Capital paid-in excess of par value 196,012 192,196
Accumulated other comprehensive loss (30) (5)
Retained earnings 28,994 10,479
-------- --------
Total stockholders' equity 224,993 202,687
-------- --------
Total liabilities and stockholders' equity $454,849 $437,708
======== ========
See accompanying notes to consolidated financial statements.
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Per Share Amounts)
For the Fiscal Year Ended
--------------------------------
April 29, April 24, April 25,
2000 1999 1998
---- ---- ----
(53 weeks) (52 weeks) (52 weeks)
Revenues $639,271 $521,704 $310,455
Cost of revenues 406,043 341,783 202,870
-------- -------- --------
Gross profit 233,228 179,921 107,585
Selling, general and administrative expenses 184,586 144,659 87,846
Restructuring and strategic restructuring costs - 5,274 3,491
-------- -------- --------
Operating income 48,642 29,988 16,248
Other (income) expense:
Interest expense 13,342 12,735 5,505
Interest income (191) (134) (132)
Other 1,856 (228) 156
-------- -------- --------
Income before provision for income taxes 33,635 17,615 10,719
Provision for income taxes 15,120 8,719 5,480
-------- -------- --------
Net income $ 18,515 $ 8,896 $ 5,239
======== ======== ========
Weighted average shares outstanding:
Basic 17,429 14,690 13,284
Diluted 17,480 14,840 13,547
Net income per share:
Basic $ 1.06 $ 0.61 $ 0.40
Diluted $ 1.06 $ 0.60 $ 0.39
See accompanying notes to consolidated financial statements.
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands)
<TABLE>
Capital Accumulated
Paid-in Other Retained Total Total
Common Stock Excess of Divisional Comprehensive Earnings Stockholders' Comprehensive
Shares Dollars Par Value Equity Income(Loss) Deficit Equity Income(Loss)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 26, 1997 - $ - $ - $19,985 $ - $ (3,656) $ 16,329
Issuances of U.S. Office
Products 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
Shares distributed in
spin-off from U.S.
Office Products 12,204 12 104,867 (104,883) 4 - - 4
Capital contribution by
U.S. Office Products - - 7,217 - - - 7,217
Compensation charge for
options tendered in
strategic restructuring - - 803 - - - 803
Compensation expense
from School Specialty,
Inc. stock purchase - - 271 - - - 271
Issuances of common
stock in conjunction
with acquistions 250 - 5,487 - - - 5,487
Issuances of common
stock 4,775 5 73,551 - - - 73,556
Cumulative translation
adjustment - - - - (9) - (9) (9)
Net income - - - - - 8,896 8,896 8,896
------------------------------------------------------------------------------------------------
Total comprehensive
income 8,891
Balance at April 24, 1999 17,229 17 192,196 - (5) 10,479 202,687
Issuances of
common stock 151 - 2,225 - - - 2,225
Issuance of common
stock in conjunction
with stock option
exercises and related
tax benefits 55 - 918 - - - 918
Issuance of common
stock in conjuction
with acquisitions 57 - 1,178 - - - 1,178
Retirement of common
stock in connection
with odd0lot tender
offer (27) - (505) - - - (505)
Cumulative translation
adjustment - - - - (25) - (25) (25)
Net income - - - - - 18,515 18,515 18,515
------------------------------------------------------------------------------------------------
Total comprehensive
income $18,490
Balance at April 29, 2000 17,465 $ 17 $196,012 - $ (30) $28,994 $224,993 =========
=================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
For the Fiscal Year Ended
--------------------------------
April 29, April 24, April 25,
2000 1999 1998
---- ---- ----
(53 weeks) (52 weeks) (52 weeks)
Cash flows from operating activities:
Net income $ 18,515 $ 8,896 $ 5,239
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization expense 11,839 9,604 4,561
Deferred taxes 5,746 468 -
Loss on disposal/impairment of fixed
assets and other 2,096 - -
Amortization of loan fees and other 671 762 78
Restructuring costs - 5,274 2,491
Changes in current assets and liabilities
(net of assets acquired and liabilities
assumed in business combinations
accounted for under the purchase method):
Accounts receivable 844 13,583 (3,586)
Inventory (6,137) 1,374 (6,666)
Prepaid expenses and other
current assets (6,441) (2,822) (717)
Accounts payable 9,943 (12,591) 5,256
Accrued liabilities (6,006) 3,075 (2,932)
-------- -------- --------
Net cash provided by
operating activities 31,070 27,623 3,724
-------- -------- --------
Cash flows from investing activities:
Cash paid in acquisitions, net of
cash acquired (1,291) (122,337) (95,670)
Additions to property and equipment (17,351) (4,872) (3,558)
Investment in long term assets (8,704) (27) (514)
-------- -------- --------
Net cash used in investing
activities (27,346) (127,236) (99,742)
-------- -------- --------
Cash flows from financing activities:
Repayment of bank debt and capital leases (198,192) (261,422) (8,372)
Proceeds from bank borrowings 186,200 355,700 -
Proceeds from issuance of common stock 2,225 73,556 -
Repurchase of common stock (505) - -
Proceeds from exercise of stock options 920 - -
Advances from (payments to) U.S. Office
Products - (62,699) 23,058
Capital contribution by U.S. Office Products - 7,217 81,332
Capitalized loan fees - (2,960) -
-------- -------- --------
Net cash provided (used in)
by financing activities (9,352) 109,392 96,018
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents (5,628) 9,779 -
Cash and cash equivalents at beginning
of period 9,779 - -
-------- -------- --------
Cash and cash equivalents at end of period $ 4,151 $ 9,779 $ -
======== ======== ========
Supplemental disclosures of cash flow
information:
Interest paid $ 13,215 $ 11,151 $ 35
Income taxes paid $ 13,255 $ 5,123 $ 1,148
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS-(Continued)
(In Thousands)
The Company issued common stock and cash in
connection with certain business combinations accounted
for under the purchase method in the fiscal years ended
April 29, 2000, April 24, 1999, and April 25, 1998. The
fair values of the assets and liabilities of the
acquired companies are presented as follows:
For the Fiscal Year Ended
---------------------------------
April 29, April 24, April 25,
2000 1999 1998
---- ---- ----
(53 weeks) (52 weeks) (52 weeks)
Accounts receivable $ 2,091 $ 49,645 $ 17,900
Inventories 1,434 30,850 18,180
Prepaid expenses and other current assets 65 11,142 2,431
Property and equipment 178 21,033 6,379
Intangible assets 2,214 103,455 80,359
Other assets 13 3,775 346
Short-term debt - (832) (1,850)
Accounts payable (1,881) (25,853) (9,400)
Accrued liabilities (759) (7,564) (9,089)
Long-term debt (885) (57,599) (6,020)
Other liabilities - (228) -
-------- -------- --------
Net assets acquired $ 2,470 $127,824 $ 99,236
======== ======== ========
The acquisitions were funded as follows:
Common stock $ 1,178 $ 5,487 $ -
U.S. Office Products common stock - - 3,566
Cash paid, net of cash acquired 1,292 122,337 95,670
-------- -------- --------
Total $ 2,470 $127,824 $ 99,236
======== ======== ========
See accompanying notes to consolidated financial statements.
<PAGE>
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") until June 9, 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 shares in an initial public offering
(the "IPO"). Following the IPO, management purchased
250 shares.
NOTE 2-BASIS OF PRESENTATION
The accompanying consolidated financial statements
and related notes to consolidated financial statements
include the accounts of School Specialty, Inc. and the
companies acquired in business combinations accounted
for under the purchase method from their respective
dates of acquisition and give retroactive effect to the
results of the pooled companies for all periods
presented. For the periods prior to the Distribution,
the consolidated financial statements reflect the
assets, liabilities, divisional equity, revenues and
expenses that were directly related to the Company as
it was operated within U.S. Office Products. In cases
involving assets and liabilities not specifically
identifiable to any particular business of U.S. Office
Products, only those assets and liabilities that were
transferred to the Company were included in the
Company's separate consolidated balance sheet. The
Company's consolidated 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, and 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.
The consolidated statement of income does not
include an allocation of interest expense on all debt
allocated to the Company. See Note 9 for further
discussion of interest expense.
NOTE 3-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses
during the reporting period. Actual results could
differ from those estimates.
<PAGE>
Definition of Fiscal Year
As used in these consolidated financial statements
and related notes to consolidated financial statements,
"fiscal 2000", "fiscal 1999" and "fiscal 1998" refer to
the Company's fiscal years ended April 29, 2000 (53
weeks), April 24, 1999 (52 weeks), and April 25, 1998
(52 weeks), respectively.
Principles of Consolidation
The consolidated financial statements include the
accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany transactions
and accounts are eliminated in consolidation.
Cash and Cash Equivalents
The Company considers temporary cash investments
with original maturities of three months or less from
the date of purchase to be cash equivalents.
Concentration of Credit Risk
Financial instruments which potentially subject
the Company to concentrations of credit risk consist
primarily of trade accounts receivable. Receivables
arising from sales to customers are not collateralized
and, as a result, management continually monitors the
financial condition of its customers to reduce the risk
of loss.
Inventories
Inventories are stated at the lower of cost or
market with cost determined on a first-in, first-out
(FIFO) basis and consist primarily of products held for
sale.
Property and Equipment
Property and equipment is stated at cost.
Additions and improvements are capitalized. Maintenance
and repairs are expensed as incurred. Depreciation of
property and equipment is calculated using the
straight-line method over the estimated useful lives of
the respective assets. The estimated useful lives range
from twenty-five to forty years for buildings and its
components and three to fifteen 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 net 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
forty years, except for goodwill associated with a
software subsidiary which is being amortized over
fifteen years. Identifiable intangible assets include
trademarks, capitalized technology, and franchise
agreements which are being amortized over their
estimated useful lives ranging from one to forty 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. If the operation is
determined to be unable to recover the carrying amount
of its assets, then intangible
<PAGE>
assets are written down first, followed by the other
long-lived assets of the operation, to fair value. Fair
value is determined based on discounted cash flows or appraised
values, depending upon the nature of the assets. Based upon
its most recent assessment, the Company does not
believe an impairment of long-lived assets exists at
April 29, 2000.
Cost Investment
The Company uses the cost method to account for
its investment in a less than 20%-held entity. Under
this method, the Company's investment is stated at cost
and is periodically evaluated to determine if a write
down of the investment is needed in order to properly
state the investment at the lower of cost or market. In
connection with this evaluation, the Company took a
$1,500 charge during the fourth quarter of fiscal 2000.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial
instruments including cash and cash equivalents,
accounts receivable, accounts payable, equity
securities and long-term debt approximate fair value.
Income Taxes
Income taxes, during the period subsequent to the
Distribution, have been computed utilizing the asset
and liability approach which requires the recognition
of deferred tax assets and liabilities for the tax
consequences of temporary differences by applying
enacted statutory tax rates applicable to future years
to differences between the financial statement carrying
amounts and the tax basis of existing assets and
liabilities.
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.
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.
Advertising Costs
The Company expenses advertising costs when the
advertisement occurs. Advertising costs are included in
the consolidated statement of income as a component of
selling, general and administrative expenses.
<PAGE>
Deferred Catalog Costs
Deferred catalog costs are amortized in amounts
proportionate to revenues over the life of the catalog,
which is typically one to two years. Amortization
expense related to deferred catalog costs is included
in the consolidated statement of income as a component
of selling, general and administrative expenses. Such
amortization expense for the year ended April 29, 2000,
April 24, 1999, and April 25, 1998 was $16,076,
$12,146, and $6,934, respectively.
Research and Development Costs
Research and development costs are charged to
operations in the year incurred. Research and
development costs are included in the consolidated
statement of income as a component of selling, general
and administrative expenses.
Internally Developed Software
During fiscal 1999 the Company adopted the
American Institute of Certified Public Accountants
("AICPA") 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.
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 Emerging Issues Task Force ("EITF")
Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in
Restructuring)".
New Accounting Pronouncements
In June 1998, the Financial Accounting
Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133
"Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 137, which
delays the adoption date of SFAS No. 133 and
was issued in July, 1999, requires adoption
of SFAS No. 133 for annual periods beginning
after June 15, 2000. SFAS No. 133
establishes standards for recognition and
measurement of derivatives and hedging
activities. The Company will implement this
statement in fiscal year 2002 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.
The SEC issued Staff Accounting Bulletin No.
101, "Revenue Recognition" ("SAB No. 101"),
in December 1999, which provides guidance on
the recognition, presentation, and disclosure
of revenue in financial statements. On June
26, 2000, the SEC issued SAB No. 101B which
delayed implementation of SAB No. 101. The
Company will implement SAB No. 101 in the
fourth quarter of fiscal year 2001 as
required by SAB No. 101B. The Company is
reviewing the requirements of SAB No. 101 and
has not yet determined the impact of this
standard on its consolidated financial
statements. It is not expected, however,
that SAB No. 101 will have a material effect
on the Company's financial position or
results of operations.
<PAGE>
Distribution Ratio
On June 9, 1998, the Company issued approximately
12,204 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 for the periods prior to the Distribution
represents the historical share data for U.S. Office
Products for the period or as of the date indicated,
retroactively adjusted to give effect to the one for
nine distribution ratio.
Reclassifications
Certain prior period amounts have been
reclassified to conform to the current year
presentation.
NOTE 4-BUSINESS COMBINATIONS
In fiscal 2000, the Company acquired 100% of a
company, which was accounted for under the purchase
method of accounting, for an aggregate purchase price
of $2,353, consisting of $1,175 of cash and 57 shares
of common stock with a market value of $1,178,
resulting in goodwill of $1,934, which will be
amortized over 40 years. During fiscal 2000, the
Company also purchased certain assets which represented
a portion of another existing business for $117. This
transaction resulted in goodwill of $280. The results
of these acquisitions have been included in the
Company's results from their dates of acquisition. The
pro-forma results of the later transaction are not
included in the table below due to immateriality.
In fiscal 1999, the Company made five acquisitions
accounted for under the purchase method of accounting
for an aggregate purchase price of $127,824, consisting
of $122,337 of cash and 250 shares of common stock with
a market value of $5,487. The total assets related to
these five acquisitions were $219,900, including
goodwill of $103,455. 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 of
accounting for an aggregate purchase price of $99,236,
consisting of $95,670 of cash and U.S. Office Products
common stock with a market value of $3,566. The total
assets related to these eight acquisitions were
$125,595, including goodwill of $80,359. The results of
these acquisitions have been included in the Company's
results from their respective dates of acquisition.
The following presents the unaudited pro forma
results of operations of the Company for the fiscal
years ended April 29, 2000, and April 24, 1999, and
includes the Company's historical consolidated results
of operations and the results of the companies acquired
in fiscal 2000 and fiscal 1999 as if all such purchase
acquisitions had been made at the beginning of fiscal
1999. The results presented below include certain pro
forma adjustments to reflect the amortization of
intangible assets and the inclusion of a federal income
tax provision on all earnings:
<PAGE>
For the Fiscal Year Ended
-----------------------------
April 29, April 24,
2000 1999
---- ----
(53 weeks) (52 weeks)
Revenues $639,271 $632,380
Net income 18,236 9,347
Net income per share:
Basic $ 1.05 $ 0.62
Diluted $ 1.05 $ 0.62
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 1999 or the results which may occur in the
future.
NOTE 5-RESTRUCTURING COSTS
During the fourth quarter of fiscal 1998, the
Company incurred restructuring costs of $2,491 to close
redundant facilities and severance costs. This
restructuring plan was completed by the end of fiscal
1999. The Company also incurred a strategic
restructuring charge during the fourth quarter of
fiscal 1998 of $1,000. This represented the
transaction costs allocated to the Company under the
distribution agreement entered into with U.S. Office
Products and the other spin-off companies.
During the first quarter of fiscal 1999, the
Company incurred a strategic restructuring charge of
$1,074. This non-cash charge related to compensation
expense attributed to the U.S. Office Product's stock
option tender offer and sale of shares of Common Stock
to some of the Company's executive management
personnel. During the second quarter of fiscal 1999,
the Company incurred restructuring costs of $4,200 to
consolidate existing warehousing, customer service and
sales operations. During the fiscal years ended April
29, 2000, and April 24,1999, the Company terminated 43
and 152 employees, respectively, under this plan.
Selected information related to the restructuring
reserve for closing redundant facilities and
consolidating existing warehousing, customer service
and sales operations follows:
Facility Severance Other Asset
Closure and and Write-downs
Consolidation Terminations and Costs Total
------------- ------------ ---------- -----
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 1,300 2,100 800 4,200
Utilizations (199) (1,029) (692) (1,920)
------- ------- ------- -------
Balance at April 24, 1999 $1,101 $1,285 $ 366 $2,752
Additions - - - -
Utilizations (1,084) (1,245) (358) (2,687)
------- ------- ------- -------
Balance at April 29, 2000 $ 17 $ 40 $ 8 $ 65
======= ======= ======= =======
<PAGE>
NOTE 6-PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
April 29, April 24,
2000 1999
---- ----
Deferred catalog costs $ 14,742 $ 13,203
Assets held for sale 4,333 -
Other 9,589 4,129
Total prepaid expenses and -------- --------
other current assets $ 28,664 $ 17,332
======== ========
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:
April 29, April 24,
2000 1999
---- ----
Land $ 2,540 $ 1,921
Projects in progress 2,954 1,607
Buildings and leasehold improvements 26,635 28,392
Furniture, fixtures, and other 17,848 12,283
Machinery and warehouse equipment 14,660 10,053
--------- ----------
64,637 54,256
--------- ----------
Less: Accumulated depreciation (12,912) (11,951)
--------- ---------
Net property and equipment $ 51,725 $ 42,305
========= =========
Depreciation expense for the fiscal years ended
April 29, 2000 (53 weeks), April 24, 1999 (52 weeks),
and April 25, 1998 (52 weeks) was $5,523, $4,948, and
$2,500, respectively.
NOTE 8-INTANGIBLE ASSETS
Intangible assets consist of the following:
April 29, April 24,
2000 1999
---- ----
Goodwill $194,350 $195,060
Other 13,148 13,037
--------- ---------
207,498 208,097
Less: Accumulated amortization (14,754) (9,387)
--------- ---------
Net intangible assets $192,744 $198,710
========= =========
Amortization expense for the fiscal years ended
April 29, 2000 (53 weeks), April 24, 1999 (52 weeks),
and April 25, 1998 (52 weeks) was $6,316, $4,656, and
$2,061, respectively.
<PAGE>
NOTE 9-CREDIT FACILITIES
Long-Term Debt
Long-term debt consists of the following:
April 29, April 24,
2000 1999
---- ----
Credit facility $161,850 $172,500
Capital lease obligations 182 785
Other debt 148 -
--------- ---------
162,180 173,285
Less: Current maturities (17,391) (11,594)
--------- ---------
Total long-term debt $144,789 $161,691
========= =========
On September 30, 1998, the Company entered into a
five year secured $350,000 credit facility (the "credit
facility") with a syndicate of financial institutions,
led by Bank of America, N.A. as Agent, consisting of a
$250,000 revolving loan and a $100,000 term loan.
Interest on borrowings under the 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
0.75%, plus a fee of 0.475% on the unborrowed amount
under the revolving term loan. Subsequent to the third
quarter of fiscal 1999, interest accrues at a rate of,
at the Company's option, either (i) LIBOR plus an
applicable margin of up to 2.000%, or (ii) the lender's
base rate plus an applicable margin of up to 0.750%,
plus a fee of up to 0.475% on the unborrowed amount
under the revolving loan. The credit facility is
secured by substantially all of the assets of the
Company and contains terms and covenants typical of
facilities of such size. The Company was in compliance
with these covenants at April 29, 2000. At April 29,
2000, the balance outstanding under the credit facility
was $161,850, including $75,600 and $86,250
outstanding under the revolving and term loans,
respectively, and included seven eurodollar contracts,
expiring within 89 days, totaling $151,250 at an
average interest rate of 7.47% . The effective
interest rate under the credit facility for fiscal 2000
was 7.89%, which includes the loan origination fee and
commitment fee on unborrowed funds, and excludes the
effect of the interest rate swap agreement disclosed
below.
To manage interest rate risk, the Company entered
into an interest rate swap agreement on October 28,
1998, with the Bank of New York covering $50,000 of the
outstanding borrowings under the 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 April 29, 2000, was 6.18% and 4.91% at
April 29. 2000, and April 24, 1999, respectively. The
fair market value of the swap agreement was $566 at
April 29, 2000.
Maturities of Long-Term Debt
Maturities on long-term debt, including capital
lease obligations, are as follows:
2001 $ 17,391
2002 18,208
2003 29,082
2004 97,405
2005 16
Thereafter 78
--------
Total maturities of long-term debt $162,180
========
<PAGE>
The credit facility contains certain restrictive
covenants, including limitations on the ability of the
Company to pay dividends or redeem stock well as
limitations on incurring debt, capital expenditures,
mergers or consolidations, sale of assets and
transactions with affiliates.
Payable to U.S. Office Products
On June 9, 1998, per the distribution agreement,
the Company borrowed $83,300 from its line of credit to
repay the remaining amounts due to U.S. Office
Products. The average outstanding long-term payable to
U.S. Office Products during the fiscal year ended April
24, 1999, was $6,871.
Interest was allocated to the Company by U.S.
Office Products 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
$158 and $5,414 during the fiscal years ended April 24,
1999, and April 25, 1998, respectively.
NOTE 10-INCOME TAXES
The provision for income taxes consists of:
For the Fiscal Year Ended
April 29, April 24, April 25,
2000 1999 1998
(53 weeks) (52 weeks) (52 weeks)
Income taxes currently payable:
Federal $ 7,371 $ 6,511 $ 3,646
State 2,003 1,740 907
------- ------- -------
9,374 8,251 4,553
Deferred income tax expense 5,746 468 927
------- ------- -------
Total provision for income taxes $15,120 $ 8,719 $ 5,480
======= ======= =======
<PAGE>
Deferred taxes are comprised of the following:
April 29, April 24,
2000 1999
Current deferred tax assets:
Inventory $ 3,001 $ 4,008
Allowance for doubtful accounts 716 858
Net operating loss carryforward 1,493 1,574
Accrued liabilities 620 820
Accrued restructuring 26 1,111
Charitable contribution carryforward 1,108 -
------- -------
Total current deferred tax assets 6,964 8,371
------- -------
Long-term deferred tax assets (liabilities):
Net operating loss carryforward 4,097 4,694
Property and equipment (1,200) (476)
Intangible assets (1,636) (408)
Unrealized loss on investment 600 -
------- -------
Total long-term deferred tax assets (liabilities) 1,861 3,810
------- -------
Net deferred tax assets $ 8,825 $12,181
======= =======
The Company has net operating loss carryforwards
of approximately $14,710, on a consolidated basis,
which expire during fiscal years 2011-2013. The
carryforwards are also subject to an annual limitation
on utilization pursuant to IRS Code Section 382 of
approximately $3,900.
The Company's effective income tax rate varied
from the U.S. federal statutory tax rate as follows:
For the Fiscal Year Ended
-------------------------------
April 29, April 24, April 25,
2000 1999 1998
---- ---- ----
(53 weeks) (52 weeks) (52 weeks)
U.S. federal statutory rate 35.0% 35.0% 34.0%
State income taxes, net of federal
income tax benefit 4.6 5.2 6.6
Non-deductible goodwill 5.4 6.5 6.0
Non-deductible acquisition costs - - 3.3
Other - 2.8 1.2
------ ------ -------
Effective income tax rate 45.0% 49.5% 51.1%
====== ====== =======
<PAGE>
NOTE 11-OPERATING 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 operating
leases are as follows:
2001 $ 4,483
2002 4,236
2003 3,358
2004 2,217
2005 1,754
Thereafter 1,670
-------
Total minimum lease payments $17,718
=======
Rent expense for the fiscal years ended April 29,
2000 (53 weeks), April 24, 1999 (52 weeks), and April
25, 1998 (52 weeks), was $5,535, $4,498, and $3,389,
respectively.
NOTE 12-COMMITMENTS AND CONTINGENCIES
Litigation
Under the terms of the agreement entered into
between the Company and U.S. Office Products in
connection with a strategic restructuring plan, the
Company is obligated, subject to a maximum obligation
of $1.75 million, to indemnify U.S. Office Products for
certain liabilities incurred by U.S. Office Products
prior to the Distribution, including liabilities under
federal securities laws (the "Indemnification
Obligation"). This Indemnification Obligation is
reduced by any insurance proceeds actually recovered
with respect to the Indemnification Obligation and is
shared on a pro rata basis with the other three
divisions of U.S. Office Products which were spun-off
from U.S. Office Products in connection with the U.S.
Office Products comprehensive restructuring.
U.S. Office Products has been named a defendant in
various class action lawsuits. These lawsuits
generally allege violations of federal securities laws
by U.S. Office Products and other named defendants
during the months preceding the Strategic Restructuring
Plan. The Company has not received any notice or claim
from U.S. Office Products alleging that these lawsuits
are within the scope of the Indemnification Obligation,
but the Company believes that certain liabilities and
costs associated with these lawsuits (up to a maximum
of $1.75 million) are likely to be subject to the
Company's Indemnification Obligation. Nevertheless,
the Company does not presently anticipate that the
Indemnification Obligation will have a material adverse
effect on the Company. Thus, due to the preliminary
nature of this action, it is not possible at this time
to assess the outcome of the claims. In accordance
with SFAS No. 5, "Accounting for Contingencies", no
provision has been recorded in the accompanying
financial statements.
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.
<PAGE>
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 29,
2000, April 24, 1999 or April 25, 1998 related to these
agreements, as no change of control has occurred.
Distribution
At the date of the Distribution, School Specialty,
U.S. Office Products and the other spin-off companies
entered into a distribution agreement, tax allocation
agreement, and an employee benefits agreement. The
spin-off companies entered into a 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 jointly and
severally. 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
On June 9, 1998, the Company implemented the
School Specialty, Inc. 401(k) Plan (the "Company 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 Company 401(k) Plan after 90 days
of service. In fiscal 2000 and fiscal 1999 the
Company's matching contribution expense was $564 and
$416, respectively. Prior to June 9, 1998 the Company
participated in the U.S. Office Products 401(k)
Retirement Plan (the "401(k) Plan"), which was similar
to the plan adopted by the Company.
Certain subsidiaries of the Company had, prior to
implementation of the Company 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.
NOTE 14-STOCKHOLDERS' EQUITY
Earnings Per Share
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
<PAGE>
common stock. The following information
presents the Company's computations of basic and
diluted EPS for the periods presented in the
consolidated statement of income.
Income Shares Per Share
(Numerator) (Denominator) Amount
Fiscal 2000 (53 weeks): ----------- ------------- -------
Basic EPS $18,515 17,429 $ 1.06
Effect of dilutive employee stock options - 51 ======
------- ------
Diluted EPS $18,515 17,480 $ 1.06
======= ====== ======
Fiscal 1999 (52 weeks):
Basic EPS $ 8,896 14,690 $ 0.61
Effect of dilutive employee stock options - 150 ======
------- -------
Diluted EPS $ 8,896 14,840 $ 0.60
======= ======= ======
Fiscal 1998 (52 weeks):
Basic EPS $ 5,239 13,284 $ 0.40
Effect of dilutive employee stock options - 263 ======
------- -------
Diluted EPS $ 5,239 13,547 $ 0.39
======= ======= =======
The Company had additional employee stock options
outstanding during the periods presented that were not
included in the computation of diluted EPS because they
were anti-dilutive.
Capital Contribution by U.S. Office Products
During fiscal 1999 and fiscal 1998, U.S. Office
Products contributed $7,217 and $81,332, 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 became
subsidiaries of the Company. The total debt allocated
to the Company at the time of the Distribution was
$83,300.
Stock Offerings
On June 9, 1998, the Company issued 2,125 shares
in conjunction with its IPO. In an offering concurrent
with the IPO, management acquired 250 shares. The
total net proceeds to the Company from the offerings
was $32,736.
On April 16, 1999, the Company issued 2,400 shares
in conjunction with a secondary public offering
receiving net proceeds of $40,820. On May 17, 1999, the
underwriters of the Company's secondary offering
exercised their over allotment option for 151 shares of
Company stock at $17.25 per share for net proceeds of
$2,225.
Employee Stock Plans
On June 10, 1998, the Board of Directors
approved the School Specialty, Inc. 1998
Stock Incentive Plan (the "Plan"). The
purpose of the Plan is to provide officers,
key employees and consultants with additional
incentives by increasing their ownership
interests in the Company. The maximum number
of options available for grant under the
Plan, is equal to 20% of the Company's
outstanding common stock. The
<PAGE>
maximum number of options available for grant in any
fiscal year under the Plan is 1,200 shares. Prior to
the approval of the Plan, the Company had
stock options outstanding under the U.S.
Office Products 1994 Long-Term Compensation
Plan. The Company replaced the options to
purchase shares of common stock of U.S.
Office Products held by employees with
options issued under the Plan 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 equal 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 No. 123 "Accounting for Stock Based
Compensation", the Company's net income and net income
per share would have been impacted as indicated in the
following table.
For the Fiscal Year Ended
---------------------------------
April 29, April 24, April 25,
2000 1999 1998
---- ---- ----
(53 weeks) (52 weeks) (52 weeks)
Net income (loss):
As reported $18,515 $ 8,896 $ 5,239
Pro forma 14,954 (1,737) 4,436
Net income (loss) per share:
As reported:
Basic $ 1.06 $ 0.61 $ 0.40
Diluted $ 1.06 $ 0.60 $ 0.39
Pro forma:
Basic $ 0.86 $ (0.12) $ 0.33
Diluted $ 0.86 $ (0.12) $ 0.33
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:
For the Fiscal Year Ended
-------------------------------
April 29, April 25, April 24,
2000 1999 1998
---- ---- ----
Expected life of option 7 years 7 years 7 years
Risk free interest rate 6.49% 5.50% 6.35%
Expected volatility of stock 67.14% 59.00% 44.10%
The weighted-average fair value of options granted
was $11.45, $10.23, and $9.75 for fiscal 2000, 1999,
and 1998, respectively.
<PAGE>
A summary of option transactions follows:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
------- ----- ------- ------
Balance at April 26, 1997 211 $26.93
Granted 257 18.01
Canceled (26) 25.45
-------
Balance at April 25, 1998 442 21.83 46 $27.14
Granted 2,031 15.86
Exercised (82) 20.62
Canceled (25) 26.49
------
Balance at April 24, 1999 2,366 $16.70 118 $23.39
Granted 803 16.23
Exercised (55) 16.21
Canceled (50) 20.20
------
Balance at April 29, 2000 3,064 $16.53 1,973 $16.20
======
The following table summarizes information about
stock options outstanding at April 29, 2000:
Options Outstanding Options Exercisable
--------------------------- -------------------
Weighted- Weighted-
Weighted- Average Average
Average Exercise Exercise
Range of Exercise Prices Options Life Price Options Price
------------------------ ------- ---- ----- ------- ------
$12.00 - $15.00 325 9.14 $14.48 -- --
$15.50 - $15.50 1,748 8.11 15.50 1,724 $15.50
$15.63 - $19.93 798 9.01 17.51 145 17.33
$21.78 - $29.43 193 7.13 25.26 104 26.34
------ ---- ------ ----- ------
3,064 8.40 $16.53 1,973 $16.20
====== ==== ====== ===== ======
Options granted 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. Options granted to directors
and non-employee officers of the Company vest over a three
year period, 20% after the first year, 50% (cumulative) after
year two and 100% (cumulative) after the third year.
As of the date of Distribution, Jonathan J.
Ledecky, a member of the Company's Board of Directors
and formerly the Chairman and Chief Executive Officer
of U.S. Office Products, received 914,079 shares under
an option grant with an exercise price of $15.50. This
grant represented 7.5% of the outstanding Company stock
as of the date of Distribution. The options were
exercisable in full on June 10, 1999.
<PAGE>
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, to
certain executive management personnel (excluding the
7.5% granted to Mr. Ledecky). The options granted were
granted under the Plan and have a per share exercise of
$15.50 and were exercisable in full on June 10, 1999.
Total options available for grant under the Plan are
equal to 20% of the outstanding shares of the Company's
common stock.
NOTE 15-SEGMENT INFORMATION
During the third quarter of fiscal 2000, the
Company modified its segment reporting by identifying
information for a third business segment, the Internet
business segment. This segment includes business
generated by products supplied through the Internet and
products supplied for use with the Internet. Effective
October 24, 1999, the Company began to separately track
financial information for this segment, and assign
certain management personnel the responsibility for
monitoring this information and focusing on the
expansion of the Company's Internet business. The
Company is unable to segregate information for the
Internet business segment for fiscal 1998, 1999, and
the first two quarters of fiscal 2000; therefore,
results for this segment prior to the third and fourth
quarters of fiscal 2000 are included in both the
Traditional and Specialty business segments.
The Company's business activities are organized
around three principal business segments, Traditional,
Specialty and Internet. Both internal and external
reporting conform to this organizational structure,
with no significant differences in accounting policies
applied. The Company evaluates the performance of its
segments and allocates resources to them based on
revenue growth and profitability. While the three
segments serve a similar customer base, notable
differences exist in products, gross margin and revenue
growth rate. Products supplied within the Traditional
segment include consumables (consisting of classroom
supplies, instructional materials, educational games,
art supplies and school forms), school furniture and
indoor and outdoor equipment. Products supplied within
the Specialty segment target specific educational
disciplines, such as art, industrial arts, physical
education, sciences, library and early childhood. The
Internet segment supplies products from both the
Traditional and Specialty segments through the
Internet. In addition, the Internet segment includes
products supplied for customer use with the Internet
(i.e., filtering software for the Internet).
<PAGE>
The following table presents segment information.
For the Fiscal Year Ended
-------------------------------
April 29, April 24, April 28,
2000 1999 1998
---- ---- ----
(53 weeks) (52 weeks) (52 weeks)
Revenues:
Traditional $386,715 $339,031 $201,770
Specialty 252,556 182,673 108,685
Internet 5,607 - -
Inter-company revenue elimination (5,607) - -
-------- -------- --------
Total $639,271 $521,704 $310,455
======== ======== ========
Operating profit (loss) and income before
taxes: (a)
Traditional $ 34,653 $ 21,222 $ 10,348
Specialty 28,573 20,944 11,054
Internet (3,261) - -
-------- -------- --------
Total 59,965 42,166 21,402
General corporate expense 11,323 6,904 1,663
One-time charges - 5,274 3,491
Interest expense and other 15,007 12,373 5,529
-------- -------- --------
Income before taxes $ 33,635 $ 17,615 $ 10,719
======== ======== ========
Identifiable assets (at year end):
Traditional $246,006 $247,204 $121,475
Specialty 174,603 164,320 98,252
Internet 10,039 - -
-------- -------- --------
Total 430,648 411,524 219,727
Corporate assets 24,201 26,184 4,002
-------- -------- --------
Total $454,849 $437,708 $223,729
======== ======== ========
Depreciation and amortization:
Traditional $ 6,129 $ 6,043 $ 2,433
Specialty 4,499 3,058 1,814
Internet 711 - -
-------- -------- --------
Total 11,339 9,101 4,247
Corporate 500 503 314
-------- -------- --------
Total $ 11,839 $ 9,604 $ 4,561
======== ======== ========
Expenditures for property and equipment:
Traditional $ 6,215 $ 782 $ 2,847
Specialty 5,284 2,326 447
Internet 3,280 - -
-------- -------- --------
Total 14,779 3,108 3,294
Corporate 2,572 1,764 264
-------- -------- --------
Total $ 17,351 $ 4,872 $ 3,558
======== ======== ========
(a) Operating profit is defined as operating income
before nonrecurring acquisition and restructuring
costs.
<PAGE>
NOTE 16-QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly
financial data for fiscal 2000 and fiscal 1999:
Fiscal Year Ended April 29, 2000
----------------------------------------------------
First Second Third Fourth Total
(13 weeks) (13 weeks) (13 weeks) (14 weeks) (53 weeks)
Revenues $194,299 $231,588 $ 97,244 $116,140 $639,271
Gross profit 72,879 82,913 33,429 44,007 233,228
Operating income (loss) 24,564 26,701 (2,245) (378) 48,642
Net income (loss) 11,364 12,184 (3,032) (2,001) 18,515
Per share amounts:
Basic $ 0.65 $ 0.70 $ (0.17) $ (0.11) $ 1.06
Diluted $ 0.65 $ 0.70 $ (0.17) $ (0.11) $ 1.06
Fiscal Year Ended April 24, 1999
---------------------------------------------------
First Second Third Fourth Total
(13 weeks) (13 weeks) (13 weeks) (13 weeks) (52 weeks)
Revenues $126,657 $212,316 $ 85,359 $ 97,372 $521,704
Gross profit 44,042 70,761 28,093 37,025 179,921
Operating income (loss) 13,326 18,674 (2,383) 371 29,988
Net income (loss) 6,563 7,430 (3,298) (1,799) 8,896
Per share amounts:
Basic $ 0.45 $ 0.51 $ (0.23) $ (0.12) $ 0.61
Diluted $ 0.44 $ 0.51 $ (0.23) $ (0.12) $ 0.60
The summation of quarterly net income per share may not
equate to the calculation for the full fiscal year as
quarterly calculations are performed on a discrete
basis.
NOTE 17-RELATED PARTY TRANSACTION
On October 1, 1999, the Company purchased a
combined warehouse and distribution facility in
Appleton, Wisconsin. Previously, the Company leased
this facility. The purchase price was $2,600, the fair
market value of the property as determined by an
independent appraisal, and was paid to the owner of the
facility, which is a corporation owned by three
shareholders, two of whom are related to certain
executive officers of the Company.
<PAGE>
NOTE 18-SUBSEQUENT EVENTS
On June 30, 2000, the Company purchased the net
assets of Global Video, Inc., for $32,000 plus a $3,000
targeted performance payment to be determined on or
about the first anniversary of the transaction.
Item 9. Change in and Disagreements with Accountants
on Accounting and Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Executive Officers. Reference is made to
"Executive Officers of the Registrant" in
Part I hereof.
(b) Directors. The information required by this
Item is set forth in our Proxy Statement for
the Annual Meeting of Stockholders to be held
on August 29, 2000, under the caption
"Election of Directors," which information is
incorporated by reference herein.
(c) Section 16 Compliance. The information
required by this Item is set forth in our
Proxy Statement for the Annual Meeting of
Stockholders to be held on August 29, 2000,
under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance," which
information is incorporated by reference
herein.
Item 11. Executive Compensation
The information required by this Item is set forth
in our Proxy Statement for the Annual Meeting of
Stockholders to be held on August 29, 2000, under the
captions "Executive Compensation," "Employment
Contracts and Related Matters," "Director Compensation
and Other Arrangements," "Compensation Committee
Report," "Compensation Committee Interlocks and Insider
Participation," and "Performance Graph," which
information is incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is set forth
in our Proxy Statement for the Annual Meeting of
Stockholders to be held on August 29, 2000, under the
caption "Security Ownership of Management and Certain
Beneficial Owners," which information is incorporated
by reference herein.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is set forth
in our Proxy Statement for the Annual Meeting of
Stockholders to be held on August 29, 2000, under the
captions "Certain Relationships and Related
Transactions" and "Director Compensation and Other
Arrangements."
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements.
Consolidated Financial Statements
Report of Independent Accountants
Consolidated Balance Sheet as of April 29, 2000, and
April 24, 1999
Consolidated Statement of Operations for the
fiscal years ended April 29, 2000 (53 weeks),
April 24, 1999 (52 weeks), and April 25, 1998 (52 weeks)
Consolidated Statement of Stockholders'
Equity for the fiscal years ended April 29,
2000 (53 weeks), April 24, 1999 (52 weeks),
and April 25, 1998 (52 weeks)
Consolidated Statement of Cash Flows for the
fiscal years ended April 29, 2000 (53 weeks),
April 24, 1999 (52 weeks), and April 25, 1998
(52 weeks)
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedule.
Schedule for the fiscal years ended April 29, 2000
(53 weeks), April 24, 1999 (52 weeks), and April
25, 1998 (52 weeks): Schedule II - Valuation and
Qualifying Accounts.
(a)(3) Exhibits.
See (c) below.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
See the Exhibit Index, which is incorporated by
reference herein.
(d) Financial Statements Excluded from Annual Report
to Shareholders.
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized,
in the City of Appleton, State of Wisconsin, on July
11, 2000.
SCHOOL SPECIALTY, INC.
By: /s/ Daniel P. Spalding
------------------------------------
Daniel P. Spalding,
Chief Executive Officer
Each person whose signature appears below hereby
constitutes and appoints Daniel P. Spalding and Mary M.
Kabacinski, 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 any and all
amendments to this Annual Report on Form 10-K, and to
file the same, with all exhibits thereto and all other
documents in connection therewith 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 thereof.
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed by
the following persons in the capacities and on the
dates indicated below.
Name Title Date
/s/ Daniel P. Spalding Chief Executive Officer (Principal July 11, 2000
- ------------------------- Executive Officer) and Director
Daniel P. Spalding
/s/ Mary M. Kabacinski Chief Financial Officer (Principal July 11, 2000
- ------------------------- Financial and Accounting Officer)
Mary M. Kabacinski
/s/ David J. Vander Zanden President, Chief Operating Officer July 11, 2000
- -------------------------- and Director
David J. Vander Zanden
/s/ Jonathan J. Ledecky Director July 11, 2000
- -----------------------
Jonathan J. Ledecky
/s/ Rochelle Lamm Director July 11, 2000
- -------------------
Rochelle Lamm
/s/ Leo C. McKenna Director July 11, 2000
- -------------------
Leo C. McKenna
/s/ Jerome M. Pool Director July 11, 2000
- -------------------
Jerome M. Pool
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Document Description
3.1 Restated Certificate of Incorporation.1
3.2 Amended and Restated Bylaws.1
4.1 Form of Stock Certificate.1
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 September 3, 1999 between Daniel P.
Spalding and School Specialty, Inc.3
10.6 Employment Agreement dated September 3, 1999 between Mary M.
Kabacinski and School Specialty, Inc.3
10.7 Employment Agreement dated September 3, 1999 between Donald J.
Noskowiak and School Specialty, Inc.3
10.8 Employment Agreement dated June 30, 1998 between Roger D. Pannier
and School Specialty, Inc.4
10.9 Employment Agreement dated March 2, 1999 between Peter Savitz
and School Specialty, Inc.4
10.10 Employment Agreement dated March 29, 1999 between Brian Chapin and
School Specialty, Inc.4
10.11 Employment Agreement dated July 26, 1996 between Donald Ray Pate, Jr.
and The Re-Print Corp.5
10.12(a) Employment Agreement dated June 27, 1997 between Richard H. Nagel
and Sax Arts and Crafts, Inc.5
10.12(b) Covenant Not to Compete Agreement dated June 27, 1997 between
Richard H. Nagel and Sax Arts and Crafts, Inc.9
10.13 Employment Agreement between David Vander
Zanden and School Specialty, Inc.6
10.14 Employment Agreement between School Specialty, Inc.
and Jonathan J. Ledecky.6
10.15 Amended Services Agreement dated as of June 8, 1998 between
U.S. Office Products and Jonathan J. Ledecky.7
10.16 Amended and Restated 1998 Stock Incentive Plan.
<PAGE>
Exhibit
Number Document Description
10.17 JuneBox.com, Inc. 2000 Equity Incentive Plan.
10.18 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 and
Nationsbank, N.A., Bank One, Wisconsin and U.S. Bank National
Association.8
10.19 Lease dated as of June 30, 1998 between Roger D. Pannier and
Pamela S. Pannier as lessor and School Specialty, Inc. as lessee.
10.20 Lease dated as of July 1, 1990 between Larry Joseph and Peter
Savitz Partners as lessor and Select Service & Supply, Co.,
Inc. as lessee including Sublease Agreement and amendments thereto.
21.1 Subsidiaries of School Specialty, Inc.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.
99.1 Schedule II - Valuation and Qualifying Accounts.
_____________________________
1 Incorporated by reference to School Specialty'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 School Specialty'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 School Specialty's Form
10-Q for the period ended October 23, 1999, as filed
with the SEC on December 7, 1999.
4 Incorporated by reference to School Specialty's Form
10-Q for the period ended July 24, 1999, as filed
with the SEC on September 7, 1999.
5 Incorporated by reference to School Specialty'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.
6 Incorporated by reference to School Specialty's
Annual Report on Form 10-K filed with the SEC on
July 24, 1998.
7 Incorporated by reference to School Specialty'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.
8 Incorporated by reference to School Specialty's Form
10-Q for the period ended January 23, 1999, as filed
with the SEC on March 1, 1999.
9 Incorporated by reference to School Specialty's
Registration Statement on Form S-1 filed with the
SEC on March 1, 1999; Registration No. 333-73103.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.16
<SEQUENCE>2
<FILENAME>0002.txt
<TEXT>
AMENDED AND RESTATED
SCHOOL SPECIALTY, INC.
1998 STOCK INCENTIVE PLAN
as of June 20, 2000
PURPOSE SCHOOL SPECIALTY, INC., a Delaware
corporation (the "Company"), wishes to
recruit, reward, and retain employees,
consultants, independent contractors,
advisors, officers and outside
directors. To further these objectives,
the Company hereby sets forth the School
Specialty, Inc. 1998 Stock Incentive
Plan (the "Plan") to provide options
("Options") or direct grants ("Stock
Grants" and, together with the Options,
"Awards") to employees, consultants,
independent contractors, advisors,
officers and outside directors with
respect to shares of the Company's
common stock (the "Common Stock"). The
Plan was originally effective as of the
effective date (the "Effective Date") of
the Company's registration under Section
12 of the Securities Exchange Act of
1934 (the "Exchange Act") with respect
to its initial public offering ("IPO"),
and this amendment and restatement is
effective as of June 20, 2000.
PARTICIPANTS The following persons are eligible to
receive Options and Stock Grants under
the Plan: (1) current and prospective
Employees (as defined below) of the
Company and any Eligible Subsidiary (as
defined in the Eligible Subsidiary
section below), (2) consultants,
advisors and independent contractors of
the Company and any Eligible Subsidiary
and (3) officers and directors of the
Company and any Eligible Subsidiary who
are not Employees ("Eligible Officers
and Eligible Directors"). Eligible
persons become "Optionees" when the
Administrator grants them an option
under this Plan or "Recipients" when
they receive a direct grant of Common
Stock. (Optionees and Recipients are
referred to collectively as
"Participants." The term Participant
also includes, where appropriate, a
person authorized to exercise an Award
in place of the original Optionee.)
Employee means any person employed as a
common law employee of the Company or an
Eligible Subsidiary.
ADMINISTRATOR The Administrator will be the
Compensation Committee of the Board of
Directors of the Company (the
"Compensation Committee"), unless the
Board specifies another committee. The
Board may also act under the Plan as
though it were the Compensation
Committee.
The Administrator is responsible for the
general operation and administration of
the Plan and for carrying out its
provisions and has full discretion in
interpreting and administering the
provisions of the Plan. Subject to the
express provisions of the Plan, the
Administrator may exercise such powers
and authority of the Board as the
Administrator may find necessary or
appropriate to carry out its functions.
The Administrator may delegate its
functions (other than those described in
the Granting of Awards section) to
Employees of the Company.
The Administrator's powers will include,
but not be limited to, the power to
amend, waive, or extend any provision or
limitation of any Award. The
Administrator may act through meetings
of a majority of its members or by
unanimous consent.
GRANTING OF Subject to the terms of the Plan, the
AWARDS Administrator will, in its sole
discretion, determine:
<PAGE>
the Participants who receive Awards,
the terms of such Awards,
the schedule for exercisability or
nonforfeitability (including any
requirements that the Participant
or the Company satisfy performance
criteria),
the time and conditions for
expiration of the Award, and
the form of payment due upon
exercise, if any.
The Administrator's determinations under
the Plan need not be uniform and need
not consider whether possible
Participants are similarly situated.
Options granted to Employees may be
nonqualified stock options ("NQSOs") or
"incentive stock options" ("ISOs")
within the meaning of Section 422 of the
Internal Revenue Code of 1986, as
amended from time to time (the "Code"),
or the corresponding provision of any
subsequently enacted tax statute.
Options granted to consultants,
independent contractors, advisors,
Eligible Officers and Eligible
Directors, including Formula Options (as
defined below), must be NQSOs. The
Administrator will not grant ISOs unless
the stockholders either have already
approved the granting of ISOs or give
such approval within 12 months after the
grant.
The Administrator may impose such
conditions on or charge such price for
the Stock Grants as it deems
appropriate.
SUBSTITUTIONS The Administrator may also grant
Awards in substitution for options or
other equity interests held by
individuals who become Employees of the
Company or of an Eligible Subsidiary as
a result of the Company's acquiring or
merging with the individual's employer
or acquiring its assets. In addition,
the Administrator may provide for the
Plan's assumption of Awards granted
outside the Plan (including those
granted by an Eligible Subsidiary) to
persons who would have been eligible
under the terms of the Plan to receive
an Award, including both persons who
provided services to any acquired
company or business and persons who
provided services to the Company or any
Eligible Subsidiary. If appropriate to
conform the Awards to the interests for
which they are substitutes, the
Administrator may grant substitute
Awards under terms and conditions
(including Exercise Price) that vary
from those the Plan otherwise requires.
Awards in substitution for U.S. Office
Products' options in connection with the
distribution by U.S. Office Products of
the Company's Common Stock will retain
their pre-distribution exercise schedule
and terms (including Change of Control
provisions) and expiration date.
JUNEBOX Awards in substitution for options
OPTIONS issued by JuneBox.com, Inc. ("JuneBox")
will, unless the Administrator determines otherwise,
retain their pre-distribution exercise
schedule and expiration dates, but any
Change of Control provisions will
thereafter refer to the Company under
the rules set forth in this Plan for any
such awards that have not become fully
exercisable on or before their
assumption under this Plan, unless the
Administrator provides otherwise. In
replacing JuneBox options, the
Administrator may adjust the Exercise
Price and number of shares covered by
JuneBox options in its discretion to
reflect the relative value of JuneBox as
an Eligible Subsidiary of the Company.
It may determine the relative value in
any manner it considers appropriate.
<PAGE>
DIRECTOR Each Eligible Director will receive a
FORMULA formula stock option ("Formula
OPTIONS Option") with respect to 15,000 shares
of Common Stock upon the first
to occur of their initial appointment or
election to the Board (with the grant
made as of the date of such appointment
or election). Thereafter, each Eligible
Director serving on the Board will
receive a Formula Option annually with
respect to 5,000 shares of Common Stock
on a date determined by the
Administrator. The Exercise Price for
Formula Options will be the Fair Market
Value on the Date of Grant.
EXERCISE Unless the Administrator specifies
SCHEDULE otherwise, each Formula Option will
become exercisable as to 20% of the
covered shares on the first anniversary
of its Date of Grant (as defined in the
Date of Grant section below), an
additional 30% on the second
anniversary, and the remaining 50% on or
after the third anniversary. A Formula
Option will become exercisable in its
entirety upon the Eligible Director's
death, Disability, or attainment of age
70. Options will be forfeited to the
extent they are not then exercisable if
an Eligible Director resigns or fails to
be reelected as a director. Exercisable
options will expire as provided under
Award Expiration.
DATE OF GRANT The Date of Grant will be the date as of
which this Plan or the Administrator
grants an Award to a Participant, as
specified in the Plan or in the
Administrator's minutes or other written
evidence of action.
EXERCISE PRICE The Exercise Price is the value of the
consideration that a Participant must
provide in exchange for one share of
Common Stock. The Administrator will
determine the Exercise Price under each
Award and may set the Exercise Price
without regard to the Exercise Price of
any other Awards granted at the same or
any other time. The Company may use the
consideration it receives from the
Participant for general corporate
purposes.
The Exercise Price per share for NQSOs
may not be less than 100% of the Fair
Market Value (as defined below) of a
share on the Date of Grant. If an
Option is intended to be an ISO, the
Exercise Price per share may not be less
than 100% of the Fair Market Value (on
the Date of Grant) of a share of Common
Stock covered by the Option; provided,
however, that if the Administrator
decides to grant an ISO to someone
covered by Sections 422(b)(6) and 424(d)
(as a more-than-10%-stockholder), the
Exercise Price of the Option must be at
least 110% of the Fair Market Value (on
the Date of Grant).
The Administrator may satisfy any state
law requirements regarding adequate
consideration for Stock Grants by (i)
issuing Common Stock held as treasury
stock or (ii) charging the Recipients at
least the par value for the shares
covered by the Stock Grant. The
Administrator may designate that a
Recipient may satisfy (ii) above either
by direct payments or by the
Administrator's withholding from other
payments due to the Recipient.
FAIR MARKET Fair Market Value of a share of Common
VALUE Stock for purposes of the
Plan will be determined as follows:
If the Common Stock trades on a
national securities exchange, the
closing sale price on the Date of
Grant;
If the Common Stock does not trade
on any such exchange, the closing
sale price as reported by the
National Association of Securities
Dealers, Inc. Automated Quotation
System ("Nasdaq") for such date;
If no such closing sale price
information is available, the
average of the closing bid and
asked prices that Nasdaq reports
for such date;
<PAGE>
If there are no such closing bid
and asked prices, the average of
the closing bid and asked prices as
reported by any other commercial
service for such date; or
If the Company has no publicly-
traded stock, the Administrator
will determine the Fair Market
Value for purposes of the Plan
using any measure of value it
determines in good faith to be
appropriate.
For any date that is not a trading day,
the Fair Market Value of a share of
Common Stock for such date shall be
determined by using the closing sale
price or the average of the closing bid
and asked prices, as appropriate, for
the immediately preceding trading day.
The Administrator can substitute a
particular time of day or other measure
of "closing sale price" if appropriate
because of changes in exchange or market
procedures.
The Fair Market Value will be deemed
equal to the IPO price for any Options
granted as of the date on which the
IPO's underwriters price the IPO or
granted on the following day before
trading opens in the Common Stock.
The Administrator has sole discretion to
determine the Fair Market Value for
purposes of this Plan, and all Awards
are conditioned on the recipient's
agreement that the Administrator's
determination is conclusive and binding
even though others might make a
different and also reasonable
determination.
EXERCISABILITY The Administrator will determine the
times and conditions for exercise of or
purchase under each Award but may not
extend the period for exercise beyond
the tenth anniversary of its Date of
Grant (or five years for ISOs granted to
10% owners covered by Code Sections
422(b)(6) and 424(d)).
Awards will become exercisable at such
times and in such manner as the
Administrator determines and the Award
Agreement, if any, indicates; provided,
however, that the Administrator may, on
such terms and conditions as it
determines appropriate, accelerate the
time at which the Participant may
exercise any portion of an Award or at
which restrictions on Stock Grants
lapse. For Stock Grants, "exercise"
refers to acceptance of the Award or
lapse of restrictions, as appropriate in
context.
If the Administrator does not specify
otherwise, Options will become
exercisable and restrictions on Stock
Grants will lapse as to one-fourth of
the covered shares on each of the first
four anniversaries of the Date of Grant,
so long as the recipient remains
employed or continues his relationship
as a service provider to the Company or
any Eligible Subsidiary, and will expire
as of the tenth anniversary of the Date
of Grant (unless they expire earlier
under the Plan or the Award Agreement).
The Administrator has the sole
discretion to determine that a change in
service-providing relationship
eliminates any further service credit on
the exercise schedule.
No portion of an Award that is
unexercisable at a recipient's
termination of service-providing
relationship (for any reason) will
thereafter become exercisable (and the
recipient will immediately forfeit any
unexercisable portions at his
termination of service-providing
relationship), unless the Award
Agreement or the Plan provides
otherwise, either initially or by
amendment.
Termination of service-providing
relationship will not occur for
recipients who are Employees, officers,
or directors of JuneBox until the
earlier of (i) the date they leave all
service-providing relationships with
both JuneBox and the Company or (ii) the
first day
<PAGE>
of the 13th month beginning
after the date JuneBox ceases to be an
Eligible Subsidiary, unless the
Administrator agrees to other treatment.
CHANGE OF Upon a Change of Control (as defined
CONTROL below), all Options held by current
Employees, consultants, advisors,
independent contractors, Eligible
Officers and Eligible Directors will
become fully exercisable and all
restrictions on Stock Grants will lapse.
A Change of Control for this purpose
means the occurrence of any one or more
of the following events:
a person, entity, or group (other
than the Company, any Company
subsidiary, any Company benefit
plan, or any underwriter
temporarily holding securities for
an offering of such securities)
acquires ownership of more than 50%
of the undiluted total voting power
of the Company's then-outstanding
securities eligible to vote to
elect members of the Board
("Company Voting Securities");
completion of a merger or
consolidation of the Company with
or into any other entity-unless the
holders of the Company Voting
Securities outstanding immediately
before such completion, together
with any trustee or other fiduciary
holding securities under a Company
benefit plan, hold securities that
represent immediately after such
merger or consolidation at least
50% of the combined voting power of
the then outstanding voting
securities of either the Company or
the other surviving entity or its
parent; or
the stockholders of the Company
approve (i) a plan of complete
liquidation or dissolution of the
Company or (ii) an agreement for
the Company's sale or disposition
of all or substantially all the
Company's assets, and such
liquidation, dissolution, sale, or
disposition is completed.
Even if other tests are met, a
Change of Control has not occurred
under any circumstance in which the
Company files for bankruptcy
protection or is reorganized
following a bankruptcy filing.
The Administrator may allow
conditional exercises in advance of
the completion of a Change of
Control that are then rescinded if
no Change of Control occurs.
The Adjustments Upon Changes in Capital
Stock provisions will also apply if the
Change of Control is a Substantial
Corporate Change (as defined in those
sections).
LIMITATION An Option granted to an Employee will be
ON ISOs an ISO only to the extent that
the aggregate Fair Market Value
(determined at the Date of Grant) of the
stock with respect to which ISOs are
exercisable for the first time by the
Optionee during any calendar year (under
the Plan and all other plans of the
Company and its subsidiary corporations,
within the meaning of Code Section
422(d)), does not exceed $100,000. This
limitation applies to Options in the
order in which such Options were
granted. If, by design or operation,
the Option exceeds this limit, the
excess will be treated as an NQSO.
METHOD OF To exercise any exercisable portion of
EXERCISE an Award, the Participant must:
Deliver a notice of exercise to the
Assistant Secretary of the Company
designated by the Board (or to
whomever the Administrator
designates), in a form complying
with any rules the Administrator
may issue, signed or otherwise
authenticated by the Participant,
and specifying the number of shares
of Common Stock underlying the
portion of the Award the
Participant is exercising;
<PAGE>
Pay the full Exercise Price, if
any, by cashier's or certified
check for the shares of Common
Stock with respect to which the
Award is being exercised, unless
the Administrator consents to
another form of payment (which
could include the use of Common
Stock); and
Deliver to the Administrator such
representations and documents as
the Administrator, in its sole
discretion, may consider necessary
or advisable.
Payment in full of the Exercise Price
need not accompany the written notice of
exercise if the exercise complies with a
previously-approved cashless exercise
method, including, for example, that the
notice directs that the stock
certificates (or other indicia of
ownership) for the shares issued upon
the exercise be delivered to a licensed
broker acceptable to the Company as the
agent for the individual exercising the
Option and at the time the stock
certificates (or other indicia) are
delivered to the broker, the broker will
tender to the Company cash or cash
equivalents acceptable to the Company
and equal to the Exercise Price and any
required withholding taxes.
If the Administrator agrees to allow an
Optionee to pay through tendering Common
Stock to the Company, the individual can
only tender stock he or she has held for
at least six months at the time of
surrender. Shares of stock offered as
payment will be valued, for purposes of
determining the extent to which the
Participant has paid the Exercise Price,
at their Fair Market Value on the date
of exercise. The Administrator may
also, in its discretion, accept
attestation of ownership of Common Stock
and issue a net number of shares upon
Option exercise or by having a broker
tender to the Company cash equal to the
Exercise Price and any withholding
taxes.
AWARD No one may exercise an Award more than
EXPIRATION ten years after its Date of
Grant (or five years, for an ISO granted
to a more-than-10% stockholder). A
recipient will immediately forfeit and
can never exercise any portion of an
Award that is unexercisable at his
termination of service-providing
relationship (for any reason), unless
the Award Agreement or the Plan provides
otherwise, either initially or by
amendment. Unless the Award Agreement
or the Plan provides otherwise, either
initially or by amendment, no one may
exercise otherwise exercisable portions
of an Award after the first to occur of:
EMPLOYMENT The 90th day after the date of
TERMINATION termination of service-providing
relationship (other
than for death or Disability), where
termination of employment means the time
when the employer-employee or other
service providing relationship between
the Employee, consultant, independent
contractor, advisor or Eligible Officer
and the Company (and the Eligible
Subsidiaries) ends for any reason,
including retirement. For grants after
June 20, 2000, the Administrator may
provide that Awards terminate
immediately upon termination of
employment for "cause" under an
Employee's employment or consultant's
services agreement or under another
definition specified in the Award
Agreement. Unless the Award Agreement
provides otherwise, termination of
employment does not include instances in
which the Company immediately rehires an
Employee as a consultant, independent
contractor or advisor. The
Administrator, in its sole discretion,
will determine all questions of whether
particular terminations or leaves of
absence are terminations of employment
and may decide to suspend the exercise
schedule during a leave rather than to
terminate the Award. Unless the Award
Agreement or the Exercisability section
provides otherwise, terminations of
employment include situations in which
the Participant's employer ceases to be
related to the Company closely enough to
be an Eligible Subsidiary for new
grants;
GROSS For the Company's termination of the
MISCONDUCT Participant's service-providing relationship as a
<PAGE>
result of the Participant's Gross
Misconduct, the time of such
termination. For purposes of this Plan,
"Gross Misconduct" means the Participant
has
committed fraud, misappropriation,
embezzlement, or willful misconduct
that has resulted or is likely to
result in material harm to the
Company or an Eligible Subsidiary;
committed or been indicted for or
convicted of, or pled guilty or no
contest to, any misdemeanor (other
than for minor infractions or
traffic violations) involving
fraud, breach of trust,
misappropriation, or other similar
activity or otherwise relating to
the Company or an Eligible
Subsidiary, or any felony; or
committed an act of gross
negligence or otherwise acted with
willful disregard for the Company's
or an Eligible Subsidiary's best
interests in a manner that has
resulted or is likely to result in
material harm to the Company or an
Eligible Subsidiary.
If the Participant has a written
employment or other agreement in
effect at the time of his
termination that specifies "cause"
for termination, "Gross Misconduct"
for purposes of his termination
will refer to "cause" under the
employment or other agreement,
rather than to the foregoing
definition.
DlSABILITY For Disability, the earlier of (i) the
first anniversary of the Participant's
termination of employment for Disability
and (ii) 30 days after the Participant
no longer has a Disability, where
"Disability" means the inability to
engage in any substantial gainful
activity by reason of any medically
determinable physical or mental
impairment that can be expected to
result in death or that has lasted or
can be expected to last for a continuous
period of not less than twelve months;
or
DEATH The date 24 months after the
Participant's death.
If exercise is permitted after
termination of service-providing
relationship, the Award will
nevertheless expire as of the date that
the former service provider violates any
covenant not to compete in effect
between the Company or any Eligible
Subsidiary and such person. In
addition, an Optionee who exercises an
Option more than 90 days after
termination of employment with the
Company and/or an Eligible Subsidiary
will only receive ISO treatment to the
extent permitted by law, and becoming or
remaining an employee of another related
company (that is not an Eligible
Subsidiary) or an independent contractor
to the Company and the Eligible
Subsidiaries will not prevent loss of
ISO status because of the formal
termination of employment.
Nothing in this Plan extends the term of
an Award beyond the tenth anniversary of
its Date of Grant, nor does anything in
this Award Expiration section make an
Award exercisable that has not otherwise
become exercisable.
AWARD Award Agreements will set forth the
AGREEMENT terms of each Award and will
include such terms and conditions,
consistent with the Plan, as the
Administrator may determine are
necessary or advisable. To the extent
the agreement is inconsistent with the
Plan, the Plan will govern. The Award
Agreements may contain special rules.
The Administrator may, but is not
required to, issue agreements for Stock
Grants.
<PAGE>
STOCK SUBJECT Except as adjusted below under
TO PLAN Adjustments upon Changes in Capital Stock,
the aggregate number of shares of
Common Stock that may be issued
under the Awards (whether ISOs,
NQSOs, or Stock Grants) may not
exceed 20% percent of the total
number of shares of Common Stock
outstanding, determined immediately
after the grant of the Award;
the maximum number of shares that
may be subject to ISOs may not
exceed 3,487,600; and
the maximum number of shares that
may be granted under Awards for a
single individual in a calendar
year may not exceed 1,200,000.
(The individual maximum applies
only to Awards first made under
this Plan and not to Awards made in
substitution of a prior employer's
options or other incentives, except
as Code Section 162(m) otherwise
requires.)
The Common Stock will come from either
authorized but unissued shares or from
previously issued shares that the
Company reacquires, including shares it
purchases on the open market. If any
Award expires, is canceled, or
terminates for any other reason, the
shares of Common Stock available under
that Award will again be available for
the granting of new Awards (but will be
counted against that calendar year's
limit for a given individual).
No adjustment will be made for a
dividend or other right (except a stock
dividend) for which the record date
precedes the date of exercise.
The Participant will have no rights of a
stockholder with respect to the shares
of stock subject to an Award except to
the extent that the Company has issued
certificates for, or otherwise confirmed
ownership of, such shares upon the
exercise of the Award.
The Company will not issue fractional
shares pursuant to the exercise of an
Award, but the Administrator may, in its
discretion, direct the Company to make a
cash payment in lieu of fractional
shares.
PERSON WHO During the Participant's lifetime, only
MAY EXERCISE the Participant or his duly
appointed guardian or personal
representative may exercise the Awards.
After his death, his personal
representative or any other person
authorized under a will or under the
laws of descent and distribution may
exercise any then exercisable portion of
an Award. If someone other than the
original recipient seeks to exercise any
portion of an Award, the Administrator
may request such proof as it may
consider necessary or appropriate of the
person's right to exercise the Award.
ADJUSTMENTS Subject to any required action by the
UPON CHANGES IN Company (which it shall
CAPITAL STOCK promptly take) or its stockholders,
and subject to the provisions of
applicable corporate law, if, after the
Date of Grant of an Award,
the outstanding shares of Common
Stock increase or decrease or
change into or are exchanged for a
different number or kind of
security because of any
recapitalization, reclassification,
stock split, reverse stock split,
combination of shares, exchange of
shares, stock dividend, or other
distribution payable in capital
stock, or
some other increase or decrease in
such Common Stock occurs without
the Company's receiving consideration
<PAGE>
the Administrator may make a
proportionate and appropriate adjustment
in the number of shares of Common Stock
underlying each Award, so that the
proportionate interest of the
Participant immediately following such
event will, to the extent practicable,
be the same as immediately before such
event. (This adjustment does not apply
to Common Stock that the Optionee has
already purchased nor to Stock Grants
that are already nonforfeitable, except
to the extent of similar treatment for
most stockholders.) Unless the
Administrator determines another method
would be appropriate, any such
adjustment to an Award will not change
the total price with respect to shares
of Common Stock underlying the
unexercised portion of the Award but
will include a corresponding
proportionate adjustment in the Award's
Exercise Price. The Administrator will
make a commensurate change to the
maximum number and kind of shares
provided in the Stock Subject to Plan
section.
Any issue by the Company of any class of
preferred stock, or securities
convertible into shares of common or
preferred stock of any class, will not
affect, and no adjustment by reason
thereof will be made with respect to,
the number of shares of Common Stock
subject to any Award or the Exercise
Price except as this Adjustments section
specifically provides. The grant of an
Award under the Plan will not affect in
any way the right or power of the
Company to make adjustments,
reclassifications, reorganizations or
changes of its capital or business
structure, or to merge or to
consolidate, or to dissolve, liquidate,
sell, or transfer all or any part of its
business or assets.
SUBSTANTIAL Upon a Substantial Corporate Change, the
CORPORATE Plan and any unexercised
CHANGE Awards will terminate unless provision
is made in writing in connection
with such transaction for the assumption
or continuation of outstanding Awards,
or the substitution for such options or
grants of any options or grants covering
the stock or securities of a successor
employer corporation, or a parent or
subsidiary of such successor, with
appropriate adjustments as to the number
and kind of shares of stock and prices,
in which event the Awards will continue
in the manner and under the terms so
provided.
Unless the Administrator determines
otherwise, if an Award would otherwise
terminate under the preceding sentence,
Participants who are then Employees,
consultants, advisors, independent
contractors, Eligible Officers and
Eligible Directors will have the right,
at such time before the consummation of
the transaction causing such termination
as the Administrator reasonably
designates, upon such reasonable notice
as determined by the Administrator, to
exercise any unexercised portions of the
Award, whether or not they had
previously become exercisable. However,
unless the Administrator determines
otherwise, the acceleration will not
occur if it would render unavailable
"pooling of interest" accounting for any
reorganization, merger, or consolidation
of the Company.
A Substantial Corporate Change means:
the dissolution or liquidation of
the Company,
merger, consolidation, or
reorganization of the Company with
one or more corporations in which
the Company is not the surviving
corporation,
the sale of substantially all of
the assets of the Company to
another corporation, or
any transaction (including a merger
or reorganization in which the
Company survives) approved by the
Board that results in any person or
entity (other than any affiliate of
the Company as defined in Rule
144(a)(1) under the Securities
<PAGE>
Act, any Company subsidiary, any Company
benefit plan, or any underwriter
temporarily holding securities for
an offering of such securities)
owning 100% of the combined voting
power of all classes of stock of
the Company.
ELIGIBLE Eligible Subsidiary means each of the
SUBSIDIARY Company's Subsidiaries, except as
the Administrator otherwise specifies.
For ISO grants, Subsidiary means any
corporation (other than the Company) in
an unbroken chain of corporations
including the Company if, at the time an
ISO is granted to a Participant under
the Plan, each corporation (other than
the last corporation in the unbroken
chain) owns stock possessing 50% or more
of the total combined voting power of
all classes of stock in another
corporation in such chain. For ISO
purposes, Subsidiary also includes a
single-member limited liability company
included within the chain described in
the preceding sentence. For NQSOs, the
Administrator may use a different
definition of Subsidiary in its
discretion and may include other forms
of entity at the same level of equity
relationship (or such other level as the
Board or the Administrator specifies).
LEGAL The Company will not issue any shares of
COMPLIANCE Common Stock under an
Award until all applicable requirements
imposed by Federal and state securities
and other laws, rules, and regulations,
and by any applicable regulatory
agencies or stock exchanges, have been
fully met. To that end, the Company may
require the Participant to take any
reasonable action to comply with such
requirements before issuing such shares,
including compliance with any Company
black-out periods or trading
restrictions. No provision in the Plan
or action taken under it authorizes any
action that is otherwise prohibited by
Federal or state laws.
The Plan is intended to conform to the
extent necessary with all provisions of
the Securities Act of 1933, as amended
(the "Securities Act"), and the
Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and all
regulations and rules the Securities and
Exchange Commission issues under those
laws. Notwithstanding anything in the
Plan to the contrary, the Administrator
must administer the Plan, and Awards may
be granted and exercised, only in a way
that conforms to such laws, rules, and
regulations. To the extent permitted by
applicable law, the Plan and any Awards
will be deemed amended to the extent
necessary to conform to such laws,
rules, and regulations.
PURCHASE FOR Unless a registration statement under
INVESTMENT the Securities Act covers the
AND OTHER shares of Common Stock a Participant
RESTRICTIONS receives upon exercise of his
Award, the Administrator may require, at
the time of such exercise or
receipt of a grant, that the Participant
agree in writing to acquire such shares
for investment and not for public resale
or distribution, unless and until the
shares subject to the Award are
registered under the Securities Act.
Unless the shares are registered under
the Securities Act, the Participant must
acknowledge:
that the shares purchased on
exercise of the Award are not so
registered,
that the Participant may not sell
or otherwise transfer the shares
unless:
the shares have been
registered under the
Securities Act in connection
with the sale or transfer
thereof, or
counsel satisfactory to the
Company has issued an opinion
satisfactory to the Company
that the sale or other
transfer of such shares is
exempt from registration under
the Securities Act, and
<PAGE>
such sale or transfer complies
with all other applicable
laws, rules, and regulations,
including all applicable
Federal and state securities
laws, rules, and regulations.
Additionally, the Common Stock, when
issued upon the exercise of an Award,
will be subject to any other transfer
restrictions, rights of first refusal,
and rights of repurchase set forth in or
incorporated by reference into other
applicable documents, including the
Company's articles or certificate of
incorporation, by-laws, or generally
applicable stockholders' agreements.
The Administrator may, in its sole
discretion, take whatever additional
actions it deems appropriate to comply
with such restrictions and applicable
laws, including placing legends on
certificates and issuing stop-transfer
orders to transfer agents and
registrars.
TAX The Participant must satisfy all
WITHOLDING applicable Federal, state, and local
income and employment tax withholding
requirements before the Company will
deliver stock certificates or otherwise
recognize ownership upon the exercise of
an Award. The Company may decide to
satisfy the withholding obligations
through additional withholding on salary
or wages. If the Company does not or
cannot withhold from other compensation,
the Participant must pay the Company,
with a cashier's check or certified
check, the full amounts required by
withholding. Payment of withholding
obligations is due before the Company
issues shares with respect to the Award.
If the Administrator so determines, the
Participant may instead satisfy the
withholding obligations by directing the
Company to retain shares from the Award
exercise, by tendering previously owned
shares, or by attesting to his ownership
of shares (with the distribution of net
shares).
TRANSFERS, Unless the Administrator otherwise
ASSIGNMENTS, approves in advance in writing for
AND PLEDGES estate planning or other purposes, an
Award may not be assigned,
pledged, or otherwise transferred in any
way, whether by operation of law or
otherwise or through any legal or
equitable proceedings (including
bankruptcy), by the Participant to any
person, except by will or by operation
of applicable laws of descent and
distribution. If necessary to comply
with Rule 16b-3 of the Exchange Act, the
Participant may not transfer or pledge
shares of Common Stock acquired under a
Stock Grant or upon exercise of an
Option until at least six months have
elapsed from (but excluding) the Date of
Grant, unless the Administrator approves
otherwise in advance in writing. The
Administrator may, in its discretion,
expressly provide that a Participant may
transfer his Award without receiving
consideration to (i) members of his
immediate family (children,
grandchildren, or spouse); (ii) trusts
for the benefit of such family members;
or (iii) partnerships where the only
partners are such family members.
AMENDMENT OR The Board may amend, suspend, or
TERMINATION terminate the Plan at any time,
OF PLAN AND without the consent of the Participants
AWARDS or their beneficiaries; provided
however, that no amendment will
deprive any Participant or beneficiary
of any previously declared Award.
Except as required by law or by the
Adjustments upon Changes in Capital
Stock section, the Board may not,
without the Participant's or
beneficiary's consent, modify the terms
and conditions of an Award so as to
adversely affect the Participant. No
amendment, suspension, or termination of
the Plan will, without the Participant's
or beneficiary's consent, terminate or
adversely affect any right or
obligations under any outstanding
Awards.
PRIVILEGES No Participant and no beneficiary or
OF STOCK other person claiming under or
OWNERSHIP through such Participant will have any
right, title, or interest in or to
any shares of Common Stock allocated or
reserved under the Plan or subject to
any Award except as to such shares of
Common Stock if any, already issued to
such Participant.
<PAGE>
EFFECT ON Whether exercising or receiving an Award
OTHER PLANS causes the Participant to
accrue or receive additional benefits
under any pension or other plan is
governed solely by the terms of such
other plan.
LIMITATIONS Notwithstanding any other
ON LIABILITY provisions of the Plan, no individual
acting as an agent of the Company shall
be liable to any Participant, former
Participant, spouse, beneficiary, or any
other person for any claim, loss,
liability, or expense incurred in
connection with the Plan, nor shall such
individual be personally liable because
of any contract or other instrument he
executes in such other capacity. The
Company will indemnify and hold harmless
each agent of the Company to whom any
duty or power relating to the
administration or interpretation of the
Plan has been or will be delegated,
against any cost or expense (including
attorneys' fees) or liability (including
any sum paid in settlement of a claim
with the Administrator's approval)
arising out of any act or omission to
act concerning this Plan unless arising
out of such person's own fraud or bad
faith.
NO EMPLOYMENT Nothing contained in this Plan
CONTRACT constitutes an employment contract
between the Company and the
Participants. The Plan does not give
any Participant any right to be retained
in the Company's employ, nor does it
enlarge or diminish the Company's right
to end the Participant's employment or
other relationship with the Company.
APPLICABLE The laws of the State of Delaware (other
LAW than its choice of law provisions)
govern this Plan and its interpretation.
DURATION Unless the Board extends the Plan's
OF PLAN term, the Administrator may not grant
Awards after June 8, 2008. The Plan
will then terminate but will continue to
govern unexercised and unexpired Awards.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.17
<SEQUENCE>3
<FILENAME>0003.txt
<TEXT>
JuneBox.com, Inc.
2000 Equity Incentive Plan
as of June 20, 2000
Purpose JuneBox.com, Inc., a Wisconsin
corporation (the "Company"), wishes
to recruit, reward, and retain
employees, directors, and other
service providers, including
consultants. To further these
objectives, the Company hereby sets
forth the JuneBox.com, Inc. 2000
Equity Incentive Plan (the "Plan"),
effective as of June 20, 2000 (the
"Effective Date"), to provide
options ("Options") to employees,
directors, and other service
providers of the Company and its
Related Companies to purchase
shares of the Company's common
stock (the "Common Stock").
Participants All Employees of the Company and of
any Eligible Affiliates are
eligible for Options under this
Plan. Eligible individuals become
"optionees" when the Administrator
grants them an option under this
Plan. The Administrator may also
grant options to directors,
consultants, and certain other
service providers. The term
optionee also includes, where
appropriate, a person authorized to
exercise an Option in place of the
original recipient. A director
serving on behalf of an investor
may, in advance of a grant, request
that the Company grant the option
directly to the investor, provided
that the resulting grant may not
qualify for exemption from
registration under Rule 701 or for
registration on Form S-8.
Employee means any person employed
as a common law employee of the
Company or of a Related Company.
Administrator The Administrator is the Board of
Directors of the Company (the
"Board"), unless the Board
specifies a committee of the Board.
The Board of Directors of School
Speciality, Inc. ("SSI") may act as
Administrator of this Plan, either
directly or through its
compensation committee, so long as
SSI is a Related Company, subject
to ratification by the Company's
Board of any actions taken. After
an initial public offering ("IPO")
covering the Company's stock, the
Administrator will be the
<PAGE>
Compensation Committee of the
Board, unless the Board either
specifies another committee or acts
under the Plan as though it were
the Compensation Committee.
The Administrator is responsible
for the general operation and
administration of the Plan and for
carrying out its provisions and has
full discretion in interpreting and
administering the provisions of the
Plan. Subject to the express
provisions of the Plan, the
Administrator may exercise such
powers and authority of the Board
as the Administrator may find
necessary or appropriate to carry
out its functions. The
Administrator may delegate its
functions (other than those
described in the Granting of
Options section) to officers or
other Employees of the Company.
The Administrator's powers will
include, but not be limited to, the
power to amend, waive, or extend
any provision or limitation of any
Option. The Administrator may act
through meetings of a majority of
its members or by unanimous
consent.
Granting of Subject to the terms of the Plan,
Options the Administrator will, in
its sole discretion, determine
the persons who receive Options,
the terms of such Options,
the schedule for
exercisability (including any
requirements that the optionee
or the Company satisfy
performance criteria),
the time and conditions for
expiration of the Options, and
the form of payment due upon
exercise.
The Administrator's determinations
under the Plan need not be uniform
and need not consider whether
possible recipients are similarly
situated.
Options granted to Employees may be
"incentive stock options" ("ISOs")
within the meaning of Section 422
of the Internal Revenue Code of
1986 (the "Code"), or the
corresponding provision of any
subsequently enacted tax statute,
or nonqualified stock options
("NQSOs"), and the
<PAGE>
Administrator will specify which form
of option it is granting. (If the
Administrator fails to specify the
form of an option grant to an
Employee, it will be an ISO to the
extent the tax laws permit.) Any
options granted to outside
directors or other persons who are
not Employees must be nonqualified
stock options.
Substitutions The Administrator may grant Options
in substitution for options or
other equity interests held by
individuals who become Employees of
the Company or of a Related Company
as a result of the Company's or
Related Company's acquiring or
merging with the individual's
employer or acquiring its assets or
through transfer from SSI. In
addition, the Administrator may
provide for the Plan's assumption
of options granted outside the Plan
to persons who would have been
eligible under the terms of the
Plan to receive a grant, including
both persons who provided services
to any acquired company or business
and persons who provided services
to the Company or any Related
Company. If appropriate to conform
the Options to the interests for
which they are substitutes, the
Administrator may grant substitute
Options under terms and conditions
(including Exercise Price) that
vary from those the Plan otherwise
requires.
Awards in substitution for SSI's
options in connection with the
distribution by SSI of the
Company's Common stock to its
public stockholders (the
"Distribution") will retain their
pre-Distribution exercise schedule
and expiration dates, but any
Change of Control provisions will
thereafter refer to the Company
under the rules set forth in this
Plan for any Options that have not
become fully exercisable on or
before the Distribution.
Director Each director of the Company who is
Formula not an Employee of the Company
Options or a Related Company (an "Eligible
Director") will receive a formula
stock option ("Formula Option") as
of the Effective Date with respect
to 15,000 shares of Common Stock,
as will each Eligible Director
later appointed or elected to the
Board (with the grant made as of
the date of his first election or
appointment). Each Eligible
Director serving on the Board at
each annual meeting of the
Company's shareholders (beginning
with the first meeting after
December 31, 2000) will receive a
Formula Option as of that meeting
with respect to 5,000 shares of
Common Stock. The Exercise Price
for Formula Options will be the
Fair Market Value on the Date of
Grant.
Exercise Unless the Administrator specifies
Schedule otherwise, each Formula
Option will become exercisable as
to 20% of the covered shares on the
first anniversary of its Date of
Grant, an additional 30% on the
second anniversary, and the
remaining 50% on or after the third
anniversary. A Formula Option will
become exercisable in its entirety
upon the director's death,
disability, or attainment of age
70. Options will be forfeited to
the extent they are not then
exercisable if a director resigns
or fails to be reelected as a
director. Exercisable options will
expire as provided under Option
Expiration.
Date Of Grant The Date of Grant will be the date
as of which the Plan or the
Administrator grants an Option to a
person, as specified in the Plan or
in the Administrator's minutes or
other written evidence of action.
Exercise Price The Exercise Price is the value of
the consideration that an optionee
must provide in exchange for one
share of Common Stock. The
Administrator will determine the
Exercise Price under each Option
and may set the Exercise Price
without regard to the Exercise
Price of any other Options granted
at the same or any other time. The
Company may use the consideration
it receives from the optionee for
general corporate purposes.
The Exercise Price per share for
NQSOs may not be less than 100% of
the Fair Market Value of a share on
the Date of Grant. For ISOs, the
Exercise Price per share must be at
least 100% of the Fair Market Value
(on the Date of Grant) of a share
of Common Stock covered by the
Option; provided, however, that if
the Administrator decides to grant
an ISO to someone covered by Code
Sections 422(b)(6) and 424(d) (as a
more-than-10%-stockholder), the
Exercise Price must be at least
110% of the Fair Market Value.
<PAGE>
Fair Market Fair Market Value of a share
Value of Common Stock for
purposes of the Plan will be
determined as follows:
if the Company has no publicly-
traded stock, the
Administrator will determine
the Fair Market Value for
purposes of the Plan using any
measure of value it determines
in good faith to be
appropriate;
if the Common Stock trades on
a national securities
exchange, the closing sale
price on the Date of Grant;
if the Common Stock does not
trade on any such exchange,
the closing sale price as
reported by the National
Association of Securities
Dealers, Inc. Automated
Quotation System ("Nasdaq")
for such date;
if no such closing sale price
information is available, the
average of the closing bid and
asked prices that Nasdaq
reports for such date; or
if there are no such closing
bid and asked prices, the
average of the closing bid and
asked prices as reported by
any other commercial service
for such date.
For any date that is not a trading
day, the Fair Market Value of a
share of Common Stock for such date
will be determined by using the
closing sale price or the average
of the closing bid and asked
prices, as appropriate, for the
immediately preceding trading day.
The Administrator can substitute a
particular time of day or other
measure of "closing sale price" if
appropriate because of changes in
exchange or market procedures.
With respect to any Options granted
as of the IPO or conditioned on the
IPO, the Fair Market Value will be
treated as equal to the price
established in the IPO for any such
Options if they are granted on or
before the date on which the IPO's
underwriters price the IPO or
granted on the following day before
trading opens in the Common Stock.
The Administrator has sole
discretion to determine the Fair
Market Value for purposes of this
Plan, and all Options are
<PAGE>
conditioned on the optionees'
agreement that the Administrator's
determination is conclusive and
binding even though others might
make a different and also
reasonable determination.
Exercisability The Administrator will determine
the times and conditions for
exercise of each Option.
Options will become exercisable at
such times and in such manner as
the Administrator determines and
the Option Agreement indicates;
provided, however, that the
Administrator may, on such terms
and conditions as it determines
appropriate, accelerate the time at
which the optionee may exercise any
portion of an Option.
If the Administrator does not
specify otherwise, Options will
become exercisable as to one-sixth
of the covered shares on the sixth
month anniversary of the Date of
Grant and as to an additional
2.778% on the first day of each
succeeding month, so long as the
optionee remains employed or
continues his relationship as a
service provider, and will expire
as of the tenth anniversary of the
Date of Grant (unless they expire
earlier under the Plan or the
Option Agreement). The
Administrator has the sole
discretion to determine that a
change in service-providing
relationship eliminates any further
service credit on the exercise
schedule.
No portion of an Option that is
unexercisable at an optionee's
termination of service-providing
relationship (for any reason) will
thereafter become exercisable (and
the optionee will immediately
forfeit any unexercisable portions
at his termination of service-
providing relationship), unless the
Option Agreement provides
otherwise, either initially or by
amendment.
Termination of service-providing
relationship will not occur for
optionees who are Employees,
officers, or directors of SSI until
the earlier of (i) the date they
leave all service-providing
relationships with both SSI and the
Company and (ii) the first day of
the 13th month beginning after the
date SSI ceases to be a Related
Company, unless the SSI Board of
Directors or a committee of such
board agrees to other treatment.
<PAGE>
Change of Upon a Change of Control, all
Control Options will become fully
exercisable, unless the
optionee's Option Agreement
provides otherwise. A Change of
Control for this purpose means the
occurrence of any one or more of
the following events (and, before
the Distribution, also includes
comparable changes with respect to
SSI):
(i) sale of all or
substantially all of the
assets of the Company to one
or more individuals, entities,
or groups (other than an
Excluded Owner);
(ii) complete or substantially
complete dissolution or
liquidation of the Company
(other than into an Excluded
Owner);
(iii) a person, entity, or
group (other than an Excluded
Owner) acquires or attains
ownership of more than 50% of
the undiluted total voting
power of the Company's then-
outstanding securities
eligible to vote to elect
members of the Board ("Company
Voting Securities");
(iv) completion of a merger or
consolidation of the Company
with or into any other entity
(other than an Excluded Owner)
unless the holders of the
Company Voting Securities
outstanding immediately before
such completion, together with
any trustee or other fiduciary
holding securities under a
Company benefit plan, retain
control because they hold
securities that represent
immediately after such merger
or consolidation at least 50%
of the combined voting power
of the then outstanding voting
securities of either the
Company or the other surviving
entity or its ultimate parent;
or
(v) after an IPO, the
individuals who constitute the
Board immediately before a
proxy contest cease to
constitute at least a majority
of the Board (excluding any
Board seat that is vacant or
otherwise unoccupied)
immediately following the
proxy contest.
An "Excluded Owner" consists of
SSI, the Company, any Related
Company, any Company benefit plan,
or any
<PAGE>
underwriter temporarily
holding securities for an offering
of such securities.
Even if other tests are met, a
Change of Control has not occurred
under any circumstance in which the
Company files for bankruptcy
protection or is reorganized
following a bankruptcy filing. The
Administrator may determine that a
particular optionee's Options will
not become fully exercisable as a
result of what the Administrator,
in its sole discretion, determines
is the optionee's insufficient
cooperation with the Company with
respect to a Change of Control. In
addition, the acceleration will not
occur if it would prevent use of
"pooling of interest" accounting
for a reorganization, merger, or
consolidation of the Company that
the Board approves.
The Company's IPO will not
constitute a Change of Control.
The Company's Distribution will
constitute a Change of Control but
only for persons whose service-
providing relationship continues
with SSI but not with the Company
immediately after the Distribution.
The Administrator may allow
conditional exercises in advance of
the completion of a Change of
Control that are then rescinded if
no Change of Control occurs. The
Administrator may also provide that
the accelerations under the Change
of Control occur automatically up
to six months after the Change of
Control.
Substantial Upon a Change of Control that
Corporate is also a Substantial
Change Corporate Change, the Options will
become exercisable
(unless the Change of Control
section provides otherwise) and the
Plan and any unexercised Options
will terminate (after the
occurrence of one of the
alternatives set forth in the next
full paragraph) unless either (i)
such termination would prevent use
of "pooling of interest" accounting
for a reorganization, merger, or
consolidation of the Company that
the Board approves, (ii) an
agreement with an optionee provides
otherwise, or (iii) provision is
made in writing in connection with
such transaction for
the assumption or continuation
of outstanding Options (which
could include replacement by
SSI), or
the substitution for such
options or grants of any
options or grants covering the
stock or securities of
<PAGE>
a successor employer entity, or
a parent or subsidiary of such
successor or by SSI or a
successor to SSI, with
appropriate adjustments as to
the number and kind of shares
of stock and prices, in which
event the Options will
continue in the manner and
under the terms so provided.
If an Option would otherwise
terminate under the preceding
sentence and the Administrator
considers that the Fair Market
Value of the Common Stock as a
result of the Substantial Corporate
Change exceeds or is likely to
exceed the Exercise Price, the
Administrator will either
provide that optionees will
have the right, at such time
before the completion of the
transaction causing such
termination as the Board or
the Administrator reasonably
designates, to exercise any
unexercised portions of the
Option, including those
portions that the Change of
Control will make exercisable
or
cause the Company, or agree to
allow the successor, to cancel
each Option after payment to
the optionee of an amount in
cash, cash equivalents, or
successor equity interests
substantially equal to the
Fair Market Value under the
transaction minus the Exercise
Price for the shares covered
by the Option (and, where the
Board or the Administrator
determines it is appropriate,
any required tax
withholdings).
The Administrator may allow
conditional exercises in advance of
the completion of a Substantial
Corporate Change that are then
rescinded if no Substantial
Corporate Change occurs.
The Board or other Administrator
may take any actions described in
the Substantial Corporate Change
section, without any requirement to
seek optionee consent.
A "Substantial Corporate Change"
means any of the following events:
a sale as described in clause
(i) under Change of Control,
<PAGE>
a dissolution or liquidation
as described in clause (ii),
an ownership change as
described in clause (iii), but
with the percentage ownership
increased to 100%,
merger, consolidation, or
reorganization of the Company
with or into one or more
corporations or other entities
in which the Company is not
the surviving entity, other
than a transaction intended
primarily to change the
Company's state of
incorporation or that
satisfies clause (iv) under
Change of Control, or
any other transaction
(including a merger or
reorganization in which the
Company survives) approved by
the Board that results in any
person or entity (other than
an Excluded Owner) owning 100%
of Company Voting Securities.
Limitation on An Option granted to an Employee
ISOs will be an ISO only to
the extent that the aggregate Fair
Market Value (determined at the
Date of Grant) of the stock with
respect to which ISOs are
exercisable for the first time by
the optionee during any calendar
year (under the Plan and all other
plans of the Company and its
subsidiary corporations, within the
meaning of Code Section 422(d)),
does not exceed $100,000. This
limitation applies to Options in
the order in which such Options
were granted. If, by design or
operation, the Option exceeds this
limit, the excess will be treated
as an NQSO.
Method of To exercise any exercisable portion
Exercise of an Option, the optionee must:
Deliver notice of exercise to
the Secretary or Assistant
Secretary of the Company (or
to whomever the Administrator
designates), in a form
complying with any rules the
Administrator may issue,
signed or otherwise
authenticated by the optionee,
and specifying the number of
shares of Common Stock
underlying the portion of the
Option the optionee is
exercising;
Pay the full Exercise Price by
cash or a cashier's or
certified check for the shares
of Common Stock
<PAGE>
with respect
to which the Option is being
exercised, unless the
Administrator consents to
another form of payment (which
could include loans from the
Company or the use of Common
Stock); and
Deliver to the Administrator
such representations and
documents as the
Administrator, in its sole
discretion, may consider
necessary or advisable.
After an IPO, payment in full of
the Exercise Price need not
accompany the written notice of
exercise if the exercise complies
with a previously-approved cashless
exercise method, including, for
example, that the notice directs
that the stock certificates (or
other indicia of ownership) for the
shares issued upon the exercise be
delivered to a licensed broker
acceptable to the Company as the
agent for the individual exercising
the option and at the time the
stock certificates (or other
indicia) are delivered to the
broker, the broker will tender to
the Company cash or cash
equivalents acceptable to the
Company and equal to the Exercise
Price and any required withholding
taxes.
If the Administrator agrees to
allow an optionee to pay through
tendering shares of Common Stock to
the Company, the individual can
only tender stock he has held for
at least six months at the time of
surrender. Shares of stock offered
as payment will be valued, for
purposes of determining the extent
to which the optionee has paid the
Exercise Price, at their Fair
Market Value on the date of
exercise. The Administrator may
also, in its discretion, accept
attestation of ownership of Common
Stock and issue a net number of
shares upon Option exercise, or,
after an IPO, by having a broker
tender to the Company cash equal to
the Exercise Price and any
withholding taxes.
Option No one may exercise an Option more
Expiration than ten years after
its Date of Grant (or five years
for ISOs granted to 10% owners
covered by Code Sections 422(b)(6)
and 424(d)). An Optionee will
immediately forfeit and can never
exercise any portion of an Option
that is unexercisable at his
termination of service-providing
relationship (for any reason),
unless the Option Agreement
provides otherwise, either
initially or by amendment. Unless
the Option Agreement provides
otherwise, either initially or by
<PAGE>
amendment, no one may exercise
otherwise exercisable portions of
an Option after the first to occur
of:
Employment The 90th day after the
Termination date of termination of
service-providing relationship
(other than for death or
Disability), where termination
of service-providing
relationship means the time
when the employer-employee or
other service-providing
relationship between the
individual and the Company
(and all Related Companies)
ends for any reason. The
Administrator may provide that
Options terminate immediately
upon termination of employment
for "cause" under an
Employee's employment or
consultant's services
agreement or under another
definition specified in the
Option Agreement. Unless the
Option Agreement provides
otherwise, termination of
service-providing relationship
does not include instances in
which the Company immediately
rehires a common law employee
as an independent contractor.
The Administrator, in its sole
discretion, will determine all
questions of whether
particular terminations or
leaves of absence are
terminations of employment and
may decide to suspend the
exercise schedule during a
leave rather than to terminate
the option. Unless the Option
Agreement or the
Exercisability section
provides otherwise,
terminations of employment
include situations in which
the optionee's employer ceases
to be related to the Company
closely enough to be a Related
Company for new grants.
Gross Misconduct For the Company's termination
of the optionee's service-
providing relationship as a
result of the optionee's Gross
Misconduct, the time of such
termination. For purposes of
this Plan, "Gross Misconduct"
means the optionee has
committed fraud,
misappropriation,
embezzlement, or willful
misconduct that has
resulted or is likely to
result in material harm
to the Company or a
Related Company;
committed or been
indicted for or convicted
of, or pled guilty or no
contest to, any
<PAGE>
misdemeanor (other than
for minor infractions or
traffic violations)
involving fraud, breach
of trust,
misappropriation, or
other similar activity or
otherwise relating to the
Company, or any felony;
or
committed an act of gross
negligence or otherwise
acted with willful
disregard for the
Company's or a Related
Company's best interests
in a manner that has
resulted or is likely to
result in material harm
to the Company or a
Related Company.
If the optionee has a written
employment or other agreement
in effect at the time of his
termination that specifies
"cause" for termination,
"Gross Misconduct" for
purposes of his termination
will refer to "cause" under
the employment or other
agreement, rather than to the
foregoing definition.
Disability For disability, the earlier of
(i) the first anniversary of
the optionee's termination of
employment for disability and
(ii) 90 days after the
optionee no longer has a
disability, where "disability"
means the inability to engage
in any substantial gainful
activity because of any
medically determinable
physical or mental impairment
that can be expected to result
in death or that has lasted or
can be expected to last for a
continuous period of not less
than 12 months, or, if the
Company then maintains long-
term disability insurance, the
date as of which the
individual is eligible for
benefits under that insurance;
or
Death The date 24 months after the
optionee's death.
If exercise is permitted after
termination of service-providing
relationship, the Option will
nevertheless expire as of the date
that the former service provider
violates any covenant not to
compete or other post-employment
covenant in effect between the
Company or a Related Company and
the former employee or other
service provider. In addition, an
optionee who exercises an Option
more than 90 days after termination
of employment with the Company
and/or Eligible Affiliates will
only receive ISO treatment to the
extent the law permits, and becoming
<PAGE>
or remaining an employee
of another related company (that is
not an Eligible Affiliate) or an
independent contractor will not
prevent loss of ISO status because
of the formal termination of
employment.
Nothing in this Plan extends the
term of an Option beyond the tenth
anniversary of its Date of Grant,
nor does anything in this Option
Expiration section make an Option
exercisable that has not otherwise
become exercisable, unless the
Administrator specifies otherwise.
Option Option Agreements (which could be
Agreement certificates) will set
forth the terms of each Option and
will include such terms and
conditions, consistent with the
Plan, as the Administrator may
determine are necessary or
advisable. To the extent the
agreement is inconsistent with the
Plan, the Plan will govern. The
Option Agreements may contain
special rules.
Put and Call The Administrator may provide in
Rights; other Option Agreements or
Restrictions other agreements that the Company
has the right (or
obligation) to purchase outstanding
Options, or the shares received
from exercising an Option, under
certain circumstances, including
termination of service-providing
relationship for any reason or
death and may provide for rights of
first refusal. The Administrator
may distinguish between
unexercisable and exercisable
Options. The Administrator may
provide in Option Agreements that
individuals who receive shares from
exercising an Option may not
transfer such shares without
complying with the agreement's
conditions.
Stock Subject Except as adjusted below under
To Plan Corporate Changes,
the aggregate number of shares
of Common Stock that may be
issued under Options may not
exceed 20% of the shares of
Common Stock (including
preferred that is convertible
into common as though it had
been converted) issued and
outstanding as of the date on
which the Administrator seeks
to make an additional grant
(provided that a decrease in
shares outstanding will not
invalidate any previously
issued Option),
the maximum number of shares
that may be granted under
Options for a single
individual in a calendar year
may not exceed 1,200,000, and
<PAGE>
the aggregate number of shares
of Common Stock that may be
issued under ISOs may not
exceed 3,500,000.
The Common Stock will come from
either authorized but unissued
shares or from previously issued
shares that the Company reacquires,
including shares it purchases on
the open market or holds as
treasury shares. If any Option
expires, is canceled, or terminates
for any other reason, the shares of
Common Stock available under that
Option will again be available for
the granting of new Options (but
will be counted against that
calendar year's limit, if any, for
a given individual). Shares used
as payment for the Exercise Price
or any required withholdings will
be added back to the totals
available for issuance.
No adjustment will be made for a
dividend or other right (except a
stock dividend) for which the
record date precedes the date of
exercise.
The optionee will have no rights of
a stockholder with respect to the
shares of stock subject to an
Option except to the extent that
the Company has issued certificates
for, or otherwise confirmed
ownership of, such shares upon the
exercise of the Option.
The Company will not issue
fractional shares pursuant to the
exercise of an Option, unless the
Administrator determines otherwise,
but the Administrator may, in its
discretion, direct the Company to
make a cash payment in lieu of
fractional shares.
Person Who During the optionee's lifetime and
May Exercise except as provided
under Transfers, Assignments, and
Pledges, only the optionee or his
duly appointed guardian or personal
representative may exercise the
Options. After his death, his
personal representative or any
other person authorized under a
will or under the laws of descent
and distribution may exercise any
then exercisable portion of an
Option. If someone other than the
original recipient seeks to
exercise any portion of an Option,
the Administrator may request such
proof as it may consider necessary
or appropriate of the person's
right to exercise the Option.
Adjustments Subject to any required action by
Upon changes the Company (which it
In Capital agrees to promptly take) or its
stockholders, and subject to
the provisions of applicable
corporate law, if, after the Date
<PAGE>
Stock of Grant of an Option,
the outstanding shares of
Common Stock increase or
decrease or change into or are
exchanged for a different
number or kind of security
because of any
recapitalization,
reclassification, stock split,
reverse stock split,
combination of shares,
exchange of shares, stock
dividend, or other
distribution payable in
capital stock, or
some other increase or
decrease in such Common Stock
occurs without the Company's
receiving consideration
(excluding, unless the
Administrator determines
otherwise, stock repurchases),
the Administrator must make a
proportionate and appropriate
adjustment in the number of shares
of Common Stock underlying each
Option, so that the proportionate
interest of the optionee
immediately following such event
will, to the extent practicable, be
the same as immediately before such
event. (This adjustment does not
apply to Common Stock that the
optionee has already purchased,
which is subject to the adjustments
applicable to Common Stock.)
Unless the Administrator determines
another method would be
appropriate, any such adjustment to
an Option will not change the total
price with respect to shares of
Common Stock underlying the
unexercised portion of the Option
but will include a corresponding
proportionate adjustment in the
Option's Exercise Price. The Board
or other Administrator may take any
actions described in this section
without any requirement to seek
optionee consent.
The Administrator will make a
commensurate change to the maximum
number and kind of shares provided
in the Stock Subject to Plan
section.
All references to numbers of shares
of Common Stock in the Plan and in
any Option grants made on or before
the IPO Effective Date assume that
the Company has 17.5 million shares
of Common Stock outstanding and
thus relate to proportionate
amounts of that level of equity.
After the Company first has at
least 17.5 million shares
outstanding, numbers will not be
adjusted except as otherwise
provided in this Adjustments
section.
Any issue by the Company of any
class of preferred stock, or
securities convertible into shares
of common or preferred
<PAGE>
stock of any class, will not affect, and
no adjustment by reason thereof will
be made with respect to, the number
of shares of Common Stock subject
to any Option or the Exercise Price
except as this Adjustments section
specifically provides. The grant
of an Option under the Plan will
not affect in any way the right or
power of the Company to make
adjustments, reclassifications,
reorganizations or changes of its
capital or business structure, or
to merge or to consolidate, or to
dissolve, liquidate, sell, or
transfer all or any part of its
business or assets.
Related Employees of Eligible Affiliates
Company will be entitled to
Employees participate in the Plan, except as
otherwise designated by
the Board or the Administrator.
"Eligible Affiliate" means each of
the Related Companies, except as
the Administrator otherwise
specifies. For ISO grants,
"Related Company" means any
corporation in an unbroken chain of
corporations including the Company
if, at the time an Option is
granted to a Participant under the
Plan, each corporation (other than
the last corporation in the
unbroken chain) owns stock
possessing 50% or more of the total
combined voting power of all
classes of stock in another
corporation in such chain. Related
Company also includes a single-
member limited liability company
included within the chain described
in the preceding sentence. The
Board or the Administrator may use
a different definition of Related
Company for NQSOs and may include
other forms of entity at the same
level of equity relationship (or
such other level as the Board or
the Administrator specifies).
Legal The Company will not issue any
Compliance shares of Common Stock
under an Option until all
applicable requirements imposed by
Federal and state securities and
other laws, rules, and regulations,
and by any applicable regulatory
agencies or stock exchanges, have
been fully met. To that end, the
Company may require the optionee to
take any reasonable action to
comply with such requirements
before issuing such shares,
including compliance with any
Company black-out periods or
trading restrictions. No provision
in the Plan or action taken under
it authorizes any action that
Federal or state laws otherwise
prohibit.
The Plan is intended to conform to
the extent necessary with all
provisions of the Securities Act of 1933
<PAGE>
("Securities Act") and the
Securities Exchange Act of 1934 and
all regulations and rules the
Securities and Exchange Commission
issues under those laws.
Notwithstanding anything in the
Plan to the contrary, the
Administrator must administer the
Plan, and Options may be granted
and exercised, only in a way that
conforms to such laws, rules, and
regulations. To the extent
permitted by applicable law, the
Plan and any Options will be
treated as amended to the extent
necessary to conform to such laws,
rules, and regulations.
Purchase For Unless a registration statement
Investment under the Securities Act
And Other covers the shares of Common Stock
Restrictions an optionee receives
upon exercising his Option, the
Administrator may require,
at the time of such exercise, that
the optionee agree in writing to
acquire such shares for investment
and not for public resale or
distribution, unless and until the
shares subject to the Option are
registered under the Securities
Act. Unless the shares are
registered under the Securities
Act, the optionee must acknowledge:
that the shares purchased on
exercise of the Option are not
so registered,
that the optionee may not sell
or otherwise transfer the
shares unless
such sale or transfer
complies with all
applicable laws, rules,
and regulations,
including all applicable
Federal and state
securities laws, rules,
and regulations, and
either
the shares have been
registered under the
Securities Act in
connection with the
sale or transfer
thereof, or
counsel satisfactory
to the Company has
issued an opinion
satisfactory to the
Company that the
sale or other
transfer of such
shares is exempt
from registration
under the Securities
Act.
Additionally, the Common Stock,
when issued upon the exercise of an
Option, will be subject to any
other transfer restrictions, rights
of first refusal, rights of
repurchase, and
<PAGE>
voting agreements
set forth in or incorporated by
reference into other applicable
documents, including the Option
Agreements, or the Company's
articles or certificate of
incorporation, by-laws, or
generally applicable stockholders'
agreements.
The Administrator may, in its sole
discretion, take whatever
additional actions it deems
appropriate to comply with such
restrictions and applicable laws,
including placing legends on
certificates and issuing stop-
transfer orders to transfer agents
and registrars.
Tax Withholding The optionee must satisfy all
applicable Federal, state, and
local income and employment tax
withholding requirements before the
Company will deliver stock
certificates or otherwise recognize
ownership upon the exercise of an
Option. The Company may decide to
satisfy the withholding obligations
through additional withholding on
salary or wages. If the Company
does not or cannot withhold from
other compensation, the optionee
must pay the Company, with a
cashier's check or certified check,
the full amounts, if any, required
for withholding. Payment of
withholding obligations is due
before the Company will issue any
shares on exercise or, if the
Administrator so requires, at the
same time as is payment of the
Exercise Price. If the
Administrator so determines, the
optionee may instead satisfy the
withholding obligations by
directing the Company to retain
shares from the Option exercise, by
tendering previously owned shares,
or by attesting to his ownership of
shares (with the distribution of
net shares), or, after an IPO, by
having a broker tender to the
Company cash equal to the
withholding taxes. Without any
requirement to seek an optionee's
consent, the Company may require
the optionee to use one or more
specified brokerage firms to
exercise and to hold shares
received from Options until the
later of two years after exercise
or one year after the Date of
Grant.
Transfers, Unless the Administrator otherwise
Assignments, approves in advance in
And Pledges writing for estate planning or
other purposes, an Option
may not be assigned, pledged, or
otherwise transferred in any way,
whether by operation of law or
otherwise or through any legal or
equitable proceedings (including
bankruptcy), by the optionee to any
person, except by will or by
operation of applicable laws of
descent and distribution. If
necessary to comply with Rule 16b-3,
the optionee may not transfer or
pledge shares of Common
<PAGE>
Stock acquired upon exercise of an
Option until at least six months have
elapsed from (but excluding) the
Date of Grant, unless the
Administrator approves otherwise in
advance in writing. The
Administrator may, in its
discretion, expressly provide that
an optionee may transfer his
Option, without receiving
consideration, to (i) members of
his immediate family (children,
grandchildren, or spouse), (ii)
trusts for the benefit of such
family members, or (iii)
partnerships whose only partners
are such family members.
Amendment or The Board may amend, suspend, or
Termination terminate the Plan at
of Plan and any time, without the consent of
Options the optionees or their
beneficiaries; provided, however,
that such actions are
consistent with this section.
Except as required by law or by the
Substantial Corporate Change
section, the Administrator may not,
without the optionee's or
beneficiary's consent, modify the
terms and conditions of an Option
so as to materially adversely
affect the optionee. No amendment,
suspension, or termination of the
Plan will, without the optionee's
or beneficiary's consent, terminate
or materially adversely affect any
right or obligations under any
outstanding Options, except as
provided in the Substantial
Corporate Change Section.
Privileges of No optionee and no beneficiary or
Stock other person claiming
Ownership under or through such optionee will
have any right, title, or
interest in or to any shares of
Common Stock allocated or reserved
under the Plan or subject to any
Option except as to such shares of
Common Stock, if any, already
issued to such optionee.
Effect on Whether exercising an Option causes
Other Plans the optionee to accrue
or receive additional benefits
under any pension or other plan is
governed solely by the terms of
such other plan.
Limitations on Notwithstanding any other
Liability provisions of the Plan, no
individual acting as a director,
officer, other employee, or agent
of the Company will be liable to
any optionee, former optionee,
spouse, beneficiary, or any other
person for any claim, loss,
liability, or expense incurred in
connection with the Plan, nor will
such individual be personally
liable because of any contract or
other instrument he executes in
such other capacity. The Company
will indemnify and hold harmless
each director, officer, other
employee, or agent of the Company
to whom any duty or power relating
to the administration or
interpretation of the Plan has been
<PAGE>
or will be delegated, against any
cost or expense (including
attorneys' fees) or liability
(including any sum paid in
settlement of a claim with the
Board's approval) arising out of
any act or omission to act
concerning this Plan unless arising
out of such person's own fraud or
bad faith.
No Employment Nothing contained in this Plan
Contract constitutes an employment
contract between the Company and
the optionees. The Plan does not
give any optionee any right to be
retained in the Company's employ,
nor does it enlarge or diminish the
Company's right to end the
optionee's employment or other
relationship with the Company.
Applicable Law The laws of the State of Wisconsin
(other than its choice of law
provisions) govern this Plan and
its interpretation.
Duration of Unless the Board extends the Plan's
Plan term, the Administrator may not grant Options
after June 20, 2010. The Plan will
then terminate but will continue to
govern unexercised and unexpired
Options.
Approval of The Plan must be submitted to
The Plan Company stockholders for
their approval within 12 months
before or after the Board adopts
the Plan to qualify any Options
designated as ISOs for treatment as
such. If the stockholders do not
so approve the Plan, any
outstanding ISOs will be treated as
void and of no effect.
In addition, the Company will
submit the Plan to its public
stockholders on or before the first
meeting of the public stockholders
that occurs at least 12 months
after the Company's IPO.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.19
<SEQUENCE>4
<FILENAME>0004.txt
<TEXT>
LEASE
THIS AGREEMENT made this 30th day of June, 1998,
by and between ROGER D. PANNIER and PAMELA S. PANNIER,
husband and wife, hereinafter called the "Lessor," and
SCHOOL SPECIALTY, INC., a Delaware Corporation,
hereinafter called the "Lessee."
1. LEASED PREMISES. Lessor, in consideration of
the covenants of the said Lessee hereinafter set forth
does by these presence lease to the said Lessee the
following described property situated in Fremont, Dodge
County, Nebraska, to-wit:
A parcel of land in the West Half of the East Half
and in the East Half of the West Half, of Section
15, Township 17 North, Range 8 East of the 6th
P.M., in Dodge County, Nebraska, bounded and
described as follows: Commencing at a point on
the West margin of the Airport Road 1314.4 feet
North of the North margin of Linden Avenue and 80
feet West of the Burlington Railroad right of way;
thence Northerly along the West margin of Airport
Road a distance of 445.6 feet; thence Westerly
parallel with the North margin of Linden Avenue a
distance of 600 feet; thence Southerly parallel
with the West margin of Airport Road a distance of
445.6 feet; thence Easterly parallel with the
North margin of Linden Avenue 600 feet to the
point of beginning, containing 6 acres, more or
less, subject to Airport Road right-of-way and
together with any lands owned by grantors on the
West to the land herein described.
2. IMPROVEMENTS. The leased premises have been
improved with a building with related fixtures which
are included in this lease as a part of the demised
premises.
3. LEASE TERM. The initial lease term shall be
for a period of five (5) years commencing on the 1st
day of July, 1998, and ending on the 30th day of June,
2003. Lessee is granted the option at the expiration
of the original five (5) year term to continue the
lease for an additional five (5) year term. Lessee
shall notify Lessor in writing of its intent to
exercise this option at least one 180 days prior to the
conclusion of the initial term. The rent for the first
extension of the lease will be determined in accordance
with Paragraph 4 of this lease.
<PAGE>
4. RENT. In consideration of the leasing of the
aforedescribed property, Lessee hereby agrees to pay
Lessor as rent for said premises the following:
Initially the monthly rental for the premises
will be $14,700.00, payable in advance on the
first day of each month throughout the term of the
lease. The monthly rental shall be subject to
adjustment each year on July 1st during the term
of the lease, by that percentage, up or down, by
which the Consumer Price Index published by the
bureau of Labor Statistics of the United States
Department of labor changes from the index on the
preceding April 30th. The consumer Price Index
used for the calculation of this adjustment shall
be the index from the City that is the closet
geographically to Fremont, Nebraska and which
publishes the index on a monthly basis. If
publication of the Consumer Price Index shall be
discontinued, the parties shall accept comparable
statistics on the cost of living for the State of
Nebraska, or if there be none, for the City of
Omaha, as they shall be computed and published by
an agency of the United States or by a responsible
financial periodical of recognized authority then
to be selected by the parties, or if the parties
cannot agree upon a selection, by arbitration.
The monthly rental shall be adjusted by a sum
equal to the change in the consumer Price Index
during the twelve (12) month period immediately
preceding each April 30th.
5. LESSEE'S ACCEPTANCE OF PROPERTY. At the
commencement of the lease term, Lessee shall accept the
building, improvements, and any equipment on or in the
leased premises in their existing condition. No
representations, statement, warranties, expressed or
implied, has been made by or on behalf of the Lessor as
to such condition, or as to the use that may be made of
such property except as may be contained in this lease.
In no event shall the Lessor be liable for any defect
in such property or for any limitations on its use
except as may be contained in this lease. The leased
premises are presently zoned industrial pursuant to the
zoning laws of the City of Fremont, Dodge County,
Nebraska. The zoning on the property presently permits
the operation of a printing and publishing plant and
all business associated therewith.
<PAGE>
6. ENVIRONMENTAL WARRANTIES, REPRESENTATIONS & AGREEMENTS.
a. Definitions. The following terms shall
have the following meanings for purposes
of this Paragraph 6.
i. "Costs" shall mean all of the
following:
(1) All costs ("Remedial Costs"),
including, but not limited to,
capital, operating, and maintenance
costs, incurred in connection with
the Remediations of the Property,
whether or not such Remediation is
voluntary, or in connection with
the Remediation of any adjoining or
neighboring property for which
Lessee is alleged or found to be
responsible. "Remedial Costs"
shall include but not be limited to
remedial costs as defined in 42
U.S.C. 9601(24), removal costs as
defined in 42 U.S.C. 9601(25) and
costs of repair of natural resource
damage.
(2) All costs arising out of
claims made by any governmental
authority based on or relating to
an alleged Environmental Condition,
including Remedial Costs.
(3) All costs arising out of
claims made by private parties,
including, but not limited to,
Remedial Costs, claims for
reimbursement or contribution under
CERCLA (as defined in section 1(c)
hereof), or otherwise, claims for
injury to person and claims for
injury to property.
(4) All attorneys' fees and costs
relating to any of the foregoing.
ii. "Environmental Condition" shall
mean with respect to any property
any condition that violates or
fails to comply with any
Environmental Laws or any condition
requiring Remediation under
Environmental Laws, including, but
not limited to, all such
<PAGE>
conditions that exist on such property,
whether or not now known or
knowable and whether or not
currently foreseen by the parties
hereto. Without limitation of the
generality of the foregoing,
"Environmental Condition" shall
include the presence of any
Hazardous Substance and shall
include all of the conditions
described or referred to in the
attached Exhibit B or in the
reports and other documents listed
in the attached Exhibit B.
iii. "Environmental Laws" shall mean all
federal, estate, and local laws,
including statutes, regulations,
ordinances, codes, rules, and other
governmental restrictions and
requirements, relating to the
discharge of air pollutants, water
pollutants, or process waste water
or otherwise relating to pollution,
protection of the environment, or
human health or other related
matters (including any matters
relating to emission, discharge,
release, threatened release,
generation, possession, or
existence of hazardous or toxic
substances, materials, or wastes),
including, but not limited to, the
Federal Solid Waste Disposal Act,
the Federal Clean Air Act, the
Federal Clean Water Act, the
Federal Resource Conservation and
Recovery Act of 1976, and the
Federal Comprehensive Environmental
Response, compensation, and
Liability Act of 1980 ("CERCLA"),
regulations of the Environmental
Protection Agency, regulations of
the Nuclear Regulatory Agency, and
regulations of any state department
of natural resources or state
environmental protection agency,
now or at any time hereafter in
effect, as any of the foregoing may
be amended from time to time.
iv. "Environmental Permits" shall mean
all permits, licenses,
authorizations, registrations, and
other governmental consents
required under applicable
Environmental laws relating to the
use, storage, treatment,
Remediation, and disposal of
Hazardous
<PAGE>
Substances or otherwise
relating to or necessary for
compliance with Environmental Laws.
v. "Hazardous Substance" shall mean
any substance, including, but not
limited to, petroleum products and
by-products, that is defined as a
hazardous or toxic substance or
hazardous or toxic waste under one
or more Environmental Laws or any
substance the generation,
possession, or existing of which is
prohibited or governed by one or
more Environmental Laws.
vi. "Remediation" shall mean
investigation or monitoring of site
conditions, cleanup, containment,
removal, or remediation of
Hazardous Substances, repair of
natural resource damage, and other
action to correct, remediate, or
terminate any Environmental
Condition.
b. Warranty Relating to the Property.
Lessor warrants that (a) no
Environmental Condition exists on or
with respect to the Property will cause
an Environmental Condition to exist on
or with respect to the Property as a
result of spreading, migration, seepage,
or otherwise, and (b no underground
storage tanks are now located on the
Property.
c. Warranty and Agreement Relating to
Lessor's Environmental Compliance.
Lessor warrants and agrees that (a)
Lessor is in compliance with all
applicable Environmental laws with
respect to the Lessor Property, the
Property and Lessor's or prior tenant of
the Lessor's operations on the Property,
(b) Lessor has obtained and is in
compliance with all Environmental
Permits required to be obtained or
complied with by Lessor as of the date
hereof, and Lessor has or will obtain
and comply with all Environmental
Permits required to be obtained or
complied with by Lessor in the future,
and (c) all such Environmental Permits
(other than those to be obtained in the
future) are in full force and effect and
lessor
<PAGE>
has made all appropriate filings
for issuance or renewal of such
Environmental Permits.
d. Release. Lessor releases Lessee,
Lessee's directors, officers,
shareholders, employees, parent
corporation, subsidiaries, and agents,
and the successors and assigns of any of
the foregoing, against any and all
claims (including, but not limited to,
third party claims for personal injury
or injury to property), actions,
administrative proceedings (including
informal proceedings), judgment,
damages, punitive damages, penalties,
fines, costs, liabilities (including
sums reasonably paid in settlement of
claims and including attorneys' fees and
expenses), interest, losses, consultant
fees, and expert fees arising from or
relating to any Environmental Condition
on the Property, which existed as of the
commencement of the term of this Lease
including, but not limited to, all
claims for reimbursement or contribution
under CERCLA.
e. Indemnification. Lessor indemnifies and
holds harmless Lessee, Lessee's
directors, officers, shareholders,
employees, parent corporation,
subsidiaries, and agents, mortgagees of
the Property, and successors and assigns
of any of the foregoing, against any and
all claims (including, but not limited
to, property), actions, administrative
proceedings (including informal
proceedings), judgments, damages,
punitive damages, penalties, fines,
costs, liabilities (including sums
reasonably paid in settlements of claims
and including attorneys' fees and
expenses), interest, losses, consultant
fees and expert fees arising from or
relating to (a) the failure of any
warranty or representation of Lessor
herein to be true, correct, and
complete, (b) the failure of Lessor to
comply with Lessor's agreements in this
section, or (c) any Environmental
Condition on the Property or the Lessor
Property, in the case of each of the
foregoing, including but not limited to
all Costs.
<PAGE>
f. Notice. Each of Lessor and Lessee agree
to promptly provide to the other party
copies of any notices, demands, claims,
inquiries, or any other correspondence
received form any governmental entity or
private party relating to or alleging
any Environmental Condition on the
Property or on the Lessor Property.
g. Survival of Obligations. Lessor's
warranties, representations, and
obligations under this Paragraph 6 shall
survive termination of the term of the
lease.
h. Attorneys' Fees. Lessor shall pay all
attorneys' fees and costs incurred by
Lessee in any action based on this
Paragraph 6.
7. ALTERATIONS. The Lessee shall not have the
right, to make any alterations or improvements to the
building on the leased property that exceed $10,000.00,
unless prior to commencement of any such alterations or
improvements, the Lessee shall have procured the
written consent of the Lessor. If consent is given:
(A) No change or alteration shall at any time be
made which shall impair the structural soundness or
diminish the value of the manufactural building on the
leased property.
(B) All work done in connection with any change
or alteration shall be done in a good and workmanlike
manner and in compliance with the Building and Zoning
laws, and with all other laws, ordinances, orders,
rules, regulations and requirements of all Federal,
State and Municipal Governments, and appropriate
departments, commissions, boards and officers thereof.
(C) Any alteration, addition, or improvements
made by the Lessee shall remain the property of the
Lessor. In addition, in the event Lessee fails to
obtain the prior written permission prior to the
commencement of any alterations, additions,
improvements or changes in the premises, such
alterations, additions or improvements shall become the
property of the Lessor and shall remain on the premises
at the termination of Lessee's tenancy.
8. USE OF LEASED PREMISES. The Lessee may use
and occupy the leased premises for the purpose of a
printing and publishing plant and all business
associated therewith.
<PAGE>
The Lessee shall be entitled to use the premises for
purposes related to printing and publishing
operations and for any other lawful purpose
provided if same does not increase the casualty risk
and cost of insurance to the facility. Further, the
Lessee shall not use nor allow, nor permit the use of
said premises for any unlawful, immoral, or objectional
purposes; nor permit anything to be done which will
create a fire hazard or nuisance; and comply with all
applicable laws, regulations, and directions of
governmental authorities. Lessee shall not permit
anything to be done in or on the leased property which
will in any way violate any governmental laws or
regulations.
9. UTILITIES AND SERVICES. Lessor shall not be
required to furnish Lessee any utilities or services.
Lessee shall be responsible for all gas, electricity,
telephone, water, sewer and any other utilities as may
be required by Lessee. Lessee shall keep said leased
premises free and clear of any lien or encumbrance of
any kind whatsoever created by lessee's negligent act
or omission and shall indemnify the Lessor against any
liability or damages on such account.
10. TAXES. The Lessee shall be responsible for
the real property taxes and assessments upon the leased
property which are due and assessed during the lease
term.
11. INSURANCE.
A. During the term, Lessee, at its own cost and expense, shall:
(1) Keep all buildings and improvements
and equipment on, in or appurtenant to the
demised premises at the commencement of the
term and thereafter erected thereon or
therein, insured against loss or damage by
perils of fire, lightning, wind, hail,
explosion, riot, riot attending a strike,
civil commotion, aircraft, vehicles, smoke,
vandalism and malicious mischief in an amount
sufficient to cover the cost of replacing the
building(s) and improvements (without
deduction for depreciation), exclusive of
foundation supports below the surface of the
ground, and the costs of excavation,
underground pipes, flues, wiring, and drains.
Such replacement value initially shall be
determined to be $1,500,000.00 and shall be
determined from time to time, hereafter, but
not more
<PAGE>
frequently than once in any thirty-
six (36) consecutive calendar months, at the
request of Lessor, by one of the insurers or,
at the option of Lessor, by an appraiser,
architect or contractor who shall be mutually
and reasonably acceptable to Lessor and
Lessee.
(2) Provide and keep in force
comprehensive general public liability
insurance against claims for personal injury,
death or property damage occurring on, in or
about the demised premises or the adjoining,
property and passageways. not less than
single limit coverage in the amount of
$5,000,000.00.
(3) Provide and keep in force such
other insurance and in such amounts as may
from time to time be required by Lessor
against such other insurable hazards as at
the time are commonly insured against in the
case of premises similarly situated.
B. All insurance provided by Lessee as
required by Lessor shall be carried in favor of
Lessor and Lessee, as their respective interest
may appear, and any underlying Lessor, fee owner
or affiliate corporation, trustee or mortgagee
designed by lessor. If requested by Lessor, such
insurance against fire or other casualty shall
include the interest of the holder of any mortgage
on the fee and shall provide that loss, if any,
shall be payable to such holder under a standard
mortgagee clause. Rent insurance and use and
occupancy insurance may be carried in favor of
Lessee but he proceeds thereof are hereby assigned
to lessor to be held by Lessor as security for the
payment of the rent and additional rent hereunder
until restoration of the demised premises. All
such insurance shall be taken in such responsible
companies licensed to do business in the state in
which the demised premises are located. All such
policies shall be non-assessable and shall require
thirty (30) days notice by registered mail to
lessor of any cancellation thereof or change
affecting Lessor's coverage thereunder.
C. Lessee shall procure policies for all
such insurance for periods not less than one year
and shall deliver to Lessor such policies or
certificates thereof with evidence of the payment
of premises thereon, and shall procure renewals
thereof from time to time at least thirty (30)
days before the expiration thereof.
<PAGE>
D. Lessee and Lessor shall cooperate in
connection with the collection of any insurance
moneys that may be due in the event of loss, and
Lessee shall execute and deliver to Lessor such
proofs of loss and other instruments which may be
required for the purpose of obtaining the recovery
of any such insurance moneys. All insurance
policies shall be written with insurance companies
rated A+ or better by Best's Insurance Guide.
12. INDEMNIFICATION. Lessee will indemnify and
save Lessor harmless from and against any and all
claims, actions, damages, liability expenses in
connection with loss of life, personal injury, and/or
damage to property, arising from any act or omission of
Lessee, its agents, family, employees, occupants,
servants, guests or licensees.
13. DUTIES OF LESSEE. The Lessee shall
faithfully perform the following duties:
(A) The Lessee shall be responsible for all
repairs, maintenance, and other upkeep on the
building.
(B) Maintain the occupied and used premises
in a clean and safe condition, and upon
termination of the residency, place premises in at
least as clean a condition, except for ordinary
wear and tear, as when the residency commenced.
(C) Dispose from the facility all wastes,
rubbish, garbage and manure in a clean and safe
manner and in accordance with all governmental
regulations.
(D) Remove the snow and ice from all public
and private areas located on the premises and to
keep all weeds, grass and other vegetation cut and
trimmed on the premises.
(E) Conduct themselves and require other
persons on the premises with its consent to
conduct themselves in a manner that will not
disturb the neighbors' peaceful enjoyment of their
premises.
(F) Lessee, shall at all times during the
term, and at its own cost and expense, keep and
maintain in good order and condition the building
and all improvements on the demised premises and
their full equipment and appurtenances, and make
all repairs thereto and any restorations,
replacements and renewals thereof, structural and non-
<PAGE>
structural, seen and unforeseen, howsoever the
necessity or desirability for repairs may occur
and shall use all reasonable precaution to prevent
waste, damage or injury, except normal and
reasonable wear and tear.
14. NON-COMPLIANCE BY LESSEE. In the event of
the Lessee's non-compliance with any provision of this
lease, the Lessor may give written notice to the Lessee
specifying the acts and omissions constituting the
breach and that the lease agreement will terminate on a
date not less than thirty (30) days after receipt of
the notice if the breach is not remedied in fourteen
(14) days and the rental agreement will then terminate
as provided in that notice. In any event, the Lessor
may terminate the lease agreement if rent is unpaid
when due and the Lessee fails to pay rent within thirty
(30) days after written notice by the Lessor of non-
payment and their intentions to terminate the lease
agreement if the rent is not paid within that period of
time.
15. ENTRY TO PREMISES. The Lessor may enter onto
the premises in order to inspect the premises, or
exhibit the premises to prospective or actual
purchasers, mortgagers, tenants, workmen, or
contractors. Unless it is impractical to do so, the
Lessor shall give the Lessee notice of its intent to
enter and shall enter only at reasonable times.
16. ASSIGNMENT AND SUBLETTING. The Lessee is
permitted to assign this lease or any interest thereon
or let or underlet the said premises, provided,
however, that any assignment or sublet shall not
release the liability of Lessee for the obligations due
under this lease, further, any assignee shall also be
made liable on this lease in addition and in
conjunction with the obligation of Lessee. This lease
shall be fully assignable by the Lessor or its assigns.
17. DESTRUCTION OF PREMISES. In the case of
damage by fire or other major casualty to the building
on the leased property, without the fault of the
Lessee, if the damage is so extensive as to destroy the
usefulness of the premises for the purpose for which
the premises were lease then, either party to this
lease may terminate the lease within thirty (30) days
notice of the event which caused the total destruction
of the leased property. In the event the lease is
canceled by either party, the rent shall be apportioned
to the time of the damage. In all other cases where
the leased property is damaged by fire or other major
casualty without the fault of
<PAGE>
the Lessee, the Lessor shall have the option of repairing
the damage and apportioning the rent until the damage has
been repaired or to terminate the remaining part of the
lease term.
18. CONDEMNATION. If the whole or any part of
the premises hereby leased shall be taken by any public
authority under the power of eminent domain, then the
term of this lease shall cease on the part so taken
from the day the possession of that part shall be
required for any public purpose, and the rent shall be
paid up to that day, and if such portion of the demised
premises is so taken as to destroy the usefulness of
the premises for the purpose for which the premises
were lease then, from that day the Lessee shall have
the right either to terminate this lease and declare
the same null and void or to continue in the possession
of the remainder of the same under the terms herein
provided, except that the rent shall be reduced in
proportion to the amount of the premises taken. All
damages awarded for such taking shall belong to and be
the property of the Lessor whether such damages shall
be awarded as compensation for reduction in value to
the lease-hold or to the fee of the premises herein
leased; provided, however, that the Lessor shall not be
entitled to any portion of the award made to the
Lessee.
19. ATTORNEY FEES. In the event of any
litigation between the parties hereto arising out of
this lease, or the leased premises, the prevailing
party shall be allowed all reasonable attorney fees
expended or incurred in such litigation to be recovered
as part of the cost therein.
20. FUTURE CONSTRUCTION. If during the term of
this lease, Lessor and Lessee agree that Lessor shall
construct and provide any additions to the building,
Lessee agrees to pay Lessor an additional monthly
rental in the sum of 1.25% of the total cost of the
addition. This amount will be paid for the remaining
of the lease and shall further be subject to the
Consumer Price Index annual adjustment. Further, all
other provisions of the lease will apply to the
addition including but not limited to tax obligations,
insurance obligations, repairs an maintenance
obligations of Lessee.
21. NOTICES. Any and all notices or demands
required or permitted to be given hereunder shall be
deemed to be properly service if sent by registered or
certified mail, postage prepaid, addressed as follows:
<PAGE>
TO THE LESSOR: Roger D. Pannier & Pamela S. Pannier
1415 N. Bristolwood Drive
Fremont, NE 68025
TO THE LESSEE: School Specialty, Inc.
A Delaware Corporation
Atten: Daniel P. Spalding
1000 N. Bluemound Drive
P.O. Box 1579
Appleton, WI 54913-1579
or at such other address or addresses as ether party
may hereafter designate in writing to the other. Any
notice of demand so mailed shall be effective for all
purposes at the time of deposit thereof in the United
States mail.
22. ENTIRE AGREEMENT. This agreement contains
the entire agreement between the parties regarding the
subject matter of this lease and can only be amended in
writing between the parties hereto. No representations
by Lessor or Lessee or their agents not included herein
shall be binding on the parties.
23. BINDING EFFECT. This agreement shall be
binding upon the parties hereto, their heirs, legatees,
personal representatives, successor and assigns.
24. GOVERNING LAW. This lease shall be governed
by and construed in accordance with the laws of the
State of Nebraska.
IN WITNESS WHEREOF, Lessor and Lessee have
executed this lease agreement on the year and date
above written.
/s/ Roger D. Pannier /s/ Pamela S. Pannier
- ------------------------ --------------------------
Roger D. Pannier, Lessor Pamela S. Pannier, Lessor
School Specialty, Inc.
A Delaware Corporation, Lessee
BY: /s/ Donald J. Noskowiak
--------------------------------------------
Its Representative (Chief Financial Officer)
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.20
<SEQUENCE>5
<FILENAME>0005.txt
<TEXT>
LEASE AGREEMENT
THIS LEASE AGREEMENT (hereinafter referred to
as the "Lease") is made and entered into this 1st day
of July, 1990, by and between SELECT SERVICE & SUPPLY
CO., INC. (hereinafter referred to as "Lessor") and
SPORTIME (hereinafter referred to as "Lessee").
W I T N E S S E T H T H A T :
FOR AND IN CONSIDERATION of the rents, covenants,
agreements and stipulations hereinafter mentioned,
reserved and contained, to be paid, kept and performed
by Lessee, Lessor has leased and rented, and by these
presents does lease and rent, unto the said Lessee who
hereby agrees to lease from Lessor, upon the terms and
conditions which are hereinafter contained, the
property hereinafter described.
1. Description of Premises. The property leased
hereunder by Lessor to Lessee is that certain real
property described on Exhibit "A" attached hereto
(hereinafter referred to as the "Property"), together
with (i) an office-warehouse currently existing thereon
(hereinafter the Property as improved referred to as
the "Premises"), and (ii) all easements running in
favor of Lessor with respect to the Property, including
specifically any and all easements for ingress and
egress, parking easements and utility easements for the
benefit of the Property.
2. Term. The term of this Lease (the "Lease
Term") shall be for a period of fifteen (15) years
commencing July 10, 1990 (the "Commencement Date").
The Lease Term shall commence upon the Commencement
Date. If the Commencement Date is any day other than
the first day of a calendar month, the first Lease Year
shall be the period of time from the Commencement Date
until the end of the month in which said Commencement
Date shall occur plus twelve (12) calendar months.
Each Lease Year thereafter shall be a successive period
of twelve (12) months.
At any time during the Lease Term, and upon
eighteen (18) months' advance written notice to Lessee,
Lessor can terminate the Lease. If so terminated, all
financial obligations of Lessee as set forth herein
shall be prorated based on such termination date, and
after such termination date neither Lessor nor Lessee
shall have any further rights or obligations hereunder.
3. Rental. For each of the first five (5) Lease
Years of the Lease Term, Lessee shall pay annual rent
to Lessor in the amount of Two Hundred Forty-Three
Thousand Two Hundred Seventy-Six and 60/100 Dollars
($243,276.60) ("Rent") in equal monthly installments of
Twenty Thousand Two Hundred Seventy-Three and 5/100
Dollars ($20,273.05) each. Monthly installments of
Rent shall be paid in advance on the first day of each
calendar month, without demand, deduction or set off.
Rent for any partial calendar month during the term
hereof shall be prorated on a per diem basis.
For each successive five (5) Lease Year
period thereafter, the Rent shall be equal to the Rent
for the immediately preceding Lease Year of the Lease
Term multiplied by a fraction,
<PAGE>
the denominator of which is the "All Items" portion of
the "Consumer Price Index for All Urban Consumers:
U.S. City Average" (1982-84=100), published by the
Bureau of Labor Statistics of the United States
Department of Labor, applicable on the date of this
Lease (or for any subsequent five year
period, the first day of such previous five year
period), and the numerator of which is the index number
for the first month of said successive five year lease
period. In the event the Consumer Price Index of the
Bureau of Labor Statistics of the United States
Department of Labor is discontinued, Lessor shall
select another index published by a department or
agency of the United States Government to be
substituted for the prior index, with any appropriate
adjustment required because of the predecessor index.
As additional rent, lessee shall pay the
taxes and insurance provided for in Paragraphs 4, 5 and
6 below. Sums other than Rent are designated as "Rent"
or "additional rent" hereunder solely for the purpose
of enabling Lessor to enforce its rights hereunder.
Such sums shall not be deemed Rent for purposes of
computing taxes or for governmental regulations
thereon.
4. Taxes. Lessee covenants and agrees to pay any
and all sales or use taxes impose by any governmental
authority relative to the direct activities of the
Lessee on the Premises. Lessee further covenants and
agrees to cause to be paid any and all ad valorem real
estate taxes assessed by any governmental authority
against the Premises and against any personalty owned
by Lessee on the Premises. It being the intention of
Lessor and Lessee that all such taxes incident to the
Premises and the business conducted thereon be the sole
responsibility of Lessee. Any ad valorem taxes
assessed against the Premises for any part of a year in
which this Lease commences or expires shall be prorated
as between the parties.
5. Damages, Accidents, Liability, Insurance, Etc.
Lessee will, at its own expense, furnish for the joint
benefit of Lessor and Lessee, public liability and
property damage insurance with minimum limits in the
amount reasonably necessary to protect Lessor, Lessee
and the Premises. It is further understood that in all
events Lessee will indemnify and save harmless Lessor
from and against any and all loss, liability, damages
and judgments for injuries or accidents to persons or
property (including to Lessor) of any nature and
howsoever occurring on or about the Premises during the
initial term of this Lease or any extended periods
thereof and whether or not the same shall be covered
adequately by any insurance.
Lessee agrees to deliver to Lessor on the
Commencement Date and on the renewal date of such
policy, the usual certificates of the insurance carrier
certifying that such insurance is in force, but the
obligation to lessor shall not be limited to the amount
of such insurance. There shall also be a clause in the
insurance policies requiring that the policies will not
be cancelled without Lessor receiving thirty (30) days
prior written notice.
6. Reconstruction or Payment. Lessee agrees that
it will maintain fire and extended coverage insurance
with vandalism and malicious mischief and such other
coverages as are reasonably requested by Lessor
covering the Premises, which insurance shall be with an
insurance company or companies authorized to do
business in the State of Georgia, in an amount not less
than 90% of the full insurable value of the building
and other improvements on said leased Premises, and in
any event not less than an amount sufficient to prevent
the insured from
<PAGE>
being a co-insurer under any applicable co-insurance
clause, and to keep such insurance in full force
and effect for and during the time any buildings and
improvements are located on the Premises during the
term of this Lease. For purposes hereof, "full
insurable value" shall mean the replacement cost of
the improvements without allowance for depreciation
but excluding footings, foundations and other portions
of improvements which are not insurable.
In the event that the improvements on the
Premises shall be damaged or destroyed so as to render
the Premises unfit for Lessee's continued occupation,
Lessor shall have the following two options: First,
lessor may elect to repair or rebuild the damaged or
destroyed improvements, and in the event Lessor elects
this option, it shall be entitled to the usage of the
proceeds from the aforesaid insurance for such
purposes. Second, lessor may elect not to repair or
rebuild the damaged or destroyed improvements but in
lieu thereof to terminate this Lease and if so
terminated any and all insurance proceeds shall be paid
to Lessor. Lessor shall notify Lessee in writing
within thirty (30) days after the damage or destruction
of the Premises which of the above two options it
elects. If Lessor elects to restore the Premises, it
shall commence the restoration promptly and shall
continue said restoration with reasonable haste and
diligence and shall complete same to the reasonable
satisfaction of Lessee within one hundred eighty (180)
days of said damage or destruction.
Lessee shall remain liable for the monthly
rentals during any period of restoration of the
Premises or during any of the various time periods
during which Lessor is permitted to elect the options
are herein set forth, but to the extent rental
insurance is payable to Lessor during these periods,
the rent payable by Lessee shall be abated to the
extent of the rental insurance proceeds so received by
Lessor. Upon the completion of such restoration and/or
ceasing of payment of any rental insurance proceeds,
then the full rental shall commence and the term of the
Lease Agreement shall be extended by appropriate Lease
Addendum to properly reflect any period of rental
abatement.
Lessee agrees that it will carry fire and
extended coverage insurance with vandalism and
malicious mischief covering all of its personal
property, improvements and equipment within the
Premises.
Lessor and Lessee hereby release each other
and anyone claiming through or under the other by way
of subrogation or otherwise from any and all liability
for any loss of or damage to property, whether or not
caused by the negligence or fault of the other party
caused by a casualty to the Premises or to the
property. In addition, Lessee shall cause the
insurance policy carried by it insuring the Premises or
the contents thereof to be written to provide that the
insurer waives all rights of recovery by way of
subrogation against Lessor in connection with any loss
or damage covered by the policy. Furthermore, Lessor
and Lessee agree to indemnify and hold each other
harmless from and against any and all claims, damages
or causes of action for damages brought on account of
injury to any person or persons or property, or loss of
life, arising out of the use, operation or maintenance
of the Property and the Premises.
7. Materialman's Lien. Lessee agrees to keep the
Premises and all parts thereof at all times free of
materialman's liens and other liens for labor,
services, supplies, equipment or material purchased or
procured, directly or indirectly, by or for Lessee.
Should any mechanics',
<PAGE>
materialman's or other liens be filed against the
Premises by reason of the acts of Lessee, Lessee shall
cause the lien to be cancelled and discharged of record
by bond or otherwise within (30) days of receiving actual
notice of such lien.
8. Utilities. Lessee is to pay all bills for
electricity, gas, fuel, water and other utilities used
by Lessee on or for the Premises during the original or
any extended term of this Lease.
9. Repairs. All non-structural repairs to the
Premises and the improvements thereon and the repair or
replacement of the roof of the Premises shall be
promptly made by Lessee so as to maintain same in good
order and appearance at all times during the term of
this Lease. Lessee shall also keep the Premises clean
and free from debris on a daily basis. Lessor's
maintenance obligations shall be limited solely to the
repair and maintenance of the foundation and exterior
walls of the Premises.
10. Alterations or Improvements. Lessee shall
not make material changes or structural alterations to
the Premises without first obtaining the written
consent of Lessor.
11. Delivery at End of Lease. Lessee agrees to
deliver to Lessor, or Lessors agent or assigns, the
Premises at the expiration or earlier termination of
this Lease, with the keys of same, cleared of all
persons and property not belonging to Lessor, in the
same good order and condition as the Premises were
received by Lessee, and to make good all damage to the
Premises, ordinary wear and tear and damage by casualty
or condemnation, excepted. No demand or notice of such
delivery shall be necessary.
12. Right of Entry. Lessor reserves the right
during the term of this Lease to enter the Premises at
reasonable hours to show the same or inspect the same.
13. Assignment and Subletting. Lessee shall not
assign this lease or any interest therein nor sublease
the Premises or any part thereof or any right or
privilege appurtenant thereto, nor permit the occupancy
or use of any part thereof by any other person without
the prior written consent of the Lessor Consent to
such assignment or sublease shall be in Lessor's sole
discretion.
14. Default of Rent, Etc. All covenants and
agreements herein made and obligations assumed are to
be construed also as conditions, and these presents are
upon the express condition that if Lessee should (i)
fail to pay when due any one of the aforesaid rent
installments and the said failure to pay shall continue
for ten (10) days after receipt of written notice to
Lessee by Lessor of such failure to pay, or (ii) fail
to perform or observe any of the other covenants,
agreements or obligations herein made or assumed by
Lessee and Lessee shall fail to cure such default
matter within thirty (30) days after receipt of written
notice to Lessee by Lessor of such default, then and
thenceforth, in any of the said events (hereinafter
referred to as an "event of default"), this Lease may
be forfeited and thereby become null and void, at the
option of Lessor. Upon an event of default, Lessor may
immediately re-enter the Premises or any part thereof
in the name of the whole, and remove therefrom all
goods and chattels not thereto properly belonging, and
expel Lessee and all other persons who may be in
possession of the Premises, and Lessor shall
thereafter be entitled to recover of Lessee the annual
rental herein reserved for
<PAGE>
the remaining portion of the initial term or any extended
term (should this Lease have been renewed for such term).
Lessor shall not be liable to Lessee in the event of
reletting for any larger amount of rent which Lessor
is able to procure for said unexpired portion of the
initial term or an extended term.
15. Right to Terminate Not Exclusive. The right
of Lessor to terminate this Lease as herein set forth
is in addition to and not in exhaustion of such other
rights that Lessor has or causes of action that may
accrue to lessor because of Lessee's failure to
fulfill, perform or observe the obligations, agreements
or covenants of this Lease Agreement and the exercise
or pursuit by Lessor of any of the rights or causes of
action that Lessor might otherwise have.
16. Insolvency or Bankruptcy. In the event of
the insolvency or bankruptcy of Lessee or the filing of
any petition under the Bankruptcy Act, voluntarily or
involuntarily, and such bankruptcy proceeding is not
stayed within ninety (90) days of the filing of such
petition, or in the event of a partial or general
assignment for the benefit of a creditor, or creditors,
or in the event any other federal or state insolvency
proceeding is commenced against or by Lessee and not
stayed within ninety (90) days of filing, then Lessor
shall have the right and privilege to either (i)
immediately terminate this Lease by thirty (30) days'
written notice or (ii) re-enter into possession of the
Premises and hold Lessee liable for the difference, if
any, between the minimum annual rental reserved for the
remaining portion of the initial term or any extended
term (should this Lease have been renewed for such
term) and any rental received by Lessor upon the
reletting of the Premises. Lessor shall not be liable
to Lessee in the event of reletting for any larger
amount of rent which Lessor is able to procure for said
unexpired portion of the initial term or any extended
term. Lessor agrees, in such event, to make a good
faith effort to procure another tenant for the
unexpired portion of the term.
17. Lawful and Moral Purposes. Lessee covenants
that the Premises shall, during the term of this Lease,
be used only and exclusively for lawful and moral
purposes, and no part of the Premises shall be used in
any manner whatsoever for any purpose in violation of
the laws of the United States or the State of Georgia
or the ordinances and laws of the County in which the
Premises is located. Lessee covenants that it shall
save and hold Lessor harmless against any violations.
18. Subordination. Lessee agrees that this Lease
shall be subordinate to any deeds to secure debt that
may hereafter be placed upon the Premises, to any and
all advances made or to be made under them, to the
interest and all obligations secured by them and to all
renewals, replacements and extensions of them.
19. Relationship of Parties. It is understood
and agreed that the relationship of the parties hereto
is strictly that of landlord and tenant and that Lessor
has no ownership in Lessee's enterprise and that this
lease shall not be construed as a joint venture or
partnership. Lessee is not and shall not be deemed to
be an agent or representative of Lessor.
20. Quiet Possession. Lessor hereby covenants
that if Lessee shall keep and perform all of the
covenants of this Lease on the part of Lessee to be
performed, Lessor will keep Lessee in the quiet and
peaceful possession of the Premises.
<PAGE>
21. Nuisance. Lessee agrees not to create or
allow any nuisance to exist on the Premises and to
abate any nuisance that may arise, promptly and free of
expense to Lessor.
22. Waiver of Breach. It is hereby covenanted
and agreed that no waiver of a breach of any of the
covenants of this Lease shall be construed to be a
waiver of any succeeding breach of the same or any
other covenant.
23. Covenants Run with Land, Etc. It is hereby
covenanted and agreed between the parties hereto that
all covenants, conditions, agreements, and undertakings
in this Lease shall be taken, deemed and treated as
covenants running with the land and shall extend to and
be binding on the respective successors and assigns of
the respective parties hereto (including any sublessee
of Lessee), the same as if they were in every case
named and expressed.
24. Attorney's Fees. Lessee covenants and agrees
to pay and to indemnify Lessor against all reasonable
legal costs and charges, including counsel fees,
lawfully and reasonably incurred in obtaining
possession of the Premises after default by Lessee or
upon default by Lessee in payment of any rent reserved
herein.
Either Lessor or Lessee shall pay reasonable
attorney's fees to the other party's attorney in the
event it becomes necessary for the nondefaulting party
to employ an attorney to force the defaulting party to
comply with any of the other covenants, obligations or
conditions imposed by this Lease on the respective
parties. If a final court decision is to the effect
that the party charged is not in violation or default,
then, in that event, such party shall not be required
to pay attorney's fees incurred by the charging party.
25. Holding Over. It is mutually understood and
agreed that in the event lessee should hold over after
the termination of this Lease, either by expiration of
the term herein stated or otherwise, such holding over
shall not be construed as a holding over from month to
month, year to year, or term of years, or for a
periodic term of any kind, but such holding over shall
be from day to day and solely at the will of Lessor.
26. Notices. All notices to be given to either
party by the other shall be by personal delivery,
overnight recognized delivery service or by certified
or registered mail, return receipt requested, whether
or not it is specifically designated as such in this
Lease and shall be deemed to be given, delivered or
received when received if by personal delivery or
overnight recognized delivery service, or when same are
deposited in the United States mail, postage prepaid
and properly addressed to the respective party if by
certified or registered mail. All notices to be given
to lessor shall by sent to the following addressed as
follows:
Larry Joseph & Peter Savitz Partners
One Sportime Way
Atlanta, GA 30340
<PAGE>
All notices to be given to Lessee shall be sent to the
following addressed as follows:
Select Service & Supply Co., Inc.
One Sportime Way
Atlanta, GA 30340
27. Lessor's Self-Help. In the event Lessee
shall fail at any time to perform any of its
obligations hereunder, including without limitation,
that of restoration, repairs, insurance and taxes,
lessor shall have the right but not the obligation to
make such payments and perform such action as Lessee
shall have failed to pay or do, and all costs, together
with interest at the rate of twelve (12%) percent per
annum, shall be due and payable to Lessor, or its
assigns, on the next rent payment due date.
28. Condemnation. In the event all of the
Premises or such portion thereof as will make the
Premises unsuitable for Lessee's operation shall be
condemned by any legally constituted authority for any
public use or purpose, then in either of said events,
the term hereby granted shall cease, at the option of
Lessee on thirty (30) days' written notice, from the
time when possession thereof is taken by said public
authority, and rental shall be accounted for as between
Lessor and Lessee as of that date. Such termination,
however, shall be without prejudice to the rights of
either Lessor or Lessee, or both, to recover
compensation and damage caused by condemnation from the
condemnor. It is further understood and agreed that
neither Lessee nor Lessor shall have any rights in any
awards made to the other by a condemnation authority.
In the event less than all of the Premises
are taken or condemned for a public or quasi-public use
and the Premises not taken may be made reasonably
suitable for Lessee's operation, this Lease will not
terminate. Lessor shall, in such event, promptly
commence and diligently complete the repair and
restoration of the Premises so that upon completion,
the Premises will constitute a complete architectural
unit with an appearance, character and commercial value
as nearly as possibly equal to the value of the
Premises immediately prior to the taking; provided,
however, Lessor shall have no obligation to make such
repair and restoration if the estimated cost of such
exceeds the condemnation proceeds received by Lessor.
Rent shall abate during any period of
restoration after a condemnation in the event Lessee
can not operate in the Premises during the restoration
period.
29. Miscellaneous. The captions in this Lease
are for convenience only and shall not in any way limit
or be deemed to construe or interpret the terms and
provisions hereof.
Time is of the essence of this Lease and of
all provisions hereof, except in respect to the
delivery of possession of the Premises at the
commencement of the term hereof.
This Lease shall be construed and enforced in
accordance with the laws of the State of Georgia.
This Lease may be executed in several
counterparts, each of which shall be an original and
all collectively shall constitute one lease.
<PAGE>
30. Successors. All the terms, covenants and
conditions hereof shall be binding upon and inure to
the benefit of the heirs, executors, administrators,
successors and assigns of the parties hereto, provided
that nothing in this Section shall be deemed to permit
any assignment, subletting, occupancy or use contrary
to the provisions of Section 16.
IN WITNESS WHEREOF, Lessor has executed this Lease
and Lessee has caused this Lease to be executed on its
behalf and through its duly authorized officers, all as
of the day and year first above written.
LESSOR:
SELECT SERVICE & SUPPLY CO., INC.
By: /s/ Peter Savitz
------------------------
Its: Vice President
Attest: /s/ Peter Savitz
--------------------
Its: Secretary
LESSEE:
LARRY JOSEPH AND PETER SAVITZ PARTNERS
By: /s/ Peter Savitz (SEAL)
----------------------------
Its: Partner
<PAGE>
EXHIBIT "A"
LEGAL DESCRIPTION
SPORTIME PARCEL
All that tract or parcel of land lying and being in
Land Lot 247, 6th District, Gwinnett County, Georgia
and being more particularly described as follows:
To find the TRUE POINT OF BEGINNING, commence at 1" rod
found on the southwesterly right-of-way line of
Pleasantdale Road (25' from centerline): said point
being located northwesterly a distance of 431.4 feet
along said southwesterly right-of-way line from its
point of intersection with the northwesterly right-of-
way line of Pleasantdale Road (50'R/W): said
intersection point being the northwest corner of a four-
way street intersection where Pleasantdale Road Makes
an abrupt angle of approximately 90 degrees; thence
South 59 degrees 17 minutes 56 seconds West a distance
of 13.51 feet to a point of the proposed right-of-way
line of Pleasantdale Road (40.00 feet from centerline),
said Point being the TRUE POINT OF BEGINNING; thence
South 59 degrees 17 minutes 56 seconds West a distance
of 289.38 feet to a 1/2" rebar found; thence South 59
degrees 46 minutes 24 seconds West a distance of 200.16
feet to a tie rod found; thence South 59 degrees 19
minutes 09 seconds West a distance of 25.38 feet of an
iron pin set; thence North 31 degrees 06 minutes 13
seconds West a distance of 434.00 feet to a iron pin
set; thence North 59 degrees 30 minutes 20 seconds East
a distance of 380.72 feet to an iron pin set; thence
10.39 feet along an arc of a curve to the right having
a radius of 100.00 feet; said curve being subtended by
a chord bearing and distance of North 62 degrees 29
minutes 00 seconds East 10.39 feet to an iron pin set;
thence North 65 degrees 27 minutes 40 seconds East a
distance of 101.62 feet to an iron pin set; thence
24.71 feet along an arc of a curve to the left having a
radius of 40.00 feet,; said curve being subtended by a
chord bearing and distance of North 47 degrees 45
minutes 49 seconds East 24.32 feet to an iron pin set
on the proposed right-of-way line of Pleasantdale Road
(80'R/W); thence along said right-of-way line South 30
degrees 58 minutes 13 seconds East a distance of 427.67
feet to the TRUE POINT OF BEGINNING, said tract
containing 5.1200 acres of land in accordance with "As-
Built Survey" for Sportime by Travis Pruitt &
Associates; dated May 30, 1990; last revised June 18,
1990.
<PAGE>
Attachment B
ENCUMBRANCES
Deed to Secure Debt and Security Agreement dated July
10, 1990 between Larry Joseph and Peter Savitz Partners
and Wachovia Bank, N.A., successor by merger to
Wachovia Bank of Georgia, N.A. (formerly known as The
First National Bank of Atlanta)
Assignment of Leases and Rents dated July 10, 1990 from
Larry Joseph and Peter Savitz Partners to Wachovia
Bank, N.A., successor by merger to Wachovia Bank of
Georgia, N.A. (formerly known as The First National
Bank of Atlanta)
<PAGE>
THIS FIRST AMENDMENT OF LEASE (this "Amendment")
is made and entered into as of April 15, 1996, by and
between LARRY JOSEPH AND PETER SAVITZ PARTNERS, a
Georgia general partnership, as "Lessor", and SELECT
SERVICE & SUPPLY CO., INC., a Georgia corporation, as
"Lessee".
BACKGROUND STATEMENT
Lessor and Lessee are parties to that certain
Lease Agreement dated July 1, 1990 (the "Lease")
relating to certain premises originally containing
57,613 square feet located on One Sportime Way,
Norcross, Gwinnett County, Georgia 30340 (the
"Premises"). As a result of scrivener's errors,
"Lessor" is identified on page 1 of the Lease as Select
Service & Supply Co., Inc., in paragraph 26 of the
Lease as Larry Joseph & Peter Savitz Partners, and on
the signature page as Select Service & Supply Co.,
Inc., while "Lessee" is identified on page 1 of the
Lease as Sportime, in paragraph 26 of the Lease as
Select Service & Supply Co., Inc., and on the signature
page as Larry Joseph & Peter Savitz Partners. Lessor
has recently completed the construction of a 19,300
square foot addition (the "Addition") to the Premises
and Lessee has agreed to lease the Addition. Lessor
and Lessee have agreed to amend the Lease to correct
the above described scrivener's errors and to include
the Addition as part of the Premises and are entering
into this Amendment to evidence their agreement.
AGREEMENT
FOR AND IN CONSIDERATION of the promises and
covenants contained herein, and for Ten and No/100
Dollars ($10.00) and other good and valuable
consideration, the receipt and sufficiency of which is
hereby acknowledged by each of the parties hereto, the
parties agree as follows:
1. The Lease as amended hereby shall remain in
full force and effect.
2. To correct the scrivener's errors in the
Lease that describe the parties, the Lease is amended
by deleting in its entirety the first paragraph of the
Lease and substituting in lieu thereof the following:
"THIS LEASE AGREEMENT (hereinafter referred to as
the "Lease") is made and entered into this 1st day
of July, 1990, by and between LARRY JOSEPH AND
PETER SAVITZ PARTNERS (hereinafter referred to as
"Lessor") and SELECT SERVICE & SUPPLY CO., INC.
(hereinafter referred to as "Lessee")."
3. ** purpose of adding the
Addition to the Premises, paragraph 1 of the Lease is
** the following sentence to the end
thereof:
**
include that certain 19,300 square foot addition
completed in the first quarter of **
Lessor and Lessee acknowledge that the Premises now
contain, and all references in this Lease to the
"Premises" shall include, 76.913 square feet, being the
original 57,613 square feet and the new 19,300 square
foot addition."
[**original text illegible]
<PAGE>
4. For the purpose of amending the Lease Term,
the first paragraph of paragraph 2 of the Lease is
hereby deleted in its entirety replaced with the
following:
"The term of this Lease (the "Lease Term") shall
continue for a period of fifteen (15) years,
commencing on April 15, 1996 (the "Commencement
Date"), comprised of three (3) successive five (5)
year periods, each of which is herein referred to
as a "five (5) Lease Year period". Each lease
Year thereafter shall be a successive period of
twelve (12) months."
5. For the purpose of amending the Rental, the
first paragraph of paragraph 3 of the Lease is hereby
deleted in its entirety and replaced with the
following:
"For each of the Lease Years in the first five (5)
Lease Year period, Lessee shall pay annual rent to
Lessor in the amount of THREE HUNDRED FIFTEEN
THOUSAND THREE HUNDRED FORTY-THREE AND 30/100
DOLLARS ($315,343.30) ("Rent") in equal monthly
installments of TWENTY-SIX THOUSAND TWO HUNDRED
SEVENTY-EIGHT AND 61/100 DOLLARS ($26,278.61)
each. Monthly installments of Rent shall be paid
in advance on the first day of each calendar
month, without demand, deduction or setoff. Rent
for April 1996 shall be paid on the Commencement
Date. Rent for any partial calendar month during
the term hereof, including, without limitation,
April 1996, shall by prorated on a per diem
basis."
6. Except as herein expressly modified or
amended, all the terms and conditions of the Lease are
hereby ratified, affirmed, and approved and remain in
full force and effect, as of the date hereof. The
parties have entered into this Amendment to clarify the
rights and obligations of the parties hereto. This
Amendment shall be binding upon and inure to the
benefit of Lessor and Lessee and their respective
successors and assigns, whether voluntary by act of the
parties or involuntary by operation of law.
IN WITNESS WHEREOF the Lessor and Lessee have
executed this Amendment under seal as of the day and
year first above written.
LESSOR:
LARRY JOSEPH AND PETER SAVITZ
PARTNERS, a Georgia general partnership
By: /s/ Lawrence A. Joseph (SEAL)
-----------------------------------
Lawrence A. Joseph, General Partner
By: /s/ Peter S. Savitz (SEAL)
---------------------------------
Peter S. Savitz, General Partner
<PAGE>
SUBLEASE AGREEMENT
THIS SUBLEASE AGREEMENT (the "Sublease") is made
and entered into this 7th day of January, 1998, by and
between SELECT SERVICE & SUPPLY CO., INC., a Georgia
corporation ("Sublessor"), and GENESIS DIRECT SIX, LLC,
a Georgia limited liability company ("Sublessee").
R E C I T A L S
A. Larry Joseph and Peter Savitz Partners, a
Georgia general partnership ("Master Lessor"), as
lessor, and Sublessor, as lessee, are lessor and lessee
respectively, under that certain Lease Agreement dated
July 1, 1990 (the "Original Lease"), as amended by that
certain First Amendment to Lease (the `First
Amendment") dated April 15, 1996 (collectively, the
"Master Lease"), as affected by that certain
Subordination, Non-Disturbance and Attornment Agreement
dated April 24, 1996 (the "Subordination Agreement",
among Master Lessor, Sublessor and Wachovia Bank of
Georgia, N.A. ("Lender"), and as further affected by
that certain Estoppel Certificate dated April 15, 1996,
(the "Estoppel Certificate") given by Sublessor in
favor of Lender, as all of the foregoing may be amended
from time to tune, relating to certain unproved real
property located at One Sportime Way, Norcross, Georgia
30340 (the "Premises"). A true, complete and correct
copy of the Master Lease is attached to this Sublease
as Exhibit A and, unless otherwise provided herein, is
incorporated herein by this reference.
B. Sublessor desires to sublease to Sublessee,
and Sublessee desires to sublease from Sublessor, the
Premises, subject to the terms and conditions
hereinafter set forth.
A G R E E M E N T
NOW, THEREFORE, in consideration of the sum of TEN
AND NO/100 DOLLARS ($10.00) each to the other paid, the
mutual covenants and agreements set forth herein, and
other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Sublessor
and Sublessee agree as follows.
1. Recitals Incorporated. The Recitals set
forth above are hereby incorporated within and made an
integral part of this Sublease.
2. Demise: Incorporation of Master Lease.
(a) Sublessor agrees to lease to Sublessee,
and Sublessee agrees to lease from Sublessor, the
Premises, subject to the terms and conditions of this
Sublease.
(b) Subject to the provisions hereof, this
Sublease shall be deemed to contain the same covenants,
agreements, conditions, definitions, terms and
provisions as are contained in the Master Lease,
mutatis mutandis (the necessary changes being made to
reflect the fact that the Sublessor shall be deemed
"Lessor" and Sublessee shall be deemed "Lessee." Except
as otherwise provided herein, Sublessee shall have all
of the rights and assumes all of the obligations of
Sublessor under the Master Lease with respect to the
Premises; provided, however that any matter requiring
the lessee under the Master Lease to procure the
consent of the lessor
<PAGE>
under the Master Lease shall
require the consent of both Master Lessor and Sublessor
(and the consent of Lender if Lender's consent is
required under the Subordination Agreement or the
Estoppel Certificate) notwithstanding the foregoing,
the following provisions of the Master Lease are
incorporated by reference into this Sublease: Sections
2, 3 and 26 of the Original Lease and Section 4 of the
First Amendment.
(c) This Sublease is subject and subordinate
to the Master Lease and to any amendment to the Master
Lease hereafter made between Master Lessor and
Sublessor, provided any such amendment will not
materially adversely affect the use by Lessee of the
Premises in accordance with this Sublease, materially
increase the obligations of Sublessee or materially
decrease its rights under this Sublease, alter the
term, or increase the Rent (as defined herein) or
additional rent required to be paid by Sublessor under
the terms of the this Sublease. This Sublease shall
automatically terminate, if it has not sooner expired
or been terminated in accordance with the provisions
hereof, on the expiration or earlier termination of the
Master Lease, provided, however, any liability of
Lessor to Lessee for termination caused by Lessor's
default or vice versa shall not be discharged by reason
of such termination. Sublessee agrees to comply fully
at all times with the Master Lease, as though Sublessee
is the lessee under the Master Lease, except that
Sublessee shall not be required to comply with those
provisions of the Master Lease which require Sublessor
to make monetary payments of any type to the Master
Lessor; provided, however, that Sublessee shall be
required to make all payments to Sublessor required
pursuant to this Sublease. Sublessee further
acknowledges and agrees that any and all maintenance,
services, utilities and similar matters and all
insurance, indemnity and tax obligations, however
designated, required to be provided or performed with
respect to the Premises or otherwise pursuant to the
Master Lease by or on behalf of the lessee under the
Master Lease (and, by incorporation herein, this
Sublease) shall be performed or provided by or on
behalf of the Sublessee, and Sublessor shall have no
obligation with respect thereto or liability whatsoever
with respect to Sublessor's or Master Lessor's failure
to perform or provide same.
3. Term. The term of this Sublease will
commence as of the date hereof (the "Commencement
Date") and continue until and expire on the date which
is one (1) year from the Commencement Date (the
"Termination Date").
4. Rent: Additional Rent.
(a) Sublessee covenants and agrees to pay to
Sublessor as Rent for the Premises during the term of
this Sublease an amount equal to the Rent payable by
Sublessor to Master Lessor under the Master Lease,
payable in equal monthly installments, in advance, on
the first day of each and every month during the term
of this Sublease, without notice, demand, offset, or
counterclaim. The parties acknowledge and agree that
Sublessor shall as of the Commencement Date hereof
tender to Sublessee all portions of the Premises.
Sublessee and Sublessor agree that the rent payable
during the term of this Sublease is $315,343.30 per
annum, payable in installments of $26,278.61 per month
(the "Rent").
(b) Sublessee further covenants and agrees to pay
to Sublessor, as additional rent, without notice,
demand, offset, or counterclaim, any and all payments
owing with regard to operating and maintenance
expenses, real estate taxes, and other costs or sums to
the extent payable by Sublessor under the Master Lease
with respect to or attributable to the Premises. Any
<PAGE>
and all statements, billings and calculations of such
amounts as prepared or submitted by or an behalf of
Master Lessor shall be binding upon Sublessee to the
extent Sublessor is bound under the Master Lease. All
payments shall be due within 15 days of each invoice
therefore by Sublessor (which invoice should be
accompanied by the corresponding invoice from Master
Lessor to Sublessor for such amount). It is the
intention of the parties to this Sublease that all
charges with respect to or attributable to the Premises
or Sublessee's use or occupancy of same shall be passed
through to Sublessee, and Sublessee covenants and
agrees to pay same to Sublessor accordingly.
Sublessee's obligations hereunder shall survive the
expiration or earlier termination of this Sublease.
(c) Sublessee shall pay interest at the rate of
twelve percent (12%) per annum on each payment of Rent
and additional rent received by Sublessor more than
five (5) business days after such payment is due,
accrued from the end of such 5 day period to the date
such payment is made by Sublessee. Rent and additional
rent shall be paid at Sublessor's notice address as set
forth below. If the term of this Sublease begins on a
day other than the first day of a month or ends on a
day other than the last day of a month, Base Rent and
additional rent will be prorated on a per them basis.
5. Premises "As-Is"; No Representations,
Warranties or Obligations. Sublessee accepts the
Premises in their "as-is" condition as of the date
hereof and Sublessee acknowledges that no
representations or warranties, either express or
implied, have been made by or on behalf of Sublessor
with respect to the condition of the Premises. Any
provision of the Master Lease or of this Sublease to
the contrary notwithstanding, Sublessor shall have no
obligation to perform any construction, improvement,
build-out, repair, maintenance or other work with
respect to the Premises or for the benefit of
Sublessee.
6. Intentionally Deleted.
7. Assignment and Subletting. Any provision of
this Sublease or of the Master Lease to the contrary
notwithstanding, Sublessee shall not assign this
Sublease, or any rights hereunder, or further sublet
all or any portion of the Premises, or permit the use
of the Premises by any party other than Sublessee,
whether voluntarily, by operation of law or otherwise,
without the prior written consent of Sublessor, Master
Lessor and Lender (if such consent of Lender is
required under the Subordination Agreement or Estoppel
Certificate). No consent to any assignment or
subletting shall release Sublessee of its liability
hereunder.
8. Use: Compliance with Law. The Premises will
be used solely for the use set forth in Section 17 of
the Master Lease and for no other purpose. Sublessee
covenants and agrees (i) not to use the premises for
any illegal purpose or in such a manner as to violate
any applicable and valid law,, rule or regulation of
any governmental body, and (ii) not to permit waste
thereon.
9. Default and Remedies. If Sublessee fails to
perform or fulfill any of the terms, covenants,
obligations or agreements set forth in this Sublease,
including without limitation, complying with all of the
applicable terms, covenants, obligations and agreements
in the Master Lease, Sublessor shall have and may
exercise any of the rights and remedies of lessor set
forth in the Master Lease, and Sublessee shall be and
remain liable to Sublessor to the extent provided
<PAGE>
therein, in addition to all other rights and remedies
available at law or in equity. Notwithstanding
anything to the contrary contained herein or provided
in the Master Lease, any grace, cure, or notice period
provided for the benefit of lessee in the Master Lease
shall be reduced by one-third (1/3) with regard to
Sublessee (e.g., Sublessee would have twenty days to
cure if the lessee would otherwise have thirty days to
cure).
10. Indemnity. Sublessee shall indemnify, defend
and save Sublessor and Master Lessor harmless from and
against all claims, actions, damages, losses, costs,
liability and expenses (including reasonably attorneys'
fees and costs of litigation) resulting from
Sublessee's failure to comply with the terms and
provisions of this Sublease (including, without
limitation, the provisions of the Master Lease to the
extent such provisions are incorporated herein) or from
the occupancy or use by Sublessee or its agents,
servants, contractors or employees of the Premises or
any portion of the Property, or occasioned wholly or in
part by any act or omission of Sublessee, its agents,
servants, contractors, employees or by any act or
omission of Sublessee's licensees, invitees or guests,
This Section 10 and Sublessee's obligations hereunder
shall survive the expiration or termination of this
Sublease for up to one (1) year after such expiration
or termination other than for third party claims which
shall survive for the applicable statute of
limitations.
11. Insurance and Related Matters. Without
limiting the other provisions of this Sublease,
Sublessee acknowledges and agrees that at all times
during the term hereof Sublessee shall be required to
carry and maintain such insurance as may be required
by, and otherwise to comply in all respects with, the
insurance provisions of the Master Lease. Sublessee
further agrees that all such insurance shall name
Sublessor, Master Lessor and any other persons required
by the Master Lease as additional named insureds and
any casualty or similar insurance shall insure Master
Lessor, Sublessor, and Sublessee, as their interests
appear. Sublessee further agrees that the waiver of
subrogation and release provisions set forth in the
Master Lease and made by lessee therein, as
incorporated herein, shall be made by Sublessee for the
benefit of both Sublessor and Master Lessor.
12. Casualty and Condemnation. The parties agree
that this Sublease shall automatically terminate as a
result of any termination of the Master Lease pursuant
to the casualty or condemnation provisions of the
Master Lease as incorporated herein and Rent shall be
apportioned as of said termination date, and Sublessee
acknowledges that it has and shall have no interest in
any Condemnation award payable with regard to the
Master Lease, this Sublease or the Premises provided
that Sublessee shall have the right to file a claim for
trade fixtures paid by Sublessee (and not reimbursed by
Sublessor) and for moving expenses, so long as neither
such application nor any award thereunder shall reduce
in any manner any award otherwise available to
Sublessor or Master Lessor.
13. Sublessee shall, on or before the last day of
the term hereof, or upon the earlier termination of
this Sublease, peaceably and quietly leave, surrender,
and yield to Sublessor the Premises, together with all
alterations, additions, and improvements (other than
Sublessee's personal property and except as otherwise
provided in this Section 13) in good order, condition
and repair (or in the same condition and repair as the
date hereof with respect to those alterations,
additions and improvements at the Premises as of the
date hereof), ordinary wear and tear, damage by
casualty and taking by condemnation that results in a
termination of the Master Lease
<PAGE>
excepted. All items of
Sublessee's personal property shall be removed by
Sublessee on or before the last day of the Sublease
term or such earlier termination, and Sublessee shall
promptly repair (at Sublessee's sole expense) any and
all damage to the Premises resulting from the removal
of such hems of Sublessee's personal property. All
alterations, additions and improvements made by
Sublessee to the Premises shall, at the option of
Sublessor (i) become the property of Sublessor without
any compensation to Sublessee and shall be surrendered
at such time as a part of the Premises, or (ii) be
removed by Sublessee on or before the last day of the
Sublease term or such earlier termination, and
Sublessee shall promptly repair (at Sublessee's sole
expense) any and all damage to the Premises resulting
from the removal of such alterations, additions and
improvements.
14. Holding Over. In the event Sublessee remains
in possession of the Premises after expiration of this
Sublease, Sublessee shall not acquire any right, title,
or interest in or to the Premises. In such event,
Sublessee shall occupy the Premises as a tenant at
sufferance, but shall otherwise be subject to all of
the conditions, provisions, and obligations of this
Sublease, except that Rent shall be equal to one
hundred fifty (150%) percent of the Rent payable
hereunder.
15. Brokers. Sublessor and Sublessee hereby
agree that in connection with this Sublease that
neither have dealt with any broker or person or entity
entitled to any brokerage commission, fee or other
compensation. Sublessee and Sublessor shall each
indemnify, protect, defend, and hold harmless the
other, and its agents and legal representatives,
against any fee, commission, or other compensation due
to any person, firm, corporation claiming to have acted
in the indemnifying party's behalf with respect to this
Sublease or the transaction represented hereby.
16. Notices. All notices, consents, approvals
and requests required or permitted under this Sublease
shall be given in writing and shall be effective for
all purposes if hand delivered or sent by (i) certified
or registered United States mail, postage prepaid, or
(ii) expedited prepaid delivery service, either
commercial or United States Postal Service, with proof
of attempted delivery, addressed as follows, or at such
other address and person as shall be designated from
time to time in a written notice to the other party in
the manner provided for in this Section 16:
If to Sublessor: Select Service & Supply Co., Inc.
One Sportime Way
Atlanta, Georgia 30340
If to Sublessee: Genesis Direct Six, LLC
c/o Genesis Direct Six, Inc.
100 Plaza Drive Secaucus,
New Jersey 07094
Attn: Barry Curtis
A notice shall be deemed to have been given pursuant to
this Sublease: in the case of hand delivery, at the
time of delivery, in the case of registered or
certified mail, upon deposit in the United States mail;
or in the case of expedited prepaid delivery, upon
deposit with such expedited delivery service.
<PAGE>
17. Capitalized Terms. Capitalized terms
utilized in this Sublease and not defined herein shall
have the meanings attributed to such terms in the
Master Lease.
18. Alterations. Sublessee shall not make any
alterations or improvements to the Premises without the
prior written approval of Sublessor and Master Lessor
(provided that Master Lessor's consent is required
under the Master Lease). Sublessee hereby agrees that
it shall indemnify, defend and hold Sublessor harmless
from and against any and all liabilities, obligations,
damages, penalties, claims costs, charges and expenses,
including without limitation, reasonable attorneys'
fees and other professional fees (if and to the extent
permitted by law), which may be imposed upon, incurred
by, or asserted against Sublessor or Master Lessor or
their respective directors, officers, partners,
members, agents, representatives or employees, and
arising directly or indirectly out of or in connection
with the performance of any construction or alterations
by Sublessee in the Premises including, without
limitation, the cost of correcting any violations of
any laws, rules, regulations and codes, To the extent
that any alterations or improvements are permitted,
Sublessee will comply with all applicable terms and
provisions of the Master Lease.
19. No Options. Any other provision of this
Sublease or of the Master Lease to the contrary
notwithstanding, Sublessee shall not be granted hereby
or by the Master Lease, nor shall Sublessee have the
benefit of, any option or other right, however
designated (i) to renew the Master Lease or this
Sublease, or (ii) to terminate the Master Lease, or
(iii) to extend the term of the Master Lease or this
Sublease, or (iv) to expand or contract the Premises,
or (v) to lease or sublease any other space in the
property of which the Premises may be a part, or in any
other property, or (vi) to purchase all or any portion
of the Premises or any other property, or (vii) to
exercise any audit rights under the Master Lease. Any
and a such rights shall be deemed to have been reserved
to and exercisable only by Sublessor.
20. Consent of Master Lessor and Lender. This
Sublease shall not be effective unless and until the
written consent to this Sublease is granted by both
Master Lessor and Lender (to the extent such Lender's
consent is required under the Subordination Agreement
or the Estoppel Certificate). Sublessor hereby
represents to Sublessee that Sublessor has not entered
into any other sublease with respect to the Premises
and this representation shall be deemed repeated and in
compliance by Sublessor as of the Commencement Date.
21. Miscellaneous.
(a) This Sublease contains the entire
agreement of the parties with respect to the subject
matter hereof, and no representations, inducements,
promises or agreements between or among such parties,
whether oral or otherwise, with respect to the subject
matter hereof not embodied herein shall be of any force
or effect.
(b) The failure of either party to insist on
one or more instances, on performance by the other
party in strict compliance with the terms and
conditions of this Sublease shall not be deemed a
waiver or relinquishment of any rights granted
hereunder or of any terms or conditions of this
Sublease unless such waiver is contained in writing and
signed by both parties. No amendment to this Sublease
shall be binding upon the parties hereto unless such
amendment is in writing and executed by all parties
hereto.
<PAGE>
(c) Time is of the essence of this Sublease.
(d) Sublessee's interest hereunder is not
subject to levy, execution or sale and is not
assignable except with Sublessor's, Master Lessor's and
Lender's prior written consent.
(e) This Sublease shall be governed by and
construed in accordance the with the laws of the State
of Georgia (without regard to the rules of such
jurisdiction concerning conflict of laws) and any
applicable law of the United States of America, as
amended from time to time.
(f) Neither this Sublease nor any short form
or memorandum hereof shall be recorded.
(g) Sublessor's obligations and liability to
Sublessee with respect to this Sublease shall be
limited solely to Sublessor's interest in the Premises,
and Sublessee shall look solely to Sublessor's interest
in the Premises for satisfaction of Sublessee's
remedies. Without expanding by implication any
limitations on liability otherwise provided by law, it
is agreed by Sublessee that neither Sublessor nor any
person or entity comprising Sublessor, nor any partner,
officer, director or shareholder of Sublessor or any
partner of Sublessor, shall have any personal liability
with respect to this Sublease.
(h) The section captions contained in this
Sublease are for convenience only and do not in any way
limit or amplify any term or provision hereof. The use
of the terms "hereof," "hereunder" and "herein" shall
refer to this Sublease as a whole, inclusive of the
Exhibits, except when noted otherwise. The use of the
masculine, feminine or neuter genders herein shall
include the masculine, feminine and neuter genders and
the singular form shall include the plural when the
context so requires.
(i) All covenants, promises, conditions,
representations, and agreements herein contained shall
be binding upon, apply, and inure to the parties hereto
and their respective heirs, executors, administrators,
successors, and permitted assigns.
(j) This Sublease may be executed in several
counterparts, each of which shall be an original and
all of which collectively shall constitute one
Sublease.
[SIGNATURES COMMENCE ON FOLLOWING PAGE]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly
executed and delivered this Sublease Agreement under
seal as of the day and year first above written.
SUBLESSEE:
GENESIS DIRECT SIX, LLC,
a Georgia limited liability company
By: /s/ [original text illegible]
--------------------------------
Its: President
[SEAL]
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
<PAGE>
SUBLESSOR:
SELECT SERVICE & SUPPLY CO.,
a Georgia corporation
By: /s/ Peter S. Savitz
-------------------------
Its: Executive Vice President
[CORPORATE SEAL]
<PAGE>
AMENDMENT TO SUBLEASE AGREEMENT
This AMENDMENT TO SUBLEASE AGREEMENT (the
"Amendment") is made and entered into this 17th day of
November 1998, by and between 3-S PARTNERS, INC., f/k/a
Select Service & Supply Co., Inc., a Georgia
corporation ("Sublessor"), and GENESIS DIRECT SIX, LLC,
a Georgia limited liability company ("Sublessee").
R E C I T A L S
A. Sublessor and Sublessee are parties to a
certain Sublease Agreement dated January 7, 1998 (the
"Sublease"), relating to certain improved real property
located at One Sportime Way, Norcross, Georgia 30340
(the "Premises").
B. Sublessor and Sublessee desire to amend the
Sublease in certain respects, as hereinafter set forth.
A G R E E M E N T
NOW, THEREFORE, in consideration of the sum of TEN
AND NO/100 DOLLARS ($10.00) each to the other paid, the
mutual covenants and agreements set forth herein, and
other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Sublessor
and Sublessee agree as follows:
1. Recitals Incorporated. The Recitals set
forth above are hereby incorporated within and made an
integral part of this Sublease.
2. Extension of Time.
(a) Subject to the terms and conditions set
forth herein, the term of the Sublease is hereby
amended and extended for an additional period of
three (3) years commencing upon the Termination
Date described in the Sublease (the "Extended
Term"). The date on which the Extended Term
commences is sometimes referred to in this
Amendment as the "Extension Date". The expiration
date of the Extended Term shall hereafter be for
all purposes the "Termination Date" of the
Sublease, unless the Sublease is earlier
terminated as set forth in Section 2(b) below.
(b) The foregoing provisions of Section 2(a)
the contrary notwithstanding, commencing on the
date which is six (6) months from and after the
Extension Date, Sublessor shall have the right to
terminate the Sublease, as amended hereby, upon
not less than six (6) months' prior written notice
to Sublessee, specifying the date upon which such
termination shall be effective (the "Early
Termination Date"). Sublessee shall thereafter
continue to be obligated to perform all
obligations of Sublessee under the Sublease, as
amended hereby, through and including the Early
Termination Date, and the Sublease, as amended
hereby, shall thereupon terminate upon the Early
Termination Date, as if the Early Termination Date
were the date of the natural expiration of the
term of the Sublease, as amended hereby.
<PAGE>
(c) Rent payable under Section 4(a) of the
Sublease during and with respect to the Extended
Term is hereby amended and shall be in the amount
of $331,100.00 per annum, payable in installments
of $27,592.50 per month, which Sublessee covenants
and agrees to pay to Sublessor. Sublessee shall
continue to be obligated to pay all other amounts
payable under the Sublease including, without
limitation, the additional rent described in
Section 4(b) thereof.
3. Capitalized Terms. Capitalized terms
utilized in this Amendment and not defined herein shall
have the meanings attributed to such terms in the
Sublease.
4. Miscellaneous.
(a) All terms, conditions and provisions of
the Sublease not expressly modified or amended
hereby shall be and remain in full force and
effect.
(b) This Sublease may be executed in several
counterparts, each of which shall be an original
and all of which collectively shall constitute one
Sublease.
IN WITNESS WHEREOF, the parties hereto have duly
executed and delivered this Amendment under seal as of
the day and year first above written.
SUBLESSEE:
GENESIS DIRECT SIX, LLC,
a Georgia limited liability company
By: /s/ Warren Struhl
------------------------------
Its: Chief Executive Officer
SUBLESSOR:
3-S PARTNERS INC., f/k/a Select Service & Supply
Co., Inc., a Georgia corporation
By: /s/ Peter S. Savitz
-----------------------------
Its: Partner
[CORPORATE SEAL]
<PAGE>
CONSENT TO AMENDMENT TO SUBLEASE
February 1, 1999
Larry Joseph and Peter Savitz Partners, a Georgia
general partnership, as lessor ("Lessor") under that
certain Lease Agreement dated July 1, 1990, as amended
by that certain First Amendment to Lease dated April
15, 1996 (the "Lease"), between Lessor and 3-S
Partners, Inc., f/k/a Select Service & Supply Co.,
Inc., a Georgia corporation, as lessee ("Lessee"),
covering certain premises located at One Sportime Way,
Norcross, Georgia 30340 (the "Premises"), hereby
consents to the Amendment No. 2 Sublease of the
Premises by Lessee to Sportime, LLC Sublease f/k/a
Genesis Direct Six, LLC, a Georgia limited liability
company ("Sublease"), in the manner described in the
Amendment No. 2 to the Sublease Agreement between
Lessee and Sublessee dated February, 1999, a copy of
which is attached hereto. The consent granted hereby
shall not be deemed to be: (i) consent to any
modification or alteration of the Lease, (ii) consent
to any present, further or subsequent assignment of the
Lease, (iii) consent to any further or subsequent
subletting of all or any portion of the Premises, or
(iv) a waiver of any liability, covenant or obligation
of Lessee under the Lease. Further, the consent
granted by Lessor herein is expressly subject to and
conditioned upon the consent of any lender of Lessor to
the Amendment No. 2 which may be required by any
agreements between Lessor and any such lender. Lessee
shall remain fully liable to Lessor for all of Lessee's
liabilities, covenants and obligations under the Lease
unless specifically released therefrom by Lessor in
writing. The acceptance by Lessor of rent, additional
rent or any other payment under the Lease from Sublease
or any third party shall not be deemed a waiver by
Lessor of the obligation of Lessee to pay all such
amounts as provided in the Lease. The performance by
Sublessee or any third party of any obligation required
of Lessee under the Lease shall not be deemed a waiver
by Lessor of the duty of Lessee to perform such
obligation.
LARRY JOSEPH AND PETER SAVITZ PARTNERS, a
Georgia general partnership
By: /s/ Peter S. Savitz
-----------------------------
Name/Title:
<PAGE>
Form of Amendment to Sublease
AMENDMENT NO. 2 TO SUBLEASE AGREEMENT
AMENDMENT NO. 2 ("Amendment No. 3") dated as of
February 1, 1999 to the Sublease Agreement dated as of
January 7, 1998, as amended on November 17, 1998
("Amendment No. 1") among 3-S Partners Inc., f/k/a
Select Service & Supply Co., Inc. ("Sublessor") and
Sportime, LLC, f/k/a Genesis Direct Six, LLC
("Sublessee"). The Sublease Agreement, as amended by
Amendment No. 1, is hereinafter referred to as the
Sublease.
WHEREAS, Sublessor and Sublessee are parties to
the Sublease relating to certain improved real property
located at One Sportime Way, Norcross, Georgia 30340.
WHEREAS, the parties to the Sublease desire to
amend the Sublease as set forth herein.
NOW, THEREFORE, for good and valuable
consideration, the receipt and sufficiency of which are
hereby acknowledged, and in consideration of the
agreements herein, the parties hereto agree as follows:
1. Amendment to Sublease.
a.The first sentence of Section 2(b) of
Amendment No. 1 is hereby amended in its
entirety as follows:
"The foregoing provisions of Section 2(a)
the contrary notwithstanding, commencing
on the date which is six months from and
after the Extension Date, Sublessee shall
have the right to terminate the Sublease,
as amended hereby, upon not less than six
(6) months' prior written notice to
Sublessor specifying the date upon which
such termination shall be effective (the
"Early Termination Date.")."
b.Section 16 of the Sublease is hereby
amended by deleting the address for
Sublessee and replacing such address with
the following:
Sportime, LLC
c/o School Specialty, Inc.
1000 North Bluemound Drive
Appleton, WI 54914
<PAGE>
2. Consent to Transaction. Sublessor hereby
consents to the acquisition of all of the
outstanding limited liability interests of
Sublessee by School Specialty, Inc. Sublessor
agrees that such transaction does not
constitute a violation of Section 7 of the
Sublease entitled "Assignment and Subletting."
3. Miscellaneous.
a. All terms, conditions and provisions of the
Sublease not expressly modified or amended
hereby shall be and remain in full force and
effect.
b. This Sublease may be executed in several
counterparts, each of which shall be an
original and all of which shall collectively
shall constitute one Sublease.
IN WITNESS WHEREOF, the undersigned have executed
this Amendment No. 2 as of the date first written
above.
SUBLESSEE:
SPORTIME, LLC
(f/k/a Genesis Direct Six, LLC)
By: /s/ Warren Struhl
----------------------------------------
Name: Warren Struhl
Title: President and Chief Executive Officer
SUBLESSOR:
3-S PARTNERS INC.
(f/k/a Select Service & Supply Co., Inc.)
By: /s/ Peter S. Savitz
------------------------
Name: Peter S. Savitz
Title: Executive Vice President
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.1
<SEQUENCE>6
<FILENAME>0006.txt
<TEXT>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
STATE OR OTHER JURISDICTION OF
INCORPORATION OR
NAME ORGANIZATION
1. ClassroomDirect.com, LLC Delaware
2. Childcraft Education Corp. New York
3. Bird-in-Hand Woodworks, Inc. New Jersey
4. Don Gresswell, Ltd. United Kingdom
5. Sportime Acquisition Inc. Delaware
6. Sportime, LLC Delaware
7. SSI Acquisition Subsidiary, Inc. Delaware
8. Global Video, LLC Arizona
9. JuneBox.com, Inc. Wisconsin
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>7
<FILENAME>0007.txt
<TEXT>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by
reference in the Registration Statements on Form S-8
(No. 333-64193) and Form S-4 (No. 333-90597) of School
Specialty, Inc. of our report dated June 9, 2000,
relating to the financial statements and financial
statement schedule, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
July 26, 2000
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.1
<SEQUENCE>8
<FILENAME>0008.txt
<TEXT>
<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 Report on
Form 10-Q and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-29-2000
<PERIOD-START> APR-24-1999
<PERIOD-END> APR-29-2000
<CASH> 4,151
<SECURITIES> 0
<RECEIVABLES> 77,772
<ALLOWANCES> (1,744)
<INVENTORY> 86,117
<CURRENT-ASSETS> 201,924
<PP&E> 64,637
<DEPRECIATION> (12,912)
<TOTAL-ASSETS> 454,849
<CURRENT-LIABILITIES> 84,906
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 17
<OTHER-SE> 224,976
<TOTAL-LIABILITY-AND-EQUITY> 454,849
<SALES> 639,271
<TOTAL-REVENUES> 639,271
<CGS> 406,043
<TOTAL-COSTS> 406,043
<OTHER-EXPENSES> 184,586
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,342
<INCOME-PRETAX> 33,635
<INCOME-TAX> 15,120
<INCOME-CONTINUING> 18,515
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,515
<EPS-BASIC> 1.06
<EPS-DILUTED> 1.06
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>9
<FILENAME>0009.txt
<TEXT>
EXHIBIT 99.1
School Specialty, Inc.
Valuation and Qualifying Accounts
The Fiscal Years Ended April 25, 1998, April 24, 1999 and April 29, 2000
<TABLE>
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description Date of Period Expenses Accounts Deductions Date Period
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance for
doubtful accounts April 27, 1997 471,000 274,000 293,000 (a) (322,000) (b) April 25, 1998 716,000
April 25, 1998 716,000 266,000 1,579,000 (a) (327,000) (b) April 24, 1999 2,234,000
April 24, 1999 2,234,000 171,000 200,000 (a) (861,000) (b) April 29, 2000 1,744,000
Accumulated
amortization
of intangibles April 27, 1997 3,324,000 2,061,000 (24,000) (c) April 25, 1998 5,361,000
April 25, 1998 5,361,000 4,656,000 (119,000) (c) April 24, 1999 9,898,000
April 24, 1999 9,898,000 6,895,000 (947,000) (c) April 29, 2000 15,846,000
</TABLE>
____________
(a) Allowance for doubtful accounts acquired in purchase acquisitions.
(b) Represents (write-offs) / recoveries of uncollectable accounts receivable.
(c) Represents (write-offs) / recoveries of fully amortized intangible assets.
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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