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<SEC-DOCUMENT>0000950131-01-502195.txt : 20010710
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ACCESSION NUMBER: 0000950131-01-502195
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 11
CONFORMED PERIOD OF REPORT: 20010428
FILED AS OF DATE: 20010709
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: SCHOOL SPECIALTY INC
CENTRAL INDEX KEY: 0001055454
STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PAPER AND PAPER PRODUCTS [5110]
IRS NUMBER: 390971239
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0430
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 000-24385
FILM NUMBER: 1676681
BUSINESS ADDRESS:
STREET 1: 1000 N BLUEMOUND DR
CITY: APPLETON
STATE: WI
ZIP: 54914
BUSINESS PHONE: 9207342756
MAIL ADDRESS:
STREET 1: 1000 NORTH BLUEMOUND DRIVE
CITY: APPLETON
STATE: WI
ZIP: 54914
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<SEQUENCE>1
<FILENAME>d10k405.txt
<DESCRIPTION>FORM 10-K
<TEXT>
<PAGE>
================================================================================
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 28, 2001
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)
Wisconsin 39-0971239
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
W6316 Design Drive
Greenville, Wisconsin 54942
(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, $0.001 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. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, as of June 15, 2001, was approximately $447,500,900. As of such
date, there were 17,767,317 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 Shareholders to be held on August 28, 2001.
================================================================================
<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 28, 2001
is referred to as "fiscal 2001"). Note that fiscal 2000 had 53 weeks, while all
other fiscal years reported and referenced represent 52 weeks.
Company Overview
School Specialty is the largest direct marketing company for
supplemental educational supplies to schools and teachers for pre-kindergarten
through twelfth grade ("preK-12") in the United States. We operate the
industry's only national distribution network and currently hold approximately a
13% market share of the $6.2 billion supplemental educational supply market. We
offer more than 80,000 items, mail over 38 million catalogs annually and have
developed both an on-line education portal and an e-commerce website. Our broad
product range enables us to provide customers with one source for virtually all
of their supplemental educational supply needs. Our leading market position has
been achieved by emphasizing high-quality products, superior order fulfillment
and exceptional customer service. As a result, we have been able to establish
relationships with virtually all of the country's preK-12 schools and reach
nearly all of the country's teachers.
We recognize that educational supply procurement decisions are made at
the district and school levels by administrators as well as at the classroom
level by teachers and curriculum specialists. As a result, we have created an
innovative multi-channel sales and marketing strategy enabling us to market our
products to the various levels of buyers within the education market.
The "traditional" or "top down" approach targets school districts and
school administrators through our traditional sales force of over 300
professionals, the School Specialty general supply catalog and the JuneBox.com
portal, a B2B (business to business) education portal.
The "specialty" or "bottom up" approach targets the classroom level
decision-makers through our specialty sales force of over 50 professionals and
through our catalogs featuring seven of our specialty brands as well as the
ClassroomDirect.com catalog and website, which is a B2T (business to teacher)
website. Our other specialty catalogs include Childcraft, Sax Arts and Crafts,
Sportime and Teacher's Video. The specialty businesses offer more specialized
products for individual disciplines. Many of these products are proprietary to
our specialty brands.
We believe most of our brands hold the leading market position in their
respective categories. We have also solidified this leading market position by
acquiring companies which have expanded our geographic presence and product
offering. The critical mass we have achieved allows us to benefit from increased
buying power while leveraging our national distribution network and sales force
to operate more efficiently.
We have grown significantly in recent years through both acquisitions
and internal growth. From fiscal 1997 through fiscal 2001, our revenues
increased from $191.7 million to $692.7 million, a compound annual growth rate,
or CAGR, of 38%. In fiscal 2001, revenues increased by 8.4% from the previous
fiscal year. These results reflect only a partial year of the revenues from
companies we acquired during fiscal 2001. We remain focused on growth
opportunities, including increasing our penetration rate
<PAGE>
and expanding in attractive regions, which would allow us to enhance our
position as the number one marketer of supplemental educational supplies in the
United States.
School Specialty, Inc., founded in October 1959, was acquired by U.S.
Office Products in May 1996. In June 1998, School Specialty was spun-off from
U.S. Office Products in a tax-free transaction. Our common stock is listed on
the Nasdaq National Market under the symbol "SCHS." In August 2000, we
reincorporated from Delaware to Wisconsin. Our principal offices are located at
W6316 Design Drive, Greenville, Wisconsin 54942, and our telephone number is
(920) 734-5712. Our 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.
Industry Overview
The school supply market consists of the sale of supplemental
educational 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, or NSSEA,
estimates that annual sales in the United States of supplemental educational
supplies and equipment to the school supply market are approximately $6.2
billion. Of this amount, approximately $3.7 billion is sold through
institutional channels and the remaining $2.5 billion is sold through retail
channels, such as teacher stores.
According to the U.S. Department of Education, there are approximately
16,000 school districts, 118,500 elementary and secondary schools and 3.3
million teachers in the United States. Administrators for both school districts
and individual schools usually make the decision to purchase the general school
supplies needed to operate the school. Teachers and curriculum specialists
generally decide on curriculum-specific products for use in their classrooms and
individual disciplines. According to the NSSEA, teachers spent approximately
$1.3 billion of their own money in 2000 on supplies to supplement classroom
materials.
The industry has highly predictable and favorable trends. Education
expenditures have risen each year for the past 15 years and are expected to
exceed $390 billion in 2001, according to the U.S. Department of Education. The
most common measure of education spending is current expenditures per student.
According to the National Education Association, current expenditures per
student in constant dollars have increased from $5,402 in 1985 to an estimated
$7,430 in 2000 and are expected to increase further to $8,316 in 2005, an
aggregate 54% increase. Incremental spending will thus exceed enrollment growth,
which according to the U.S. Department of Education is projected to grow by 19%
from 1985 to 2005 to a record level of 53.5 million students. As the market is
affected by prevailing political and social trends, the attitude of the
government towards education determines, to some extent, total expenditures on
education. The prevailing political and social environments are favorable for
incremental expenditures on education. The proposed fiscal 2002 federal budget
provides for a 4.6 billion, a 11%, increase in federal education funding.
The industry is also highly fragmented with over 3,400 direct marketers
of supplemental education supplies, many of which are family- or employee-owned
businesses that operate in a single geographic region. We believe the increasing
demand for single-source suppliers, prompt order fulfillment and competitive
pricing, along with the related need for suppliers to invest in automated
inventory and electronic ordering systems, is fostering consolidation within the
industry. In addition, the industry is currently experiencing a shift in growth
to the higher margin specialty business, which offers more focused products for
different educational disciplines. Increased purchasing at the school and
classroom levels, which increases individual school's and teacher's roles in
educational supply procurement decisions, is also driving this trend.
<PAGE>
Recent Acquisitions
Envision Product Line. In May 2001, we acquired the TimeTracker product
line of student and teacher planners from Envision, Inc. We paid approximately
$4.1 million in cash and issued 120,106 shares of our common stock for a total
purchase price of approximately $6.8 million.
J.L. Hammett Division. In November 2000, we acquired the assets of the
wholesale division of J.L. Hammett Company ("Hammett"), our leading competitor
in the preK-12 supplemental educational supplies market. We paid approximately
$79 million in cash for these division assets and $2.8 million for 5-year non-
compete agreements with certain individuals.
Global Video, LLC. In June 2000, we acquired the assets of Global Video
which produces and markets educational videos under the brand name Teacher's
Video(TM). We paid approximately $34 million in net cash for Global Video
including a $3 million earnout payable in July 2001.
Competitive Strengths
We attribute our strong competitive position to the following key
factors:
Number One Market Share. We have the highest revenues of any direct
marketing company for supplemental education supplies. We have developed this
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.
Leading Established Brands. We have the most established and recognized
brands in the industry. We believe that seven of our nine brands have a leading
market position in their respective categories, based on revenues. With a
historical track record of over 100 years for some brands, the Company's
traditional and specialty brands represent a significant competitive advantage.
Broad Product Lines. Our strategy is to provide a full range of high-
quality products to meet the complete supply needs of schools for preK-12. With
over 80,000 items ranging from classroom supplies and furniture to playground
equipment, we provide customers with one source for virtually all of their
supplemental educational supplies and furniture needs. In addition to our
traditional School Specialty brand, our specialty businesses enrich our general
product offering and create opportunities to cross merchandise our specialty
products to our traditional customers. Specialty businesses include the
following brands:
Brand Products
----- --------
Childcraft.................... Early childhood
ClassroomDirect.com........... General supplies
Sax Arts and Crafts........... Art supplies
Frey Scientific............... Science
Sportime...................... Physical education
Teacher's Video............... Educational videos
Brodhead Garrett.............. Industrial arts
Hammond & Stephens............ School forms
Innovative Full-Service Business Model. We believe that we are the only
company in our industry that has developed a full-service business model with an
integrated, multi-channel marketing approach. As a result, we reach district and
school administrative decision makers as well as teachers and
3
<PAGE>
curriculum specialists through separate sales forces, catalog mailings and the
Internet. We utilize our customer database across our family of catalogs to
maximize their effectiveness and increase our marketing reach. Our primary e-
commerce websites, JuneBox.com for administrative purchase decisions and
ClassroomDirect.com for teacher-based purchase decisions, establish a
comprehensive presence on the Internet which is a significant competitive
advantage for us.
Stable Industry with Favorable Trends and Dynamics. Because the market
for educational supplies is driven primarily by demographics and government
spending, we believe our industry is less exposed to economic cycles than many
others. We have established working relationships with many large public
education organizations and understand how to do business effectively with these
institutions.
Established Infrastructure and Customer Relationships. We believe our
seven leading brands, national sales force, the industry's largest product
offering, established customer relationships and a national distribution network
with multiple sales channels, including e-commerce, give us a significant
advantage in this industry. The supplemental education supply market is highly
seasonal, with a January through July selling season and a June through October
shipping season, and our infrastructure and logistical capacities and
capabilities permit us to meet the requirements of these peak periods
effectively.
Proven Acquisition and Integration Model. We have completed over 28
acquisitions since May 1996. We have established a 6 to 12 month target for our
integration process in which a transition team is assigned to sell or
discontinue incompatible business units, reduce the number of items in the
product offering, 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.
Effective Use of Technology. We believe that our use of information
technology systems allows us to turn over 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 strategies.
Experienced and Incentivised Management. Our management team provides
depth and continuity of experience. In addition, management's interests are
aligned with those of our shareholders, as many members of management own shares
of our common stock and/or have been granted options to purchase our common
stock.
Growth Strategy
We use the following strategies to grow and enhance our position as the
leading marketer of supplemental educational supplies:
Internal Growth. We plan to continue to increase our revenues by:
. Taking advantage of market growth through rising expenditures per
student, combined with increasing enrollment
. Increasing penetration in geographic markets where we are currently
underrepresented
. Cross-merchandising specialty products to traditional customers
. Adding new products to enhance the breadth of our product offering
4
<PAGE>
. Pursuing price increases to the extent supported by market
conditions
. Intensifying marketing efforts through partnerships with companies
such as Riverdeep Group plc, a curriculum-based educational software
company
. Adding sales through Internet channels
Margin Improvement. As we continue to grow our revenues, we plan to
increase margins by selling more specialty products, which typically generate
higher gross margins due to the large number of proprietary and branded products
in the product mix. In addition, we believe we can further improve operating
margins by leveraging the benefits of the recent Hammett acquisition and:
. Increasing buying power combined with price expansion
. Continuing the elimination of redundant expenses of acquired
businesses
. Reducing our overhead costs
. Improving the efficiency of our distribution network
. Reviewing and adjusting the level of customer discounts
. Taking advantage of the industry's shift toward site-based (versus
centralized) purchasing
Acquisitions. Our selective acquisition strategy and proven integration
model have allowed us to solidify our leading position within the industry and
establish a strong national marketing and distribution platform. This platform
allows us to integrate acquired brands more easily and strengthen our specialty
brand portfolio and enter supplemental education categories in which we do not
currently compete, such as music or math, in addition to enabling us to grow
faster than the industry. We believe that our size and national presence give us
an advantage as a potential acquirer in a consolidating industry.
Furthermore, our proven integration model allows us to realize
significant synergies. We believe we have demonstrated our ability to reduce
redundant costs, retain the customers of the acquired brands, and integrate
distribution networks and information technology platforms. For each
acquisition, we assume a reduction of approximately 10% of the acquired
company's revenues. The reduction is expected as we discontinue any unprofitable
business lines, divest any product lines outside our core competencies and
reduce overlapping sales forces. The integration model is designed to offset the
sales reduction and efficiently combine the companies. The model allows us to
smoothly consolidate distribution centers, improve geographic distribution,
integrate the back-office functions, expand purchasing power and, when a
specialty company is acquired, realize product and margin enhancement related to
cross merchandising.
Product Lines
We market two broad categories of products: general school supplies and
specialty products geared towards specific educational disciplines. Our
specialty products enrich our general supply product offering and create
opportunities to cross merchandise our specialty products to our traditional
customers. With over 80,000 items ranging from classroom supplies and furniture
to playground equipment, we provide customers with one source for virtually all
of their supplemental educational supply needs.
5
<PAGE>
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, which
assists in the building or renovation of schools.
Our specialty businesses 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.
ClassroomDirect.com. ClassroomDirect.com offers general supplemental
educational supplies to teachers and curriculum specialists directly through its
mail-order catalogs and fully integrated B2T website.
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
products for early childhood through middle school as well as targeted products
for physically challenged children.
Teacher's Video. Teacher's Video is a leading marketer and producer of
educational videos for educators targeting teachers, curriculum coordinators and
department heads through 16 different curriculum-oriented catalogs, with a total
annual mailing volume in excess of 22 million catalogs.
Brodhead Garrett. Brodhead Garrett is the nation's oldest marketer of
industrial arts products and technical materials to classrooms. Brodhead
Garrett's product line includes various items such as drill presses, sand paper,
lathes and robotic controlled arms.
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.
Our merchandising managers, many of whom have prior experience in
education, continually review and update the product lines for each business.
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
6
<PAGE>
seeking out new product lines. This annual review process results in a constant
reshaping and expansion of the educational materials we offer.
Sales and Marketing
We have implemented an innovative multi-channel sales and marketing
strategy that employs a traditional sales force of over 300 professionals, a
specialty sales force of over 50 professionals, over 38 million catalogs mailed
annually, a B2T website and a B2B educational portal. We believe we have
developed a substantially different sales and marketing model from that of other
supplemental educational supply companies in the United States. Our strategy is
to use two separate sales and marketing approaches ("top down" and "bottom up")
to reach all the prospective purchasers in the education system.
Traditional Business. Our "top down" marketing approach targets
administrative decision-makers through our traditional sales force, the School
Specialty general supply catalog and the JuneBox.com education portal. This
approach accounts for the majority of our traditional business.
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.
Schools typically purchase supplies based on established relationships with
relatively few vendors. We seek to establish and maintain these critical
relationships, by assigning accounts within a specific geographic territory to a
local area sales representative who is supported by a centrally located customer
service team. The customer service representatives frequently call on existing
customers to ascertain and fulfill their supplemental educational supply needs.
The representatives maintain contact with these customers throughout the order
cycle and assist in processing orders.
As part of the integration of Beckley-Cardy, which we acquired in 1998, we
restructured our traditional sales and marketing operations from a decentralized
regional system to a more centralized national structure. We believe that the
new structure significantly improves our effectiveness through better sales
management, resulting in higher regional penetration, and significant cost
savings through the reduction of distribution centers.
"Projects by Design" is a service we provide to help in the building or
renovation of schools. Our professionals prepare a detailed room-by-room
analysis to simplify supplemental educational supply planning and fulfillment.
Customers have the ability to view prospective classrooms through our innovative
software in order to efficiently manage the project.
Specialty Business. We use the "bottom up" approach to target the
classroom level decision-makers through our specialty sales force and catalogs
featuring seven specialty brands along with our ClassroomDirect.com catalog and
website. These catalogs allow teachers to procure supplies that are specific to
their curriculum and classroom needs and may not have been purchased by school
administration.
For each specialty brand, a major catalog containing its full product
offering is distributed near the end of the calendar year for the beginning of
the January through July selling season. During the course of the year we mail
additional supplemental catalogs. Schools can also access the Childcraft,
Teacher's Video and ClassroomDirect.com websites. Further, we believe that by
cross marketing our specialty brands to traditional customers, we can achieve
substantial incremental sales.
7
<PAGE>
Internet Operations. Our Internet approach comprises both a B2T website
and a B2B portal and creates a new sales channel for School Specialty. We have
invested approximately $11 million within the last three years to develop what
we believe to be the number one education portal and e-commerce website in the
industry. In January 1999, we launched our fully-integrated, e-commerce website
ClassroomDirect.com. The site offers access to approximately 18,000 items with
digital pictures of most items. The site is currently teacher-focused, but we
have the option to broaden the format to target the large parent/student market.
In August 1999, we launched JuneBox.com, a portal structured as an
education mall offering our products. We believe that this site will play an
important role within the education industry by providing education-related
content and information, thereby strengthening our brand name recognition. In
March 2000, we signed an agreement with Ariba, Inc. to power JuneBox.com.
JuneBox.com offers School Specialty's full product portfolio as well as
other suppliers' products such as United Stationers, one of the largest
suppliers of office products and janitorial supplies. This portal provides
enhanced value to educators as it offers over 140,000 items. JuneBox.com is a
one-stop shop for all supplemental educational supplies as well as teaching
tips, lesson plan help, product reviews and updates on current events affecting
the education community.
We also benefit from the Internet with increased quality of customer
service and lower operating costs. By shifting the majority of customer
service for e-commerce customers to the Internet and having orders reviewed and
verified on-line, we have been able to reduce the associated costs while
providing a 24-hour service. Substantially all of our investments in our
Internet operations have been dedicated towards building an efficient, advanced
and flexible Internet platform.
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.
School Specialty has built a broad customer base where no single customer
accounted for more than 2% of sales during fiscal 1999, 2000 or 2001. We believe
we sell into every school district in the United States and reach nearly all of
the country's teachers.
Procurement
Traditional Business. We purchase our general school supplies and furniture
and equipment from over 2,000 vendors. Product selection is typically evaluated
on an annual basis and we typically negotiate an annual supply contract with
each vendor. Our supply contracts with our larger vendors typically provide for
special pricing and/or extended terms and often include volume based incentive
and rebate programs. In fiscal 2000, we introduced a private label,
ClassroomSelect, which has allowed for margin expansion. We have exclusive
distribution rights on several furniture and equipment lines.
Specialty Business. Many of our products in the specialty business are
proprietary. We either develop the product or it is an exclusive product
developed on our behalf. Typically, we outsource the manufacturing of
proprietary products, except for our Childcraft division, which manufactures
wood furniture for sale by Childcraft and our other businesses. We produce our
Teacher's Video proprietary videos at our Global Video facility in Tempe,
Arizona. Our Hammond & Stephens forms are designed and produced at our facility
in Fremont, Nebraska. We purchase non-proprietary products in the specialty
business in a similar manner as our traditional business procurement process.
8
<PAGE>
To the extent the traditional and specialty businesses are sourcing product
from common vendors, we typically negotiate one contract to take full advantage
of our combined buying power. We maintain close and stable relationships with
our vendors to facilitate a streamlined procurement process. At the same time,
we continually review alternative supply sources in an effort to improve
quality, improve customer satisfaction, and reduce product cost.
Logistics
We have built what we believe is the largest and most sophisticated
distribution network among our direct marketing competitors, with twelve fully-
automated and seamlessly-integrated distribution centers that ship directly to
the customer. The distribution centers average approximately 190,000 square
feet. We also maintain three call centers to support customer service and sales.
We believe this network represents a significant competitive advantage for us,
allowing us to reach any school in a fast and efficient manner. We shipped
approximately 70% of stocked inventory via UPS in fiscal 2001 and had a 97% on-
time delivery rate. The fill-rate of our facilities has generally exceeded 95%
at the peak of our shipping season. We have the ability to expand the network
through necessary additions needed to support sales growth. New warehouse
capacity can be leased and no large capital investments are typically required.
In order to maintain the proprietary nature of some of our specialty
products, we operate two small manufacturing facilities. The Lancaster,
Pennsylvania facility manufactures products for the Childcraft brand, while the
Fremont, Nebraska facility is used for the production of school forms. Our
manufactured products account for approximately 5% of our sales.
Information Systems
We believe that through the utilization of technology in areas such as
purchasing and inventory management, customer order fulfillment and database
management, we are able to turn over inventory more quickly than competitors,
offer customers more convenient and cost effective ways of ordering products and
more precisely focus our sales and marketing strategies.
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, System
for Distributors, offers a fully-integrated process from sales order entry
through customer invoicing, and inventory requirements planning through accounts
payable. Our system provides information through daily automatic posting to the
general ledger and integrated inventory control. We have made numerous
enhancements to this process that allow greater flexibility in addressing the
seasonal requirements of the industry and meeting specific customer needs.
The remaining specialty divisions use a mail-order and catalog system
provided by Smith-Gardner & Associates. This mail-order and catalog system
meets the 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 believe the market we operate in is competitive on a regional basis.
However our heaviest competition is coming from alternate channel competitors
such as office product contract stationers and
9
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office supply superstores. Their primary advantages over us are size, location,
greater financial resources and buying power. Their primary disadvantage is that
their product mix typically covers less than 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 June 15, 2001, we had approximately 2,200 full-time employees. To
meet the seasonal demands of our customers, we employ many seasonal employees
during the late spring and summer months. Historically, we have been able to
meet our requirements for seasonal employment. As of June 15, 2001, none of our
employees were represented by a labor union. We consider our relations with our
employees to be very good.
Forward-Looking Statements
Statements in this Annual Report which are not historical are "forward-
looking" statements within the meaning of the Private Securities Litigation
Reform Act of 1995. The forward-looking statements include: (1) 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 internal growth plans, projected revenues, margin
improvement, future acquisitions, capital expenditures and adequacy of capital
resources; (2) statements included or incorporated by reference in our future
filings with the Securities and Exchange Commission; 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 projected revenues, costs, earnings and earnings per share. Forward-
looking statements also include statements regarding the intent, belief or
current expectation of School Specialty or its officers. Forward-looking
statements include statements preceded by, followed by or that include forward-
looking terminology such as "may," "will," "should," "believes," "expects,"
"anticipates," "estimates," "continues" or similar expressions.
All forward-looking statements included in this Annual Report are based on
information available to us as of the date hereof. We do not undertake to update
any forward-looking statements that may be made by or on behalf of us, in this
Annual Report or otherwise. Our actual results may differ materially from those
contained in the forward-looking statements identified above. Factors which may
cause such a difference to occur include, but are not limited to the factors
listed in Exhibit 99.2 to our Form 10-K for fiscal 2001.
10
<PAGE>
Item 2. Properties
----------
We recently moved our corporate headquarters from 1000 North Bluemound
Drive, Appleton, Wisconsin to a leased facility at W6316 Design Drive,
Greenville, Wisconsin a combined office and warehouse facility of approximately
332,000 square feet. We also lease or own the following principal facilities:
<TABLE>
<CAPTION>
Approximate
Square 0wned/
Locations Footage Leased Lease Expiration
--------- ------- ------ ----------------
<S> <C> <C> <C>
Agawam, Massachusetts (1)..................... 188,000 Leased November 30, 2020
Atlanta, Georgia (2).......................... 20,000 Leased January 31, 2006
Birmingham, Alabama (2)....................... 190,000 Leased November 30, 2006
Fremont, Nebraska (2)......................... 95,000 Leased June 30, 2003
Fresno, California (1)........................ 163,200 Leased November 1, 2009
Greenville, Wisconsin (3)..................... 332,000 Leased June 1, 2021
Lancaster, Pennsylvania (2)................... 73,000 Leased December 31, 2002
Lancaster, Pennsylvania (2)................... 204,000 Leased February 28, 2009
Lufkin, Texas (1)............................. 140,000 Owned --
Lyons, New York (1)........................... 179,000 Owned --
Mansfield, Ohio (3)........................... 315,000 Leased November 30, 2020
New Berlin, Wisconsin (2)..................... 97,500 Leased March 31, 2002
Salina, Kansas (1)............................ 123,000 Owned --
Southaven, Mississippi (1).................... 200,000 Leased December 31, 2010
Tempe, Arizona (2)............................ 57,000 Leased February 28, 2005
</TABLE>
________________
(1) Location services the traditional segment.
(2) Location services the specialty segment.
(3) Location services both business segments.
The 73,000 square foot Lancaster, Pennsylvania facility is used for
manufacturing and the Fremont, Nebraska facility is used for production of
school forms. The other facilities are distribution centers and/or office space.
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.
Item 3. Legal Proceedings
-----------------
We are, from time to time, a party to legal proceedings arising in the
normal course of business. We believe 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 28,
2001 to a vote of our security holders.
11
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
As of June 15, 2001, 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 Chief
Age 46 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 46 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, has
Age 52 served as Executive Vice President and Chief
Financial Officer of School Specialty since August
1999. From 1989 to 1999, she served as Senior Vice
President and Chief Financial Officer for Marquette
Medical Systems, a manufacturer of medical devices.
A. Brent Pulsipher Mr. Pulsipher became Executive Vice President of
Age 59 Corporate Logistics and Technology of School
Specialty in March 2001. From 1998 to 2001, Mr.
Pulsipher was Chief Information Officer for Tropical
Sportswear International, an apparel producer and
brand manager. Mr. Pulsipher held the position of
Manager of Consulting Services for Distribution
Resources Company from 1988 to 1998. Prior to 1988,
Mr. Pulsipher held various executive operational and
consulting positions.
Michael J. Killoren Mr. Killoren has served as Executive Vice President
Age 44 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.
Donald J. Noskowiak Mr. Noskowiak has served as Vice President of Finance
Age 43 and Business Development of School Specialty since
August 1999. Mr. Noskowiak has been with School
Specialty since 1992, and served as Chief Financial
Officer from 1997 to August 1999.
Daniel P. Spalding and Michael J. Killoren are cousins.
12
<PAGE>
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 Shareholder 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, as reported by the Nasdaq National
Market during the indicated quarters.
High Low
---- ---
Fiscal 2001 quarter ended
-------------------------
July 29, 2000................................... $19.50 $14.50
October 28, 2000................................ 21.31 15.06
January 27, 2001................................ 21.69 15.00
April 28, 2001.................................. 23.39 19.69
High Low
---- ---
Fiscal 2000 quarter ended
-------------------------
July 24, 1999................................... $19.31 $14.31
October 23, 1999................................ 17.38 11.88
January 22, 2000................................ 16.63 12.13
April 29, 2000.................................. 23.13 14.13
Holders
As of June 15, 2001, there were 2,212 record holders of our 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 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.
13
<PAGE>
Item 6. Selected Financial Data
-----------------------
SELECTED FINANCIAL DATA
(in thousands, except per share data) (1) (2)
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------------------------
(52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks) (52 Weeks)
-------- -------- -------- -------- --------
April 28, April 29, April 24, April 25, April 26,
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues.............................. $692,674 $639,271 $521,704 $310,455 $191,746
Cost of revenues...................... 440,946 406,043 341,783 202,870 126,862
-------- -------- -------- -------- --------
Gross profit........................ 251,728 233,228 179,921 107,585 64,884
Selling, general and administrative
expenses........................ 208,647 184,586 144,659 87,846 53,177
Non-recurring acquisition costs....... -- -- -- -- 1,792
Restructuring and strategic
restructuring costs............ 4,500 -- 5,274 3,491 194
-------- -------- -------- -------- --------
Operating income.................... 38,581 48,642 29,988 16,248 9,721
Interest expense (net)................ 16,014 13,151 12,601 5,373 4,197
Other expense (income)................ 1,214 1,856 (228) 156 (196)
-------- -------- -------- -------- --------
Income before provision for
income taxes...................... 21,353 33,635 17,615 10,719 5,720
Provision for (benefit from) income
taxes (3)......................... 9,214 15,120 8,719 5,480 (2,412)
-------- -------- -------- -------- --------
Net income.......................... $ 12,139 $ 18,515 $ 8,896 $ 5,239 $ 8,132
======== ======== ======== ======== ========
Net income per share:
Basic............................... $ 0.69 $ 1.06 $ 0.61 $ 0.40 $ 0.81
Diluted............................. $ 0.68 $ 1.06 $ 0.60 $ 0.39 $ 0.80
Weighted average shares outstanding:
Basic............................... 17,495 17,429 14,690 13,284 10,003
Diluted............................. 17,782 17,480 14,840 13,547 10,196
</TABLE>
<TABLE>
<CAPTION>
April 28, April 29, April 24, April 25, April 26,
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital....................... $ 85,518 $116,857 $115,853 $ 47,791 $ 14,491
Total assets.......................... 506,292 454,849 437,708 223,729 87,685
Long-term debt........................ 158,168 144,789 161,691 63,014 33,792
Total debt............................ 179,783 162,180 173,285 83,302 60,746
Shareholders' equity.................. 239,460 224,993 202,687 106,466 16,329
</TABLE>
__________
(1) The historical financial information of School Specialty, Inc. 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 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 2001 presentation. These reclassifications have no effect on net
income or net income per share.
(3) Results for the fiscal year ended April 26, 1997 include a benefit from
income taxes of $2.4 million which primarily resulted from the reversal of
a $5.3 million valuation allowance in the quarter ended
14
<PAGE>
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 the following discussion and analysis in conjunction
with our consolidated financial statements and related notes, included elsewhere
in this Annual Report.
Overview
We are the largest direct marketing company for supplemental
educational supplies to schools and teachers for preK-12 in the United States.
We offer more than 80,000 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 primarily through
acquisitions but also through internal growth. Our revenues for fiscal 2001 were
$692.7 million and our operating income before restructuring costs was $43.1
million, which represented compound annual increases of 38% and 39%,
respectively, compared to our fiscal 1997 results.
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 profit and margins also improved significantly over the
last several years, prior to fiscal 2001. This improvement reflects our
acquisitions of specialty companies, which typically have higher operating
margins than our traditional business. In addition, through the integration of
acquired businesses, we have been able to further improve our operating profit
and margins by eliminating redundant expenses, leveraging overhead costs and
improving purchasing power. Because our business is seasonal, the timing of our
acquisitions may affect the comparability of our operating profit and margins in
the short term. In particular, the decline in operating profit and margins in
fiscal 2001 was primarily due to the Hammett acquisition, a major acquisition
during a seasonally low period. In addition, fiscal 2001 operating profit and
margins were impacted by our investment in Internet operations.
In recent years, we have grown through acquisitions. As a result of
integrating the acquired operations, we have recorded restructuring charges over
the last several years. These charges have primarily been to close existing
facilities and to consolidate operations that, when combined with acquired
operations, became redundant. To the extent our integrations have resulted in
the closure of an acquired facility or consolidation of acquired operations, the
costs were charged to goodwill.
Our effective tax rate is higher than the federal statutory tax rate
of 35%. This historically has been 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 June through October. During this period, we
receive, ship and bill the majority of our orders so that schools and teachers
receive their merchandise by the start of each school year. Our inventory levels
increase in April through June in anticipation of the peak shipping season. The
majority of shipments are
15
<PAGE>
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 two quarters of our fiscal year and operate
at a net loss in our third and fourth fiscal quarters.
Results of Operations
The following table sets forth certain information as a percentage of
revenues on a historical basis concerning our results of operations for the
fiscal years 2001, 2000, and 1999.
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------------
April 28, 2001 April 29, 2000 April 24, 1999
-------------- -------------- --------------
(52 Weeks) (53 Weeks) (52 Weeks)
-------- -------- --------
<S> <C> <C> <C>
Revenues............................................. 100.0% 100.0% 100.0%
Cost of revenues..................................... 63.7 63.5 65.5
----- ----- -----
Gross profit...................................... 36.3 36.5 34.5
Selling, generaland administrative expenses.......... 30.1 28.9 27.7
Restructuring and strategic restructuring costs...... 0.6 -- 1.0
----- ----- -----
Operating income.................................. 5.6 7.6 5.8
Interest expense, net................................ 2.3 2.1 2.4
Other expense........................................ 0.2 0.2 --
----- ----- -----
Income before provision for income taxes............. 3.1 5.3 3.4
Provision for income taxes........................... 1.3 2.4 1.7
----- ----- -----
Net income........................................... 1.8% 2.9% 1.7%
===== ===== =====
</TABLE>
Consolidated Historical Results of Operations
Fiscal Year Ended April 28, 2001 (52 weeks) Compared to Fiscal Year Ended April
29, 2000 (53 weeks)
Revenues
- --------
Revenues increased 8.4% from $639.3 million for fiscal 2000 to $692.7
million for fiscal 2001. This increase is primarily due to the inclusion of
revenues from the eight businesses acquired since the beginning of fiscal 2000
and internal growth on existing business. These increases were partially offset
by an extra week of shipments in fiscal 2000, as fiscal 2000 was a 53 week
fiscal year and fiscal 2001 had 52 weeks. On a comparable 52 week basis,
revenues increased 10.4% from fiscal 2000 to fiscal 2001.
Gross Profit
- ------------
Gross profit increased 7.9% from $233.2 million, or 36.5% of revenues, in
fiscal 2000 to $251.7 million, or 36.3% of revenues, in fiscal 2001. The
increase in gross profit was due primarily to an increase in revenues. The
change in gross margin was primarily due to slightly lower gross margins in the
traditional segment driven by lower margins on the furniture lines, partially
offset by enhanced consumable business gross margins and an increase in
consumable business product mix, which has higher gross margins than the
furniture lines in the traditional segment. This change in traditional segment
gross margin was offset by an increase in specialty segment gross margin in the
Childcraft division (driven by improved operating efficiencies and purchasing
power) and the acquisition of Global Video in June 2000, which has higher gross
margins than most of our other specialty businesses.
16
<PAGE>
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 warehouse shipments
transportation costs), catalog costs, general administrative overhead (which
includes information systems, accounting, legal, and human resources) and
depreciation and amortization expense.
Selling, general and administrative expenses increased 13.0% from $184.6
million, or 28.9% of revenues, in fiscal 2000 to $208.6 million, or 30.1% of
revenues, in fiscal 2001. The increase in selling, general and administrative
expenses was primarily due to an increase in variable costs related to increased
revenues, expenses incurred to develop our Internet operations, and the
acquisition of certain assets of Hammett. The change in selling, general and
administrative expenses as a percentage of revenues was due to 1) growth in the
specialty segment, which typically has higher selling, general and
administrative expenses than our other business segments, 2) expenses incurred
in developing our Internet operations and 3) the acquisition of Hammett during
our seasonally low period, which created redundancies in the traditional
segment. We began to integrate Hammett during the third quarter of fiscal 2001,
and will further consolidate operations as a result of the acquisition in the
third quarter of fiscal 2002, following our heavy shipping season.
Restructuring Costs
- -------------------
During the fourth quarter of fiscal 2001, we recorded a restructuring
charge of $4.5 million, which includes $2.4 million to close redundant
facilities, $1.5 million for severance and termination benefits for
approximately 80 individuals and $0.6 million for other costs. We began to
formulate the plan for restructuring during fiscal 2001's third quarter
following our acquisition of Hammett. Further details of the restructuring
charge are discussed in the notes to consolidated financial statements.
Interest Expense
- ----------------
Net interest expense increased $2.9 million from $13.2 million, or 2.1% of
revenues, in fiscal 2000, to $16.0 million, or 2.3% of revenues in fiscal 2001.
The increase in net interest expense was primarily attributable to the debt
assumed and cash paid for the acquisitions of Global Video and Hammett, which
occurred in June 2000 and November 2000, respectively, and a slight increase in
the effective interest rate. These increases were partially offset by reduced
interest expense attributable to debt repaid from the net proceeds from sale-
leaseback transactions of $17.8 million, the sale of property of $6.6 million,
the sale of Gresswell of $3.5 million and proceeds from an accounts receivable
securitization (the "receivable securitization") of $50.0 million, which we
entered into in November 2000.
Other Expenses
- --------------
Other expenses decreased $0.7 million from $1.9 million in fiscal 2000 to
$1.2 million in fiscal 2001. Other expenses in fiscal 2001 primarily consisted
of a $0.7 million pre-tax loss on the disposition of Gresswell and the discount
and loss on the receivable securitization of $1.4 million, partially offset by a
$0.5 million pre-tax gain on the sale of SmartStuff. Other expenses in fiscal
2000 primarily consisted of a $1.5 million non-cash impairment charge on a
minority equity investment.
17
<PAGE>
Provision for Income Taxes
- --------------------------
Provision for income taxes for fiscal 2001 decreased 39.1% or $5.9 million
over fiscal 2000, reflecting income tax rates of 43.2% and 45.0% in fiscal 2001
and fiscal 2000, respectively. The decrease in the effective tax rate was
primarily due to the impact of the difference in book and tax basis related to
the divestitures of SmartStuff and Gresswell. 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 29, 2000 (53 weeks) Compared to Fiscal 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 was primarily due to internal growth on
existing business and the inclusion of revenues from the six companies acquired
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 margin was due primarily to 1) a shift in product mix to
increased revenue from the specialty segment, where proprietary products
generate higher gross margins than the traditional segment, 2) an improvement in
traditional segment 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 segment 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 our
Internet segment, which as a group has lower gross margins than our other
businesses.
Selling, General and Administrative Expenses
- --------------------------------------------
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 was primarily due to an increase in revenues. The increase in selling,
general and administrative expense as a percentage of revenues is primarily due
to 1) a shift in revenue mix to the specialty segment, which has higher selling,
general and administrative expenses than the traditional segment, 2) higher
amortization expense due to goodwill amortization related to the acquisitions we
completed since the beginning of fiscal 1999, and 3) expenses related to
expanding the Internet segment, which were incremental in fiscal 2000. These
increases were offset by reduced selling, general and administrative expenses in
the traditional segment, which was primarily due to the integration of Beckley-
Cardy and the restructuring of the traditional segment, 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 a $4.2 million restructuring charge 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
18
<PAGE>
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.
Interest Expense
- ----------------
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 was primarily attributable to the debt
assumed and cash paid for the six companies acquired since the beginning of
fiscal 1999, partially offset by reduced interest expense attributable to debt
repaid from the net proceeds from our follow-on offering of common stock in
April 1999.
Other Expenses
- --------------
Other expenses of $1.9 million for fiscal 2000 primarily represented 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 was
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%, was primarily due to
state income taxes and non-deductible goodwill amortization.
Liquidity and Capital Resources
At April 28, 2001, we had working capital of $85.5 million. Our
capitalization at April 28, 2001 was $419.2 million and consisted of total debt
of $179.8 million and shareholders' equity of $239.5 million.
We currently have a five year secured $350 million credit facility with
Bank of America, N.A. The credit facility had an initial $100 million term loan
maturing quarterly and $250 million of availability under revolving loans. The
credit facility matures on September 30, 2003. The amount outstanding as of
April 28, 2001 under the credit facility was approximately $179.0 million,
consisting of $110.0 million and $69.0 million outstanding under the revolving
and term loans, respectively. Borrowings under the credit facility are usually
significantly higher during the first two quarters of our fiscal year to meet
the working capital needs of our peak selling season.
Effective January 2, 2001, we entered into an interest rate swap agreement
with The Bank of New York covering $50 million of the outstanding amount under
the revolving portion of our credit facility. The one-year non-cancelable swap
agreement fixes the 30-day LIBOR interest rate at 6.07% per annum on a $50
million notional amount.
On October 28, 1998, we entered into an interest rate swap agreement with
The Bank of New York covering $50 million of the outstanding amount under the
revolving portion of our credit facility. The agreement fixed the 30-day LIBOR
interest rate at 4.37% per annum on a $50 million notional amount and had a
three year term that was cancelable by The Bank of New York on the second
anniversary. On October 30, 2000, The Bank of New York cancelled the swap
agreement.
19
<PAGE>
As of April 28, 2001, our effective interest rate on borrowings under our
credit facility was approximately 6.8% excluding the effect of the swap
agreement and 7.0% including the effect of the swap agreement.
In fiscal 2001, we borrowed under our credit facility primarily for
seasonal working capital, acquisitions, and capital expenditures. During the
same period, we made certain immaterial changes to certain financial and other
covenants under our credit facility.
In November 2000, we entered into the receivable securitization, with a
financial institution whereby we sell on a continuous basis an undivided
interest in all of our eligible trade accounts receivable. Under the receivable
securitization, we transfer without recourse all of our accounts receivable to a
wholly-owned subsidiary. This subsidiary, in turn, has sold and, subject to
certain conditions, may from time to time sell an undivided interest in these
receivables and is permitted to receive advances of up to $50.0 million for the
sale of such undivided interest. The facility expires in November 2001. At
April 28, 2001, $50.0 million was advanced under the receivable securitization
and accordingly, that amount of accounts receivable has been removed from our
consolidated balance sheet. The proceeds from the sale were used to reduce
borrowings on our credit facility. Costs associated with the sale of
receivables, primarily related to the discount and loss on sale, were $1.4
million and are included in other expenses in our consolidated statement of
operations.
During fiscal 2001, net cash provided by operating activities was $38.5
million, a 23.8% increase over fiscal 2000. Net cash used in investing
activities was $104.1 million, including $116.1 million for acquisitions and
$15.2 million for additions to property and equipment. This use of cash was
offset by net proceeds provided by sale-leaseback transactions of $17.8 million,
the sale of property of $6.6 million, and the sale of Gresswell of $3.5 million.
Net borrowings of $15.8 million under the credit facility, combined with cash
from operations, cash on hand and proceeds from the receivables securitization
of $50.0 million were used to finance the above investing activities.
During fiscal 2000, net cash provided by operating activities was $31.1
million. Net cash used in investing activities was $27.3 million, including
$1.3 million for acquisitions, $17.4 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 equity 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 our follow-on offering of common
stock, as well as cash from operations and cash on hand.
Our capital expenditures in fiscal 2002 are expected to be approximately
$10 million. The largest items include computer hardware and software and
distribution equipment and improvements.
We anticipate that our cash flow from operations, borrowings available from
our existing credit facility and other sources of capital 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 primarily due to increased shipments to customers coinciding with
the start of each school year.
20
<PAGE>
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 2001 and fiscal 2000. We derived this data from
unaudited consolidated financial statements.
<TABLE>
<CAPTION>
Fiscal Year Ended April 28, 2001
----------------------------------------------------------------------------------------
First Second Third Fourth Total
---------------- ---------------- ---------------- ---------------- ----------------
(13 weeks) (13 weeks) (13 weeks) (13 weeks) (52 weeks)
<S> <C> <C> <C> <C> <C>
Revenues......................... $217,067 $240,539 $104,658 $130,410 $692,674
Gross profit..................... 79,069 85,513 38,034 49,112 251,728
Operating income (loss).......... 24,107 27,782 (4,211) (9,097) 38,581
Net income (loss)................ 11,393 12,902 (4,802) (7,354) 12,139
Per share amounts:
Basic......................... $ 0.65 $ 0.74 $ (0.27) $ (0.42) $ 0.69
Diluted....................... $ 0.65 $ 0.73 $ (0.27) $ (0.42) $ 0.68
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended April 29, 2000
----------------------------------------------------------------------------------------
First Second Third Fourth Total
---------------- ---------------- ---------------- ---------------- ----------------
(13 weeks) (13 weeks) (13 weeks) (14 weeks) (53 weeks)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
Inflation
Inflation has and is expected to have only a minor effect 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.
We 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 our financial
position or results of operations.
21
<PAGE>
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. A hypothetical 1% decrease
in interest rates during fiscal 2001 would have decreased our fiscal 2001
interest expense by approximately $2.5 million. The estimated fair value at
April 28, 2001.
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 in the interest rate swap
agreements during fiscal 1999 and fiscal 2001. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources." These interest rate swap agreements have the effect of locking in,
for a specified period, the base interest rate we pay on a notional principal
amount established in the swaps. As a result, while these hedging arrangements
are structured to reduced our exposure to interest rate increases, it also
limits the benefit we might otherwise have received from any interest rate
decrease. The swaps are usually cash settled monthly, with interest expense
adjusted for amounts paid or received. Effect of these swaps have been minor
during fiscal 2001.
<PAGE>
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. A hypothetical
1% decrease in interest rates during fiscal 2001 would have decreased our fiscal
2001 interest expense by approximately $2.5 million. The estimated fair value of
long-term debt approximates its carrying value at April 28, 2001.
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 interest rate swap
agreements during fiscal 1999 and fiscal 2001. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." These interest rate swap agreements have the effect of
locking in, for a specified period, the base interest rate we pay on a notional
principal amount established in the swaps. As a result, while these hedging
arrangements are structured to reduce our exposure to interest rate increases,
it also limits the benefit we might otherwise have received from any interest
rate decreases. The swaps are usually cash settled monthly, with interest
expense adjusted for amounts paid or received. Effects of these swaps have been
minor during fiscal 2001.
23
<PAGE>
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
of School Specialty, Inc.:
We have audited the accompanying consolidated balance sheet of School
Specialty, Inc., a Wisconsin corporation, and its subsidiaries as of April 28,
2001 and the related consolidated statements of operations, shareholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
financial statements of School Specialty, Inc. as of and for the two years
ended April 29, 2000, were audited by other auditors whose report dated June 9,
2000, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of School Specialty, Inc. as
of April 28, 2001, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements as of and for the year ended April 28, 2001, taken as a
whole. The schedule listed in Part IV Item 14(a)(2) of this Form 10-K is
presented for the purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in our audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data as of and for the year ended
April 28, 2001, required to be set forth therein in relation to the basic
financial statements taken as a whole.
Arthur Andersen LLP
Milwaukee, Wisconsin
June 4, 2001
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of School Specialty, Inc.
In our opinion, the consolidated balance sheet as of April 29, 2000 and the
related consolidated statements of operations, of shareholders' equity and of
cash flows for each of the two years in the period ended April 29, 2000,
present fairly, in all material respects, the financial position, results of
operations and cash flows of School Specialty, Inc. and its subsidiaries at
April 29, 2000 and for each of the two years in the period ended April 29,
2000, in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 14(a)(2) presents fairly, in
all material respects, the information set forth therein as of April 29, 2000
and April 24, 1999, and for each of the two years in the period ended April 29,
2000, 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 of
America, 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 our opinion. We have not audited the
consolidated financial statements or financial statement schedule of School
Specialty, Inc. for any period subsequent to April 29, 2000.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
June 9, 2000
F-2
<PAGE>
FINANCIAL STATEMENTS
SCHOOL SPECIALTY, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
April April
28, 29,
2001 2000
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,688 $ 4,151
Accounts receivable, less allowance for doubtful accounts
of $3,523 and $1,744, respectively....................... 40,358 76,028
Inventories............................................... 102,192 86,117
Prepaid expenses and other current assets................. 35,053 28,664
Deferred taxes............................................ 7,873 6,964
-------- --------
Total current assets.................................... 191,164 201,924
Property and equipment, net................................. 43,522 51,725
Intangible assets, net...................................... 254,871 192,744
Deferred taxes.............................................. -- 1,861
Other....................................................... 16,735 6,595
-------- --------
Total assets............................................ $506,292 $454,849
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities--long-term debt........................ $ 21,615 $ 17,391
Accounts payable.......................................... 57,896 48,874
Accrued compensation...................................... 7,989 8,634
Accrued restructuring..................................... 2,513 65
Other accrued liabilities................................. 15,633 10,103
-------- --------
Total current liabilities............................... 105,646 85,067
Long-term debt.............................................. 158,168 144,789
Deferred taxes.............................................. 3,018 --
-------- --------
Total liabilities....................................... 266,832 229,856
Commitments and contingencies
Shareholders' 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 17,587,008 and 17,464,505 shares
issued and outstanding................................... 18 17
Capital paid-in excess of par value....................... 198,119 196,012
Accumulated other comprehensive loss (income)............. 190 (30)
Retained earnings......................................... 41,133 28,994
-------- --------
Total shareholders' equity.............................. 239,460 224,993
-------- --------
Total liabilities and shareholders' equity.............. $506,292 $454,849
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Fiscal Year Ended
----------------------------
April April April
28, 2001 29, 2000 24, 1999
-------- -------- --------
(52 (53 (52
weeks) weeks) weeks)
<S> <C> <C> <C>
Revenues.......................................... $692,674 $639,271 $521,704
Cost of revenues.................................. 440,946 406,043 341,783
-------- -------- --------
Gross profit.................................. 251,728 233,228 179,921
Selling, general and administrative expenses...... 208,647 184,586 144,659
Restructuring and strategic restructuring costs... 4,500 -- 5,274
-------- -------- --------
Operating income.............................. 38,581 48,642 29,988
Other (income) expense:
Interest expense................................ 16,142 13,342 12,735
Interest income................................. (128) (191) (134)
Other........................................... 1,214 1,856 (228)
-------- -------- --------
Income before provision for income taxes.......... 21,353 33,635 17,615
Provision for income taxes........................ 9,214 15,120 8,719
-------- -------- --------
Net income........................................ $ 12,139 $ 18,515 $ 8,896
======== ======== ========
Weighted average shares outstanding:
Basic........................................... 17,495 17,429 14,690
Diluted......................................... 17,782 17,480 14,840
Net income per share:
Basic........................................... $ 0.69 $ 1.06 $ 0.61
Diluted......................................... $ 0.68 $ 1.06 $ 0.60
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Capital Accumulated
Common Stock Paid-in Other Total Total
---------------- Excess of Divisional Comprehensive Retained Shareholders' Comprehensive
Shares Dollars Par Value Equity Income (Loss) Earnings Equity Income (Loss)
------- ------- --------- ---------- ------------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Issuance of common
stock in conjunction
with acquisitions..... 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
Issuance of common
stock................. 151 -- 2,225 -- -- -- 2,225
Issuance of common
stock in conjunction
with stock option
exercises, net of
tax................... 55 -- 918 -- -- -- 918
Issuance of common
stock in conjunction
with acquisitions..... 57 -- 1,178 -- -- -- 1,178
Retirement of common
stock in connection
with odd-lot 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
Issuance of common
stock in conjunction
with stock option
exercises, net of
tax................... 133 1 2,375 -- -- -- 2,376
Retirement of common
stock in connection
with odd-lot tender
offer................. (11) -- (268) -- -- -- (268)
Cumulative translation
adjustment............ -- -- -- -- 30 -- 30 30
Unrealized gain on
securities available
for sale, net of tax.. -- -- -- -- 190 -- 190 190
Net income............. -- -- -- -- -- 12,139 12,139 12,139
------- ---- -------- --------- ---- ------- -------- -------
Total comprehensive
income.............. $12,359
=======
Balance at April 28,
2001................... $17,587 $ 18 $198,119 $ -- $190 $41,133 $239,460
======= ==== ======== ========= ==== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
For the Fiscal Year Ended
-------------------------------
April 28, April 29, April 24,
2001 2000 1999
--------- --------- ---------
(52 (53 (52
weeks) weeks) weeks)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $ 12,139 $ 18,515 $ 8,896
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense..... 14,539 11,839 9,604
Deferred taxes............................ 3,970 5,746 468
Restructuring costs, net of payments...... 2,513 -- 5,274
(Gain) loss on disposal/impairment of
property and equipment and other......... (305) 2,096 --
Amortization of loan fees and other....... 1,041 671 762
Loss on business dispositions............. 250 -- --
Changes in current assets and liabilities
(net of assets acquired and liabilities
assumed in business combinations
accounted for under the purchase method):
Accounts receivable..................... 10,968 844 13,583
Inventories............................. (8,478) (6,137) 1,374
Prepaid expenses and other current
assets................................. (5,182) (6,441) (2,822)
Accounts payable........................ 7,471 9,943 (12,591)
Accrued liabilities..................... (458) (6,006) 3,075
--------- --------- ---------
Net cash provided by operating
activities........................... 38,468 31,070 27,623
--------- --------- ---------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash
acquired................................... (116,062) (1,291) (122,337)
Additions to property and equipment......... (15,200) (17,351) (4,872)
Proceeds from business disposition, net of
cash disposed.............................. 3,538 -- --
Proceeds from sale and leaseback of
property................................... 17,790 -- --
Proceeds from sale of property.............. 6,632 -- --
Investment in long-term assets.............. (816) (8,704) (27)
--------- --------- ---------
Net cash used in investing activities. (104,118) (27,346) (127,236)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from bank borrowings............... 204,097 186,200 355,700
Repayment of bank debt and capital leases... (188,277) (198,192) (261,422)
Proceeds from sale of accounts receivable... 50,000 -- --
Capitalized accounts receivable
securitization/loan fees................... (741) -- (2,960)
Proceeds from exercise of stock options..... 2,376 920 --
Repurchase of common stock.................. (268) (505) --
Proceeds from issuance of common stock...... -- 2,225 73,556
Payments to U.S. Office Products............ -- -- (62,699)
Capital contribution by U.S. Office
Products................................... -- -- 7,217
--------- --------- ---------
Net cash provided by (used in)
financing activities................. 67,187 (9,352) 109,392
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.................................. 1,537 (5,628) 9,779
Cash and cash equivalents at beginning of
period....................................... 4,151 9,779 --
--------- --------- ---------
Cash and cash equivalents at end of period.... $ 5,688 $ 4,151 $ 9,779
========= ========= =========
Non-cash investing activities:
Common stock received for net assets sold in
business disposition....................... $ 9,901 $ -- $ --
Supplemental disclosures of cash flow
information:
Interest paid............................... $ 15,154 $ 13,215 $ 11,151
Income taxes paid........................... $ 8,992 $ 13,255 $ 5,123
</TABLE>
F-6
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS--(Continued)
(In Thousands)
The Company issued common stock and/or cash in connection with certain
business combinations accounted for under the purchase method in the fiscal
years ended April 28, 2001, April 29, 2000, and April 24, 1999. The fair values
of the assets and liabilities of the acquired companies are presented as
follows:
<TABLE>
<CAPTION>
For the Fiscal Year Ended
-----------------------------
April April 29, April
28, 2001 2000 24, 1999
-------- ---------- --------
(52 (52
weeks) (53 weeks) weeks)
<S> <C> <C> <C>
Accounts receivable.............................. $ 27,725 $ 2,091 $ 49,645
Inventories...................................... 8,680 1,434 30,850
Prepaid expenses and other current assets........ 5,143 65 11,142
Property and equipment........................... 5,922 178 21,033
Intangible assets................................ 78,254 2,214 103,455
Other assets..................................... 20 13 3,775
Short-term debt and capital lease obligations.... (1,217) -- (832)
Accounts payable................................. (3,036) (1,881) (25,853)
Accrued liabilities.............................. (4,863) (759) (7,564)
Long-term debt and capital lease obligations..... (566) (885) (57,599)
Other liabilities................................ -- -- (228)
-------- ------- --------
Net assets acquired............................ $116,062 $ 2,470 $127,824
======== ======= ========
The acquisitions were funded as follows:
Common stock..................................... $ -- $ 1,178 $ 5,487
Cash paid, net of cash acquired.................. 116,062 1,292 122,337
-------- ------- --------
Total.......................................... $116,062 $ 2,470 $127,824
======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
Note 1--Background
School Specialty, Inc. (the "Company"), previously a Delaware corporation,
reincorporated as a Wisconsin corporation effective August 29, 2000. The
Company 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. 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 statements of operations
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 operations in fiscal 1999 does not include an
allocation of interest expense on all debt allocated to the Company prior to
the distribution. 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.
Definition of Fiscal Year
The Company's fiscal year ends on the last Saturday in April in each year.
As used in these consolidated financial statements and related notes to
consolidated financial statements, "fiscal 2001," "fiscal 2000," and
F-8
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
"fiscal 1999" refer to the Company's fiscal years ended April 28, 2001 (52
weeks), April 29, 2000 (53 weeks), and April 24, 1999 (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.
Inventories
Inventories are generally stated at the lower of cost or market with cost
determined on a weighted-average 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 term.
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 other identifiable intangible
assets. Goodwill is amortized on a straight-line basis over an estimated useful
life, which is typically forty years. Identifiable intangible assets include
non-compete agreements, trademarks, 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 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 28, 2001.
Investments
The Company uses the cost method to account for its investment in preferred
stock 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 connection with this evaluation, the
Company took a $1,500 charge during fiscal 2000.
F-9
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
The Company has an equity investment in the common stock of Riverdeep Group
plc, which is classified and accounted for as an available-for-sale security.
This investment is reported at fair market value. Unrealized holding gains, net
of tax, related to this investment are reported as other comprehensive income,
a component of shareholders' equity. As of April 28, 2001, the unrealized
holding gain on this investment, net of tax, was $190.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments including cash
and cash equivalents, accounts receivable, accounts payable, investments in
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 in fiscal 1999
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.
Cost of Revenues
Vendor rebates are recognized as a reduction in cost of revenues.
Advertising Costs
The Company expenses advertising costs when the advertisement occurs.
Advertising costs are included in the consolidated statement of operations as a
component of selling, general and administrative expenses.
Deferred Catalog Costs
Deferred catalog costs are amortized in amounts proportionate to revenues
over the life of the catalog, which is typically one year. Amortization expense
related to deferred catalog costs is included in the consolidated statement of
operations as a component of selling, general and administrative expenses. Such
amortization expense for fiscal years 2001, 2000 and 1999, was $22,905,
$16,076, and $12,146, respectively.
F-10
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
Shipping and Handling Costs
The Company accounts for shipping and handling costs as a cost of revenues
for shipments made directly from vendors to customers. For warehouse shipments,
the Company accounts for shipping and handling costs as a selling, general and
administrative expense. The amount of shipping and handling costs in selling,
general and administrative expenses for fiscal years 2001, 2000 and 1999 was
$28,561, $23,410 and $19,286, respectively.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") 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.
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 2001, the Company made two acquisitions accounted for under the
purchase method. In June 2000, the Company acquired Global Video, LLC, for an
aggregate purchase price, net of cash acquired, of approximately $34,316. The
preliminary purchase price allocation has resulted in goodwill of approximately
$28,795, which will be amortized over 40 years. In November 2000, the Company
acquired certain assets and liabilities of J.L. Hammett for an aggregate
purchase price of $78,996 and $2,750 in non-compete agreements with certain
individuals. The preliminary purchase price allocation has resulted in goodwill
of approximately $46,709, which will be amortized over 40 years. The Company
does not expect the final allocations of purchase price to be materially
different.
In fiscal 2000, the Company made two acquisitions accounted for under the
purchase method of accounting, for an aggregate purchase price of $2,470,
consisting of $1,292 of cash and 57 shares of common stock with a market value
of $1,178, resulting in goodwill of $2,214, which will be amortized over 40
years.
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.
F-11
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
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 1999, the Company incurred a strategic restructuring charge of
$1,074. This non-cash charge related to compensation expense attributed to U.S.
Office Products' stock option tender offer and sale of shares of Common Stock
to some of the Company's executive management personnel. Additionally, during
1999, the Company recorded a restructuring charge 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.
During the fourth quarter of fiscal 2001, the Company recorded a
restructuring charge of $4,500 to close redundant facilities and for related
severance costs. The Company terminated 76 employees under this plan.
Selected information related to the restructuring reserve for closing
redundant facilities and consolidating existing warehousing, customer service
and sales operations is as follows:
<TABLE>
<CAPTION>
Facility Severance
Closure and and Other
Consolidation Terminations Costs Total
------------- ------------ ----- -------
<S> <C> <C> <C> <C>
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
Additions....................... 2,391 1,544 565 4,500
Utilizations.................... (714) (784) (554) (2,052)
------- ------- ----- -------
Balance at April 28, 2001......... $ 1,694 $ 800 $ 19 $ 2,513
======= ======= ===== =======
</TABLE>
Note 6--Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
April April
28, 29,
2001 2000
------- -------
<S> <C> <C>
Deferred catalog costs.................................... $16,596 $14,742
Assets held for sale...................................... 1,429 4,333
Other..................................................... 17,028 9,589
------- -------
Total prepaid expenses and other current assets......... $35,053 $28,664
======= =======
</TABLE>
Deferred catalog costs represent costs which have been paid to produce
Company catalogs which will be used in future periods.
F-12
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
Note 7--Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
April April
28, 29,
2001 2000
-------- --------
<S> <C> <C>
Land.................................................. $ 678 $ 2,540
Projects in progress.................................. 4,428 2,954
Buildings and leasehold improvements.................. 11,546 26,635
Furniture, fixtures, and other........................ 23,915 17,848
Machinery and warehouse equipment..................... 18,643 14,660
-------- --------
59,210 64,637
Less: Accumulated depreciation........................ (15,688) (12,912)
-------- --------
Net property and equipment.......................... $ 43,522 $ 51,725
======== ========
</TABLE>
Depreciation expense for fiscal years 2001, 2000 and 1999 was $7,100,
$5,523, and $4,948, respectively.
Note 8--Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
April April
28, 29,
2001 2000
-------- --------
<S> <C> <C>
Goodwill.............................................. $267,272 $194,350
Other................................................. 7,213 13,148
-------- --------
274,485 207,498
Less: Accumulated amortization........................ (19,614) (14,754)
-------- --------
Net intangible assets............................... $254,871 $192,744
======== ========
Amortization expense for fiscal years 2001, 2000 and 1999 was $7,439,
$6,316, and $4,656, respectively.
Note 9--Credit Facilities
Long-Term Debt
Long-term debt consists of the following:
<CAPTION>
April April
28, 29,
2001 2000
-------- --------
<S> <C> <C>
Credit facility....................................... $179,002 $161,850
Capital lease obligations............................. 645 182
Other debt............................................ 136 148
-------- --------
179,783 162,180
Less: Current maturities.............................. (21,615) (17,391)
-------- --------
Total long-term debt................................ $158,168 $144,789
======== ========
</TABLE>
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 accrues at a rate of, at the
Company's option, either
F-13
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
(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 28, 2001. At April 28, 2001, the balance
outstanding under the credit facility was $179,002, including $110,000 and
$69,002 outstanding under the revolving and term loans, respectively, and
included six eurodollar contracts, expiring within 92 days, totaling $110,000
at an average interest rate of 6.48% . The effective interest rate under the
credit facility for fiscal 2001 was 8.41%, which includes the loan origination
fee and commitment fee on unborrowed funds, and excludes the effect of the
interest rate swap agreements disclosed below.
On October 28, 1998, the Company entered into an interest rate swap
agreement with The Bank of New York covering $50,000 of the outstanding credit
facility. The agreement fixed the 30-day LIBOR interest rate at 4.37% per annum
on a $50,000 notional amount and had a three year term that was cancelable by
The Bank of New York on the second anniversary. On October 30, 2000, The Bank
of New York cancelled the swap agreement.
The Company entered into an interest rate swap agreement on December 13,
2000 (effective date of January 2, 2001), 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 6.07% per annum on the $50,000 notional
amount and has a one-year term which expires on January 2, 2002. The floating
LIBOR interest rate at April 28, 2001, April 29, 2000, and April 24, 1999 was
5.08%, 6.18%, and 4.91%, respectively. The fair market value of the swap
agreement at April 28, 2001 was ($660).
Maturities of Long-Term Debt
Maturities of long-term debt, including capital lease obligations for our
fiscal years, are as follows:
<TABLE>
<S> <C>
2002............................ $ 21,615
2003............................ 27,387
2004............................ 130,564
2005............................ 139
2006............................ 18
Thereafter...................... 60
--------
Total maturities of long-term
debt......................... $179,783
========
</TABLE>
The credit facility contains certain restrictive covenants, including
limitations on the ability of the Company to pay dividends or redeem stock as
well as limitations on incurring debt, capital expenditures, mergers or
consolidations, sale of assets and transactions with affiliates. The Company is
in compliance with all of the credit facility's restrictive covenants at April
28, 2001.
Note 10--Securitization of Accounts Receivable
The Company and certain of its U.S. subsidiaries entered into an agreement
(the "Receivables Facility") in November 2000 with a financial institution
whereby it sells on a continuous basis an undivided interest in all eligible
trade accounts receivable. Pursuant to the Receivables Facility, the Company
formed New School, Inc. ("NSI"), a wholly-owned, special purpose, bankruptcy-
remote subsidiary. As such, the assets of NSI will be available first and
foremost to satisfy the claims of the creditors of NSI. NSI was formed for the
sole purpose of buying and selling receivables generated by the Company and
certain subsidiaries of the Company. Under
F-14
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
the Receivables Facility, the Company and certain subsidiaries transfer without
recourse all their accounts receivables to NSI. NSI, in turn, has sold and,
subject to certain conditions, may from time to time sell an undivided interest
in these receivables and is permitted to receive advances of up to $50,000 for
the sale of such undivided interest. The Company receives a fee from the
financial institution for billing and collection functions, which remain the
responsibility of the Company, that approximates fair value. The agreement
expires in November 2001.
This transaction is accounted for as a sale of receivables under the
provision of SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities." There was $50,000 advanced under the
Receivables Facility at April 28, 2001, and accordingly, that amount of
accounts receivable has been removed from the Consolidated Balance Sheet. Costs
associated with the sale of receivables, primarily related to the discount and
loss on sale, were $1,389 and are included in other expenses in the
Consolidated Statement of Operations for the fiscal year ended April 28, 2001.
Note 11--Income Taxes
The provision for income taxes consists of:
<TABLE>
<CAPTION>
For the Fiscal Year Ended
-------------------------------
April 28, April 29, April 24,
2001 2000 1999
---------- --------- ---------
(52 weeks) (53 weeks) (52 weeks)
<S> <C> <C> <C>
Income taxes currently payable:
Federal................................ $3,834 $ 7,371 $6,511
State.................................. 1,410 2,003 1,740
------ ------- ------
5,244 9,374 8,251
Deferred income tax expense.............. 3,970 5,746 468
------ ------- ------
Total provision for income taxes..... $9,214 $15,120 $8,719
====== ======= ======
</TABLE>
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
April 28, April 29,
2001 2000
--------- ---------
<S> <C> <C>
Current deferred tax assets (liabilities):
Inventory.......................................... $ 4,028 $ 3,001
Allowance for doubtful accounts.................... 1,493 716
Net operating loss carryforward.................... 1,493 1,493
Accrued liabilities................................ (885) 620
Accrued restructuring.............................. 994 26
Charitable contribution carryforward............... 750 1,108
------- -------
Total current deferred tax assets................ 7,873 6,964
------- -------
Long-term deferred tax assets (liabilities):
Net operating loss carryforward...................... 2,284 4,097
Property and equipment............................... (1,500) (1,200)
Intangible assets.................................... (4,402) (1,636)
Unrealized loss on investment........................ 600 600
------- -------
Total long-term deferred tax assets
(liabilities)................................... (3,018) 1,861
------- -------
Net deferred tax assets.......................... $ 4,855 $ 8,825
======= =======
</TABLE>
F-15
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
The Company has net operating loss carryforwards of approximately $9,317, on
a consolidated basis, which expire during fiscal years 2011-2013. The
carryforwards are also subject to an annual federal 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:
<TABLE>
<CAPTION>
For the Fiscal Year Ended
-------------------------------
April 28, April 29, April 24,
2001 2000 1999
---------- --------- ---------
(52 weeks) (53 weeks) (52 weeks)
<S> <C> <C> <C>
U.S. federal statutory rate............. 35.0% 35.0% 35.0%
State income taxes, net of federal
income tax benefit..................... 4.5 4.6 5.2
Non-deductible goodwill................. 7.1 5.4 6.5
Impact of divestitures.................. (3.4) -- --
Other................................... -- -- 2.8
---- ---- ----
Effective income tax rate............... 43.2% 45.0% 49.5%
==== ==== ====
</TABLE>
Note 12--Operating Lease Commitments
The Company leases various types of warehouse and office facilities and
equipment, under noncancelable lease agreements which expire at various dates.
Future minimum lease payments under noncancelable operating leases for our
fiscal years are as follows:
<TABLE>
<S> <C>
2002...................................... $ 9,089
2003...................................... 7,787
2004...................................... 6,492
2005...................................... 6,329
2006...................................... 5,888
Thereafter................................ 55,382
-------
Total minimum lease payments............ $90,967
=======
</TABLE>
Rent expense for fiscal 2001, 2000 and 1999, was $7,462, $5,535, and $4,498,
respectively.
In November 2000, the Company entered into two sale-leaseback transactions.
Net proceeds from the transactions were approximately $17,800 and resulted in a
deferred gain of $877, which is being amortized over the life of the leases.
The leases have initial terms of 20 years, with four, five year options to
extend the initial term.
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 virtually all full-time
employees are eligible to participate in the Company 401(k) Plan after 90 days
of service. In fiscal years 2001, 2000 and 1999, the Company's matching
contribution expense was $657, $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.
F-16
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
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--Shareholders' Equity
Earnings Per Share
Basic earnings per share ("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 to issue common stock were exercised.
The following information presents the Company's computations of basic and
diluted EPS for the periods presented in the consolidated statement of
operations.
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Fiscal 2001:
Basic EPS................................ $12,139 17,495 $0.69
=====
Effect of dilutive employee stock
options................................. -- 287
------- ------
Diluted EPS.............................. $12,139 17,782 $0.68
======= ====== =====
Fiscal 2000:
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:
Basic EPS................................ $ 8,896 14,690 $0.61
=====
Effect of dilutive employee stock
options................................. -- 150
------- ------
Diluted EPS.............................. $ 8,896 14,840 $0.60
======= ====== =====
</TABLE>
The Company had additional employee stock options outstanding during the
periods presented of 373, 948 and 280, respectively, that were not included in
the computation of diluted EPS because they were anti-dilutive.
Stock Offerings
On April 16, 1999, the Company issued 2,400 shares in conjunction with a
secondary public offering for 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 maximum number
F-17
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
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 to employees and directors. 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.
<TABLE>
<CAPTION>
For the Fiscal Year Ended
-------------------------------
April 28, April 29, April 24,
2001 2000 1999
---------- --------- ---------
(52 weeks) (53 weeks) (52 weeks)
<S> <C> <C> <C>
Net income (loss):
As reported........................... $12,139 $18,515 $ 8,896
Pro forma............................. 9,405 14,954 (1,737)
Net income (loss) per share:
As reported:
Basic............................... $ 0.69 $ 1.06 $ 0.61
Diluted............................. $ 0.68 $ 1.06 $ 0.60
Pro forma:
Basic............................... $ 0.54 $ 0.86 $ (0.12)
Diluted............................. $ 0.53 $ 0.86 $ (0.12)
</TABLE>
The fair value of options granted (which is amortized to expense over the
option vesting period in determining the pro forma impact) is estimated on the
date of grant using the Black-Scholes single option pricing model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
For the Fiscal Year
Ended
-----------------------
April April April
28, 29, 24,
2001 2000 1999
------- ------- -------
<S> <C> <C> <C>
Expected life of option 7 years 7 years 7 years
Risk free interest rate........................... 5.30% 6.49% 5.50%
Expected volatility of stock...................... 59.58% 67.14% 59.00%
</TABLE>
The weighted-average fair value of options granted was $11.98, $11.45, and
$10.23, for fiscal 2001, 2000, and 1999, respectively.
F-18
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
A summary of option transactions follows:
<TABLE>
<CAPTION>
Options Options
Outstanding Exercisable
----------------- -----------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
------- --------- ------- ---------
<S> <C> <C> <C> <C>
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
Granted................................ 243 18.58
Exercised.............................. (133) 15.83
Canceled............................... (108) 16.99
-----
Balance at April 28, 2001................ 3,066 $16.70 2,173 $16.47
=====
</TABLE>
The following table summarizes information about stock options outstanding
at April 28, 2001:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
--------------------------- -----------------
Weighted- Weighted-
Weighted- Average Average
Average Exercise Exercise
Range of Exercise Prices Options Life Price Options Price
------------------------ ------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
$12.00-$15.00 283 8.15 $14.40 68 $14.38
$15.50-$15.50 1,648 7.12 15.50 1,633 15.50
$15.63-$19.93 811 8.13 17.38 321 17.43
$20.25-$29.43 324 7.73 23.11 151 25.94
----- ---- ------ ----- ------
3,066 7.55 $16.70 2,173 $16.47
===== ==== ====== ===== ======
</TABLE>
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
of the Company vest over a three year period, 20% after the first year, 50%
(cumulative) after the second year 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 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.
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 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 price of $15.50 and were exercisable in full
on June 10, 1999.
F-19
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
On June 20, 2000, the Board of Directors approved the JuneBox.com, Inc.,
2000 Equity Incentive Plan. The purpose of the plan is to recruit, reward and
retain employees, directors and other service providers by increasing their
ownership interests in JuneBox.com. JuneBox.com is a wholly-owned subsidiary of
School Specialty, Inc., and its stock is not publicly traded. During fiscal
2001, approximately 1,900 options were granted at fair market value at the date
of grant under this Plan and no options were exercised.
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 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 and operate principally
in the United States. 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).
F-20
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
The following table presents segment information.
<TABLE>
<CAPTION>
For the Fiscal Year Ended
----------------------------
April April April
28, 29, 24,
2001 2000 1999
-------- -------- --------
(52 (53 (52
weeks) weeks) weeks)
<S> <C> <C> <C>
Revenues:
Traditional.................................... $415,001 $386,715 $339,031
Specialty...................................... 277,673 252,556 182,673
Internet....................................... 25,262 5,607 --
Inter-company revenue elimination.............. (25,262) (5,607) --
-------- -------- --------
Total........................................ $692,674 $639,271 $521,704
======== ======== ========
Operating profit (loss) and income before taxes:
(a)
Traditional.................................... $ 27,829 $ 34,653 $ 21,222
Specialty...................................... 29,867 28,573 20,944
Internet....................................... (2,974) (3,261) --
-------- -------- --------
Total........................................ 54,722 59,965 42,166
General corporate expense...................... 11,641 11,323 6,904
Restructuring charges.......................... 4,500 -- 5,274
Interest expense and other..................... 17,228 15,007 12,373
-------- -------- --------
Income before taxes.......................... $ 21,353 $ 33,635 $ 17,615
======== ======== ========
Identifiable assets (at year end):
Traditional.................................... $241,878 $246,006 $247,204
Specialty...................................... 168,297 174,603 164,320
Internet....................................... 10,669 10,039 --
-------- -------- --------
Total........................................ 420,844 430,648 411,524
Corporate assets............................... 85,448 24,201 26,184
-------- -------- --------
Total........................................ $506,292 $454,849 $437,708
======== ======== ========
Depreciation and amortization:
Traditional.................................... $ 6,266 $ 6,129 $ 6,043
Specialty...................................... 5,483 4,499 3,058
Internet....................................... 1,516 711 --
-------- -------- --------
Total........................................ 13,265 11,339 9,101
Corporate...................................... 1,274 500 503
-------- -------- --------
Total........................................ $ 14,539 $ 11,839 $ 9,604
======== ======== ========
Expenditures for property and equipment:
Traditional.................................... $ 4,479 $ 6,215 $ 782
Specialty...................................... 3,571 5,284 2,326
Internet....................................... 3,852 3,280 --
-------- -------- --------
Total........................................ 11,902 14,779 3,108
Corporate...................................... 3,298 2,572 1,764
-------- -------- --------
Total........................................ $ 15,200 $ 17,351 $ 4,872
======== ======== ========
</TABLE>
- --------
(a) Operating profit is defined as operating income before restructuring costs.
F-21
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
Note 16--Quarterly Financial Data (unaudited)
The following presents certain unaudited quarterly financial data for fiscal
2001 and fiscal 2000:
<TABLE>
<CAPTION>
Fiscal Year Ended April 28, 2001
----------------------------------------------
First Second Third Fourth Total
-------- -------- -------- -------- --------
(13 (13 (13 (13 (52
weeks) weeks) weeks) weeks) weeks)
<S> <C> <C> <C> <C> <C>
Revenues...................... $217,067 $240,539 $104,658 $130,410 $692,674
Gross profit.................. 79,069 85,513 38,034 49,112 251,728
Operating income (loss)....... 24,107 27,782 (4,211) (9,097) 38,581
Net income (loss)............. 11,393 12,902 (4,802) (7,354) 12,139
Per share amounts:
Basic....................... $ 0.65 $ 0.74 $ (0.27) $ (0.42) $ 0.69
Diluted..................... $ 0.65 $ 0.73 $ (0.27) $ (0.42) $ 0.68
<CAPTION>
Fiscal Year Ended April 29, 2000
----------------------------------------------
First Second Third Fourth Total
-------- -------- -------- -------- --------
(13 (13 (13 (14 (53
weeks) weeks) weeks) weeks) weeks)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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--Subsequent Event
On May 9, 2001, the Company purchased certain assets and liabilities of
Envision, Inc. The purchase price, which is subject to change, was
approximately $6,750, funded 60% in cash, through borrowings under the
Company's credit facility, and 40% in School Specialty, Inc., common stock,
representing 120 shares.
F-22
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure
Information previously reported.
F-23
<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 Shareholders to be held on August 28,
2001, 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 Shareholders to be held
on August 28, 2001, 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 Shareholders to be held on August 28, 2001, 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 Shareholders to be held on August 28, 2001, 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 Shareholders to be held on August 28, 2001, under the
captions "Certain Relationships and Related Transactions" and "Director
Compensation and Other Arrangements."
F-24
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements.
Consolidated Financial Statements
Reports of Independent Public Accountants
Consolidated Balance Sheets as of April 28, 2001, and April 29, 2000
Consolidated Statements of Operations for the fiscal years ended
April 28, 2001 (52 weeks), April 29, 2000 (53 weeks), and April 24,
1999 (52 weeks)
Consolidated Statements of Shareholders' Equity for the fiscal years
ended April 28, 2001 (52 weeks), April 29, 2000 (53 weeks), and
April 24, 1999 (52 weeks)
Consolidated Statements of Cash Flows for the fiscal years ended
April 28, 2001 (52 weeks), April 29, 2000 (53 weeks), and April 24,
1999 (52 weeks)
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedule.
Schedule for the fiscal years ended April 28, 2001 (52 weeks), April
29, 2000 (53 weeks), and April 24, 1999 (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.
F-25
<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 9, 2001.
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 9, 2001
- ----------------------------
Daniel P. Spalding Executive Officer) and Director
/s/ Mary M. Kabacinski Chief Financial Officer (Principal July 9, 2001
- ----------------------------
Mary M. Kabacinski Financial and Accounting Officer)
/s/ David J. Vander Zanden President, Chief Operating Officer July 9, 2001
- ----------------------------
David J. Vander Zanden and Director
/s/ Jonathan J. Ledecky Director July 9, 2001
- ----------------------------
Jonathan J. Ledecky
/s/ Rochelle Lamm Director July 9, 2001
- ----------------------------
Rochelle Lamm
/s/ Leo C. McKenna Director July 9, 2001
- ----------------------------
Leo C. McKenna
/s/ Jerome M. Pool Director July 9, 2001
- ----------------------------
Jerome M. Pool
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Document Description
- ------ --------------------
3.1 Articles of Incorporation of School Specialty, Inc., incorporated
herein by reference to Appendix B of the School Specialty, Inc.
definitive Proxy Statement dated July 24, 2000.
3.2 Bylaws of School Specialty, Inc., incorporated herein by reference to
Exhibit 3.2 of School Specialty's current report on Form 8-K dated
August 31, 2000.
4.1 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,
incorporated herein by reference to Exhibit 10.12 of School Specialty's
Form 10-Q for the period ended January 23, 1999.
4.2 Amended and Restated Pledge Agreement dated as of September 30, 1998
given by School Specialty, Inc. and the other pledgors named therein to
Nationsbank, N.A. as Administrative Agent.
4.3 Amended and Restated Security Agreement dated as of September 30, 1998
given by School Specialty, Inc. and the other grantors named therein to
Nationsbank, N.A. as Administrative Agent.
4.4 Amendment No. 1 to Amended and Restated Credit Agreement dated as of
May 12, 2000, incorporated herein to Exhibit 10.1 of School Specialty's
Quarterly Report on Form 10-Q for the period ended July 29, 2000.
4.5 Consent and Amendment to Amended and Restated Credit Agreement dated
November 20, 2000.
4.6 Certain other long-term debt is described in Note 9 of the Notes to
Consolidated Financial Statements. School Specialty agrees to furnish
the Commission, upon request, copies of any instruments defining the
rights of holders of any such long-term debt described in Note 9 and
not filed herewith.
10.1 Distribution Agreement among U.S. Office Products Company, Workflow
Management, Inc., Aztec Consulting, Inc., Navigant International, Inc.
and School Specialty, Inc., incorporated herein by reference to Exhibit
10.1 of 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.
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., incorporated herein by
reference to Exhibit 10.2 of 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.
<PAGE>
Exhibit
Number Document Description
- ------ --------------------
10.3 Tax Indemnification Agreement among Workflow Management, Inc., Aztec
Technology Partners, Inc., Navigant International, Inc. and School
Specialty, Inc., incorporated herein by reference to Exhibit 10.3 of
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.
10.4 Employee Benefits Agreement among Workflow Management, Inc., Aztec
Technology Partners, Inc., Navigant International, Inc. and School
Specialty, Inc., incorporated herein by reference to Exhibit 10.4 of
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.
10.5 Employment Agreement dated September 3, 1999 between Daniel P. Spalding
and School Specialty, Inc., incorporated herein by reference to Exhibit
10.1 of School Specialty's Quarterly Report on Form 10-Q for the period
ended October 23, 1999.
10.6 Employment Agreement dated September 3, 1999 between Mary M. Kabacinski
and School Specialty, Inc., incorporated herein by reference to Exhibit
10.2 of School Specialty's Quarterly Report on Form 10-Q for the period
ended October 23, 1999.
10.7 Employment Agreement dated September 3, 1999 between Donald J.
Noskowiak and School Specialty, Inc., incorporated herein by reference
to Exhibit 10.3 of School Specialty's Quarterly Report on Form 10-Q for
the period ended October 23, 1999.
10.8 Employment Agreement dated March 26, 2001 between A. Brent Pulsipher
and School Specialty, Inc.
10.9 Employment Agreement between David J. Vander Zanden and School
Specialty, Inc., incorporated herein by reference to Exhibit 10.8 of
School Specialty's Annual Report on Form 10-K for the fiscal year ended
April 25, 1998.
10.10 Employment Agreement dated August 22, 2000 between Michael J. Killoren
and JuneBox.com, Inc.
10.11 Amended Services Agreement dated as of June 8, 1998 between U.S. Office
Products and Jonathan J. Ledecky, incorporated herein by reference to
Exhibit 10.11 of 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.
10.12 Amended and Restated 1998 Stock Incentive Plan dated June 20, 2000,
incorporated herein by reference to Appendix C of the School Specialty,
Inc. definitive Proxy Statement dated July 24, 2000.
10.13 Receivables Purchase Agreement dated November 22, 2000, incorporated
herein by reference to Exhibit 10.1(a) of School Specialty's Quarterly
Report on Form 10-Q for the period ended January 27, 2001.
<PAGE>
Exhibit
Number Document Description
- ------ --------------------
10.14 Receivables Sales Agreement dated November 22, 2000, incorporated
herein by reference to Exhibit 10.1(b) of School Specialty's Quarterly
Report on Form 10-Q for the period ended January 27, 2001.
16.1 Letter from PricewaterhouseCoopers, LLP dated December 14, 2000 to the
SEC incorporated herein by reference to Exhibit 16.1 of School
Specialty's current report on Form 8-K dated December 11, 2000.
21.1 Subsidiaries of School Specialty, Inc.
23.1 Consent of ArthurAndersen LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
99.1 Schedule II - Valuation and Qualifying Accounts.
99.2 Forward-Looking Statements
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.2
<SEQUENCE>2
<FILENAME>dex42.txt
<DESCRIPTION>AMENDED AND RESTATED PLEDGE AGREEMENT
<TEXT>
<PAGE>
EXHIBIT 4.2
AMENDED AND RESTATED PLEDGE AGREEMENT
-------------------------------------
THIS AMENDED AND RESTATED PLEDGE AGREEMENT dated as of September 30, 1998
(as amended and modified, the "Pledge Agreement" or this "Agreement") amends and
---------------- ---------
restates that certain Pledge Agreement dated as of June 9, 1998 by and among the
Administrative Agent and the Pledgors identified therein, and is made by those
parties identified as "Pledgors" on the signature pages and such other parties
as may become Pledgors hereunder after the date hereof (the "Pledgors") in favor
--------
of NATIONSBANK, N.A., as Administrative Agent (in such capacity, the
"Administrative Agent") for the Lenders under the Credit Agreement described
- ---------------------
below and any Affiliates of Lenders which provide interest rate or currency
protection agreements as hereafter provided (collectively, the "Lenders").
-------
WITNESSETH
WHEREAS, the Lenders have severally agreed to make loans and extensions of
credit to School Specialty, Inc., a Delaware corporation (the "Borrower") upon
--------
the terms and conditions provided in the terms of that Amended and Restated
Credit Agreement dated as of the date hereof (as amended and modified, the
"Credit Agreement") among the Borrower, the Guarantors and Lenders identified
- -----------------
therein and NationsBank, N.A., as Administrative Agent;
WHEREAS, it is a condition precedent to the effectiveness of the Credit
Agreement and the obligations of the Lenders to make their respective loans and
extensions of credit to the Borrower thereunder that the Credit Parties shall
have executed and delivered this Pledge Agreement to the Administrative Agent
for the ratable benefit of the Lenders;
NOW, THEREFORE, in consideration of the premises and to induce the
Administrative Agent and the Lenders to enter into the Credit Agreement and to
induce the Lenders to make their respective loans and extensions of credit
thereunder, the Pledgors hereby agree with the Administrative Agent, for the
ratable benefit of the Lenders, as follows:
1. Defined Terms. (a) Unless otherwise defined herein, terms defined in
-------------
the Credit Agreement and used herein shall have the meanings given to them in
the Credit Agreement. For purposes of this Agreement, the term "Lender" shall
------
include any Affiliate of any Lender which has entered into a Hedging Agreement
with a Credit Party to the extent permitted by the Credit Agreement.
(b) The following terms shall have the following meanings:
"Agreement": this Pledge Agreement, as the same may be amended,
---------
modified or otherwise supplemented from time to time.
"Code": the Uniform Commercial Code from time to time in effect in
----
the State of New York.
"Collateral": the Pledged Stock and all Proceeds thereof.
----------
"Collateral Account": any account established to hold money Proceeds,
------------------
maintained under the sole dominion and control of the Administrative Agent,
subject to
1
<PAGE>
withdrawal by the Administrative Agent for the account of the Lenders as
provided in Section 8(a).
"Issuers": the collective reference to the companies identified on
-------
Schedule 1 attached hereto as the issuers of the Pledged Stock;
----------
individually, each an "Issuer."
"Pledged Stock": the shares of capital stock or membership units, as
-------------
applicable, listed on Schedule 1 hereto, together with all stock
----------
certificates or membership certificates, as applicable, and all options or
rights of any nature whatsoever that may be issued or granted by any Issuer
to a Pledgor in respect of the Pledged Stock while this Agreement is in
effect.
"Proceeds": all "proceeds" as such term is defined in Section 9-
--------
306(1) of the Uniform Commercial Code in effect in the State of New York on
the date hereof and, in any event, shall include, without limitation, all
dividends or other income from the Pledged Stock, collections thereon or
distributions with respect thereto.
"Secured Obligations": the collective reference to the following:
-------------------
(a) All unpaid principal of and interest on (including, without
limitation, interest accruing at the then applicable rate provided in
the Credit Agreement after the maturity of the Loans and other
obligations owing under the Credit Agreement and interest accruing at
the then applicable rate provided in the Credit Agreement after the
filing of any petition in bankruptcy, or the commencement of any
insolvency, reorganization or like proceeding, relating to the
Borrower, whether or not a claim for post-filing or post-petition
interest is allowed in such proceeding) the Loans and all other
obligations and liabilities of the Borrower to the Agent and the
Lenders, whether direct or indirect, absolute or contingent, due or to
become due, or now existing or hereafter incurred, which may arise
under, out of, or in connection with, the Credit Agreement, any Notes,
the other Credit Documents, any Hedging Agreements with a Lender or an
Affiliate of a Lender to the extent permitted under the Credit
Agreement or any other document made, delivered or given in connection
therewith, in each case whether on account of principal, interest,
reimbursement obligations, fees, indemnities, costs, expenses or
otherwise (including, without limitation, all fees and disbursements
of counsel to the Agent or to the Lenders that are required to be paid
by the Borrower pursuant to the terms of the Credit Agreement, any
other Credit Document or any Hedging Agreements with a Lender or an
Affiliate of a Lender to the extent permitted under the Credit
Agreement); and
(b) the prompt payment, performance and observance by the
Guarantors under the Credit Agreement of all obligations of the
Guarantors thereunder and under the other Credit Documents to which
the Guarantors are a party (including, without limitation, payment of
their guaranty obligations under the Credit Agreement), or under any
Hedging Agreement with a Lender or an Affiliate of a Lender to the
extent permitted under the Credit Agreement, to which
<PAGE>
such Guarantor is a party or any guaranty is given by it in connection
therewith; and
(c) All other indebtedness, liabilities and obligations of any
kind or nature, now existing or hereafter arising, owing by the
Pledgors to any Lender or the Administrative Agent, arising under this
Pledge Agreement or any of the other Credit Documents, whether
primary, secondary, direct, contingent, or joint and several; and
(d) All liabilities and obligations, now existing or hereafter
arising, owing by the Borrower to any Lender or any Affiliate of a
Lender arising under Hedging Agreements with a Lender or an Affiliate
of a Lender to the extent permitted under the Credit Agreement.
"Securities Act": the Securities Act of 1933, as amended.
--------------
(c) The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole
and not to any particular provision of this Agreement, and section and
paragraph references are to this Agreement unless otherwise specified.
(d) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
2. Pledge; Grant of Security Interest. Each of the Pledgors hereby
----------------------------------
delivers to the Administrative Agent, for the ratable benefit of the Lenders,
all the Pledged Stock and hereby grants to the Administrative Agent, for the
ratable benefit of the Lenders, a first security interest in the Collateral, as
collateral security for the prompt and complete payment and performance when due
(whether at the stated maturity, by acceleration or otherwise) of the Secured
Obligations.
3. Stock Powers. Concurrently with the delivery to the Administrative
------------
Agent of each certificate representing one or more shares of Pledged Stock to
the Administrative Agent, each of the Pledgors shall deliver an undated stock
power covering such certificate, duly executed in blank with, if the
Administrative Agent so requests, signature guaranteed.
4. Representations and Warranties. Each of the Pledgors represents and
------------------------------
warrants that:
(a) The shares of Pledged Stock constitute the percentage of capital
stock or membership units, as applicable, of the Issuer set forth on
Schedule 1.
----------
(b) All the shares of the Pledged Stock have been duly and validly
issued and are fully paid and nonassessable.
(c) The Pledgor is the record and beneficial owner of, and has good
and marketable title to, the Pledged Stock, free of any and all Liens or
options in favor of, or claims of, any other Person, except the security
interests created by this Agreement.
<PAGE>
(d) Upon delivery to the Administrative Agent of the stock certificates
or membership certificates, as applicable, evidencing the Pledged Stock,
the security interest created by this Agreement will constitute a valid,
perfected first priority security interest in the Collateral, enforceable
in accordance with its terms against all creditors of the Pledgor and any
Persons purporting to purchase any Collateral from the Pledgor, except as
affected by bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting creditors'
rights generally, general equitable principles (whether considered in a
proceeding in equity or at law) and an implied covenant of good faith and
fair dealing.
5. Covenants. Each of the Pledgors covenants and agrees with the
---------
Administrative Agent and the Lenders that, from and after the date of this
Agreement until this Agreement is terminated and the security interests created
hereby are released:
(a) If the Pledgor shall, as a result of its ownership of the Pledged
Stock, become entitled to receive or shall receive any stock certificate or
membership certificate, as applicable (including, without limitation, any
certificate representing a stock dividend or a distribution in connection
with any reclassification, increase or reduction of capital or any
certificate issued in connection with any reorganization), option or
rights, whether in addition to, in substitution of, as a conversion of, or
in exchange for any shares of the Pledged Stock, or otherwise in respect
thereof, the Pledgor shall accept the same as the agent of the
Administrative Agent and the Lenders, hold the same in trust for the
Administrative Agent and the Lenders and deliver the same forthwith to the
Administrative Agent in the exact form received, duly indorsed by the
Pledgor to the Administrative Agent, if required, together with an undated
stock power covering such certificate duly executed in blank by the Pledgor
and with, if the Administrative Agent so requests, signature guaranteed, to
be held by the Administrative Agent, subject to the terms hereof, as
additional collateral security for the Secured Obligations. Except in
connection with any transaction permitted under Section 8.5 of the Credit
Agreement, any sums paid upon or in respect of the Pledged Stock upon the
liquidation or dissolution of any issuer shall be paid over to the
Administrative Agent to be held by it hereunder as additional collateral
security for the Secured Obligations, and in case any distribution of
capital shall be made on or in respect of the Pledged Stock or any property
shall be distributed upon or with respect to the Pledged Stock pursuant to
the recapitalization or reclassification of the capital of the Issuer or
pursuant to the reorganization thereof, the property so distributed shall
be delivered to the Administrative Agent to be held by it hereunder as
additional collateral security for the Secured Obligations. If any sums of
money or property so paid or distributed in respect of the Pledged Stock
shall be received by the Pledgor, the Pledgor shall, until such money or
property is paid or delivered to the Administrative Agent, hold such money
or property in trust for the Lenders, segregated from other funds of the
Pledgor, as additional collateral security for the Secured Obligations.
(b) Without the prior written consent of the Administrative Agent, the
Pledgor will not (i) vote to enable, or take any other action to permit,
any Issuer to issue any stock or other equity securities of any nature or
to issue any other securities convertible into or granting the right to
purchase or exchange for any stock or equity securities of any nature
<PAGE>
of any Issuer, (ii) sell, assign, transfer, exchange, or otherwise dispose
of, or grant any option with respect to, the Collateral, (iii) create,
incur or permit to exist any Lien or option in favor of, or any claim of
any Person with respect to, any of the Collateral, or any interest therein,
except for the security interests created by this Agreement or (iv) enter
into any agreement or undertaking restricting the right or ability of the
Pledgor or the Administrative Agent to sell, assign or transfer any of the
Collateral.
(c) The Pledgor shall maintain the security interest created by this
Agreement as a first, perfected security interest and shall defend such
security interest against claims and demands of all Persons whomsoever. At
any time and from time to time, upon the written request of the
Administrative Agent, and at the sole expense of the Pledgor, the Pledgor
will promptly and duly execute and deliver such further instruments and
documents and take such further actions as the Administrative Agent may
reasonably request for the purposes of obtaining or preserving the full
benefits of this Agreement and of the rights and powers herein granted. If
any amount payable under or in connection with any of the Collateral shall
be or become evidenced by any promissory note, other instrument or chattel
paper, such note, instrument or chattel paper shall be immediately
delivered to the Administrative Agent, duly endorsed in a manner
satisfactory to the Administrative Agent, to be held as Collateral pursuant
to this Agreement.
(d) The Pledgor shall pay, and save the Administrative Agent and the
Lenders harmless from, any and all liabilities with respect to, or
resulting from any delay in paying, any and all stamp, excise, sales or
other taxes which may be payable or determined to be payable with respect
to any of the Collateral or in connection with any of the transactions
contemplated by this Agreement, except for any such liabilities which
result from the gross negligence or willful misconduct of the
Administrative Agent.
6. Cash Dividends; Voting Rights. Unless an Event of Default shall have
-----------------------------
occurred and the Administrative Agent shall have given notice to the Pledgor of
the Administrative Agent's intent to exercise its corresponding rights pursuant
to Section 7 below, the Pledgor shall be permitted to receive all cash dividends
paid in the normal course of business of the Issuers and consistent with past
practice or otherwise to enable the partners or shareholders of the Pledgor to
pay taxes, to the extent permitted in the Credit Agreement, in respect of the
Pledged Stock and to exercise all voting and corporate rights with respect to
the Pledged Stock; provided, however, that no vote shall be cast or corporate
-------- --------
right exercised or other action taken which, in the Administrative Agent's
reasonable judgment, would impair the Collateral or which would be inconsistent
with or result in any violation of any provision of the Credit Agreement, this
Agreement or any other Credit Document.
7. Rights of the Lenders and the Administrative Agent. (a) All money
--------------------------------------------------
Proceeds received by the Administrative Agent hereunder shall be held by the
Administrative Agent for the benefit of the Lenders in a Collateral Account.
All Proceeds while held by the, Administrative Agent in a Collateral Account (or
by the Pledgors in trust for the Administrative Agent and the Lenders) shall
continue to be held as collateral security for all the Secured Obligations and
shall not constitute payment thereof until applied as provided in Section 8(a).
<PAGE>
(b) At any time after an Event of Default shall have occurred and be
continuing and the Administrative Agent shall give notice of its intent to
exercise such rights to the Pledgor, (i) the Administrative Agent shall have the
right to receive any and all cash dividends paid in respect of the Pledged Stock
and make application thereof to the Secured Obligations in such order as the
Administrative Agent may determine, and (ii) all shares of the Pledged Stock
shall be registered in the name of the Administrative Agent or its nominee, and
the Administrative Agent or its nominee may thereafter exercise (A) all voting,
corporate and other rights pertaining to such shares of the Pledged Stock at any
meeting of shareholders of any Issuer or otherwise and (B) any and all rights of
conversion, exchange, subscription and any other rights, privileges or options
pertaining to such shares of the Pledged Stock as if it were the absolute owner
thereof (including, without limitation, the right to exchange at its discretion
any and all of the Pledged Stock upon the merger, consolidation, reorganization,
recapitalization or other fundamental change in the corporate structure of any
Issuer, or upon the exercise by the Pledgor or the Administrative Agent of any
right, privilege or option pertaining to such shares of the Pledged Stock, and
in connection therewith, the right to deposit and deliver any and all of the
Pledged Stock with any committee, depositary, transfer agent, registrar or other
designated agency upon such terms and conditions as the Administrative Agent may
determine), all without liability except to account for property actually
received by it, but the Administrative Agent shall have no duty to the Pledgor
to exercise any such right, privilege or option and shall not be responsible for
any failure to do so or delay in so doing.
8. Remedies. (a) At any time after an Event of Default shall have
--------
occurred, at the Administrative Agent's election, the Administrative Agent's
election, the Administrative Agent may apply all or any part of Proceeds held in
any Collateral Account in payment of the Secured Obligations in such order as
the Administrative Agent may elect.
(b) At any time after an Event of Default shall have occurred, the
Administrative Agent, on behalf of the Lenders, may exercise, in addition to all
other rights and remedies granted in this Agreement and in any other instrument
or agreement securing, evidencing or relating to the Secured Obligations, all
rights and remedies of a secured party under the Code. Without limiting the
generality of the foregoing, the Administrative Agent, without demand of
performance or other demand, presentment, protest, advertisement or notice of
any kind (except any notice required by law referred to below) to or upon the
Pledgor or any other Person (all and each of which demands, defenses,
advertisements and notices are hereby waived), may in such circumstances
forthwith collect, receive, appropriate and realize upon the Collateral, or any
part thereof, and/or may forthwith sell, assign, given an option or options to
purchase or otherwise dispose of and deliver the Collateral or any part thereof
(or contract to do any of the foregoing), in one or more parcels at public or
private sale or sales, in the over-the-counter market, at any exchange, broker's
board or office of the Administrative Agent or any Lender or elsewhere upon such
terms and conditions as it may deem advisable and at such prices as it may deem
best, for cash or on credit or for future delivery without assumption of any
credit risk. The Administrative Agent or any Lender shall have the right upon
any such public sale or sales, and, to the extent permitted by law, upon any
such private sale or sales, to purchase the whole or any part of the Collateral
so sold, free of any right or equity of redemption in the Pledgor, which right
or equity of redemption is hereby waived or released. The Administrative Agent
shall apply any Proceeds from time to time held by it and the net proceeds of
any such collection, recovery, receipt, appropriation, realization or sale,
after deducting all reasonable costs and expenses of
<PAGE>
every kind incurred in respect thereof or incidental to the care or safekeeping
of any of the Collateral or in any way relating to the Collateral or the rights
of the Administrative Agent and the Lenders hereunder, including, without
limitation, reasonable attorneys' fees and disbursements of counsel to the
Administrative Agent, to the payment in whole or in part of the Secured
Obligations, in such order as the Administrative Agent may elect, and only after
such application and after the payment by the Administrative Agent of any other
amount required by any provision of law, including, without limitation, Section
9-504(1)(c) of the Code, need the Administrative Agent account for the surplus,
if any, to the Pledgor. To the extent permitted by applicable law, the Pledgor
waives all claims, damages and demands it may acquire against the Administrative
Agent or any Lender arising out of the exercise by them of any rights hereunder.
If any notice of a proposed sale or other disposition of Collateral shall be
required by law, such notice shall be deemed reasonable and proper if given at
least 20 days before such sale or other disposition. The Pledgor shall remain
liable for any deficiency if the proceeds of any sale or other disposition of
Collateral are insufficient to pay the Secured Obligations and the fees and
disbursements of any attorneys employed by the Administrative Agent or any
Lender to collect such deficiency.
9. Registration Rights; Private Sales. (a) If the Administrative Agent
----------------------------------
shall determine to exercise its right to sell any or all of the Pledged Stock
pursuant to Section 8 hereof, and if in the opinion of the Administrative Agent
it is necessary or advisable to have the Pledged Stock, or that portion thereof
to be sold, registered under the provisions of the Securities Act, the Pledgor
will cause the Issuer thereof to (i) execute and deliver, and cause the
directors and officers of such Issuer to execute and deliver, all such
instruments and documents, and do or cause to be done all such other acts as may
be, in the opinion of the Administrative Agent, necessary or advisable to
register the Pledged Stock, or that portion thereof to be sold, under the
provisions of the Securities Act, (ii) to use its best efforts to cause the
registration statement relating thereto to become effective and to remain
effective for a period of one year from the date of the first public offering of
the Pledged Stock, or that portion thereof to be sold, and (iii) to make all
amendments thereto and/or to the related prospectus which, in the opinion of the
Administrative Agent, are necessary or advisable, all in conformity with the
requirements of the Securities Act and the rules and regulations of the
Securities and Exchange Commission applicable thereto. The Pledgor acknowledges
and agrees to cause the such Issuer to comply with the provisions of the
securities or "Blue Sky" laws of any and all jurisdiction which the
Administrative Agent shall designate and to make available to its security
holders, as soon as practicable, an earnings statement (which need not be
audited) which will satisfy the provisions of Section 11(a) of the Securities
Act.
(b) The Pledgor recognizes that the Administrative Agent may be unable to
effect a public sale of any or all the Pledged Stock, by reason of certain
prohibitions contained in the Securities Act and applicable state securities
laws or otherwise, and may be compelled to resort to one or more private sales
thereof to a restricted group of purchasers which will be obligated to agree,
among other things, to acquire such securities for their own account for
investment and not with a view to the distribution or resale thereof. The
Pledgor agrees that any such private sale may result in prices and other terms
less favorable than if such sale were a public sale and agrees that no such
private sale shall be deemed to have been made in a commercially unreasonable
manner solely because it is a private sale. The Administrative Agent shall be
under no obligation to delay a sale of any of the Pledged Stock for the period
of time necessary to
<PAGE>
permit the Issuer thereof to register such securities for public sale under the
Securities Act, or under applicable state securities laws, even if such Issuer
agrees to do so.
(c) The Pledgor further agrees to use its best efforts to do or cause to be
done all such other acts as may be necessary to make such sale or sales of all
or any portion of the Pledged Stock pursuant to this Section valid and binding
and in compliance with any and all other applicable Requirements of Law. The
Pledgor further agrees that a breach of any of the covenants contained in this
Section will cause irreparable injury to the Administrative Agent and the
Lenders, that the Administrative Agent and the Lenders have no adequate remedy
at law in respect of such breach and, as a consequence, that each and every
covenant contained in this Section shall be specifically enforceable against the
Pledgor, and the Pledgor hereby waives and agrees not to assert any defenses
against an action for specific performance of such covenants except for a
defense that no Event of Default has occurred under the Credit Agreement.
10. Irrevocable Authorization and Instruction to Issuer. The Pledgor
---------------------------------------------------
hereby authorizes and instructs each Issuer to comply with any instruction
received by it from the Administrative Agent in writing that (a) states that an
Event of Default has occurred and (b) is otherwise in accordance with the terms
of this Agreement, without any other or further instructions from the Pledgor,
and the Pledgor agrees that each Issuer shall be fully protected in so
complying.
11. Administrative Agent's Appointment as Attorney-in-Fact. (a) The
------------------------------------------------------
Pledgor hereby irrevocably constitutes and appoints the Administrative Agent and
any officer or agent of the Administrative Agent, with full power of
substitution, as its true and lawful attorney-in-fact with fully irrevocable
power and authority in the place and stead of the Pledgor and in the name of the
Pledgor or in the Administrative Agent's own name, from time to time in the
Administrative Agent's discretion, for the purpose of carrying out the terms of
this Agreement, to take any and all appropriate action and to execute any and
all documents and instruments which may be necessary or desirable to accomplish
the purposes of this Agreement, including, without limitation, any financing
statements, endorsement, assignment or other instruments of transfer
contemplated hereunder.
(b) The Pledgor hereby ratifies all that said attorneys shall lawfully do
or cause to be done pursuant to the power of attorney granted in Section 11(a).
All powers, authorizations and agencies contained in this Agreement are coupled
with an interest and are irrevocable until this Agreement is terminated and the
security interests created hereby are released.
12. Duty of Administrative Agent. The Administrative Agent's sole duty
----------------------------
with respect to the custody, safekeeping and physical preservation of the
Collateral in its possession, under Section 9-207 of the Code or otherwise,
shall be to deal with it in the same manner as the Administrative Agent deals
with similar securities and property for its own account, except that the
Administrative Agent shall have no obligation to invest funds held in any
Collateral Account and may hold the same as demand deposits. Neither the
Administrative Agent, any Lender nor any of their respective directors,
officers, employees or agents shall be liable for failure to demand, collect or
realize upon any of the Collateral or for any delay in doing so or shall be
under any obligation to sell or otherwise dispose of any Collateral upon the
request of the
<PAGE>
Pledgor or any other Person or to take any other action whatsoever with regard
to the Collateral or any part thereof except as provided herein.
13. Execution of Financing Statements. Pursuant to Section 9-402 of the
---------------------------------
Code, the Pledgor authorizes the Administrative Agent to file financing
statements with respect to the Collateral without the signature of the Pledgor
in such form and in such filing offices as the Administrative Agent reasonably
determines appropriate to perfect the security interests of the Administrative
Agent under this Agreement. A carbon, photographic or other reproduction of
this Agreement shall be sufficient as a financing statement for filing in any
jurisdiction.
14. Authority of Administrative Agent. The Pledgor acknowledges that the
---------------------------------
rights and responsibilities of the Administrative Agent under this Agreement
with respect to any action taken by the Administrative Agent or the exercise or
non-exercise by the Administrative Agent of any option, voting right, request,
judgment or other right or remedy provided for herein or resulting or arising
out of this Agreement shall, as between the Administrative Agent and the
Lenders, be governed by the Credit Agreement and by such other agreements with
respect thereto as may exist from time to time among them, but, as between the
Administrative Agent and the Pledgor, the Administrative Agent shall be
conclusively presumed to be acting as agent for the Lenders with full and valid
authority so to act or refrain from acting, and neither the Pledgor nor any
Issuer shall be under any obligation, or entitlement, to make any inquiry
respecting such authority.
15. Notices. All notices shall be given or made in accordance with
-------
Section 11.1 of the Credit Agreement.
16. Severability. Any provision of this Agreement which is prohibited or
------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
17. Amendments in Writing, No Waiver; Cumulative Remedies. (a) None of
-----------------------------------------------------
the terms or provisions of this Agreement may be waived, amended, supplemented
or otherwise modified except by a written instrument executed by the Pledgor and
the Administrative Agent, provided that any provision of this Agreement may be
--------
waived by the Administrative Agent and the Lenders in a letter or agreement
executed by the Administrative Agent or by facsimile transmission from the
Administrative Agent.
(b) Neither the Administrative Agent nor any Lender shall by any act
(except by a written instrument pursuant to Section 17(a) hereof), delay,
indulgence, omission or otherwise be deemed to have waived any right or remedy
hereunder or to have acquiesced in any Default or Event of Default or in any
breach of any of the terms and conditions hereof. No failure to exercise, nor
any delay in exercising on the part of the Administrative Agent or any Lender,
any right, power or privilege hereunder shall operate as a waiver thereof. No
single or partial exercise of any right, power or privilege hereunder shall
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. A waiver by the Administrative Agent or any Lender
of any right or remedy hereunder on any one occasion shall not be
<PAGE>
construed as a bar to any right or remedy which the Administrative Agent or such
Lender would otherwise have on any future occasion.
(c) The rights and remedies herein provided are cumulative, may be
exercised singly or concurrently and are not exclusive of any other rights or
remedies provided by law.
18. Section Headings. The section headings used in this Agreement are for
----------------
convenience of reference only and are not to affect the construction hereof or
be taken into consideration in the interpretation hereof.
19. Successors and Assigns. This Agreement shall be binding upon the
----------------------
successors and assigns of the Pledgor and shall inure to the benefit of the
Administrative Agent and the Lenders and their successors and assigns, provided
that the Pledgor may not assign any of its rights or obligations under this
Agreement without the prior written consent of the Agent and any such purported
assignment shall be null and void.
21. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE
-------------
PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Pledge Agreement to be
duly executed and delivered as of the date first above written.
PLEDGORS: SCHOOL SPECIALTY, INC.,
a Delaware corporation
By: /s/ Donald J. Noskowiak
-----------------------
Name: Donald J. Noskowiak
Title: CFO & Exec. VP
CHILDCRAFT EDUCATION CORP.,
a New York corporation
By: /s/ Donald J. Noskowiak
-----------------------
Name: Donald J. Noskowiak
Title: VP
THE NATIONAL SCHOOL SUPPLY
COMPANY,
a Delaware corporation
By: /s/ Donald J. Noskowiak
-----------------------
Name: Donald J. Noskowiak
Title: VP
ADMINISTRATIVE AGENT: NATIONSBANK, N.A.,
as Administrative Agent
By: /s/ Michael Heredia
-------------------
Name: Michael R. Heredia
Title: Senior Vice President
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.3
<SEQUENCE>3
<FILENAME>dex43.txt
<DESCRIPTION>AMENDED AND RESTATED SECURITY AGREEMENT
<TEXT>
<PAGE>
EXHIBIT 4.3
AMENDED AND RESTATED SECURITY AGREEMENT
---------------------------------------
THIS AMENDED AND RESTATED SECURITY AGREEMENT dated as of September 30, 1998
(as amended and modified, the "Security Agreement" or this "Agreement") amends
------------------ ---------
and restates that certain Security Agreement dated as of June 9, 1998, by and
among the Administrative Agent and the Credit Parties party thereto, and is by
and among SCHOOL SPECIALTY, INC., a Delaware corporation (the "Borrower"), the
--------
subsidiaries and affiliates identified on the signature pages hereto and such
other subsidiaries and affiliates as may hereafter join this Security Agreement
(the "Guarantors" and collectively with the Borrower, the "Credit Parties") and
---------- --------------
NATIONSBANK, N.A., as Administrative Agent (in such capacity, the
"Administrative Agent") for the Lenders under the Credit Agreement described
- ---------------------
below and any Affiliates of Lenders which provide interest rate or currency
protection agreements as hereafter provided (collectively, the "Lenders").
-------
WITNESSETH
WHEREAS, the Lenders have severally agreed to make loans and extensions of
credit to the Borrower upon the terms and conditions provided in the terms of
that Amended and Restated Credit Agreement dated as of the date hereof (as
amended and modified, the "Credit Agreement") among the Borrower, the Guarantors
----------------
and Lenders identified therein and NationsBank, N.A., as Administrative Agent;
WHEREAS, it is a condition precedent to the effectiveness of the Credit
Agreement and the obligation of the Lenders to make their respective loans and
extensions of credit to the Borrower thereunder that the Credit Parties shall
have executed and delivered this Security Agreement to the Administrative Agent
for the ratable benefit of the Lenders;
NOW, THEREFORE, in consideration of the premises and to induce the
Administrative Agent and the Lenders to enter into the Credit Agreement and to
induce the Lenders to make their respective loans and extensions of credit
thereunder, the Credit Parties hereby agree with the Administrative Agent, for
the ratable benefit of the Lenders, as follows:
1. Defined Terms.
-------------
1.1 Definitions. (a) Unless otherwise defined herein, terms defined in
-----------
the Credit Agreement and used herein shall have the meanings given to them in
the Credit Agreement, and the following terms which are defined in the Uniform
Commercial Code in effect in the State of New York on the date hereof are used
herein as so defined: Accounts, Chattel Paper, Documents, Equipment, Farm
Products, Fixtures, General Intangibles, Instruments, Inventory, Investment
Property and Proceeds. For purposes of this Agreement, the term "Lender" shall
include any Affiliate of any Lender which has entered into a Hedging Agreement
with a Credit Party to the extent permitted by the Credit Agreement.
(b) The following terms shall have the following meanings:
"Agreement": this Security Agreement, as the same may be amended,
---------
supplemented or otherwise modified from time to time.
<PAGE>
"Code": the Uniform Commercial Code as from time to time in effect in
----
the State of New York.
"Collateral": as defined in Section 2 of this Agreement; provided
---------- --------
that Collateral shall not include any property which is subject to a Lien
permitted under Section 8.2 of the Credit Agreement securing Indebtedness
permitted under Section 8.1 of the Credit Agreement to the extent that the
grant of a security interest hereunder would be prohibited by such Lien or
by the terms of such Indebtedness.
"Collateral Account": any collateral account established by the
------------------
Administrative Agent as provided in subsection 3.3 or subsection 7.2.
"Contracts": all contracts and agreements to which a Credit Party is
---------
a party, as each may be amended, supplemented or otherwise modified from
time to time, including, without limitation, (a) all rights of a Credit
Party to receive moneys due and to become due to it thereunder or in
connection therewith, (b) all rights of a Credit Party to damages arising
out of or for breach or default in respect thereof and (c) all rights of a
Credit Party to exercise all remedies thereunder.
"Copyright Licenses": any written agreement, naming any Credit Party
------------------
as licensor, granting any right under any Copyright including, without
limitation, any thereof referred to in Schedule 3 hereto.
----------
"Copyrights": (i) all registered United States copyrights in all
----------
Works, now existing or hereafter created or acquired, all registrations and
recordings thereof, and all applications in connection therewith,
including, without limitation, registrations, recordings and applications
in the United States Copyright office including, without limitation, any
thereof referred to in Schedule 3 hereto, and (ii) all renewals thereof
----------
including, without limitation, any thereof referred to in Schedule 3
----------
hereto.
"Patent License": all agreements, whether written or oral, providing
--------------
for the grant by or to a Credit Party of any right to manufacture, use or
sell any invention covered by a Patent, including without limitation, any
thereof referred to in Schedule 4 hereto.
----------
"Patents": (a) all letters patent of the United States or any other
-------
country and all reissues and extensions thereof, including, without
limitation, any thereof referred to in Schedule 4 hereto, and (b) all
----------
applications for letters patent of the United States or any other country
and all divisions, continuations and continuations-in-part thereof,
including, without limitation, any thereof referred to in Schedule 4
----------
hereto.
"Secured Obligations": the collective reference to the following:
-------------------
(a) All unpaid principal of and interest on (including, without
limitation, interest accruing at the then applicable rate provided in
the Credit Agreement after the maturity of the Loans and other
obligations owing under the Credit Agreement and interest accruing at
the then applicable rate provided in the Credit Agreement after the
filing of any petition in bankruptcy, or the commencement of any
insolvency, reorganization or like proceeding, relating to
2
<PAGE>
the Borrower, whether or not a claim for post-filing or post-petition
interest is allowed in such proceeding) the Loans and all other
obligations and liabilities of the Borrower to the Administrative
Agent and the Lenders, whether direct or indirect, absolute or
contingent, due or to become due, or now existing or hereafter
incurred, which may arise under, out of, or in connection with, the
Credit Agreement, any Notes, this Security Agreement, the other Credit
Documents, any Hedging Agreements with a Lender or an Affiliate of a
Lender to the extent permitted under the Credit Agreement or any other
document made, delivered or given in connection therewith, in each
case whether on account of principal, interest, reimbursement
obligations, fees, indemnities, costs, expenses or otherwise
(including, without limitation, all fees and disbursements of counsel
to the Administrative Agent or to the Lenders that are required to be
paid by the Borrower pursuant to the terms of the Credit Agreement,
this Security Agreement, any other Credit Document or any Hedging
Agreements with a Lender or an Affiliate of a Lender to the extent
permitted under the Credit Agreement); and
(b) The prompt payment, performance and observance by the
Guarantors under the Credit Agreement of all obligations of the
Guarantors thereunder and under this Security Agreement and the other
Credit Documents to which the Guarantors are a party (including,
without limitation, payment of their guaranty obligations under the
Credit Agreement), or under any Hedging Agreement with a Lender or an
Affiliate of a Lender to the extent permitted under the Credit
Agreement, to which such Guarantor is a party or any guaranty is given
by it in connection therewith; and
(c) All other indebtedness, liabilities and obligations of any
kind or nature, now existing or hereafter arising, owing by the Credit
Parties to any Lender or the Administrative Agent, arising under this
Security Agreement or any of the other Credit Documents, whether
primary, secondary, direct, contingent, or joint and several; and
(d) All liabilities and obligations, now existing or hereafter
arising, owing by the Borrower to any Lender or any Affiliate of a
Lender arising under Hedging Agreements with a Lender or an Affiliate
of a Lender to the extent permitted under the Credit Agreement.
"Trademark License": means any agreement, written or oral, providing
-----------------
for the grant by or to a Credit Party of any right to use any Trademark,
including, without limitation, any thereof referred to in Schedule 5
----------
hereto.
"Trademarks": (a) all trademarks, trade names, corporate names,
----------
company names, business names, fictitious business names, trade styles,
service marks, logos and other source or business identifiers, and the
goodwill associated therewith, now existing or hereafter adopted or
acquired, all registrations and recordings thereof, and all applications in
connection therewith, whether in the United States Patent and Trademark
Office or in any similar office or agency of the United States, any State
thereof or any
3
<PAGE>
other country or any political subdivision thereof, or otherwise,
including, without limitation, any thereof referred to in Schedule 5
----------
hereto, and (b) all renewals thereof.
"Work": any work which is subject to copyright protection pursuant to
----
Title 17 of the United States Code.
1.2 Other Definitional Provisions. (a) The words "hereof," "herein" and
-----------------------------
"hereunder" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement, and section and paragraph references are to this Agreement unless
otherwise specified.
(b) The meanings given to terms defined herein shall be equally applicable
to both the singular and plural forms of such terms.
2. Grant of Security Interest. As collateral security for the prompt and
--------------------------
complete payment and performance when due (whether at the stated maturity, by
acceleration or otherwise) of the Secured Obligations, each of the Credit
Parties hereby grants to the Administrative Agent, for the ratable benefit of
the Lenders, a security interest in all of the following property now owned or
at any time hereafter acquired by such Credit Party or in which such Credit
Party now has or at any time in the future may acquire any right, title or
interest (collectively, the "Collateral"):
----------
(a) all Accounts;
(b) all Chattel Paper;
(c) all Contracts;
(d) all Copyrights;
(e) all Copyright Licenses;
(f) all Documents;
(g) all Equipment;
(h) all Fixtures;
(i) all General Intangibles, including the Contracts;
(j) all Instruments;
(k) all Inventory;
(l) all Investment Property;
(m) all Patents;
(n) all Patent Licenses;
4
<PAGE>
(o) all Trademarks;
(p) all Trademark Licenses;
(q) all books, records, ledger cards, files, correspondence, computer
programs, tapes, disks, and related data processing software
(owned by such Borrower or in which it has an interest) that at
any time evidence or contain information relating to any
Collateral or are otherwise necessary or helpful in the
collection thereof or realization thereupon; and
(r) to the extent not otherwise included, all Proceeds and products
of any and all of the foregoing;
provided that this Agreement shall not constitute an assignment of, or a grant
- --------
of a security interest in or lien on, any contract or other agreement to which
any Credit Party is a party if such assignment or grant of a security interest
or lien is prohibited by the terms of such contract or agreement.
This Agreement shall create a continuing security interest in the
Collateral which shall remain in effect until all the Secured Obligations, now
existing or hereafter arising, shall have been paid in full, the commitments
relating thereto shall have been terminated and the Credit Agreement or the
Security Documents shall no longer be in effect.
3. Provisions Relating to Accounts.
-------------------------------
3.1 Credit Parties Remain Liable under Accounts. Anything herein to the
-------------------------------------------
contrary notwithstanding, each of the Credit Parties shall remain liable under
each of the Accounts to observe and perform all the conditions and obligations
to be observed and performed by it thereunder, all in accordance with the terms
of any agreement giving rise to each such Account. Neither the Administrative
Agent nor any Lender shall have any obligation or liability under any Account
(or any agreement giving rise thereto) by reason of or arising out of this
Agreement or the receipt by the Administrative Agent or any Lender of any
payment relating to such Account pursuant hereto, nor shall the Administrative
Agent or any Lender be obligated in any manner to perform any of the obligations
of a Credit Party under or pursuant to any Account (or any agreement giving rise
thereto), to make any payment, to make any inquiry as to the nature or the
sufficiency of any payment received by it or as to the sufficiency of any
performance by any party under any Account (or any agreement giving rise
thereto), to present or file any claim, to take any action to enforce any
performance or to collect the payment of any amounts which may have been
assigned to it or to which it may be entitled at any time or times.
3.2 Analysis of Accounts. The Administrative Agent shall have the right,
--------------------
after the occurrence and during the continuation of an Event of Default, to make
test verifications of the Accounts in any manner and through any medium that it
reasonably considers advisable, and the Credit Parties shall furnish all such
assistance and information as the Administrative Agent may require in connection
with such test verifications. At any time and from time to time, upon the
Administrative Agent's request and at the expense of the Credit Parties, the
Credit Parties shall cause independent public accountants or others satisfactory
to the Administrative Agent to furnish to the Administrative Agent reports
showing reconciliations, aging and test verifications
5
<PAGE>
of, and trial balances for, the Accounts. The Administrative Agent in its own
name or in the name of others may communicate with account debtors on the
Accounts to verify with them to the Administrative Agent's satisfaction the
existence, amount and terms of any Accounts.
3.3 Collections on Accounts. (a) The Administrative Agent hereby
-----------------------
authorizes the Credit Parties to collect the Accounts, provided that the
--------
Administrative Agent may curtail or terminate said authority at any time after
the occurrence and during the continuation of an Event of Default. If required
by the Administrative Agent at any time after the occurrence and during the
continuation of an Event of Default, any payments of Accounts, when collected by
the Credit Parties, (i) shall be forthwith (and, in any event, within two
Business Days) deposited by the Credit Parties in a Collateral Account
maintained under the sole dominion and control of the Administrative Agent,
subject to withdrawal by the Administrative Agent for the account of the Lenders
only as provided in subsection 7.3, and (ii) until so turned over, shall be held
by the Credit Parties in trust for the Administrative Agent and the Lenders,
segregated from other funds of the Credit Parties.
(b) Each such deposit of Proceeds of Accounts shall be accompanied by a
report identifying in reasonable detail the nature and source of the payments
included in the deposit.
(c) At the Administrative Agent's request after the occurrence and during
the continuation of an Event of Default, the Borrowers shall deliver to the
Administrative Agent all original and other documents in their possession or
control (or which they have a right or ability to get) evidencing, and relating
to, the agreements and transactions which gave rise to the Accounts.
4. Provisions Relating to Contracts.
--------------------------------
4.1 Credit Parties Remain Liable under Contracts. Anything herein to the
--------------------------------------------
contrary notwithstanding, each of the Credit Parties shall remain liable under
each of the Contracts to observe and perform all the conditions and obligations
to be observed and performed by it thereunder, all in accordance with and
pursuant to the terms and provisions of each Contract. Neither the
Administrative Agent nor any Lender shall have any obligation or liability under
any Contract by reason of or arising out of this Agreement or the receipt by the
Administrative Agent or any such Lender of any payment relating to such Contract
pursuant hereto, nor shall the Administrative Agent or any Lender be obligated
in any manner to perform any of the obligations of a Credit Party under or
pursuant to any Contract, to make any payment, to make any inquiry as to the
nature or the sufficiency of any payment received by it or as to the sufficiency
of any performance by any party under any Contract, to present or file any
claim, to take any action to enforce any performance or to collect the payment
of any amounts which may have been assigned to it or to which it may be entitled
at any time or times.
4.2 Communication with Contracting Parties. The Administrative Agent in
--------------------------------------
its own name or in the name of others, at any time after the occurrence and
during the continuation of an Event of Default, may communicate with parties to
the Contracts to verify with them to the Administrative Agent's satisfaction the
existence, amount and terms of any Contract.
6
<PAGE>
5. Representations and Warranties. Each of the Credit Parties hereby
------------------------------
represents and warrants that:
5.1 Title; No Other Liens. Except for the security interest granted to
---------------------
the Administrative Agent, for the ratable benefit of the Lenders, pursuant to
this Agreement and the other Liens permitted to exist on the Collateral pursuant
to the Credit Agreement, the Credit Party owns each item of the Collateral free
and clear of any and all Liens or claims of others. No security agreement,
financing statement or other public notice with respect to all or any part of
the Collateral is on file or of record in any public office, except such as have
been filed in favor of the Administrative Agent, for the ratable benefit of the
Lenders, pursuant to this Agreement or as are permitted pursuant to the Credit
Agreement.
5.2 Perfected First Priority Liens. The security interests granted
------------------------------
pursuant to this Agreement (a) upon completion of the filings and other actions
specified on Schedule 2 attached hereto, and possession of such Collateral with
----------
respect to which perfection is required by possession, will constitute perfected
security interests in the Collateral in favor of the Administrative Agent, for
the ratable benefit of the Lenders and (b) are prior to all other Liens on the
Collateral in existence on the date hereof except for Liens permitted to exist
pursuant to the Credit Agreement. Each Credit Party shall use best efforts to
secure landlord lien waivers in form and content reasonably satisfactory to the
Administrative Agent for each location where the fair market value of Inventory
and Equipment kept at such location in the aggregate exceeds $1,000,000.
5.3 Inventory and Equipment. The Inventory and the Equipment of the
-----------------------
Credit Party are kept at the locations listed on Schedule 1 hereto.
----------
5.4 Chief Executive Office. The Credit Party's chief executive office and
----------------------
chief place of business, and the place where it keeps its books and records, is
located at the address shown on Schedule 1.
----------
5.5 Farm Products. None of the Collateral constitutes, or is the Proceeds
-------------
of, Farm Products.
5.6 Representations and Warranties Relating to Contracts. (a) No consent
----------------------------------------------------
of any party (other than the Credit Party) to any Contract is required, or
purports to be required, in connection with the execution, delivery and
performance of this Agreement.
(b) Each Contract is in full force and effect and constitutes a valid and
legally enforceable obligation of the parties thereto, except as affected by
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally, general
equitable principles (whether considered in a proceeding in equity or at law)
and an implied covenant of good faith and fair dealing.
(c) No consent or authorization of, filing with or other act by or in
respect of any Governmental Authority is required in connection with the
execution, delivery, performance, validity or enforceability of any of the
Contracts by any party thereto other than those which have been duly obtained,
made or performed, are in full force and effect.
7
<PAGE>
(d) No amount payable to the Credit Party under or in connection with any
Contract is evidenced by any Instrument (other than checks and other instruments
in the process of collection) or Chattel Paper which has not been delivered to
the Administrative Agent.
5.7 Copyrights, Patents and Trademarks. (a) Schedule 3 hereto includes
---------------------------------- ----------
all Copyrights and Copyright Licenses owned by the Credit Party in its own name
as of the date hereof. Schedule 4 hereto includes all Patents and Patent
----------
Licenses owned by the Credit Party in its own name as of the date hereof.
Schedule 5 hereto includes all Trademarks and Trademark Licenses owned by the
- ----------
Credit Party in its own name as of the date hereof.
(b) To the best of the Credit Party's knowledge, each Copyright, Patent
and Trademark of the Borrower is valid, subsisting, unexpired, enforceable and
has not been abandoned.
(c) Except as set forth in either Schedule 4 or Schedule 5, none of such
---------- ----------
Copyrights, Patents and Trademarks is the subject of any licensing or franchise
agreement.
(d) No holding, decision or judgment has been rendered by any Governmental
Authority which would limit, cancel or question the validity of any Copyright,
Patent or Trademark.
(e) No action or proceeding is pending seeking to limit, cancel or
question the validity of any Copyright, Patent or Trademark, or which, if
adversely determined, would have a material adverse effect on the value of any
Copyright, Patent or Trademark.
6. Covenants. Each of the Credit Parties covenants and agrees with the
---------
Administrative Agent and the Lenders that, from and after the date of this
Agreement until this Agreement is terminated and the security interests created
hereby are released:
6.1 Delivery of Instruments and Chattel Paper. If any amount payable
-----------------------------------------
under or in connection with any of the Collateral shall be or become evidenced
by any Instrument or Chattel Paper, such Instrument (other than checks and other
instruments in the process of collection) or Chattel Paper shall be immediately
delivered to the Administrative Agent (except for promissory notes issued in
connection with loans to employees, officers and directors which shall be
immediately delivered to the Administrative Agent upon the request of the
Administrative Agent), duly indorsed in a manner satisfactory to the
Administrative Agent, to be held as Collateral pursuant to this Agreement.
6.2 Maintenance of Perfected Security Interest; Further Documentation.
-----------------------------------------------------------------
(a) The Credit Party shall maintain the security interest created by this
Agreement as a perfected security interest subject only to the Liens permitted
to exist pursuant to the Credit Agreement and shall defend such security
interest against claims and demands of all Persons whomsoever.
(b) At any time and from time to time, upon the written request of the
Administrative Agent, and at the sole expense of the Credit Party, the Credit
Party will promptly and duly execute and deliver such further instruments and
documents and take such further action (including without limitation all actions
required under the Federal Assignment of Claims Act or any similar state
statute) as the Administrative Agent may reasonably request for the purpose of
8
<PAGE>
obtaining or preserving the full benefits of this Agreement and of the rights
and powers herein granted, including, without limitation, the filing of any
financing or continuation statements under the Uniform Commercial Code in effect
in any jurisdiction with respect to the security interests created hereby.
6.3 Changes in Locations, Name, etc. The Credit Party will not:
-------------------------------
(a) permit any of the Inventory or Equipment to be kept at a location
other than those listed on Schedule 1 hereto, unless it shall have given
----------
the Administrative Agent and the Lenders at least 30 days' prior written
notice (or, in the case of the acquisition of Inventory or Equipment in
connection with a Credit Party's purchase of a business, written notice
within 30 days of the date of such acquisition) of such change and any
filings required under the Uniform Commercial Code in effect in the
affected jurisdiction to maintain the perfected security interest granted
pursuant to this Agreement shall have been made, except that Equipment may
be moved from such location for a reasonable period of time for purposes of
repair of such Equipment or for testing in the ordinary cause of business;
(b) change the location of its chief executive office and chief place
of business or the location at which it maintains its books and records
from that specified in subsection 5.4, unless it shall have given the
Administrative Agent and the Lenders at least 30 days' prior written notice
of such change and any filings required under the Uniform Commercial Code
in effect in the affected jurisdiction to maintain the perfected security
interest granted pursuant to this Agreement shall have been made; or
(c) change its name, identity or corporate structure to such an extent
that any financing statement filed by the Administrative Agent in
connection with this Agreement would become seriously misleading, unless it
shall have given the Administrative Agent and the Lenders at least 30 days'
prior written notice of such change and any filings required under the
Uniform Commercial Code in effect in the affected jurisdiction to maintain
the perfected security interest granted pursuant to this Agreement shall
have been made.
6.5 Further Identification of Collateral. The Credit Party will furnish
------------------------------------
to the Administrative Agent and the Lenders from time to time statements and
schedules further identifying and describing the Collateral and such other
reports in connection with the Collateral as the Administrative Agent may
reasonably request, all in reasonable detail.
6.6 Indemnification. The Credit Parties agree to pay, and to save the
---------------
Administrative Agent and the Lenders harmless from, any and all liabilities,
costs and expenses (including, without limitation, reasonable legal fees and
expenses) (i) with respect to, or resulting from any delay in paying, any and
all excise, sales or other taxes which may be payable or determined to be
payable with respect to any of the Collateral, (ii) with respect to, or
resulting from, any delay in complying with any Requirement of Law applicable to
any of the Collateral and (iii) in connection with any of the transactions
contemplated by this Agreement, except for any such liabilities which result
from the gross negligence or willful misconduct of the Administrative Agent or
any Lender, respectively. In any suit, proceeding or action brought by the
9
<PAGE>
Administrative Agent or any Lender under any Account for any sum owing
thereunder, the Credit Party will save, indemnify and keep the Administrative
Agent and such Lender harmless from and against all expense, loss or damage
suffered by reason of any defense, setoff, counterclaim, recoupment or reduction
or liability whatsoever of the account debtor thereunder, arising out of a
breach by the Credit Party of any obligation thereunder or arising out of any
other agreement, indebtedness or liability at any time owing to or in favor of
such account debtor or its successors from the Credit Party.
6.7 Covenants Relating to Accounts Upon Default. At any time after the
-------------------------------------------
occurrence and during the continuation of an Event of Default:
(a) the amount represented by the Credit Party to the Lenders from
time to time as owing by each account debtor or by all account debtors in
respect of the Accounts will at such time be the correct amount actually
owing by such account debtor or debtors thereunder,
(b) the Credit Party will not amend, modify, terminate or waive any
agreement giving rise to an Account in any manner which could reasonably be
expected to materially adversely affect the value of the Accounts as
Collateral;
(c) the Credit Party will not fail to exercise promptly and diligently
each and every material right which it may have under each agreement giving
rise to an Account (other than any right of termination);
(d) the Credit Party will not fail to deliver to the Administrative
Agent a copy of each material demand, notice or document received by it
relating in any way to any agreement giving rise to an Account; and
(e) other than in the ordinary course of business as generally
conducted by the Credit Party, the Credit Party will not grant any
extension of the time of payment of any of the Accounts, compromise,
compound or settle the same for less than the full amount thereof, release,
wholly or partially, any Person liable for the payment thereof, or allow
any credit or discount whatsoever thereon.
6.8 Covenants Relating to Contracts. The Credit Party will deliver to the
-------------------------------
Administrative Agent, upon request by the Administrative Agent, copies of all
Contracts, including any amendments or modifications thereto.
6.9 Covenants Relating to Copyrights. (a) The Credit Party will employ
--------------------------------
the Copyright for each Work with such notice of copyright as may be required by
law to secure copyright protection.
(b) The Credit Party will not do any act or knowingly omit to do any act
whereby any material Copyright may become invalidated and (i) will not do any
act, or omit to do any act, whereby any material Copyright may become injected
into the public domain; (ii) shall notify the Administrative Agent immediately
if it knows, or has reason to know, that any material Copyright may become
injected into the public domain or of any adverse determination or development
(including, without limitation, the institution of, or any such determination or
10
<PAGE>
development in, any court or tribunal in the United States or any other country)
regarding the Credit Party's ownership of any such Copyright or its validity;
(iii) will take all necessary steps as it shall deem appropriate under the
circumstances, to maintain and pursue each application (and to obtain the
relevant registration) and to maintain each registration of each material
Copyright owned by the Credit Party including, without limitation, filing of
applications for renewal when necessary; and (iv) will promptly notify the
Administrative Agent of any material infringement of any material Copyright of
the Credit Party of which it becomes aware and will take such actions as it
shall reasonably deem appropriate under the circumstances to protect such
Copyright including, where appropriate, the bringing of suit for infringement,
seeking injunctive relief and seeking to recover any and all damages for such
infringement.
6.10 Covenants Relating to Patents and Trademarks. (a) The Credit Party
--------------------------------------------
(either itself or through licensees) will, except with respect to any Trademark
that the Credit Party shall reasonably determine is not useful to it in its
business, (i) continue to use each Trademark on each and every trademark class
of goods applicable to its current line as reflected in its current catalogs,
brochures and price lists in order to maintain such Trademark in full force free
from any claim of abandonment for non-use, (ii) maintain as in the past the
quality of products and services offered under such Trademark, (iii) employ such
Trademark with the appropriate notice of registration, (iv) not adopt or use any
mark which is confusingly similar or a colorable imitation of such Trademark
unless the Administrative Agent, for the ratable benefit of the Lenders, shall
obtain a perfected security interest in such mark pursuant to this Agreement,
and (v) not (and not permit any licensee or sublicensee thereof to) do any act
or knowingly omit to do any act whereby any Trademark may become invalidated.
(b) The Credit Party will not, except with respect to any Patent that the
Credit Party shall reasonably determine is of negligible economic value to it,
do any act, or omit to do any act, whereby any Patent may become abandoned or
dedicated.
(c) The Credit Party will notify the Administrative Agent and the Lenders
immediately if it knows that any application or registration relating to any
Patent or Trademark may become abandoned or dedicated, or of any adverse
determination or development (including, without limitation, the institution of,
or any such determination or development in, any proceeding in the United States
Patent and Trademark Office or any court or tribunal in any country) regarding
the Credit Party's ownership of any Patent or Trademark or its right to register
the same or to keep and maintain the same.
(d) Whenever the Credit Party, either by itself or through any agent,
employee, licensee or designee, shall file an application for the registration
of any Patent or Trademark with the United States Patent and Trademark Office or
any similar office or agency in any other country or any political subdivision
thereof, the Credit Party shall report such filing to the Administrative Agent
and the Lenders within five Business Days after the last day of the fiscal
quarter in which such filing occurs. Upon request of the Administrative Agent,
the Credit Party shall execute and deliver any and all agreements, instruments,
documents and papers as the Agent may request to evidence the Administrative
Agent's and the Lenders' security interest in any Patent or Trademark and the
goodwill and general intangibles of the Credit Party relating thereto or
represented thereby.
11
<PAGE>
(e) The Credit Party will take all reasonable and necessary steps,
including, without limitation, in any proceeding before the United States Patent
and Trademark Office, or any similar office or agency in any other country or
any political subdivision thereof, to maintain and pursue each application (and
to obtain the relevant registration) and to maintain each registration of the
Patents and Trademarks, including, without limitation, filing of applications
for renewal, affidavits of use and affidavits of incontestability.
(f) In the event that any Patent or Trademark included in the Collateral is
infringed, misappropriated or diluted by a third party, the Credit Party shall
promptly notify the Administrative Agent and the Lenders after it learns thereof
and shall unless the Credit Party shall reasonably determine that such Patent or
Trademark is of negligible economic value to the Credit Party which
determination the Credit Party shall promptly report to the Administrative Agent
and the Lenders, promptly sue for infringement, misappropriation or dilution, to
seek injunctive relief where appropriate and to recover any and all damages for
such infringement, misappropriation or dilution, or take such other actions as
the Credit Party shall reasonably deem appropriate under the circumstances to
protect such Patent or Trademark.
6.11 Covenants Relating to Inventory and Equipment.
---------------------------------------------
(a) The Credit Party will, upon thirty (30) days' written notice from the
Administrative Agent, provide to the Administrative Agent the location, value
and owner of the Inventory and/or Equipment on a quarterly basis or, after the
occurrence and during the continuation of an Event of Default, more frequently.
(b) Each Credit Party shall, at its own expense, maintain insurance with
respect to the Equipment and Inventory in such amounts, against such risks, in
such form and with such insurers, as are consistent with prudent business
practice and in any event consistent with normal industry practice (except to
any greater extent as may be required by the terms of any of the other Credit
Documents). Each policy for liability insurance shall provide for all losses to
be paid on behalf of the Administrative Agent and such Credit Party as their
interests may appear, and each policy for property damage insurance shall
provide for all losses (except for losses of less than $2,000,000 per
occurrence) to be paid directly to the Administrative Agent. Each such policy
shall in addition (i) name such Credit Party and the Administrative Agent as
insured parties thereunder (without any representation or warranty by or
obligation upon the Administrative Agent) as their interests may appear, (ii)
contain the agreement by the insurer that any loss thereunder shall be payable
to the Administrative Agent notwithstanding any action, inaction or breach of
representation or warranty by such Credit Party, (iii) provide that there shall
be no recourse against the Administrative Agent for payment of premiums or other
amounts with respect thereto and (iv) provide that at least thirty (30) days'
prior written notice of cancellation or lapse shall be given to the
Administrative Agent by the insurer. Each Credit Party shall, if so requested
by the Administrative Agent, deliver to the Administrative Agent original or
duplicate policies of such insurance and, as often as the Administrative Agent
may reasonably request, a report of a reputable insurance broker with respect to
such insurance. Further, each Credit Party shall, at the request of the
Administrative Agent, duly exercise and deliver instruments of assignment of
such insurance policies to comply with the requirements of Section 6.3 hereof
and cause the insurers to acknowledge notice of such assignment.
12
<PAGE>
(c) In the case of any loss involving damage to Equipment or Inventory of
any Credit Party, such Credit Party shall make or cause to be made the necessary
repairs to or replacements of such Equipment or Inventory, and any proceeds of
insurance properly received by or released to such Credit Party shall be used by
such Credit Party, except as otherwise required or permitted hereunder or by the
Credit Agreement, to pay or as reimbursement for the costs of such repairs or
replacements.
(d) So long as no Event of Default shall have occurred and shall be
continuing, all insurance payments received by the Administrative Agent in
connection with any loss, damage or destruction of any Inventory or Equipment
shall be released by the Administrative Agent to the applicable Credit Party for
the repair, replacement or restoration thereof. To the extent that (i) the
amount of any such insurance payments exceeds the cost of any such repair,
replacement or restoration, or (ii) such insurance payments are not otherwise
required by the applicable Credit Party to complete any such repair, replacement
or restoration required hereunder, the Administrative Agent shall not be
required to release the amount thereof to such Credit Party and may hold or
continue to hold such amount in a Collateral Account as additional security for
the Secured Obligations of such Credit Party (except that any such amount shall
be released by the Administrative Agent to such Credit Party if no Event of
Default has occurred and is then continuing). If an Event of Default has
occurred and is continuing, the Administrative Agent may elect, in its sole and
absolute discretion, to release any such insurance payments for the purposes set
forth in the first sentence of this subparagraph (d), or to hold such insurance
payments as additional Collateral hereunder or apply the same as specified in
the Credit Agreement.
7. Remedies.
--------
7.1 Notice to Account Debtors And Contract Parties. Upon the request of
----------------------------------------------
the Administrative Agent at any time after the occurrence and during the
continuation of an Event of Default, the Credit Parties shall notify account
debtors on the Accounts and parties to the Contracts that the Accounts and the
Contracts have been assigned to the Administrative Agent for the ratable benefit
of the Lenders and that payments in respect thereof shall be made directly to
the Administrative Agent.
7.2 Proceeds to be Turned Over To Administrative Agent. In addition to
--------------------------------------------------
the rights of the Administrative Agent and the Lenders specified in subsection
3.3 with respect to payments of Accounts, after the occurrence and during the
continuation of an Event of Default all Proceeds received by the Credit Parties
consisting of cash, checks and other near-cash items shall be held by the Credit
Parties in trust for the Administrative Agent and the Lenders, segregated from
other funds of the Credit Parties, and shall, forthwith upon receipt by the
Credit Parties, be turned over to the Administrative Agent in the exact form
received by the Credit Parties (duly indorsed by the Credit Parties to the
Administrative Agent, if required) and held by the Administrative Agent in a
Collateral Account maintained under the sole dominion and control of the
Administrative Agent. All Proceeds while held by the Administrative Agent in a
Collateral Account (or by the Credit Parties in trust for the Administrative
Agent and the Lenders) shall continue to be held as collateral security for all
the Secured Obligations and shall not constitute payment thereof until applied
as provided in subsection 7.3.
13
<PAGE>
7.3 Application of Proceeds. At any time after an Event of Default shall
-----------------------
have occurred and be continuing, the Administrative Agent shall apply all of the
Proceeds held in any Collateral Account in payment of the Secured Obligations in
such order as the Administrative Agent may elect. Any balance of such Proceeds
remaining after the Secured Obligations shall have been paid in full and the
Commitments shall have been terminated shall be paid over to the Credit Parties
or to whomsoever may be lawfully entitled to receive the same.
7.4 Code Remedies. At any time after an Event of Default shall have
-------------
occurred and be continuing, the Administrative Agent, on behalf of the Lenders,
may exercise, in addition to all other rights and remedies granted to them in
this Agreement and in any other instrument or agreement securing, evidencing or
relating to the Secured Obligations, all rights and remedies of a secured party
under the Code. Without limiting the generality of the foregoing, the
Administrative Agent, without demand of performance or other demand,
presentment, protest, advertisement or notice of any kind (except any notice
required by law referred to below) to or upon the Credit Parties or any other
Person (all and each of which demands, defenses, advertisements and notices are
hereby waived), may in such circumstances forthwith collect, receive,
appropriate and realize upon the Collateral, or any part thereof, and/or may
forthwith sell, lease, assign, give option or options to purchase, or otherwise
dispose of and deliver the Collateral or any part thereof (or contract to do any
of the foregoing), in one or more parcels at public or private sale or sales, at
any exchange, broker's board or office of the Administrative Agent or any Lender
or elsewhere upon such terms and conditions as it may deem advisable and at such
prices as it may deem best, for cash or on credit or for future delivery without
assumption of any credit risk. The Administrative Agent or any Lender shall
have the right upon any such public sale or sales, and, to the extent permitted
by law, upon any such private sale or sales, to purchase the whole or any part
of the Collateral so sold, free of any right or equity of redemption in the
Credit Parties, which right or equity is hereby waived or released. The Credit
Parties further agree, at the Administrative Agent's request, to assemble the
Collateral and make it available to the Administrative Agent at places which the
Administrative Agent shall reasonably select, whether at the respective Credit
Party's premises or elsewhere. The Administrative Agent shall apply the net
proceeds of any such collection, recovery, receipt, appropriation, realization
or sale, after deducting all reasonable costs and expenses of every kind
incurred therein or incidental to the care or safekeeping of any of the
Collateral or in any way relating to the Collateral or the rights of the
Administrative Agent and the Lenders hereunder, including, without limitation,
reasonable attorneys' fees and disbursements, to the payment in whole or in part
of the Secured Obligations, in such order as the Administrative Agent may elect,
and only after such application and after the payment by the Administrative
Agent of any other amount required by any provision of law, including, without
limitation, Section 9-504(1)(c) of the Code, need the Administrative Agent
account for the surplus, if any, to each of the Credit Parties. To the extent
permitted by applicable law, the Credit Parties waive all claims, damages and
demands it may acquire against the Administrative Agent or any Lender arising
out of the exercise by them of any rights hereunder. If any notice of a
proposed sale or other disposition of Collateral shall be required by law, such
notice shall be deemed reasonable and proper if received by the Credit Parties
at least 20 days before such sale or other disposition.
7.5 Deficiency. The Credit Parties shall remain liable for any deficiency
----------
if the proceeds of any sale or other disposition of the Collateral are
insufficient to pay the Secured
14
<PAGE>
Obligations and the fees and disbursements of any attorneys employed by the
Administrative Agent or any Lender to collect such deficiency.
8. Administrative Agent's Appointment as Attorney-in-Fact; Administrative
----------------------------------------------------------------------
Agent's Performance of Credit Parties' Obligations.
- ------- ------------------------------------------
8.1 Powers. Each of the Credit Parties hereby irrevocably constitutes and
------
appoints the Administrative Agent and any officer or agent thereof, with full
power of substitution, as its true and lawful attorney-in-fact with full
irrevocable power and authority in the place and stead of such Credit Party and
in the name of such Credit Party or in its own name, from time to time in the
Administrative Agent's discretion, for the purpose of carrying out the terms of
this Agreement, to take any and all appropriate action and to execute any and
all documents and instruments which may be necessary or desirable to secure the
Secured Obligations and grant security interests in the Collateral as
contemplated by this Agreement, and, without limiting the generality of the
foregoing, each Credit Party hereby gives the Administrative Agent the power and
right, on behalf of such Credit Party, without notice to or assent by such
Credit Party, to do the following:
(a) in the case of any Account, at any time when the authority of the
Credit Party to collect the Accounts has been curtailed or terminated
pursuant to subsection 3.3(a), or in the case of any other Collateral, at
any time after an Event of Default shall have occurred and be continuing,
in the name of the Borrower or its own name, or otherwise, to take
possession of and indorse and collect any checks, drafts, notes,
acceptances or other instruments for the payment of moneys due under any
Account, Instrument, or General Intangible or with respect to any other
Collateral and to file any claim or to take any other action or proceeding
in any court of law or equity or otherwise deemed appropriate by the
Administrative Agent for the purpose of collecting any and all such moneys
due under any Account, Instrument or General Intangible or with respect to
any other Collateral whenever payable;
(b) in the case of any Copyrights, Patents or Trademarks, at any time
after an Event of Default has occurred and is continuing, to execute and
deliver any and all agreements, instruments, documents, and papers as the
Administrative Agent may request to evidence the Administrative Agent's and
the Lenders' security interest in any copyright, Patent or Trademark and
the goodwill and general intangibles of the Credit Party relating thereto
or represented thereby;
(c) at any time after an Event of Default has occurred and is
continuing, to pay or discharge taxes and Liens levied or placed on or
threatened against the Collateral, to effect, any repairs or any insurance
called for by the terms all or any part of the premiums therefor and the
costs thereof;
(d) to execute, in connection with the sale provided for in Section
7.4 hereof, any endorsements, assignments or other instruments of
conveyance or transfer with respect to the Collateral; and
15
<PAGE>
(e) upon the occurrence and during the continuation of any Event of
Default, (i) to direct any party liable for any payment under any of the
Collateral to make payment of any and all moneys due or to become due
thereunder directly to the Administrative Agent or as the Administrative
Agent shall direct; (ii) to ask or demand for, collect, receive payment of
and receipt for, any and all moneys, claims and other amounts due or to
become due at any time in respect of or arising out of any Collateral;
(iii) to sign and indorse any invoices, freight or express bills, bills of
lading, storage or warehouse receipts, drafts against debtors, assignments,
verifications, notices and other documents in connection with any of the
Collateral; (iv) to commence and prosecute any suits, actions or
proceedings at law or in equity in any court of competent jurisdiction to
collect the Collateral or any thereof and to enforce any other right in
respect of any Collateral; (v) to defend any suit, action or proceeding
brought against the Credit Party with respect to any Collateral; (vi) to
settle, compromise or adjust any such suit, action or proceeding and, in
connection therewith, to give such discharges or releases as the
Administrative Agent may deem appropriate; (vii) to assign or grant
licenses, any Copyright, Patent or Trademark (along with the goodwill of
the business to which any such Copyright, Patent or Trademark pertains),
throughout the world for such term or terms, on such conditions, and in
such manner, as the Administrative Agent shall in its reasonable discretion
determine; and (viii) generally, to sell, transfer, pledge and make any
agreement with respect to or otherwise deal with any of the Collateral as
fully and completely as though the Administrative Agent were the absolute
owner thereof for all purposes, and to do, at the Administrative Agent's
option and the Credit Party's expense, at any time, or from time to time,
all reasonable acts and things which the Administrative Agent deems
necessary to protect, preserve or realize upon the Collateral and the
Administrative Agent's and the Lenders' security interests therein and to
effect the intent of this Agreement, all as fully and effectively as the
Credit Party might do.
The Administrative Agent agrees that, except after the occurrence and
continuation of an Event of Default, it will forbear from exercising the power
of attorney or any rights granted to the Administrative Agent pursuant to this
subsection 8.1.
8.2 Performance by Administrative Agent of Credit Parties' Obligations.
------------------------------------------------------------------
If the Credit Parties fail to perform or comply with any of their agreements
contained herein, the Administrative Agent, at its option, but without any
obligation so to do, may perform or comply, or otherwise cause performance or
compliance, with such agreement.
8.3 Credit Parties' Reimbursement Obligation. The expenses of the
----------------------------------------
Administrative Agent incurred in connection with actions undertaken as provided
in this Section, together with interest thereon at the rate per annum set forth
in subsection 3.1 of the Credit Agreement for Base Rate Loans from the date of
payment by the Administrative Agent to the date reimbursed by the Credit
Parties, shall be payable by the Credit Parties to the Administrative Agent on
demand.
8.4 Ratification; Power Coupled With An Interest. The Credit Parties
--------------------------------------------
hereby ratify all that said attorneys shall lawfully do or cause to be done by
virtue hereof. All powers, authorizations and agencies contained in this
Agreement are coupled with an interest and are
16
<PAGE>
irrevocable until this Agreement is terminated and the security interests
created hereby are released.
9. Duty of Administrative Agent. The Administrative Agent's sole duty
----------------------------
with respect to the custody, safekeeping and physical preservation of the
Collateral in its possession, under Section 9-207 of the Code or otherwise,
shall be to deal with it in the same manner as the Administrative Agent deals
with similar property for its own account. Neither the Administrative Agent,
any Lender nor any of their respective directors, officers, employees or agents
shall be liable for failure to demand, collect or realize upon any of the
Collateral or for any delay in doing so or shall be under any obligation to sell
or otherwise dispose of any Collateral upon the request of the Credit Parties or
any other Person or to take any other action whatsoever with regard to the
Collateral or any part thereof. The powers conferred on the Administrative
Agent and the Lenders hereunder are solely to protect the Administrative Agent's
and the Lenders' interests in the Collateral and shall not impose any duty upon
the Administrative Agent or any Lender to exercise any such powers. The
Administrative Agent and the Lenders shall be accountable only for amounts that
they actually receive as a result of the exercise of such powers, and neither
they nor any of their officers, directors, employees or agents shall be
responsible to the Credit Parties for any act or failure to act hereunder,
except for their own gross negligence or willful misconduct, except as provided
herein.
10. Execution of Financing Statements. Pursuant to Section 9-402 of the
---------------------------------
Code, each of the Credit Parties authorizes the Administrative Agent to file
financing statements with respect to the Collateral without the signature of the
Credit Party in such form and in such filing offices as the Administrative Agent
reasonably determines appropriate to perfect the security interests of the
Administrative Agent and the Lenders under this Agreement. A carbon,
photographic or other reproduction of this Agreement shall be sufficient as a
financing statement for filing in any jurisdiction.
11. Authority of Administrative Agent. The Credit Parties acknowledge
---------------------------------
that the rights and responsibilities of the Administrative Agent under this
Agreement with respect to any action taken by the Administrative Agent or the
exercise or non-exercise by the Administrative Agent of any option, voting right
request, judgment or other right or remedy provided for herein or resulting or
arising out of this Agreement shall, as between the Administrative Agent and the
Lenders, be governed by the Credit Agreement and by such other agreements with
respect thereto as may exist from time to time among them, but, as between the
Administrative Agent and the Credit Parties, the Administrative Agent shall be
conclusively presumed to be acting as agent for the Lenders with full and valid
authority so to act or refrain from acting, and the Credit Parties shall be
under no obligation, or entitlement, to make any inquiry respecting such
authority.
12. Notices. All notices shall be given or made in accordance with
-------
Section 11.1 of the Credit Agreement.
13. Severability. Any provision of this Agreement which is prohibited or
------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any
17
<PAGE>
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
14. Amendments in Writing; No Waiver; Cumulative Remedies.
-----------------------------------------------------
14.1 Amendments in Writing. None of the terms or provisions of this
---------------------
Agreement may be waived, amended, supplemented or otherwise modified except by a
written instrument executed by the Administrative Agent and the Credit Parties
directly affected thereby; provided that any provision of this Agreement may be
---------
waived by the Administrative Agent in a letter or agreement executed by the
Administrative Agent or by facsimile transmission from the Administrative Agent.
14.2 No Waiver by Course of Conduct. Neither the Administrative Agent nor
------------------------------
any Lender shall by any act (except by a written instrument pursuant to
subsection 14.1 hereof), delay, indulgence, omission or otherwise be deemed to
have waived any right or remedy hereunder or to have acquiesced in any Default
or Event of Default or in any breach of any of the terms and conditions hereof.
No failure to exercise, nor any delay in exercising, on the part of the
Administrative Agent or any Lender, any right, power or privilege hereunder
shall operate as a waiver thereof. No single or partial exercise of any right,
power or privilege hereunder shall preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. A waiver by the
Administrative Agent or any Lender of any right or remedy hereunder on any one
occasion shall not be construed as a bar to any right or remedy which the
Administrative Agent or such Lender would otherwise have an any future occasion.
14.3 Remedies Cumulative. The rights and remedies herein provided are
-------------------
cumulative, may be exercised singly or concurrently and are not exclusive of any
other rights or remedies provided by law.
15. Section Headings. The section and subsection headings used in this
----------------
Agreement are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation hereof.
16. Successors and Assigns. This Agreement shall be binding upon the
----------------------
successors and assigns of the Credit Parties and shall inure to the benefit of
the Administrative Agent and the Lenders and their successors and assigns,
provided that the Credit Parties may not assign any of their rights or Secured
- --------
Obligations under this Agreement without the prior written consent of the
Administrative Agent and any such purported assignment shall be null and void.
17. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND SECURED OBLIGATIONS
-------------
OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[Remainder of Page Intentionally Left Blank]
18
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Security Agreement to
be duly executed and delivered as of the date first above written.
BORROWER: SCHOOL SPECIALTY, INC.
a Delaware corporation
By: /s/ Donald J. Noskowiak
-----------------------
Name: Donald J. Noskowiak
Title: CFO & Exec. V.P.
GUARANTORS: CHILDCRAFT EDUCATION CORP.,
a New York corporation
By: /s/ Donald J. Noskowiak
-----------------------
Name: Donald J. Noskowiak
Title: V.P.
RE-PRINT LLC,
a Delaware limited liability company
By: /s/ Donald J. Noskowiak
-----------------------
Name: Donald J. Noskowiak
Title: V.P. School Specialty, Inc. Member
BIRD-IN-HAND WOODWORKS, INC.
a New Jersey corporation
By: /s/ Donald J. Noskowiak
-----------------------
Name: Donald J. Noskowiak
Title: V.P.
SAX ARTS & CRAFTS, INC.
a Delaware corporation
By: /s/ Donald J. Noskowiak
-----------------------
Name: Donald J. Noskowiak
Title: V.P.
THE NATIONAL SCHOOL SUPPLY COMPANY
a Delaware corporation
By: /s/ Donald J. Noskowiak
-----------------------
Name: Donald J. Noskowiak
Title: V.P.
19
<PAGE>
BECKLEY-CARDY, INC.
a Delaware corporation
By: /s/ Donald J. Noskowiak
-----------------------
Name: Donald J. Noskowiak
Title: V.P. & CFO
ADMINISTRATIVE AGENT: NATIONSBANK, N.A.
as Administrative agent
By: /s/ Michael Heredia
-------------------
Name: Michael R. Heredia
Title: Senior Vice President
20
<PAGE>
Schedules to Amended and Restated Security Agreement:
Schedule 1 Chief Executive Office and Locations of
Collateral
Schedule 2 Filings and Actions Required to Perfect Security
Interests
Schedule 3 U.S. Copyright Registrations
Schedule 4 U.S. and Foreign Patents
Schedule 5 (I) U.S. Trademark Registrations and
Applications
(II)Foreign Trademark Registrations Applications
The above schedules to this document have been omitted. The schedules will be
furnished supplementally to the Securities and Exchange Commission upon request.
21
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.5
<SEQUENCE>4
<FILENAME>dex45.txt
<DESCRIPTION>CONSENT & AMENDED AND RESTATED CREDIT AGREEMENT
<TEXT>
<PAGE>
EXHIBIT 4.5
CONSENT AND AMENDMENT
THIS CONSENT AND AMENDMENT dated as of November 20, 2000 (this "Amendment")
---------
relating to the Credit Agreement referenced below is by and among SCHOOL
SPECIALTY, INC., a Wisconsin corporation (the "Borrower"), the Subsidiaries of
--------
the Borrower identified as "Guarantors" on the signature pages hereto, the
Lenders identified on the signature pages hereto and Bank of America, N.A., as
Administrative Agent (in such capacity, the "Administrative Agent"). Terms used
--------------------
herein but not otherwise defined herein shall have the meanings provided to such
terms in the Credit Agreement.
W I T N E S S E T H
WHEREAS, a $350 million credit facility has been extended to the Borrower
pursuant to the terms of that Amended and Restated Credit Agreement dated as of
September 30, 1998 (as amended, modified, supplemented, increased and extended
from time to time, the "Credit Agreement") by and among the Borrower, the
----------------
Guarantors, the Lenders and the Administrative Agent;
WHEREAS, the Borrower proposes to enter, and to cause certain of its
Subsidiaries to enter, into a Securitization Transaction substantially on the
terms and conditions set forth in the agreements attached as Schedule 1 hereto
----------
(the "Proposed Securitization Transaction");
-----------------------------------
WHEREAS, the Borrower has requested that the Lenders consent to the
Proposed Securitization Transaction, thereby causing the Proposed Securitization
Transaction to be deemed a "Permitted Securitization Transaction" under the
Credit Agreement;
WHEREAS, the requested consent requires the approval of the Required
Lenders; and
WHEREAS, the Required Lenders have agreed to the requested consent on the
terms and conditions set forth herein.
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Consents to Proposed Securitization Transaction. The Required Lenders
-----------------------------------------------
hereby agree and confirm that the Proposed Securitization Transaction satisfies
clause (i) of the definition of "Permitted Securitization Transaction". The
Required Lenders hereby authorize and direct the Administrative Agent to give
notice to the Borrower of the satisfaction of the conditions precedent set forth
in Section 6 of this Amendment.
2. Consent to Intercreditor Agreement. The Required Lenders hereby
----------------------------------
authorize and direct the Administrative Agent to enter into an Intercreditor
Agreement in substantially the form of Schedule 2 hereto in connection with the
----------
Proposed Securitization Transaction.
3. Consent to Release of Liens. The Required Lenders hereby consent to
---------------------------
the release by the Administrative Agent of the security interest and liens of
the Administrative Agent, for the benefit of the Lenders, in all of the Property
described on Schedule 3 hereto.
----------
<PAGE>
4. Consent Relating to Special Purpose Subsidiary. The Required Lenders
----------------------------------------------
hereby consent and agree that, solely for purposes of Section 7.11(a) of the
Credit Agreement, the Special Purpose Subsidiary shall not be deemed a "Non-
Guarantor Subsidiary" and accordingly shall not be required to deliver a Joinder
Agreement or other agreement providing for a guaranty of, or a grant of a
security interest in its Property to secure, the obligations of the Credit
Parties under the Credit Documents.
5. Amendments. The Credit Agreement is amended in the following respects:
----------
(a) The following definition is added to Section 1.1 of the Credit
Agreement:
"Special Purpose Subsidiary" means New School, Inc., a Delaware
corporation.
(b) The definition of "Credit Documents" in Section 1.1 of the Credit
Agreement is amended to read as follows:
"Credit Documents" means a collective reference to this Credit
----------------
Agreement, the Notes, the LOC Documents, the Security Agreement,
the Pledge Agreement, the Mortgages, the Intercreditor Agreement,
each Joinder Agreement, the Administrative Agent's Fee Letter,
and all other related agreements and documents issued or
delivered hereunder or thereunder or pursuant hereto or thereto.
(c) The following sentence is added to Section 8.1 of the Credit
Agreement immediately following the last clause thereof:
Notwithstanding anything to the contrary in this Section 8.1 or
otherwise, the Special Purpose Subsidiary shall not contract,
create, incur, assume or permit to exist any Indebtedness other
than Indebtedness existing under Permitted Securitization
Transactions.
(d) The following sentence is added to the end of Section 8.2 of the
Credit Agreement:
Notwithstanding anything to the contrary in this Section 8.2 or
otherwise, the Special Purpose Subsidiary shall not contract,
create, incur, assume or permit to exist any Lien with respect to
any of its Property, whether now owned or hereafter acquired,
except for Liens existing in connection with Permitted
Securitization Transactions.
6. Conditions Precedent. This Amendment shall be effective upon
--------------------
satisfaction of the following conditions precedent:
(a) receipt by the Administrative Agent of multiple counterparts of
this Amendment executed by the Credit Parties and the Required Lenders;
(b) receipt by the Administrative Agent of the promissory note or
other agreement or instrument evidencing the obligation of the Special
Purpose Subsidiary to pay amounts to the Borrower or any of its
Subsidiaries (including the "Original Sellers" as such term is defined in
Schedule 3 hereto) in connection with or relating to the Proposed
----------
Securitization Transaction,
2
<PAGE>
together with a related endorsement (in a form satisfactory to the
Administrative Agent) executed in blank;
(c) receipt by the Administrative Agent of (i) a pledge joinder
agreement (in form and substance satisfactory to the Administrative Agent)
evidencing the pledge by the Borrower of all of the capital stock of the
Securitization Subsidiary pursuant to the terms of the Pledge Agreement and
(ii) the stock certificates representing the capital stock of the
Securitization Subsidiary, together with related stock powers executed in
blank; and
(d) receipt by the Administrative Agent a legal opinion of counsel to
the Borrower (in form, scope and substance satisfactory to the
Administrative Agent) to the effect that the pledge by the Borrower of the
promissory note referenced in clause (a) above and the pledge by the
Borrower of the capital stock of the Securitization Subsidiary (i) do not
conflict with (A) the agreements, documents and instruments relating to the
Proposed Securitization Transaction, (B) the governance documents of the
Securitization Subsidiary or (C) any Requirement of Law, and (ii) are
enforceable against the Borrower.
7. Covenant to Deliver Opinion of Counsel. The Borrower hereby covenants
--------------------------------------
and agrees to to the Administrative Agent, no later than thirty (30) days after
the date hereof, a legal opinion of counsel to the Borrower (in form, scope and
substance satisfactory to the Administrative Agent) relating to the pledge by
the Borrower of the promissory note referenced in clause (a) above and the
pledge by the Borrower of the capital stock of the Securitization Subsidiary.
The Borrower hereby agrees that the failure to deliver such legal opinion to the
Administrative Agent by such date shall constitute an immediate Event of
Default.
8. Reaffirmation of Representations and Warranties. The Credit Parties
-----------------------------------------------
hereby affirm that the representations and warranties set forth in the Credit
Documents are true and correct as of the date hereof after giving effect to this
Amendment (except those that expressly relate to an earlier period).
9. Reaffirmation of Guaranty. Each of the Guarantors (i) acknowledges and
-------------------------
consents to all of the terms and conditions of this Amendment, (ii) affirms all
of its obligations under the Credit Documents and (iii) agrees that this
Amendment and all documents executed in connection herewith do not operate to
reduce or discharge the Guarantors' obligations under the Credit Agreement and
the other Credit Documents.
10. No Other Changes. Except as modified hereby, all of the terms and
----------------
provisions of the Credit Agreement and the other Credit Documents (including the
schedules and exhibits thereto) shall remain in full force and effect.
11. Cost and Expenses. The Borrower agrees to pay all reasonable costs and
-----------------
expenses of the Administrative Agent in connection with the preparation,
execution and delivery of this Amendment, including without limitation the
reasonable fees and expenses of Moore & Van Allen, PLLC.
12. Counterparts. This Amendment may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be deemed an
original and it shall not be necessary in making proof of this Amendment to
produce or account for more than one such counterpart.
13. Governing Law. This Amendment shall be deemed to be a contract made
-------------
under, and for all purposes shall be construed in accordance with, the laws of
the State of New York.
3
<PAGE>
[Remainder of Page Intentionally Left Blank]
4
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Amendment to be duly executed and delivered as of the date first above
written.
BORROWER: SCHOOL SPECIALTY, INC.
- --------
a Wisconsin corporation
By: /s/ Mary M. Kabacinski
--------------------------------
Name: Mary M. Kabacinski
Title: CFO
GUARANTORS: CHILDCRAFT EDUCATION CORP.,
- ----------
a New York corporation
CLASSROOMDIRECT.COM, LLC,
a Delaware limited liability company
BIRD-IN-HAND WOODWORKS, INC.,
a New Jersey corporation
SPORTIME, LLC,
a Delaware limited liability company
JUNEBOX.COM, INC.,
a Wisconsin corporation
By: /s/ Mary M. Kabacinski
--------------------------------
Name: Mary M. Kabacinski
Title: Treasurer
[Signature Pages Continue]
<PAGE>
LENDERS: BANK OF AMERICA, N.A., a national banking
- -------
association formerly known as NationsBank, N.A.,
individually as a Lender and in its capacity as
Administrative Agent
By: /s/ Michael R. Heredia
---------------------------------------------
Name: Michael R. Heredia
Title: Managing Director
BANK ONE, NA (main office, Chicago)
By: /s/ A.F. Maggiore
---------------------------------------------
Name: Anthony F. Maggiore
Title: Managing Director
U.S. BANK NATIONAL ASSOCIATION
By:______________________________________________
Name:
Title:
THE BANK OF NEW YORK
By:______________________________________________
Name:
Title:
HARRIS TRUST AND SAVINGS BANK
By: /s/ George M. Dluhy
---------------------------------------------
Name: George M. Dluhy
Title: Vice President
FIRSTAR BANK, N.A. (formerly known as Firstar Bank
Milwaukee, N.A.)
By:______________________________________________
Name:
Title:
CITIZENS BANK OF MASSACHUSETTS, as successor to USTRUST
By: /s/ John E. Lucas
---------------------------------------------
Name: John E. Lucas
Title: Vice President
[Signature Pages Continue]
<PAGE>
LASALLE BANK NATIONAL ASSOCIATION
By: /s/ Lou D. Banach
-----------------------------
Name: Lou D. Banach
Title: Vice President & Senior Lender
ST. FRANCIS BANK, F.S.B.
By: /s/ John C. Tans
-----------------------------
Name: John C. Tans
Title: Vice President
UNION BANK OF CALIFORNIA, N.A.
By: /s/ J. Scott Jessup
-----------------------------
Name: J. Scott Jessup
Title: Vice President
WACHOVIA BANK, N.A.
By: /s/ Susan F. Holmes
-----------------------------
Name: Susan F. Holmes
Title: Vice President
MARSHALL & ILSLEY BANK
By:_______________________________
Name:
Title:
<PAGE>
SCHEDULE 1
Proposed Securitization Transaction Agreements
<PAGE>
SCHEDULE 2
Form of Intercreditor Agreement
<PAGE>
SCHEDULE 3
Property to be Released
All of the following assets, whether now or hereafter arising: (a) all Purchased
Receivables, (b) all Collections, (c) each Lock-Box, (d) each Collection
Account, (e) all Related Security, (f) all other rights and payments relating to
the Receivables, and (g) all proceeds of any of the foregoing. As used in this
Schedule 3, the following terms shall have the following meanings:
"Borrower" means School Specialty, Inc., a Wisconsin corporation.
--------
"Collection Account" means each concentration account, depository
------------------
account, lock-box account or similar account in which any
Collections are collected or deposited.
"Collections" means, with respect to any Purchased Receivable, all
-----------
cash collections and other cash proceeds in respect of such Purchased
Receivable, including, without limitation, all yield, Finance Charges,
or other related amounts accruing in respect thereof and all cash
proceeds of Related Security with respect to such Purchased
Receivable.
"Contract" means any instrument, agreement, invoice or other writing
--------
between an Originator and an Obligor for the sale of goods or the
rendering of services by such Originator to such Obligor.
"Finance Charges" means, with respect to a Purchased Receivable, any
---------------
finance, interest, late payment charges or similar charges owing by an
Obligor pursuant to the related Contract.
"Lock-Box" means each locked postal box with respect to which a bank
--------
holding one or more Collection Accounts has been granted exclusive
access for the purpose of retrieving and processing payments made on
the Purchased Receivables.
"Obligor" means a Person obligated to make payments to an Originator
-------
pursuant to a Contract.
"Original Seller" means each of ClassroomDirect.com, LLC, a Delaware
---------------
limited liability company, Childcraft Education Corp., a New York
corporation, Global Video, LLC, a Wisconsin limited liability company,
and Sportime, LLC, a Delaware limited liability company, in their
respective capacities as sellers under the Receivables Transfer
Agreements.
"Originator" means an Original Seller or the Borrower.
----------
"Person" means an individual, partnership, corporation (including a
------
business trust), limited liability company, joint stock company,
trust, unincorporated association, joint venture or other entity, or a
government or any political subdivision or agency thereof.
"Purchased Receivables" means (i) all Receivables sold, contributed or
---------------------
otherwise transferred by an Original Seller to the Borrower under and
pursuant to the terms of the Receivables Transfer Agreements and
subsequently sold, contributed or otherwise
<PAGE>
transferred by the Borrower to the Transferee under and pursuant to
the terms of the Receivables Sales Agreement, and (ii) all other
Receivables sold, contributed or otherwise transferred by the Borrower
to the Transferee under and pursuant to the terms of the Receivables
Sales Agreement.
"Receivable" means the indebtedness and other obligations, whether
----------
constituting an account, chattel paper, instrument, payment intangible
or general intangible, arising in connection with the sale of goods or
the rendering of services by an Originator and further includes,
without limitation, the obligation to pay any Finance Charges with
respect thereto.
"Receivables Sale Agreement" means that certain Receivables Sale
--------------------------
Agreement, dated on or about November 20, 2000, between the Transferee
and the Borrower (as such agreement may be amended, restated,
supplemented, or otherwise modified form time to time).
"Receivables Transfer Agreement" means each of those certain
------------------------------
Receivables Transfer Agreements, dated on or about November 20, 2000,
between the Borrower and each of the Original Sellers (as such
agreements may be amended, restated, supplemented, or otherwise
modified form time to time).
"Records" means, with respect to any Purchased Receivable, all
-------
Contracts and other documents, books, records and other information
(including, without limitation, computer programs, tapes, disks, punch
cards, data processing software and related property and rights)
relating to such Purchased Receivable, any Related Security therefor
and the related Obligor.
"Related Security" means, with respect to any Purchased Receivable:
----------------
(a) all security interests or liens and property subject thereto
from time to time, if any, purporting to secure payment of such
Purchased Receivable, whether pursuant to the Contract related to
such Purchased Receivable or otherwise, together with all
financing statements and security agreements describing any
collateral securing such Purchased Receivable,
(b) all guaranties, letters of credit, insurance and other
agreements or arrangements of whatever character from time to
time supporting or securing payment of such Purchased Receivable
whether pursuant to the Contract related to such Purchased
Receivable or otherwise,
(c) all service contracts and other contracts and agreements
associated with such Purchased Receivable,
(d) all Records and rights under the Contract(s) related to such
Purchased Receivable,
(e) all of the Borrower's right, title and interest in, to and
under the Receivables Transfer Agreement in respect of such
Purchased Receivable, and
(f) all proceeds of any of the foregoing.
<PAGE>
"Transferee" means New School, Inc., a Delaware corporation.
----------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.8
<SEQUENCE>5
<FILENAME>dex108.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT BRENT PULSIPHER
<TEXT>
<PAGE>
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, dated as of this 26th day of March, 2001 and
having an "Effective Date" of March 26, 2001, is by and between School
Specialty, Inc., a Wisconsin corporation (the "Company") and A. Brent Pulsipher
("Employee").
RECITALS
The Company desires to employ Employee and to have the benefit of his
skills and services, and Employee desires to accept employment with the Company,
on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises, terms, covenants
and conditions set forth herein, and the performance of each, the parties
hereto, intending legally to be bound, hereby agree as follows:
AGREEMENTS
1. Employment and Duties. The Company hereby agrees to employ the
---------------------
Employee and the Employee hereby accepts employment as Executive Vice
President, Corporate Logistics & Technology of the Company and agrees
to devote his full business time and efforts to the diligent and
faithful performance of his duties hereunder under the direction of
the Chief Operating Officer of the Company. Such duties shall be
performed in the State of Wisconsin.
2. Term of Employment. Unless sooner terminated as hereinafter provided,
------------------
the term of the Employee's employment hereunder shall commence with
and only with the Effective Date of this agreement and shall continue
until March 26, 2004 (the "term"). This Agreement may be terminated
prior to the end of the Term in the manner provided herein. In the
event that this agreement is not terminated pursuant to the terms of
this Agreement, following the initial term as described above, said
agreement shall extend for successive renewal terms of one (1) year
each measured from the date of renewal, unless either party shall
notify the other party of their desire to not renew the term of this
agreement, with said notice to be made no later than ninety (90) days
prior to the expiration of the initial term of this agreement or any
then effective renewal term thereof.
3. Compensation. For all services rendered by Employee, the Company shall
------------
compensate Employee as follows:
(a) Base Salary and Guaranteed Bonus. Effective on the date hereof,
--------------------------------
the annual base salary and guaranteed bonus payable to the
Employee shall in total be Two Hundred Seventy Two Thousand Two
Hundred Dollars ($272,200.00) per year or such greater amount as
determined from time to time by the President and/or Chief
Executive Officer of the Company (but
<PAGE>
not reviewed less frequently than on an annual basis), payable on
a regular basis in accordance with the Company's standard payroll
procedures, but not less than monthly. It is understood that the
base salary is a minimum amount, and shall not be reduced during
the term of this Agreement. For purposes of public disclosure,
pro-rata share of benefits, calculation of incentive bonuses in
the executive incentive bonus plan and calculation of future
raises, the base salary will be One Hundred Ninety Thousand Five
Hundred Dollars ($190,500.00). The balance of base salary and
guaranteed bonus, Eighty One Thousand Seven Hundred Dollars
($81,700.00), will be considered the guaranteed portion of bonus
income. If, under 3(b), incentive bonus earned is in excess of
$81,700.00, it will be due and payable in the ordinary course of
the executive bonus plan. If less than $81,700.00, the $81,700.00
will be considered earned by the employee.
(b) Incentive Bonus. During the initial term and any extensions
---------------
thereof, Employee shall be eligible to receive an incentive bonus
based upon his participation in the Company's executive bonus
program.
(c) Perquisites, Benefits, and Other Compensation. During the initial
---------------------------------------------
term and any extensions thereof, Employee shall be entitled to
receive all perquisites and benefits as are customarily provided
by the Company to its executive employees, subject to such
changes, additions, or deletions as the Company may make
generally from time to time, as well as such other perquisites or
benefits as may be specified from time to time by the Board of
Directors or the Chief Executive Officer of the Company.
(d) Stock Options. The Employee shall be eligible for an option grant
-------------
as approved by the Board of Directors.
4. Covenants and Conditions.
------------------------
(a) The Employee will acquire information and knowledge respecting
the intimate and confidential affairs of the Company in the
various phases of its business. Accordingly, the Employee agrees
that he shall not during his employment with the Company or for
twenty four (24) months thereafter, use for himself or disclose
to any person not employed by the Company any such knowledge or
information heretofore acquired or acquired during the term of
this employment hereunder. Nothing in this agreement shall be
construed to limit or supersede the common law of torts or
statutory or other protection of trade secrets where such law
provides the Company with greater protections or protections for
a longer duration than that provided in this section 4 of this
Agreement.
(b) The Employee agrees that all memoranda, notes, records, papers,
or other documents and all copies thereof relating to the
Company's operations or
<PAGE>
business, some of which may be prepared by him, and all objects
associated therewith (such as models and samples) in any way obtained
by him shall be the Company's property. This shall include, but is not
limited to, documents and objects concerning any process, apparatus,
or product manufactured, used, developed, investigated, or considered
by the Company. The Employee shall not, except for Company use, copy
or duplicate any of the aforementioned documents or objects, nor
remove them from the Company's facilities. The Employee shall not use
any information concerning the aforementioned documents or objects,
except for the Company's benefit, either during his employment or for
a period of twenty four (24) months thereafter. The Employee agrees
that he will deliver all of the aforementioned documents and objects
that may be in his possession to the Company on termination of his
employment, or at any other time on the Company's request, together
with his written certification of compliance.
(c) The terms of the provisions of Paragraph 4(c), (d) and (e) shall be in
effect from the Effective Date of this Agreement through and including
two years (2) following the termination of the employment of the
Employee with the Company (the "Effective Period"). During the
Effective Period, the Employee will not, without the written consent
of the Company, either as principal, agent, consultant, employee,
director, or otherwise, directly or indirectly, contact (1) any
customer of the Company with whom the Employee had direct contact on
behalf of the Company; (2) any customer of the Company who was
contacted by an individual directly or indirectly supervised by the
Employee; and (3) any customer of the Company about whom the Employee
obtained non-public information in connection with his/her
relationship with the Company, with the purpose or effect of causing
such customer to buy or use products competitive with the Company's.
The customer contacts/acquisition of knowledge described in this
Paragraph 4 only apply to those occurring during the eighteen (18)
months prior to the termination of Employee's relationship with the
Company.
(d) In addition and supplemental to any obligations otherwise owed the
Company by the Employee, the Employee agrees he will not engage in any
business activity in the sale and distribution of educational
equipment, supplies, materials and furniture or related internet
market businesses which competes with the business activities of the
Company for the Effective Period.
(e) During the Effective Period, the Employee will not, without the
written consent of the Company, either as principal, agent,
consultant, employee, director, or otherwise, directly or indirectly,
in one or a series of transactions, solicit, induce, or influence any
proprietor, partner, stockholder, lender, director, officer, employee,
joint venturer, investor,
<PAGE>
lessor, independent contractor, supplier, customer, or any other
person which has a business relationship with the Company, to
discontinue or reduce or modify the extent of such relationship, with
the Company.
5. Death or Disability of the Employee. The Employee's employment shall
-----------------------------------
terminate immediately upon his/her death. In the event the Employee becomes
physically or mentally disabled under the terms of the then currently
effective disability coverage for full time employees of the Company, they
shall cease receiving compensation under the terms of this agreement. In
the event that the Employee returns to active full time employment with the
Company during the term of this agreement, or any extension or renewal
thereof, they shall then be compensated for their employment under the
terms of this agreement for their actual active employment with the
Company.
6. Termination. The Company reserves the right to terminate the Employee's
-----------
employment immediately under this agreement should any of the following
occur:
(a) The Employee's commission of a felony that is an act which, in the
opinion of the Board of Directors, is either abhorrent to the
community or is an intentional act, which the Board of Directors
considers materially damaging to the reputation of the Company or its
successors or assigns.
(b) The Employee's breach of or failure to perform his obligations in
accordance with the terms and conditions of this agreement or by
mutual agreement of the parties hereto.
(c) The death or disability of the Employee.
Should the term of the Employee's employment with the Company be terminated
pursuant to the terms of Section 6(b) herein, the Company shall pay to the
Employee the Base Salary described in Section 3(a) for a period of twelve
(12) months. Termination for any other cause shall provide for no severance
compensation.
7. Rights and Obligations of Successors. In the event that any of the
-------------------------------------
following events occur, a "Change in Control" shall be deemed to occur for
the purpose of this Agreement: (a) any person or group of persons acting in
concert becomes the beneficial owner, directly or indirectly (excluding
ownership by or through employee benefit plans), of securities of the
Company representing fifty percent (50%) or more of the combined voting
power of the Company's then outstanding securities; (b) the Company is
combined (by merger, share exchange, consolidation, or otherwise) with
another corporation and as a result of such combination less than seventy
five percent (75%) of the outstanding securities of the surviving or
resulting corporation are owned in the aggregate by the former shareholders
of the Company; or (c) any person or group of persons acting in concert
obtains direct or indirect control of the Board of Directors of the
Company,
<PAGE>
other than the current shareholders of the Company. The Employee shall have
the right to terminate his employment under the terms of this Agreement for
a period of sixty (60) days following the Change in Control. In the event
that the Employee shall not so elect to terminate this Agreement, then this
agreement shall be assignable and transferable by the Company to any
subsidiary or affiliate or to any subsidiary or affiliate of the Company
affiliated with the Change in Control and shall inure to the benefit of and
be binding upon the Employee and his heirs and personal representatives and
the Company and its successors and assigns. In the event the Employee
elects to terminate employment, the Employee shall be paid through the term
of this Agreement and any then currently effective extension thereof.
8. Representations of the Employee. The Employee warrants and represents to
--------------------------------
the Company that as of the Effective Date, he/she is not subject to any
employment, consulting or services agreement, or any restrictive covenants
or agreements of any type which would conflict or prohibit the Employee
from fully carrying out their duties as described under the terms of this
agreement. Further the Employee warrants and represents to the Company that
he/she has not and will not retain or use, for the benefit of the Company,
any confidential information, records, trade secrets, or other property of
a former employer. These warranties and representations shall remain in
full force and effect beyond the term of the employment of the Employee
with the Company.
9. Notice. All notices, demands and other communications hereunder shall be
------
deemed to have been duly given, if delivered by hand or mailed, certified
or registered mail with postage prepaid:
To the Company: School Specialty, Inc.
1000 North Bluemound Drive
P.O. Box 1579
Appleton WI 54913-1579
Attention: Mr. Daniel P. Spalding
Fax: 1-920-882-5863
With a copy to: Joseph F. Franzoi IV, Esq.
Franzoi & Franzoi, S.C.
514 Racine Street
Menasha, WI 54952
Fax: (920) 725-0998
To Employee: A. Brent Pulsipher
11910 Marblehead Drive
Tampa, FL 33626
<PAGE>
or to such other address as the person to whom notice is to be given
may have specified in a notice duly given to the sender as provided
herein. Such notice, request, claim, demand, waiver, consent, approval
or other communication shall be deemed to have been given as of the
date so delivered, telefaxed, mailed or dispatched and, if given by any
other means, shall be deemed given only when actually received by the
addressees.
10. Entire Agreement; Amendment; Waiver. This Agreement (including any
-----------------------------------
documents referred to herein) sets forth the entire understanding of
the parties hereto with respect to the subject matter contemplated
hereby. Any and all previous agreements and understandings between or
among the parties regarding the subject matter hereof, whether written
or oral, are superseded by this Agreement. This Agreement shall not be
amended or modified except by a written instrument duly executed by
each of the parties hereto. Any extension or waiver by any party of any
provision hereto shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
11. Expenses. Each party hereto shall bear and pay all of their respective
--------
fees, expenses and disbursements of their agents, representatives,
accountants and counsel incurred in connection with the subject matter
of this Agreement, and its enforcement.
11. Severability. If any provision of this Agreement or the application
------------
thereof to any person or circumstances is held invalid or unenforceable
in any jurisdiction, the remainder hereof, and the application of such
provision to such person or circumstances in any other jurisdiction,
shall not be affected thereby, and to this end the provisions of this
Agreement shall be severable.
12. Governing Law. This Agreement shall in all respects be construed
-------------
according to the laws of the State of Wisconsin, without regard to its
conflict of laws principles.
IN WITNESS WHEREOF, the parties hereto have cause this Agreement to be duly
executed as of the date first written above.
COMPANY: School Specialty, Inc.
/s/ Daniel P. Spalding
---------------------------------------------
Daniel P. Spalding, President
EMPLOYEE:
/s/ A. Brent Pulsipher
--------------------------------------------
A. Brent Pulsipher, Individually
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.10
<SEQUENCE>6
<FILENAME>dex1010.txt
<DESCRIPTION>EMPLOYMENT AGEE. MICHAEL KILLOREN JUNEBOX.COM
<TEXT>
<PAGE>
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, dated as of this 22nd day of August, 2000 and
having an "Effective Date" of August 1, 2000, is by and between JuneBox.com,
Inc., a Wisconsin corporation (the "Company") and Michael J. Killoren
("Employee").
RECITALS
The Company desires to employ Employee and to have the benefit of his
skills and services, and Employee desires to accept employment with the Company,
on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises, terms, covenants
and conditions set forth herein, and the performance of each, the parties
hereto, intending legally to be bound, hereby agree as follows:
AGREEMENTS
1. Employment and Duties. The Company hereby agrees to employ the Employee
---------------------
and the Employee hereby accepts employment as a Executive Vice President
/ CIO of the Company and agrees to devote his full business time and
efforts to the diligent and faithful performance of his duties hereunder
under the direction of the Chief Operating Officer of the Company. Such
duties shall be performed in the State of Wisconsin.
2. Term of Employment. Unless sooner terminated as hereinafter provided,
------------------
the term of the Employee's employment hereunder shall commence with and
only with the Effective Date of this agreement and shall continue until
July 31, 2003 (the "term"). This Agreement may be terminated prior to
the end of the Term in the manner provided herein. In the event that
this agreement is not terminated pursuant to the terms of this
Agreement, following the initial term as described above, said agreement
shall extend for successive renewal terms of one (1) year each measured
from the date of renewal, unless either party shall notify the other
party of their desire to not renew the term of this agreement, with said
notice to be made no later than ninety (90) days prior to the expiration
of the initial term of this agreement or any then effective renewal term
thereof.
3. Compensation. For all services rendered by Employee, the Company shall
------------
compensate Employee as follows:
(a) Base Salary. Effective on the date hereof, the annual base salary
-----------
payable to the Employee shall be One Hundred Forty Thousand Dollars
(140,000.00) per year or such greater amount as determined from
time to
<PAGE>
time by the President and/or Chief Executive Officer of the Company
(but not reviewed less frequently than on an annual basis), payable
on a regular basis in accordance with the Company's standard
payroll procedures, but not less than monthly. It is understood
that the base salary is a minimum amount, and shall not be reduced
during the term of this Agreement.
(b) Incentive Bonus. During the initial term and any extensions
---------------
thereof, Employee shall be eligible to receive an incentive bonus
based upon his participation in the Company's executive bonus
program.
(c) Perquisites, Benefits, and Other Compensation. During the initial
---------------------------------------------
term and any extensions thereof, Employee shall be entitled to
receive all perquisites and benefits as are customarily provided by
the Company to its executive employees, subject to such changes,
additions, or deletions as the Company may make generally from time
to time, as well as such other perquisites or benefits as may be
specified from time to time by the Board of Directors or the Chief
Executive Officer of the Company.
(d) Stock Options. The Employee shall be eligible for an option grant
-------------
as approved by the Board of Directors.
4. Covenants and Conditions.
------------------------
(a) The Employee will acquire information and knowledge respecting the
intimate and confidential affairs of the Company in the various
phases of its business. Accordingly, the Employee agrees that he
shall not during his employment with the Company or for twenty four
(24) months thereafter, use for himself or disclose to any person
not employed by the Company any such knowledge or information
heretofore acquired or acquired during the term of this employment
hereunder. Nothing in this agreement shall be construed to limit or
supersede the common law of torts or statutory or other protection
of trade secrets where such law provides the Company with greater
protections or protections for a longer duration than that provided
in this section 4 of this Agreement.
(b) The Employee agrees that all memoranda, notes, records, papers, or
other documents and all copies thereof relating to the Company's
operations or business, some of which may be prepared by him, and
all objects associated therewith (such as models and samples) in
any way obtained by him shall be the Company's property. This shall
include, but is not limited to, documents and objects concerning
any process, apparatus, or product manufactured, used, developed,
investigated, or considered by the Company. The Employee shall not,
except for Company use, copy or duplicate any of the aforementioned
documents or objects, nor remove them from the Company's
facilities. The Employee shall not use any
<PAGE>
information concerning the aforementioned documents or objects,
except for the Company's benefit, either during his employment or
for a period of twenty four (24) months thereafter. The Employee
agrees that he will deliver all of the aforementioned documents and
objects that may be in his possession to the Company on termination
of his employment, or at any other time on the Company's request,
together with his written certification of compliance, except for
those documents and objects received as a director of the Company.
(c) The terms of the provisions of this Paragraph 4(c) shall be in
effect from the Effective Date of this Agreement through and
including two years (2) following the termination of the employment
of the Employee with the Company (the "Effective Period"). During
the Effective Period, the Employee will not, without the written
consent of the Company, either as principal, agent, consultant,
employee, director, or otherwise, directly or indirectly, contact
(1) any customer of the Company with whom the Employee had direct
contact on behalf of the Company; (2) any customer of the Company
who was contacted by an individual directly or indirectly
supervised by the Employee; and (3) any customer of the Company
about whom the Employee obtained non-public information in
connection with his/her relationship with the Company, with the
purpose or effect of causing such customer to buy or use products
competitive with the Company's. The customer contacts/acquisition
of knowledge described in this Paragraph 4 only apply to those
occurring during the eighteen (18) months prior to the termination
of Employee's relationship with the Company.
(d) In addition and supplemental to any obligations otherwise owed the
Company by the Employee, the Employee agrees he will not engage in
any business activity in the sale and distribution of educational
equipment, supplies, materials and furniture or related internet
market businesses which competes with the business activities of
the Company for the Effective Period.
(e) During the Effective Period, the Employee will not, without the
written consent of the Company, either as principal, agent,
consultant, employee, director, or otherwise, directly or
indirectly, in one or a series of transactions, solicit, induce, or
influence any proprietor, partner, stockholder, lender, director,
officer, employee, joint venturer, investor, lessor, independent
contractor, supplier, customer, or any other person which has a
business relationship with the Company, to discontinue or reduce or
modify the extent of such relationship, with the Company.
5. Death or Disability of the Employee. The Employee's employment shall
-----------------------------------
terminate immediately upon his/her death. In the event the Employee becomes
<PAGE>
physically or mentally disabled under the terms of the then currently
effective disability coverage for full time employees of the Company, they
shall cease receiving compensation under the terms of this agreement. In
the event that the Employee returns to active full time employment with the
Company during the term of this agreement, or any extension or renewal
thereof, they shall then be compensated for their employment under the
terms of this agreement for their actual active employment with the
Company.
6. Termination. The Company reserves the right to terminate the Employee's
-----------
employment immediately under this agreement should any of the following
occur:
(a) The Employee's commission of a felony that is an act which, in the
opinion of the Board of Directors, is either abhorrent to the
community or is an intentional act, which the Board of Directors
considers materially damaging to the reputation of the Company or its
successors or assigns.
(b) The Employee's breach of or failure to perform his obligations in
accordance with the terms and conditions of this agreement or by
mutual agreement of the parties hereto.
(c) The death or disability of the Employee.
Should the term of the Employee's employment with the Company be terminated
pursuant to the terms of Section 6(b) herein, the Company shall pay to the
Employee the Base Salary described in Section 3(a) for a period of six (6)
months. Termination for any other cause shall provide for no severance
compensation.
7. Successors and Assigns. Rights and duties under this Agreement shall be and
----------------------
are binding upon and inure to the benefit of the parties hereto and their
respective heirs, personal representatives, successors and assigns,
although this agreement, and the right of the employee to act as a sales
representative of the Company, is purely personal and not transferable.
8. Representations of the Employee. The Employee warrants and represents to
-------------------------------
the Company that as of the Effective Date, he/she is not subject to any
employment, consulting or services agreement, or any restrictive covenants
or agreements of any type which would conflict or prohibit the Employee
from fully carrying our their duties as described under the terms of this
agreement. Further the Employee warrants and represents to the Company that
he/she has not and will not retain or use, for the benefit of the Company,
any confidential information, records, trade secrets, or other property of
a former employer. Further the Employee represents to the Company and
acknowledges that he/she approached the Company for the opportunity of
employment with the Company and that the Company in no way actively
solicited the Employee to become employed with the Company or to terminate
their employment with any former employer. These warranties and
<PAGE>
representations shall remain in full force and effect beyond the term
of the employment of the Employee with the Company.
9. Notice. All notices, demands and other communications hereunder shall
------
be deemed to have been duly given, if delivered by hand or mailed,
certified or registered mail with postage prepaid:
To the Company: JuneBox.com, Inc.
1377 Midway Road
P.O. Box 1579
Menasha WI 54952
Attention: Mr. Daniel P. Spalding
Fax: 1-920-882-5863
With a copy to: Joseph F. Franzoi IV, Esq.
Franzoi & Franzoi, S.C.
514 Racine Street
Menasha, WI 54952
Fax: (920) 725-0998
To Employee: Mr. Michael J. Killoren
or to such other address as the person to whom notice is to be given
may have specified in a notice duly given to the sender as provided
herein. Such notice, request, claim, demand, waiver, consent, approval
or other communication shall be deemed to have been given as of the
date so delivered, telefaxed, mailed or dispatched and, if given by any
other means, shall be deemed given only when actually received by the
addressees.
10. Entire Agreement; Amendment; Waiver. This Agreement (including any
-----------------------------------
documents referred to herein) sets forth the entire understanding of
the parties hereto with respect to the subject matter contemplated
hereby. Any and all previous agreements and understandings between or
among the parties regarding the subject matter hereof, whether written
or oral, are superseded by this Agreement. This Agreement shall not be
amended or modified except by a written instrument duly executed by
each of the parties hereto. Any extension or waiver by any party of any
provision hereto shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
11. Expenses. Each party hereto shall bear and pay all of their respective
--------
fees, expenses and disbursements of their agents, representatives,
accountants and counsel incurred in connection with the subject matter
of this Agreement, and its enforcement.
<PAGE>
11. Severability. If any provision of this Agreement or the application
------------
thereof to any person or circumstances is held invalid or unenforceable
in any jurisdiction, the remainder hereof, and the application of such
provision to such person or circumstances in any other jurisdiction,
shall not be affected thereby, and to this end the provisions of this
Agreement shall be severable.
12. Governing Law. This Agreement shall in all respects be construed
-------------
according to the laws of the State of Wisconsin, without regard to its
conflict of laws principles.
IN WITNESS WHEREOF, the parties hereto have cause this Agreement to be duly
executed as of the date first written above.
COMPANY: JuneBox.com, Inc.
/s/ Daniel P. Spalding
----------------------------------
Daniel P. Spalding, President
EMPLOYEE:
/s/ Michael J. Killoren
----------------------------------
Michael J. Killoren, Individually
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.1
<SEQUENCE>7
<FILENAME>dex211.txt
<DESCRIPTION>SUBSIDIARIES OF SCHOOL SPECIALTY, INC.
<TEXT>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OR OTHER JURISDICTION OF
NAME INCORPORATION OR ORGANIZATION
<S> <C>
1. ClassroomDirect.com, LLC Delaware
2. Childcraft Education Corp. New York
3. Bird-in-Hand Woodworks, Inc. New Jersey
4. Sportime Acquisition Inc. Delaware
5. Sportime, LLC Delaware
6. SSI Acquisition Subsidiary, Inc. Delaware
7. Global Video, LLC Wisconsin
8. JuneBox.com, Inc. Wisconsin
9. New School, Inc. Delaware
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>8
<FILENAME>dex231.txt
<DESCRIPTION>CONSENT OF ARTHUR ANDERSEN LLP
<TEXT>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-64193 and 333-90361) and Form S-4 (No. 333-
90597) of School Specialty, Inc. of our report dated June 4, 2001, relating to
the financial statements and financial statement schedule, which appears in this
Form 10-K.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
July 5, 2001
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.2
<SEQUENCE>9
<FILENAME>dex232.txt
<DESCRIPTION>CONSENT OF PRICEWATERHOUSECOOPERS LLP
<TEXT>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-64193 and 333-90361) 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 5, 2001
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>10
<FILENAME>dex991.txt
<DESCRIPTION>SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
<TEXT>
<PAGE>
EXHIBIT 99.1
School Specialty, Inc.
Valuation and Qualifying Accounts
The Fiscal Years Ended April 24, 1999, April 29, 2000, and April 28, 2001
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance
Beginning Costs and Other at End of
Description Date of Period Expenses Accounts Deductions Date Period
- ----------- -------------- ---------- ---------- ------------- --------------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance for doubtful
Accounts................. 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
April 29, 2000 1,744,000 545,000 3,569,000 (a) (2,336,000) (b) April 28, 2001 3,522,000
Restructuring reserve..... April 25, 1998 472,000 4,200,000 - (1,920,000) April 24, 1999 2,752,000
April 24, 1999 2,752,000 - - (2,687,000) April 29, 2000 65,000
April 29, 2000 65,000 4,500,000 - (2,052,000) April 28, 2001 2,513,000
</TABLE>
____________
(a) Allowance for doubtful accounts acquired in purchase acquisitions.
(b) Represents write-offs of uncollectable accounts receivable.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2
<SEQUENCE>11
<FILENAME>dex992.txt
<DESCRIPTION>FORWARD LOOKING STATEMENTS
<TEXT>
<PAGE>
EXHIBIT 99.2
FORWARD-LOOKING STATEMENTS
You should consider the following factors in evaluating us and our
business. If any of the following or other risks actually occurs, our business,
financial condition and results of operations could be adversely affected. In
such case, the trading price of our common stock could decline.
Dependence on Growth of Student Population and School Expenditures. Our
growth strategy and profitability depend in part on growth in the student
population and expenditures per student in preK-12 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 the school year, we record most of
our revenues from June to October. As a result, we usually earn more than 100%
of our annual net income in the first two quarters of our fiscal year and
operate at a net loss in our third and fourth fiscal quarters. This seasonality
causes our operating results to vary considerably from quarter to quarter.
Material Amount of Goodwill. Approximately $254.9 million, or 50.3%, of our
total assets as of April 28, 2001 represented 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 have
amortized goodwill on a straight-line basis over 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.
Ability to Identify and Integrate Acquisitions. Our business has grown
significantly through acquisitions in recent years. Since May 1996, we have
acquired 28 companies. Future growth in our revenues and earnings are enhanced
by our ability to continue to acquire and successfully integrate and operate
school supply companies. We cannot guarantee that we will be able to identify
and acquire businesses at all or on reasonable terms. In addition, we cannot be
sure that we will be able to operate the businesses that we acquire profitably
or that our management and financial controls, personnel, computer systems and
other corporate support systems will be adequate to manage the increased size
and scope of our operations as a result of acquisitions. Managing and
integrating acquired businesses may result in substantial costs, delays, or
other operating or financial problems that could materially and adversely affect
our financial condition and results of operations.
Dependence on Key Suppliers and Service Providers. We depend upon a
limited number of suppliers for some of our products, especially furniture and
proprietary products. We also depend upon a
<PAGE>
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 October), 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 suppliers.
Competition. The market for school supplies is highly competitive and
fragmented. We estimate that over 3,400 companies market educational materials
to schools with preK-12 as a primary focus of their business. We also face
increasing competition from alternate channel marketers, including office supply
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 supplemental educational supply 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.
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 Chairman and 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 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 our executive
officers, we do not have employment agreements with other members of our
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 our management.
Dependence on Our Information 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
Greenville, Wisconsin and at three other locations. If any of these links
becomes disrupted or unavailable, this could materially and adversely affect our
business, results of operations and financial condition.
Several of our recently-acquired divisions and/or subsidiaries use
predecessor information systems. 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 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.
Leverage. As of April 28, 2001, we had $179.0 million of bank debt
outstanding. 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
<PAGE>
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, and our business may suffer as a result.
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.
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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