Essendant will incur significant costs related to the Transactions.
Essendant expects to incur significant
one-time
costs in connection with the Transactions in 2018, including
financing-related fees, legal, accounting and other professional fees and transition and integration-related expenses. While Essendant expects to be able to fund these
one-time
costs using cash from operations
and borrowings under existing and anticipated credit sources, these costs will negatively impact Essendants liquidity, cash flows and results of operations in the periods in which they are incurred.
Essendant will incur significant debt related to the Transactions.
Essendant expects to incur new indebtedness in connection with the Transactions, and the degree to which Essendant will be leveraged following completion of
the Transactions may have a material adverse effect on Essendants businesses, financial condition or results of operations and cash flows. On April 12, 2018, Essendant entered into a commitment letter with JPMorgan Chase Bank, N.A. and
Citibank, N.A. (collectively, together with all additional commitment parties added to the commitment letters from time to time, the Commitment Parties) (together with any amendments, supplements and joinders thereto, the Essendant
Commitment Letter) pursuant to which the Commitment Parties have agreed to provide credit facilities to Essendant, the proceeds of which will be used for general corporate purposes, to make any
true-up
payments required to be made by SpinCo pursuant to the Separation Agreement, to pay certain other fees and expenses and to refinance certain existing indebtedness of Essendant. Also on April 12, 2018, SpinCo entered into a commitment letter
with the Commitment Parties (together with any amendments, supplements and joinders thereto the SpinCo Commitment Letter; the SpinCo Commitment Letter and the Essendant Commitment Letter are referred to herein collectively as the
Commitment Letters), pursuant to which the Commitment Parties have agreed to provide a term loan credit facility to SpinCo, the proceeds of which will finance the Internal Reorganization Cash Payments and certain fees and expenses
related to the Transactions. Essendants ability to make payments on and to refinance its indebtedness, including the debt incurred pursuant to the Transactions, as well as any future debt that Essendant may incur, will depend on, among other
things, Essendants ability to generate cash in the future from operations, financings or asset sales. Essendants ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors
that are beyond Essendants control. If Essendant is not able to repay or refinance its debt as it becomes due, Essendant may be forced to sell assets or take other disadvantageous actions, including (i) reducing financing in the future
for working capital, capital expenditures and general corporate purposes or (ii) dedicating an unsustainable level of Essendants cash flow from operations to the payment of principal and interest on Essendants indebtedness. In
addition, Essendants ability to withstand competitive pressures and react to changes in Essendants industry could be impaired. The lenders who hold such debt also could accelerate amounts due in the event Essendant were to default, which
could potentially trigger a default or acceleration of any of Essendants other debt. In addition, Essendant may increase its debt or raise additional capital following the Transactions, subject to restrictions in Essendants debt
agreements and agreements entered into in connection with the Transactions. If Essendants cash flow from operations is less than it anticipates, or if Essendants cash requirements are more than it expects, Essendant may require more
financing. However, debt or equity financing may not be available to Essendant on terms advantageous or acceptable to Essendant, if at all. If Essendant incurs additional debt or raises equity through the issuance of preferred stock, the terms of
the debt or preferred stock issued may give the holders rights, preferences and privileges senior to those of holders of Essendants common stock, particularly in the event of liquidation. The terms of the debt or preferred stock also may
impose additional and more stringent restrictions on Essendants operations than it currently has. If Essendant raises funds through the issuance of additional equity, Essendant stockholders percentage ownership in Essendant would be
diluted. If Essendant is unable to raise additional capital when needed, it could affect Essendants financial condition.
Essendants
rights plan and certain anti-takeover provisions contained in Essendants certificate of incorporation, Essendants bylaws and under Delaware law could hinder a takeover attempt.
On May 17, 2018, the Essendant Board of Directors adopted a stockholder rights plan, as subsequently amended on May 29, 2018, between Essendant and
Equiniti Trust Company, as rights agent (the Rights Plan). Pursuant to the Rights Plan, one preferred stock purchase right (a Right) was distributed as a dividend on each share of Essendant common stock held of record as of
the close of business on May 27, 2018. Each Right entitles Essendant stockholders to purchase a unit representing one
one-thousandth
of a share of Series A Junior Participating Preferred Stock for $33.00,
subject to adjustment.
The Rights generally will be exercisable only if a person or group acquires beneficial ownership (including through derivatives)
of 10% or more (or 15% or more for a person or group reporting beneficial ownership on Schedule 13G) of Essendant common stock or commences a tender or exchange offer upon consummation of which such person or group would beneficially own 10% or more
of Essendant common stock. The Rights expire on May 17, 2019, unless earlier redeemed, exchanged or terminated.
Although the Essendant Board of
Directors believes that, given current circumstances, it is in the best interests of stockholders that no one person or group acquire undue influence or control through purchases of Essendant stock, the Rights Plan could have the effect of delaying,
deferring or preventing a change in control. For example, such provisions may deter tender offers for shares of common
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