<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) JUNE 30, 1998
COMMISSION FILE NUMBER 000-24385
SCHOOL SPECIALTY, INC.
(Exact name of registrant)
<TABLE>
<S> <C>
DELAWARE 39-0971239
(State of organization) (I.R.S. Employer Identification
Number)
</TABLE>
1000 NORTH BLUEMOUND DRIVE, APPLETON, WI 54914
(Address of principal executive offices and zip code)
(920) 734-2756
(Registrant's telephone Number)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
As previously reported, School Specialty, Inc. (the "Company") acquired on
June 30, 1998 substantially all of the assets of Hammond & Stephens Company
("Hammond & Stephens") and acquired on August 17, 1998 all of the common stock
of Beckley-Cardy, Inc. ("Beckley-Cardy"). This amendment to report on Form 8-K
is filed to include the financial statements listed in Item 7 relating to those
acquisitions.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements. The following financial statements are filed as
exhibits to this amendment to Report on Form 8-K and such exhibits are
incorporated herein by reference.
(1) Financial statements of Hammond & Stephens Company as of and for the
year ended October 31, 1997 and as of and for the six months ended April 30,
1998 and 1997 (unaudited). (Exhibit 99.1)
(2) Financial statements of The National School Supply Company and
Subsidiaries as of and for the year ended March 31, 1998 and as of and for
the three months ended June 30, 1998 and 1997 (unaudited). (Exhibit 99.2)
(b) Pro forma financial information. An unaudited pro forma balance sheet of
the Company as of July 25, 1998 reflecting the acquisition of Beckley-Cardy as
though that acquisition occurred on July 25, 1998, and unaudited pro forma
combined statements of income for the twelve months ended April 25, 1998 and for
the three months ended July 25, 1998 reflecting the acquisitions of Hammond &
Stephens and Beckley-Cardy and certain other transactions as if they occurred at
the beginning of each period are set forth in exhibit 99.3 and such exhibits are
incorporated herein by reference.
(c) The following exhibits are filed with this report:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
99.1 Financial statements of Hammond & Stephens Company as of and for the year ended October 31, 1997 and
as of April 30, 1998 (unaudited) and for the six months ended April 30, 1998 and 1997 (unaudited).
(Exhibit 99.1)
99.2 Financial statements of The National School Supply Company and Subsidiaries as of and for the year
ended March 31, 1998 and as of June 30, 1998 (unaudited) and for the three months ended June 30, 1998
and 1997 (unaudited). (Exhibit 99.2)
99.3 Pro Forma Combined Financial Statements of School Specialty, Inc. (unaudited)
</TABLE>
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned hereunto duly authorized.
<TABLE>
<S> <C> <C>
SCHOOL SPECIALTY, INC.
By: /s/ DONALD J. NOSKOWIAK
-----------------------------------------
Donald J. Noskowiak
CHIEF FINANCIAL OFFICER
</TABLE>
Dated: September 14, 1998
<PAGE>
Exhibit 99.1
Report of Independent Accountants
To the Stockholders and
Board of Directors of
Hammond & Stephens Company
In our opinion, the accompanying balance sheet and the related statements of
income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Hammond & Stephens Company at
October 31, 1997, and the results of its operations and its cash flows for
the year in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
September 3, 1998
<PAGE>
Hammond & Stephens Company
Balance Sheet
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
October 31, April 30,
1997 1998
Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,930,710 $ 226,749
Accounts receivable 732,334 720,778
Inventories 2,025,849 3,467,382
Employees' advances 12,319 1,049
Prepaid expenses 36,255 47,555
Income tax deposit 151,032 151,032
--------------- ---------------
Total current assets 5,888,499 4,614,545
--------------- ---------------
Property and equipment:
Fixtures and equipment 2,071,181 2,077,916
Transportation equipment 28,364 28,364
Leasehold improvements 62,337 62,337
--------------- ---------------
2,161,882 2,168,617
Less: Accumulated depreciation 1,470,219 1,557,838
--------------- ---------------
Total property and equipment 691,663 610,779
--------------- ---------------
Investments and other assets:
Cash value of life insurance 423,882 456,382
--------------- ---------------
Total assets $ 7,004,044 $ 5,681,706
--------------- ---------------
--------------- ---------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 238,247 $ 295,939
Accrued sales commissions 578,880 30,689
Other accrued expenses 198,657 112,309
--------------- ---------------
Total current liabilities 1,015,784 438,937
--------------- ---------------
Stockholders' equity:
Common stock; authorized 1,500 shares, $100 par value; issued
and outstanding 1,500 shares 150,000 150,000
Retained earnings 6,966,073 6,220,582
--------------- ---------------
7,116,073 6,370,582
Less: Treasury stock, 1,050 shares at cost 1,127,813 1,127,813
--------------- ---------------
Total stockholders' equity 5,988,260 5,242,769
--------------- ---------------
Total liabilities and stockholders' equity $ 7,004,044 $ 5,681,706
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an
integral part of the financial statements.
<PAGE>
Hammond & Stephens Company
Statement of Income
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the For the
Year Ended Six Months Ended
October 31, --------------------------------
1997 April 30, April 30,
1997 1998
(Unaudited)
<S> <C> <C> <C>
Net sales $ 9,082,852 $ 1,800,254 $ 1,744,600
Cost of goods sold 4,372,852 867,461 842,341
--------------- --------------- ---------------
Gross profit 4,710,000 932,793 902,259
Selling, general and administrative expenses 2,466,670 846,996 925,104
--------------- --------------- ---------------
Operating income (loss) 2,243,330 85,797 (22,845)
Other income:
Interest income 70,838 45,823 61,091
Other 56,456 28,438 26,263
--------------- --------------- ---------------
Net income $ 2,370,624 $ 160,058 $ 64,509
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
The accompanying notes are an
integral part of the financial statements.
<PAGE>
Hammond & Stephens Company
Statement of Stockholders' Equity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Total
Capital Retained Stock Held Stockholders'
Stock Earnings in Treasury Equity
<S> <C> <C> <C> <C>
Balance at October 31, 1996 $ 150,000 $ 6,575,449 $ (1,127,183) $ 5,598,266
------------- --------------- --------------- ---------------
Net income 2,370,624 2,370,624
Cash dividends paid on common stock,
$4,400 per share (1,980,000) (1,980,000)
------------- --------------- --------------- ---------------
Balance at October 31, 1997 150,000 6,966,073 (1,127,813) 5,988,890
Net income (unaudited) 64,509 64,509
Cash dividends paid on common stock,
$1,800 per share (unaudited) (810,000) (810,000)
------------- --------------- --------------- ---------------
Balance at April 30, 1998 (unaudited) $ 150,000 $ 6,220,582 $ (1,127,813) $ 5,243,399
------------- --------------- --------------- ---------------
------------- --------------- --------------- ---------------
</TABLE>
The accompanying notes are an
integral part of the financial statements.
<PAGE>
Hammond & Stephens Company
Statement of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the For the
Year Ended Six Months Ended
October 31, ----------------------------
1997 April 30, April 30,
1997 1998
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,370,624 $ 160,058 $ 64,509
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation 192,676 89,384 87,619
Cash surrender value of officers' life insurance (24,186) 2,424 524
Gain on sale of assets (4,000)
Changes in assets and liabilities:
Accounts receivable (83,559) (115,124) 22,827
Inventories (39,299) (1,561,561) (1,441,533)
Employees' advances (8,605)
Prepaid expenses (2,701) (7,146) (11,300)
Income tax deposit (16,570)
Accounts payable (9,930) (47,279) 60,058
Accrued expenses (19,386) (647,068) (636,905)
--------------- --------------- ---------------
Net cash provided by (used in) operating
activities 2,355,064 (2,126,312) (1,854,201)
Cash flows from investing activities:
Purchases of property and equipment (153,496) (15,507) (6,736)
Purchase of officers' life insurance (40,731) (33,024) (33,024)
Proceeds from sales of assets 4,000
--------------- --------------- ---------------
Net cash used in investing activities (190,227) (48,531) (39,760)
Cash flows from financing activities:
Dividends paid (1,980,000) (810,000)
--------------- --------------- ---------------
Net cash used in financing activities (1,980,000) (810,000)
Net increase (decrease) in cash and cash equivalents 184,837 (2,174,843) (2,703,961)
Cash and cash equivalents at beginning of period 2,745,873 2,745,873 2,930,710
--------------- --------------- ---------------
Cash and cash equivalents at end of period $ 2,930,710 $ 571,030 $ 226,749
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
The accompanying notes are an
integral part of the financial statements.
<PAGE>
Hammond & Stephens Company
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Nature of Business and Significant Accounting Policies
Nature of Business
The Company is primarily engaged in the printing and sales of educational
materials to schools nationwide.
Revenue Recognition
The Company recognizes revenue from product sales at the time of billing,
which is completed within one day of shipment. All goods shipped on the
last day of the year are billed on the last day of the year and have been
properly included in current year revenues.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months
or less to be cash equivalents.
Accounts Receivable
Doubtful accounts are written off as deemed uncollectible. It is
management's opinion that all accounts represented on the balance sheet
at October 31, 1997 are collectible.
Inventory Valuation
Inventory is valued at the lower of cost, using the first-in, first-out
method, or market.
Property and Equipment
Property and equipment are recorded at cost. Expenditures for maintenance
and repairs are charged to expense as incurred. Major expenditures for
improvements are capitalized. The Company computes depreciation on its
property and equipment using the straight-line method.
Rates used for depreciation are based on the following estimated useful
lives: fixtures and equipment - 3 to 20 years; transportation equipment -
5 years; and leasehold improvements - 10 to 31 years.
Upon sale or retirement of property and equipment, the related costs and
accumulated depreciation are removed from the accounts and any gain or
loss is included in the determination of income.
Advertising Expense
Advertising costs are expensed as incurred except for catalog costs,
which are deferred and expensed as distributed. Advertising expense
including catalog costs for the year ended October 31, 1997 was $219,486.
Deferred catalog costs as of October 31, 1997 were $12,674.
Income Taxes
The Company has elected to be taxed under the provisions of Subchapter S
of the Internal Revenue Code by unanimous consent of its stockholders.
Under those provisions, the Company does not pay Federal corporate income
taxes on its taxable income. Instead, the stockholders are liable for
individual income taxes on their respective shares of the Company's
taxable income.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
<PAGE>
Hammond & Stephens Company
Notes to Financial Statements
- --------------------------------------------------------------------------------
Unaudited Interim Financial Data
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair
presentation of the financial condition of the Company as of April 30,
1998 and the results of operations and of cash flows for the six months
ended April 30, 1997 and April 30, 1998, as presented in the accompanying
unaudited financial data.
2. Concentration of Credit Risk
The Company maintains cash balances at one financial institution located
in Fremont, Nebraska. The accounts are secured by the Federal Deposit
Insurance Corporation up to $100,000. Uninsured balances aggregate
$2,936,020 at October 31, 1997.
3. Inventories
Inventories consist of the following components:
<TABLE>
<CAPTION>
October 31, April 30,
1997 1998
<S> <C> <C>
Raw material $ 311,483 $ 693,476
Work in process 669,697 1,144,236
Finished goods 1,044,669 1,629,670
--------------- ---------------
$ 2,025,849 $ 3,467,382
--------------- ---------------
--------------- ---------------
</TABLE>
4. Property and Equipment
For the year ending October 31, 1997, depreciation expense was $192,676.
5. Building Lease
The Company's operations are conducted in facilities leased from the
Company's president. The lease was for a two-year term, through December
31, 1997 and provided for monthly rental payments of $9,900 through
October 31, 1997 and $14,700 for November and December 1997, with the
Company paying all maintenance and executory costs. The Company has
determined the building to be an operating lease and it is recorded as
such in the financial statements. The future minimum rental payments
excluding maintenance and executory costs required under this lease are
as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ended October 31, 1998 $ 29,400
-----------
-----------
</TABLE>
Building lease expense for the year ending October 31, 1997 was $118,800.
The building lease was renewed for a two year term on January 1, 1998 for
a fixed monthly rental payment of $14,700.
<PAGE>
Hammond & Stephens Company
Notes to Financial Statements
- --------------------------------------------------------------------------------
6. Employee Benefit Plan
The Company maintains a profit sharing plan which includes provisions
from the Internal Revenue Code, Section 401-(K). The plan covers
substantially all the employees. Profit sharing expense for the year
ended October 31, 1997 was $42,290.
7. Subsequent Events
On June 30, 1998, the Company was acquired by School Specialty, Inc. a
supplier of non-textbook education products to schools and educators.
Total consideration for the acquisition was approximately $16.5 million,
payable in a cash transaction structured as an asset purchase for certain
assets and liabilities of the Company. The acquisition has been accounted
for under the purchase method of accounting.
<PAGE>
Report of Independent Auditors
The Board of Directors
The National School Supply Company
We have audited the accompanying consolidated balance sheets of The National
School Supply Company and Subsidiaries as of March 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended March 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
National School Supply Company and Subsidiaries as of March 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended March 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Cleveland, Ohio
June 11, 1998, except for Note C,
as to which the date is June 17, 1998
1
<PAGE>
The National School Supply Company and Subsidiaries
Consolidated Balance Sheets
(In thousands, except for share data)
<TABLE>
<CAPTION>
March 31 June 30,
1998 1997 1998
------------------------------- ----------------
Assets (Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,235 $ 5,207 $ 1,517
Accounts receivable, less allowance of $1,352 at
June 30, 1998 and $1,386 and $1,410 at
March 31, 1998 and 1997, respectively 21,965 18,846 26,205
Inventories 22,745 14,362 30,532
Prepaid catalog costs 5,286 4,486 4,577
Prepaid and other 864 149 592
--------------- --------------- --------------
Total current assets 52,095 43,050 63,423
Property, plant and equipment--Notes A, B, C and G:
Land and improvements 1,316 1,295 1,335
Building and improvements 14,452 14,303 14,469
Machinery, equipment and furniture 12,059 11,301 12,419
--------------- --------------- --------------
27,827 26,899 28,223
Less accumulated depreciation and amortization 9,283 7,097 9,865
--------------- --------------- --------------
Total property, plant and equipment 18,544 19,802 18,358
Intangible assets, net--Notes B and C 13,266 14,799 12,886
Other long-term assets 221 221 221
--------------- -------------- --------------
Total assets $ 84,126 $ 77,872 $ 94,888
--------------- -------------- --------------
--------------- -------------- --------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
March 31 June 30,
1998 1997 1998
------------------------------- ----------------
Liabilities and stockholders' equity (Unaudited)
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 15,787 $ 8,318 $ 20,578
Accrued expenses--Note A 6,263 7,059 5,889
Current portion of long-term obligations--
Notes C and G 3,084 4,036 3,085
------------- -------------- --------------
Total current liabilities 25,134 19,413 29,552
Long-term obligations--Notes C, and G Long-term debt:
Due to bank and others 22,360 20,193 29,464
Due to affiliated companies 20,225 19,929 20,295
------------- -------------- --------------
42,585 40,122 49,759
Other 1,165 1,411 1,110
------------- -------------- --------------
Total long-term obligations 43,750 41,533 50,869
Stockholders' equity--Notes D, and E: Common stock, $0.01 par
value per share:
Class A:
Authorized shares--4,175,000
Issued and outstanding shares--3,230,300 32 32 32
Class B:
Authorized shares--1,548,000
Issued and outstanding shares--1,500,042 15 15 15
Class C:
Authorized shares--550,000
Issued and outstanding shares--427,487 4 4 4
Capital in excess of par value 45,690 45,690 45,690
Accumulated deficit (30,499) (28,815) (31,274)
------------- --------------- -------------
Total stockholders' equity 15,242 16,926 14,467
--------------- --------------- -------------
Total liabilities and stockholders' equity $ 84,126 $ 77,872 $ 94,888
--------------- --------------- -------------
--------------- --------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
The National School Supply Company and Subsidiaries
Consolidated Statement of Operations
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended March 31 June 30
1998 1997 1996 1998 1997
--------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales $ 176,034 $ 174,637 $ 164,994 $ 38,772 $ 34,896
Cost of goods sold 115,134 111,054 106,293 24,914 22,569
------------- ----------- ------------ ------------ ------------
Gross profit 60,900 63,583 58,701 13,858 12,327
Selling, general and administrative expenses 52,398 50,879 54,419 12,393 12,226
Depreciation 2,419 2,735 2,889 582 621
Amortization 1,533 1,525 3,194 380 379
Restructuring costs--Note A 1,198 1,381 4,343 76 62
Goodwill write-down 1,864
------------- ----------- ------------ ------------ ------------
Operating income (loss) 3,352 7,063 (8,008) 427 (961)
Interest expense, net 5,036 7,375 8,685 1,202 1,097
------------- ----------- ------------ ------------ ------------
Loss before income taxes and extraordinary
gain (1,684) (312) (16,693) (775) (2,058)
Provision for income taxes--Note F - - - - -
------------- ----------- ------------ ------------ ------------
Loss before extraordinary gain (1,684) (312) (16,693) (775) (2,058)
Extraordinary gain from debt restructuring,
net of income taxes--Note C - 564 - - -
------------- ----------- ------------ ------------ ------------
Net (loss) income $ (1,684) $ 252 $ (16,693) $ (775) $ (2,058)
------------- ----------- ------------ ------------ ------------
------------- ----------- ------------ ------------ ------------
</TABLE>
4
See accompanying notes to consolidated financial statements.
<PAGE>
The National School Supply Company and Subsidiaries
Consolidated Statement of Stockholders' Equity
(In Thousands)
<TABLE>
<CAPTION>
Common Stock Capital in Total
-------------------------------------- Excess of Accumulated Stockholders'
Class A Class B Class C Par Value Deficit Equity
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1995 $ 1 $ 15 $ 4 $ 15,271 $ (12,374) $ 2,917
Net loss - - - - (16,693) (16,693)
---------------- --------- --------- -------------- ------------- ----------------
Balance at March 31, 1996 1 15 4 15,271 (29,067) (13,776)
Net income 252 252
Stock issued--Note A 31 - - 30,419 - 30,450
---------------- --------- --------- -------------- ------------- ----------------
Balance at March 31, 1997 32 15 4 45,690 (28,815) 16,926
Net loss - - - - (1,684) (1,684)
---------------- --------- --------- -------------- ------------- ----------------
Balance at March 31, 1998 32 15 4 45,690 (30,499) 15,242
Net loss (unaudited) - - - - (775) (775)
---------------- --------- --------- -------------- ------------- ----------------
Balance at June 30, 1998
(unaudited) $ 32 $ 15 $ 4 $ 45,690 $ (31,274) $ 14,467
---------------- --------- --------- -------------- ------------- ----------------
---------------- --------- --------- -------------- ------------- ----------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
The National School Supply Company and Subsidiaries
Consolidated Statement of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended March 31 June 30
1998 1997 1996 1998 1997
--------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities
<S> <C> <C> <C> <C> <C>
Net (loss) income $ (1,684) $ 252 $ (16,693) $ (775) $ (2,058)
Adjustments to reconcile net (loss) income to net
cash (used) provided by operating activities:
Extraordinary gain - (564) - - -
Depreciation and amortization 3,952 4,260 6,083 962 1,000
Compensation expense from issuance of stock - 450 - - -
Loss on sale of property, plant and equipment - - 600 - -
Write-down of assets held for sale - - 1,012 - -
Goodwill write-down - - 1,864 - -
Provision for losses on accounts receivable - - 2,806 - -
Other 295 635 545 70 80
Change in operating assets and liabilities:
Accounts receivable (3,119) 7,131 (5,258) (4,240) (4,456)
Inventories (8,383) 7,313 4,309 (7,787) (13,084)
Prepaid and other current assets (1,515) 349 (488) 981 (901)
Accounts payable 7,469 (8,697) (3,290) 4,791 13,354
Accrued expenses (796) (610) 878 (374) (1,754)
Other non-current assets and liabilities (246) (794) (287) - -
-------------- ----------- ------------ ----------- ------------
Net cash (used) provided by operating activities (4,027) 9,725 (7,919) (6,372) (7,819)
Cash flows used in investing activities
Additions to property, plant and equipment, net (1,168) (1,551) (4,890) (396) (510)
Proceeds from sale of property and equipment 7 1,353 1,842 - -
-------------- ----------- ------------ ----------- ------------
Net cash used in investing activities (1,161) (198) (3,048) (396) (510)
Cash flows provided (used) by financing activities
Net borrowings (payments) on revolving credit 5,191 (7,000) 7,000 7,372 4,173
Proceeds from issuance of long-term debt - 937 4,489
Payments on long-term debt (3,966) (28,400) - (250) (251)
Prepayment penalties on long-term debt - (983) - - -
Net payments on capital leases (9) (570) (663) (72) (15)
Proceeds from issuance of stock - 30,000 - - -
-------------- ----------- ------------ ----------- ------------
Net cash provided (used) by financing activities 1,216 (6,016) 10,826 7,050 3,907
-------------- ----------- ------------ ----------- ------------
Net (decrease) increase in cash and cash equivalents (3,972) 3,511 (141) 282 (4,422)
Cash and cash equivalents at beginning of year 5,207 1,696 1,837 1,235 5,207
-------------- ----------- ------------ ----------- ------------
Cash and cash equivalents at end of year $ 1,235 $ 5,207 $ 1,696 $ 1,517 $ 785
-------------- ----------- ------------ ----------- ------------
-------------- ----------- ------------ ----------- ------------
Supplemental disclosure of cash flow information
Interest paid $ 5,026 $ 8,481 $ 7,183 $ 1,173 $ 955
-------------- ----------- ------------ ----------- ------------
-------------- ----------- ------------ ----------- ------------
Properties acquired under capital leases $ 377
------------
------------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
The National School Supply Company
Notes to Consolidated Financial Statements
Years Ended March 31, 1998, 1997 and 1996
Three Months Ended June 30, 1998 and 1997 (Unaudited)
A. Organization and Nature of the Business
The National School Supply Company and its subsidiaries ("the Company") are
engaged in the distribution of educational supplies and equipment, teaching
aids, school furniture and instructional materials for science, art and
technology education. The Company sells primarily to elementary, secondary and
vocational schools and early learning centers throughout the United States. The
products are marketed through catalogs which carry the names of Beckley-Cardy,
Frey Scientific, Pyramid Art Supply and Brodhead-Garrett.
The Company's business is seasonal in nature, corresponding to the purchasing
cycle of school systems. Because of seasonality, a substantial part of annual
revenues and operating income is realized in the second quarter of the fiscal
year.
Effective November 5, 1992, certain limited partnerships affiliated with Butler
Capital Corporation (Butler) formed Beckley-Cardy, Inc. (Beckley) to acquire a
subsidiary of Advanstar Communications, Inc., a company which had recently
emerged from Chapter 11 bankruptcy. The acquisition was accounted for as a
purchase and, accordingly, the purchase price of $49,000,000 was allocated to
the underlying assets and liabilities based on their estimated fair values as of
the acquisition date. The excess of the purchase price over the estimated fair
value of the net assets acquired ($21,430,000) was classified as intangible
assets.
Effective September 14, 1993, the Company (which was 60% owned by Butler at that
date), Butler, Beckley and certain individual stockholders of the Company
entered into an Agreement of Merger and Plan of Reorganization whereby Beckley
became a wholly-owned subsidiary of the Company. Because of Butler's common
ownership interests in the Company and Beckley, the merger was accounted for as
if it were a pooling-of-interests.
Effective at the close of business on March 31, 1995, one of the Company's
subsidiaries, FSC Educational, Inc., was merged into another subsidiary,
Beckley.
Effective October 31, 1996, the Company issued 1,327,588 shares of Class A
Common Stock to Butler Capital Corporation, an existing investor, (at a price of
$9.50 per share), 1,777,676 shares to Fenway Partners, Inc., a new investor (at
a price of $9.50 per share) and another 100,000 shares to an executive of the
Company (at a price of $5.00 per share) as part of his executive employment
agreement. Net proceeds from the stock issuance were used to pay down
outstanding long-term debt.
7
<PAGE>
The National School Supply Company
Notes to Consolidated Financial Statements--Continued
A. Organization and Nature of the Business--Continued
Restructuring costs related to various organizational changes have been charged
to expense as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Direct compensation $ 924 $ 225 $ 2,181
Professional services 198 485 255
Facilities closing expense - - 1,636
Stock compensation expense - 450 -
Other 76 221 271
------------- ----------- -------------
$ 1,198 $ 1,381 $ 4,343
------------- ----------- -------------
------------- ----------- -------------
</TABLE>
In a prior year, the Company consolidated certain warehouse facilities. In 1996,
the Company recorded a provision of $1,012,000 to adjust the carrying value of
these assets based on expected losses on the impending sales. During 1997, the
assets were sold and the Company recognized proceeds approximately equal to the
net carrying value as of March 31, 1996.
B. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements as of June 30, 1998
and for the three months ended June 30, 1998 and 1997 have been prepared in
accordance with generally accepted accounting principles for interim financial
information and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month
period ended June 30, 1998 are not necessarily indicative of the results that
may be expected for the year ending March 31, 1999.
8
<PAGE>
The National School Supply Company
Notes to Consolidated Financial Statements--Continued
B. Summary of Significant Accounting Policies--Continued
Cash and Cash Equivalents
The Company considers highly liquid investments with a maturity of three months
or less to be cash equivalents, which are stated at cost.
Inventory
The Company values its inventory at the lower of cost or market on a first-in,
first-out (FIFO) basis. Substantially all inventory is finished products
purchased for resale.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Provisions for depreciation and
amortization are computed by the straight-line method over the following
estimated useful lives:
<TABLE>
<CAPTION>
<S> <C>
Building and improvements 15-30 years
Machinery, equipment and furniture 3-10 years
</TABLE>
Fair Value of Financial Instruments
At March 31, 1998 and 1997, the carrying value of the Company's financial
instruments, which include cash and cash equivalents, accounts receivable and
accounts payable, approximate their fair value. The estimated fair value of the
Company's long-term debt was $47,961,000 at March 31, 1998 and $47,665,000 at
March 31, 1997 as compared with the carrying value of $45,669,000 and
$44,158,000 included in the balance sheet at year-end 1998 and 1997,
respectively.
Revenue Recognition
Revenue from the sale of the Company's products is recognized upon shipment to
the customer.
9
<PAGE>
The National School Supply Company
Notes to Consolidated Financial Statements--Continued
B. Summary of Significant Accounting Policies--Continued
Advertising Expense
Advertising costs are expensed as incurred except for catalog costs, which are
deferred and expensed as revenue from the respective catalog is realized.
Advertising expenditures including catalog costs for the years ended March 31,
1998, 1997 and 1996 were $7,101,000, $4,824,000 and $4,927,000, respectively.
Deferred catalog costs as of March 31, 1998 and 1997 were $5,286,000 and
$4,486,000, respectively.
Concentration of Credit Risk
Credit is extended based on an evaluation of the customer's financial condition
and generally collateral is not required. Credit terms are consistent with the
industry and losses from credit sales are provided for in the financial
statements.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principals requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Reclassification
Certain amounts have been reclassified in 1996 and 1997 to conform with the 1998
presentation.
10
<PAGE>
The National School Supply Company
Notes to Consolidated Financial Statements--Continued
B. Summary of Significant Accounting Policies--Continued
Intangible Assets
Intangible assets consist of the following at March 31 (in thousands):
<TABLE>
<CAPTION>
Accumulated
Cost Amortization Net
------------------------- ------------------------ -------------------------
1998 1997 1998 1997 1998 1997
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Customer lists $ 14,300 $ 14,300 $ 5,150 $ 4,197 $ 9,150 $ 10,103
Goodwill 5,673 5,673 2,044 1,665 3,629 4,008
Debt issuance costs 1,781 1,781 1,294 1,093 487 688
---------- ------------- --------- ----------- ---------- ------------
$ 21,754 $ 21,754 $ 8,488 $ 6,955 $ 13,266 $ 14,799
---------- ------------- --------- ----------- ---------- ------------
---------- ------------- --------- ----------- ---------- ------------
</TABLE>
Intangible assets are amortized on a straight-line basis over periods ranging
generally from 5 to 15 years.
The ongoing value and remaining useful lives of intangible assets are subject to
periodic evaluation and the company currently expects the carrying amounts to be
fully recoverable. When events or circumstances indicate that intangible assets
might be impaired, an undiscounted cash flow methodology would be used to
determine whether an impairment loss would be recognized.
As a result of a periodic evaluation during the year ended March 31, 1996, the
Company wrote-off net intangible assets of $1,864,000 which consisted primarily
of goodwill associated with a specific business unit. Other fully amortized
intangible assets were also written off in 1997 and 1996 as a result of the
merger with Beckley.
11
<PAGE>
The National School Supply Company
Notes to Consolidated Financial Statements--Continued
C. Financing Arrangements
Long-term debt consisted of the following at March 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------------------
<S> <C> <C>
Revolving credit, due in fiscal year 2000 $ 5,192 $ -
Supplemental term loan with an interest rate of 8.25% payable
quarterly, principal payments due annually in fiscal years
1998 through 2002 10,200 12,200
Subordinated debt with an interest rate of 11.25% payable
quarterly, entire principal due in fiscal year 2000 6,458 6,458
Subordinated debt (net of original issue discount of $462 and
$757 at March 31, 1998 and 1997, respectively) with an effective
interest rate of 15.4% payable quarterly, entire
principal due in fiscal year 2000 5,961 5,666
Subordinated debt with an effective interest rate of 9.0%
payable quarterly, entire principal due in fiscal year 2003 7,804 7,804
Construction term loans with interest ranging from 8.25% to
8.31% payable quarterly, principal payments due quarterly
in fiscal years 1997 through 2002 9,371 11,154
Capital lease obligations 311 320
Other notes payable 372 556
------------- ------------
45,669 44,158
Less current portion 3,084 4,036
------------- ------------
$ 42,585 $ 40,122
------------- ------------
------------- ------------
</TABLE>
In September 1994, the Company and its subsidiaries entered into a combined
Revolving Credit, Term Loan and Guaranty Agreement (the "Credit Agreement") with
a bank. Maximum borrowings under the Revolving Credit facility and Term Loan are
$30,000,000 ($10,000,000 during the period February 15 through April 1 each year
and $33,000,000 from June 17, 1998 through October 31, 1998) and $15,000,000,
respectively. The agreement also provides for the bank to issue Letters of
Credit in amounts which will not exceed $10,000,000 in the aggregate. The face
amount of the Letters of Credit issued shall reduce the amount of funds
available under the Revolving Credit facility. As of March 31, 1998, Letters of
Credit of $500,000 were outstanding. The Revolving Credit facility expires on
June 30, 1999.
12
<PAGE>
The National School Supply Company
Notes to Consolidated Financial Statements--Continued
C. Financing Arrangements--Continued
Advances under the Credit Agreement bear interest at a CD Rate, a Eurodollar
Rate or a Reference Rate plus an applicable margin as specified in the Credit
Agreement. A fee of 3/8% per annum is applied to the unused portion of the
Revolving Credit facility.
The Credit Agreement is secured by accounts receivable, inventory, certain
property, plant and equipment and general intangible assets. As of March 31,
1996, funds under the Term Loan Agreement had been advanced for construction of
a new facility. Upon completion of the new facility, in fiscal 1997, the funds
advanced under the Term Loan Agreement were converted to a five year term loan
under a fifteen year amortization schedule, with the final payment due on June
30, 2001. The Term Loan Agreement also provides for restrictions on payments of
subordinated debt and accelerated principal payments on the Term Loan based upon
a calculation of "excess cash flow" on an annual basis.
On October 29, 1996, an amendment was made to the Credit Agreement which
included revisions to certain financial covenants and certain provisions for a
restructuring of a portion of the Company's debt. The debt restructuring
included a Supplemental Term Loan under the Credit Agreement of $12,200,000.
Substantially all of the proceeds from the sale of stock (see Note A) and the
Supplemental Term Loan were used to repay the entire amount outstanding under a
former senior notes agreement, repay approximately $24,325,000 (net of
$1,200,000 of unamortized original issue discount) of the amounts outstanding
under the subordinated debt instruments, and to pay related accrued interest,
prepayment penalties and refinancing costs. The Company recorded an
extraordinary gain of $564,000 from the debt restructuring due to the write-off
of deferred interest less prepayment penalties. No income tax expense was
recorded for the extraordinary gain due to the use of available net operating
loss carryforwards.
As a result of the Company's recapitalization in October 1996, subordinated debt
instruments are now payable to Butler (60.76%) and Fenway (39.24%). The
percentages are based on the investor's pro rata equity ownership. All
subordinated debt is fully subordinated to the Credit Agreement. Amortization of
the original issue discount is provided over the period the subordinated debt is
outstanding using the effective interest rate method. Such amortization was
approximately $295,000, $635,000 and $545,000 for the years ended March 31,
1998, 1997 and 1996, respectively. Interest is also provided using the effective
interest rate method for the interest-free period on certain subordinated debt.
13
<PAGE>
The National School Supply Company
Notes to Consolidated Financial Statements--Continued
C. Financing Arrangements--Continued
At the Bank's request, the Company must prepay all or any portion of the
Supplemental Term Loan if the Company arranges for refinancing. Additionally,
the Company may be required to prepay certain portions of the Credit Agreement
in an amount equal to the Excess Cash Flow (as defined) on an annual basis. Any
prepayments under the Excess Cash Flow provision would apply first to the Term
Loan, then to the Supplemental Term Loan and would not affect scheduled
maturities. No amounts are required to be prepaid under the Excess Cash Flow
provision for fiscal year 1998. $1,000,000 was required to be paid for fiscal
year 1997.
All long-term debt agreements contain certain restrictive covenants and
provisions which, among other matters, place limitations on indebtedness,
dividends and certain other payments, changes in control, certain investments
and capital expenditures. Other covenants require the maintenance of minimum
working capital and net worth levels and interest coverage and debt service
coverage ratios.
As of March 31, 1998, the Company was in violation of a financial covenant under
the Credit Agreement as the result of planned acceleration of inventory receipts
to improve service levels. Effective June 17, 1998, an amendment was made to the
Credit Agreement which included a waiver by the bank of the covenant violation
that occurred and revisions to certain financial covenants through March 31,
1999, including the leverage, interest coverage, debt service coverage, net
worth and current ratios.
Aggregate principal payments due on long-term debt are as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Years ending March 31:
1999 $ 3,084
2000 20,669
2001 3,880
2002 10,231
2003 7,805
---------------
$ 45,669
---------------
---------------
</TABLE>
14
<PAGE>
The National School Supply Company
Notes to Consolidated Financial Statements--Continued
C. Financing Arrangements--Continued
Scheduled principal payments under the subordinated debt agreements were
deferred in fiscal year 1996 according to the Credit Agreement. Payments were
made concurrent with the debt and equity restructuring in October 1996.
Subordinated debt principal payments are permitted out of excess cash flow,
provided certain covenant calculations are met.
Other long-term liabilities represent interest at March 31, 1998 and 1997.
D. Stockholders' Equity
The Company has three classes of common stock authorized. Class A and B stock
have equal voting rights of one vote per share outstanding. Each holder of Class
C stock is entitled to a number of votes equal to a conversion factor for each
Class C share outstanding. Class C shares may be converted into the number of
Class A shares as is equal to the conversion factor in effect at the time of
such conversion.
E. Stock Options and Warrants
The Company maintains two stock option plans. The 1987 Stock Plan has three
remaining participants who hold fully vested options to purchase shares of the
Company's Class A or Class C Common Stock at an exercise price of $1.73 per
share. There are no remaining grants under the 1987 Stock Plan.
The 1997 Performance Accelerated Stock Option Plan (the 1997 Plan) succeeds a
previous plan which originated in 1993. All options issued under the 1993 Plan
have been canceled. The 1997 Plan granted 721,792 options in 1997 to employees
to purchase shares of the Company's Class A Common Stock. The options vest over
time, with vesting accelerated if certain financial objectives are met. All
options under the 1997 Plan are exercisable at $9.50 per share, which was the
market price at the time of the grant. Generally, options under the 1997 Plan
expire ten years from the date of grant.
15
<PAGE>
E. Stock Options and Warrants--Continued
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APBO No. 25), and related
interpretations in accounting for its employee stock options, because as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123) requires the use of highly subjective assumptions
in option valuation models. Under APBO No. 25, because the exercise price of the
Company's employee stock options is not less than the fair market price of the
shares at the date of the grant and the number of options is known, no
compensation expense is recognized in the financial statements.
Pro forma information regarding net income determined as if the Company had
accounted for the 1997 Performance Accelerated Stock Option Plan under the fair
value method of SFAS. No. 123 is required to be disclosed for the year ended
March 31, 1997 as options were granted in that year. The fair value for these
options was estimated at the date of the grant using the Minimum Value Model
which is typically used for non-public companies. The following input
assumptions were used in determining the fair value.
<TABLE>
<CAPTION>
1997
-------------------
<S> <C>
Risk-free interest rate 5.0%
Expected life of option 10 years
Expected dividend yield 0.0%
</TABLE>
Because the Company's employee stock options have several unique
characteristics, and because changes in the subjective input assumptions can
materially affect the fair value estimate, it is management's opinion that the
existing model does not necessarily provide a reliable single measure of the
fair value of its employee stock options.
The amounts below represent the pro forma information calculated through the use
of the Minimum Value Model.
<TABLE>
<CAPTION>
1997
-------------------
<S> <C>
Reported net income $ 252,000
Pro forma net loss (115,000)
</TABLE>
16
<PAGE>
E. Stock Options and Warrants--Continued
The weighted average fair value of the Company's stock options used to compute
the pro forma net loss disclosure is $3.38.
Due to the required phase-in provisions, the effects of applying SFAS No. 123 to
arrive at the above pro forma amounts are not representative of the expected
effects on pro forma net income in future years.
A summary of the Company's stock option activity and related information for the
years ended March 31 is shown in the following table.
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------ --------------------------
Weighted Weighted Weighted
Average Average Average
Optioned Exercise Optioned Exercise Optioned Exercise
Shares Price Shares Price Shares Price
------------------------------------------------------ --------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning of year 743,542 $ 9.43 130,496 $ 17.91 190,196 $ 18.58
Granted - - 721,792 9.50 30,800 20.04
Exercised - - - - - -
Canceled 310,958 9.50 108,746 20.04 90,500 20.04
------------------------------------------------------ --------------------------
Outstanding end of year 432,584 $ 9.11 743,542 $ 9.43 130,496 $ 17.91
------- ------- -------
------- ------- -------
Exercisable end of year 223,787 $ 8.75 265,178 $ 8.86 55,623 $ 12.88
</TABLE>
At March 31, 1998 and 1997, the weighted average remaining contractual life of
the Company's stock options was 7.62 years and 9.74 years, respectively.
As of March 31, 1998 and 1997, there were 36,261 shares available for future
grants.
In addition, effective October 29, 1996, the Company amended and restated its
warrant agreement with BCC Industrial Services (BCC), an affiliate of Butler.
The new agreement entitles BCC to purchase, at any time, 22,819 duly authorized,
validly issued, fully paid and nonassessable shares of the Company's Class A
Common Stock at a purchase price of $9.50 per share.
17
<PAGE>
F. Income Taxes
The Company uses the liability method in measuring the provision for income
taxes and recognizing deferred tax assets and liabilities in the balance sheet.
The liability method requires that deferred income taxes reflect the tax
consequences of currently enacted rates for differences between the tax and
financial reporting bases of assets and liabilities.
There was no income tax expense or benefit recorded in 1998, 1997 or 1996. The
Company has available net operating loss carryforwards of approximately $24
million. These carryforwards, if not utilized, expire in varying amounts from
2009 to 2013.
The significant components of deferred tax assets and liabilities were as
follows (in thousands):
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
----------------------------- -----------------------------
Deferred Deferred
Deferred Tax Deferred Tax
Tax Assets Liabilities Tax Assets Liabilities
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net operating loss carryforwards $ 8,276 $ - $ 6,846 $ -
Inventory 635 - 705 -
Catalog costs - 1,719 - 1,363
Accrued liabilities and other 3,763 2,361 2,055 16
------------------------------------------------------------
12,674 4,080 9,606 1,379
Valuation allowance (8,594) - (8,227) -
------------------------------------------------------------
$ 4,080 $ 4,080 $ 1,379 $ 1,379
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
18
<PAGE>
F. Income Taxes--Continued
The provision for income taxes differs from the amounts computed by applying the
federal statutory rate as follows:
<TABLE>
<CAPTION>
March 31
-------------------------------------------
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Income tax expense (credit) at federal
statutory rate (34.0)% (34.0)% (34.0)%
Non-deductible intangible amortization 9.3 49.3 2.5
Other, net 2.1 (43.8) 0.6
Valuation allowance 22.6 28.5 30.9
-------------------------------------------
0.0% 0.0% 0.0%
--- --- ---
--- --- ---
</TABLE>
G. Leases
The Company leases equipment under agreements accounted for as capital leases.
The cost of equipment recorded under capital leases was $457,035 and $377,000 as
of March 31, 1998 and 1997, respectively.
The Company has operating leases for certain machinery and computer equipment.
Rent expense for all operating leases amounted to approximately $412,000 in
1998, $329,000 in 1997 and $476,000 in 1996.
19
<PAGE>
G. Leases--Continued
At March 31,1998, future minimum lease payments under non-cancelable operating
and capital leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------------------------
<S> <C> <C>
Years ending March 31:
1999 $ 127 $ 550
2000 127 499
2001 108 189
2002 9 17
2003 - -
---------------------------
Total minimum lease payments 371 $ 1,255
--------
--------
Less amount representing interest 60
--------------
Present value of total obligation under capital leases 311
Less current portion 98
--------------
Long-term obligation under capital leases $ 213
--------
--------
</TABLE>
H. Benefit Plans
The Company sponsors defined contribution employee savings plans covering
substantially all of its salaried and hourly employees. During fiscal 1997, the
Company merged these plans into one plan covering all eligible employees. Under
the plan, the Company contributes a matching amount based upon the employees'
deferred salary contribution. Company contributions were approximately $403,000,
$414,000 and $405,000 for the years ended March 31, 1998, 1997 and 1996,
respectively.
20
<PAGE>
I. Contingencies
The Company is subject to legal proceedings and claims arising in the ordinary
course of its business. Management evaluates each claim and provides for any
potential loss when the claim is probable and estimable. In the opinion of
management, the ultimate liability with respect to these actions will not
materially affect the financial position, results of operations and cash flows
of the Company.
J. Year 2000 (Unaudited)
In fiscal 1998, the Company completed an upgrade of its J.D. Edwards (JDE)
software which, through testing and implementation, has addressed the Year 2000
date conversion issue. Additionally, the Company uses software from large
national vendors with a broad base of active users in all other software
applications, therefore, the Year 2000 date conversion was accomplished through
the JDE and other software upgrades at no significant cost to the Company.
However, there can be no assurance that the systems of other companies on which
the Company's systems rely also will be timely converted or that any such
failure to convert by another company would not have an adverse effect on the
Company's systems.
K. Subsequent Event (Unaudited)
Effective August 14, 1998, the Company and its stockholders entered into an
Agreement and Plan of Merger with School Specialty, Inc. to sell all of its
outstanding common stock for total consideration of approximately $138 million.
21
<PAGE>
Exhibit 99.3
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma combined financial statements give effect to all
acquisitions completed through September 14, 1998, the refinancing of all
amounts that were payable to U.S. Office Products Company, and the distribution
of 12,187,723 shares of School Specialty Common Stock to the former stockholders
of U.S. Office Products Company which was completed in June, 1998 (the
"Distribution"). The pro forma offering adjustments further adjust such pro
forma combined financial statements to give effect to the June, 1998 stock
offering of 2,125,000 shares and the sale of 250,000 shares of Common Stock to
School Specialty, Inc. executives (collectively the "Offering") and the use of
the proceeds therefrom to repay debt.
The unaudited pro forma combined balance sheet as of July 25, 1998 gives effect
to the business acquired by the Company after July 25, 1998, as if the
transaction had occurred as of the Company's most recent balance sheet date,
July 25, 1998.
The unaudited pro forma combined statement of income for the fiscal year ended
April 25, 1998 gives effect to (i) the acquisitions completed during fiscal 1998
in business combinations accounted for under the purchase method of accounting,
including Sax Arts & Crafts, Inc., American Academic, and five other
individually insignificant companies (the "Fiscal 1998 Purchase Acquisitions");
(ii) the acquisition of Hammond and Stephens, which was effective as of June 30,
1998, in a business combination accounted for under the purchase method of
accounting (the "First Quarter Fiscal 1999 Purchase Acquisition"); (iii) the
acquisition of National School Supply ("Beckley Cardy"), which was effective as
of August 1, 1998, in a business combination accounted for under the purchase
method of accounting (the "Second Quarter Fiscal 1999 Purchase Acquisition");
(iv) the refinancing of all amounts payable to U.S. Office Products Company; (v)
the Distribution; and (vi) the Offering, as if all such transactions had
occurred on April 27, 1997.
The unaudited pro forma combined statement of income for the fiscal year ended
April 25, 1998 includes (i) the audited financial information of the Company for
the fiscal year ended April 25, 1998; (ii) the unaudited financial information
of the Fiscal 1998 Purchase Acquisitions for the period from April 27, 1997
through their respective acquisition dates; (iii) the unaudited financial
information of the First Quarter Fiscal 1999 Purchase Acquisition for the period
from April 27, 1997 through April 25, 1998; and (iv) the unaudited financial
information of the Second Quarter Fiscal 1999 Purchase Acquisition for the
period from April 27, 1997 through April 25, 1998.
The unaudited pro forma combined statement of income for the three months ended
July 25, 1998 gives effect to (i) the First Quarter Fiscal 1999 Purchase
Acquisition; (ii) the Second Quarter Fiscal 1999 Purchase Acquisition; (iii) the
refinancing of all amounts payable to U.S. Office Products Company; (iv) the
Distribution; and (v) the Offering, as if all such transactions had occurred on
April 26, 1998.
The unaudited pro forma combined statement of income for the three months ended
July 25, 1998 includes (i) the unaudited financial information of the Company
for the three months ended July 25, 1998; (ii) the unaudited financial
information of the First Quarter Fiscal 1999 Purchase Acquisition for the period
from April 26, 1998 through its acquisition date; and (iii) the unaudited
financial information of the Second Quarter Fiscal 1999 Purchase Acquisition for
the period from April 26, 1998 through July 25, 1998.
The unaudited pro forma adjustments are based upon preliminary estimates,
available information and certain assumptions that management deems appropriate.
The unaudited pro forma combined financial data presented herein does not
purport to represent what the Company's financial position or results of
operations would have been had the transactions which are the subject of pro
forma adjustments occurred on those dates, as assumed, and are not necessarily
representative of the Company's financial position or results of operations in
any future period. The pro forma combined financial statements should be read in
conjunction with the other financial statements and notes thereto included
elsewhere in this Current Report on Form 8-K and in the Company's Annual Report
on Form 10-K for the fiscal year ended April 25, 1998.
<PAGE>
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED BALANCE SHEET
July 25, 1998
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
National
School School Pro Forma Proforma
Specialty, Inc. Supply Adjustments Combined
------------------ ------------ ------------- --------------
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents .................... $ $ $ $
Accounts receivable .......................... 92,632 43,157 135,789
Inventories .................................. 56,092 25,294 (3,794) (a) 77,592
Prepaid expenses and other current assets .... 12,435 3,502 15,937
------------- ----------------- ------------- ----------
Total current assets .................... 161,159 71,953 (3,794) 229,318
Property and equipment, net ........................ 23,316 18,216 (1,500) (a) 40,032
Intangible assets, net ............................. 112,450 12,757 63,547 (a) 188,754
Deferred income tax asset .......................... 6,191 (a) 6,191
Other assets ....................................... 109 109
------------- ----------------- ------------- ----------
Total assets ............................ $ 297,034 $102,926 $ 64,444 $ 464,404
------------- ----------------- ------------- ----------
------------- ----------------- ------------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt .............................. $ 244 $ $ $ 244
Accounts payable ............................. 42,636 23,420 66,056
Accrued compensation ......................... 4,772 1,500 (a) 6,272
Other accrued liabilities .................... 15,327 4,719 500 (a) 20,546
--------------- -------------- ---------------- ----------
Total current liabilities ............... 62,979 28,139 2,000 93,118
Long-term debt ..................................... 287 287
Long-term debt to bank ............................. 77,600 57,456 80,287 (a) 215,343
Deferred income tax liability ...................... 512 28 (540) (a)
--------------- -------------- ---------------- -----------
Total liabilities ....................... 141,378 85,623 81,747 308,748
Stockholders' equity:
Common stock ................................. 15 51 (51) (a) 15
Capital paid in excess of par value .......... 147,495 45,690 (45,690) (a) 147,495
Retained earnings ............................ 8,146 (28,438) 28,438 (a) 8,146
--------------- -------------- ---------------- ----------
Total stockholders' equity .............. 155,656 17,303 (17,303) 155,656
--------------- -------------- ---------------- -----------
Total liabilities and stockholders'
equity ................................ $ 297,034 $102,926 $ 64,444 $ 464,404
--------------- -------------- ---------------- -----------
--------------- -------------- ---------------- -----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
<PAGE>
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED JULY 25, 1998
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Pro forma Pro
National Pro Spin Off & Forma
School Hammond & School Pro forma Forma Offering Combined
Specialty, Inc. Stephens Supply Adjustments Combined Adjustments As Adjusted
--------------- --------- --------- ------------ -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues ....................... $ 126,657 $ 2,380 $ 53,690 $182,727 $ 182,727
Cost of revenues ............... 82,615 1,181 36,122 119,918 119,918
------------ ------- --------- ----------- -------- ---------- -----------
Gross profit ............ 44,042 1,199 17,568 62,809 62,809
Selling, general and
administrative expenses ..... 28,927 476 12,567 41,970 24 (b) 41,994
Amortization ................... 715 381 143 (c) 1,239 1,239
Non-recurring charges .......... 1,074 1,074 1,074
Restructuring costs ............ 127 127 127
------------ ------- --------- ----------- -------- ---------- -----------
Operating income ........ 13,326 723 4,493 (143) 18,399 (24) 18,375
Other (income) expense:
Interest expense ........ 1,173 1,265 1,492 (d) 3,930 (343) (f) 3,587
Other ................... (15) 235 220 220
------------ ------- --------- ----------- -------- ---------- -----------
Income (loss) before provision
for income taxes ........ 12,153 738 2,993 (1,635) 14,249 319 14,568
Provision for income taxes ..... 5,591 4 1,387 (e) 6,982 128 (e) 7,110
------------ ------- --------- ----------- -------- ---------- -----------
Net (loss) income .............. $ 6,562 $ 738 $ 2,989 $ (3,022) $ 7,267 $ 191 $ 7,458
------------ ------- --------- ----------- -------- ---------- -----------
------------ ------- --------- ----------- -------- ---------- -----------
Weighted average shares:
Basic ................... 14,728 14,728 15,929 (g)
Diluted ................. 14,848 14,848 16,049 (g)
Net income per share:
Basic ................... $ 0.45 $ 0.49 $ 0.47
Diluted ................. $ 0.44 $ 0.49 $ 0.46
</TABLE>
See accompanying notes to pro forma combined financials statements.
<PAGE>
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED APRIL 25, 1998
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Individually
Insignificant
National Fiscal 1998
School Sax Arts American Hammond & School Purchase Pro forma
Specialty, Inc. & Crafts Academic Stephens Supply Acquisitions Adjustments
-------------- -------- -------- --------- ------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues ........................ $ 310,455 $ 5,421 $ 36,423 $ 9,028 $176,774 $ 28,943
Cost of revenues ................ 219,313 3,467 26,203 4,386 121,161 21,314
--------- -------- --------- --------- --------- ------------- ------------
Gross profit .............. 91,142 1,954 10,220 4,642 55,613 7,629
Selling, general and
administrative expenses ... 69,342 1,451 6,968 2,555 49,403 6,425
Amortization .................... 2,061 1,533 1,222 (c)
Restructuring costs ............. 3,491 1,198
--------- -------- --------- --------- --------- ------------- ------------
Operating income .......... 16,248 503 3,252 2,087 3,479 1,204 (1,222)
Other (income) expense:
Interest expense .......... 5,505 18 441 5,047 38 6,742 (d)
Interest income ........... (132) (3) (154) (4) 293 (d)
Other ..................... 156 24 57
--------- -------- --------- --------- --------- ------------- ------------
Income (loss) before provision
for income taxes ......... 10,719 488 2,787 2,241 (1,568) 1,113 (8,257)
Provision for income taxes ...... 5,480 189 892 18 141 (1,379) (e)
--------- -------- --------- --------- --------- ------------- ------------
Net (loss) income ............... $ 5,239 $ 299 $ 1,895 $ 2,241 $ (1,586) $ 972 $ (6,878)
--------- -------- --------- --------- --------- ------------- ------------
--------- -------- --------- --------- --------- ------------- ------------
Weighted average shares:
Basic ..................... 13,284
Diluted ................... 13,547
Net income per share:
Basic ..................... $ 0.40
Diluted ................... $ 0.39
</TABLE>
<TABLE>
<CAPTION>
Pro forma Pro
Pro Spin Off & Forma
Forma Offering Combined
Combined Adjustments As Adjusted
---------- -------------- --------------
<S> <C> <C> <C>
Revenues ........................ $567,044 $ 567,044
Cost of revenues ................ 395,844 395,844
--------- -------------- -----------
Gross profit .............. 171,200 171,200
Selling, general and
administrative expenses ... 136,144 295 (b) 136,439
Amortization .................... 4,816 4,816
Restructuring costs ............. 4,689 4,689
--------- -------------- -----------
Operating income .......... 25,551 (295) 25,256
Other (income) expense:
Interest expense .......... 17,791 (2,455) (f) 15,336
Interest income ...........
Other ..................... 237 237
--------- -------------- -----------
Income (loss) before provision
for income taxes ......... 7,523 2,160 9,683
Provision for income taxes ...... 5,341 864 (e) 6,205
Net (loss) income ............... $ 2,182 $ 1,296 $ 3,478
--------- -------------- -----------
--------- -------------- -----------
Weighted average shares:
Basic ..................... 13,284 15,659 (g)
Diluted ................... 13,547 15,922 (g)
Net income per share:
Basic ..................... $ 0.16 $ 0.22
Diluted ................... $ 0.16 $ 0.22
</TABLE>
See accompanying notes to pro forma combined financials statements.
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(Unaudited)
(Dollars and Share Amounts in Thousands)
UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
a) Adjustment to reflect purchase price adjustments associated with
acquisition of National School Supply for approximately $77,661 of cash and
assumed debt of $60,082. The portion of the consideration assigned to
goodwill (approximately $76,000) in the transaction accounted for under the
purchase method represents the excess of the cost over the fair market
value of the net assets acquired. The pro forma adjustment of goodwill
represents the difference between the calculated goodwill and the existing
National School Supply net intangibles asset balance as of April 30, 1998.
The Company amortizes goodwill over a period of 40 years. The
recoverability of the unamortized goodwill will be assessed on an ongoing
basis by comparing anticipated undiscounted future cash flows from
operations to net book value.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS
b) Adjustment to reflect additional corporate overhead expenses to be incurred
as a stand-alone, publicly traded entity, rather than as a division of U.S.
Office Products.
c) Adjustment to reflect the increase in amortization expense relating to
goodwill recorded in purchase accounting related to the Fiscal 1998 and
Fiscal 1999 Purchase Acquisitions for the periods prior to the respective
dates of acquisition. The Company has recorded goodwill amortization in the
historical financial statements from the respective dates of acquisition
forward. The goodwill is being amortized over an estimated life of 40
years.
d) Adjustment to reflect the increase in interest expense. Interest expense is
being calculated on the average pro forma debt outstanding during the
applicable periods at a weighted average interest rate of approximately
7.5%. The adjustment also reflects a reduction in interest income to zero
as the Company generally expects to use available cash to repay debt. Pro
forma interest expense will fluctuate $216 on an annual basis for each
0.125% change in interest rates.
e) Adjustment to calculate the provision for income taxes on the pro forma
combined and pro forma combined as adjusted results. The difference between
the pro forma combined and pro forma combined as adjusted effective tax
rates of 71% and 64%, respectively, and the statutory tax rate of 35% for
the fiscal year ended April 25, 1998, relates primarily to non-deductible
goodwill, restructuring costs and state income taxes. The difference
between the pro forma combined and pro forma combined as adjusted effective
tax rate of 49%, and the statutory tax rate of 35% for the fiscal year
ended July 25, 1998, relates primarily to non-deductible goodwill and state
income taxes.
f) Adjustment to reflect a decrease in interest expense as a result of the
utilization of the net proceeds from the Offering and sale of shares to
executive management of $32,736 to repay long-term debt at an annual
interest rate of 7.5%.
g) The weighted average shares outstanding used to calculate pro forma
combined as adjusted earnings per share is calculated based upon the
weighted average shares of the Company, adjusted to reflect the shares sold
in the Offering, as if the Offering had occurred on April 27, 1997.
