<PAGE> 1
4
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): February 9, 1999.
SCHOOL SPECIALTY, INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 000-24385 39-0971239
-------- --------- ----------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
1000 North Bluemound Drive
Appleton, Wisconsin 54914
--------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (920) 734-2756
<PAGE> 2
Item 2. Acquisition or Disposition of Assets
As previously reported, on February 9, 1999, School Specialty, Inc.
(the "Company") acquired all of the limited liability company interests in
Sportime, LLC, a subsidiary of Genesis Direct, Inc. ("Sportime").
This Amendment to Report on Form 8-K is filed to include the financial
statements listed in Item 7 relating to this acquisition.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements. The following historical financial
statements of Sportime and its predecessor, Select Service &
Supply Co., Inc., are filed as an Exhibit to this Amendment to
Report on Form 8-K, and such Exhibit is incorporated herein by
reference: financial statements as of and for the year ended
December 31, 1997 (audited), and as of March 28, 1998 (unaudited)
and December 26, 1998 (unaudited), the three months ended March
31, 1997 (unaudited) and March 28, 1998 (unaudited) and the nine
months ended December 31, 1997 (unaudited) and December 26, 1998
(unaudited). (Exhibit 99.1)
(b) Pro Forma Financial Information. The following unaudited pro forma
combined financial statements of the Company are filed as an
Exhibit to this Amendment to Report on Form 8-K, and such Exhibit
is incorporated herein by reference: pro forma combined balance
sheet as of January 23, 1999, pro forma combined statements of
income for the year ended April 25, 1998 and pro forma combined
statements of income for the nine months ended January 23, 1999.
(Exhibit 99.2)
(c) The following exhibits are filed with this report:
Exhibit
-------
No. Description
-- ------------
23.1 Consent of Ernst & Young LLP.
99.1 Financial statements of Sportime.
99.2 Pro forma combined financial statements of the Company.
2
<PAGE> 3
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.
Dated: April 26, 1999
SCHOOL SPECIALTY, INC.
By: /s/ Donald J. Noskowiak
---------------------------
Donald J. Noskowiak
Chief Financial Officer
3
<PAGE> 4
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
23.1 Consent of Ernst & Young LLP.
99.1 Financial statements of Sportime.
99.2 Pro forma combined financial statements of the Company.
4
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-64193) pertaining to the School Specialty, Inc. 1998
Stock Incentive Plan of our report dated January 30, 1998 with respect to the
financial statements of Select Service & Supply Co., Inc. included in this
Current Report (Form 8-K/A) of School Specialty, Inc. dated February 9, 1999.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Hackensack, New Jersey
April 21, 1999
<PAGE> 1
Exhibit 99.1
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Select Service & Supply Co., Inc.
We have audited the accompanying balance sheet of Select Service &
Supply Co., Inc. as of December 31, 1997, and the related statements of income
and retained earnings, 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.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Select Service &
Supply Co., Inc. as of December 31, 1997, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Hackensack, New Jersey
January 30, 1998
<PAGE> 2
SELECT SERVICE & SUPPLY CO., INC.
BALANCE SHEET
December 31, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash................................................................................ $ 397,012
Accounts receivable, less allowance of $131,700..................................... 3,657,754
Inventories......................................................................... 3,844,340
Deferred advertising costs and other current assets................................. 1,962,695
-----------
Total current assets....................................................... 9,861,801
Property, equipment and leasehold improvements, net.......................................... 1,333,243
Other assets................................................................................. 115,211
-----------
Total assets............................................................... $11,310,255
===========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
Current liabilities:
Notes payable to bank............................................................... $ 2,866,000
Accounts payable.................................................................... 1,410,261
Accrued expenses.................................................................... 970,370
Current portion of long-term debt................................................... 26,074
-----------
Total current liabilities.................................................. 5,272,705
Long-term debt, less current portion......................................................... 84,226
Stockholders' equity:
Class A common stock, $.10 par value; authorized 100,000 shares, issued and
outstanding 1,000 shares......................................................... 100
Class B common stock, non-voting, $.10 par value; authorized 900,000 shares,
issued and outstanding 99,000 shares............................................. 9,900
Additional paid-in capital.......................................................... 32,889
Retained earnings................................................................... 5,910,435
-----------
Total stockholders' equity................................................. 5,953,324
-----------
Total liabilities and stockholders' equity................................. $11,310,255
===========
</TABLE>
See accompanying notes.
2
<PAGE> 3
SELECT SERVICE & SUPPLY CO., INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
Year ended December 31, 1997
<TABLE>
<S> <C>
Net sales.................................................................................... $29,257,897
Cost of good sold............................................................................ 15,314,982
-----------
Gross profit................................................................................. 13,942,915
Selling, general and administrative expenses................................................. 11,654,280
-----------
Income from operations....................................................................... 2,288,635
Interest expense............................................................................. (181,289)
Other income................................................................................. 232,199
-----------
Net income................................................................................... 2,339,545
Retained earnings at beginning of year....................................................... 5,612,680
Dividends.................................................................................... (2,041,790)
-----------
Retained earnings at end of year............................................................. $ 5,910,435
===========
</TABLE>
See accompanying notes.
3
<PAGE> 4
SELECT SERVICE & SUPPLY CO., INC.
STATEMENT OF CASH FLOWS
Year ended December 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities
Net income.......................................................................... $ 2,339,545
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.............................................. 356,644
Gain on sale of property and equipment..................................... (10,909)
Changes in operating assets and liabilities:
Accounts receivable............................................... 1,195
Inventories....................................................... (110,306)
Deferred advertising costs and other current assets............... (349,173)
Accounts payable and accrued expenses............................. 421,308
Other liabilities................................................. (97,415)
------------
Net cash provided by operating activities................ 2,550,889
Cash flows from investing activities
Purchase of property and equipment.................................................. (691,721)
Proceeds from disposition of property and equipment................................. 13,650
-----------
Net cash used in investing activities.................... (678,071)
Cash flows from financing activities
Increase in revolving line of credit................................................ 554,000
Principal payment on long-term debt................................................. (24,471)
Payment of notes to related parties................................................. (75,000)
Payment of dividends .............................................................. (2,041,790)
------------
Net cash used in financing activities......................... (1,587,261)
------------
Net increase in cash......................................................................... 285,557
Cash at beginning of year.................................................................... 111,455
-----------
Cast at end of year.......................................................................... $ 397,012
===========
Supplemental disclosures of cash flow information
Interest paid....................................................................... $ 179,977
===========
</TABLE>
See accompanying notes.
4
<PAGE> 5
SELECT SERVICE & SUPPLY CO., INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. ORGANIZATION
The Company is engaged in catalog and direct sales primarily to
education systems, caps and church organizations, principally in the United
States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Concentration of Credit Risk
Certain financial instruments potentially subject the Company to
concentrations of credit risk. Accounts receivable represent sales to government
agencies and other institutional customers throughout the United States. The
Company periodically performs credit evaluations of its customers but generally
does not require collateral.
Inventory
Inventories are valued at the lower of cost or market with cost
determined by the first-in, first-out method.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost.
Depreciation of assets, including leasehold improvements, is computed using the
straight-line method over the lesser of the estimated useful lives of the assets
or the lease term. Leasehold improvements are amortized on a straight-line basis
over the shorter of the life of the improvement or the remainder of the lease
term. Amortization of leasehold improvements is included in depreciation
expense.
Fair Values of Financial Instruments
The fair value of financial instruments does not materially differ from
their carrying value.
Revenue Recognition
Sales are recorded at the time of shipment and a provision of
anticipated merchandise returns, net of exchanges, is recorded based upon
historical experience.
Direct Response Advertising and Promotion Costs
Recognition of advertising costs is in accordance with the provisions
of the AICPA Statement of Position 93-7, Reporting of Advertising Costs. Direct
response advertising costs, consisting primarily of catalog design, printing and
postage expenditures, are amortized over the period during which associated net
revenues are expected, generally approximating nine months or less. Direct
response advertising expenses were $2,882,924 for the year ended December 31,
1997. As of December 31, 1997, approximately $1,816,000 of direct response
advertising costs have been deferred.
Income Taxes
The Company and its stockholders have elected to be treated as an S
Corporation under the Internal Revenue Code for federal and state purposes.
Therefore, no provision for income taxes has been made as the Company's income
will be included in the personal income tax returns of the stockholders.
5
<PAGE> 6
SELECT SERVICE & SUPPLY CO., INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 1997
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
<TABLE>
Property, equipment and leasehold improvements consist of the following:
<S> <C>
Equipment, furniture and fixtures...................................................... $2,640,360
Leasehold improvements................................................................. 105,659
----------
2,746,019
Less accumulated depreciation.......................................................... 1,412,776
----------
$1,333,243
</TABLE>
Depreciation expense, including amortization of leasehold improvements was
approximately $351,246 for the year ended December 31, 1997.
4. ACCRUED LIABILITIES
<TABLE>
Accrued liabilities consist of the following:
<S> <C>
Employee compensation.................................................................. $109,478
Customer prepayments................................................................... 455,633
Other.................................................................................. 405,259
--------
$970,370
</TABLE>
5. NOTES PAYABLE AND LONG-TERM DEBT
The Company maintains a revolving line of credit with a bank which
provides for borrowings of up to $5.0 million (including $1.0 million available
for letters of credit) based on eligible collateral. The note is payable on
demand, bears interest payable monthly at the lower of LIBOR plus 1.25% or the
banks prime rate minus .25%, and is secured by certain trade accounts
receivable, inventory, equipment and life insurance. The rate in effect at
December 31, 1997 was 7.2%.
Long-term debt consists of secured notes payable to commercial lenders,
which bear interest at various rates (weighted-average of approximately 14.4% at
December 31, 1997) and are payable in varying monthly installments of principal
and interest through April 2004. The loans are secured by equipment with a
carrying value of $102,000 at December 31, 1997.
As of December 31, 1997, maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998................................................................................... $26,074
1999................................................................................... 20,896
2000................................................................................... 20,430
2002................................................................................... 24,047
2003................................................................................... 16,463
</TABLE>
6
<PAGE> 7
SELECT SERVICE & SUPPLY CO., INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 1997
6. STOCKHOLDERS' EQUITY
During 1997, the Company's Board of Directors and shareholders approved a
Restatement and Amendment by the Entirety of the Articles of Incorporation (the
"Plan of Reorganization") which authorized two new classes of common stock which
replaced the then existing single class of common stock. As a result of the Plan
of Reorganization, each of the previously existing 900 shares of common stock
was converted into 1 and one-ninth shares of the newly authorized Class A common
stock and 110 shares of the newly authorized Class B Non-Voting Common Stock. As
a result of these conversions, $1,000 was reclassified from additional paid-in
capital to Class B Non-Voting Common Stock.
7. RELATED PARTY TRANSACTIONS AND COMMITMENTS
At December 31, 1996 the Company had outstanding notes payable to related
parties which represented amounts due to individuals related to the Company's
stockholders. The notes carried interest at 12%, and were payable on demand.
These notes were fully repaid in 1997. Interest expense relating to these notes
totaled approximately $7,550 in 1997.
The Company leases office and warehouse facilities under a 15 year
non-cancelable operating lease with a related party which expires in 2005. In
addition to the fixed rental, the lease requires the Company to pay additional
rents based on certain operating costs of the facility including property taxes.
Future minimum rental commitments under this agreement are as follows:
<TABLE>
<S> <C>
1998................................................................................... $315,600
1999................................................................................... 315,600
2000................................................................................... 315,600
2001................................................................................... 315,600
2002................................................................................... 315,600
Thereafter............................................................................. 798,000
</TABLE>
Rent expense under this agreement was approximately $316,000 in 1997.
8. EMPLOYEE BENEFIT PLAN
The Company has established a defined contribution employee savings plan
pursuant to Internal Revenue Code Section 401(k) which allows all employees
meeting certain eligibility requirements to contribute a portion of their annual
compensation. Company contributions are at the discretion of the Company's Board
of Directors. The Company accrued a contribution of $45,200 for the year ended
December 31, 1997.
9. SUBSEQUENT EVENT
On January 8, 1998, Genesis Direct, Inc. acquired certain of the Company's
assets and assumed certain of the Company's liabilities. These financial
statements represent the historical carrying values of the assets and
liabilities, and no adjustments have been recorded related to this transaction.
7
<PAGE> 8
SPORTIME, LLC
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 28, DECEMBER 26,
1998 1998
---- ----
ASSETS (SUCCESSOR COMPANY)
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash $ 104,732 $ 378,792
Accounts receivable, less allowance of $119,528 and
$150,186, respectively.................................................. 3,064,317 3,916,426
Inventories............................................................... 3,779,406 4,797,116
Prepaid and other current assets.......................................... 2,147,084 2,424,044
----------- -----------
Total current assets.................................................. 9,095,539 11,516,378
Property, equipment and leasehold improvements, net.......................... 1,344,087 1,218,788
Receivable from Genesis Direct, Inc.......................................... 400,000 878,764
Intangible assets, net....................................................... 15,170,389 14,689,021
Other assets................................................................. 8,288 11,221
----------- -----------
Total assets.............................................................. $26,018,303 $28,314,172
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable.......................................................... $ 1,631,844 $ 1,370,955
Accrued expenses.......................................................... 766,492 915,778
Current portion of long-term debt......................................... 26,381 13,820
----------- -----------
Total current liabilities............................................. 2,424,717 2,300,553
Long-term debt, less current portion......................................... 77,739 70,833
Other long-term liabilities.................................................. 144,840 196,621
----------- -----------
Total liabilities..................................................... 2,647,296 2,568,007
Commitments and contingencies
Stockholders' equity
Divisional equity......................................................... 23,363,407 23,363,407
Retained earnings......................................................... 7,600 2,382,758
----------- -----------
Total stockholders' equity............................................ 23,371,007 25,746,165
----------- -----------
Total liabilities and stockholders' equity............................ $26,018,303 $28,314,172
=========== ===========
</TABLE>
See accompanying notes.
8
<PAGE> 9
SPORTIME, LLC
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS SEVEN DAYS EIGHTY DAYS NINE MONTHS ENDED
ENDED ENDED ENDED -----------------
MARCH 31, JANUARY 7, MARCH 28, DECEMBER 31, DECEMBER 26,
1997 1998 1998 1997 1998
---- ---- ---- ---- ----
(PREDECESSOR (PREDECESSOR (SUCCESSOR (PREDECESSOR (SUCCESSOR
COMPANY) COMPANY) COMPANY) COMPANY) COMPANY)
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues...................................... $ 5,084,874 $ 64,309 $ 5,989,961 $24,173,023 $26,147,461
Cost of goods sold............................ 2,705,689 38,503 3,259,448 12,609,293 13,785,287
----------- ----------- ----------- ----------- -----------
Gross profit............................. 2,379,185 25,806 2,730,513 11,563,730 12,362,174
Selling, general and administrative expenses.. 2,496,567 176,395 2,701,207 9,157,713 9,943,557
----------- ----------- ----------- ----------- -----------
Income (loss) from operations............ (117,382) (150,589) 29,306 2,406,017 2,418,617
Interest expense.............................. (33,695) (564) (6,449) (147,594) (10,866)
Other income (expense)........................ 19,293 (4,189) (15,277) 212,906 (32,593)
----------- ----------- ----------- ----------- -----------
Net income (loss)............................. (131,784) (155,342) 7,580 2,471,329 2,375,158
Retained earnings at beginning of period...... 5,612,680 5,910,435 5,755,093 5,480,896 7,600
Dividends..................................... - - - (2,041,790) -
Elimination of retained earnings balance
at date of acquisition by Genesis - - (5,755,073) - -
Direct, Inc................................ ----------- ----------- ----------- ----------- -----------
Retained earnings at end of period............ $ 5,480,896 $ 5,755,093 $ 7,600 $ 5,910,435 $ 2,382,758
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
9
<PAGE> 10
SPORTIME, LLC
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS SEVEN DAYS EIGHTY DAYS NINE MONTHS ENDED
ENDED ENDED ENDED -----------------
MARCH 31, JANUARY 7, MARCH 28, DECEMBER 31, DECEMBER 26,
1997 1998 1998 1997 1998
---- ---- ---- ---- ----
(PREDECESSOR (PREDECESSOR (SUCCESSOR (PREDECESSOR (SUCCESSOR
COMPANY) COMPANY) COMPANY) COMPANY) COMPANY)
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................... $ (131,784) $ (155,342) $ 7,580 $ 2,471,329 $ 2,375,158
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization expense.... 178,111 8,183 179,596 178,533 597,516
Gain on sale of property and equipment... (10,909) - - - -
Changes in operating assets and
liabilities:
Accounts receivable.................... 1,550,691 (17,467) 417,570 (1,549,496) (852,109)
Inventories............................ 153,089 172,501 (108,406) (263,395) (1,017,710)
Deferred advertising costs and other
current assets....................... (525,293) (417,408) 283,274 176,120 215,501
Accounts payable....................... 124,265 291,541 (54,933) 297,043 (260,889)
Other liabilities...................... (574,906) (281,613) (102,725) 477,491 (92,118)
----------- ----------- ---------- ----------- -----------
Net cash provided by (used in)
operating activities............... 763,264 (399,605) 621,956 1,787,625 965,349
----------- ----------- ---------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment......... (192,044) - (109,048) (499,677) (203,491)
Other...................................... 13,650 - - - -
----------- ----------- ---------- ----------- -----------
Net cash used in investing activities.. (178,394) - (109,048) (499,677) (203,491)
----------- ----------- ---------- ----------- -----------
Cash flows from financing activities:
Increase in revolving line of credit....... (624,000) 2,593 (2,866,000) 1,178,000 -
Principal borrowings (payments) on
long-term debt............................ (14,448) - (5,583) (85,023) (9,034)
Payments to Genesis Direct, Inc............ - - (400,000) - (478,764)
Investment by Genesis Direct, Inc. to
repay revolving line of credit............ - - 2,863,407 - -
Payment of dividends....................... - - - (2,041,790) -
----------- ----------- ---------- ------------ -----------
Net cash provided by (used in)
financing activities................. (638,448) 2,593 (408,176) (948,813) (487,798)
----------- ----------- ---------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents................................. (53,578) (397,012) 104,732 339,135 274,060
Cash and cash equivalents at beginning of
period...................................... 111,455 397,012 - 57,877 104,732
----------- ----------- ---------- ----------- -----------
Cash and cash equivalents at end of period.... $ 57,877 $ - $ 104,732 $ 397,012 $ 378,792
=========== =========== ========== =========== ===========
Supplemental disclosures of cash flow information:
Interest paid.............................. $ 32,383 $ - $ - $ 147,594 $ -
</TABLE>
See accompanying notes.
10
<PAGE> 11
SPORTIME, LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited financial statements include the results of
Select Service & Supply Co., Inc. from January 1, 1998 to January 7, 1998, and
the results of Sportime, LLC (the "Company") for the periods subsequent to
January 7, 1998. On January 8, 1998, Genesis Direct, Inc. acquired the Company,
which included certain of the assets and liabilities of Select Service & Supply
Co., Inc., for approximately $20.5 million, consisting of $18.5 million of cash,
$1.0 million of stock and $1.0 million of debt. The total assets acquired by
Genesis Direct, Inc. was approximately $25.8 million, including goodwill of
$14.8 million. Amortization expense during the three months ended March 28, 1998
and the nine months ended December 26, 1998 was $94,250 and $282,750,
respectively.
These statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 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.
NOTE 2--SUBSEQUENT EVENTS
On March 29, 1999, 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 $23.0 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.
11
<PAGE> 1
Exhibit 99.2
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma financial statements give effect to, where
applicable, all acquisitions completed through February 9, 1999, the spin-off
and the refinancing of all amounts payable to U.S. Office Products in connection
with the spin-off and the June 1998 initial public offering and concurrent
offering to certain directors and officers. The pro forma common stock offering
adjustments further adjust such pro forma financial statements to give effect to
the secondary offering completed on April 16, 1999 (the "Secondary Offering").
The pro forma combined balance sheet gives effect to the Sportime
acquisition completed on February 9, 1999.
The pro forma combined statement of income for the fiscal year ended
April 25, 1998 gives effect to (i) the spin-off and the refinancing of all
amounts payable to U.S. Office Products in connection with the spin-off; (ii)
the June 1998 initial public offering and concurrent offering to certain
directors and officers; (iii) the acquisitions of Sax Arts and Crafts, American
Academic and six other individually insignificant companies in business
combinations accounted for under the purchase method completed during the fiscal
year ended April 25, 1998 (the "Fiscal 1998 Purchase Acquisitions"); and (iv)
the acquisitions of Hammond & Stephens, National School Supply and Sportime in
business combinations accounted for under the purchase method completed during
the fiscal year ending April 24, 1999 (the "Fiscal 1999 Purchase Acquisitions"),
as if all such transactions had occurred on April 27, 1997. The pro forma
combined statement of income for the year ended April 25, 1998 includes (i) our
audited financial information for the year ended April 25, 1998; (ii) the
unaudited financial information of the Fiscal 1998 Purchase Acquisitions for the
period from April 27, 1997 through their respective dates of acquisitions; and
(iii) the unaudited financial information of the Fiscal 1999 Purchase
Acquisitions for the period from April 27, 1997 through April 25, 1998.
The pro forma combined statement of income for the nine months ended
January 23, 1999 gives effect to (i) the spin-off and the refinancing of all
amounts payable to U.S. Office Products in connection with the spin-off; (ii)
the June 1998 initial public offering and concurrent offering to certain
directors and officers; and (iii) the Fiscal 1999 Purchase Acquisitions, as if
all such transactions had occurred on April 26, 1998. The pro forma combined
statement of income for the nine months ended January 23, 1999 includes our
unaudited financial information for the nine months ended January 23, 1999 and
the unaudited financial information of the Fiscal 1999 Purchase Acquisitions for
the period from April 26, 1998 through the earlier of their respective dates of
acquisition or January 23, 1999.
Our historical financial statements reflect an allocated portion of
general and administrative costs and interest expense incurred by U.S. Office
Products. The allocated costs include expenses such as: certain corporate
executives' salaries, accounting and legal fees, departmental costs for
accounting, finance, legal, purchasing, marketing and human resources, as well
as other general overhead costs. These corporate overheads have been allocated
to us using one of several factors, dependent on the nature of the costs being
allocated, including, revenues, number and size of acquisitions and number of
employees. Interest expense incurred by U.S. Office Products has been allocated
to us based upon our average outstanding intercompany balances with U.S. Office
Products at U.S. Office Products' weighted average interest rate during such
period.
The pro forma adjustments are based upon preliminary estimates,
available information and certain assumptions that management deems appropriate.
The unaudited pro forma combined financial data presented herein does not
purport to represent what our financial position or results of operations would
have been had the transactions which are the subject of pro forma adjustments
occurred on those dates, as assumed, and are not necessarily representative of
our financial position or results of operations in any future period.
1
<PAGE> 2
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED BALANCED SHEET
JANUARY 23, 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SCHOOL PRO FORMA
ASSETS SPECIALTY, INC. SPORTIME ADJUSTMENTS
--------------- -------- -----------
<S> <C> <C> <C>
Cash & cash equivalents................... $ - $ - $ -
Accounts receivable, net.................. 84,843 3,432 -
Inventories............................... 46,799 4,371 -
Prepaid and other current assets........ 16,219 2,820 -
--------- -------- ---------
Total current assets.................. 147,861 10,623 -
Property and equipment, net............... 39,781 1,185
Intangible assets, net.................... 183,693 14,689 (1,102) (a)
Other assets.............................. 7,178 12 -
--------- -------- ---------
Total assets.......................... $ 378,513 $ 26,509 $ (1,102)
========= ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt....... $ 10,314 $ - $ -
Accounts payable........................ 15,485 1,063 -
Accrued compensation.................... 11,945 303 -
Accrued income taxes.................... 5,596 6 -
Accrued restructuring................... 3,638 - -
Other accrued liabilities............... 10,057 738 -
--------- -------- --------
Total current liabilities............. 57,035 2,110 -
Long-term debt............................ 162,199 69 23,000 (a)
Other..................................... 212 228 -
--------- -------- --------
Total liabilities....................... 219,446 2,407 23,000
Stockholders' equity:
Common stock............................ 15 - -
Capital paid in excess of par value..... 146,768 - -
Accumulated other comprehensive income.. 6 - -
Retained earnings....................... 12,278 - -
Equity of purchased company............. - 24,102 (24,102) (a)
--------- -------- --------
Total stockholders' equity............ 159,067 24,102 (24,102)
--------- -------- --------
Total liabilities and stockholders'
equity................................ $ 378,513 $ 26,509 $ (1,102)
========= ======== ========
<CAPTION>
PRO FORMA
COMMON STOCK
PRO FORMA OFFERING PRO FORMA
ASSETS COMBINED ADJUSTMENTS AS ADJUSTED
------------- --------------- -------------
<S> <C> <C> <C>
Cash & cash equivalents................... $ - $ 41,050 (b) $ -
(41,050)(b)
Accounts receivable, net.................. 88,275 88,275
Inventories............................... 51,170 - 51,170
Prepaid and other current assets........ 19,039 - 19,039
---------- --------- ---------
Total current assets.................. 158,484 - 158,484
Property and equipment, net............... 40,966 - 40,966
Intangible assets, net.................... 197,280 - 197,280
Other assets.............................. 7,190 - 7,190
---------- --------- ---------
Total assets.......................... $ 403,920 $ - $ 403,920
========== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt....... $ 10,314 $ - $ 10,314
Accounts payable........................ 16,548 - 16,548
Accrued compensation.................... 12,248 - 12,248
Accrued income taxes.................... 5,602 - 5,602
Accrued restructuring................... 3,638 - 3,638
Other accrued liabilities............... 10,795 - 10,795
---------- --------- ---------
Total current liabilities............. 59,145 - 59,145
Long-term debt............................ 185,268 (41,050) (b) 144,218
Other..................................... 440 - 440
---------- --------- ---------
Total liabilities....................... 244,853 (41,050) 203,803
Stockholders' equity:
Common stock............................ 15 2 (b) 17
Capital paid in excess of par value..... 146,768 41,048 (b) 187,816
Accumulated other comprehensive income.. 6 - 6
Retained earnings....................... 12,278 - 12,278
Equity of purchased company............. - - -
--------- -------- ---------
Total stockholders' equity............ 159,067 41,050 200,117
--------- -------- ---------
Total liabilities and stockholders'
equity................................ $ 403,920 $ - $ 403,920
========= ======== =========
</TABLE>
2
<PAGE> 3
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 23, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NATIONAL
SCHOOL PRO FORMA SCHOOL
SPECIALTY, INC. SPORTIME ADJUSTMENTS SUBTOTAL SUPPLY
--------------- -------- ----------- -------- ------
<S> <C> <C> <C> <C> <C>
Revenues.......... $ 424,332 $ 25,778 $ - $450,110 $ 53,690
Cost of revenues.. 281,436 12,047 - 293,483 36,122
---------- --------- --------- -------- --------
Gross profit... 142,896 13,731 - 156,627 17,568
Selling, general
and administrative
expenses.......... 108,005 11,625 (188) (g) 119,442 12,948
Restructuring
costs............. 5,274 - - 5,274 127
-------- --------- --------- -------- -------
Operating
income............ 29,617 2,106 188 31,911 4,493
Other (income)
expense:
Interest
expense......... 8,942 3 1,380 (h) 10,325 1,265
Interest income (114) - - (114) -
Other.......... - 200 - 200 235
-------- --------- --------- -------- -------
Income before
provision for
income taxes.... 20,789 1,903 (1,192) 21,500 2,993
Provision for
income taxes...... 10,094 - 385 (i) 10,479 4
-------- --------- --------- -------- -------
Net income........ $ 10,695 $ 1,903 $ (1,577) $ 11,021 $ 2,989
======== ========= ========= ======== =======
Weighted average
shares:
Basic.......... 14,625 14,625
Diluted........ 14,665 14,665
Net income
per share:
Basic.......... $ 0.73 $ 0.75
Diluted........ 0.73 0.75
<CAPTION>
PRO FORMA
COMMON STOCK
HAMMOND & PRO FORMA PRO FORMA OFFERING PRO FORMA
STEPHENS ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
-------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues.......... $2,380 $ - $506,180 $ - $506,180
Cost of revenues.. 1,181 - 330,786 - 330,786
------ ------- -------- -------- --------
Gross profit... 1,199 - 175,394 - 175,394
Selling, general
and administrative
expenses.......... 476 24 (f) 133,046 - 133,046
156 (g)
Restructuring
costs............. - - 5,401 - 5,401
------ ------- -------- -------- --------
Operating
income............ 723 (180) 36,947 - 36,947
Other (income)
expense:
Interest
expense........... - 1,910 (h) 13,500 (2,463) (j) 11,037
Interest income - 114 (h) - - -
Other.......... (15) - 420 - 420
------ ------- -------- -------- --------
Income before
provision for
income taxes.... 738 23,027 2,463 25,490
(2,204)
Provision for
income taxes...... - 800 (i) 11,283 985 12,268
------ ------- -------- -------- --------
Net income........ $ 738 $(3,004) $ 11,744 $ 1,478 $ 13,222
====== ======= ======== ======== ========
Weighted average
shares:
Basic.......... 15,025 (k) 17,425 (l)
Diluted........ 15,065 (k) 17,465 (l)
Net income
per share:
Basic.......... $ 0.78 $ 0.76
Diluted........ 0.78 0.76
</TABLE>
3
<PAGE> 4
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED APRIL 25, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SCHOOL SAX NATIONAL
SPECIALTY, PRO FORMA ARTS AND AMERICAN SCHOOL
INC.(c) SPORTIME(d) ADJUSTMENTS SUBTOTAL CRAFTS(c) ACADEMIC(c) SUPPLY(e)
---------- ----------- ----------- -------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.......... $ 310,455 $ 30,981 $ - $341,436 $ 5,421 $ 36,423 $176,034
Cost of revenues.. 202,870 14,467 - 217,337 3,196 24,382 120,652
--------- -------- ------- -------- ------- --------- --------
Gross profit... 107,585 16,514 - 124,099 2,225 12,041 55,382
Selling, general
and administrative
expenses........ 87,846 14,367 142 (g) 102,355 1,722 8,789 50,832
Restructuring
costs............. 3,491 - - 3,491 - - 1,198
--------- -------- ------- -------- ------- --------- -------
Operating
income............ 16,248 2,147 (142) 18,253 503 3,252 3,352
Other (income)
expense:
Interest
expense........... 5,505 - 1,840 (h) 7,345 18 441 5,036
Interest income (132) - - (132) (3) - -
Other.......... 156 (45) - 111 - 24 -
--------- -------- ------ -------- ------- --------- -------
Income before
provision for
income taxes.... 10,719 2,192 (1,982) 10,929 488 2,787 (1,684)
Provision for
income taxes...... 5,480 - 782 (i) 6,262 189 892 -
--------- -------- ------- -------- ------- --------- -------
Net income........ $ 5,239 $ 2,192 $(2,764) $ 4,667 $ 299 $ 1,895 $(1,684)
========= ======== ======= ======== ======= ========= =======
Weighted average
shares:
Basic.......... 13,284 13,284
Diluted........ 13,547 13,547
Net income
per share:
Basic.......... $ 0.40 $ 0.35
Diluted........ 0.39 0.34
<CAPTION>
INDIVIDUALLY
INSIGNIFICANT PRO FORMA
FISCAL 1998 COMMON STOCK
HAMMOND & PURCHASE PRO FORMA PRO FORMA OFFERING PRO FORMA
STEPHENS ACQUISITIONS(c) ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
----------- --------------- ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues.......... $ 9,028 $ 28,943 $ - $597,285 $ - $ 597,285
Cost of revenues.. 4,386 19,865 - 389,818 - 389,818
--------- --------- -------- -------- -------- ----------
Gross profit... 4,642 9,078 - 207,467 - 207,467
Selling, general
and administrative
expenses....... 2,555 7,873 295 (f) 175,403 - 175,403
982 (g)
Restructuring
costs............. - - - 4,689 - 4,689
--------- --------- -------- -------- -------- ----------
Operating
income............ 2,087 1,205 (1,277) 27,375 - 27,375
Other (income)
expense:
Interest
expense........... - 38 4,122 (h) 17,000 (3,284) (j) 13,716
Interest income (154) (4) 293 (h) - - -
Other.......... - 58 - 193 - 193
--------- --------- -------- -------- -------- ----------
Income before
provision for
income taxes.... 2,241 1,113 (5,692) 10,182 3,284 13,466
Provision for
income taxes...... - 140 (1,577) (i) 5,906 1,315 7,221
-------- --------- -------- -------- -------- ----------
Net income........ $ 2,241 $ 973 $ (4,115) $ 4,276 $ 1,969 $ 6,245
========= ========= ======== ======== ======== ==========
Weighted average
shares:
Basic.......... 15,659 (k) 18,059 (l)
Diluted........ 15,922 (k) 18,322 (l)
Net income
per share:
Basic.......... $ 0.27 $ 0.35
Diluted........ 0.27 0.34
</TABLE>
4
<PAGE> 5
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 the
acquisition of Sportime, LLC. The portion of the consideration assigned to
goodwill ($13,587) in the transaction accounted for under the purchase
method represents the excess of the cost over the fair market value of the
net assets acquired. We amortize goodwill over a period of 40 years. The
recoverability of the unamortized goodwill will be assessed on an ongoing
basis by comparing anticipated undiscounted future cash flows from
operations to net book value.
(b) Adjustment to reflect $41,050 of net proceeds from the sale of 2,400 shares
of Common Stock as part of the Secondary Offering (net of expenses and
underwriting discount) and the utilization of the proceeds to repay $41,050
of long-term debt.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS
(c) Certain reclassifications have been made to our historical results and the
results of the Fiscal 1998 Purchase Acquisitions for the period prior to
their respective dates of acquisition for the fiscal year ended April 25,
1998 to conform with the fiscal 1999 presentation. These reclassifications
had no effect on net income or net income per share.
(d) Includes the results of Select Service & Supply Co., Inc. from January 1,
1998 to January 7, 1998, and the results of Sportime, LLC for the period
subsequent to January 7, 1998. On January 8, 1998 Genesis Direct, Inc.
acquired Sportime, LLC, which included certain of the assets and
liabilities of Select Service & Supply Co., Inc., for approximately $20.5
million in a purchase transaction and recorded approximately $14.8 million
of goodwill. The results for the period subsequent to January 7, 1998
include amortization expense of approximately $34,000 per month.
(e) The results are for the fiscal year ended March 31, 1998.
(f) 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.
(g) Adjustment to reflect the increase (decrease) in amortization expense
relating to goodwill recorded in purchase accounting related to the Fiscal
1998 and Fiscal 1999 Purchase Acquisitions for the periods prior to the
respective dates of acquisition. We have recorded goodwill amortization in
the historical financial statements from the respective dates of
acquisition forward. The goodwill is being amortized over an estimated life
of 40 years.
(h) Adjustment to reflect an increase in interest expense. Interest expense is
being calculated on the average pro forma debt outstanding during the
applicable periods at a weighted average interest rate of approximately
8.0%. The adjustment also reflects a reduction in interest income to zero
as we generally expect to use available cash to repay debt. Pro forma
interest expense will fluctuate approximately $272 on an annual basis for
each 0.125% change in interest rates.
(i) Adjustment to calculate the provision for income taxes on the pro forma
combined results at an effective income tax rate of approximately 49% for
the nine months ended January 23, 1999 and 58% for the fiscal year ended
April 25, 1998. The difference between the effective tax rates and the
statutory tax rate of 35% relates primarily to state income taxes and
nondeductible goodwill.
(j) Adjustment to reflect a decrease in interest expense as a result of the
utilization of the net proceeds from the Secondary Offering to repay
$41,050 of long-term debt at an annual interest rate of 8%.
(k) The weighted average shares outstanding used to calculate basic pro forma
combined earnings per share is calculated based upon our weighted average
shares, adjusted to reflect shares sold in the June 1998 initial public
offering and the concurrent offering to certain officers and directors, as
if these offerings had occurred on April 27, 1997.
5
<PAGE> 6
(l) The weighted average shares outstanding used to calculate pro forma as
adjusted earnings per share is calculated based upon the pro forma weighted
average shares described in note (k), adjusted to reflect the 2,400 shares
sold in the Secondary Offering, as if the Secondary Offering had occurred
on April 27, 1997.
6
