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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JANUARY 24, 2015

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO                     

Commission File Number: 000-24385

 

 

SCHOOL SPECIALTY, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware    39-0971239

(State or Other Jurisdiction

of Incorporation)

  

(IRS Employer

Identification No.)

W6316 Design Drive

Greenville, Wisconsin 54942

(Address of Principal Executive Offices)

(Zip Code)

(920) 734-5712

(Registrant’s Telephone Number, including Area Code)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  x    No  ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at

March 2, 2015

Common Stock, $0.001 par value   1,000,004

 

 

 


Table of Contents

SCHOOL SPECIALTY, INC.

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JANUARY 24, 2015

 

         Page
Number
 
PART I - FINANCIAL INFORMATION   

ITEM 1.

 

CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

  
 

Condensed Consolidated Balance Sheets at January 24, 2015, April 26, 2014 and January 25, 2014 (Successor Company)

     2   
 

Condensed Consolidated Statements of Operations for the Three Months Ended January 24, 2015, Three Months Ended January 25, 2014, Nine Months Ended January 24, 2015, Thirty-Three Weeks Ended January 25, 2014 (Successor Company) and Six Weeks Ended June 11, 2013 (Predecessor Company)

     3   
 

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended January 24, 2015, Three Months Ended January 25, 2014, Nine Months Ended January 24, 2015, Thirty-Three Weeks Ended January 25, 2014 (Successor Company) and Six Weeks Ended June 11, 2013 (Predecessor Company)

     4   
 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended January 24, 2015, Thirty-Three Weeks Ended January 25, 2014 (Successor Company) and Six Weeks Ended June 11, 2013 (Predecessor Company)

     5   
 

Notes to Condensed Consolidated Financial Statements

     6   

ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

     31   

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     41   

ITEM 4.

 

CONTROLS AND PROCEDURES

     41   

PART II - OTHER INFORMATION

  

ITEM 6.

 

EXHIBITS

     42   

 

-Index-


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Unaudited Financial Statements

SCHOOL SPECIALTY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In Thousands, Except Share Data)

 

     Successor Company  
     January 24, 2015     April 26, 2014     January 25, 2014  

ASSETS

      

Current assets:

      

Cash and cash equivalents

   $ 11,861      $ 9,008      $ 17,888   

Accounts receivable, less allowance for doubtful accounts of $925, $984 and $1,267, respectively

     56,819        62,631        56,017   

Inventories

     81,298        93,387        73,224   

Deferred catalog costs

     9,380        8,057        9,933   

Prepaid expenses and other current assets

     18,899        18,043        13,655   

Refundable income taxes

     569        —          5,432   

Assets held for sale

     1,598        2,200        2,200   
  

 

 

   

 

 

   

 

 

 

Total current assets

  180,424      193,326      178,349   

Property, plant and equipment, net

  34,938      39,045      36,036   

Goodwill

  21,588      21,588      21,588   

Intangible assets, net

  44,888      48,251      49,371   

Development costs and other

  32,387      36,646      36,413   

Deferred taxes long-term

  12      48      47   

Investment in unconsolidated affiliate

  715      715      715   
  

 

 

   

 

 

   

 

 

 

Total assets

$ 314,952    $ 339,619    $ 322,519   
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Current maturities - long-term debt

$ 14,904    $ 12,388    $ 1,434   

Accounts payable

  32,026      42,977      23,033   

Accrued compensation

  4,324      8,966      4,910   

Deferred revenue

  2,069      2,613      2,559   

Other accrued liabilities

  12,498      14,460      14,555   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

  65,821      81,404      46,491   

Long-term debt - less current maturities

  156,468      153,987      152,581   

Other liabilities

  843      1,171      1,422   
  

 

 

   

 

 

   

 

 

 

Total liabilities

  223,132      236,562      200,494   
  

 

 

   

 

 

   

 

 

 

Commitments and contingencies - Note 19

Stockholders’ equity:

Preferred stock, $0.001 par value per share, 500,000 shares authorized; none outstanding

  —        —        —     

Common stock, $0.001 par value per share, 2,000,000 shares authorized; 1,000,004 shares outstanding

  1      1      1   

Capital in excess of par value

  118,283      120,955      120,955   

Accumulated other comprehensive loss

  (1,266   (414   (436

Retained earnings (accumulated deficit)

  (25,198   (17,485   1,505   
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

  91,820      103,057      122,025   
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

$ 314,952    $ 339,619    $ 322,519   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

2


Table of Contents

SCHOOL SPECIALTY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In Thousands, Except Per Share Amounts)

 

     Successor Company     Successor Company     Predecessor
Company
 
     Three Months
Ended
January 24, 2015
    Three Months
Ended
January 25, 2014
    Nine Months
Ended
January 24, 2015
    Thirty-Three
Weeks Ended
January 25, 2014
    Six Weeks
Ended
June 11, 2013
 
 

Revenues

   $ 77,754      $ 74,664      $ 515,893      $ 463,792      $ 58,697   

Cost of revenues

     50,946        48,216        323,697        284,494        35,079   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

  26,808      26,448      192,196      179,298      23,618   

Selling, general and administrative expenses

  50,882      48,672      180,717      157,378      27,473   

Facility exit costs and restructuring

  2,218      2,429      4,280      6,034      —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

  (26,292   (24,653   7,200      15,886      (3,855
 

Other expense (income):

 

Interest expense

  4,306      4,715      14,787      12,141      3,235   

Change in fair value of interest rate swap

  (47   (134   (18   488      —     

Refund of early termination fee

  —        —        —        (4,054   —     

Reorganization items, net

  —        901      271      5,548      (84,799
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for (benefit from) income taxes

  (30,551   (30,135   (7,841   1,763      77,709   

Provision for (benefit from) income taxes

  100      —        (127   258      1,641   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

$ (30,651 $ (30,135 $ (7,714 $ 1,505    $ 76,068   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

Weighted average shares outstanding:

 

Basic

  1,000      1,000      1,000      1,000      18,922   

Diluted

  1,000      1,000      1,000      1,000      18,922   
 

Net Income (loss) per Share:

 

Basic

$ (30.65 $ (30.14 $ (7.71 $ 1.51    $ 4.02   

Diluted

$ (30.65 $ (30.14 $ (7.71 $ 1.51    $ 4.02   

See accompanying notes to condensed consolidated financial statements.

 

 

3


Table of Contents

SCHOOL SPECIALTY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In Thousands)

 

     Successor Company     Successor Company     Predecessor
Company
 
     Three Months
Ended

January 24, 2015
    Three Months
Ended

January 25, 2014
    Nine Months
Ended

January 24, 2015
    Thirty-Three
Weeks Ended

January 25, 2014
    Six Weeks Ended
June 11, 2013
 

Net income (loss)

   $ (30,651   $ (30,135   $ (7,714   $ 1,505      $ 76,068   

Other comprehensive income (loss), net of tax:

            

Foreign currency translation adjustments

     (698     (330     (852     (436     (101
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

$ (31,349 $ (30,465 $ (8,566 $ 1,069    $ 75,967   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

4


Table of Contents

SCHOOL SPECIALTY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Thousands)

 

     Successor Company     Predecessor
Company
 
     Nine Months
Ended
January 24, 2015
    Thirty-Three
Weeks Ended
January 25, 2014
    Six Weeks Ended
June 11, 2013
 

Cash flows from operating activities:

        

Net income (loss)

   $ (7,714   $ 1,505      $ 76,068   

Adjustments to reconcile net income (loss) to net cash used in operating activities:

        

Depreciation and intangible asset amortization expense

     13,872        14,290        2,983   

Amortization of development costs

     8,644        4,936        918   

Non-cash reorganization items

     —          (458     (99,668

Amortization of debt fees and other

     1,432        1,557        9   

Change in fair value of interest rate swap

     (18     488        —     

(Gain) loss on disposal of assets and assets held for sale

     577        —          —     

Share-based compensation expense

     320        —          —     

Deferred taxes

     35        —          —     

Non-cash interest expense

     1,588        913        —     

Changes in current assets and liabilities:

        

Accounts receivable

     5,269        10,452        (8,011

Inventories

     12,086        29,458        (18,255

Deferred catalog costs

     (1,323     (2,763     1,754   

Prepaid expenses and other current assets

     (1,430     17,703        722   

Accounts payable

     (8,670     (14,913     11,012   

Accrued liabilities

     (8,708     (28,366     12,488   

Accrued bankruptcy-related reorganization costs

     —          (6,188  
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

  15,961      28,614      (19,980
  

 

 

   

 

 

   

 

 

 
 

Cash flows from investing activities:

 

Additions to property, plant and equipment

  (9,387   (4,291   (243

Change in restricted cash

  —        26,302      —     

Investment in product development costs

  (4,676   (3,683   (463

Proceeds from disposal of property, plant and equipment and intangibles

  216      1,599      —     
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

  (13,847   19,927      (706
  

 

 

   

 

 

   

 

 

 
 

Cash flows from financing activities:

 

Proceeds from bank borrowings

  268,689      230,421      7,561   

Repayment of bank borrowings

  (266,916   (254,972   (148,619

Issuance of debt

  —        —        165,924   

Payment of early termination fee

  —        (26,399   —     

Recovery of interest and reduction of early termination fee

  —        5,399      —     

Payment of debt fees and other

  (1,034   (636   (9,415
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

  739      (46,187   15,451   
  

 

 

   

 

 

   

 

 

 
 

Net increase/(decrease) in cash and cash equivalents

  2,853      2,354      (5,235

Cash and cash equivalents, beginning of period

  9,008      15,534      20,769   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

$ 11,861    $ 17,888    $ 15,534   
  

 

 

   

 

 

   

 

 

 
 

Supplemental disclosures of cash flow information:

 

Interest paid

$ 11,867    $ 9,561    $ 5,578   

Income taxes paid

$ 1,834    $ 717    $ —     

Bankruptcy related reorganization costs paid (included in operating activities, above)

$ 650    $ 22,246    $ 3,802   

See accompanying notes to condensed consolidated financial statements.

 

5


Table of Contents

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) 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 GAAP for complete financial statements. In the opinion of management, all adjustments (which are normal and recurring in nature unless otherwise noted) considered necessary for a fair presentation have been included. The balance sheet at April 26, 2014 has been derived from School Specialty, Inc.’s (“School Specialty” or the “Company”) audited financial statements for the fiscal year ended April 26, 2014. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 26, 2014.

During the period January 28, 2013 through June 11, 2013, School Specialty, Inc. and certain of its subsidiaries operated as debtors-in-possession under bankruptcy court jurisdiction (see Note 3). In accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 852, Reorganizations, for periods including and subsequent to the filing of the Chapter 11 petition, all expenses, gains and losses that resulted from the reorganization were reported separately as reorganization items in the Consolidated Statements of Operations. Net cash used for reorganization items was disclosed separately in the Consolidated Statements of Cash Flows, and liabilities subject to compromise were reported separately in the Consolidated Balance Sheets.

As discussed in Note 4 – Fresh Start Accounting, as of June 11, 2013 (the “Effective Date”), the Company adopted fresh start accounting in accordance with ASC 852. The adoption of fresh start accounting resulted in the Company becoming a new entity for financial reporting purposes. Accordingly, the financial statements on or prior to June 11, 2013 are not comparable with the financial statements for periods after June 11, 2013. The consolidated financial statements as of January 24, 2015, April 26, 2014 and January 25, 2014 and for the three and nine months ended January 24, 2015 and the three months and thirty three weeks ended January 25, 2014 and any references to “Successor” or “Successor Company” relate to the financial position and results of operations of the reorganized Company subsequent to bankruptcy emergence on June 11, 2013. References to “Predecessor” or “Predecessor Company” refer to the financial position and results of operations of the Company prior to the bankruptcy emergence.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, “Presentation of Financial Statements and Property, Plant and Equipment; Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU 2014-08 modifies the requirements for reporting discontinued operations. Under the amendments in ASU 2014-08, the definition of discontinued operations has been modified to only include those disposals of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. ASU 2014-08 also expands the disclosure requirements for disposals that meet the definition of discontinued operations and requires entities to disclose information about disposals of individually significant components that do not meet the definition of discontinued operations. ASU 2014-08 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2014. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods, and interim periods within that period, beginning after December 15, 2016 and early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. The Company has not yet determined the potential effects of the adoption of ASU 2014-09 on its consolidated financial statements.

 

6


Table of Contents

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern.” ASU 2014-15 defines management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective in the annual period ending after December 15, 2016. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.

NOTE 3 – BANKRUPTCY PROCEEDINGS

On January 28, 2013 (the “Petition Date”), School Specialty, Inc. and certain of its subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief under Chapter 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The cases (the “Chapter 11 Cases”) were jointly administered as Case No. 13-10125 (KJC) under the caption “In re School Specialty, Inc., et al.” The Debtors continued to operate their business as “debtors-in-possession” (“DIP”) under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of Chapter 11 and orders of the Bankruptcy Court. The Company’s foreign subsidiaries (collectively, the “Non-Filing Entities”) were not part of the Chapter 11 Cases.

The Chapter 11 Cases were filed in response to an environment of ongoing declines in school spending and a lack of sufficient liquidity, including trade credit provided by the Debtors’ vendors, to permit the Debtors to pursue their business strategy to position the School Specialty brands successfully for the long term. As a result of the Chapter 11 filing, the Company’s common stock was delisted from the NASDAQ Stock Market, effective March 1, 2013.

On May 23, 2013, the Bankruptcy Court entered an order confirming the Debtors’ Second Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (the “Reorganization Plan”), and a corrected copy of such order was entered by the Bankruptcy Court on June 3, 2013. The Reorganization Plan, which is described in additional detail below, became effective on the Effective Date. Pursuant to the Reorganization Plan, on the Effective Date, the Company’s existing credit agreements, outstanding convertible subordinated debentures, equity plans and certain other agreements were cancelled. In addition, all outstanding equity interests of the Company that were issued and outstanding prior to the Effective Date were cancelled on the Effective Date. Also on the Effective Date, in accordance with and as authorized by the Reorganization Plan, the Company reincorporated in Delaware and issued a total of 1,000,004 shares of Common Stock of the reorganized Company to holders of certain allowed claims against the Debtors in exchange for such claims. As of June 12, 2013, there were 60 record holders of the new common stock of the reorganized Company issued pursuant to the Reorganization Plan.

Reorganization Plan

In order for the Company to emerge successfully from Chapter 11, the Company determined that it was in the best interests of the Debtors’ estates to seek Bankruptcy Court confirmation of a reorganization plan. A reorganization plan determines the rights and satisfaction of claims of various creditors and security holders, subject to the ultimate outcome of negotiations and Bankruptcy Court decisions ongoing through the date on which the reorganization plan is confirmed.

On May 23, 2013, the Bankruptcy Court entered an order confirming the Reorganization Plan, and a corrected copy of such order was entered by the Bankruptcy Court on June 3, 2013. The Reorganization Plan became effective on the Effective Date.

 

7


Table of Contents

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

General

The Reorganization Plan generally provided for the payment in full in cash on or as soon as practical after the Effective Date of specified claims, including:

 

    All claims (the “DIP Financing Claims”) under the Debtor-in-Possession Credit Agreement (the “ABL DIP Agreement”) by and among Wells Fargo Capital Finance, LLC (as Administrative Agent, Co-Collateral Agent, Co-Lead Arranger and Joint Book Runner) and GE Capital Markets, Inc. (as Co-Collateral Agent, Co-Lead Arranger and Joint Book Runner and Syndication Agent), General Electric Capital Corporation (as syndication agent), the lenders party to the ABL DIP Facility (as defined below), and the Company and certain of its subsidiaries;

 

    Certain pre-petition secured claims;

 

    All claims relating to the costs and expenses of administering the Chapter 11 Cases; and

 

    All priority claims.

In addition, the Reorganization Plan generally provides for the treatment of allowed claims against, and equity interests in, the Debtors as follows:

 

    The lenders under the Senior Secured Super Priority Debtor-in-Possession Credit Agreement (the “Ad Hoc DIP Agreement”) by and among the Company, certain of its subsidiaries, U.S. Bank National Association, as Administrative Agent and Collateral Agent and the lenders party thereto were entitled to receive (i) cash in an approximate amount of $98,000, and (ii) 65% of the common stock of the reorganized Company. The fair value of the 65% ownership interest was approximately $78,600 as of the Effective Date. Approximately $57,200 of this value was in satisfaction of the portion of the Ad Hoc DIP not settled in cash with approximately $21,375 representing excess value received by the Ad Hoc DIP lenders. The $21,375 of excess value received by the Ad Hoc DIP lenders was recognized as a reorganization loss;

 

    Each holder of an allowed general unsecured claim is entitled to receive a deferred cash payment equal to 20% of such allowed claim, plus interest, on the terms described in the Reorganization Plan;

 

    Each holder of an unsecured claim arising from the provision of goods and/or services to the Debtors in the ordinary course of its pre-petition trade relationship with the Debtors, with whom the reorganized Debtors continue to do business after the Effective Date, is entitled to receive a deferred cash payment equal to 20% of such claim, plus interest, on the terms described in the Reorganization Plan. Such holders may increase their percentage recoveries to 45%, plus interest, by electing to provide the reorganized Debtors with customary trade terms for a specified period, as described in the Reorganization Plan;

 

    Each holder of the Company’s 3.75% Convertible Subordinated Debentures due 2026, as further described elsewhere in this report, received its pro rata share of 35% of the common stock of the reorganized Company;

 

    Each holder of an allowed general unsecured claim or allowed trade unsecured claim of $3 or less, or any holder of a general unsecured claim or trade unsecured claim in excess of $3 that agreed to voluntarily reduce the amount of its claim to $3 under the terms described in the Reorganization Plan, was entitled to receive a cash payment equal to 20% of such allowed claim on or as soon as practicable after the Effective Date; and

 

    Holders of equity interests in the Company prior to the Effective Date, including claims arising out of or with respect to such equity interests, were not entitled to receive any distribution under the Reorganization Plan.

 

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Table of Contents

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

Exit Facilities

As of the Effective Date, the Debtors closed on the exit credit facilities, the proceeds of which were or will be, among other things, used to (i) pay in cash the DIP Financing Claims, to the extent provided for in the Reorganization Plan, (ii) make required distributions under the Reorganization Plan, (iii) satisfy certain Reorganization Plan-related expenses, and (iv) fund the reorganized Company’s working capital needs. The terms of the exit credit facilities are described under Note 14 of the Notes to Condensed Consolidated Financial Statements - Debt.

Equity Interests

As mentioned above, all shares of the Company’s common stock outstanding prior to the Effective Date were cancelled and extinguished as of the Effective Date. The Company issued 1,000,004 shares of new common stock on the Effective Date pursuant to the Reorganization Plan, which constitutes the total number of shares of new common stock outstanding immediately following the Effective Date.

On the Effective Date, equity interests in the Company’s U.S. subsidiaries were deemed cancelled and extinguished and of no further force and effect, and each reorganized subsidiary was deemed to issue and distribute the new subsidiary equity interests. The ownership and terms of such new subsidiary equity interests in the reorganized subsidiaries are the same as the ownership and terms of the equity interests in these subsidiaries immediately prior to the Effective Date, except as otherwise provided in the Reorganization Plan.

Financial Statement Presentation

We have prepared the accompanying consolidated financial statements in accordance with FASB ASC Topic 852 “Reorganizations” (“FASB ASC 852”). FASB ASC 852 requires that the financial statements distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain expenses including professional fees, realized gains and losses and provisions for losses that are realized from the reorganization and restructuring process are classified as reorganization items on the condensed consolidated statement of operations.

In connection with the Company’s emergence from Chapter 11, the Company was required to adopt fresh start accounting as of June 11, 2013 in accordance with ASC 852 “Reorganizations”. The Company elected to use June 8, 2013 (the “Convenience Date”), which was the week ended date nearest to the Effective Date, to avoid disruption to the Company’s weekly accounting processes. The Company performed a qualitative and quantitative assessment in order to determine the appropriateness of using the Convenience Date for fresh start accounting instead of the Effective Date. The Company’s assessment determined that the use of the Convenience Date did not have a material impact on either the predecessor or successor periods in fiscal 2014 and there were no qualitative factors that would preclude the use of the Convenience Date for accounting and reporting purposes. The adoption of fresh start accounting resulted in the Company becoming a new entity for financial reporting purposes. Accordingly, the financial statements on or prior to June 11, 2013 are not comparable with the financial statements for periods after June 11, 2013. The consolidated financial statements as of January 24, 2015, April 26, 2014 and January 25, 2014 and for the three and nine months ended January 24, 2015 and the three months and thirty three weeks ended January 25, 2014 and any references to “Successor” or “Successor Company” show the financial position and results of operations of the reorganized Company subsequent to bankruptcy emergence on June 11, 2013. References to “Predecessor” or “Predecessor Company” refer to the financial position and results of operations of the Company prior to the bankruptcy emergence. Prior to the Effective Date, the Predecessor Company’s financial statements included in this Quarterly Report on Form 10-Q do not reflect or provide for the consequences of the Chapter 11 bankruptcy proceeding.

NOTE 4 – FRESH START ACCOUNTING

On the Effective Date, the Company adopted fresh start accounting and reporting in accordance with FASB ASC 852. The Company was required to apply the provisions of fresh start reporting to its financial statements, as the

 

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

holders of existing voting shares of the Predecessor Company received less than 50% of the voting shares of the emerging entity and the reorganization value of the Predecessor Company’s assets immediately before the date of confirmation was less than the post-petition liabilities and allowed claims.

Fresh start reporting generally requires resetting the historical net book value of assets and liabilities to fair value as of the Effective Date by allocating the entity’s enterprise value as set forth in the Reorganization Plan to its assets and liabilities pursuant to accounting guidance related to business combinations. The financial statements as of the Effective Date report the results of the Successor Company with no beginning retained earnings or accumulated deficit. Any presentation of the Successor Company represents the financial position and results of operations of a new reporting entity and is not comparable to prior periods. The consolidated financial statements for periods ended prior to the Effective Date do not include the effect of any changes in capital structure or changes in the fair value of assets and liabilities as a result of fresh start accounting.

In accordance with FASB ASC 852, the Predecessor Company’s results of operations prior to the Effective Date include (i) a pre-emergence gain of $161,943 resulting from the discharge of liabilities under the Reorganization Plan; (ii) pre-emergence charges to earnings of $46,878 recorded as reorganization items resulting from certain costs and expenses relating to the Reorganization Plan becoming effective, including the cancellation of certain debt upon issuance of new equity and the cancellation of equity-based awards of the Predecessor; and (iii) a pre-emergence decrease in earnings of $30,266 resulting from the aggregate changes to the net carrying value of the Predecessor Company’s pre-emergence assets and liabilities to reflect their fair values under fresh start accounting, as well as the recognition of goodwill. See Note 5, “Reorganization Items, Net” for additional information.

Enterprise Value / Reorganization Value Determination

Enterprise value represents the fair value of an entity’s interest-bearing debt and stockholders’ equity. In the disclosure statement associated with the Reorganization Plan, which was confirmed by the Bankruptcy Court, we estimated a range of enterprise values between $275,000 and $325,000, with a midpoint of $300,000. Based on current and anticipated economic conditions and the direct impact these conditions have on our business, we deemed it appropriate to use the midpoint between the low end and high end of the range to determine the final enterprise value of $300,000, comprised of debt valued at approximately $179,000 and equity valued at approximately $121,000.

FASB ASC 852 provides for, among other things, a determination of the value to be assigned to the assets of the reorganized Company as of a date selected for financial reporting purposes. The Company adjusted its enterprise value of $300,000 for certain items such as post-petition liabilities to determine a reorganization value attributable to assets of $415,410. Under fresh start accounting, the reorganization value was allocated to the Company’s assets based on their respective fair values in conformity with the purchase method of accounting for business combinations included in FASB ASC 805, Business Combinations. The excess reorganization value over the fair value of identified tangible and intangible assets of $21,588 was recorded as goodwill.

The reorganization value represents the amount of resources available, or that become available, for the satisfaction of post-petition liabilities and allowed claims, as negotiated between the Company and its creditors (the “Interested Parties”). This value, along with other terms of the Reorganization Plan, was determined only after extensive arms-length negotiations between the Interested Parties. Each Interested Party developed its view of what the value should be based upon expected future cash flows of the business after emergence from Chapter 11, discounted at rates reflecting perceived business and financial risks. This value is viewed as the fair value of the entity before considering liabilities and is intended to approximate the amount a willing buyer would pay for the assets of the Successor Company immediately after restructuring. The reorganization value was determined using numerous projections and assumptions that are inherently subject to significant uncertainties and the resolution of contingencies beyond the control of the Company. Accordingly, there can be no assurance that the estimates, assumptions and amounts reflected in the valuation will be realized.

 

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

Accounting Policies and Reorganized Consolidated Balance Sheet

Fresh start accounting and reporting permits the selection of appropriate accounting policies for Successor Company. The Predecessor Company’s significant accounting policies that were disclosed in the Annual Report on Form 10-K for the year ended April 27, 2013 were generally adopted by the Successor Company as of the Effective Date, though many of the account balances were affected by the reorganization and fresh start adjustments presented below.

The adjustments presented below were made to the June 11, 2013 condensed consolidated balance sheet and contain estimates of fair value. Estimates of fair value represent the Company’s best estimates, which are based on industry and data trends, and by reference to relevant market rates and discounted cash flow valuation methods, among other factors. The determination of the fair value of assets and liabilities was subject to significant estimation and assumptions. In accordance with ASC No. 805, the allocation of the reorganization value was subject to additional adjustment until the Company completed its analysis. This analysis was finalized in the first quarter of fiscal 2015. The table below represents the final determination of the fair value of individual assets and liabilities.

The condensed consolidated balance sheet, reorganization adjustments and fresh start adjustments presented below summarize the impact of the Reorganization Plan and the adoption of fresh start accounting as of the Effective Date.

Certain of the fresh start adjustments were updated between the Effective Date and finalization of fresh start accounting during the three months ended July 26, 2014 and January 24, 2015. During the first quarter of fiscal 2015, the Successor Company updated the estimated value of unsecured claims certain holders of which elected to provide the Company with customary trade terms and thereby recover 45% of their claims, in accordance with the Reorganization Plan (see Notes 3 and 7).

 

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

REORGANIZED CONDENSED CONSOLIDATED BALANCE SHEET

AS OF JUNE 11, 2013

 

     June 11, 2013  
     Predecessor
Company
    Reorganization
Adjustments
    Fresh Start
Adjustments
    Successor
Company
 

ASSETS

        

Current assets:

        

Cash and cash equivalents

   $ 11,052      $ 4,363 (1)    $ —        $ 15,415   

Restricted cash

     26,421        —          —          26,421   

Accounts receivable

     66,894        —          (250 )(8)      66,644   

Inventories

     110,830        —          (8,147 )(8)      102,683   

Other current assets

     45,819        321 (2)      (788 )(8)      45,352   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

  261,016      4,684      (9,185   256,515   

Property, plant and equipment, net

  37,604      (6,202 )(2)    14,148 (8)    45,550   

Goodwill

  —        —        21,588 (8)(9)    21,588   

Intangible assets, net

  109,155      —        (56,795 )(8)    52,360   

Development costs and other

  31,142      8,255 (3)    —        39,397   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

$ 438,917    $ 6,737    $ (30,244 $ 415,410   
  

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$ 38,226    $ —      $ —      $ 38,226   

Accrued compensation

  7,229      (315 )(2)    —        6,914   

Other accrued liabilities

  60,301      9,947 (2)(4)(6)    22 (8)    70,270   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

  105,756      9,632      22      115,410   

Long-term debt

  205,863      (39,939 )(5)    —        165,924   

Other liabilities

  925      12,195 (2)(6)    —        13,120   

Liabilities subject to compromise

  223,988      (223,988 )(6)    —        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

$ 536,532    $ (242,100 $ 22    $ 294,454   
  

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and contingencies

Stockholders’ equity:

Common stock - Predecessor

$ 24    $ (24 )(7)  $ —      $ —     

Capital in excess of par value - Predecessor

  446,232      (446,232 )(7)    —        —     

Treasury Stock - Predecessor

  (186,637   186,637 (7)    —        —     

Accumulated (deficit) and other comprehensive income - Predecessor

  (357,234   387,500 (7)    (30,266 )(7)(8)    —     

Common stock - Successor

  —        1 (7)    —        1   

Capital in excess of par value - Successor

  —        120,955 (7)    —        120,955   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

  (97,615   248,837      (30,266   120,956   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

$ 438,917    $ 6,737    $ (30,244 $ 415,410   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The Company deposited $7,647 of proceeds from its exit financing into a segregated cash account which was used to pay administrative claims and certain advisors in the bankruptcy proceedings. The Company utilized $3,284 of its cash balance immediately prior to emergence to fund a portion of the cash requirements from exit financing.
(2) The Company recorded adjustments related to various contract rejections or amendments completed as part of the Reorganization Plan. This included a $6,202 write down of property, plant and equipment related to the amendment of capital lease obligations for the Mansfield, OH distribution center and the rejection of capital lease obligations for the Company’s Agawam, MA property. In addition, the Company recorded $920 related to various contract damages relating to lease rejections and severance obligations, classified between long-term and short-term liabilities.
(3) In connection with entering into the exit credit facilities, the Company capitalized $8,255 of deferred financing costs.

 

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

(4) Pursuant to the Chapter 11 Cases, additional professional fees of $2,057 were recorded. In addition, certain administrative and convenience claims of $8,435 were recorded as current liabilities, offset by accrued interest expense converted to new Successor Company equity.
(5) The table below presents refinancing of the Predecessor long-term debt. The Company issued $78,620 of new Successor Company equity (including $21,375 in excess of debt carrying amount), partially offset by $17,306 of debt discount and other financing costs. The current portion of the reorganized debt was $25,251, which includes of $23,823 of new Successor Company ABL loan.

 

     June 11, 2013  

Predecessor Company long-term debt

   $ 205,863   

Reorganization adjustments:

  

Issuance of Successor Company equity

     (78,620

Equity issuance in excess of debt carrying amount

     21,375   

Financing costs and professional fees paid with exit financing

     17,306   
  

 

 

 

Reorganized Successor Company long-term debt

$ 165,924   
  

 

 

 

 

(6) Liabilities subject to compromise generally refer to pre-petition obligations, secured or unsecured, that may be impaired by a plan of reorganization. FASB ASC 852 requires such liabilities, including those that became known after filing the Chapter 11 petitions, be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts. These liabilities represented the estimated amount expected to be resolved on known or potential claims through the Chapter 11 process. Liabilities subject to compromise also includes items that may be assumed under the Reorganization Plan, and may be subsequently reclassified to liabilities not subject to compromise. Liabilities subject to compromise also include certain pre-petition liabilities including accrued interest and accounts payable. At April 27, 2013, liabilities subject to compromise were $228,302, of which administrative claim payments of $4,314 were made in the Predecessor period of fiscal 2014. The table below identifies the principal categories of liabilities subject to compromise at June 11, 2013:

 

     June 11, 2013  

Accounts payable

   $ 47,683   

2011 Debentures

     163,688   

Pre-petition accrued interest on 2011 Debentures

     979   

Sale-leaseback obligations

     11,638   
  

 

 

 

Liabilities subject to compromise

$ 223,988   
  

 

 

 

 

(7) The Company recorded elimination of (1) the Predecessor Company’s common stock, (2) the Predecessor Company’s capital in excess of par value, net of stock options cancellation of $3,624, (3) the Predecessor Company’s treasury stock, and (4) the Predecessor Company’s accumulated deficit and accumulated other comprehensive loss. The following table represents reorganization value to be allocated to assets reconciled to the Successor Company Equity. The Company recorded Successor Company common stock of $1 and capital in excess of par value of $120,955.

 

     June 11, 2013  

Total reorganization value to be allocated to assets

   $ 415,410   

Less: Debt

     (179,044

Less: Other liabilities

     (115,410
  

 

 

 

Successor Company Equity

$ 120,956   
  

 

 

 

The above estimated amounts were updated during the three months ended July 26, 2014 (see note 7).

 

(8) The following table represents the adjustments for fresh start accounting primarily related to recording goodwill, recording our intangible assets, fixed assets, and other assets and liabilities at fair value and related deferred income taxes in accordance with ASC 805. Additionally, such fresh start accounting adjustments reflect the increase in inventory reserve of $6,600, and elimination of certain capitalized costs of $1,426. The Company also recorded other fresh start accounting adjustments relating to (1) deferred rent included in current liabilities, (2) vendor rebates receivables in current assets, and (3) other current assets and liabilities as a result of fresh start accounting. In addition, the impact of fresh start accounting adjustments on the accumulated retained earnings was eliminated.

 

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

 

     June 11, 2013  

Fresh start accounting adjustments:

  

Goodwill

   $ 21,588   

Fair value adjustment to intangible assets

     (56,795

Fair value adjustment to fixed assets

     15,522   

Fresh start accounting adjustments relating to inventory

     (8,147

Other fresh start accounting adjustments

     (2,434
  

 

 

 

Total fresh start accounting adjustments

$ (30,266
  

 

 

 

 

(9) The following table represents a reconciliation of the enterprise value attributed to assets, determination of the total reorganization value to be allocated to these assets and the determination of goodwill:

 

     June 11, 2013  

Enterprise value attributed to School Specialty

   $ 300,000   

Plus: other liabilities (excluding debt)

     115,410   
  

 

 

 

Total reorganization value to be allocated to assets

  415,410   

Less: fair value assigned to tangible and intangible assets

  (393,822
  

 

 

 

Value of School Specialty assets in excess of fair value (Goodwill)

$ 21,588   
  

 

 

 

 

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

NOTE 5 – REORGANIZATION ITEMS, NET

Reorganization items directly associated with the process of reorganizing the business under Chapter 11 of the Bankruptcy Code have been recorded on a separate line item on the condensed consolidated statements of operations. The following table displays the details of reorganization items for the three and nine months ended January 24, 2015, and the three months and thirty three weeks ended January 25, 2014 and the six weeks ended June 11, 2013:

 

    Successor Company     Successor
Company
    Successor
Company
    Predecessor
Company
 
    Three Months Ended
January 24, 2015
    Three Months Ended
January 25, 2014
    Nine Months Ended
January 24, 2015
    Thirty-Three Weeks
Ended

January 25, 2014
    Six Weeks Ended
June 11, 2013
 

Liabilities subject to compromise

  $ —        $ —        $ —        $ —        $ 223,988   

Issuance of capital in excess of par value

    —          —          —          —          (42,335

Reclassified into other balance sheet liability accounts

    —          —          —          458        (19,710
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Settlement of liabilities subject to compromise

$ —      $ —      $ —      $ 458    $ 161,943   
 

Fresh start accounting adjustments:

 

Goodwill

$ —      $ —      $ —      $ —      $ 21,588   

Fair value adjustment to intangible assets

  —        —        —        —        (56,795

Fair value adjustment to fixed assets

  —        —        —        —        15,522   

Fresh start accounting adjustments relating to inventory

  —        —        —        —        (8,147

Other fresh start accounting adjustments

  —        —        —        —        (2,434
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fresh start accounting adjustments

$ —      $ —      $ —      $ —      $ (30,266
 

Other reorganization adjustments:

 

Asset write-downs due to contract rejections

$ —      $ —      $ —      $ —      $ (7,011

Professional fees

  —        (901   271      (6,006   (10,512

Cancellation of equity-based awards

  —        —        —        —        (3,624

Financing fees

  —        —        —        —        (2,853

Issuance of equity in excess of debt carrying amount

  —        —        —        —        (21,375

Other

  —        —        —        —        (1,503
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other reorganization adjustments

$ —      $ (901 $ 271    $ (6,006 $ (46,878
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

Total Reorganization items, net

$ —      $ (901 $ 271    $ (5,548 $ 84,799   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The 2011 Debentures and related accrued interest within the liabilities subject to compromise at June 11, 2013 were settled by the issuance of new common stock representing 35% ownership in the Successor Company, with an estimated fair value of $42,335. The portion of accounts payable within the liabilities subject to compromise that will be paid in accordance with the Reorganization Plan were classified between long-term and short-term liabilities. Administrative claims totaling $8,335 were classified as short-term with any remaining recoveries under the Reorganization Plan classified as Deferred Cash Payments in long-term debt (see Note 14 of the Notes to Condensed Consolidated Financial Statements – Debt). Since the value of Common Stock issued and the amounts to be paid in cash at a later date were less than the liabilities subject to compromise, the Predecessor Company recorded a gain on reorganization of $161,943 for the six weeks ended June 11, 2013.

Fresh start accounting adjustments resulted in a net asset write down of $30,266 which has partially offset the gain related to the settlement of liabilities subject to compromise. The fresh start accounting adjustments are related to the preliminary valuation done in accordance with the adoption of the fresh start accounting. See Note 4 – Fresh Start Accounting for information on these fresh start valuation adjustments.

A portion of the gain related to the settlement of liabilities subject to compromise is further offset by $46,878 of other reorganizational adjustments. Equity issued to the Ad Hoc DIP lenders in excess of the debt carrying amount was $21,375. Professional fees and financing fees associated with the Predecessor Company’s debtor-in-possession financings were $13,365. The cancellation of equity awards outstanding as of the Effective Date triggered $3,624 of unrecognized share-based compensation expense. In addition, the rejection of certain leases pursuant to the Reorganization Plan resulted in an additional $7,011 of expense.

NOTE 6 – INCOME TAXES

The Company files income tax returns with the U.S., various U.S. states, and foreign jurisdictions. The most significant tax return the Company files is with the U.S. The Company’s tax returns are no longer subject to

 

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

examination by the U.S. for fiscal years before 2011. The Company has various state tax audits and appeals in process at any given time. It is not anticipated that any adjustments resulting from tax examinations or appeals would result in a material change to the Company’s financial position or results of operations.

Pursuant to the Reorganization Plan, on the Effective Date, the Company realized cancellation of indebtedness income. During the six weeks ended June 11, 2013, the Company excluded from taxable income $129,084 of cancellation of indebtedness income as defined under Internal Revenue Code (“IRC”) Section 108. IRC Section 108 excludes from taxable income the amount of indebtedness discharged under a Chapter 11 case. IRC Section 108 also requires a reduction of tax attributes equal to the amount of excluded taxable income. As a result, the Company reduced the available federal and state net operating loss carry forward and adjusted the tax reporting basis of tangible and intangible assets for the discharge of indebtedness income. In addition to the adjustment to the tax reporting basis as described above, the fresh start accounting adjustments also created additional basis differences between income tax and financial reporting.

The Company has determined that an ownership change occurred in fiscal 2013 that is subject to IRC Section 382. Due to the limitations imposed under Section 382, certain federal and state deferred tax attributes may be significantly reduced over the next five years.

In fiscal 2012, the Company concluded that the realization of a majority of the deferred tax assets did not meet the more likely than not threshold, and recorded a tax valuation allowance of $32,638. In fiscal 2013, the Company increased its tax valuation allowance to $71,272. As of April 26, 2014, the Company reduced its valuation allowance to $30,573 related to the reduction of tax attributes associated with the cancellation of indebtedness and other fresh start adjustments. At the end of fiscal 2014 and at the end of the third quarter of fiscal 2015 there was a full valuation allowance against all the Company’s U.S. deferred tax assets. As of January 24, 2015, the Company had an immaterial amount of unremitted earnings from foreign investments.

The balance of the Company’s liability for unrecognized income tax benefits, net of federal tax benefits, at January 24, 2015, April 26, 2014 and January 25, 2014, was $116, $398 and $662, respectively, all of which would have an impact on the effective tax rate if recognized. The Company does not expect any material changes in the amount of unrecognized tax benefits within the next twelve months. The Company classifies accrued interest and penalties related to unrecognized tax benefits as income tax expense in its consolidated statements of operations. The amounts of accrued interest and penalties included in the liability for uncertain tax positions are not material.

 

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

NOTE 7 – STOCKHOLDERS’ EQUITY

Changes in condensed consolidated stockholders’ equity during the nine months ended January 24, 2015 (Successor Company), six weeks ended June 11, 2013 (Predecessor Company) and the thirty-three weeks ended January 25, 2014 (Successor Company) were as follows:

 

                                                                                                     
     Common
Stock
     Additional
Paid-in
Capital
    Retained
Earnings
(Accumulated
Deficit)
    Treasury
Stock
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
    Stockholders’    

Equity
 

Balance, April 26, 2014 (Successor Company)

   $   1       $ 120,955      $ (17,485   $         —        $ (414   $  103,057   

Net loss

     —           —          (7,714     —          —          (7,714

Share-based compensation expense

     —           320        —          —          —          320   

Foreign currency translation adjustment

     —           —          —          —          (852     (852

Change in Fresh Start estimate

     —           (2,992     —          —          —          (2,992
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 24, 2015 (Successor Company)

$ 1    $  118,283    $   (25,198 $ —      $   (1,266 $          91,820   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

                                                                                                     
     Common
Stock
    Additional
Paid-in
Capital
    Retained
Earnings
(Accumulated
Deficit)
    Treasury
Stock
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
    Stockholders’    

Equity (Deficit)
 

Balance, April 27, 2013 (Predecessor Company)

   $ 24      $ 446,232      $ (361,192   $ (186,637   $ 22,381      $ (79,192

Net income

     —          —          76,068        —          —          76,068   

Foreign currency translation adjustment

             (101     (101

Cancellation of Predecessor Company common stock

     (24     —          —          —          —          (24

Elimination of Predecessor Company capital in excess of par

     —          (446,232     —          —          —          (446,232

Elimination of Predecessor Company accumulated deficit

     —          —          285,124        —          —               285,124   

Elimination of Predecessor Company treasury stock

     —          —          —          186,637        —          186,637   

Elimination of Predecessor Company accumulated other comprehensive loss

     —          —          —          —          (22,280     (22,280
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 11, 2013 (Predecessor Company)

$ —      $ —      $ —      $ —      $ —      $ —     

Issuance of Successor Company Common Stock

$ 1    $ —      $ —      $ —      $ —      $ 1   

Establishment of Successor Company capital in excess of par

  —        120,955      —        —        —        120,955   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 12, 2013 (Successor Company)

  1      120,955      —        —        —        120,956   

Net income

  —        —        1,505      —        —        1,505   

Foreign currency translation adjustment

  —        —        —        —        (436   (436
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 25, 2014 (Successor Company)

$ 1    $ 120,955    $ 1,505    $ —      $ (436 $        122,025   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

17


Table of Contents

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

In the first quarter of fiscal 2015, the Company revised its fresh-start estimate for the amount of deferred cash payment obligations (see Note 14 – Debt). The change in estimate is related to an increased number of unsecured trade creditors which elected to provide the Company customary trade terms which entitled those creditors to a 45% recovery of their unsecured claim rather than a 20% recovery. This change in estimate resulted in a decrease of $2,992 to the Successor Company’s equity and a corresponding increase in long-term debt. This change was incorrectly recorded in the financial statements as $1,564 in the first quarter of fiscal 2015. In the third quarter of fiscal 2015 the recorded amount was corrected to $2,992. Management has concluded that the misstatements of interim financial statements in the first and second quarters of fiscal 2015 were not material.

NOTE 8 – EARNINGS PER SHARE

Earnings Per Share

The following information presents the Company’s computations of basic earnings per share (“basic EPS”) and diluted earnings per share (“diluted EPS”) for the periods presented in the condensed consolidated statements of operations:

 

     Income (loss)
(Numerator)
     Weighted
Average
Shares
(Denominator)
     Per Share
Amount
 

Three months ended January 24, 2015:

        

Basic EPS

   $ (30,651      1,000       $ (30.65
        

 

 

 

Effect of dilutive non-vested stock options

  —        —     
  

 

 

    

 

 

    

Basic and diluted EPS (Successor Company)

$ (30,651      1,000    $ (30.65
  

 

 

    

 

 

    

 

 

 

Three months ended January 25, 2014:

Basic EPS

$ (30,135   1,000    $ (30.14
        

 

 

 

Effect of dilutive non-vested stock options

  —        —     
  

 

 

    

 

 

    

Basic and diluted EPS (Successor Company)

$ (30,135   1,000    $ (30.14
  

 

 

    

 

 

    

 

 

 

 

     Income (loss)
(Numerator)
     Weighted
Average
Shares
(Denominator)
     Per Share
Amount
 

Nine months ended January 24, 2015:

        

Basic EPS

   $ (7,714      1,000       $   (7.71
        

 

 

 

Effect of dilutive non-vested stock options

  —        —     
  

 

 

    

 

 

    

Basic and diluted EPS (Successor Company)

$ (7,714   1,000    $ (7.71
  

 

 

    

 

 

    

 

 

 

Thirty-three weeks ended January 25, 2014:

Basic EPS

$ 1,505    $ 1,000    $ 1.51   
        

 

 

 

Effect of dilutive non-vested stock options

  —        —     
  

 

 

    

 

 

    

Basic and diluted EPS (Successor Company)

$ 1,505      1,000    $ 1.51   
  

 

 

    

 

 

    

 

 

 

Six weeks ended June 11, 2013:

Basic EPS

$ 76,068      18,922    $ 4.02   
        

 

 

 

Effect of dilutive non-vested stock options

  —        —     
  

 

 

    

 

 

    

Basic and diluted EPS (Predecessor Company)

$ 76,068      18,922    $ 4.02   
  

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

The Company had stock options outstanding of 89 and 64 during the three and nine months ended January 24, 2015, respectively, that were not included in the computation of Diluted EPS because they were anti-dilutive. The Company did not have any stock options outstanding during the three months and thirty three weeks ended January 25, 2014.

All outstanding stock options and restricted shares of the Predecessor Company were cancelled as of the Effective Date.

NOTE 9 – SHARE-BASED COMPENSATION EXPENSE

Employee Stock Plans

As of January 24, 2015, the Company had one share-based employee compensation plan. The 2014 Incentive Plan (“the 2014 Plan”) was adopted by the Board of Directors on April 24, 2014 and approved on September 4, 2014 by the Company’s stockholders. On April 24, 2014, School Specialty, Inc.’s CEO was awarded 33 stock options under the 2014 Plan. Other members of management were awarded 65 stock options during fiscal 2015. September 4, 2014, the date on which the stockholders approved the 2014 Plan, was considered the grant date, or measurement date, for those awards issued prior to this date. As such, those awards made prior to September 4, 2014 were not considered outstanding and no expense associated with those awards was recognized prior to that date. There were 68 stock options awarded prior to the measurement date. The 33 stock options that were awarded to the Company’s CEO will vest as to one-fourth of the options on the first four anniversaries of the date of award. The 65 options that were awarded to other members of management will vest as to one-half of the options on the second anniversary of the date of award and as to one-fourth of the options on each of the third and fourth anniversaries of the award date.

A summary of the option activity for the Successor Company during the nine months ended January 24, 2015 follows:

 

     Options Outstanding      Options Exercisable  

Successor Company

   Options      Weighted-
Average
Exercise
Price
     Options      Weighted-
Average
Exercise
Price
 

Balance at April 26, 2014

     —         $ —           —         $ —     

Granted

     98         130.00         

Exercised

     —           —           

Canceled

     (25      130.00         
  

 

 

          

Balance at January 24, 2015

  73    $ —        —      $ —     
  

 

 

          

The weighted average fair value of options granted during fiscal 2015 was $55.17 per share. The fair value of options is estimated on the measurement date using the Black-Scholes single option pricing model. The weighted-average assumptions included an average risk-free rate of 1.95%, expected volatility of 48.0% and expected term of 6.3 years.

All of the options outstanding as of January 24, 2015 have an exercise price of $130.00 per share and a weighted average remaining contractual term of 9.41 years. No portion of the current outstanding stock options have vested or have intrinsic value as of January 24, 2015.

Prior to the Effective Date, the Company had three share-based employee compensation plans under which awards were outstanding as of April 27, 2013: the School Specialty, Inc. 1998 Stock Incentive Plan (the “1998 Plan”), the School Specialty, Inc. 2002 Stock Incentive Plan (the “2002 Plan”), and the School Specialty, Inc. 2008 Equity Incentive Plan (the “2008 Plan”). All plans were approved by the Company’s stockholders.

 

19


Table of Contents

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

In conjunction with the Reorganization Plan which became effective on June 11, 2013 (see Note 3 – Bankruptcy Proceedings), all shares, options, Non-Vested Stock Units (NSUs) and restricted shares that were outstanding on the Effective Date were canceled. As a result, the Predecessor Company recognized a $3,624 reorganization item related to the unrecognized share-based compensation expense which was triggered upon the cancellation of the awards.

A summary of option activity for the Predecessor Company during the six weeks ended June 11, 2013 follows:

 

     Options Outstanding      Options Exercisable  

Predecessor Company

   Options      Weighted-
Average
Exercise
Price
     Options      Weighted-
Average
Exercise
Price
 

Balance at April 27, 2013

     2,550       $ 15.27         1,207       $ 24.76   

Granted

     —           —           

Exercised

     —           —           

Canceled

     (2,550      15.27         
  

 

 

          

Balance at June 11, 2013

  —      $ —        —      $ —     
  

 

 

          

The Company recognized share-based compensation expense of $179 and $320 for the three and nine month periods ended January 24, 2015, respectively. The stock-based compensation expense is reflected in selling, general and administrative (“SG&A”) expenses in the accompanying consolidated statements of operations. Share-based compensation expense is recognized ratably over the vesting period. There was no income tax benefit recognized related to share-based compensation expense in the three and nine month periods ended January 24, 2015. Since there were no stock options outstanding in either the three month or thirty three week periods ended January 25, 2014, stock-based compensation expense in each period was zero.

Total unrecognized stock-based compensation expense as of January 24, 2015 was $3,683.

On May 28, 2014, the Board granted 6 stock appreciation rights (“SARs”) to each of the non-employee members of the Board under the 2014 Plan. Prior to the approval of the 2014 Plan at the Annual Meeting of Stockholders on September 4, 2014, the SARs were not considered outstanding, nor granted and therefore no expense was recognized prior to this date. Each SAR has a grant date value of $130 and will be settled in cash upon exercise. As such, the SARs are accounted for as liability awards. Since the Company’s stock trading price was less than each SARs exercise price as of the end of the third quarter of fiscal 2015, no expense was recorded for each SAR. The SARs will vest as to one-half of the SARs on the second anniversary of the date of grant and as to one-fourth of the SARs on each of the third and fourth anniversaries of the date of grant. Total SARs that remain outstanding as of January 24, 2015 are 11 as 6 SARs have been canceled due to the death of a non employee Board member.

 

20


Table of Contents

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

NOTE 10 – GOODWILL AND OTHER INTANGIBLE ASSETS

The following table presents details of the Successor Company’s intangible assets, excluding goodwill (preliminary values):

 

January 24, 2015

   Gross Value      Accumulated
Amortization
     Net Book
Value
 

Amortizable intangible assets:

        

Customer relationships (13 years)

   $ 11,300       $ (1,449    $ 9,851   

Publishing rights (20 years)

     4,000         (333      3,667   

Trademarks (20 years)

     22,700         (1,892      20,808   

Developed technology (7 years)

     6,600         (1,571      5,029   

Content (5 years)

     4,400         (1,467      2,933   

Perpetual license agreements (5 years)

     1,200         (400      800   

Favorable leasehold interests (10 years)

     2,160         (360      1,800   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

$ 52,360    $ (7,472 $ 44,888   
  

 

 

    

 

 

    

 

 

 

 

April 26, 2014

   Gross Value      Accumulated
Amortization
     Net Book
Value
 

Amortizable intangible assets:

        

Customer relationships (13 years)

   $ 11,300       $ (797    $ 10,503   

Publishing rights (20 years)

     4,000         (183      3,817   

Trademarks (20 years)

     22,700         (1,040      21,660   

Developed technology (7 years)

     6,600         (864      5,736   

Content (5 years)

     4,400         (807      3,593   

Perpetual license agreements (5 years)

     1,200         (220      980   

Favorable leasehold interests (10 years)

     2,160         (198      1,962   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

$ 52,360    $ (4,109 $ 48,251   
  

 

 

    

 

 

    

 

 

 

 

January 25, 2014

   Gross Value      Accumulated
Amortization
     Net Book
Value
 

Amortizable intangible assets:

        

Customer relationships (13 years)

   $ 11,300       $ (579    $ 10,721   

Publishing rights (20 years)

     4,000         (133      3,867   

Trademarks (20 years)

     22,700         (757      21,943   

Developed technology (7 years)

     6,600         (629      5,971   

Content (5 years)

     4,400         (587      3,813   

Perpetual license agreements (5 years)

     1,200         (160      1,040   

Favorable leasehold interests (10 years)

     2,160         (144      2,016   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

$ 52,360    $ (2,989 $ 49,371   
  

 

 

    

 

 

    

 

 

 

The gross values were determined by the valuation which was performed as part of the fresh start accounting. In addition to the intangible assets above, the Successor Company recorded $21,588 of goodwill.

Intangible asset amortization expenses were included in selling, general and administrative expense. Intangible asset amortization expense for the three months ended January 24, 2015 and January 25, 2014 was $1,119 and $1,208, respectively. Intangible amortization for the nine months ended January 24, 2015, thirty-three weeks ended January 25, 2014, and six weeks ended June 11, 2013 was $3,362, $2,988, and $1,138, respectively.

Intangible asset amortization expense for each of the five succeeding fiscal years and the remainder of fiscal 2015 is estimated to be:

 

Fiscal 2015 (three months remaining)

$  1,121   

Fiscal 2016

  4,483   

Fiscal 2017

  4,483   

Fiscal 2018

  4,483   

Fiscal 2019

  3,456   

Fiscal 2020

  3,363   

 

21


Table of Contents

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

The table below shows the allocation to the segments of the recorded goodwill as of January 24, 2015. There were no changes during the twelve month period ending January 24, 2015, other than fresh start accounting adjustments.

 

     Distribution
Segment
     Curriculum
Segment
     Total  

Fresh Start Valuation:

        

Goodwill

   $ 14,666       $ 6,922       $ 21,588   
  

 

 

    

 

 

    

 

 

 

Balance at January 24, 2015

$ 14,666    $ 6,922    $ 21,588   
  

 

 

    

 

 

    

 

 

 

NOTE 11 – INVESTMENT IN UNCONSOLIDATED AFFILIATE

The Company holds a 35% interest, accounted for under the cost method, in Carson-Dellosa Publishing, which is accounted for under the cost method as the Company does not have significant influence over the investee.

The investment in unconsolidated affiliate consisted of the following:

 

     Percent
Owned
    Successor Company  
       January 24, 2015      April 26, 2014      January 25, 2014  

Carson- Dellosa Publishing, LLC

     35   $ 715       $ 715       $ 715   

The investment amount represents the Company’s maximum exposure to loss as a result of the Company’s ownership interest.

NOTE 12 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

 

     Successor Company  
     January 24,
2015
     April 26,
2014
     January 25,
2014
 

Land

   $ —         $ —         $ 210   

Projects in progress

     4,682         10,854         4,466   

Buildings and leasehold improvements

     3,637         3,595         5,493   

Furniture, fixtures and other

     36,540         30,525         30,632   

Machinery and warehouse equipment

     11,453         6,770         6,687   
  

 

 

    

 

 

    

 

 

 

Total property, plant and equipment

  56,312      51,744      47,488   

Less: Accumulated depreciation

  (21,374   (12,699   (9,252
  

 

 

    

 

 

    

 

 

 

Net property, plant and equipment

$ 34,938    $ 39,045    $ 38,236   
  

 

 

    

 

 

    

 

 

 

Depreciation expense for the three months ended January 24, 2015 and January 25, 2014 was $3,699 and $3,603, respectively. Depreciation expense for the nine months ended January 24, 2015, thirty-three weeks ended January 25, 2014, and six weeks ended June 11, 2013 was $10,510, $11,302, and $1,845, respectively.

 

22


Table of Contents

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

NOTE 13 – ASSETS HELD FOR SALE

In fiscal 2014, the company-wide Process Improvement Program was launched to better align the Company’s operating groups, enhance systems and processes and drive efficiency throughout the organization to improve the customer experience. As part of this program, the Salina, Kansas facility was closed in the third quarter of fiscal 2014. The Salina distribution center ceased processing customer shipments in the second quarter of fiscal 2014. The facility is classified as held for sale on the January 24, 2015, April 26, 2014 and January 25, 2014 consolidated balance sheets. During the third quarter of fiscal 2015 the asset was written down to $1,598 to reflect the net proceeds expected to be realized from an accepted offer to sell the property. This transaction is expected to close in the Company’s fourth quarter with the net proceeds being used to reduce debt.

In fiscal 2014, the Company decided to sell certain print assets of its subsidiary, Premier Agendas, Inc. (“Premier”). Historically, Premier printed approximately 30% of all agendas sold, with the remainder being printed by vendors. The decision was made to have all agendas printed by outside sources and sell the printing assets. These assets were sold early in the third quarter of fiscal 2014.

NOTE 14 – DEBT

Long-term debt consisted of the following:

 

     Successor Company  
     January 24, 2015      April 26, 2014      January 25, 2014  

New ABL Facility, maturing in 2018

   $ 13,605       $ 10,600       $ —     

New Term Loan, maturing in 2019

     142,680         143,913         144,275   

New Term Loan Original Issue Discount

     (2,258      (2,473      (2,594

Deferred Cash Payment Obligations, maturing in 2019

     17,344         14,335         12,334   
  

 

 

    

 

 

    

 

 

 

Total debt

  171,372      166,375      154,015   

Less: Current maturities

  (14,904   (12,388   (1,434
  

 

 

    

 

 

    

 

 

 

Total long-term debt

$ 156,468    $ 153,987    $ 152,581   
  

 

 

    

 

 

    

 

 

 

Successor Company Debt

Credit Agreement

On June 11, 2013, the Company entered into a Loan Agreement (the “Asset-Based Credit Agreement”) by and among the Company, Bank of America, N.A, as Agent, SunTrust Bank, as Syndication Agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated and SunTrust Robinson Humphrey, Inc., as Joint Lead Arrangers and Bookrunners, and the Lenders that are party to the Asset-Based Credit Agreement (the “Asset-Based Lenders”). In the third quarter of fiscal 2015, the Company amended the Asset-Based Credit Agreement facility. The main purpose for the amendment was to provide the Company additional flexibility in its execution of certain restructuring actions by increasing the dollar amount of earnings before interest, taxes, depreciation and amortization (“EBITDA”) covenant add backs for non-recurring, unusual or extraordinary charges, business optimization expenses or other restructuring charges or reserves and cash expenses relating to earn outs or similar obligations.

Under the Asset-Based Credit Agreement, the Asset-Based Lenders agreed to provide a revolving senior secured asset-based credit facility (the “New ABL Facility”) in an aggregate principal amount of $175,000. Outstanding amounts under the New ABL Facility will bear interest at a rate per annum equal to, at the Company’s election: (1) a base rate (equal to the greatest of (a) the prime lending rate, (b) the federal funds rate plus 0.50%, and (c) the 30-day LIBOR rate plus 1.00% per annum) (the “Base Rate”) plus an applicable margin (equal to a specified margin based on the interest rate elected by the Company, the fixed charge coverage ratio under the New ABL Facility and the applicable point in the life of the New ABL Facility) (the “Applicable Margin”), or (2) a LIBOR rate plus the Applicable Margin (the “LIBOR Rate”). Interest on loans under the New ABL Facility bearing interest based upon

 

23


Table of Contents

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

the Base Rate will be due monthly in arrears, and interest on loans bearing interest based upon the LIBOR Rate will be due on the last day of each relevant interest period or, if sooner, on the respective dates that fall every three months after the beginning of such interest period.

The effective interest rate under the New ABL Facility for the three and nine months ended January 24, 2015 was 39.21% and 8.06%, respectively, which included amortization of loan origination fees of $306 and $884 and commitment fees on unborrowed funds of $209 and $517. The rate for the three month period is more heavily influenced by the commitment fees and debt fee amortization due to the seasonally low outstanding balance on the New ABL Facility in the third quarter. As of January 24, 2015, the outstanding balance on the New ABL Facility was $13,605, which was reflected as currently maturing, long-term debt in the accompanying condensed consolidated balance sheets.

The New ABL Facility will mature on June 11, 2018. The Company may prepay advances under the New ABL Facility in whole or in part at any time without penalty or premium. The Company will be required to make specified prepayments upon the occurrence of certain events, including: (1) the amount outstanding on the New ABL Facility exceeding the Borrowing Base (as determined in accordance with the terms of the New ABL Facility), and (2) the Company’s receipt of net cash proceeds of any sale or disposition of assets that are first priority collateral for the New ABL Facility.

Pursuant to a Guaranty and Collateral Agreement dated as of June 11, 2013 (the “New ABL Security Agreement”), the New ABL Facility is secured by a first priority security interest in substantially all assets of the Company and the guarantor subsidiaries. Under an intercreditor agreement between the Asset-Based Lenders and the Term Loan Lenders, as defined and described below, the Asset-Based Lenders have a first priority security interest in substantially all working capital assets of the Company and the guarantor subsidiaries, and a second priority security interest in all other assets, subordinate only to the first priority security interest of the New Term Loan Lenders in such other assets.

The Asset-Based Credit Agreement contains customary events of default and financial, affirmative and negative covenants, including but not limited to a springing financial covenant relating to the Company’s fixed charge coverage ratio and restrictions on indebtedness, liens, investments, asset dispositions and dividends and other restricted payments.

Term Loan

Also on June 11, 2013, the Company entered into a Credit Agreement (the “New Term Loan Credit Agreement”) among the Company, Credit Suisse AG, as Administrative Agent and Collateral Agent, and the Lenders defined in the New Term Loan Credit Agreement (the “Term Loan Lenders”). In the third quarter of fiscal 2015, the Company amended the New Term Loan Credit Agreement. The main purpose for the amendment was to provide the Company additional flexibility in its execution of certain restructuring actions by increasing the dollar amount of EBITDA covenant add backs for non-recurring, unusual or extraordinary charges, business optimization expenses or other restructuring charges or reserves and cash expenses relating to earn outs or similar obligations.

Under the New Term Loan Credit Agreement, the Term Loan Lenders agreed to make a term loan (the “New Term Loan”) to the Company in aggregate principal amount of $145,000, including an original issue discount of $2,900. The outstanding principal amount of the New Term Loan will bear interest at a rate per annum equal to the applicable LIBOR rate (with a 1% floor) plus 8.50%, or the base rate plus a margin of 7.50%. Interest on loans under the New Term Loan Credit Agreement bearing interest based upon the base rate will be due quarterly in arrears, and interest on loans bearing interest based upon the LIBOR Rate will be due on the last day of each relevant interest period or, if sooner, on the respective dates that fall every three months after the beginning of such interest period.

The effective interest rate under the New Term Loan Credit Facility for the nine months ended January 24, 2015 was 10.20% which included amortization of loan origination fees of $548 and original issue discount amortization of

 

24


Table of Contents

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

$214. As of January 24, 2015, the outstanding balance on the New Term Loan Credit Agreement was $140,422, net of the unamortized original issue discount. Of this amount, $1,299 was reflected as currently maturing, long-term debt in the accompanying condensed consolidated balance sheets. The original issue discount is being amortized as additional interest expense on a straight-line basis over the life of the New Term Loan.

The New Term Loan matures on June 11, 2019. The New Term Loan Credit Agreement requires prepayments at specified levels upon the Company’s receipt of net proceeds from certain events, including: (1) certain dispositions of property, divisions, business units or business lines; and (2) other issuances of debt other than Permitted Debt (as defined in the New Term Loan Credit Agreement). The New Term Loan Credit Agreement also requires prepayments at specified levels from the Company’s excess cash flow. The Company is also permitted to voluntarily prepay the New Term Loan in whole or in part. Any prepayments are to be made at par, plus an early payment fee calculated in accordance with the terms of the New Term Loan Credit Agreement if prepaid prior to the second anniversary of the Term Loan Credit Agreement.

Pursuant to a Guarantee and Collateral Agreement dated as of June 11, 2013 (the “New Term Loan Security Agreement”), the Term Loan is secured by a first priority security interest in substantially all assets of the Company and the guarantor subsidiaries. Under an intercreditor agreement between the Asset-Based Lenders and the Term Loan Lenders, the Term Loan Lenders have a second priority security interest in substantially all working capital assets of the Company and the subsidiary guarantors, subordinate only to the first priority security interest of the Asset-Based Lenders in such assets, and a first priority security interest in all other assets.

The New Term Loan Credit Agreement contains customary events of default and financial, affirmative and negative covenants, including but not limited to quarterly financial covenants commencing on the fiscal quarter ending October 26, 2013, relating to the Company’s (1) minimum interest coverage ratio and (2) maximum net total leverage ratio and restrictions on indebtedness, liens, investments, asset dispositions and dividends and other restricted payments.

The New Term Loan required the Company to enter into an interest rate hedge, within 90 days of the Effective Date, in an amount equal to at least 50% of the aggregate principal amount outstanding under the New Term Loan. The purpose of the interest rate hedge is to effectively subject a portion of the New Term Loan to a fixed or maximum interest rate. As such, the Company entered into an interest rate swap agreement on August 27, 2013 that effectively fixes the interest payments on a portion of the Company’s variable-rate debt. The swap, which has a termination date of September 11, 2016, effectively fixes the LIBOR-based interest rate on the debt in the amount of the notional amount of the swap at 9.985%. The notional amount of the swap at January 24, 2015 was $72,500. The fair value of the derivative (valued under Level 2) increase as of the end of third quarter fiscal 2015 compared to the end of second quarter fiscal 2015 by $47 and a gain of $47 was recognized for the quarter. The gain for the third quarter of fiscal 2015 was recorded in “Change in fair value of interest rate swap” on the condensed consolidated statement of operations.

Under this swap agreement, the Company will pay the counterparty interest on the notional amount at a fixed rate per annum of 1.485% and the counterparty will pay the Company interest on the notional amount at a variable rate per annum equal to the greater of 1-month LIBOR or 1.0%. The 1-month LIBOR rate applicable to this agreement was 0.161% at January 25, 2014. The notional amounts do not represent amounts exchanged by the parties, and thus are not a measure of exposure of the Company. The amounts exchanged are normally based on the notional amounts and other terms of the swaps. The variable rates are subject to change over time as 1-month LIBOR fluctuates.

The company has estimated the fair value of its Term Loan (valued under Level 3) as of January 24, 2015 approximated the carrying value of $142,680.

Deferred Cash Payment Obligations

In connection with the Reorganization Plan, general unsecured creditors are entitled to receive a deferred cash payment obligation of 20% of the allowed claim in full settlement of the allowed unsecured claims. Such payment

 

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

accrues quarterly paid-in-kind interest of 5% per annum beginning on the Effective Date. Trade unsecured creditors had the ability to make a trade election to provide agreed upon customary trade terms. If the election was made, those unsecured trade creditors received a deferred cash payment obligation of 45% of the allowed claim in full settlement of those claims. As of the Effective Date, the deferred payment obligations under the trade elections began to accrue quarterly paid-in-kind interest of 10% per annum. All deferred cash payment obligations, along with interest paid-in-kind, are payable in December 2019.

The Company’s reconciliation of general unsecured claims was completed during the first quarter of fiscal 2015. The Company’s deferred payment obligations are $17,344, of which $3,045 represents a 20% recovery for the creditors and $12,070 represents a 45% recovery for the creditors with the remaining $2,229 related to accrued paid-in-kind interest.

Predecessor Company Debt

For a description of the Predecessor Company’s debt, please see the disclosure contained in the Company’s Form 10-K for the fiscal year ended April 26, 2014.

 

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

NOTE 15 – CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME

Changes in accumulated other comprehensive income (loss) during the nine months ended January 24, 2015, six weeks ended June 11, 2013 (Predecessor Company), and the thirty-three weeks ended January 25, 2014 (Successor Company) were as follows:

 

     Foreign
Currency
Translation
 

Accumulated Other Comprehensive Income (Loss) at April 26, 2014 (Successor)

   $ (414

Other comprehensive income before reclassifications

     198   

Amounts reclassified from other comprehensive income

     —     
  

 

 

 

Accumulated Other Comprehensive Income (Loss) at July 26, 2014 (Successor)

$ (216
  

 

 

 

Other comprehensive income before reclassifications

  (352

Amounts reclassified from other comprehensive income

  —     
  

 

 

 

Accumulated Other Comprehensive Income (Loss) at October 25, 2014 (Successor)

$ (568
  

 

 

 

Other comprehensive income before reclassifications

  (698

Amounts reclassified from other comprehensive income

  —     
  

 

 

 

Accumulated Other Comprehensive Income (Loss) at January 24, 2015 (Successor)

$ (1,266
  

 

 

 

 

     Foreign
Currency
Translation
 

Accumulated Other Comprehensive Income at April 27, 2013 (Predecessor)

   $ 22,381   

Other comprehensive income (loss) before reclassifications

     (101

Amounts reclassified from other comprehensive income (loss)

     (22,280
  

 

 

 

Accumulated Other Comprehensive Income at June 11, 2013 (Predecessor)

$ —     
  

 

 

 

Other comprehensive income (loss) before reclassifications

  (7

Amounts reclassified from other comprehensive income

  —     
  

 

 

 

Accumulated Other Comprehensive Income (Loss) at July 27, 2013 (Successor)

$ (7
  

 

 

 

Other comprehensive income (loss) before reclassifications

  (99

Amounts reclassified from other comprehensive income

  —     
  

 

 

 

Accumulated Other Comprehensive Income (Loss) at October 26, 2013 (Successor)

$ (106
  

 

 

 

Other comprehensive income (loss) before reclassifications

  (330

Amounts reclassified from other comprehensive income

  —     
  

 

 

 

Accumulated Other Comprehensive Income (Loss) at January 25, 2014 (Successor)

$ (436
  

 

 

 

Amounts reclassified from other comprehensive income (loss) are reflected in “Reorganization items, net” on the income statement for the six weeks ended June 11, 2013.

 

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

NOTE 16 – RESTRUCTURING

In the first nine months of fiscal 2015 and fiscal 2014, the Company recorded restructuring costs associated with closure or disposal of distribution centers and severance related to headcount reductions. The following is a reconciliation of accrued restructuring costs for the nine months ended January 24, 2015 (Successor Company), the six weeks ended June 11, 2013 (Predecessor Company) and the thirty three weeks ended January 25, 2014 (Successor Company):

 

     Distribution      Curriculum      Corporate      Total  

Accrued Restructuring Costs at April 26, 2014 (Successor)

   $ —         $ 58       $ 135       $ 193   

Amounts charged to expense

     15         —           97         112   

Payments

     (15      (58      (159      (232
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Restructuring Costs at July 26, 2014 (Successor)

$ —      $ —      $ 73    $ 73   
  

 

 

    

 

 

    

 

 

    

 

 

 

Amounts charged to expense

  —        —        1,631      1,631   

Payments

  —        —        (282   (282
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Restructuring Costs at October 25, 2014 (Successor)

$ —      $ —      $ 1,422    $ 1,422   
  

 

 

    

 

 

    

 

 

    

 

 

 

Amounts charged to expense

  —        —        1,881      1,881   

Payments

  —        —        (1,592   (1,592
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Restructuring Costs at January 24, 2015 (Successor)

$ —      $ —      $ 1,711    $ 1,711   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Distribution      Curriculum      Corporate      Total  

Accrued Restructuring Costs at April 27, 2013 (Predecessor)

   $ (21    $ 149       $ 588       $ 716   

Amounts charged to expense

     21         —           —           21   

Payments

     —           (15      (167      (182
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Restructuring Costs at June 11, 2013 (Predecessor)

$ —      $ 134    $ 421    $ 555   
  

 

 

    

 

 

    

 

 

    

 

 

 

Reclassification

  406      —        (406   —     

Amounts charged to expense

  —        31      1,325      1,356   

Payments

  (158   (37   (1,328   (1,523
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Restructuring Costs at July 27, 2013 (Successor)

$ 248    $ 128    $ 12    $ 388   
  

 

 

    

 

 

    

 

 

    

 

 

 

Amounts charged to expense

  47      62      2,140      2,249   

Payments

  (271   (103   (675   (1,049
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Restructuring Costs at October 26, 2013 (Successor)

$ 24    $ 87    $ 1,477    $ 1,588   
  

 

 

    

 

 

    

 

 

    

 

 

 

Amounts charged to expense

  13      275      246      534   

Payments

  (34   (208   (1,180   (1,422
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Restructuring Costs at January 25, 2014 (Successor)

$ 3    $ 154    $ 543    $ 700   
  

 

 

    

 

 

    

 

 

    

 

 

 

The $21 charged to Predecessor for the six weeks ended June 11, 2013 was included in reorganization items, net. The amounts charged to Successor for all periods presented were included in facility exit costs and restructuring in the Condensed Consolidated Statements of Operations.

NOTE 17 – SEGMENT INFORMATION

During the fourth quarter of fiscal 2014, the Company changed its operating segments in order to align its segments with changes in the management and reporting structure of the Company. Information for prior years has been restated to reflect the new reporting structure. The Company determines its operating segments based on the information utilized by the chief operating decision maker, the Company’s Chief Executive Officer, to allocate resources and assess performance. Based on this information, the Company has determined that it operates in two operating segments, Distribution and Curriculum, which also constitute its reportable segments. The change in the Company’s operating segments is a result of changes within its organizational management of the business, efficiencies obtained within the organization, and how management reviews results of the business on a monthly and quarterly basis. The Company operates principally in the United States, with limited operations in Canada. The Distribution segment offers products that include basic classroom supplies and office products, supplemental learning materials, physical education equipment, classroom technology, planning and student development, coordinated school health and furniture. The Curriculum segment is a PreK-12 curriculum-based publisher of proprietary and non-proprietary products in the categories of science and reading and literacy. The accounting policies of the segments are the same as those described in Summary of Significant Accounting Policies as included in the Company’s Form 10-K for the fiscal year ended April 26, 2014.

 

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

    Successor     Successor     Successor     Predecessor  
    Three Months
Ended
January 24, 2015
    Three Months
Ended
January 25, 2014
    Nine Months
Ended
January 24, 2015
    Thirty-Three
Weeks Ended

January 25, 2014
    Six Weeks
Ended
June 11, 2013
 
   

Revenues:

         

Distribution

  $ 67,737      $ 64,370      $ 442,286      $ 403,580      $ 49,142   

Curriculum

    10,017        10,294        73,607        60,212        9,555   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

$ 77,754    $ 74,664    $ 515,893    $ 463,792    $ 58,697   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   

Operating income (loss) and income (loss) before taxes:

Distribution

$ (15,398 $ (15,340 $ 16,526    $ 25,212    $ (2,658

Curriculum

  (5,810   (5,321   3,525      2,078      (1,197

Corporate (1)

  (5,084   (3,992   (12,851   (11,404   —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

  (26,292   (24,653   7,200      15,886      (3,855

Interest expense and reorganization items, net

  4,259      5,482      15,041      14,123      (81,564
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

$ (30,551 $ (30,135 $ (7,841 $ 1,763    $ 77,709   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Successor      Successor      Successor  
     January 24, 2015      April 26, 2014      January 25, 2014  

Identifiable assets:

        

Distribution

   $ 199,474       $ 214,723       $ 213,963   

Curriculum

     92,160         103,622         71,717   

Corporate assets

     23,318         21,274         36,839   
  

 

 

    

 

 

    

 

 

 

Total

$ 314,952    $ 339,619    $ 322,519   
  

 

 

    

 

 

    

 

 

 

 

    Successor     Successor     Successor     Predecessor  
    Three Months
Ended
January 24, 2015
    Three Months
Ended
January 25, 2014
    Nine Months
Ended
January 24, 2015
    Thirty-Three
Weeks Ended
January 25, 2014
    Six Weeks
Ended
June 11, 2013
 
   

Depreciation and amortization of intangible assets and development costs:

         

Distribution

  $ 4,150      $ 4,178      $ 12,396      $ 12,989      $ 2,080   

Curriculum

    2,365        1,890        10,120        6,237        1,821   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

$ 6,515    $ 6,068    $ 22,516    $ 19,226    $ 3,901   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   

Expenditures for property, plant and equipment, intangible and other assets and development costs:

Distribution

$ 1,115    $ 2,108    $ 6,234    $ 4,326    $ 317   

Curriculum

  1,448      1,554      5,045      3,649      389   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

$ 2,563    $ 3,662    $ 11,279    $ 7,975    $ 706   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Operating expenses in Corporate for the Successor’s three month period ended January 24, 2015 and for the Successor’s three month period ended January 25, 2014 were $5,084 and $13,314, respectively. Operating expenses in Corporate for the nine month period ended January 24, 2015 and for the thirty three weeks ended January 25, 2014 were $12,851 and $11,404, respectively. These amounts included restructuring and facility exit costs, costs incurred to implement process improvement actions and other corporate professional expenses.

 

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

NOTE 18 – RESTRICTED CASH

During the fourth quarter of fiscal 2013, the Company placed $25,000 of cash into a restricted account. The Ad Hoc DIP Agreement required the funds to be placed in an escrow account as a deposit for an early termination fee payable to Bayside Finance, LLC (“Bayside”) that was provided under the former term loan credit agreement of the Predecessor Company. The Bankruptcy Court ruled that the funds were owed, but the Official Committee of Unsecured Creditors contested the ruling and filed an appeal in the Federal District Court of Delaware. On the Effective Date, an additional $119, representing interest earned, was transferred into the restricted account. After the Effective Date, the Company deposited an additional $1,280 into the restricted account related to potential interest expense on the unpaid early termination fees for the pre-bankruptcy term loan with Bayside. In the second quarter of fiscal 2014, this escrow amount, including interest, was released to Bayside. On October 24, 2013, the Bankruptcy Court approved a stipulation which reflected the settlement of this matter. In connection with this settlement, the parties agreed that the amount of the early termination fee was $21,000. As a result, Bayside refunded to the Company $5,399 which represented the amount of restricted account funds that had been released to Bayside in excess of the $21,000 settlement. The $5,399 consisted of a reduction of the early termination fee of $4,054 and a recovery of interest expense previously paid in fiscal 2014 of $1,345.

During the first quarter of fiscal 2013, the Company transferred $2,708 of cash into an additional restricted account. The funds in the restricted account serve as collateral primarily for the Company’s workmen’s compensation insurance and other lease obligations, secured by letters of credit. During the third and fourth quarters of fiscal 2013 and the first and second quarters of fiscal 2014, $972, $434, $601 and $701, respectively, was transferred from the restricted cash account as the letters of credit secured by these amounts were canceled. As of January 24, 2015 the Company has no restrictions on its cash balance.

NOTE 19 – COMMITMENTS AND CONTINGENCIES

Various claims and proceedings arising in the normal course of business are pending against the Company. The results of these matters are not expected to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Quarterly Overview

School Specialty, Inc. (the “Company”), is an education company that provides innovative and proprietary products, programs, and services to help educators engage and inspire students of all ages and abilities to learn. Through each of our leading brands, we design, develop, and provide pre K-12 educators with the latest and very best curriculum, supplemental learning resources and classroom basics. Working in collaboration with educators, we reach beyond the scope of textbooks to help teachers, guidance counselors, and school administrators ensure that every student reaches his or her full potential.

Our business is subject to seasonal fluctuations. Our historical revenues and profitability have been dramatically higher in the first two quarters of our fiscal year, primarily due to increased shipments to customers coinciding with the start of each school year. Due to variations in the timing of shipments within this season primarily as a result of changes or delays in the finalization of state education budgets as well as the impact that the bankruptcy proceedings had on last year’s first and second fiscal quarter revenue, the Company views a year-over-year comparison of the first nine months of the fiscal year to be a more meaningful analysis than year-over-year comparative results for quarterly periods on an individual basis. The Company’s third quarter is historically its lowest revenue and volume quarters. Thus, small changes, whether positive or negative, can have a more dramatic impact on margins.

During the third quarter and early portion of the fourth quarter of fiscal 2015, the Company executed a number of initiatives with the objective of creating one leadership structure and to consolidate departmental resources in order to support a more centralized operating model. The total number of associates has been reduced by approximately 180, a reduction of 13%. In addition, the Company has reduced its utilization of outside consultants. The Company estimates the annual savings of these initiatives to be approximately $16.5 million. The Company expects these initiatives to provide approximately $5.1 million of total savings in fiscal 2015, with $1.1 million having already been realized in the third quarter of fiscal 2015.

Results of Operations

Factors Affecting Comparability

Fresh Start Accounting Adjustments

The Company adopted fresh start accounting and reporting effective June 11, 2013, the Fresh Start Reporting Date. The financial statements as of the Fresh Start Reporting Date report the results of the Successor Company with no beginning retained earnings or accumulated deficit. Any financial statement presentation of the Successor Company represents the financial position and results of operations of a new reporting entity and is not comparable to prior periods presented by the Predecessor Company. The financial statements for periods ended prior to the Fresh Start Reporting Date do not include the effect of any changes in the Predecessor Company’s capital structure or changes in the fair value of assets and liabilities as a result of fresh start accounting.

Accordingly, management has provided a non-GAAP analysis entitled “Non-GAAP Financial Information – Combined Results” for the nine months ended January 24, 2015. Non-GAAP Financial Information – Combined Results combines GAAP results of the Successor Company for the thirty three weeks ended January 25, 2014 and GAAP results of the Predecessor Company for the six weeks ended June 11, 2013. Management’s non-GAAP analysis compares the Successor Company’s GAAP results for the nine months ended January 24, 2015 for certain financial items to the Non-GAAP Financial Information – Combined Results.

Revenues

Revenues for the three months ended January 24, 2015 increased 4.1%, or $3.1 million from the three months ended January 25, 2014.

Distribution segment revenues increased 5.2%, or $3.4 million, from the three months ended January 25, 2014. Furniture product line revenue increased approximately $3.3 million, or 17.1%. While a portion of this increase is

 

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due to the timing of school construction projects shifting to the second half of fiscal 2015, the Company continues to experience year-over-year increases in order rates for the Furniture product line. We believe that expanded product offerings, including new proprietary product lines, and an investment in project design expertise are driving a strong pipeline of opportunities in the Furniture product line. Revenues for the remaining product lines within the segment were flat in the third quarter of fiscal 2015 as compared to the third quarter of fiscal 2014. However, improved order rates for these categories in the third quarter, up 3.0% as compared to last year’s third quarter, provide confidence that year-over-year performance in the fourth quarter is expected to show growth particularly in the AV/Tech product line.

Curriculum segment revenues decreased 2.7%, or $0.3 million, from the three months ended January 25, 2014. Approximately $0.4 million of the decline is related to the Company’s Science business although incoming Science orders were up 2.7% in the third quarter. This increased order rate and the current sales pipeline support the Company’s belief that Science revenues will show year-over-year growth in the fourth quarter. This decrease was offset by an increase of $0.1 million in the Reading business.

Gross Profit

Gross margin for the three months ended January 24, 2015 was 34.5% as compared to 35.4% for the three months ended January 25, 2014.

Distribution segment gross margin was 33.2% for the three months ended January 24, 2015 as compared to 33.9% for the three months ended January 25, 2014. The decrease in gross margin is primarily related to the mix of furniture revenue in the quarter. Furniture typically has lower gross margins as compared to other distribution product lines as freight expense is a component of gross profit. Revenue from the furniture product line represented 33% of total segment revenue in the current year’s third quarter as compared to 29% in last year’s third quarter, which resulted in 70 basis point gross margin decline.

Curriculum segment gross margin was 43.0% for the three months ended January 24, 2015 as compared to 45.3% for the three months ended January 25, 2014. Increased product development amortization of $0.5 million in the Science business, primarily related to increased amortization of the investment in custom CPO and FOSS products in support of the Texas Science adoption, negatively impacted the segment gross margins by 490 basis points. Partially offsetting the decline is a favorable product mix within the segment, particularly a higher mix of digital products within the Reading business.

Selling, General and Administrative Expenses

SG&A includes selling expenses, the most significant of which are sales wages and commissions; operations expenses, which includes customer service, warehouse and out-bound freight costs; catalog costs; general administrative overhead, which includes information systems, accounting, legal and human resources; and depreciation and intangible asset amortization expense.

SG&A for the three months ended January 24, 2015 increased $2.2 million from $48.7 million in the third quarter of fiscal 2014 to $50.9 million in the third quarter of fiscal 2015. As a percent of revenue, SG&A increased from 65.2% for the three months ended January 25, 2014 to 65.4% for the three months ended January 24, 2015.

SG&A attributable to the Distribution and Curriculum segments increased $0.9 million and Corporate SG&A increased $1.3 million in the third quarter as compared to last year’s third quarter.

Distribution segment SG&A increased $0.8 million, or 2.1%, from $37.1 million in the third quarter of fiscal 2014 to $37.9 million in the third quarter of fiscal 2015. As compared to last year’s third quarter, compensation and benefit costs increased by $0.2 million in the current year’s third quarter. The benefit of headcount reduction was offset by an unpaid week of furlough last year totaling $1.0 million for the segment. Transportation costs increased by $0.2 million related primarily to higher freight rates. Online marketing costs increased by $0.4 million as the Company continues to focus on using digital marketing campaigns to increase customer interactions. Distribution segment SG&A decreased as a percent of revenue from 57.7% for the three months ended January 25, 2014 to 56.0% for the three months ended Janaury 24, 2015.

 

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Curriculum segment SG&A increased $0.1 million, or 1.4%, from $10.0 million for the three months ended January 25, 2014 to $10.1 million for the three months ended January 24, 2015. Curriculum segment SG&A increased as a percent of revenue from 97.0% for the three months ended January 25, 2014 to 101.0% for the three months ended January 24, 2015.

Corporate SG&A consists primarily of costs incurred with respect to implementing the Company’s process improvement initiatives. Corporate SG&A increased $1.3 million, from $1.6 million in the third quarter of fiscal 2014 to $2.9 million in the third quarter of fiscal 2015. This increase is related primarily to the write down of $0.6 million of the Company’s Salina, Kansas distribution center to net realizable value based on a pending sale transaction. This property has been classified as an asset held for sale since the end of last year’s second quarter. The Company has an accepted offer to sell this property with expected net proceeds totaling $1.6 million. This sale is expected to close in the Company’s fourth quarter.

Facility Exit Costs and Restructuring

In the third quarter of fiscal 2015, the Company recorded $2.2 million of charges related primarily to severance.

In the third quarter of fiscal 2014, the Company recorded $2.4 million of bankruptcy related restructuring charges consisting of costs associated with facility closures and consulting fees associated with the Company’s process improvement initiatives.

Interest Expense

Interest expense decreased $0.4 million, from $4.7 million in last year’s third quarter to $4.3 million for the third quarter of fiscal 2015. This decrease is related to the non-cash interest expense associated primarily with the amortization of debt fees and original issue discount amortization associated with the New Term Loan.

Change in fair value of interest rate swap

In the second quarter of fiscal 2014, the Company entered into an interest rate swap agreement that effectively fixes the interest payments on a portion of the Company’s variable-rate debt. The swap, which has a termination date of September 11, 2016, effectively fixes the LIBOR-based interest rate on the debt in the amount of the notional amount of the swap at 9.985%. The notional amount of the swap at January 24, 2015 was $72.5 million. As of January 24, 2015, the fair value of the derivative increased by less than $0.1 million and, accordingly, a non-cash gain of less than $0.1 was recorded.

Reorganization Items, Net

In the three months ended January 25, 2014, the Company recorded $0.9 million net reorganization loss. This consisted primarily of professional fees associated with activities attributable to the implementation of the Company’s Reoganization Plan. The Company did not incur any reorganization gain or loss in the third quarter of fiscal 2015.

Provision for (Benefit from) Income Taxes

The provision for income taxes was $0.1 million for the three months ended January 24, 2015. The Company did not recognize any tax benefit in fiscal 2015, as future realization of deferred tax assets, including net operating loss carryforwards, did not meet the more likely than not threshold, the Company recorded a full valuation allowance as of January 24, 2015.

The effective tax rate for the three months ended January 25, 2014 was 1.5%. This rate was significantly lower than the statutory rate because the net reorganization income realized during this period was primarily related to cancellation of indebtedness income. The Company did not recognize tax benefit in fiscal 2014 as future realization of deferred tax assets did not meet the more likely than not threshold as of January 25, 2014.

 

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Non-GAAP Financial Information — Combined Results

As a result of the emergence from bankruptcy occurring six weeks into fiscal 2014, management believes that the presentation of Non-GAAP Financial Information — Combined Results for the first nine months of fiscal 2014 offers a useful non-GAAP normalized comparison to GAAP results of the Successor Company for the nine months ended January 24, 2015. The Non-GAAP Financial Information — Combined Results presented below are reconciled to the most comparable GAAP measures.

Successor Company GAAP results for the Nine Months Ended January 24, 2015 Compared to Non-GAAP Combined Results for the Nine Months Ended January 25, 2014

Revenues

 

     Successor
Company
     Non-GAAP
Combined
     Successor
Company
     Predecessor
Company
 
     Nine Months Ended
January 24, 2015
     Nine Months Ended
January 25, 2014
     Thirty-Three Weeks
Ended

January 25, 2014
     Six Weeks Ended
June 11, 2013
 
 

Revenues

   $ 515,893       $ 522,489       $ 463,792       $ 58,697   

Revenues for the nine months ended January 24, 2015 decreased 1.3%, or $6.6 million from the nine months ended January 25, 2014.

Distribution segment revenues decreased 2.3%, or $10.4 million, from the combined nine months ended January 25, 2014. The student planner and agenda products accounted for $8.7 million of the decline. We believe schools consider agenda products more discretionary in nature and some schools are de-emphasizing paper-based agendas in favor of digital products. Commercial printing generated zero revenues in fiscal 2015 as compared to $4.3 million of revenues generated in fiscal 2014 prior to the sale of the print plant assets in November 2013. Furniture revenues were up $4.4 million for the first nine months of fiscal 2015 as the Company has been successful in both re-establishing credit terms with most furniture vendors and gaining back customer confidence in the year following the emergence from bankruptcy. Overall furniture orders are up over 8% in the current fiscal year. Revenue in the remaining product categories declined by $1.8 million in the first nine months of fiscal 2015.

Curriculum segment combined revenues increased 5.5%, or $3.8 million, from the combined nine months ended January 25, 2014. This increase is related to the adoption of a state science curriculum in Texas during the first quarter of fiscal 2015 using the Company’s curriculum products.

Gross Profit

 

     Successor
Company
     Non-GAAP
Combined
     Successor
Company
     Predecessor
Company
 
     Nine Months Ended
January 24, 2015
     Nine Months Ended
January 25, 2014
     Thirty-Three Weeks
Ended

January 25, 2014
     Six Weeks Ended
June 11, 2013
 
 

Gross profit

   $ 192,196       $ 202,916       $ 179,298       $ 23,618   

Gross margin for the nine months ended January 24, 2015 was 37.3% as compared to 38.8% for the combined nine months ended January 25, 2014.

Distribution segment combined gross margin was 35.1% for the nine months ended January 24, 2015 as compared to 36.7% for the combined nine months ended January 25, 2014. The decrease in gross margin is primarily related to the Company’s agenda product category. Approximately 100 basis points of the gross margin decline relates to the Company’s student planner and agenda product category, as both the mix of agendas as a percentage of the overall segment revenues and gross margins within the agendas category have declined. The remaining decline in gross margin is related to volume decline and product mix within the remaining product categories.

 

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Curriculum segment combined gross margin was 50.0% for the nine months ended January 24, 2015 as compared to 52.6% for the combined nine months ended January 25, 2014. The decline is related to increased product development amortization of $2.7 million which contributed to a decrease of 330 basis points of gross margin. The additional product development amortization is due primarily to increased amortization of 70% of the investment in custom CPO and FOSS product in support of the Texas Science adoption. This decline is offset by a favorable product mix as Texas adoption revenue has a higher curriculum content.

Selling, General and Administrative Expenses

 

     Successor
Company
     Non-GAAP
Combined
     Successor
Company
     Predecessor
Company
 
     Nine Months Ended
January 24, 2015
     Nine Months Ended
January 25, 2014
     Thirty-Three Weeks
Ended

January 25, 2014
     Six Weeks Ended
June 11, 2013
 
 

Selling, general and administrative expenses

   $ 180,717       $ 184,851       $ 157,378       $ 27,473   

SG&A includes selling expenses, the most significant of which are sales wages and commissions; operations expenses, which includes customer service, warehouse and out-bound freight costs; catalog costs; general administrative overhead, which includes information systems, accounting, legal and human resources; and depreciation and intangible asset amortization expense.

SG&A decreased $4.1 million from $184.8 million for the combined nine months ended January 25, 2014 to $180.7 million for the nine months ended January 24, 2015. As a percent of revenue, SG&A decreased from 35.4% for the combined nine months ended January 25, 2014 to 35.0% for the nine months ended January 24, 2015.

SG&A attributable to the Distribution and Curriculum segments decreased $7.3 million and Corporate SG&A increased $3.2 million in the first nine months as compared to last year’s first nine months.

Distribution segment SG&A decreased $4.8 million, or 3.3%, from $143.7 million for the combined nine months ended January 25, 2014 to $138.9 million for the nine months ended January 24, 2015. The segment had a decrease of $2.2 million in its marketing costs primarily associated with a decrease in catalog costs as the Company reduced the number of seasonal catalog mailings and reduced circulation of other catalogs. This reduction reflects the Company’s continued strategy of increasing customer interactions through digital marketing campaigns and a more efficient use of printed catalogs. Depreciation and amortization expense decreased by $2.7 million as a result of the adoption of fresh start accounting. Compensation and benefit costs for the Distribution segment decreased $1.8 million which is net of a $1.0 million current year increase related to the elimination of an unpaid furlough week. Headcount for the Distribution segment has been reduced by approximately 8% compared to the combined first nine months of fiscal 2014. These decreases were partially offset by $1.8 million of additional outbound freight costs. Distribution segment SG&A decreased as a percent of revenue from 31.7% for the combined nine months ended January 25, 2014 to 31.4% for the nine months ended January 24, 2015.

Curriculum segment SG&A decreased $2.5 million, or 7.1%, from $35.8 million for the combined nine months ended January 25, 2014 to $33.3 million for the nine months ended January 24, 2015. The segment had a decrease of $0.8 million in its marketing costs primarily associated with a decrease in catalog costs as the Company reduced the number of seasonal catalog mailings. Compensation and benefit costs for the Curriculum segment decreased by $1.0 million. Curriculum segment SG&A decreased as a percent of revenue from 51.3% for the combined nine months ended January 25, 2014 to 45.2% for the nine months ended January 24, 2015.

The Corporate SG&A increase of $3.2 million is related primarily to process improvement implementation costs such as consulting fees and warehouse implementation costs associated with transitioning the majority of fulfillment activities to the Company’s Mansfield, Ohio distribution center. Approximately $0.6 million of the increase is attributable to the third quarter fiscal 2015 write down of the Company’s Salina, Kansas facility which is classified as an asset held for sale.

 

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Facility Exit Costs and Restructuring

In the nine months ended January 24, 2015, the Company recorded $4.3 million of restructuring charges related primarily to severance and adjustments to estimated lease termination costs associated with a prior year distribution center closure.

In the combined nine months ended January 25, 2014, the Successor Company recorded $6.0 million of bankruptcy-related facility exit costs and restructuring charges. The closure of the Company’s distribution centers and printing plants resulted in charges of $3.8 million which included lease termination costs and other shutdown related expenditures. Severance in the combined first nine months of fiscal 2014 was $2.2 million.

Interest Expense

 

     Successor
Company
     Non-GAAP
Combined
     Successor
Company
     Predecessor
Company
 
     Nine Months Ended
January 24, 2015
     Nine Months Ended
January 25, 2014
     Thirty-Three Weeks
Ended

January 25, 2014
     Six Weeks Ended
June 11, 2013
 
 

Interest expense

   $ 14,787       $ 15,376       $ 12,141       $ 3,235   

Interest expense decreased $0.6 million, from $15.4 million for the nine months ended January 25, 2014 to $14.8 million for the combined nine months ended January 24, 2015.

Non-cash interest increased in the nine months ended January 24, 2015 by $0.6 million as compared to the combined nine months ended January 25, 2014. Non-cash interest expense associated with paid-in-kind interest on deferred vendor obligations increased by $0.8 million, mainly due to the increase in deferred vendor obligations. This increase was partially offset by a $0.2 million decrease in non-cash interest related to debt fee amortization and original issue discount accretion. For the nine months ended January 24, 2015, interest expense associated with the Successor Company’s New Term Loan was approximately $0.6 million lower than the term loan interest expense for the combined nine months ended January 25, 2014, primarily due to a lower interest rate under the New Term Loan as compared to the Predecessor Company’s term loan. For the nine months ended January 24, 2015, interest expense associated with the Successor Company’s New ABL Facility was approximately $0.5 million lower than the interest expense for the combined nine months ended January 25, 2014, primarily due to a lower average outstanding balance.

Change in Fair Value of Interest Rate Swap

In the second quarter of fiscal 2014, the Company entered into an interest rate swap agreement that effectively fixes the interest payments on a portion of the Company’s variable-rate debt. The swap, which has a termination date of September 11, 2016, effectively fixes the LIBOR-based interest rate on the debt in the amount of the notional amount of the swap at 9.985%. The notional amount of the swap at January 24, 2015 was $72.5 million. As of January 24, 2015, the fair value of the derivative increased by less than $0.1 million and, accordingly, a non-cash gain of less than $0.1 million was recorded.

Partial Refund of Early Termination Fee

During the third quarter of fiscal 2013, the Company recorded a $25.1 million prepayment charge related to the acceleration of the obligations under the Bayside term loan credit agreement. The charge was triggered by the Company’s non-compliance with the minimum liquidity covenant. The early payment fee represented the present value of interest payments due to Bayside during the term of the term loan agreement. The $25.1 million early termination fee plus approximately $1.3 million of potential interest expense was placed in an escrow account. The escrow funds, totaling $26.4 million, were released to Bayside early in the second quarter of fiscal 2014.

 

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During the second quarter of fiscal 2014, the parties reached an agreement whereby the early termination fee was fixed at $21.0 million. As such, Bayside retained $21.0 million, and refunded to the Company the $5.4 million escrow. The refund was received by the Company in the second quarter of fiscal 2014, of which $4.1 million was a partial refund of the early termination fee and the remainder was a refund of interest expense.

Reorganization Items, Net

In the nine months ended January 24, 2015, the Company recorded a $0.3 million net reorganization loss. This consisted of professional advisory fees and other costs related to the continued implementation of the Reorganization Plan and the resolution of unresolved claims.

In the combined nine months ended January 25, 2014, the Company recorded a $79.3 million net reorganization gain. This consists of $162.4 million of cancellation of indebtedness income related to the settlement of prepetition liabilities and changes in the Predecessor’s capital structure arising from implementation of the Reorganization Plan, offset by $30.2 million of fresh start adjustments, $21.4 million of cancellation of debt upon the issuance of equity, $19.4 million of professional, financing and other fees, $7.0 million of contract rejections and $5.1 million of other reorganization adjustments.

Provision for (Benefit from) Income Taxes

 

     Successor
Company
    Non-GAAP
Combined
    Successor
Company
    Predecessor
Company
 
     Nine Months Ended
January 24, 2015
    Nine Months Ended
January 25, 2014
    Thirty-Three Weeks
Ended

January 25, 2014
    Six Weeks Ended
June 11, 2013
 
 

Provision for (benefit from) income taxes

   $ (127   $ 1,899      $ 258      $ 1,641   

Effective tax rate

     1.6     2.5     14.6     2.1

The provision for income taxes was $0.1 million for the nine months ended January 24, 2015 as compared to a combined provision for income taxes of $1.9 million for the combined nine months ended January 25, 2014.

The effective rate for the nine months ended January 24, 2015 was 1.6%. The benefit recorded in the nine months ended January 24, 2015 is related to foreign and state tax true-ups. The Company does not expect to have taxable income in fiscal 2015. As future realization of deferred tax assets, including net operating loss carryforwards, did not meet the more likely than not threshold, the Company recorded a full valuation allowance as of January 24, 2015.

The effective tax rate for the combined nine months ended January 25, 2014 was 2.4%. This rate was significantly lower than the statutory rate because the net reorganization income realized during this period was primarily related to cancellation of indebtedness income. During the six weeks ended June 11, 2013, the Company excluded from taxable income $129,084 of cancellation of indebtedness income as defined under Internal Revenue Code (“IRC”) Section 108. IRC Section 108 excludes from taxable income the amount of indebtedness discharged under a Chapter 11 case. IRC Section 108 also requires a reduction of tax attributes equal to the amount of excluded taxable income. As a result, the Company reduced the available federal and state net operating loss carryforward and adjusted the tax reporting basis of tangible and intangible assets for the discharge of indebtedness income. In addition to the adjustment to the tax reporting basis as described above, the fresh start accounting adjustments also created additional basis differences between income tax and financial reporting. Because the Company had recorded a full valuation allowance in fiscal 2013, the reduction of tax attributes resulted in a corresponding reduction of the valuation allowance. Thus, the reduction of tax attributes did not result in an increased effective tax rate for the combined nine months ended January 25, 2014.

Liquidity and Capital Resources

At January 24, 2015, the Company had working capital of $114.6 million. The Company’s capitalization at January 24, 2015 was $263.2 million and consisted of total debt of $171.4 million and stockholders’ equity of $91.8 million.

 

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For a description of the Predecessor Company’s debt, please see the disclosure contained in the Company’s Form 10-K for the fiscal year ended April 26, 2014.

On June 11, 2013, in accordance with the Reorganization Plan, the Company entered into a Loan Agreement (the “Asset-Based Credit Agreement”) among the Company, Bank of America, N.A, as Agent, SunTrust Bank, as Syndication Agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated and SunTrust Robinson Humphrey, Inc., as Joint Lead Arrangers and Bookrunners, and the Lenders that are party to the Asset-Based Credit Agreement (the “Asset-Based Lenders”).

Under the Asset-Based Credit Agreement, the Asset-Based Lenders agreed to provide a revolving senior secured asset-based credit facility (the “New ABL Facility”) in an aggregate principal amount of $175 million. Outstanding amounts under the New ABL Facility will bear interest at a rate per annum equal to, at the Company’s election: (1) a base rate (equal to the greatest of (a) the prime lending rate, (b) the federal funds rate plus 0.50%, and (c) the 30-day LIBOR rate plus 1.00% per annum) (the “Base Rate”) plus an applicable margin (equal to a specified margin based on the interest rate elected by the Company, the fixed charge coverage ratio under the New ABL Facility and the applicable point in the life of the New ABL Facility) (the “Applicable Margin”), or (2) a LIBOR rate plus the Applicable Margin (the “LIBOR Rate”). Interest on loans under the New ABL Facility bearing interest based upon the Base Rate will be due monthly in arrears, and interest on loans bearing interest based upon the LIBOR Rate will be due on the last day of each relevant interest period or, if sooner, on the respective dates that fall every three months after the beginning of such interest period.

The New ABL Facility will mature on June 11, 2018. The Company may prepay advances under the New ABL Facility in whole or in part at any time without penalty or premium. The Company will be required to make specified prepayments upon the occurrence of certain events, including: (1) the amount outstanding on the New ABL Facility exceeding the Borrowing Base, and (2) the Company’s receipt of net cash proceeds of any sale or disposition of assets that are first priority collateral for the New ABL Facility.

Pursuant to a Guaranty and Collateral Agreement dated as of June 11, 2013 (the “New ABL Security Agreement”), the New ABL Facility is secured by a first priority security interest in substantially all assets of the Company and the guarantor subsidiaries. Under an intercreditor agreement between the Asset-Based Lenders and the Term Loan Lenders, as defined and described below, the Asset-Based Lenders have a first priority security interest in substantially all working capital assets of the Company and the guarantor subsidiaries, and a second priority security interest in all other assets, subordinate only to the first priority security interest of the Term Loan Lenders in such other assets.

The Asset-Based Credit Agreement contains customary events of default and financial, affirmative and negative covenants, including but not limited to a springing financial covenant relating to the Company’s fixed charge coverage ratio and restrictions on indebtedness, liens, investments, asset dispositions and dividends and other restricted payments. The Company was in compliance with the financial covenants during the nine months ended January 24, 2015.

Also on June 11, 2013, the Company entered into a credit agreement (the “New Term Loan Credit Agreement”) among the Company, Credit Suisse AG, as Administrative Agent and Collateral Agent, and the lenders party to the New Term Loan Credit Agreement (the “Term Loan Lenders”).

Under the New Term Loan Credit Agreement, the Term Loan Lenders agreed to make a term loan (the “New Term Loan”) to the Company in aggregate principal amount of $145 million. The outstanding principal amount of the New Term Loan will bear interest at a rate per annum equal to the applicable LIBOR rate (with a 1% floor) plus 8.50%, or the base rate plus a margin of 7.50%. Interest on loans under the New Term Loan Credit Agreement bearing interest based upon the base rate will be due quarterly in arrears, and interest on loans bearing interest based upon the LIBOR rate will be due on the last day of each relevant interest period or, if sooner, on the respective dates that fall every three months after the beginning of such interest period.

The New Term Loan matures on June 11, 2019. The New Term Loan Credit Agreement requires prepayments at specified levels upon the Company’s receipt of net proceeds from certain events, including: (1) certain dispositions of property, divisions, business units or business lines; and (2) other issuances of debt other than Permitted Debt, as

 

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defined in the New Term Loan Credit Agreement. The New Term Loan Credit Agreement also requires prepayments at specified levels from the Company’s excess cash flow. The Company is also permitted to voluntarily prepay the New Term Loan in whole or in part. Any prepayments are to be made at par, plus an early payment fee calculated in accordance with the terms of the New Term Loan Credit Agreement if prepaid prior to the second anniversary of the New Term Loan Credit Agreement.

Pursuant to a Guarantee and Collateral Agreement dated as of June 11, 2013 (the “New Term Loan Security Agreement”), the New Term Loan is secured by a first priority security interest in substantially all assets of the Company and the guarantor subsidiaries. Under an intercreditor agreement between the Asset-Based Lenders and the Term Loan Lenders, the Term Loan Lenders have a second priority security interest in substantially all working capital assets of the Company and the subsidiary guarantors, subordinate only to the first priority security interest of the Asset-Based Lenders in such assets, and a first priority security interest in all other assets.

The New Term Loan Credit Agreement contains customary events of default and financial, affirmative and negative covenants, including but not limited to quarterly financial covenants that commenced on the fiscal quarter ending January 25, 2014, relating to the Company’s (1) minimum interest coverage ratio and (2) maximum net total leverage ratio and restrictions on indebtedness, liens, investments, asset dispositions and dividends and other restricted payments. The Company was in compliance with the financial covenants during the nine months ended January 24, 2015.

On October 31, 2014 the Company obtained amendments to both its Asset-Based Credit Agreement and New Term Loan Credit Agreement. The amendments provide the Company additional flexibility in its execution of certain restructuring actions by increasing the dollar amount of EBITDA covenant add backs for non-recurring, unusual or extraordinary charges, business optimization expenses or other restructuring charges or reserves and cash expenses relating to earn outs or similar obligations. The Company closely evaluates its expected ability to remain in compliance with the financial covenants under our New ABL Security Agreement and New Term Loan Credit Agreement. Based on current projections, the Company believes it will maintain compliance with these financial covenants through the remainder of fiscal 2015 and fiscal 2016.

Net cash provided by operating activities was $16.0 million for the nine months ended January 24, 2015 and $28.6 million for the thirty three weeks ended January 25, 2014 (Successor Company), and net cash used in operating activities was $20.0 million in the six weeks ended June 11, 2013 (Predecessor Company). The combined increase of $7.4 million is due to a reduction in bankruptcy-related costs or other financing related fees of $25.4 million which were paid in the first nine months on fiscal 2014, partially offset by the impact of working capital changes of $14.1 million, excluding accrued bankruptcy fees. Operating cash flow in fiscal 2014 was benefited by approximately $15.0 million of inventory prepayments made in the fourth quarter of fiscal 2013. These prepayments were necessary due to the impact the bankruptcy filing had on vendor relationships and terms. As the Company was able to return vendors to more customary terms in the year following the bankruptcy, large inventory prepayments are no longer necessary. In addition, operating cash flow is partially offset by decreased operating income in the current year, after adjusting for the non-cash impact of depreciation and amortization, as compared to the combined nine month period last year.

Net cash used in investing activities was $13.8 million for the nine months ended January 24, 2015. Net cash provided by investing activities was $19.9 million for the thirty three weeks ended January 25, 2014 (Successor Company) and net cash used in investing activities was $0.7 million for the six weeks ended June 11, 2013 (Predecessor Company). The combined decrease was primarily due to the release of $26.3 million of restricted cash in fiscal 2014 which related primarily to the Bayside early termination fee dispute, which was settled in the second quarter of fiscal 2014. The remaining difference is related to increased spending on property, plant and equipment in the current year, primarily to support the Company’s distribution center consolidation and its eCommerce initiatives.

Net cash provided by financing activities was $0.7 million for the nine months ended January 24, 2015. Net cash used by financing activities was $46.2 for the thirty three weeks ended January 25, 2014 (Successor Company), respectively. Net cash provided by financing activities was $15.5 million for the six weeks ended June 11, 2013 (Predecessor Company). The combined increase of $31.5 million relates primarily to the payment of the $26.4 million of early termination fee in fiscal 2014. Outstanding borrowings on the New ABL Facility were $13.6 million as January 24, 2015, while the excess availability on that date for the New ABL Facility was $34.9 million.

 

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We believe that our cash flow from operations, borrowings available from our existing credit facility and other sources of capital will be sufficient to meet our liquidity requirements for operations, including anticipated capital expenditures and our contractual obligations for the foreseeable future.

Fluctuations in Quarterly Results of Operations

Our business is subject to seasonal influences. Our historical revenues and profitability have been dramatically higher in the first two quarters of our fiscal year, primarily due to increased shipments to customers coinciding with the start of each school year. Quarterly results also may be materially affected by the variations in our costs for the products sold, the mix of products sold and general economic conditions. Therefore, results for any fiscal quarter are not indicative of the results that we may achieve for any subsequent fiscal quarter or for a full fiscal year.

Inflation

Inflation, particularly in energy costs, has had and is expected to have an effect on our results of operations and our internal and external sources of liquidity.

Forward-Looking Statements

Statements in this Quarterly Report which are not historical are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include: (1) statements made under Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operation, including, without limitation, statements with respect to our Process Improvement Program, internal growth plans, projected revenues, margin improvement, capital expenditures, adequacy of capital resources and ability to comply with financial covenants; and (2) statements included or incorporated by reference in our future filings with the Securities and Exchange Commission. Forward-looking statements also include statements regarding the intent, belief or current expectation of School Specialty or its officers. Forward-looking statements include statements preceded by, followed by or that include forward-looking terminology such as “may,” “should,” “believes,” “expects,” “anticipates,” “estimates,” “continues” or similar expressions.

All forward-looking statements included in this Quarterly Report are based on information available to us as of the date hereof. We do not undertake to update any forward-looking statements that may be made by us or on our behalf, in this Quarterly Report or otherwise. Our actual results may differ materially from those contained in the forward-looking statements identified above. Factors which may cause such a difference to occur include, but are not limited to, the risk factors set forth in Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended April 26, 2014.

 

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in qualitative and quantitative disclosures about market risk from what was reported in our Annual Report on Form 10-K for the fiscal year ended April 26, 2014.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on an evaluation as of the end of the period covered by this quarterly report, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) were not effective for the purposes set forth in the definition of the Exchange Act rules due to a material weakness in internal control over financial reporting related to accounting for non-routine transactions.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter ended January 24, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

ITEM 6. Exhibits

See the Exhibit Index, which is incorporated herein by reference.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

SCHOOL SPECIALTY, INC.
(Registrant)

March 4, 2015

/s/ Ryan M. Bohr

Date Ryan M. Bohr
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)

March 4, 2015

/s/ Kevin L. Baehler

Date Kevin L. Baehler
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit
No.

  

Description

  10.1    Severance Agreement between School Specialty, Inc. and Patrick Collins, dated as of December 1, 2014 (incorporated by reference to Exhibit 10.1 of School Specialty, Inc.’s Form 8-K dated December 1, 2014).
  10.2    Severance Agreement between School Specialty, Inc. and Richard Holden, dated as of December 19, 2014 (incorporated by reference to Exhibit 10.1 of School Specialty, Inc.’s Form 8-K dated December 19, 2014).
  10.3    First Amendment, Consent and Limited Waiver to Loan Agreement among School Specialty, Inc., and certain of its subsidiaries, Bank of America, N.A., SunTrust Bank and Bank of Montreal, as lenders, and Bank of America, N.A. as agent for the lenders (incorporated by reference to Exhibit 10.1 of School Specialty, Inc.’s Form 8-K dated October 31, 2014).
  10.4    Amendment No. 1 to the Credit Agreement, dated June 11, 2013, among School Specialty, Inc., the lenders party thereto, and Credit Suisse AG, as Administrative Agent and Collateral Agent for the lenders (incorporated herein by reference to Exhibit 10.2 of School Specialty, Inc.’s Form 8-K dated October 31, 2014),
  10.5    Employment Agreement between School Specialty, Inc. and Ryan Bohr, dated as of October 27, 2014 (incorporated herein by reference to Exhibit 10.1 of School Specialty, Inc.’s Form 8-K dated October 27, 2014,
  10.6    Stock Option Agreement by and between School Specialty, Inc. and Ryan Bohr, dated as of October 27, 2014 (incorporated herein by reference to Exhibit 10.2 of School Specialty, Inc.’s Form 8-K dated October 27, 2014.
  10.7    Management Incentive Plan for Fiscal 2015 (incorporated herein by reference to Exhibit 10.3 of School Specialty, Inc.’s Form 8-K dated October 27, 2014).
  10.8    Employment Agreement between School Specialty, Inc. and Edward J. Carr, Jr. dated January 19, 2015.
  10.9    Stock Option Agreement by and between School Specialty, Inc. and Edward J. Carr, Jr. dated January 19, 2015.
  31.1    Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002, by Chief Executive Officer.
  31.2    Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002, by Chief Financial Officer.
  32.1    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002, by Chief Executive Officer.
  32.2    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002, by Chief Financial Officer.
101    The following materials from School Specialty, Inc.’s. Quarterly Report on Form 10-Q for the quarter ended January 24, 2015 are filed herewith, formatted in XBRL (Extensive Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statement of Operations, (iii) the Condensed Consolidated Statement of Comprehensive Income, (iv) the Condensed Consolidated Statement of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.

 

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