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 22, 2000.
[ ] 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 of Other (IRS Employer
Jurisdiction of Incorporation) Identification No.)
426 West College Avenue
Appleton, Wisconsin
(Address of Principal Executive Offices)
54911
(Zip Code)
(920) 734-2756
(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 the number of shares outstanding of each of
the issuer's classes of common stock, as of the latest
practicable date.
Outstanding at
Class February 29, 2000
Common Stock, $0.001 par value 17,437,758
SCHOOL SPECIALTY, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JANUARY 22, 2000
PART I - FINANCIAL INFORMATION
Page
Number
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at January 22, 2000
(Unaudited) and April 24, 1999 1
Unaudited Consolidated Statements of Operations
for the Three Months Ended January 22, 2000
and January 23, 1999 and for the Nine Months
Ended January 22, 2000 and January 23, 1999 2
Unaudited Consolidated Statements of Cash Flows
for the Nine Months Ended January 22, 2000
and January 23, 1999 3
Notes to Unaudited Consolidated Financial
Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 13
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SCHOOL SPECIALTY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
January 22, April 24,
2000 1999
(unaudited)
ASSETS
- ----------
Current assets:
Cash and cash equivalents $ 6,945 $ 9,779
Accounts receivable, less allowance for
doubtful accounts of $1,984 and
$2,234, respectively 96,870 74,781
Inventories 58,041 78,783
Deferred taxes 8,396 8,371
Prepaid expenses and other current assets 19,892 18,673
--------- ---------
Total current assets 190,144 190,387
Property and equipment, net 47,960 42,305
Intangible assets, net 198,882 201,206
Deferred taxes and other 4,812 3,810
--------- ---------
Total assets $ 441,798 $ 437,708
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------
Current liabilities:
Current portion - long term debt $ 15,396 $ 11,594
Accounts payable 30,302 37,050
Accrued compensation 10,635 8,410
Accrued income taxes 9,847 4,193
Accrued restructuring 1,015 2,752
Other accrued liabilities 9,323 9,194
--------- ---------
Total current liabilities 76,518 73,193
Long term debt 138,549 161,691
Other 132 137
--------- ---------
Total liabilities 215,199 235,021
Stockholders' equity:
Preferred stock, $0.001 par value per
share, 1,000,000 shares authorized;
none outstanding - -
Common stock, $0.001 par value per share,
150,000,000 shares authorized
and 17,437,758 and 17,229,197 shares
issued and outstanding, respectively 17 17
Capital paid-in excess of par value 195,597 192,196
Accumulated other comprehensive loss (10) (5)
Retained earnings 30,995 10,479
--------- ---------
Total stockholders' equity 226,599 202,687
--------- ---------
Total liabilities and stockholders'
equity $ 441,798 $ 437,708
========= =========
See accompanying notes to consolidated financial statements.
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
January 22, January 23, January 22, January 23,
2000 1999 2000 1999
Revenues $97,244 $85,359 $523,131 $424,332
Cost of revenues 63,815 57,266 333,910 281,436
-------- -------- -------- --------
Gross profit 33,429 28,093 189,221 142,896
Selling, general and
administrative expenses 35,674 30,476 140,201 108,005
Restructuring costs - - - 5,274
-------- -------- -------- --------
Operating income (loss) (2,245) (2,383) 49,020 29,617
Other income (expense):
Interest expense (3,216) (3,879) (10,081) (8,942)
Interest income 13 37 84 114
Other (382) - (391) -
-------- -------- -------- --------
Income (loss) before
provision for (benefit
from) income taxes (5,830) (6,225) 38,632 20,789
Provision for (benefit from)
income taxes (2,798) (2,927) 18,116 10,094
-------- -------- -------- --------
Net income (loss) $(3,032) $(3,298) $ 20,516 $ 10,695
======== ======== ======== ========
Weighted average shares
outstanding:
Basic 17,434 14,579 17,417 14,625
Diluted 17,434 14,579 17,425 14,665
Net income per share:
Basic $ (0.17) $ (0.23) $ 1.18 $ 0.73
Diluted $ (0.17) $ (0.23) $ 1.18 $ 0.73
See accompanying notes to consolidated financial statements.
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Nine
Months Ended
January 22, January 23,
2000 1999
Cash flows from operating activities:
Net income $ 20,516 $ 10,695
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense 9,576 6,607
Restructuring costs - 5,274
Amortization of loan fees 430 420
Loss on disposal of fixed assets 415 -
Change in current assets and liabilities
(net of assets acquired and liabilities
assumed in business combinations accounted
for under the purchase method):
Accounts receivable (19,998) (1,971)
Inventory 22,176 27,208
Prepaid expenses and other current assets (1,942) 1,722
Accounts payable (8,605) (31,924)
Accrued liabilities 6,523 11,069
--------- ---------
Net cash provided by operating activities 29,091 29,100
--------- ---------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received (1,291) (95,030)
Additions to property and equipment (10,698) (3,978)
Other (1,936) 171
--------- ---------
Net cash used in investing activities (13,925) (98,837)
Cash flows from financing activities:
Proceeds from issuance of common stock 2,225 32,735
Proceeds from bank borrowings 142,000 302,700
Repayment of bank debt and capital leases (162,225) (187,857)
Repayment of amounts due to U.S.
Office Products - (82,976)
Capital contribution by U.S. Office Products - 8,095
Capitalized loan fees - (2,960)
--------- ---------
Net cash provided by (used in) financing
activities (18,000) 69,737
--------- ---------
Net decrease in cash and cash equivalents (2,834) -
Cash and cash equivalents, beginning of period 9,779 -
--------- ---------
Cash and cash equivalents, end of period $ 6,945 $ -
========= =========
See accompanying notes to consolidated financial statements.
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
(In thousands)
The Company issued common stock and cash in connection
with certain business combinations accounted for under
the purchase method of accounting in the nine months
ended January 22, 2000, and January 23, 1999. The fair
values of the assets and liabilities of the acquired
companies at the dates of the acquisitions are
presented as follows:
For the Nine
Months Ended
January 22, January 23,
2000 1999
Accounts receivable $ 2,091 $ 44,153
Inventories 1,434 24,701
Prepaid expenses and other current assets 66 3,251
Property and equipment 179 17,312
Intangible assets 2,186 85,312
Other assets 13 7,223
Accounts payable (1,857) (23,621)
Accrued liabilities (760) (6,303)
Long-term debt (885) (56,998)
--------- ---------
Net assets acquired $ 2,467 $ 95,030
========= =========
Acquisitions were funded as follows:
Common stock $ 1,176 $ -
Cash paid, net of cash acquired 1,291 95,030
--------- ---------
Total $ 2,467 $ 95,030
========= =========
See accompanying notes to consolidated financial statements.
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
NOTE 1-BASIS OF PRESENTATION
The accompanying unaudited consolidated financial
statements have been prepared in accordance with
generally accepted accounting principles for interim
financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and
footnotes required by generally accepted accounting
principles for complete financial statements. In the
opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a
fair presentation have been included. The balance
sheet at April 24, 1999, has been derived from the
Company's audited financial statements for the fiscal
year ended April 24, 1999. 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 year ended April 24, 1999.
NOTE 2-STOCKHOLDERS' EQUITY
Changes in stockholders' equity during the nine months
ended January 22, 2000, were as follows:
Stockholders' equity balance at April 24, 1999 $202,687
Issuance of common stock 3,401
Net income 20,516
Cumulative translation adjustment (5)
---------
Stockholders' equity balance at January 22, 2000 $226,599
=========
On May 17, 1999, the underwriters of the Company's
secondary offering, which occurred on April 16, 1999,
exercised their over allotment option for 151 shares of
Common Stock for net proceeds of approximately $2,225.
The Company issued 57 shares of Common Stock, valued at
approximately $1,176, as part of the acquisition of
Audio Graphics, which occurred during the quarter ended
July 24, 1999. 53 shares were issued during the
quarter ended July 24, 1999 and 4 shares were issued
during the quarter ended January 22, 2000.
NOTE 3-EARNINGS (LOSS) PER SHARE
The following information presents the Company's
computations of basic earnings (loss) per share ("basic
EPS") and diluted earnings per share ("diluted EPS")
for the periods presented in the consolidated
statements of operations:
Income Share Per Share
(Numerator) (Denominator) Amount
Three months ended January 22, 2000:
Basic and Diluted EPS $(3,032) 17,434 $ (0.17)
======== ======== ========
Three months ended January 23, 1999:
Basic and Diluted EPS $(3,298) 14,579 $ (0.23)
======== ======== ========
Nine months ended January 22, 2000:
Basic and EPS $20,516 17,417 $ (1.18)
Effect of dilutive employee stock ========
options - 8
-------- --------
Diluted EPS $20,516 17,425 $ (1.18)
======== ======== ========
Nine months ended January 23, 1999:
Basic EPS $10,695 14,625 $ 0.73
Effect of dilutive employee stock ========
options - 40
-------- --------
Diluted EPS $10,695 14,665 $ 0.73
======== ======== ========
The Company had additional employee stock options
outstanding during the periods presented that were not
included in the computation of diluted EPS because they
were anti-dilutive.
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
NOTE 4-ACCOUNTING PRONOUNCEMENT
In June, 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards
("SFAS") No. 133 "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 137, which delays
the adoption date of SFAS No. 133 and was issued in
July, 1999, requires adoption of SFAS No. 133 for
annual periods beginning after June 15, 2000. SFAS No.
133 establishes standards for recognition and
measurement of derivatives and hedging activities. The
Company will implement this statement in fiscal year
2002 as required. The adoption of SFAS No. 133 is not
expected to have a material effect on the Company's
financial position or results of operations.
NOTE 5-BUSINESS COMBINATIONS
During the fiscal period ended April 24, 1999, the
Company completed five business combinations which were
accounted for under the purchase method of accounting.
In the first three months of fiscal 2000, the Company
made one insignificant acquisition, which was accounted
for under the purchase method of accounting, for an
aggregate purchase price of $2,356, resulting in
goodwill of $1,914, which will be amortized over 40
years. The results of this acquisition have been
included in the Company's results from the respective
date of acquisition. During the third quarter ended
January 22, 2000, a transaction was completed in which
the Company purchased certain assets and retained
certain employees which represented a piece of a
business. This transaction resulted in recording
goodwill of $272. The pro forma results of these
transactions are not included below as they have an
immaterial impact on the pro forma financial results.
The following presents the unaudited pro forma results
of operations of the Company for the three and nine
month periods ended January 22, 2000 and January 23,
1999, and includes the Company's unaudited consolidated
financial statements, which give retroactive effect to
the acquisitions as if all such purchase acquisitions
had been made at the beginning of fiscal 1999. The
results presented below include certain pro forma
adjustments to reflect the amortization of intangible
assets, adjustments to interest expense, and the
inclusion of a federal income tax provision on all
earnings for the periods ended January 22, 2000 and
January 23, 1999, respectively:
Three Months Ended Nine Months Ended
January 22, January 23, January 22, January 23,
2000 1999 2000 1999
Revenues $97,244 $98,150 $523,131 $528,111
Net income (3,032) (3,834) 20,509 11,298
Net income per share:
Basic $ (0.17) $ (0.26) $ 1.18 $ 0.76
Diluted $ (0.17) $ (0.26) $ 1.18 $ 0.75
The unaudited pro forma results of operations are
prepared for comparative purposes only and do not
necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning
of fiscal 1999 or the results that may occur in the
future. The pro forma results include the results from
businesses acquired, including product lines and
business segments that have been discontinued
subsequent to the Company's acquisition of the
business.
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
NOTE 6-SEGMENT INFORMATION
During the third quarter of fiscal 2000, the Company
modified its segment reporting by identifying
information for a third business segment, the Internet
business segment. This segment includes business
generated by products supplied through the Internet and
products supplied for use with the Internet. Effective
October 24, 1999, the Company began to separately track
financial information for this segment, and assign
certain management personnel the responsibility of
monitoring this information and focusing on the
expansion of the Company's Internet business. The
Company is unable to segregate information for the
Internet business segment for fiscal 1999 and the first
two quarters of fiscal 2000; therefore, results for
this segment prior to the three months ended January
22, 2000 are included in both the Traditional and
Specialty business segments.
The Company's business activities are organized around
three principal business segments, Traditional,
Specialty and Internet. Both internal and external
reporting (beginning with this quarter) conform to this
organizational structure, with no significant
differences in accounting policies applied. The
Company evaluates the performance of its segments and
allocates resources to them based on revenue growth and
profitability. While the three segments serve a
similar customer base, notable differences exist in
products, gross margin and revenue growth rate.
Products supplied within the Traditional segment
include consumables (consisting of classroom supplies,
instructional materials, educational games, art
supplies and school forms), school furniture and indoor
and outdoor equipment. Products supplied within the
Specialty segment target specific educational
disciplines, such as art, industrial arts, physical
education, sciences, library and early childhood. The
Internet segment supplies products from both the
traditional and specialty segments through the
Internet. In addition, the Internet segment includes
products supplied for use with the Internet (i.e.,
filtering software for the Internet).
The following table presents segment information (as
stated above, information for the three and nine months
ended January 23, 1999 reflects the Company's segment
information as previously reported, which did not
separately identify the Internet segment. This segment
is only separately identifiable beginning with the
third quarter of fiscal 2000. Any Internet segment
results for fiscal 1999 and the first two quarters of
fiscal 2000 are included in both the Traditional and
Specialty segments):
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
January 22, January 23, January 22, January 23,
2000 1999 2000 1999
Revenues:
Traditional $ 55,300 $ 55,347 $324,658 $288,550
Specialty 40,836 30,012 197,365 135,782
Internet 1,108 - 1,108 -
--------- --------- --------- ---------
Total $ 97,244 $ 85,359 $523,131 $424,332
========= ========= ========= =========
Operating Profit (Loss) and
Pretax Profit (Loss)
Traditional $ 582 $ (1,816) $ 34,038 $ 22,752
Specialty 1,344 1,116 25,331 16,867
Internet (1,070) - (1,070) -
--------- --------- --------- ---------
Total 856 (700) 58,299 39,619
General Corporate Expense 3,101 1,683 9,279 4,728
One Time Charges - - - 5,274
Interest Expense and Other 3,585 3,842 10,388 8,828
--------- --------- --------- ---------
Income Before Taxes $ (5,830) $ (6,225) $ 38,632 $ 20,789
========= ========= ========= =========
Identifiable Assets
(at quarter end):
Traditional $237,731 $248,341 $237,731 $248,341
Specialty 171,296 119,656 171,296 119,656
Internet 4,504 - 4,504 -
--------- --------- --------- ---------
Total 413,531 367,997 413,531 367,997
Corporate Assets 28,267 10,516 28,267 10,516
--------- --------- --------- ---------
Total $441,798 $378,513 $441,798 $378,513
========= ========= ========= =========
Depreciation and
Amortization:
Traditional $ 1,475 $ 1,712 $ 4,832 $ 4,213
Specialty 1,191 722 3,705 2,029
Internet 306 - 306 -
--------- --------- --------- ---------
Total 2,972 2,434 8,843 6,242
Corporate 345 132 733 365
--------- --------- --------- ---------
Total $ 3,317 $ 2,566 $ 9,576 $ 6,607
========= ========= ========= =========
Expenditures for Property
and Equipment:
Traditional $ 1,695 $ 214 $ 4,715 $ 709
Specialty 851 1,188 3,370 2,084
Internet 356 - 356 -
--------- --------- --------- ---------
Total 2,902 1,402 8,441 2,793
Corporate 12 706 2,257 1,185
--------- --------- --------- ---------
Total $ 2,914 $ 2,108 $ 10,698 $ 3,978
========= ========= ========= =========
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
NOTE 7-RESTRUCTURING COSTS
During the first quarter of fiscal 1999, the Company
recorded a one-time charge of $1,074, which is
discussed in the fiscal 1999 Form 10-K. This non-cash
charge related to compensation expense attributed to
the U.S. Office Product's stock option tender offer and
sale of shares of Common Stock to some of the Company's
executive management personnel, net of underwriting
discounts.
During the second quarter of fiscal 1999, the Company
recorded a $4,200 restructuring charge, which is
discussed in the fiscal 1999 Form 10-K. This charge
was for the Company's plan to consolidate existing
warehousing, customer service and sales operations.
Under this restructuring plan, the Company expects to
eliminate approximately 240 jobs. During the three and
nine months ended January 23, 1999, the Company
terminated 49 and 99 employees, respectively, under the
plan. During the three and nine months ended January
22, 2000, the Company terminated 13 and 36 employees,
respectively, under the plan.
During the fourth quarter of fiscal 1998, the Company
incurred restructuring costs to close redundant
facilities and related severance costs. The liability
associated with this restructuring plan was $472 as of
April 25, 1998. This restructuring plan was completed
by the end of fiscal 1999.
Selected information related to the restructuring reserve follows:
Restructuring Employee Facility Other Asset
Charge Termination Closure and Write-downs
(In Thousands) Benefits Consolidation and Costs Total
April 25, 1998
liability balance $ 214 $ - $ 258 $ 472
Additions -
restructuring charge:
Second quarter,
fiscal 1999 2,100 1,300 800 4,200
Utilizations:
First quarter,
fiscal 1999 (148) - (119) (267)
Second quarter,
fiscal 1999 (66) - (139) (205)
Third quarter,
fiscal 1999 (231) - (331) (562)
Fourth quarter,
fiscal 1999 (584) (199) (103) (886)
--------- --------- --------- ---------
April 24, 1999
liability balance $ 1,285 $ 1,101 $ 366 $ 2,752
Utilizations:
First quarter,
fiscal 2000 (351) (47) - (398)
Second quarter,
fiscal 2000 (236) (122) (54) (412)
Third quarter,
fiscal 2000 (396) (531) - (927)
--------- --------- --------- ---------
January 22, 2000
liability balance $ 302 $ 401 $ 312 $ 1,015
========= ========= ========= =========
NOTE 8-RELATED PARTY TRANSACTION
On October 1, 1999, the Company purchased a combined
warehouse and distribution facility in Appleton,
Wisconsin. Previously, the Company leased this
facility. The purchase price was $2,600, the fair
market value of the property as determined by an
independent appraisal, and was paid to the owner of the
facility (which is a corporation consisting of three
shareholders, two of whom are related to certain
executive officers of the Company).
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
The following table sets forth various items as a
percentage of revenues on a historical basis.
Three Months Ended Nine Months Ended
January 22, January 23, January 22, January 23,
2000 1999 2000 1999
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 65.6 67.1 63.8 66.3
------ ------ ------ ------
Gross profit 34.4 32.9 36.2 33.7
Selling, general and
administrative expenses 36.7 35.7 26.8 25.4
Restructuring costs - - - 1.3
------ ------ ------ ------
Operating income (loss) (2.3) (2.8) 9.4 7.0
Interest and other 3.7 4.5 2.0 2.1
------ ------ ------ ------
Income (loss) before
provision for (benefit
from) income taxes (6.0) (7.3) 7.4 4.9
Provision for (benefit
from) income taxes (2.9) (3.4) 3.5 2.4
------ ------ ------ ------
Net income (loss) (3.1)% (3.9)% 3.9% 2.5%
====== ====== ====== ======
Three Months Ended January 22, 2000 Compared to the
Three Months Ended January 23, 1999
Revenues
Revenues increased 13.9% from $85.4 million for the
three months ended January 23, 1999, to $97.2 million
for the three months ended January 22, 2000. This
increase was primarily due to internal growth on
existing business and the inclusion of revenues from
the four companies acquired in business combinations
accounted for under the purchase method of accounting
since January 1999.
Gross Profit
Gross profit improved 19.0% from $28.1 million or 32.9%
of revenues for the three months ended January 23,
1999, to $33.4 million or 34.4% of revenues for the
three months ended January 22, 2000. The increase in
gross profit as a percentage of revenues was due
primarily to (1) an increase in specialty business
revenue, where proprietary products generate higher
gross margins than the traditional business, (2) an
improvement in specialty business gross margin due
primarily to contributions from the Sportime
acquisition and a more favorable product mix and (3) a
decline in traditional gross margin, driven by a less
favorable product mix, which was weighted toward
furniture and equipment, a lower gross margin product
line than consumables.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include
selling expenses (the most significant component of
which is sales wages and commissions), operations
expenses (which includes customer service, warehouse
and outbound transportation costs), catalog costs and
general administrative overhead (which includes
information systems, accounting, legal, human resources
and purchasing expense).
Selling, general and administrative expenses increased
17.1% from $30.5 million or 35.7% of revenues for the
three months ended January 23, 1999, to $35.7 million
or 36.7% of revenues for the three months ended January
22, 2000. The increase in selling, general and
administrative expenses is primarily due to the
increase in revenue. The increase in selling, general
and administrative expenses as a percent of revenues is
primarily due to (1) a shift in revenue mix to
specialty business, which has higher selling, general
and administrative expenses than the traditional
business, (2) higher amortization expense due to
goodwill amortization related to the four acquisitions
since the end of January 1999 and (3) expenses
attributable to the newly created internet segment.
These increases are offset by reduced selling, general
and administrative expenses in the traditional
business, which is primarily due to the
integration of Beckley-Cardy and the restructuring of
the traditional business, which began in the second
quarter of fiscal 1999.
Net Interest Expense and Other Expenses
Interest expense, net of interest income, decreased
from $3.8 million or 4.5% of revenues for the three
months ended January 23, 1999 to $3.2 million or 3.3%
of revenues for the three months ended January 22,
2000. The decrease in interest expense is primarily
attributed to a reduction in debt outstanding, which is
primarily due to the repayment of debt with the
proceeds from our secondary offering, offset by the
debt assumed and cash paid for the four companies
acquired since the end of January 1999. Other expenses
of $382 for the quarter ended January 22, 2000
primarily represented the loss on the disposal of a
facility donated to a municipality.
Benefit from Income Taxes
Benefit from income taxes for the three months ended
January 22, 2000 and January 23, 1999 was $2.8 million
and $2.9 million, respectively, reflecting income tax
rates of 48% and 47%, respectively. The higher
effective tax rate, compared to the federal statutory
rate of 35.0%, is primarily due to state income taxes
and non-deductible goodwill amortization.
Nine Months Ended January 22, 2000 Compared to the Nine
Months Ended January 23, 1999
Revenues
Revenues increased 23.3% from $424.3 million for the
nine months ended January 23, 1999, to $523.1 million
for the nine months ended January 22, 2000. This
increase was primarily due to internal growth on
existing business and the inclusion of revenues from
the six companies acquired in business combinations
accounted for under the purchase method of accounting
since the beginning of fiscal 1999.
Gross Profit
Gross profit increased 32.4% from $142.9 million or
33.7% of revenues for the nine months ended January 23,
1999 to $189.2 million or 36.2% of revenues for the
nine months ended January 22, 2000. The increase in
gross profit as a percentage of revenues was due
primarily to (1) a shift in product mix to increased
revenue from specialty business, where proprietary
products generate higher gross margins than the
traditional business, (2) an improvement in traditional
business gross margins, driven primarily by more
favorable pricing and the elimination of less
profitable products from our product offering and (3)
an improvement in specialty business gross margin,
which was driven by a more favorable product mix and
contributions from Sportime, which was acquired in
February 1999 and has higher gross margins than our
other businesses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased
29.8% from $108.0 million or 25.4% of revenues for the
nine months ended January 23, 1999, to $140.2 million
or 26.8% of revenues for the nine months ended January
22, 2000. The increase in selling, general and
administrative expenses is primarily due to an increase
in revenue. The increase in selling, general and
administrative expenses as a percent of revenues is
primarily due to (1) a shift in revenue mix to
specialty business, which has higher selling, general
and administrative expenses than the traditional
business and (2) higher amortization expense due to
goodwill amortization related to the six acquisitions
since the beginning of fiscal 1999. These increases
are offset by reduced selling, general and
administrative expenses in the traditional business,
which is primarily due to the integration of Beckley-
Cardy and the restructuring of the traditional
business, which began in the second quarter of fiscal
1999.
Restructuring Costs
During 1999, we recorded a restructuring charge of
$1,074 in the first quarter and $4,200 in the second
quarter, for a total of $5,274 for the nine months
ended January 23, 1999. The $1,074 related to a one-
time, non-cash charge for compensation expense
attributed to the U.S. Office Product's stock option
tender offer and sale of shares of Common Stock to some
of our executive management personnel, net of
underwriting discounts. The $4,200 charge
was for our plan to consolidate existing warehousing,
customer service and sales operations. Further details
of the restructuring charge are discussed in the Notes
to consolidated financial statements.
Net Interest Expense and Other Expenses
Net interest expense increased $1.2 million from $8.8
million or 2.1% of revenues for the nine months ended
January 23, 1999 to $10.0 million or 1.9% of revenues
for the nine months ended January 22, 2000. The
increase in interest expense is primarily attributed to
the debt assumed and cash paid for the six companies
acquired since the beginning of fiscal 1999, partially
offset by debt repaid from the net proceeds of our
secondary offering. Other expenses of $391 for the
nine months ended January 22, 2000 primarily
represented the loss on the disposal of a facility
donated to a municipality.
Provision for Income Taxes
Provision for income taxes for the nine months ended
January 22, 2000 increased 79.5% or $8.0 million over
the nine months ended January 23, 1999, reflecting
income tax rates of 46.9% and 48.6% for the nine months
ended January 22, 2000 and January 23, 1999,
respectively. The higher effective tax rate, compared
to the federal statutory rate of 35.0%, is primarily
due to state income taxes and non-deductible goodwill
amortization.
Liquidity and Capital Resources
We have a five-year secured $350 million revolving
Senior Credit Facility with NationsBank. The Senior
Credit Facility has a $100 million term loan payable
quarterly over five years commencing in January 1999
and revolving loans which mature on September 30, 2003.
The amount outstanding as of January 22, 2000 under the
Senior Credit Facility was $153.2 million, consisting
of $63.2 million outstanding under the revolving loan
portion of the facility and $90.0 million outstanding
under the term loan portion of the facility.
Borrowings under the Senior Credit Facility are usually
significantly higher during our first and second
quarters to meet the working capital needs of our peak
selling season. On October 28, 1998, we entered into
an interest rate swap agreement with the Bank of New
York covering $50 million of the outstanding Senior
Credit Facility. The agreement fixes the 30 day LIBOR
interest rate at 4.37% per annum on the $50 million
notional amount and has a three year term that may be
canceled by the Bank of New York on the second
anniversary. Our effective interest rate for the nine
months ended January 22, 2000 was approximately 7.5%.
During the nine months ended January 22, 2000, we had
net repayments under our Senior Credit Facility of
$19.3 million, which resulted from strong cash flow
from operations offset by capital expenditures for
property and equipment and acquisitions.
On April 16, 1999, we sold 2,400,000 shares of common
stock in a secondary public offering. On May 17, 1999,
we sold an additional 151,410 shares of common stock to
cover over-allotments for approximately $2.2 million in
net proceeds. The proceeds were used to reduce
indebtedness outstanding under our Senior Credit
Facility.
At January 22, 2000, we had working capital of $113.6
million. Our capitalization at January 22, 2000 was
$379.8 million and consisted of bank debt of $153.2
million and stockholders' equity of $226.6 million.
We anticipate that our cash flow from operations and
borrowings available from our existing Senior Credit
Facility will be sufficient to meet our liquidity
requirements for our operations (including anticipated
capital expenditures) and our debt service obligations
for the remainder of the fiscal year.
During the nine months ended January 22, 2000, net cash
provided by operating activities was $29.1 million.
This net provision of cash by operating activities
during the period is indicative of the high seasonal
nature of our business, with sales occurring in the
first and second quarters of the fiscal year and cash
receipts in the second and third quarters. Net cash
used in investing activities was $13.9 million,
including $1.3 million for acquisitions, $10.7 million
for additions to property and equipment and $1.9
million for other long-term assets including a minority
investment in an Internet business. Net cash used in
financing activities was $18.0 million, which consisted
primarily of net debt repayments under our Senior
Credit Facility.
During the nine months ended January 23, 1999, net cash
provided by operating activities was $29.1 million.
Net cash used in investing activities was $98.8
million, including $95.0 million for acquisitions. Net
cash provided by
financing activities was $69.7 million, and included
(1) repayment of debt to U.S. Office Products of $83.0
million, (2) borrowings under the Senior Credit Facility
of $302.7 million, offset by debt repayments of $187.9
million. Net borrowings include $16.9 million used
to fund the cash portion price of the acquisition of
Hammond and Stephens and $134.7 million used to fund
the acquisition of Beckley-Cardy (consisting of $78.1
million for the cash potion of the purchase price and
$56.6 million for debt repayment), (3) payment of loan
fees of $3.0 million, (4) $32.7 million in net proceeds
from the issuance of common stock in conjunction with
our initial public offering and sale of 250,000 shares
of common stock to management, and (5) $8.1 million of
contributed capital from U.S. Office Products under
a distribution agreement entered into in connection with
the spin-off.
In October 1999, we entered into agreements to sell and
leaseback four of our distribution facilities, subject
to certain contingencies. Due to uncertainty and
unfavorable movements in the interest rate environment,
we have decided not to proceed with this transaction at
this time.
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 (May-October) primarily due to increased
shipments to customers coinciding with the start of
each school year.
Quarterly results also may be materially affected by
the timing of acquisitions, the timing and magnitude of
costs related to such acquisitions, variations in the
costs for the products we sell, the mix of products
sold and general economic conditions. Moreover, the
operating margins of companies acquired by us may
differ substantially from our own margins, which could
contribute to further fluctuation in our quarterly
operating results. Therefore, results for any quarter
are not indicative of the results that we may achieve
for any subsequent fiscal quarter or for a full fiscal
year.
Inflation
Inflation has and is expected to have only a minor
affect on our results of operations and our internal
and external sources of liquidity.
Year 2000
Our systems, as well as those of our third party
suppliers, made an uneventful transition from 1999 to
2000. No material disruptions occurred and operations
continued without interruption in the new year. While
initial indications suggest that Year 2000 issues will
not adversely affect operations, we will continue to
monitor our systems, as well as those of our third
party suppliers, to ensure Year 2000 compliance.
Forward-Looking Statements
Statements in this report which are not strictly
historical are "forward looking." In accordance with
the Private Securities Litigation Reform Act of 1995,
we can obtain a "safe-harbor" for forward-looking
statements by identifying those statements and by
accompanying those statements with cautionary
statements which identify factors that could cause
actual results to differ materially from those in the
forward-looking statements. Accordingly, the foregoing
"Management's Discussions and Analysis of Financial
Condition and Results of Operations" contains certain
forward-looking statements relating to growth plans and
projected revenues, earnings and costs. Our actual
results may differ materially from those contained in
the forward-looking statements herein. Factors which
may cause such a difference to occur include those
factors identified in Item 1, "Business - Forward
Looking Statements," contained in the Company's Form
10-K for the year ended April 24, 1999, which factors
are incorporated herein by reference to such Form 10-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For information as to our Quantitative and Qualitative
Disclosures about Market Risk, please see our Annual
Report on Form 10-K for the fiscal year ended April 24,
1999. There have been no material changes in our
quantitative or qualitative exposure to market risk
since the end of fiscal 1999.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The following information is furnished as to securities
of School Specialty sold during the three months ended
January 22, 2000 that were not registered under the
Securities Act:
In January 2000, we issued 4,332 shares of our common
stock to the principal shareholder of Audio Graphic
Systems as a post-closing adjustment to the purchase
price of the company in connection with our acquisition
of such company which closed in May 1999. These shares
were issued at an aggregate price of $89,269 (or $20.61
per share). The sale of these shares was exempt from
registration pursuant to Section 4(2) of the Securities
Act.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit No. Description
3.1 Amended and Restated By-Laws
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
We did not file any reports on Form 8-K during the
quarter covered by this report.
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 6, 2000 /s/ Daniel P. Spalding
- ------------------ --------------------------
Date Daniel P. Spalding
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
March 6, 2000 /s/ Mary M. Kabacinski
- ------------------ --------------------------
Date Mary M. Kabacinski
Executive Vice President and Chief Financial
Officer (Principal Financial and Accounting
Officer)
INDEX TO EXHIBITS
Exhibit No. Description
3.1 Amended and Restated By-Laws
27.1 Financial Data Schedule