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 27, 2001.
[ ] 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)
Wisconsin 39-0971239
(State or Other (IRS Employer
Jurisdiction of Incorporation) Identification No.)
1000 North Bluemound Drive
Appleton, Wisconsin
(Address of Principal Executive Offices)
54914
(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 the number of shares outstanding of each of
the issuer's classes of common stock, as of the latest
practicable date.
Outstanding at
Class March 1, 2001
Common Stock, $0.001 par value 17,577,205
SCHOOL SPECIALTY, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JANUARY 27, 2001
PART I - FINANCIAL INFORMATION
Page
Number
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at January 27, 2001
(Unaudited) and April 29, 2000 1
Unaudited Consolidated Statements of Operations
for the Three Months Ended January 27, 2001
and January 22, 2000 and for the Nine Months
Ended January 27, 2001 and January 22, 2000 2
Unaudited Consolidated Statements of Cash Flows
for the Nine Months Ended January 27, 2001
and January 22, 2000 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 14
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
SCHOOL SPECIALTY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
January 27, April 29,
2001 2000
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,817 $ 4,151
Accounts receivable, less allowance for
doubtful accounts of $3,843 and
$1,744, respectively 54,086 76,028
Inventories 69,925 86,117
Prepaid expenses and other current assets 42,987 28,664
Deferred taxes 6,964 6,964
-------- --------
Total current assets 179,779 201,924
Property and equipment, net 44,755 51,725
Intangible assets, net 262,033 192,744
Deferred taxes 1,861 1,861
Other 6,772 6,595
-------- --------
Total assets $495,200 $454,849
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities - long-term debt $ 14,823 $ 17,391
Accounts payable 39,105 48,874
Accrued compensation 3,326 8,634
Other accrued liabilities 17,823 8,953
Accrued income taxes 7,214 1,150
Accrued restructuring - 65
-------- --------
Total current liabilities 82,291 85,067
Long-term debt 167,102 144,789
-------- --------
Total liabilities 249,393 229,856
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 17,541,909 and 17,464,505 shares
issued and outstanding, respectively 17 17
Capital paid-in excess of par value 197,303 196,012
Accumulated other comprehensive loss - (30)
Retained earnings 48,487 28,994
-------- --------
Total stockholders' equity 245,807 224,993
-------- --------
Total liabilities and stockholders' equity $495,200 $454,849
======== ========
See accompanying notes to consolidated financial statements.
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
For the Three For the Nine
Months Ended Months Ended
------------------------ ------------------------
January 27, January 22, January 27, January 22,
2001 2000 2001 2000
Revenues $104,658 $ 97,244 $562,264 $523,131
Cost of revenues 66,624 63,815 359,648 333,910
-------- -------- -------- --------
Gross profit 38,034 33,429 202,616 189,221
Selling, general and
administrative expenses 42,245 35,674 154,938 140,201
-------- -------- -------- --------
Operating income (loss) (4,211) (2,245) 47,678 49,020
Other (income) expense:
Interest expense 4,214 3,216 12,510 10,081
Interest income (33) (13) (97) (84)
Other 1,398 382 1,101 391
-------- -------- -------- --------
Income (loss) before
provision for (benefit from)
income taxes (9,790) (5,830) 34,164 38,632
Provision for (benefit from)
income taxes (4,988) (2,798) 14,671 18,116
-------- -------- -------- --------
Net income (loss) $ (4,802) $ (3,032) $ 19,493 $ 20,516
======== ======== ======== ========
Weighted average shares
outstanding:
Basic 17,473 17,434 17,467 17,417
Diluted 17,473 17,434 17,672 17,425
Net income (loss) per share:
Basic $(0.27) $(0.17) $1.12 $1.18
Diluted $(0.27) $(0.17) $1.10 $1.18
See accompanying notes to consolidated financial statements.
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Nine
Months Ended
------------------------
January 27, January 22,
2001 2000
Cash flows from operating activities:
Net income $ 19,493 $ 20,516
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization expense 10,862 9,576
Amortization of loan fees and other 455 430
(Gain) loss on disposal of fixed assets (184) 415
Loss on disposition of business 717 -
Change in current assets and liabilities (net
of assets acquired and liabilities assumed in
business combinations accounted for under
the purchase method):
Accounts receivable (2,054) (19,998)
Inventory 23,794 22,176
Prepaid expenses and other current assets (11,667) (1,942)
Accounts payable (10,655) (8,605)
Accrued liabilities 3,168 6,523
-------- --------
Net cash provided by operating activities 33,929 29,091
-------- --------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash acquired (113,832) (1,291)
Additions to property and equipment (9,925) (10,698)
Proceeds from disposition of business, net of cash 3,538 -
Proceeds from the sale of property and equipment 20,275 -
Other (1,575) (1,936)
-------- --------
Net cash used in investing activities (101,519) (13,925)
-------- --------
Cash flows from financing activities:
Proceeds from bank borrowings 159,200 142,000
Repayment of bank debt and capital leases (141,238) (162,225)
Proceeds from sale of accounts receivable 50,000 -
Proceeds from exercise of stock options 1,508 -
Repurchase of common stock (214) -
Proceeds from issuance of common stock - 2,225
-------- --------
Net cash provided by (used in) financing
activities 69,256 (18,000)
-------- --------
Net increase (decrease) in cash and cash equivalents 1,666 (2,834)
Cash and cash equivalents, beginning of period 4,151 9,779
-------- --------
Cash and cash equivalents, end of period $ 5,817 $ 6,945
======== ========
See accompanying notes to consolidated financial statements.
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
(In thousands)
The Company entered into certain business combinations
accounted for under the purchase method of accounting
in the nine months ended January 27, 2001, and January
22, 2000. The transactions that occurred in the nine
months ending January 27, 2001 were paid for using
cash. The transactions during the nine months ended
January 22, 2000 were paid for using cash and common
stock or cash. 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 27, January 22,
2001 2000
Accounts receivable $ 28,068 $ 2,091
Inventories 8,674 1,434
Prepaid expenses and other current assets 5,194 66
Property and equipment 5,957 179
Intangible assets 75,314 2,186
Other assets 50 13
Short-term debt and capital lease obligations
and long-term debt (1,217) -
Accounts payable (2,080) (1,857)
Accrued liabilities (5,562) (760)
Long-term capital lease obligations (566) (885)
-------- --------
Net assets acquired $113,832 $ 2,467
======== ========
Acquisitions were funded as follows:
Cash paid, net of cash acquired $113,832 $ 1,291
Common stock - 1,176
-------- --------
Total $113,832 $ 2,467
======== ========
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 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 29, 2000, has been derived from the Company's
audited financial statements for the fiscal year ended
April 29, 2000. 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 29, 2000.
NOTE 2-STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Changes in stockholders' equity during the nine months
ended January 27, 2001, were as follows:
Stockholders' equity balance at April 29, 2000 $224,993
Net income 19,493
Repurchase of common stock (214)
Proceeds from stock option exercises 1,508
Other 27
--------
Stockholders' equity balance at January 27, 2001 $245,807
========
Comprehensive income for the periods presented in the
consolidated statements of operations were as follows:
For the Three For the Nine
Months Ended Months Ended
------------------------ ------------------------
January 27, January 22, January 27, January 22,
2001 2000 2001 2000
Net income $(4,802) $(3,032) $19,493 $20,516
Other comprehensive loss:
Cumulative translation
adjustment 234 12 30 (5)
-------- -------- ------- -------
Total comprehensive income
(loss) $(4,568) $(3,020) $19,523 $20,511
======== ======== ======= =======
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
NOTE 3-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 consolidated statements of
operations:
Income (Loss) Share Per Share
(Numerator) (Denominator) Amount
Three months ended January 27, 2001:
Basic and diluted EPS $ (4,802) 17,473 $ (0.27)
======== ======== ========
Three months ended January 22, 2000:
Basic and diluted EPS $ (3,032) 17,434 $ (0.17)
======== ======== ========
Nine months ended January 27, 2001:
Basic $ 19,493 17,467 $ 1.12
========
Effect of dilutive employee stock
options - 205
-------- --------
Diluted EPS $ 19,493 17,672 $ 1.10
======== ======== ========
Nine months ended January 22, 2000:
Basic $ 20,516 17,417 $ 1.18
========
Effect of dilutive employee stock
options - 8
-------- --------
Diluted EPS $ 20,516 17,425 $ 1.18
======== ======== ========
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.
NOTE 4-ACCOUNTING PRONOUNCEMENTS
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.
The SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition" ("SAB No. 101"), in December
1999, which provides guidance on the recognition,
presentation, and disclosure of revenue in financial
statements. On June 26, 2000, the SEC issued SAB No.
101B which delayed implementation of SAB No. 101. The
Company will implement SAB No. 101 in the fourth
quarter of fiscal year 2001 as required by SAB No.
101B. The Company has determined that implementing SAB
No. 101 will not have a material effect on the
Company's financial position or results of operations.
In September 2000, the FASB issued SFAS No. 140,
"Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." SFAS No.
140 replaces SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments
of Liabilities." It revises the standards for
accounting for securitizations and other transfers of
financial assets and collateral and requires certain
disclosures, but it carries over most of SFAS No. 125's
provisions without reconsideration. SFAS No. 140 is
generally effective for transfers and servicing of
financial assets and extinguishments of liabilities
occurring after March 31, 2001. The disclosure
requirements are effective for financial statements for
fiscal years ending after December 15, 2000. The
Company does not expect the adoption of SFAS No. 140 to
have a material impact on its present securitization
activities.
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
NOTE 5-BUSINESS COMBINATIONS
On November 22, 2000, the Company acquired certain net
assets of J.L. Hammett Company. The transaction was
accounted for under the purchase method of accounting,
for a cash purchase price of approximately $82,500,
which is subject to change, resulting in goodwill of
approximately $46,800, which will be amortized over 40
years. The results of this acquisition have been
included in the Company's results from the date of
acquisition.
On June 30, 2000, the Company acquired Global Video,
LLC. The transaction was accounted for under the
purchase method of accounting, for a cash purchase
price of approximately $32,000, which is subject to
change, resulting in goodwill of approximately $25,800,
which will be amortized over 40 years. The results of
this acquisition have been included in the Company's
results from the date of acquisition.
During fiscal 2000, the Company purchased 100% of a
company, and certain assets of another company. The
results of these acquisitions have been included in the
Company's results from their respective dates of
acquisition.
NOTE 6-SEGMENT INFORMATION
The Company's business activities are organized around
three principal business segments, traditional,
specialty and Internet. Both internal and external
reporting 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, 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
customer use with the Internet (i.e., filtering
software for the Internet).
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 beginning of fiscal 2000's third
quarter), the Company began to separately track
financial information for this segment, and assign
certain management personnel the responsibility for
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 the first two quarters of
fiscal 2000; therefore, results for this segment for
those periods are included in both the traditional and
specialty business segments.
During the third quarter of fiscal 2001, the Company
entered into an accounts receivable securitization
transaction (see Note 10). As a result of this
transaction, receivables are sold by divisions to
corporate. Consequently, effective with the third
quarter of fiscal 2001, identifiable assets at
corporate include eligible trade accounts receivable
for the consolidated operations. These receivables have
historically been reported in their respective segment.
The following table presents segment information:
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
------------------------ ------------------------
January 27, January 22, January 27, January 22,
2001 2000 2001 2000
Revenues:
Traditional $ 61,695 $ 55,379 $341,541 $324,737
Specialty 42,963 41,865 220,723 198,394
Internet 3,364 1,108 20,261 1,108
Inter-company revenue
elimination (3,364) (1,108) (20,261) (1,108)
-------- -------- -------- --------
Total $104,658 $ 97,244 $562,264 $523,131
======== ======== ======== ========
Operating profit (loss) and
income before taxes:
Traditional $ 101 $ 582 $ 32,747 $ 34,038
Specialty (745) 1,344 24,878 25,331
Internet (914) (1,070) (2,470) (1,070)
-------- -------- -------- --------
Total (1,558) 856 55,155 58,299
General corporate expense 2,653 3,101 7,477 9,279
Interest expense and other 5,579 3,585 13,514 10,388
-------- -------- -------- --------
Income (loss) before
taxes $ (9,790) $ (5,830) $ 34,164 $ 38,632
======== ======== ======== ========
Identifiable assets (at
quarter end):
Traditional $223,482 $237,731 $223,482 $237,731
Specialty 165,060 171,296 165,060 171,296
Internet 11,879 4,504 11,879 4,504
-------- -------- -------- --------
Total 400,421 413,531 400,421 413,531
Corporate assets
94,779 28,267 94,779 28,267
-------- -------- -------- --------
Total $495,200 $441,798 $495,200 $441,798
======== ======== ======== ========
Depreciation and
amortization:
Traditional $ 1,716 $ 1,475 $ 4,376 $ 4,832
Specialty 1,643 1,191 4,316 3,705
Internet 311 306 1,299 306
-------- -------- -------- --------
Total 3,670 2,972 9,991 8,843
Corporate 332 345 871 733
-------- -------- -------- --------
Total $ 4,002 $ 3,317 $ 10,862 $ 9,576
======== ======== ======== ========
Expenditures for property
and equipment:
Traditional $ 1,006 $ 1,695 $ 1,957 $ 4,715
Specialty 709 851 2,799 3,370
Internet 646 356 3,479 356
-------- -------- -------- --------
Total 2,361 2,902 8,235 8,441
Corporate 670 12 1,690 2,257
-------- -------- -------- --------
Total $ 3,031 $ 2,914 $ 9,925 $ 10,698
======== ======== ======== ========
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
NOTE 7-FINANCING ACTIVITIES
On October 30, 2000, the Company's interest rate swap
agreement with the Bank of New York was canceled by the
Bank of New York under the terms of the January 27,
1998, swap agreement. The swap agreement, which fixed
the 30-day LIBOR interest rate at 4.37% per annum on a
$50,000 notional amount, was for a three-year term,
cancelable by the Bank on the second anniversary.
The Company entered into an interest rate swap
agreement on December 13, 2000, (effective date of
January 2, 2001), with the Bank of New York covering
$50,000 of the outstanding borrowings under the
Company's credit facility. The agreement fixes the 30-
day LIBOR interest rate at 6.07% per annum on the
$50,000 notional amount and has a one year term which
expires on January 2, 2002.
NOTE 8-SALE/LEASEBACK TRANSACTION
On November 3, 2000, the Company entered into a
sale/leaseback transaction for the Company's
distribution centers in Mansfield, Ohio and Agawam,
Massachusetts. The transaction netted approximately
$17,800 in cash, which was used to reduce outstanding
borrowings under the Company's credit facility. The
transaction also resulted in a gain on sale of $877,
which will be amortized over the life of the lease.
NOTE 9-DISPOSITION
On January 17, 2001, the Company sold Don Gresswell,
Ltd., a U.K. subsidiary. The transaction, a sale of
stock for net cash of approximately $3,500, resulted in
a pre-tax loss of $717.
NOTE 10-ACCOUNTS RECEIVABLE SECURITIZATION
The Company and certain of its U.S. subsidiaries
entered into an agreement (the "Receivables Facility")
in November 2000 with a financial institution whereby
it sells on a continuous basis an undivided interest in
all eligible trade accounts receivable. Pursuant to the
Receivables Facility, the Company formed New School,
Inc. ("NSI"), a wholly-owned, special purpose,
bankruptcy-remote subsidiary. NSI was formed for the
sole purpose of buying and selling receivables
generated by the Company and certain subsidiaries of
the Company. Under the Receivables Facility, the
Company and certain subsidiaries transfer without
recourse all of their accounts receivables to NSI. NSI,
in turn, has sold and, subject to certain conditions,
may from time to time sell an undivided interest in
these receivables and is permitted to receive advances
of up to $50,000 for the sale of such undivided
interest. The agreement expires in November 2001.
This two-step transaction is accounted for as a sale of
receivables under the provision of SFAS No. 125,
"Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities." There was
$50,000 advanced under the Receivables Facility at
January 27, 2001, and accordingly, that amount of
accounts receivable has been removed from the
Consolidated Balance Sheet. Costs associated with the
sale of receivables, primarily related to the discount
and loss on sale, were $687, and are included in other
expenses in the Consolidated Statements of Operations
for the three and nine month periods ended January 27,
2001.
NOTE 11-SUBSEQUENT EVENT
On February 21, 2001, the Company sold the net assets
of SmartStuff Software, an operating unit of the
Company. The transaction, a sale of net assets for
stock, resulted in a pre-tax gain of approximately
$400.
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 27, January 22, January 27, January 22,
2001 2000 2001 2000
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 63.7 65.6 64.0 63.8
----- ----- ----- -----
Gross profit 36.3 34.4 36.0 36.2
Selling, general and
administrative expenses 40.3 36.7 27.5 26.8
----- ----- ----- -----
Operating income (loss) (4.0) (2.3) 8.5 9.4
Interest expense and other 5.4 3.7 2.4 2.0
----- ----- ----- -----
Income (loss) before
provision for (benefit
from) income taxes (9.4) (6.0) 6.1 7.4
Provision for (benefit
from) income taxes (4.8) (2.9) 2.6 3.5
----- ----- ----- -----
Net income (4.6)% (3.1)% 3.5% 3.9%
===== ===== ===== =====
Three Months Ended January 27, 2001 Compared to Three Months
Ended January 22, 2000
Revenues
Revenues increased 7.6% from $97.2 million for the
three months ended January 22, 2000, to $104.7 million
for the three months ended January 27, 2001. This
increase was partially due to revenues from the
acquisitions of Global Video, LLC ("Global"), acquired
on June 30, 2000, and revenues from the assets acquired
from J.L. Hammett Company ("Hammett") on November 22,
2000. This increase was offset by the sale of Don
Gresswell, Ltd. ("Gresswell"), our U.K. subsidiary in
January 2001.
Gross Profit
Gross profit was $38.0 million or 36.3% of revenues for
the three months ended January 27, 2001, an increase of
$4.6 million, or 13.8% over fiscal 2000's third quarter
of $33.4 million or 34.4% of revenues. The increase in
gross profit was primarily due to an increase in
revenues. The change in gross profit as a percent of
revenues was due primarily to 1) product mix in the
traditional segment, driven by revenue growth in higher-
margin consumable business and 2) an increase in
specialty segment gross margin, benefited by the
acquisition of Global, which has higher gross margins
than most of our specialty businesses.
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 on warehouse
shipments), catalog costs and general administrative
overhead (which includes information systems,
accounting, legal, human resources, marketing and
purchasing expense).
Selling, general and administrative expenses increased
18.4% from $35.7 million or 36.7% of revenues for the
three months ended January 22, 2000, to $42.2 million
or 40.3% of revenues for the three months ended January
27, 2001. The increase in selling, general and
administrative expenses was primarily due to 1)
increased outbound transportation costs due to higher
fuel prices, 2) investments in infrastructure to
develop the Internet Segment, and 3) increased
operations expenses, driven by the acquisition of
Hammett during a seasonally light quarter, resulting in
redundancies in warehousing and other operations
expense in the traditional segment. Integrating
Hammett into the traditional business began during the
third quarter of fiscal 2001, and will result in the
consolidation of warehousing during the third quarter
of fiscal 2002, following our heavy shipping season.
These increases were offset by a reduction in general
corporate expenses.
Interest Expense
Interest expense, net of interest income, increased
$1.0 million from $3.2 million or 3.3% of revenues for
the three months ended January 22, 2000 to $4.2
million or 4.0% of revenues for the three months ended
January 27, 2001. The increase in interest expense was
primarily due to a slight increase in our effective
borrowing rate and an increase in debt due to debt
assumed and cash paid to acquire Global during the
first quarter of 2001 and Hammett in the third quarter.
These increases were offset by the accounts
receivable securitization (the "Securitization"), a
transaction we entered into in November 2000. Under the
agreement, we may sell up to $50 million in eligible
receivables on a continuous basis. The proceeds from
the sale were used to reduce our debt outstanding. In
addition, we entered into a sale/leaseback transaction
in November 2000, which netted $17.8 million in cash,
which was used to reduce debt outstanding.
Other Expense
Other expenses increased from $0.4 million for the
three months ended January 22, 2000 to $1.4 million for
the three months ended January 27, 2001. Other expenses
for the three months ended January 27, 2001, primarily
consisted of a loss on the disposition of Gresswell,
our U.K. subsidiary of $0.7 million and the discount
and loss on the Securitization of $0.7 million.
Provision for (benefit from) Income Taxes
The benefit from income taxes for the three months
ended January 27, 2001 increased 78.2% or $2.2 million
over the three months ended January 22, 2000,
reflecting income tax rates of 50.9% and 48.0% for the
three months ended January 27, 2001 and January 22,
2000, respectively. The effective tax rate of 50.9% in
the third quarter of fiscal 2001 as compared to 48.0%
in the third quarter of fiscal 2000 is due to reduced
state taxes and a smaller percentage impact of non-
deductible goodwill amortization due to the
acquisitions of Hammett and Global and the
disposition of Gresswell. The higher effective tax
rate, compared to the federal statutory rate of 35.0%,
was primarily due to state income taxes and non-
deductible goodwill amortization.
Nine Months Ended January 27, 2001 Compared to the Nine
Months Ended January 22, 2000
Revenues
Revenues increased 7.5% from $523.1 million for the
nine months ended January 22, 2000 to $562.3 million
for the nine months ended January 27, 2001. Increase
in revenues was primarily driven by 1) acquisitions of
Global and Hammett in June 2000 and November 2000,
respectively and 2) growth in all three business
segments. These increases were offset by the sale of
Gresswell in January 2001.
Gross Profit
Gross profit increased 7.5% from $189.2 million or
36.2% of revenues for the nine months ended January 22,
2000 to $202.6 million or 36.0% of revenues for the
nine months ended January 27, 2001. The increase in
gross profit is primarily due to the increase in
revenues. The slight change in gross margin is
primarily due to product mix.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased
10.5% from $140.2 million or 26.8% of revenues for the
nine months ended January 22, 2000 to $155.0 million or
27.5% of revenues for the nine months ended January 27,
2001. The increase in selling, general and
administrative expenses was primarily due to an
increase in revenues, investment in the Internet
segment and the acquisition of Hammett during our
seasonally low third quarter, resulting in redundancies
in operating expenses in the traditional business. The
increase in selling, general and administrative
expenses as a percent of revenue, was primarily due to
1) growth in the specialty segment, which typically has
higher selling, general and administrative expenses
than our other business segments, 2) expenses incurred
in developing the Internet segment and 3) the
acquisition of Hammett, which created redundancies in
the traditional segment. We began to integrate Hammett
during the third quarter, and will consolidate
warehouses as a result of the acquisition in the third
quarter of fiscal 2002, following our heavy shipping
season.
Interest Expense
Interest expense, net of interest income, increased
$2.5 million from $10.0 million or 1.9% of revenues for
the nine months ended January 22, 2000 to $12.4 million
or 2.2% of revenues for the nine months ended January
27, 2001. The increase in interest expenses is
primarily due to an increase in debt outstanding due to
the acquisitions of Global in June 2000 and Hammett in
November 2000 for $113.8 million in net cash, offset
by proceeds from the sale leaseback transaction of
$17.8 million and the Securitization of $50.0 million
and a slight increase in the effective borrowing rate.
Other Expenses
Other expenses increased $0.6 million from $0.5 million
for the nine months ended January 22, 2000 to $1.1
million for the nine months ended January 27, 2001.
Other expenses for the nine months ended January 27,
2001, primarily consisted of the loss on the
disposition of Gresswell of $0.7 million and the
discount and loss on the Securitization of $0.7
million.
Provision for Income Taxes
Provision for income taxes for the nine months ended
January 27, 2001 decreased 19.0% or $3.4 million over
the nine months ended January 22, 2000, reflecting
income tax rates of 42.9% and 46.9% for the nine months
ended January 27, 2001 and January 22, 2000,
respectively. The effective tax rate of 42.9% for the
nine months ended January 27, 2001 as compared to 46.9%
for the nine months ended January 22, 2000 was due to
reduced state taxes and a smaller percentage impact of
non-deductible goodwill amortization due to the
acquisitions of Global and Hammett and the sale of
Gresswell. 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
At January 27, 2001, we had net working capital of
$97.5 million. Our capitalization at January 27, 2001
was $427.7 million and consisted of debt of $181.9
million and stockholders' equity of $245.8 million.
We have a five-year secured $350 million revolving
credit facility with Bank of America, N.A. The 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 27, 2001 under the
credit facility was approximately $231.0 million,
consisting of $158.4 million outstanding under the
revolving loan portion of the facility and $72.6
million outstanding under the term loan portion of the
facility. Borrowings under the credit facility are
usually significantly higher during our first and
second quarters to meet the working capital needs of
our peak selling season. To accommodate our business
growth, we have made and we intend, as necessary, to
make immaterial changes to certain financial and other
covenants under the credit facility.
Effective January 2, 2001, the Company entered into an
interest rate swap agreement with the Bank of New York.
The one-year non-cancelable swap agreement fixes the 30-
day LIBOR interest rate at 6.07% per annum on a $50
million notional amount.
On October 28, 1998, we entered into an interest rate
swap agreement with the Bank of New York covering $50
million of the outstanding credit facility. The
agreement fixed the 30 day LIBOR interest rate at 4.37%
per annum on a $50 million notional amount and had a
three year term that was cancelable by the Bank of New
York on the second anniversary. As of January 27,
2001, our effective interest rate on borrowings under
our credit facility was approximately 8.9% excluding
the effect of the swap agreement and 8.4% including the
effect of the swap agreement. On October 30, 2000, the
Bank of New York canceled the swap agreement.
We anticipate that our cash flow from operations and
borrowings available from our existing 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 27, 2001, net cash
provided by operating activities was $33.9 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 $101.5 million,
including $113.8 million for acquisitions and $9.9
million for capital expenditures, offset by $2.5
million in proceeds from the sale of a closed warehouse
facility, $17.8 million in net proceeds from the
sale/leaseback transaction and $3.5 million in net
proceeds from the sale of Gresswell. Net cash provided
by financing activities was $69.3 million, which
consisted primarily of borrowings under our credit
facility and a $50.0 million decrease in borrowings due
to proceeds from the securitization.
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 capital expenditures 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 credit facility.
Subsequent Event
On February 21, 2001, we sold the net assets of
SmartStuff Software, an operating unit of School
Specialty. The transaction, a sale of net assets for
stock, resulted in a pre-tax gain of $0.4 million.
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 our
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.
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 Discussion 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, pages 15 - 18, for the year ended April 29,
2000, 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, pages 15 - 18, for the fiscal year
ending April 29, 2000. There have been no material
changes in our quantitative or qualitative exposure to
market risk since the end of fiscal 2000.
(Remainder of this page was intentionally left blank.)
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
See "Index to Exhibits" which is incorporated
herein by reference.
(b) The Company filed two reports on Form 8-K during
the quarter covered by this report as follows:
(1) Form 8-K dated November 22, 2000, filed on
December 5, 2000 under Item 2. The Company
acquired substantially all of the assets
of the wholesale division of the J.L. Hammett
Company.
(2) Form 8-K dated December 11, 2000, filed on
December 15, 2000 under Item 4. The Company
dismissed PricewaterhouseCoopers LLP as its
independent auditors and engaged Arthur
Andersen LLP to act as its independent auditor.
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)
03/01/2001 /s/ Daniel P. Spalding
Date ------------------------------
Daniel P. Spalding
Chairman of the Board,
Chief Executive Officer
(Principal Executive Officer)
03/01/2001 /s/ Mary M. Kabacinski
Date ------------------------------
Mary M. Kabacinski
Executive Vice President,
Chief Financial Officer
(Principal Financial
and Accounting Officer)
INDEX TO EXHIBITS
Exhibit No. Description
2.1 Asset Purchase Agreement
among School Specialty, Inc.
and J. L. Hammett Company
and Monatiquot Real Estate
Trust, dated November 13,
2000 incorporated by
reference to the Registrant's
current report on Form 8-K
dated November 22, 2000.
10.1(a) Receivables Purchase Agreement
dated November 22, 2000.
10.1(b) Receivables Sales Agreement
dated November 22, 2000.
21.1 Subsidiaries of School
Specialty, Inc.