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 OCTOBER 23, 1999.
[ ] 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 November 30, 1999
---------- ---------------------
Common Stock, $0.001 par value 17,433,426
SCHOOL SPECIALTY, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED OCTOBER 23, 1999
PART I - FINANCIAL INFORMATION
Page
Number
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at October 23, 1999
(Unaudited) and April 24, 1999 1
Unaudited Consolidated Statements of Operations for the
Three Months Ended October 23, 1999 and October 24, 1998
and for the Six Months Ended October 23, 1999
and October 24, 1998 2
Unaudited Consolidated Statements of Cash Flows for the
Six Months Ended October 23, 1999 and October 24, 1998 3
Notes to Unaudited Consolidated Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SCHOOL SPECIALTY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
October 23, April 24,
1999 1999
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,241 $ 9,779
Accounts receivable, less allowance for doubtful
accounts of $1,998 and $2,234, respectively 170,883 74,781
Inventories 53,105 78,783
Deferred taxes 8,371 8,371
Prepaid expenses and other current assets 14,934 18,673
-------- --------
Total current assets 253,534 190,387
Property and equipment, net 47,131 42,305
Intangible assets, net 200,628 201,206
Deferred taxes and other 4,121 3,810
-------- --------
Total assets $505,414 $437,708
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion - long term debt $ 11,646 $ 11,594
Accounts payable 41,306 37,050
Accrued compensation 11,973 8,410
Accrued income taxes 13,824 4,193
Accrued restructuring 1,578 2,752
Other accrued liabilities 11,531 9,194
-------- --------
Total current liabilities 91,858 73,193
Long term debt 183,805 161,691
Other 210 137
-------- --------
Total liabilities 275,873 235,021
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 17,433,426
and 17,229,197 shares issued and outstanding,
respectively 17 17
Capital paid-in excess of par value 195,509 192,196
Accumulated other comprehensive loss (12) (5)
Retained earnings 34,027 10,479
-------- --------
Total stockholders' equity 229,541 202,687
-------- --------
Total liabilities and stockholders' equity $505,414 $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 Six Months Ended
October 23, October 24, October 23, October 24,
1999 1998 1999 1998
Revenues $231,588 $212,316 $425,887 $338,973
Cost of revenues 148,675 141,555 270,095 224,170
-------- -------- -------- --------
Gross profit 82,913 70,761 155,792 114,803
Selling, general and
administrative expenses 56,212 47,887 104,527 77,529
Restructuring costs - 4,200 - 5,274
-------- -------- -------- --------
Operating income 26,701 18,674 51,265 32,000
Other income (expense):
Interest expense (3,695) (3,858) (6,863) (5,063)
Interest income 33 45 71 77
Other (17) - (11) -
-------- -------- -------- --------
Income before provision
for income taxes 23,022 14,861 44,462 27,014
Provision for income taxes 10,838 7,431 20,914 13,021
-------- -------- -------- --------
Net income $ 12,184 $ 7,430 $ 23,548 $ 13,993
======== ======== ======== ========
Weighted average shares
outstanding:
Basic 17,433 14,573 17,408 14,651
Diluted 17,438 14,573 17,423 14,710
Net income per share:
Basic $ 0.70 $ 0.51 $ 1.35 $ 0.96
Diluted $ 0.70 $ 0.51 $ 1.35 $ 0.95
See accompanying notes to consolidated financial statements.
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Six Months Ended
October 23, October 24,
1999 1998
Cash flows from operating activities:
Net income $ 23,548 $ 13,993
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization expense 6,259 4,041
Restructuring costs - 5,274
Deferred taxes (311) -
Amortization of loan fees 379 230
Change in current assets and liabilities
(net of assets acquired and liabilities
assumed in business combinations accounted
for under the purchase method):
Accounts receivable (94,086) (66,923)
Inventory 27,310 21,914
Prepaid expenses and other current assets 2,768 4,598
Accounts payable 3,419 (16,386)
Accrued liabilities 13,417 16,813
-------- --------
Net cash used in operating activities (17,297) (16,446)
-------- --------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received (1,085) (95,030)
Additions to property and equipment (7,784) (1,870)
Other (878) 575
-------- --------
Net cash used in investing activities (9,747) (96,325)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,225 32,735
Proceeds from bank borrowings 115,900 290,700
Repayment of bank debt and capital leases (94,619) (132,823)
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
financing activities 23,506 112,771
-------- --------
Net decrease in cash and cash equivalents (3,538) -
Cash and cash equivalents, beginning of period 9,779 -
-------- --------
Cash and cash equivalents, end of period $ 6,241 $ -
======== ========
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 six months ended October 23, 1999,
and October 24, 1998. The fair values of the assets and
liabilities of the acquired companies at the dates of the
acquisitions are presented as follows:
For the Six Months Ended
October 23, October 24,
1999 1998
Accounts receivable $ 2,016 $ 44,153
Inventories 632 24,701
Prepaid expenses and other current assets 46 3,251
Property and equipment 85 17,312
Intangible assets 1,700 85,312
Other assets 13 7,223
Accounts payable (837) (23,621)
Accrued liabilities (597) (6,303)
Long-term debt (885) (56,998)
-------- --------
Net assets acquired $ 2,173 $ 95,030
======== ========
Acquisitions were funded as follows:
Common stock $ 1,088 -
Cash paid, net of cash acquired 1,085 95,030
-------- --------
Total $ 2,173 $ 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 six months ended
October 23, 1999, were as follows:
Stockholders' equity balance at April 24, 1999 $202,687
Issuance of common stock 3,313
Net income 23,548
Cumulative translation adjustment (7)
--------
Stockholders' equity balance at October 23, 1999 $229,541
========
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 53 shares of Common
Stock, valued at approximately $1,088, as part of the acquisition
of Audio Graphics, which occurred during the quarter ended July
24, 1999.
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 Share Per Share
(Numerator) (Denominator) Amount
Three months ended October 23, 1999:
Basic EPS $ 12,184 $ 17,433 $ 0.70
Effect of dilutive employee stock options - 5 ======
-------- --------
Diluted EPS $ 12,184 $ 17,438 $ 0.70
======== ======== ======
Three months ended October 24, 1998:
Basic EPS $ 7,430 $ 14,573 $ 0.51
Effect of dilutive employee stock options - - ======
-------- --------
Diluted EPS $ 7,430 $ 14,573 $ 0.51
======== ======== ======
Six months ended October 23, 1999:
Basic EPS $ 23,548 $ 17,408 $ 1.35
Effect of dilutive employee stock options - 15 ======
-------- --------
Diluted EPS $ 23,548 $ 17,423 $ 1.35
======== ======== ======
Six months ended October 24, 1998:
Basic EPS $ 13,993 $ 14,651 $ 0.96
Effect of dilutive employee stock options - 59 ======
-------- --------
Diluted EPS $ 13,993 $ 14,710 $ 0.95
======== ======== ======
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
$2,177, resulting in goodwill of $1,700, 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.
The following presents the unaudited pro forma results of
operations of the Company for the three and six month periods
ended October 23, 1999 and October 24, 1998, 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 October 23, 1999
and October 24, 1998, respectively:
Three Months Ended Six Months Ended
October 23, October 24, October 23, October 24,
1999 1998 1999 1998
Revenues $231,588 $230,035 $425,887 $429,961
Net income 12,184 7,301 23,541 15,132
Net income per share:
Basic and diluted $ 0.70 $ 0.49 $ 1.35 $ 1.01
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.
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
NOTE 6-SEGMENT INFORMATION
The Company's business activities are organized around its two
principal business segments, Traditional and Specialty. 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 two 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, school
forms and educational software) and 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 following table presents segment information:
Three Months Ended Six Months Ended
October 23, October 24, October 23, October 24,
1999 1998 1999 1998
Revenues:
Traditional $148,119 $149,640 $269,358 $233,203
Specialty 83,469 62,676 156,529 105,770
-------- -------- -------- --------
Total $231,588 $212,316 $425,887 $338,973
======== ======== ======== ========
Operating Profit and
Pretax Profit
Traditional $ 17,236 $ 15,215 $ 33,456 $ 24,568
Specialty 12,508 9,321 23,987 15,751
-------- -------- -------- --------
Total 29,744 24,536 57,443 40,319
General Corporate Expense 3,043 1,662 6,178 3,045
One Time Charges - 4,200 - 5,274
Interest Expense and Other 3,679 3,813 6,803 4,986
-------- -------- -------- --------
Income Before Taxes $ 23,022 $ 14,861 $ 44,462 $ 27,014
======== ======== ======== ========
Identifiable Assets
(at quarter end):
Traditional $292,670 $308,827 $292,670 $308,827
Specialty 191,799 124,456 191,799 124,456
-------- -------- -------- --------
Total 484,469 433,283 484,469 433,283
Corporate Assets 20,945 12,855 20,945 12,855
-------- -------- -------- --------
Total $505,414 $446,138 $505,414 $446,138
======== ======== ======== ========
Depreciation and
Amortization:
Traditional $ 1,645 $ 1,827 $ 3,357 $ 2,501
Specialty 1,334 757 2,514 1,307
-------- -------- -------- --------
Total 2,979 2,584 5,871 3,808
Corporate 231 129 388 233
-------- -------- -------- --------
Total $ 3,210 $ 2,713 $ 6,259 $ 4,041
======== ======== ======== ========
Expenditures for Property
and Equipment:
Traditional $ 2,954 $ 354 $ 3,020 $ 495
Specialty 1,432 503 2,519 896
-------- -------- -------- --------
Total 4,386 857 5,539 1,391
Corporate 2,121 111 2,245 479
-------- -------- -------- --------
Total $ 6,507 $ 968 $ 7,784 $ 1,870
======== ======== ======== ========
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
NOTE 7 - 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 Six Months Ended
October 23, October 24, October 23, October 24,
1999 1998 1999 1998
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 64.2 66.7 63.4 66.1
----- ----- ----- -----
Gross profit 35.8 33.3 36.6 33.9
Selling, general and
administrative expenses 24.3 22.5 24.6 22.9
Restructuring costs - 2.0 - 1.6
----- ----- ----- -----
Operating income 11.5 8.8 12.0 9.4
Interest and other 1.5 1.8 1.6 1.5
----- ----- ----- -----
Income before provision
for income taxes 10.0 7.0 10.4 7.9
Provision for income taxes 4.7 3.5 4.9 3.8
----- ----- ----- -----
Net income 5.3% 3.5% 5.5% 4.1%
===== ===== ===== =====
Three Months Ended October 23, 1999 Compared to the Three Months Ended
October 24, 1998
Revenues
Revenues increased 9.1% from $212.3 million for the three months
ended October 24, 1998, to $231.6 million for the three months
ended October 23, 1999. 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 October, 1998.
Gross Profit
Gross profit increased 17.2% from $70.8 million or 33.3% of
revenues for the three months ended October 24, 1998, to $82.9
million or 35.8% of revenues for the three months ended October
23, 1999. The increase in gross profit as a percentage of
revenues was due primarily to (1) an improvement in traditional
business gross margins, which is primarily due to improved
pricing and the elimination of less profitable products from our
product offering, (2) an increase in specialty business revenue,
where proprietary products generate higher gross margins than the
traditional business and (3) an improvement in specialty business
gross margin due primarily to contributions from the Sportime
acquisition and a more favorable product mix.
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 17.4% from
$47.9 million or 22.5% of revenues for the three months ended
October 24, 1998, to $56.2 million or 24.3% of revenues for the
three months ended October 23, 1999. 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 and (2) higher amortization expense due to
goodwill amortization related to the four acquisitions since the
end of October, 1998. 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.
Interest Expense
Interest expense, net of interest income, decreased from $3.8
million or 1.8% of revenues for the three months ended October
24, 1998 to $3.7 million or 1.5% of revenues for the three months
ended October 23, 1999. 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 October, 1998.
Provision for Income Taxes
Provision for income taxes for the three months ended October 23,
1999 increased 45.8% or $3.4 million over the three months ended
October 24, 1998, reflecting income tax rates of 47.1% and 50.0%
for the three months ended October 23, 1999 and October 24, 1998,
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.
Six Months Ended October 23, 1999 Compared to the Six Months
Ended October 24, 1998
Revenues
Revenues increased 25.6% from $339.0 million for the six months
ended October 24, 1998, to $425.9 million for the six months
ended October 23, 1999. 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 35.7% from $114.8 million or 33.9% of
revenues for the six months ended October 24, 1998 to $155.8
million or 36.6% of revenues for the six months ended October 23,
1999. 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 34.8% from
$77.5 million or 22.9% of revenues for the six months ended
October 24, 1998, to $104.5 million or 24.6% of revenues for the
six months ended October 23, 1999. 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
amortization of goodwill related to our six acquisitions since
the beginning of fiscal 1999, which were accounted for under the
purchase method of accounting. These increases are offset by
reduced selling, general and administrative expense 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.
Interest Expense
Interest expense, net of interest income, increased $1.8 million
from $5.0 million or 1.5% of revenues for the six months ended
October 24, 1998 to $6.8 million or 1.6% of revenues for the six
months ended October 23, 1999. 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.
Provision for Income Taxes
Provision for income taxes for the six months ended October 23,
1999 increased 60.6% or $7.9 million over the six months ended
October 24, 1998, reflecting income tax rates of 47.0% and 48.2%
for the six months ended October
23, 1999 and October 24, 1998, 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 October 23, 1999 under the
Senior Credit Facility was $194.7 million, consisting of $102.2
million outstanding under the revolving loan portion of the
facility and $92.5 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 six months ended October 23, 1999
was approximately 7.34%. During the six months ended October 23,
1999, we had net borrowings under our Senior Credit Facility of
$22.2 million, which were used to meet our seasonal working
capital requirements, to fund an acquisition and to fund capital
expenditures.
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 October 23, 1999, we had working capital of $161.7 million.
Our capitalization at October 23, 1999 was $424.2 million and
consisted of bank debt of $194.7 million and stockholders' equity
of $229.5 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 six months ended October 23, 1999, net cash used in
operating activities was $17.3 million. This net use 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 $9.7 million, including $1.1 million for an
acquisition, $7.8 million for additions to property and equipment
and $0.9 million for other long-term assets. Net cash provided
by financing activities was $23.5 million, which consisted
primarily of net borrowings under our Senior Credit Facility.
During the six months ended October 24, 1998, net cash used in
operating activities was $16.4 million. Net cash used in
investing activities was $96.3 million, including $95.0 million
for acquisitions. Net cash provided by financing activities was
$112.8 million, and included (1) repayment of debt to U.S. Office
Products of $83.0 million, (2) borrowings under the Senior Credit
Facility of $290.7 million, offset by debt repayments of $132.8
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. The selling price of the facilities would be
approximately $22.4 million, which represents fair market value.
Net proceeds would be approximately $21.7 million, and would be
used to repay outstanding indebtedness under our Senior Credit
Facility or for general corporate purposes, including working
capital and for acquisitions. Due to uncertainty in the interest
rate environment, we may not proceed with this transaction, which
is currently scheduled to close in December 1999. Our liquidity
and 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 year, regardless of whether or not we proceed
with the above sale and leaseback transaction.
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.
Year 2000
We have established a centrally managed company-wide plan to
identify, evaluate and address Year 2000 issues. Although our
mission critical systems, network elements and products were
verified for Year 2000 compliance as of the end of November 1999,
we may still be susceptible to Year 2000-related problems. In
addition, if our suppliers, service providers and/or customers
fail to resolve their Year 2000 issues in an effective and timely
manner, our business could be significantly and adversely
affected. We believe that some of our school customers have not
yet addressed or resolved their Year 2000 issues.
We estimate that expenses of approximately $100,000 will be
incurred in fiscal 2000 in connection with our Year 2000
expenses, in addition to approximately $20,000 in expenses
incurred through April 24, 1999. We also expect to incur certain
capital improvement costs (totaling approximately $300,000) to
support this project. We expect to fund our Year 2000 efforts
through operating cash flows. We will use the Senior Credit
Facility for capital improvements related to the effort.
As part of our Year 2000 initiative, we are evaluating scenarios
that may occur as a result of the century change and are in the
process of developing contingency and business continuity plans
tailored for Year 2000-related occurrences. We are highly
reliant on our computer order processing and inventory systems to
fill orders, bill customers and collect payments. A loss of
either of these systems would cause long delays in filling and
shipping products, billing customers and collecting accounts
receivable. The highly seasonal nature of our business does not
allow for any delay in shipping products to customers. Although
the seasonal nature of our business would heighten any problems
encountered, the timing of the majority of our sales, shipping,
billing and collection efforts for fiscal 2000 will be complete
prior to the Year 2000. We expect that any unforeseen problems
related to Year 2000 issues would be identified within the months
of January and February 2000, which is our slowest period. We
have identified that we may experience certain inconveniences or
inefficiencies as a result of a supplier's failure to remediate
its Year 2000 issues. We believe, however, that most of our
business will proceed without any significant interruption.
Statements made or contained in this quarterly report on Form 10-
Q or any past statements regarding our state of readiness for the
Year 2000 are deemed Year 2000 Readiness Statements and are
subject to the Year 2000 Information and Readiness Disclosure Act
(P.L. 105-271) to the fullest extent permissible by law.
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 4. Submission of Matters to a Vote of Security Holders
(a) On September 2, 1999, we held our Annual Meeting of Stockholders.
(b) Not applicable.
(c) The Annual Meeting of Stockholders was held to elect two
directors to serve until the 2002 Annual Meeting of Stockholders
as Class I directors and to ratify the appointment of
PricewaterhouseCoopers LLP as our independent auditors for fiscal
2000. The results of these proposals, which were voted upon at
the Annual Meeting, are as follows:
Election of Directors
For Withheld
(1) Jonathan J. Ledecky 14,709,147 39,306
(2) Jerome M. Pool 14,712,502 35,951
Ratification of Independent Auditors
For Against Abstain/Broker
Non-Vote
PricewaterhouseCoopers LLP 14,629,077 108,285 11,091
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit No. Description
10.1 Employment Agreement dated as of September 3, 1999
between School Specialty, Inc. and Daniel P. Spalding
10.2 Employment Agreement dated as of September 23, 1999
between School Specialty, Inc. and Mary M. Kabacinski
10.3 Employment Agreement dated as of September 3, 1999
between School Specialty, Inc. and
Donald J. Noskowiak
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)
December 6, 1999 /s/ Daniel P. Spalding
- --------------------------- ----------------------------
Date Daniel P. Spalding
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
December 6, 1999 /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
10.1 Employment Agreement dated as of September 3, 1999 between
School Specialty, Inc. and Daniel P. Spalding
10.2 Employment Agreement dated as of September 3, 1999 between
School Specialty, Inc. and Mary M. Kabacinski
10.3 Employment Agreement dated as of September 3, 1999 between
School Specialty, Inc. and Donald J. Noskowiak
27.1 Financial Data Schedule