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 27, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
__________
Commission File Number: 000-24385
SCHOOL SPECIALTY, INC.
(Exact Name of Registrant as Specified in its Charter)
Wisconsin 39-0971239
(State or Other (IRS Employer
Jurisdiction of Incorporation) Identification No.)
W6316 Design Drive
Greenville, Wisconsin
(Address of Principal Executive Offices)
54942
(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 November 30, 2001
----- -----------------
Common Stock, $0.001 par value 17,997,374
SCHOOL SPECIALTY, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED OCTOBER 27, 2001
PART I - FINANCIAL INFORMATION
- ------------------------------
Page
Number
------
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at October 27, 2001
(Unaudited), April 28, 2001 and October 28, 2000 (Unaudited)............ 1
Unaudited Consolidated Statements of Operations for the Three Months
Ended October 27, 2001 and October 28, 2000 and for the Six
Months Ended October 27, 2001 and October 28, 2000...................... 2
Unaudited Consolidated Statements of Cash Flows for the Six
Months Ended October 27, 2001 and October 28, 2000...................... 3
Notes to Unaudited Consolidated Financial Statements.......................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................................... 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................................... 16
PART II - OTHER INFORMATION
- ---------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................... 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................. 19
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. Financial Statements
SCHOOL SPECIALTY, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
October 27, April 28, October 28,
2001 2001 2000
---- ---- ----
(unaudited) (unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents.......................................... $ 7,676 $ 5,688 $ 5,776
Accounts receivable, less allowance for doubtful accounts of
$3,750, $3,523, and $1,643, respectively......................... 132,726 40,358 165,287
Inventories........................................................ 68,302 102,192 53,889
Prepaid expenses and other current assets.......................... 20,265 35,053 30,314
Deferred taxes..................................................... 7,873 7,873 6,964
-------- ---------- ----------
Total current assets............................................. 236,842 191,164 262,230
Property and equipment, net........................................... 43,315 43,522 56,032
Intangible assets, net................................................ 264,348 254,871 215,607
Deferred taxes........................................................ - - 1,861
Other................................................................. 12,818 16,735 6,371
-------- ---------- ----------
Total assets..................................................... $557,323 $ 506,292 $ 542,101
======== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities - long-term debt................................ $ 23,062 $ 21,615 $ 14,838
Accounts payable................................................... 45,453 57,896 44,154
Accrued compensation............................................... 15,350 7,989 9,538
Other accrued liabilities.......................................... 16,915 15,633 11,175
Accrued income taxes............................................... 14,050 - 14,641
Accrued restructuring.............................................. 1,528 2,513 -
--------- ---------- ----------
Total current liabilities........................................ 116,358 105,646 94,346
Long-term debt........................................................ 154,934 158,168 198,590
Deferred taxes and other.............................................. 3,018 3,018 95
--------- ---------- ----------
Total liabilities................................................ 274,310 266,832 293,031
Shareholders' 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 17,997,374, 17,587,008 and 17,465,005
shares issued and outstanding, respectively...................... 18 18 17
Capital paid-in excess of par value................................ 207,132 198,119 195,998
Accumulated other comprehensive (loss) income...................... (1,081) 190 (234)
Retained earnings.................................................. 76,944 41,133 53,289
--------- ---------- ----------
Total shareholders' equity...................................... 283,013 239,460 249,070
--------- ---------- ----------
Total liabilities and shareholders' equity...................... $557,323 $ 506,292 $ 542,101
========= ========== ==========
See accompanying notes to consolidated financial statements.
1
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Data)
For the Three For the Six
Months Ended Months Ended
------------ ------------
October 27, October 28, October 27, October 28,
2001 2000 2001 2000
---- ---- ---- ----
Revenues.......................................... $269,656 $240,539 $529,818 $457,606
Cost of revenues.................................. 169,822 155,026 329,690 293,024
-------- --------- -------- --------
Gross profit................................... 99,834 85,513 200,128 164,582
Selling, general and administrative expenses...... 63,477 57,731 131,551 112,693
-------- --------- -------- -------
Operating income............................... 36,357 27,782 68,577 51,889
Other (income) expense:
Interest expense............................... 4,156 4,605 7,961 8,296
Interest income................................ (15) (28) (31) (64)
Other.......................................... 112 (34) 964 (297)
--------- ---------- --------- ---------
Income before provision for income taxes.......... 32,104 23,239 59,683 43,954
Provision for income taxes........................ 12,843 10,337 23,875 19,659
--------- --------- --------- --------
Net income........................................ $ 19,261 $ 12,902 $ 35,808 $ 24,295
======== ======== ======== ========
Weighted average shares outstanding:
Basic.......................................... 17,909 17,465 17,823 17,465
Diluted........................................ 23,379 17,735 20,896 17,665
Net income per share:
Basic.......................................... $1.08 $0.74 $2.01 $1.39
Diluted........................................ $0.89 $0.73 $1.78 $1.38
See accompanying notes to consolidated financial statements.
2
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
For the Six
Months Ended
---------------------------
October 27, October 28,
2001 2000
---- ----
Cash flows from operating activities:
Net income............................................................... $ 35,808 $ 24,295
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization expense.................................. 4,613 6,860
Amortization of debt fees and other.................................... 1,210 357
Loss (gain) on disposal of property and equipment...................... 100 (184)
Gain on sale of available-for-sale security............................ (287) -
Loss on business disposition........................................... 130 -
Change in current assets and liabilities (net of assets acquired and
liabilities assumed in business combinations accounted for under the
purchase method):
Accounts receivable.................................................... (92,335) (84,856)
Inventories............................................................ 32,773 33,869
Prepaid expenses and other current assets.............................. 14,874 (2,025)
Accounts payable....................................................... (12,448) (5,527)
Accrued liabilities.................................................... 23,150 15,690
---------- ---------
Net cash provided by (used in) operating activities.................. 7,588 (11,521)
---------- ---------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash acquired.......................... (7,931) (31,316)
Proceeds from business disposition....................................... 1,500 -
Additions to property and equipment...................................... (3,805) (6,894)
Proceeds from sale of property and equipment............................. 157 2,485
Proceeds from sale of available-for-sale security........................ 5,238 -
Other.................................................................... - (602)
---------- ---------
Net cash used in investing activities................................ (4,841) (36,327)
---------- ---------
Cash flows from financing activities:
Proceeds from bank borrowings............................................ 76,600 173,797
Repayment of bank debt and capital leases................................ (227,906) (124,332)
Proceeds from convertible debt offering.................................. 149,500 -
Payment of debt fees..................................................... (5,208) -
Proceeds from repayment of long-term note receivable..................... 1,115 -
Proceeds from exercise of stock options.................................. 5,140 8
---------- ---------
Net cash (used in) provided by financing activities.................. (759) 49,473
---------- ---------
Net increase in cash and cash equivalents................................... 1,988 1,625
Cash and cash equivalents, beginning of period.............................. 5,688 4,151
---------- ---------
Cash and cash equivalents, end of period.................................... $ 7,676 $ 5,776
========== =========
Non-cash investing activities:
Common stock issued for net assets acquired in business combination...... $ 2,700 -
See accompanying notes to consolidated financial statements.
3
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 in the six months ended October 27, 2001, and October 28, 2000.
The transactions that occurred in the six months ending October 27, 2001 were
paid for using cash or cash and common stock, and the transaction that occurred
during the six months ended October 28, 2000 was paid for using 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 Six
Months Ended
------------------------
October 27, October 28,
2001 2000
---- ----
Accounts receivable................................... $ 33 $ 4,403
Inventories........................................... 358 1,641
Prepaid expenses and other current assets............. 24 2,174
Property and equipment................................ 572 897
Intangible assets..................................... 6,890 25,813
Short-term debt and capital lease obligations......... (19) (1,217)
Accounts payable...................................... (5) (806)
Accrued liabilities................................... (432) (1,023)
Long-term capital lease obligations................... - (566)
-------- ---------
Net assets acquired................................ $ 7,421 $ 31,316
======== =========
Acquisitions were funded as follows:
Cash paid, net of cash acquired....................... $ 4,721 $ 31,316
Common stock.......................................... 2,700 -
-------- ---------
Total............................................. $ 7,421 $ 31,316
======== =========
See accompanying notes to consolidated financial statements.
4
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands, Except Per Share Data)
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 considered
necessary for a fair presentation have been included. The balance sheet at April
28, 2001, has been derived from the Company's audited financial statements for
the fiscal year ended April 28, 2001. 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 28, 2001.
NOTE 2--SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Changes in shareholders' equity during the six months ended October 27, 2001,
were as follows:
Shareholders' equity balance at April 28, 2001............. $239,460
Net income................................................. 35,808
Issuance of common stock for business combination.......... 2,700
Issuance of common stock in conjunction with
stock option exercises................................... 5,140
Tax benefit from issuance of common stock in conjunction
with stock option exercises.............................. 1,173
Unrealized loss on derivative financial instruments,
net of tax............................................... (279)
Unrealized loss on available-for-sale securities,
net of tax............................................... (989)
---------
Shareholders' equity balance at October 27, 2001........... $283,013
========
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5
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands, Except Per Share Data)
Comprehensive income for the periods presented in the consolidated statement of
operations were as follows:
For the Three For the Six
Months Ended Months Ended
---------------------------- ---------------------------
October 27, October 28, October 27, October 28,
2001 2000 2001 2000
---- ---- ---- ----
Net income .......................................................... $ 19,261 $ 12,902 $ 35,808 $ 24,295
Other comprehensive income (loss):
Unrealized loss on securities available-for-sale:
Unrealized holding loss arising during period, net
of tax ....................................................... (689) - (817) -
Less: Reclassification adjustment for gains
included in net income, net of tax ........................... 172 - 172 -
----------- --------- ---------- ---------
Net unrealized loss on securities available-for-sale
recognized in other comprehensive income ....................... (861) - (989) -
Unrealized loss on derivative financial instrument:
Unrealized holding gain arising during period, net
of tax ....................................................... 540 - 70 -
Less: Reclassification adjustment for losses
included in net income, net of tax ........................... (204) - (349) -
----------- --------- ---------- ---------
Net unrealized gain (loss) on derivative financial
instruments recognized in other comprehensive
income ......................................................... 336 - (279) -
Cumulative translation adjustment ................................. - (103) - (204)
----------- --------- ---------- ---------
Total comprehensive income .......................................... $ 18,736 $ 12,799 $ 34,540 $ 24,091
=========== ========= ========== =========
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6
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands, Except Per Share Data)
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 27, 2001:
Basic EPS ........................................................ $19,261 17,909 $ 1.08
========
Effect of dilutive employee stock options ........................ - 841
Effect of convertible debt ....................................... 1,440 4,629
------- -------
Diluted EPS ...................................................... $20,701 23,379 $ 0.89
======= ======= ========
Three months ended October 28, 2000:
Basic EPS ........................................................ $12,902 17,465 $ 0.74
========
Effect of dilutive employee stock options ........................ - 270
------- -------
Diluted EPS ...................................................... $12,902 17,735 $ 0.73
======= ======= ========
Six months ended October 27, 2001:
Basic EPS ........................................................ $35,808 17,823 $ 2.01
========
Effect of dilutive employee stock options ........................ - 758
Effect of convertible debt ....................................... 1,440 2,315
------- -------
Diluted EPS ...................................................... $37,248 20,896 $ 1.78
======= ======= ========
Six months ended October 28, 2000:
Basic EPS ........................................................ $24,295 17,465 $ 1.39
========
Effect of dilutive employee stock options ........................ - 200
------- -------
Diluted EPS ...................................................... $24,295 17,665 $ 1.38
======= ======= ========
The Company had additional employee stock options outstanding during the periods
presented of 62 and 241 for the three months ended October 27, 2001 and October
28, 2000, respectively, and 62 and 283 for the six months ended October 27, 2001
and October 28, 2000, respectively, that were not included in the computation of
diluted EPS because they were anti-dilutive.
NOTE 4--GOODWILL AND OTHER INTANGIBLE ASSETS
Effective at the beginning of fiscal 2002, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 142, which resulted in goodwill no
longer being subject to amortization, but rather an annual impairment test. The
following information presents what reported net income, basic EPS and diluted
EPS would have been had SFAS No. 142 been adopted at the beginning of fiscal
2001:
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7
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands, Except Per Share Data)
For the Three For the Six
Months Ended Months Ended
----------------------------- ----------------------------
October 27, October 28, October 27, October 28,
2001 2000 2001 2000
---- ----- ---- ----
Reported net income .................................. $ 19,261 $ 12,902 $ 35,808 $ 24,295
Add back: Goodwill amortization ................. - 1,212 - 2,358
---------- ---------- ---------- ----------
Adjusted net income .................................. $ 19,261 $ 14,114 $ 35,808 $ 26,653
========== ========== ========== ==========
Basic EPS:
Reported basic EPS .............................. $ 1.08 $ 0.74 $ 2.01 $ 1.39
Goodwill amortization ........................... - 0.07 - 0.14
---------- ---------- ---------- ----------
Adjusted basic EPS ................................... $ 1.08 $ 0.81 $ 2.01 $ 1.53
========== ========== ========== ==========
Diluted EPS:
Reported diluted EPS ............................ $ 0.89 $ 0.73 $ 1.78 $ 1.38
Goodwill amortization ........................... - 0.07 - 0.13
---------- ---------- ---------- ----------
Adjusted diluted EPS ................................. $ 0.89 $ 0.80 $ 1.78 $ 1.51
========== ========== ========== ==========
NOTE 5--BUSINESS COMBINATIONS
On October 11, 2001, the Company acquired Premier Science for an aggregate
purchase price, which is subject to adjustment, of $1,220 funded in cash through
borrowings under the Company's credit facility. The preliminary purchase price
allocation, which is subject to adjustment, resulted in goodwill of
approximately $110, and that amount is expected to be fully deductible for tax
purposes. The results of this acquisition and the related goodwill have been
included in the Company's Specialty segment results from the date of
acquisition.
On May 9, 2001, the Company acquired certain net assets of Envision, Inc., a
designer, producer and marketer of student agenda books based in Grand Junction,
Colorado, for an aggregate purchase price of $6,701, funded 60% in cash, through
borrowings under the Company's credit facility, and 40% in School Specialty,
Inc. common stock, representing 120 shares. The transaction was accounted for
under the purchase method. The preliminary purchase price allocation, which is
subject to adjustment, resulted in goodwill of approximately $5,873. The results
of this acquisition and the related goodwill have been included in the Company's
Specialty segment results from the date of acquisition.
On June 30, 2000, the Company acquired Global Video, LLC, a producer and
marketer of educational videos based in Tempe, Arizona, for an aggregate
purchase price, net of cash acquired of $34,316. The transaction was accounted
for under the purchase method and the purchase price allocation resulted in
goodwill of approximately $28,795. The results of this acquisition and the
related goodwill have been included in the Company's Specialty segment results
from the date of acquisition. During the first quarter of fiscal 2002, the
Company paid $3,210 to the former owners of Global Video as additional purchase
price consideration. The purchase agreement provided for an earn-out provision,
which was met during fiscal 2002's first quarter. In addition, the Company
recorded a goodwill adjustment of approximately $2,300 for costs to consolidate
Global Video's operations into our existing operations. The plan of
consolidation is expected to be completed by the end of fiscal 2002.
8
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands, Except Per Share Data)
NOTE 6--SEGMENT INFORMATION
The Company's business activities are organized around two principal business
segments, Traditional and Specialty and operate principally in the United
States. 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 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.
Effective with the beginning of fiscal 2002, the Company discontinued separately
reporting the Internet segment, as the management of this business has changed
such that this business is operated as a sales channel. Amounts previously
reported for the Internet segment have been restated to conform with fiscal
2002's presentation. The following table presents segment information:
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9
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands, Except Per Share Data)
Three Months Ended Six Months Ended
--------------------------- ---------------------------
October 27, October 28, October 27, October 28,
2001 2000 2001 2000
---- ---- ---- ----
Revenues:
Traditional ..................................... $179,228 $148,879 $344,919 $279,846
Specialty ....................................... 90,428 91,660 184,899 177,760
-------- -------- -------- --------
Total ......................................... $269,656 $240,539 $529,818 $457,606
======== ======== ======== ========
Operating profit and income before taxes:
Traditional ..................................... $ 26,163 $ 17,768 $ 46,564 $ 33,825
Specialty ....................................... 14,390 12,818 31,076 24,381
-------- -------- -------- --------
Total ......................................... 40,553 30,586 77,640 58,206
General corporate expense ....................... 4,196 2,804 9,063 6,317
Interest expense and other ...................... 4,253 4,543 8,894 7,935
-------- -------- -------- --------
Income before taxes ............................. $ 32,104 $ 23,239 $ 59,683 $ 43,954
======== ======== ======== ========
Identifiable assets (at quarter end):
Traditional ..................................... $215,277 $277,518 $215,277 $277,518
Specialty ....................................... 160,507 225,288 160,507 225,288
-------- -------- -------- --------
Total ......................................... 375,874 502,806 375,784 502,806
Corporate assets ................................ 181,539 39,295 181,539 39,295
-------- -------- -------- --------
Total ......................................... $557,323 $542,101 $557,323 $542,101
======== ======== ======== ========
Depreciation and amortization:
Traditional ..................................... $ 778 $ 1,326 $ 1,539 $ 2,660
Specialty ....................................... 755 1,839 1,508 3,469
-------- -------- -------- --------
Total ......................................... 1,533 3,165 3,047 6,129
Corporate ....................................... 790 388 1,566 731
-------- -------- -------- --------
Total ......................................... $ 2,323 $ 3,553 $ 4,613 $ 6,860
======== ======== ======== ========
Expenditures for property and equipment:
Traditional ..................................... $ 688 $ 370 $ 1,266 $ 951
Specialty ....................................... 461 1,027 1,032 2,821
-------- -------- -------- --------
Total ......................................... 1,149 1,397 2,298 3,772
Corporate ....................................... 350 1,597 1,507 3,122
-------- -------- -------- --------
Total ......................................... $ 1,499 $ 2,994 $ 3,805 $ 6,894
======== ======== ======== ========
NOTE 7-- RESTRUCTURING COSTS
During the fourth quarter of fiscal 2001, the Company recorded a restructuring
charge of $4,500 to close redundant facilities and for related severance costs,
which is discussed in the fiscal 2001 Form 10-K. The Company terminated 76
employees under this plan. No employees were terminated under this plan during
the six months ended October 27, 2001.
During the second quarter of fiscal 1999, the Company recorded a $4,200
restructuring charge, which is discussed in the fiscal 2000 Form 10-K. This
charge was for the Company's plan to consolidate existing warehousing, customer
service and sales operations. Under this restructuring plan, which was completed
during the first quarter of fiscal 2001, the Company eliminated approximately
240 jobs.
10
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands, Except Per Share Data)
Selected information related to the restructuring reserve follows:
Facility
Severance and Closure and
Terminations Consolidation Other Costs Total
------------ ------------- ----------- -----
April 29, 2000 liability balance $ 40 $ 17 $ 8 $ 65
First quarter, fiscal 2001
Utilizations....................................... (40) (17) (8) (65)
Second quarter, fiscal 2001
Utilizations....................................... - - - -
Third quarter, fiscal 2001
Utilizations....................................... - - - -
Fourth quarter, fiscal 2001
Additions.......................................... 1,544 2,391 565 4,500
Utilizations....................................... (744) (697) (546) (1,987)
------------ ------------- ----------- ---------
April 28, 2001 liability balance 800 1,694 19 2,513
First quarter, fiscal 2002
Utilizations....................................... (337) (291) (19) (647)
Second quarter, fiscal 2002
Utilizations....................................... (140) (198) - (356)
------------ ------------- ----------- ---------
October 27, 2001 liability balance...................... $ 323 $ 1,205 $ - $ 1,528
============ ============= =========== =========
NOTE 8--CONVERTIBLE DEBT OFFERING
On July 30, 2001, the Company sold an aggregate principal amount of $130,000 of
6 percent convertible subordinated notes of the Company due August 1, 2008. The
notes are convertible at any time prior to maturity into shares of School
Specialty, Inc. common stock at a conversion price of $32.29 per share and
accrue interest payable semi-annually. Net proceeds from the sale of these notes
was approximately $125,740. On August 2, 2001, the purchasers of the notes
exercised their over-allotment option in full and purchased an additional
$19,500 aggregate principal amount of the notes, with net proceeds to the
Company of approximately $18,915. The Company used the total net proceeds from
the offering of approximately $144,655 to repay a portion of the debt
outstanding under the credit facility.
NOTE 9--SUBSEQUENT EVENT
On November 13, 2001, the Company entered into a purchase agreement with
Franklin Covey Company to purchase the stock of Premier Agendas, Inc., a
Washington corporation, and Premier School Agendas Ltd., Agenda Scolaire Premier
Ltee., a Canadian corporation. The cash purchase price, which is subject to
change, is estimated at $152,500. The proposed transaction is subject to
regulatory approval and is expected to close before the end of December 2001.
11
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 27, October 28, October 27, October 28,
2001 2000 2001 2000
---- ---- ---- ----
Revenues ........................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues ................................... 63.0 64.4 62.2 64.0
----- ----- ----- -----
Gross profit ..................................... 37.0 35.6 37.8 36.0
Selling, general and administrative expenses ....... 23.5 24.0 24.8 24.7
----- ----- ----- -----
Operating income ................................. 13.5 11.5 13.0 11.3
Interest expense, net .............................. 1.6 1.8 1.5 1.8
Other .............................................. - - 0.2 (0.1)
----- ----- ----- -----
Income before provision for income taxes ........... 11.9 9.7 11.3 9.6
Provision for income taxes ......................... 4.8 4.3 4.5 4.3
----- ----- ----- -----
Net income ......................................... 7.1% 5.4% 6.8% 5.3%
===== ===== ===== =====
Three Months Ended October 27, 2001 Compared to Three Months Ended October 28,
2000
Revenues
- --------
Revenues increased 12.1% from $240.5 million for the three months ended October
28, 2000 to $269.7 million for the three months ended October 27, 2001. Increase
was primarily due to the inclusion of revenues from the businesses acquired
since the beginning of fiscal 2001 and internal growth in Specialty segment
revenues. These increases were offset by the exclusion of revenues in the
Specialty segment for the two businesses disposed of during fiscal 2001 and the
business disposed of during fiscal 2002.
Gross Profit
- ------------
Gross profit was $99.8 million or 37.0% of revenues for the three months ended
October 27, 2001, an increase of $14.3 million, or 16.7% over the three months
ended October 28, 2000, of $85.5 million or 35.6% of revenues. The increase in
gross profit was primarily due to an increase in revenues and gross margin
expansion. The increase in gross margin was due primarily to strong consumable
business gross margins in the Traditional segment, offset by an increased mix of
revenues from the Traditional segment, which typically has lower gross margins
than the Specialty segment. The change in revenue mix was due to the acquisition
of J.L. Hammett's K - 12 wholesale division ("Hammett") in our fiscal 2001 third
quarter, which is part of the Traditional segment.
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 warehouse shipment
transportation costs), catalog costs, general administrative overhead (which
includes information systems, accounting, legal, and human resources) and
depreciation and amortization expense.
Selling, general and administrative expenses increased 10.0% from $57.7 million
or 24.0% of revenues for the three months ended October 28, 2000, to $63.5
million or 23.5% of revenues for the three months ended October 27, 2001. The
increase in selling, general and administrative expenses was primarily due to an
increase in variable costs related to increased revenues, and an increase in
fixed operating costs, primarily due to redundancies with the Hammett
acquisition, which will be fully integrated with existing operations in fiscal
2002's third quarter. These increases are offset by our early adoption at the
beginning of fiscal 2002 of SFAS No. 142, which resulted in the discontinuance
of amortization of goodwill. The decrease in selling, general and administrative
expenses as a
12
percentage of revenues was primarily due to the reduction in goodwill
amortization expense, due to our adoption of SFAS No. 142.
Interest Expense
- ----------------
Net interest expense decreased $0.4 million from $4.6 million or 1.8% of
revenues for the three months ended October 28, 2000 to $4.1 million or 1.6% of
revenues for the three months ended October 27, 2001. The decrease in interest
expense was due to a reduction in our effective borrowing rate and a reduction
in debt outstanding.
Other Expense (Income)
- ----------------------
Other expense increased $0.1 million to $0.1 million in fiscal 2002's second
quarter. Other expense in fiscal 2002 primarily represented the discount and
loss on the accounts receivable securitization of $0.4 million, offset by a $0.3
million realized gain on the sale of available-for-sale securities.
Provision for Income Taxes
- --------------------------
Provision for income taxes for the three months ended October 27, 2001 increased
24.2% or $2.5 million over the three months ended October 28, 2000, reflecting
income tax rates of 40.0% and 44.5% for the three months ended October 27, 2001
and October 28, 2000, respectively. The effective tax rate of 40.0% in the
second quarter of fiscal 2002 as compared to 44.5% in the second quarter of
fiscal 2001 was due primarily to the impact of our adoption of SFAS No. 142 and
its impact on non-deductible goodwill amortization. The higher effective tax
rate, compared to the federal statutory rate of 35.0%, was primarily due to
state income taxes.
Six Months Ended October 27, 2001 Compared to the Six Months Ended October 28,
2000
Revenues
- --------
Revenues increased 15.8% from $457.6 million for the six months ended October
28, 2000, to $529.8 million for the six months ended October 27, 2001. Increase
in revenues was primarily driven by the inclusion of revenues from the
businesses acquired since the beginning of fiscal 2001 and internal growth in
Specialty segment revenues. These increases were offset by the exclusion of
revenues in the Specialty segment for the two businesses disposed of during
fiscal 2001 and the business disposed of during fiscal 2002.
Gross Profit
- ------------
Gross profit increased 21.6% from $164.6 million or 36.0% of revenues for the
six months ended October 28, 2000 to $200.1 million or 37.8% of revenues for the
six months ended October 27, 2001. The increase in gross profit was primarily
due to an increase in revenues and gross margin improvement, driven by selling
price expansion and reduced product cost, primarily in the Traditional segment,
resulting from synergies realized through the integration of Hammett, which was
acquired in November 2000.
Gross margin was 37.8% for the six months ended October 27, 2001 as compared to
36.0% for the six months ended October 28, 2000. The increase in gross margin
was due primarily to an increase in Traditional segment gross margin from 31.2%
to 33.7%, driven by an increase in consumable gross margin resulting from
selling price expansion and reduced product cost, as well as an increase in
Specialty segment gross margin, driven primarily by the enhancement in
Childcraft's margins due to reduced product cost and improvement in
ClassroomDirect.com's gross margin, primarily due to selling price expansion due
to the reduction of aggressive internet pricing. The increase in gross margin
was reduced on a consolidated basis by a change in revenue mix, with the
Traditional segment generating a 23.3% increase (or $65.1 million) in revenues
over fiscal 2001. This increased the Traditional segment revenues to 65.1% of
revenues from 61.2%. Traditional segment gross margin is typically lower than
Specialty segment gross margin.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses increased 16.7% from $112.7 million
or 24.7% of revenues for the six months ended October 28, 2000, to $131.6
million or 24.8% of revenues for the six months ended October 27, 2001.
13
The increase in selling, general and administrative expenses was primarily due
to an increase in variable costs related to increased revenues and an increase
in fixed operating costs, primarily due to redundancies created with the Hammett
acquisition, which will be fully integrated with existing operations in the
fiscal 2002's third quarter. These increases are offset by our early adoption at
the beginning of fiscal 2002 of SFAS No. 142, which resulted in the
discontinuance of amortization of goodwill. The change in selling, general and
administrative expenses as a percentage of revenues was primarily due to 1) an
increase in commission expense in the Traditional segment driven by expanded
gross margins, 2) increased facility and warehouse expenses in the Traditional
segment driven by redundancies created with the Hammett acquisition and an
increase in leased versus owned facilities and 3) increased catalog costs in the
Specialty segment due to the inclusion of expense for the full six months ended
October 27, 2001 of Global Video, which has higher catalog costs as a percentage
of revenues than our other specialty businesses. The increases were offset by a
reduction in amortization expense, due to our adoption of SFAS No. 142.
Interest Expense
- ----------------
Net interest expense decreased $0.3 million from $8.2 million or 1.8% of
revenues for the six months ended October 28, 2000 to $7.9 million or 1.5% of
revenues for the six months ended October 27, 2001. The decrease in interest
expense was primarily attributed to a reduction in our effective borrowing rate
and the reduction in our outstanding debt.
Other Expense (Income)
- ----------------------
Other expense increased $1.3 million from income of $0.3 million for the six
months ended October 28, 2000 to expense of $1.0 million for the six months
ended October 27, 2001. Other expenses for the six months ended October 27, 2001
primarily consisted of the discount and loss on the accounts receivable
securitization of $1.2 million, offset by $0.3 million realized gain on the sale
of available-for-sale securities.
Provision for Income Taxes
- --------------------------
Provision for income taxes for the six months ended October 27, 2001 increased
21.4% or $4.2 million over the six months ended October 28, 2000, reflecting
income tax rates of 40.0% and 44.7% for the six months ended October 27, 2001
and October 28, 2000, respectively. The effective tax rate of 40.0% in the
second quarter of fiscal 2002 as compared to 44.7% in the second quarter of
fiscal 2001 was due primarily to the impact of our adoption of SFAS No. 142 and
its impact on non-deductible goodwill amortization. The higher effective tax
rate, compared to the federal statutory rate of 35.0%, was primarily due to
state income taxes.
Liquidity and Capital Resources
At October 27, 2001, we had working capital of $120.5 million. Our
capitalization at October 27, 2001 was $461.0 million and consisted of total
debt of $178.0 million and shareholders' equity of $283.0 million.
We have a five-year secured $350 million revolving credit facility with Bank of
America, N.A. The credit facility had an initial $100 million term loan maturing
quarterly and $250 million of availability under revolving loans. The credit
facility matures on September 30, 2003. The amount outstanding as of October 27,
2001 under the credit facility was approximately $5.0 million and $22.8 million
under the revolving and term loans, respectively. As of October 27, 2001, our
effective interest rate on borrowings under our credit facility was 4.4%.
Borrowings under the credit facility are usually significantly higher during the
first two quarters of our fiscal year to meet the working capital needs of our
peak selling season.
On July 30, 2001, we sold an aggregate principal amount of $130,000 of 6 percent
convertible subordinated notes due August 1, 2008. The notes are convertible at
any time prior to maturity into shares of School Specialty, Inc. common stock at
a conversion price of $32.29 per share and accrue interest payable
semi-annually. Net proceeds from the sale of these notes was approximately
$125,740. On August 2, 2001, the purchasers of the notes exercised their
over-allotment option in full and purchased an additional $19,500 aggregate
principal amount of the notes, with
14
net proceeds of approximately $18,915. We used the total net proceeds from the
offering of approximately $144,655 to repay a portion of the debt outstanding
under the credit facility.
Effective January 2, 2001, we entered into an interest rate swap agreement with
the Bank of New York covering $50 million of outstanding debt. The one-year,
non-cancelable swap agreement fixed the 30 day LIBOR interest rate at 6.07% per
annum on a $50 million notional amount.
In November 2000, we entered into the receivable securitization, with a
financial institution whereby we sell on a continuous basis an undivided
interest in all of our eligible trade accounts receivable. Under the receivable
securitization, we transfer without recourse all of our accounts receivable to a
wholly-owned subsidiary. This subsidiary, 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 million for the
sale of such undivided interest. The facility expired in November 2001. However,
it was amended to extend the expiration to November 19, 2002. At October 27,
2001, $50 million was advanced under the receivable securitization and
accordingly, that amount of accounts receivable has been removed from our
consolidated balance sheet. The proceeds from the sale were used to reduce
outstanding debt. Costs associated with the sale of receivables in fiscal 2002,
primarily related to the discount and loss on sale, were $1.2 million and are
included in other expenses in our consolidated statement of operations.
During the six months ended October 27, 2001, net cash provided by operating
activities was $7.6 million. Net cash used in investing activities was $4.8
million, including $7.9 million for acquisitions and purchase price adjustments
and $3.8 million for capital expenditures. These uses were partially offset by
proceeds of $5.2 from the sale of available-for-sale securities and $1.5 million
in proceeds from a business disposition. Net cash used in financing activities
was $0.8 million. Net proceeds from our convertible debt offering of
approximately $144.7 million were used to repay the debt outstanding on our
credit facility.
During the six months ended October 28, 2000, net cash used in operating
activities was $11.5 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 $36.3 million, including $31.3 million for an acquisition and
$6.9 million for capital expenditures, offset by $2.5 million in proceeds from
the sale of a closed warehouse facility. Net cash provided by financing
activities was $49.5 million, which consisted primarily of borrowings under our
credit facility.
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.
Subsequent Event
On November 13, 2001, we entered into a purchase agreement with Franklin Covey
Company to purchase the stock of Premier Agendas, Inc., a Washington
corporation, and Premier School Agendas Ltd., Agenda Scolaire Premier Ltee., a
Canadian corporation. The cash purchase price, which is subject to change, is
estimated at $152.5 million. The proposed transaction is subject to regulatory
approval and is expected to close before the end of December 2001.
Fluctuations in Quarterly Results of Operations
Our business is subject to seasonal influences. Our historical revenues and
profitability have been dramatically higher in the first two quarters of our
fiscal year primarily due to increased shipments to customers coinciding with
the start of each school year.
Quarterly results also may be materially affected by the timing of acquisitions,
the timing and magnitude of costs related to such acquisitions, variations in
our costs for the products we sold, the mix of products sold and general
economic conditions. Moreover, the operating margins of companies we acquire may
differ substantially from our
15
own, 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 effect on our results of
operations and our internal and external sources of liquidity.
Forward-Looking Statements
Statements in this report which are not historical are "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995. The forward-looking statements include: (1) statements made under Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, including, without limitation, statements with respect to internal
growth plans, projected revenues, margin improvement, future acquisitions,
capital expenditures and adequacy of capital resources; (2) statements included
or incorporated by reference in our future filings with the Securities and
Exchange Commission; and (3) information contained in written material, releases
and oral statements issued by, or on behalf of School Specialty including,
without limitation, statements with respect to projected revenues, costs,
earnings and earnings per share. Forward-looking statements also include
statements regarding the intent, belief or current expectation of School
Specialty or its officers. Forward-looking statements include statements
preceded by, followed by or that include forward-looking terminology such as
"may," "will," "should," "believes," "expects," "anticipates," "estimates,"
"continues" or similar expressions.
All forward-looking statements included in this report are based on information
available to us as of the date hereof. We do not undertake to update any
forward-looking statements that may be made by or on behalf of us, in this
report or otherwise. Our actual results may differ materially from those
contained in the forward-looking statements identified above. Factors which may
cause such a difference to occur include, but are not limited to the factors
identified in Exhibit 99.2 to our Form 10-K for the fiscal year ended April 28,
2001.
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 ending April
28, 2001. There have been no material changes in our quantitative or qualitative
exposure to market risk since the end of fiscal 2001.
16
PART II - OTHER INFORMATION
- ---------------------------
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) On August 28, 2001, we held our Annual Meeting of Shareholders.
(b) Not applicable.
(c) The Annual Meeting of Shareholders was held to:
(1) Elect two directors to serve until the 2004 Annual Meeting of
Shareholders as Class III directors;
(2) Ratify the appointment of Arthur Andersen LLP as School
Specialty's independent auditors for fiscal 2002.
The results of these proposals, which were voted upon at the Annual
Meeting, are as follows:
(1) Election of Class III Directors
-------------------------------
For Withheld
--- --------
(1) Daniel P. Spalding 15,460,782 963,825
(2) Leo C. McKenna 16,328,753 95,854
(2) Ratification of Independent Auditors
------------------------------------
For Against Abstain
--- ------- -------
Arthur Andersen LLP 16,367,024 51,640 5,943
(d) Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
See the Exhibit Index which is incorporated herein by reference.
(b) The Company filed one report on Form 8-K during the quarter covered by
this report as follows:
(1) Form 8-K dated July 31, 2001, filed on August 1, 2001 under Items
5 and 7. The Company announced its sale of an additional $19.5
million of convertible subordinated notes.
17
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)
12/10/2001 /s/ Daniel P. Spalding
---------- -------------------------------------------------
Date Daniel P. Spalding
Chairman of the Board, Chief Executive Officer
(Principal Executive Officer)
12/10/2001 /s/ Mary M. Kabacinski
---------- -------------------------------------------------
Date Mary M. Kabacinski
Executive Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
18
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
10.1 Amendment No. 3 to Receivables Purchase Agreement dated
as of November 20, 2001
12.1 Statement Regarding Computation of Ratio of Earnings to
Fixed Charges
19