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 JULY 27, 2002.
[_] 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 August 23, 2002
----- ---------------
Common Stock, $0.001 par value 18,242,809
SCHOOL SPECIALTY, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JULY 27, 2002
PART I - FINANCIAL INFORMATION
- ------------------------------
Page
Number
------
ITEM 1. CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at July 27, 2002, April 27, 2002, and July 28, 2001.... 1
Condensed Consolidated Statements of Operations for the Three Months Ended July 27, 2002
and July 28, 2001...................................................................... 2
Condensed Consolidated Statements of Cash Flows for the Three Months Ended July 27, 2002
and July 28, 2001...................................................................... 3
Notes to Condensed Consolidated Financial Statements......................................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........ 12
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK................................... 15
PART II-OTHER INFORMATION
- -------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................. 15
-Index-
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. Condensed Consolidated Unaudited Financial Statements
SCHOOL SPECIALTY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
July 27, April 27, July 28,
2002 2002 2001
--------- --------- -----------
As Restated
See Note 12
ASSETS
------
Current assets:
Cash and cash equivalents ................................... $ 5,026 $ 6,123 $ 4,058
Accounts receivable, less allowance for doubtful accounts of
$2,809, $2,719 and $3,413, respectively ................... 174,744 34,356 142,270
Inventories ................................................. 106,439 98,148 111,248
Deferred catalog costs ...................................... 7,655 13,590 9,637
Prepaid expenses and other current assets ................... 9,316 12,770 11,558
Assets held for sale ........................................ 1,350 -- 1,429
Deferred taxes .............................................. 7,341 7,341 7,873
--------- --------- ---------
Total current assets ...................................... 311,871 172,328 288,073
Property and equipment, net ................................... 65,149 67,083 60,287
Goodwill ...................................................... 391,315 390,946 260,673
Intangible assets, net ........................................ 34,752 35,457 2,543
Other ......................................................... 7,382 7,828 15,952
--------- --------- ---------
Total assets .............................................. $ 810,469 $ 673,642 $ 627,528
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities - long-term debt ......................... $ 433 $ 4,471 $ 10,602
Accounts payable ............................................ 104,012 47,097 95,747
Accrued compensation ........................................ 12,421 16,712 8,555
Deferred revenue ............................................ 11,029 10,681 1,779
Accrued restructuring ....................................... 752 863 1,866
Other accrued liabilities ................................... 34,207 13,917 24,212
--------- --------- ---------
Total current liabilities ................................. 162,854 93,741 142,761
Long-term debt .............................................. 325,465 285,592 222,355
Deferred taxes .............................................. 23,139 23,139 3,018
--------- --------- ---------
Total liabilities ......................................... 511,458 402,472 368,134
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 18,234,015, 18,046,315 and 17,825,544 shares
issued and outstanding, respectively ...................... 18 18 18
Capital paid-in excess of par value ......................... 212,012 208,053 202,558
Accumulated other comprehensive income (loss) ............... 321 395 (553)
Retained earnings ........................................... 86,660 62,704 57,371
--------- --------- ---------
Total shareholders' equity ............................... 299,011 271,170 259,394
--------- --------- ---------
Total liabilities and shareholders' equity ............... $ 810,469 $ 673,642 $ 627,528
========= ========= =========
See accompanying notes to condensed consolidated financial statements.
1
SCHOOL SPECIALTY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
For the Three
Months Ended
--------------------------
July 27, July 28,
2002 2001
--------- ------------
As Restated
See Note 12
Revenues ......................................... $ 298,027 $ 260,162
Cost of revenues ................................. 173,536 159,868
--------- ---------
Gross profit .................................. 124,491 100,294
Selling, general and administrative expenses ..... 79,553 67,824
--------- ---------
Operating income .............................. 44,938 32,470
Other (income) expense:
Interest expense .............................. 4,508 4,223
Interest income ............................... (1) (16)
Other ......................................... 472 852
--------- ---------
Income before provision for income taxes ......... 39,959 27,411
Provision for income taxes ....................... 16,003 10,965
--------- ---------
Net income ....................................... $ 23,956 $ 16,446
========= =========
Weighted average shares outstanding:
Basic ......................................... 18,158 17,738
Diluted ....................................... 23,433 18,399
Net income per share:
Basic ......................................... $ 1.32 $ 0.93
Diluted ....................................... $ 1.08 $ 0.89
See accompanying notes to condensed consolidated financial statements.
2
SCHOOL SPECIALTY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Three
Months Ended
-----------------------
July 27, July 28,
2002 2001
--------- -----------
As Restated
See Note 12
Cash flows from operating activities:
Net income ........................................................... $ 23,956 $ 16,446
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization expense .............................. 3,627 2,504
Amortization of debt fees and other ................................ 561 613
Restructuring related payments ..................................... (111) (647)
Loss on disposal or impairment of property and equipment ........... 965 32
Change in current assets and liabilities (net of assets acquired and
liabilities assumed in business combinations accounted for under the
purchase method):
Accounts receivable ................................................ (140,396) (101,883)
Inventories ........................................................ (8,308) (8,918)
Prepaid expenses and other current assets .......................... 9,388 12,209
Accounts payable ................................................... 56,919 37,851
Accrued liabilities ................................................ 16,738 11,317
--------- ---------
Net cash used in operating activities ............................ (36,661) (30,476)
--------- ---------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash acquired ...................... (4,016) (6,760)
Additions to property and equipment .................................. (3,424) (2,306)
Proceeds from the disposal of property and equipment ................. 96 187
Proceeds from note receivable ........................................ -- 1,115
--------- ---------
Net cash used in investing activities ............................ (7,344) (7,764)
--------- ---------
Cash flows from financing activities:
Proceeds from bank borrowings ........................................ 63,200 54,900
Repayment of debt and capital leases ................................. (23,353) (20,000)
Payment of debt fees and other ....................................... (115) (364)
Proceeds from exercise of stock options .............................. 3,176 2,074
--------- ---------
Net cash provided by financing activities ........................ 42,908 36,610
--------- ---------
Net decrease in cash and cash equivalents ............................... (1,097) (1,630)
Cash and cash equivalents, beginning of period .......................... 6,123 5,688
--------- ---------
Cash and cash equivalents, end of period ................................ $ 5,026 $ 4,058
========= =========
See accompanying notes to condensed consolidated financial statements.
3
SCHOOL SPECIALTY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
(In thousands)
The Company issued common stock and cash in connection with a business
combination accounted for under the purchase method in the three months ended
July 28, 2001. The fair values of the assets and liabilities of the acquired
company is presented as follows:
For the Three
Months Ended
July 28, 2001
-------------
Accounts receivable ........................................... $ 29
Inventories ................................................... 138
Prepaid expenses and other current assets ..................... 11
Property and equipment ........................................ 554
Goodwill and intangible assets ................................ 5,930
Short-term debt and capital lease obligations ................. (19)
Accrued liabilities ........................................... (393)
-------
Net assets acquired ........................................ $ 6,250
=======
The acquisitions were funded as follows:
Cash paid, net of cash acquired (1) ........................... $ 3,550
Common stock .................................................. 2,700
-------
Total ...................................................... $ 6,250
=======
(1) Fiscal 2003 cash paid in acquisitions, net of cash acquired, as reported
within cash flows from investing activities, includes the payment of a note
payable to selling shareholders related to the acquisition of Premier
Agendas. Fiscal 2002 cash paid in acquisitions, net of cash acquired, as
reported within cash flows from investing activities, includes the payment
of an earn-out provision to the former owners of Global Video.
See accompanying notes to condensed consolidated financial statements.
4
SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed 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 (which are
normal and recurring in nature) considered necessary for a fair presentation
have been included. The balance sheet at April 27, 2002, has been derived from
the Company's audited financial statements for the fiscal year ended April 27,
2002. 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 27, 2002.
Certain amounts previously reported have been reclassified to conform with the
current year presentation.
NOTE 2 - SHAREHOLDERS' EQUITY
Changes in shareholders' equity during the three months ended July 27, 2002,
were as follows:
Shareholders' equity balance at April 27, 2002 $271,170
Net income 23,956
Issuance of common stock in conjunction with
stock option exercises 3,176
Tax benefit on option exercises 783
Foreign currency translation adjustment (74)
--------
Shareholders' equity balance at July 27, 2002 $299,011
========
Comprehensive income for the periods presented in the consolidated statements of
operations was as follows:
For the Three Months Ended
--------------------------
July 27, July 28,
2002 2001
---- ----
Net income $23,956 $16,446
Other comprehensive loss:
Unrealized loss on available-for-sale securities, net of tax - (128)
Unrealized loss on derivative financial instrument:
Unrealized holding loss, net of tax - (471)
Less: Reclassification adjustment for losses included
in net income, net of tax - (144)
------- -------
Net unrealized loss on derivative financial instrument
recognized in other comprehensive income - (615)
Foreign currency translation adjustment (74) -
------- -------
Total comprehensive income $23,882 $15,703
======= =======
5
SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED 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 Share Per Share
(Numerator) (Denominator) Amount
--------- ----------- ------
Three months ended July 27, 2002:
Basic EPS $23,956 18,158 $ 1.32
=======
Effect of dilutive stock options - 646
Effect of convertible debt 1,452 4,629
------- ------
Diluted EPS $25,408 23,433 $ 1.08
======= ====== =======
Three months ended July 28, 2001:
Basic EPS $16,446 17,738 $ 0.93
=======
Effect of dilutive stock options - 661
------- ------
Diluted EPS $16,446 18,399 $ 0.89
======= ====== =======
The Company had additional employee stock options outstanding during the three
months ended July 27, 2002 and July 28, 2001 of 206 and 62, respectively, that
were not included in the computation of diluted EPS because they were
anti-dilutive.
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002 the FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities." Under SFAS No. 146, costs associated with an exit
or disposal activity shall be recognized and measured at their fair value in the
period in which the liability is incurred rather than at the date of a
commitment to an exit or disposal plan. The provisions of the statement will be
effective for exit or disposal activities that are initiated after December 31,
2002. The Company is currently evaluating the impact of the statement.
NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents details of the Company's intangible assets:
Accumulated Net Book
Gross Value Amortization Value
----------- ------------ -----------
July 27, 2002
- -------------
Amortizable intangible assets:
Customer relationships $ 19,384 $ (742) $ 18,642
Non-compete agreements 3,221 (965) 2,256
Order backlog and other 1,452 (675) 777
----------- ----------- -----------
Total amortizable intangible assets 24,057 (2,382) 21,675
Non-amortizable intangible assets:
Perpetual license agreement 12,700 - 12,700
Other 377 - 377
----------- ----------- -----------
Total non-amortizable intangible assets 13,077 - 13,077
----------- ----------- -----------
Total intangible assets $ 37,134 $ (2,382) $ 34,752
=========== ============ ===========
6
SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
Accumulated Net Book
April 27, 2002 Gross Value Amortization Value
-------------- ----------- ------------ --------
Amortizable intangible assets:
Customer relationships ................... $ 19,384 $ (420) $ 18,964
Non-compete agreements ................... 3,221 (793) 2,428
Order backlog and other .................. 1,452 (464) 988
-------- -------- --------
Total amortizable intangible assets .... 24,057 (1,677) 22,380
Non-amortizable intangible assets:
Perpetual license agreement .............. 12,700 -- 12,700
Other .................................... 377 -- 377
-------- -------- --------
Total non-amortizable intangible assets 13,077 -- 13,077
-------- -------- --------
Total intangible assets .............. $ 37,134 $ (1,677) $ 35,457
======== ======== ========
Accumulated Net Book
July 28, 2001 Gross Value Amortization Value
------------- ----------- ------------ --------
Amortizable intangible assets:
Non-compete agreements ................... $ 2,750 $ (367) $ 2,383
Other .................................... 517 (357) 160
-------- -------- --------
Total amortizable intangible assets .... $ 3,267 $ (724) $ 2,543
======== ======== ========
Intangible amortization expense included in selling, general and administrative
expenses for the three months ended July 28, 2002 and July 27, 2001 was $706 and
$167, respectively.
Estimated intangible amortization expense for each of the five succeeding fiscal
years and the remainder of fiscal 2003 is estimated to be:
Fiscal 2003 (nine months remaining) ............. $1,791
Fiscal 2004 ..................................... 2,044
Fiscal 2005 ..................................... 1,995
Fiscal 2006 ..................................... 1,764
Fiscal 2007 ..................................... 1,344
Fiscal 2008 ..................................... 1,344
The following information presents changes to net goodwill during the period
beginning July 28, 2001 through July 27, 2002:
Balance at Balance at Balance at
July 28, April 27, July 27,
Segment 2001 Acquired Adjustments 2002 Adjustments 2002
------- ---------- ---------- ------------ ---------- ------------ ----------
Traditional ..... $ 155,967 $ 747 $ 3,202 $ 159,916 $ - $ 159,916
Specialty ....... 104,706 127,984 (1,660) 231,030 369 231,399
---------- ---------- ------------ ---------- ----------- ----------
Total ......... $ 260,673 $ 128,731 $ 1,542 $ 390,946 $ 369 $ 391,315
========== ========== ============ ========== =========== ==========
7
SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
The adjustments during fiscal 2002 in the Traditional segment represent the
final allocation of purchase price associated with the acquisition of J.L.
Hammett. The Specialty segment adjustments during fiscal 2002 represent final
purchase accounting adjustments of $(2,188) related to Global Video and $118
related to Envision. The balance of the fiscal 2002 adjustments represent
foreign currency translation. The adjustments during fiscal 2003 in the
Specialty segment primarily represent $447 for exit costs, consisting of
employee termination and facility closure costs, related to the closure of
regional sales offices at Premier Agendas. The balance of the fiscal 2003
adjustments represent foreign currency translation.
NOTE 6 - PRO FORMA RESULTS
The following information presents the unaudited pro forma results of operations
of the Company for the three months ended July 28, 2001, and includes the
Company's consolidated results of operations and the results of the companies
acquired during fiscal 2002 as if all such purchase acquisitions had been made
at the beginning of fiscal 2002, with the exception of the historical results
from the Bradburn and Premier Science acquisitions, which have been excluded as
they are immaterial. The results presented below include certain pro forma
adjustments to reflect the amortization of certain amortizable intangible
assets, adjustments to interest expense, and the inclusion of an income tax
provision on all earnings for the three months ended July 28, 2001:
For the Three
Months Ended
July 28, 2001
-------------
Revenues...................... $294,415
Net income.................... 22,344
Net income per share:
Basic...................... $1.26
Diluted.................... $1.21
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 2002 or the
results that may occur in the future. No pro forma results are provided for
fiscal 2003, as no acquisitions occurred during fiscal 2003.
NOTE 7 - SEGMENT INFORMATION
The Company's business activities are organized around two principal business
segments, Traditional and Specialty and operate principally in the United
States, with limited Specialty segment operations in Canada. 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 rates.
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.
This segment also supplies student academic planners. All intercompany
transactions have been eliminated.
The following table presents segment information:
8
SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
----------------------
July 27, July 28,
2002 2001
-------- --------
Revenues:
Traditional ..................................... $162,207 $165,691
Specialty ....................................... 135,820 94,471
-------- --------
Total ......................................... $298,027 $260,162
======== ========
Operating income and income before taxes:
Traditional ..................................... $ 19,528 $ 20,537
Specialty ....................................... 31,379 16,811
-------- --------
Total ......................................... 50,907 37,348
Corporate expenses .............................. 5,969 4,878
-------- --------
Operating income .............................. 44,938 32,470
Interest expense and other ...................... 4,979 5,059
-------- --------
Income before taxes ........................... $ 39,959 $ 27,411
======== ========
Identifiable assets (at quarter end):
Traditional ..................................... $261,125 $272,701
Specialty ....................................... 337,416 171,709
-------- --------
Total ......................................... 598,541 444,410
Corporate assets (1) ............................ 211,928 183,118
-------- --------
Total ......................................... $810,469 $627,528
======== ========
Depreciation and intangible amortization:
Traditional ..................................... $ 991 $ 977
Specialty ....................................... 1,677 755
-------- --------
Total ......................................... 2,668 1,732
Corporate ....................................... 959 772
-------- --------
Total ......................................... $ 3,627 $ 2,504
======== ========
Expenditures for property and equipment:
Traditional ..................................... $ 299 $ 578
Specialty ....................................... 1,160 571
-------- --------
Total ......................................... 1,459 1,149
Corporate ....................................... 1,965 1,157
-------- --------
Total ......................................... $ 3,424 $ 2,306
======== ========
(1) Includes assets of New School, Inc.
NOTE 8 - 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 and fiscal 2002 Form 10-K's. The Company
terminated 76 employees under this plan. No employees were terminated under this
plan during the three months ended July 27, 2002.
9
SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
Selected information related to the restructuring reserve follows:
Facility
Closure and Severance and
Consolidation Terminations Other Costs Total
-------------- ------------- ----------- -----
April 28, 2001 liability balance.......... $ 1,694 $ 800 $ 19 $ 2,513
First quarter, fiscal 2002
Utilizations......................... (291) (337) (19) (647)
Second quarter, fiscal 2002
Utilizations......................... (198) (140) - (338)
Third quarter, fiscal 2002
Utilizations......................... (339) (227) - (566)
Fourth quarter, fiscal 2002
Utilizations and adjustments......... (163) 64 - (99)
-------- --------- --------- ---------
April 27, 2002 liability balance 703 160 - 863
First quarter, fiscal 2003
Utilizations........................ (76) (35) - (111)
-------- --------- --------- ---------
July 27, 2002 liability balance........... $ 627 $ 125 $ - $ 752
======== ========= ========= =========
NOTE 9 - SECURITIZATION OF ACCOUNTS RECEIVABLE
On May 2, 2002, the Receivables Facility was amended to allow New School, Inc.
to receive advances up to $100,000 under the Receivables Facility.
NOTE 10 - IMPAIRMENT LOSS/ASSETS HELD FOR SALE
During fiscal 2003's first quarter, the Company recorded an impairment loss,
within the Traditional segment as a component of selling, general and
administrative expenses, related to the closure of the Lufkin, Texas warehouse
of $796. During fiscal 2003's first quarter, the Company decided to close and
market the facility as part of a plan to reduce the number of warehouses and to
align capacity and efficiency to better serve customers and reduce overall
warehousing costs. The facility, classified as held for sale on the July 27,
2002 balance sheet, is being marketed for sale and is expected to be sold within
the next twelve months.
NOTE 11 - SUBSEQUENT EVENT
On August 14, 2002, the Company acquired the stock of ABC School Supply, Inc.
and Three Dimension Woodcrafts, Inc. (collectively "ABC") from the former
shareholders for approximately $30,735. ABC, a leading marketer and manufacturer
of proprietary early childhood products to the pre-K through K-2 marketplace, is
headquartered in Duluth, Georgia with a manufacturing facility (Three Dimension
Woodcrafts, Inc.) in Lineville, Alabama. The acquisition is expected to create
synergies with our Childcraft business and will be reported as part of our
Specialty segment operations.
10
SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
NOTE 12 - RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's consolidated fiscal 2001 financial
statements, the Company determined that two sale-leaseback transactions which
occurred in November 2000 were improperly accounted for. The Company initially
accounted for the transactions as operating leases under sale-leaseback
accounting. The leases contain a specific technical default provision within the
agreements that could, under remote circumstances, allow for continuing
ownership involvement by the Company in the two properties. Due to this specific
default provision within the leases, the Company should have accounted for the
transactions as financings as opposed to sales and subsequent operating leases.
The following table summarizes the impact of this restatement on the Company's
previously filed fiscal 2002 first quarter Form 10-Q's unaudited quarterly
financial results:
As Reported As Restated
----------- -----------
At July 28, 2001:
Prepaid expenses and other current assets ..... $ 11,716 $ 11,558
Property and equipment ........................ 44,008 60,287
Other assets .................................. 15,228 15,952
Current maturities - long-term debt ........... 10,356 10,602
Other accrued liabilities ..................... 25,249 24,212
Long-term debt ................................ 204,410 222,355
Retained earnings ............................. 57,680 57,371
For the three months ended July 28, 2001:
Selling, general and administrative expenses .. $ 68,074 $ 67,824
Operating income .............................. 32,220 32,470
Interest expense .............................. 3,805 4,223
Income before provision for income taxes ...... 27,579 27,411
Provision for income taxes .................... 11,032 10,965
Net income .................................... 16,547 16,446
Diluted EPS ................................... $ 0.90 $ 0.89
As reported amounts reflect reclassifications made to conform with the current
year presentation.
11
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A")
Our financial statements for the three months ended July 28, 2001 have been
restated. See "Restatement of Financial Statements" note in our notes to
condensed consolidated financial statements. The following MD&A gives affect to
the restatement.
Results of Operations
The following table sets forth various items as a percentage of revenues on a
historical basis concerning our results of operations for the three months ended
July 27, 2002 and July 28, 2001.
Three Months Ended
------------------------
July 27, July 28,
2002 2001
---- ----
Revenues .............................................. 100.0% 100.0%
Cost of revenues ...................................... 58.2 61.4
----- -----
Gross profit ....................................... 41.8 38.6
Selling, general and administrative expenses .......... 26.7 26.1
----- -----
Operating income .................................. 15.1 12.5
Interest expense, net ................................. 1.5 1.7
Other expense ......................................... 0.2 0.3
----- -----
Income before provision for income taxes .............. 13.4 10.5
Provision for income taxes ............................ 5.4 4.2
----- -----
Net income ............................................ 8.0% 6.3%
===== =====
Three Months Ended July 27, 2002 Compared to Three Months Ended July 28, 2001
Revenues
Revenues increased 14.6% from $260.2 million for the three months ended July 28,
2001, to $298.0 million for the three months ended July 27, 2002. Increase in
revenues was primarily due to the inclusion of revenues from Premier Agendas
which was acquired in December 2001 and internal growth in the Specialty
businesses. Traditional segment revenues decreased 2.1% from $165.7 million to
$162.2 million. Change in Traditional segment revenues was primarily due to
lighter consumables volume partially offset by an increase in revenues in the
furniture lines. Specialty segment revenues increased 43.8% or $41.3 million
from $94.5 million to $135.8 million, driven by the acquisition of Premier
Agendas and internal growth in other Specialty businesses, partially offset by
the exclusion of revenues related to the disposition of ClassroomDirect's
engineering business in August 2001.
Gross Profit
Gross profit increased 24.1% from $100.3 million or 38.6% of revenues for the
three months ended July 28, 2001 to $124.5 million or 41.8% of revenues for the
three months ended July 27, 2002. The increase in gross profit was due to an
increase in revenues and gross margin expansion, combined with a shift in
revenue mix to more Specialty segment revenues, which generally are higher gross
profit/margin products. Specialty segment revenues were 36.3% of total revenues
for the first three months of fiscal 2002 and 45.6% of total revenues for the
first three months of fiscal 2003, primarily due to the acquisition of Premier
Agendas, which is reported as part of the Specialty segment. Traditional segment
gross profit decreased $0.4 million or 0.6% from $56.7 million or 34.2% of
revenues to $56.3 million or 34.7%. The change in Traditional segment gross
profit was due to reduced revenues, partially offset by gross margin expansion,
driven primarily by expanded gross margins in both the consumable and furniture
lines. Specialty segment gross profit increased $24.5 million or 56.3% from
$43.6 million or 46.2% of revenues to $68.2 million or 50.2% of revenues. The
increase in Specialty segment gross profit was primarily due to an increase in
revenues and gross margin expansion. The gross margin expansion was primarily
due to the inclusion of Premier Agendas, which has higher gross margins than
most of our other Specialty businesses and gross margin expansion in the
ClassroomDirect business, primarily due to a reduction in promotional pricing.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") 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 intangible amortization expense.
SG&A increased 17.3% from $67.8 million or 26.1% of revenues for the three
months ended July 28, 2001, to $79.6 million or 26.7% of revenues for the three
months ended July 27, 2002. The increase in SG&A was primarily due to an
increase in revenues, resulting in increased variable costs, and a change in
revenue mix, resulting in an increase in Specialty segment revenues. Specialty
segment businesses generally have higher SG&A than the Traditional segment
primarily due to increased catalog and marketing costs. Traditional segment SG&A
increased $0.7 million from $36.1 million to $36.8 million. The increase was
primarily due to an asset impairment charge associated with the closing of the
Lufkin, Texas warehouse, partially offset by a reduction in variable expenses
and improved efficiencies in the warehouses. Specialty segment SG&A increased
37.1% from $26.8 million or 28.4% of revenues to $36.8 million or 27.1% of
revenues. The increase in SG&A was primarily due to an increase in revenues. The
decrease in SG&A as a percent of revenues was primarily due to Premier Agendas,
which has a slightly lower SG&A structure than our other Specialty businesses
and a reduction in other Specialty businesses SG&A, primarily due to expense
control measures and improved operating efficiencies.
Interest Expense
Net interest expense increased $0.3 million from $4.2 million or 1.6% of
revenues for the three months ended July 28, 2001 to $4.5 million or 1.5% of
revenues for the three months ended July 27, 2002. The increase in interest
expense was primarily due to an increase in debt outstanding, primarily driven
by cash paid for Premier Agendas. The increase in interest expense due to
increased debt outstanding is partially offset by a reduction in our effective
interest rate.
Other Expense
Other expense decreased $0.4 million to $0.5 million in fiscal 2003's first
quarter. Other expense in fiscal 2003 and fiscal 2002 primarily represented the
discount and loss on the accounts receivable securitization of $0.4 million and
$0.8 million, respectively. The decrease in the discount was primarily due to a
decrease in interest rates, partially offset by an increase in average accounts
receivable securitized from $50.0 million in fiscal 2002's first quarter to
$63.1 million during fiscal 2003's first quarter.
Provision for Income Taxes
Provision for income taxes for the three months ended July 27, 2002 increased
45.9% or $5.0 million over the three months ended July 28, 2001, reflecting
income tax rates of 40.0%. The higher effective tax rate, compared to the
federal statutory rate of 35%, was primarily due to state, local and foreign
income taxes.
Liquidity and Capital Resources
At July 27, 2002, we had working capital of $149.0 million. Our capitalization
at July 27, 2002 was $624.9 million and consisted of total debt of $325.9
million and shareholders' equity of $299.0 million.
We currently have a five-year secured $250 million revolving loan credit
facility with Bank of America, N.A. The credit facility matures on September 30,
2003. The amount outstanding as of July 27, 2002 was $158.1 million. The credit
facility is secured by substantially all of our assets and contains certain
financial and other covenants. 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. At July 27, 2002, our
effective interest rate on borrowings under our credit facility was
approximately 5.3%, including amortization of loan origination costs and
commitment fees.
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We currently have a $100 million receivable securitization facility which
expires in November 2002 and may be extended further with the financial
institution's consent. At July 27, 2002, $50 million was advanced under the
receivable securitization and accordingly, that amount of accounts receivable
has been removed from our consolidated balance sheet. Costs associated with the
sale of receivables, primarily related to the discount and loss on sale, were
$0.4 million and are included in other expenses in our consolidated statement of
operations.
Net cash used in operating activities increased $6.2 million from $30.5 million
to $36.7 million for the first quarter of fiscal 2002 and fiscal 2003,
respectively. This net use of cash by operating activities during the period is
indicative of the highly 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. Fiscal 2003's first quarter use of cash increased due
to the acquisition of Premier Agendas, which billed a large majority of their
first quarter revenue in July.
Net cash used in investing activities for the first quarter of fiscal 2003 was
$7.3 million as compared with $7.8 million in fiscal 2002's first quarter.
Fiscal 2003 includes a $4.0 million payment to the former owners of Premier
Agendas. Fiscal 2002 included $3.6 million for the acquisition of Envision and a
$3.0 million payment related to an earn-out provision to the former owners of
Global Video.
Net cash provided by financing activities increased $6.3 million from $36.6
million to $42.9 million, primarily consisting of borrowings under our credit
facility to fund the increase in cash used in operations.
We anticipate that our cash flow from operations, borrowings available from our
existing bank credit facility and other sources of capital will be sufficient to
meet our liquidity requirements for operations, including anticipated capital
expenditures and our contractual obligations.
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 sold, the mix of products
sold and general economic conditions. Moreover, the operating margins of
companies we acquire may differ substantially from our own, which could
contribute to further fluctuation in quarterly operating results. Therefore,
results for any fiscal quarter are not indicative of the results that we may
achieve for any subsequent fiscal quarter or for a full fiscal year.
Inflation
Inflation 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 Quarterly Report which are not historical are
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The forward-looking statements include: (1)
statements made under Item 2, Management's Discussion and Analysis of Financial
Condition and Results of 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.
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All forward-looking statements included in this Quarterly Report are based on
information available to us as of the date hereof. We do not undertake to update
any forward-looking statements that may be made by or on behalf of us, in this
Quarterly Report or otherwise. Our actual results may differ materially from
those contained in the forward-looking statements identified above. Factors
which may cause such a difference to occur include, but are not limited to, the
factors identified in Exhibit 99.2 to our Form 10-K for the fiscal year ended
April 27, 2002.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no changes in quantitative and qualitative disclosures about
market risk from what was reported in our Annual Report on Form 10-K for the
fiscal year ended April 27, 2002.
PART II - OTHER INFORMATION
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ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
See the Exhibit Index, which is incorporated herein by reference.
(b) Reports on Form 8-K.
The Company filed one report on Form 8-K during the quarter covered by
this report as follows:
(1) Form 8-K dated and filed June 11, 2002 under Item 4. The
Company dismissed Arthur Andersen LLP as its independent
auditor and engaged Deloitte & Touche 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)
08/29/02 /s/ David J. Vander Zanden
-------- --------------------------
Date David J. Vander Zanden
President and Chief Operating Officer
(Interim Chief Executive Officer)
08/29/02 /s/ Mary M. Kabacinski
-------- ----------------------
Date Mary M. Kabacinski
Executive Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
12.1 Statement Regarding Computation of Ratio of Earnings to Fixed Charges
99.1 School Specialty, Inc.'s Certification of Periodic Report by the Chief
Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 School Specialty, Inc.'s Certification of Periodic Report by the Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
16