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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-K
______________________________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934: For the fiscal year ended April 27, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 000-24385
SCHOOL SPECIALTY, INC.
(Exact name of Registrant as specified in its charter)
Wisconsin 39-0971239
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
W6316 Design Drive
Greenville, Wisconsin 54942
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (920) 734-5712
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant, as of July 8, 2002, was approximately $454,151,825. As of such
date, there were 18,234,015 shares of the Registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders
to be held on August 27, 2002 are incorporated by reference into Part II and
Part III.
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PART I
Item 1. Business
Unless the context requires otherwise, all references to "School
Specialty," "we" or "our" refer to School Specialty, Inc. and its subsidiaries.
Our fiscal year ends on the last Saturday in April in each year. In this Annual
Report on Form 10-K ("Annual Report"), we refer to fiscal years by reference to
the calendar year in which they end (e.g. the fiscal year ended April 27, 2002
is referred to as "fiscal 2002"). Note that fiscal 2000 had 53 weeks, while all
other fiscal years reported and referenced represent 52 weeks.
Company Overview
School Specialty is the largest direct marketing company for
supplemental educational supplies to schools and teachers for pre-kindergarten
through twelfth grade ("preK-12") in the United States. We operate the
industry's only national distribution network and currently hold approximately a
14 percent market share of the $6.2 billion supplemental educational supply
market. We offer more than 80,000 items, mail over 38 million catalogs annually
and have developed both an on-line education portal and e-commerce websites. Our
broad product range enables us to provide customers with one source for
virtually all of their supplemental educational supply needs. Our leading market
position has been achieved by emphasizing high-quality products, superior order
fulfillment and exceptional customer service. As a result, we have been able to
establish relationships with virtually all of the country's preK-12 schools and
reach nearly all of the country's teachers.
We recognize that educational supply procurement decisions are made at
the district and school levels by administrators as well as at the classroom
level by teachers and curriculum specialists. As a result, we have created an
innovative multi-channel sales and marketing strategy enabling us to market our
products to the various levels of buyers within the education market.
The "traditional" or "top down" approach targets school districts and
school administrators through our traditional sales force of over 300
professionals, the School Specialty general supply catalog and the JuneBox.com
portal, a B2B (business to business) education portal.
The "specialty" or "bottom up" approach targets the classroom level
decision-makers through our specialty sales force of over 200 professionals and
through our catalogs featuring seven of our specialty brands as well as the
ClassroomDirect catalog and website, which is a B2T (business to teacher)
website. Our other specialty catalogs include Childcraft, Sax Arts and Crafts,
Sportime and Premier Agendas. The specialty businesses offer more specialized
products for individual disciplines. Many of these products are proprietary to
our specialty brands.
We believe most of our brands hold the leading market position in their
respective categories. We have also solidified this leading market position by
acquiring companies which have expanded our geographic presence and product
offering. The critical mass we have achieved allows us to benefit from increased
buying power while leveraging our national distribution network and sales force
to operate more efficiently.
We have grown significantly in recent years through both acquisitions
and internal growth. From fiscal 1997 through fiscal 2002, our revenues
increased from $191.7 million to $767.4 million, a compound annual growth rate,
or CAGR, of 32 percent. In fiscal 2002, revenues increased by 10.8 percent from
the previous fiscal year. These results reflect only a partial year of the
revenues from companies we acquired during fiscal 2002. We remain focused on
growth opportunities, including
increasing our penetration rate and expanding in attractive regions, which would
allow us to enhance our position as the number one marketer of supplemental
educational supplies in the United States.
School Specialty, Inc., founded in October 1959, was acquired by U.S.
Office Products in May 1996. In June 1998, School Specialty was spun-off from
U.S. Office Products in a tax-free transaction. Our common stock is listed on
the Nasdaq National Market under the symbol "SCHS." In August 2000, we
reincorporated from Delaware to Wisconsin. Our principal offices are located at
W6316 Design Drive, Greenville, Wisconsin 54942, and our telephone number is
(920) 734-5712. Our general website address is www.schoolspecialty.com.
Information contained in any of our websites is not deemed to be a part of this
Annual Report.
Industry Overview
The school supply market consists of the sale of supplemental
educational supplies, furniture and equipment to school districts, individual
schools, teachers and curriculum specialists who purchase products for school
and classroom use. The National School Supply Equipment Association, or NSSEA,
estimates that annual sales in the United States of supplemental educational
supplies and equipment to the school supply market are approximately $6.2
billion. Of this amount, approximately $3.7 billion is sold through
institutional channels and the remaining $2.5 billion is sold through retail
channels, such as teacher stores.
According to the U.S. Department of Education, there are approximately
16,000 school districts, 118,500 elementary and secondary schools and 3.6
million teachers in the United States. Administrators for both school districts
and individual schools usually make the decision to purchase the general school
supplies needed to operate the school. Teachers and curriculum specialists
generally decide on curriculum-specific products for use in their classrooms and
individual disciplines. According to the NSSEA, teachers spent approximately
$1.3 billion of their own money in 2001 on supplies to supplement classroom
materials.
The industry has highly predictable and generally favorable trends.
Education expenditures have risen each year for the past 15 years and are
expected to have exceeded $390 billion in 2001, according to the U.S. Department
of Education. The most common measure of education spending is current
expenditures per student. According to the National Education Association,
current expenditures per student in constant dollars have increased from $6,620
in 1988 to an estimated $7,400 in 2000 and are expected to increase further to
$9,760 in 2010, a 32 percent increase over 2000 expenditures. Incremental
spending will thus exceed enrollment growth, which according to the U.S.
Department of Education is projected to grow by 17 percent from 1988 to 2010 to
a record level of 53.0 million students. As the market is affected by prevailing
political and social trends, the attitude of the government towards education
determines, to some extent, total expenditures on education. The prevailing
political and social environments are generally favorable for incremental
expenditures on education.
In January 2002 President Bush signed into law the No Child Left Behind
Act of 2001 designed to improve student achievement in classrooms across the
country. The fiscal 2002 federal budget provides for $4.6 billion in federal
education funding, an 11 percent increase from last year.
The industry is also highly fragmented with over 3,400 direct marketers
of supplemental education supplies, many of which are family- or employee-owned
businesses that operate in a single geographic region. We believe the increasing
demand for single-source suppliers, prompt order fulfillment and competitive
pricing, along with the related need for suppliers to invest in automated
inventory and electronic ordering systems, is fostering consolidation within the
industry. In addition, the industry is currently experiencing a shift in growth
to the higher margin specialty business, which offers more focused products for
different educational disciplines. Increased purchasing at the school and
classroom levels, which
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increases individual school's and teacher's roles in educational supply
procurement decisions, is also driving this trend.
Recent Acquisitions
Premier Agendas. In December 2001 we acquired all of the stock of
Premier Agendas, Inc. and Premier School Agendas, Ltd (together "Premier
Agendas"). Headquartered in Bellingham, Washington, Premier Agendas is the
largest provider of academic agendas in the United States and Canada. Premier
Agendas has been included in our specialty segment since the date of
acquisition. We paid approximately $156 million in total purchase price for
Premier Agendas, including cash of approximately $152 million and a $4 million
six-month note payable to the former owners of Premier Agendas that bears
interest at two percent over LIBOR. The note was paid in full on June 21, 2002.
Envision Product Line. In May 2001, we acquired the TimeTracker product
line of student and teacher planners from Envision, Inc. We paid approximately
$4 million in cash and issued 120,106 shares of our common stock for a total
purchase price of approximately $6.7 million. TimeTracker is now a product line
of Premier Agendas and has been reported in our specialty segment since the date
of acquisition.
Other Acquisitions. We acquired two other businesses in fiscal 2002 for
a total purchase price of approximately $3.3 million The businesses are Premier
Science, a start-up science curriculum company which will be operated as a
product line within our Frey Scientific specialty brand and Bradburn School
Supply which will become part of our traditional School Specialty brand.
Competitive Strengths
We attribute our strong competitive position to the following key
factors:
Number One Market Share. We have the highest revenues of any direct
marketing company for supplemental education supplies. We have developed this
leading market position by emphasizing high-quality products, superior order
fulfillment and exceptional customer service. We believe that our large size and
brand recognition have resulted in significant buying power, economies of scale
and customer loyalty.
Leading Established Brands. We have the most established and recognized
brands in the industry. We believe that seven of our nine brands have a leading
market position in their respective categories, based on revenues. With a
historical track record of over 100 years for some brands, the Company's
traditional and specialty brands represent a significant competitive advantage.
Broad Product Lines. Our strategy is to provide a full range of
high-quality products to meet the complete supply needs of schools for preK-12.
With over 80,000 items ranging from classroom supplies and furniture to
playground equipment, we provide customers with one source for virtually all of
their supplemental educational supplies and furniture needs. In addition to our
traditional School Specialty brand, our specialty businesses enrich our general
product offering and create opportunities to cross merchandise our specialty
products to our traditional customers. Specialty businesses include the
following brands:
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Brand Products
Childcraft .............................. Early childhood
ClassroomDirect ......................... General supplies
Sax Arts and Crafts ..................... Art supplies
Frey Scientific ......................... Science
Sportime ................................ Physical education
Teacher's Video ......................... Educational videos
Brodhead Garrett ........................ Industrial arts
Premier Agendas ......................... Student agendas
Innovative Full-Service Business Model. We believe that we are the only
company in our industry that has developed a full-service business model with an
integrated, multi-channel marketing approach. As a result, we reach district and
school administrative decision makers as well as teachers and curriculum
specialists through separate sales forces, catalog mailings and the Internet. We
utilize our customer database across our family of catalogs to maximize their
effectiveness and increase our marketing reach. Our primary e-commerce websites,
JuneBox.com for administrative purchase decisions and ClassroomDirect.com for
teacher-based purchase decisions, establish a comprehensive presence on the
Internet which we believe is a significant competitive advantage for us.
Stable Industry with Favorable Trends and Dynamics. Because the market
for educational supplies is driven primarily by demographics and government
spending, we believe our industry is less exposed to economic cycles than many
others. We have established working relationships with many large public
education organizations and understand how to do business effectively with these
institutions.
Established Infrastructure and Customer Relationships. We believe our
seven leading brands, national sales force, the industry's largest product
offering, established customer relationships and a national distribution network
with multiple sales channels, including e-commerce, give us a significant
advantage in this industry. The supplemental education supply market is highly
seasonal, with a January through July selling season and a June through October
shipping season, and our infrastructure and logistical capacities and
capabilities permit us to meet the requirements of these peak periods
effectively.
Proven Acquisition and Integration Model. We have completed over 30
acquisitions since May 1996. We have established a 6 to 12 month target for our
integration process in which a transition team is assigned to sell or
discontinue incompatible business units, reduce the number of items in the
product offering, eliminate redundant expenses, integrate the acquired entity's
management information systems, and exploit buying power. To date, our
integration efforts have focused on acquired traditional companies and certain
administrative and warehousing functions at our specialty divisions. We believe
that through these processes, we can rapidly improve the operating margins of
the businesses we acquire.
Effective Use of Technology. We believe that our use of information
technology systems allows us to turn over inventory more quickly than our
competitors, offer customers more convenient and cost effective ways of ordering
products, and more precisely focus our sales and marketing strategies.
Experienced and Incentivised Management. Our management team provides
depth and continuity of experience. In addition, management's interests are
aligned with those of our shareholders, as many members of management own shares
of our common stock and/or have been granted options to purchase our common
stock.
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Growth Strategy
We use the following strategies to grow and enhance our position as the
leading marketer of supplemental educational supplies:
Internal Growth. We plan to continue to increase our revenues by:
. Taking advantage of market growth through rising expenditures per
student, combined with increasing enrollment
. Increasing penetration in geographic markets where we are currently
underrepresented
. Increasing penetration in large districts by offering our
single-source product solution
. Cross-merchandising specialty products to traditional customers
. Encouraging brand loyalty to the total School Specialty brand
offering
. Adding new products to enhance the breadth of our product offering
. Pursuing price increases to the extent supported by market
conditions
. Adding sales through Internet channels
Margin Improvement. As we continue to grow our revenues, we plan to
increase margins by selling more specialty products, which typically generate
higher gross margins due to the large number of proprietary and branded products
in the product mix. In addition, we believe we can further improve operating
margins by leveraging the benefits of recent acquisitions and:
. Increasing buying power combined with price expansion
. Continuing the elimination of redundant expenses of acquired
businesses
. Reducing our overhead costs
. Improving the efficiency of our distribution network
. Reviewing and adjusting the level of customer discounts
. Taking advantage of the industry's shift toward site-based (versus
centralized) purchasing
Acquisitions. Our selective acquisition strategy and proven integration
model have allowed us to solidify our leading position within the industry and
establish a strong national marketing and distribution platform. This platform
allows us to integrate acquired brands more easily and strengthen our specialty
brand portfolio and enter supplemental education categories in which we do not
currently compete, such as music or math, in addition to enabling us to grow
faster than the industry. We believe that our size and national presence give us
an advantage as a potential acquirer in a consolidating industry.
Furthermore, our proven integration model allows us to realize
significant synergies. We believe we have demonstrated our ability to reduce
redundant costs, retain the customers of the acquired brands, and integrate
distribution networks and information technology platforms. For each
acquisition, we generally assume a reduction of approximately 10 percent of the
acquired company's revenues. The reduction is expected as we discontinue any
unprofitable business lines, divest any product lines outside
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our core competencies and reduce overlapping sales forces. The integration model
is designed to offset the sales reduction and efficiently combine the companies.
The model allows us to smoothly consolidate distribution centers, improve
geographic distribution, integrate the back-office functions, expand purchasing
power and, when a specialty company is acquired, realize product and margin
enhancement related to cross merchandising.
Product Lines
We market two broad categories of products: general school supplies and
specialty products geared towards specific educational disciplines. Our
specialty products enrich our general supply product offering and create
opportunities to cross merchandise our specialty products to our traditional
customers. With over 80,000 items ranging from classroom supplies and furniture
to playground equipment, we provide customers with one source for virtually all
of their supplemental educational supply needs. Our business is highly seasonal
with peak sales levels occurring from June through October.
Our general school supply product lines can be described as follows:
School Specialty. Through the School Specialty catalog, which is
targeted to administrative decision makers, we offer a comprehensive selection
of classroom supplies, instructional materials, educational games, art supplies,
school forms, educational software, physical education equipment, audio-visual
equipment, school furniture and indoor and outdoor equipment. We believe we are
the largest school furniture resale source in the United States. We have been
granted exclusive franchises for certain furniture lines in specific territories
and we enjoy significant purchasing power in open furniture lines. We enhance
our furniture offering with a custom design and contract management service
called Projects by Design, which assists in the building or renovation of
schools.
Our specialty businesses offer product lines for specific educational
disciplines, as follows:
Childcraft. Childcraft markets early childhood education products and
materials. Childcraft also markets over 1,000 proprietary or exclusive products
manufactured by its Bird-in-Hand Woodworks subsidiary, including wood classroom
furniture and equipment such as library shelving, cubbies, easels, desks and
play vehicles.
ClassroomDirect. ClassroomDirect offers general supplemental
educational supplies to teachers and curriculum specialists directly through its
mail-order catalogs and fully integrated B2T website.
Sax Arts and Crafts. Sax Arts and Crafts is a leading marketer of art
supplies and art instruction materials, including paints, brushes, paper,
ceramics, art metals and glass, leather and wood crafts. Sax Arts and Crafts
offers customers a toll free "Art Savvy Hotline" staffed with professional
artists to respond to customer questions.
Frey Scientific. Frey Scientific is a leading marketer of laboratory
supplies, equipment and furniture for science classrooms. Frey Scientific offers
value-added focus in the biology, chemistry, physics and earth science areas.
Sportime. Sportime is a leading marketer of physical education,
athletic and recreational products. Sportime's catalog product offering includes
products for early childhood through middle school as well as targeted products
for physically challenged children.
Teacher's Video. Teacher's Video is a leading marketer and producer of
educational videos for educators targeting teachers, curriculum coordinators and
department heads through 16 different curriculum-oriented catalogs, with a total
annual mailing volume in excess of 22 million catalogs.
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Brodhead Garrett. Brodhead Garrett is the nation's oldest marketer of
industrial arts products and technical materials to classrooms. Brodhead
Garrett's product line includes various items such as drill presses, sand paper,
lathes and robotic controlled arms.
Premier Agendas. Premier Agendas is the largest provider of academic
agendas in the United States and Canada. The agendas include proprietary content
to promote student success. Premier is also a leading publisher of school forms,
including record books, grade books, teacher planners and other printed forms
under the brand Hammond & Stephens.
Our merchandising managers, many of whom have prior experience in
education, continually review and update the product lines for each business.
The merchandising managers convene customer focus groups and advisory panels to
determine whether current offerings are well-received and to anticipate future
demand. The merchandising managers also travel to product fairs and conventions
seeking out new product lines. This annual review process results in a constant
reshaping and expansion of the educational materials we offer.
For further information regarding our traditional and specialty
segments, see our "Segment Information" in notes to consolidated financial
statements.
Sales and Marketing
We have implemented an innovative multi-channel sales and marketing
strategy that employs a traditional sales force of over 300 professionals, a
specialty sales force of over 200 professionals, over 38 million catalogs mailed
annually, a B2T website and a B2B educational portal. We believe we have
developed a substantially different sales and marketing model from that of other
supplemental educational supply companies in the United States. Our strategy is
to use two separate sales and marketing approaches ("top down" and "bottom up")
to reach all the prospective purchasers in the education system.
Traditional Business. Our "top down" marketing approach targets
administrative decision-makers through our traditional sales force, the School
Specialty general supply catalog and the JuneBox.com education portal. This
approach accounts for the majority of our traditional business.
Our primary compensation program for sales representatives is based on
commissions as a percentage of gross profit on sales. For new and transitioning
sales representatives, we offer salary and expense reimbursement until the
representative is moved to a full commission compensation structure.
Schools typically purchase supplies based on established relationships
with relatively few vendors. We seek to establish and maintain these critical
relationships by assigning accounts within a specific geographic territory to a
local area sales representative who is supported by a centrally located customer
service team. The customer service representatives frequently call on existing
customers to ascertain and fulfill their supplemental educational supply needs.
The representatives maintain contact with these customers throughout the order
cycle and assist in processing orders.
As part of the integration of Beckley-Cardy, which we acquired in 1998,
we restructured our traditional sales and marketing operations from a
decentralized regional system to a more centralized national structure. We
believe that the new structure significantly improves our effectiveness through
better sales management, resulting in higher regional penetration, and
significant cost savings through the reduction of distribution centers.
"Projects by Design" is a service we provide to help in the building or
renovation of schools. Our professionals prepare a detailed room-by-room
analysis to simplify supplemental educational supply
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planning and fulfillment. Customers have the ability to view prospective
classrooms through our innovative software in order to efficiently manage the
project.
Specialty Business. We use the "bottom up" approach to target the
classroom level decision-makers through our specialty sales force and catalogs
featuring seven specialty brands along with our ClassroomDirect.com catalog and
website. These catalogs allow teachers to procure supplies that are specific to
their curriculum and classroom needs and may not have been purchased by school
administration.
For each specialty brand, a major catalog containing its full product
offering is distributed near the end of the calendar year for the beginning of
the January through July selling season. During the course of the year we mail
additional supplemental catalogs. Schools can also access the Childcraft,
Teacher's Video and ClassroomDirect.com websites. Further, we believe that by
cross marketing our specialty brands to traditional customers, we can achieve
substantial incremental sales.
Internet Operations. Our Internet approach comprises both a B2T website
and a B2B portal and creates a new sales channel for School Specialty. We have
invested approximately $11 million within the last three years to develop what
we believe to be the number one education portal and e-commerce website in the
industry. In January 1999, we launched our fully-integrated, e-commerce website
ClassroomDirect.com. The site offers access to approximately 18,000 items with
digital pictures of most items. The site is currently teacher-focused, but we
have the option to broaden the format to target the large parent/student market.
In August 1999, we launched JuneBox.com, a portal structured as an
education mall offering our products. We believe that this site will play an
important role within the education industry by providing education-related
content and information, thereby strengthening our brand name recognition.
JuneBox.com is a one-stop shop for all supplemental educational
supplies offering School Specialty's full product portfolio or custom electronic
catalogs as well as teaching tips, lesson plan help, product reviews and updates
on current events affecting the education community.
We also benefit from the Internet with increased quality of customer
service and lower operating costs. By shifting the majority of customer service
for e-commerce customers to the Internet and having orders reviewed and verified
on-line, we have been able to reduce the associated costs while providing a
24-hour service. Substantially all of our investments in our Internet operations
have been dedicated towards building an efficient, advanced and flexible
Internet platform.
Pricing. Pricing for our general and specialty product offerings varies
by product and market channel. We generally offer a negotiated discount from
catalog prices for supplies from our School Specialty catalog and respond to
quote and bid requests. The pricing structure of specialty products offered
through direct marketing is generally not subject to negotiation.
School Specialty has built a broad customer base where no single
customer accounted for more than 2% of sales during fiscal 2000, 2001 or 2002.
We believe we sell into every school district in the United States and reach
nearly all of the country's teachers.
Procurement
Traditional Business. We purchase our general school supplies and
furniture and equipment from over 2,000 vendors. Product selection is evaluated
on an annual basis and we typically negotiate an annual supply contract with
each vendor. Our supply contracts with our larger vendors usually provide for
special pricing and/or extended terms and often include volume based incentive
and rebate programs. In
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fiscal 2000, we introduced a private label, ClassroomSelect, and subsequently
expanded product selection which has allowed for margin expansion. We have
exclusive distribution rights on several furniture and equipment lines.
Specialty Business. Many of our products in the specialty business are
proprietary. We either develop the product or it is an exclusive product
developed on our behalf. Typically, we outsource the manufacturing of
proprietary products, except for our Childcraft division, which manufactures
wood furniture for sale by Childcraft and our other businesses. We produce our
Teacher's Video proprietary videos at our Global Video facility in Tempe,
Arizona. Our Premier agendas and forms are designed and produced at our
facilities in Bellingham, Washington and Fremont, Nebraska, as well as through
third party printers. We purchase non-proprietary products in the specialty
business in a similar manner as our traditional business procurement process.
To the extent the traditional and specialty businesses are sourcing
product from common vendors, we typically negotiate one contract to take full
advantage of our combined buying power. We maintain close and stable
relationships with our vendors to facilitate a streamlined procurement process.
At the same time, we continually review alternative supply sources in an effort
to improve quality, improve customer satisfaction, and reduce product cost.
Logistics
We have built what we believe is the largest and most sophisticated
distribution network among our direct marketing competitors, with nine
fully-automated and seamlessly-integrated distribution centers that ship
directly to the customer. The distribution centers average approximately 190,000
square feet. We also maintain call centers to support customer service and
sales. We believe this network represents a significant competitive advantage
for us, allowing us to reach any school in a fast and efficient manner. We
shipped approximately 70 percent of stocked inventory via UPS in fiscal 2002 and
had a 97 percent on-time delivery rate. The fill-rate of our facilities has
generally exceeded 95 percent at the peak of our shipping season. We have the
ability to expand the network through necessary additions needed to support
sales growth. New warehouse capacity can be leased and no large capital
investments are typically required.
In order to maintain the proprietary nature of some of our specialty
products, we operate three small manufacturing facilities. The Lancaster,
Pennsylvania facility manufactures products for the Childcraft brand, while the
Bellingham, Washington and Fremont, Nebraska facilities are used for the
production of student agendas and school forms. Our manufactured products
account for approximately 5 percent of our sales.
Information Systems
We believe that through the utilization of technology in areas such as
purchasing and inventory management, customer order fulfillment and database
management, we are able to turn over inventory more quickly than our
competitors, offer customers more convenient and cost effective ways of ordering
products and more precisely focus our sales and marketing strategies.
We use two principal information systems. In the traditional and
certain specialty businesses, we use a specialized distribution software package
used primarily by office products and paper marketers. This software package,
System for Distributors, offers a fully-integrated process from sales order
entry through customer invoicing, and inventory requirements planning through
accounts payable. Our system provides information through daily automatic
posting to the general ledger and integrated inventory
9
control. We have made numerous enhancements to this process that allow greater
flexibility in addressing the seasonal requirements of the industry and meeting
specific customer needs.
The remaining specialty divisions use a mail-order and catalog system
provided by Ecometry Corporation. This mail-order and catalog system meets the
needs of the direct marketing approach with extensive list management and
tracking of multiple marketing efforts. The system provides complete and
integrated order processing, inventory control, warehouse management and
financial applications.
In April 2002 we installed a new order management and warehouse
management system in our Fresno, California distribution center. With this
system, designed by Yantra, we expect to achieve a more simplified order process
cycle, improved access to data and enhancement of our inventory control
procedures. Following evaluation of the pilot Fresno installation, we plan to
install the Yantra system in our other distribution centers beginning in October
2002.
Our software and hardware allow for continued incremental growth as
well as the opportunity to integrate new client-server and other technologies
into the information systems.
Competition
We believe competition in the market we operate in is fragmented with
approximately 3,400 regional suppliers to preK-12 schools. These companies are
generally smaller than us in terms of revenues and serve customers in a limited
geographic region. We also compete with alternate channel competitors such as
office product contract stationers and office supply superstores. Their primary
advantages over us are size, location, greater financial resources and buying
power. Their primary disadvantage is that their product mix typically covers
less than 20 percent of the school's needs (measured by volume).
For the most part, our competitors do not offer special order
fulfillment software, which we believe is increasingly important to adequately
service school needs. We believe we compete favorably with these companies on
the basis of service and product offering.
Employees
As of June 1, 2002, we had approximately 2,400 full-time employees. To
meet the seasonal demands of our customers, we employ many seasonal employees
during the late spring and summer months. Historically, we have been able to
meet our requirements for seasonal employment. None of our employees is
represented by a labor union. We consider our relations with our employees to be
very good.
Forward-Looking Statements
Statements in this Annual 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 1, Business and Item 7, 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
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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 Annual 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 Annual 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 listed in Exhibit 99.2 to our Form 10-K for fiscal 2002.
11
Item 2. Properties
Our corporate headquarters is located in a leased facility at W6316
Design Drive, Greenville, Wisconsin, a combined office and warehouse facility of
approximately 332,000 square feet, which also services both our traditional and
specialty segments. In addition, we lease or own the following principal
facilities:
Approximate
Square Owned/
Locations Footage Leased Lease Expiration
--------- --------- -------- ------------------
Agawam, Massachusetts (1) ...................... 188,000 Leased November 30, 2020
Atlanta, Georgia (2) ........................... 20,000 Leased January 31, 2006
Bellingham, Washington (2) ..................... 48,000 Leased March 31, 2011
Fremont, Nebraska (2) .......................... 95,000 Leased June 30, 2003
Fresno, California (3) ......................... 163,200 Leased November 1, 2009
Lancaster, Pennsylvania (2) .................... 73,000 Leased December 31, 2002
Lancaster, Pennsylvania (2) .................... 204,000 Leased February 28, 2009
Lufkin, Texas (1) .............................. 140,000 Owned --
Lyons, New York (1) ............................ 179,000 Owned --
Mansfield, Ohio (3) ............................ 315,000 Leased November 30, 2020
New Berlin, Wisconsin (2) ...................... 16,200 Leased September 30, 2007
Salina, Kansas (1) ............................. 123,000 Owned --
Southaven, Mississippi (3) ..................... 200,000 Leased December 31, 2010
Tempe, Arizona (2) ............................. 57,000 Leased February 28, 2005
- ----------
(1) Location primarily services the traditional segment.
(2) Location primarily services the specialty segment.
(3) Location primarily services both business segments.
The 73,000 square foot Lancaster, Pennsylvania facility is used for
manufacturing and the Fremont, Nebraska and Bellingham, Washington facilities
are used for production of agendas and school forms. The other facilities are
distribution centers and/or office space. We believe that our properties, as
enhanced for our ongoing expansion, are adequate to support our operations for
the foreseeable future. We regularly review the utilization and consolidation of
our facilities.
Item 3. Legal Proceedings
We are, from time to time, a party to legal proceedings arising in the
normal course of business. We believe that none of these legal proceedings will
materially or adversely affect our financial position, results of operations or
cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted during the quarter ended April 27, 2002
to a vote of our security holders.
12
EXECUTIVE OFFICERS OF THE REGISTRANT
As of June 1, 2002, the following persons served as executive officers
of School Specialty:
Name and Age
------------
of Officer
----------
David J. Vander Zanden Mr. Vander Zanden became the President and Chief Operating Officer of School
Age 47 Specialty in March 1998 and was appointed the Interim Chief Executive Officer in
March 2002, following the unexpected death of Daniel P. Spalding, former Chairman
and Chief Executive Officer. From 1992 to March 1998, he served as President of
Ariens Company, a manufacturer of outdoor lawn and garden equipment. Mr. Vander
Zanden has served as a director of School Specialty since June 1998.
Mary M. Kabacinski Ms. Kabacinski, a Certified Public Accountant, has served as Executive Vice
Age 53 President and Chief Financial Officer of School Specialty since August 1999. From
1989 to 1999, she served as Senior Vice President and Chief Financial Officer for
Marquette Medical Systems, a manufacturer of medical devices.
A. Brent Pulsipher Mr. Pulsipher became Executive Vice President of Corporate Logistics and Technology
Age 60 of School Specialty in March 2001. From 1998 to 2001, Mr. Pulsipher was Chief
Information Officer for Tropical Sportswear International, an apparel producer and
brand manager. Mr. Pulsipher held the position of Manager of Consulting Services for
Distribution Resources Company from 1988 to 1998.
Donald J. Noskowiak Mr. Noskowiak has served as Vice President of Finance and Business Development of
Age 44 School Specialty since August 1999. Mr. Noskowiak has been with School Specialty
since 1992, and served as Chief Financial Officer from 1997 to August 1999.
The term of office of each executive officer is from one annual meeting
of the Board of Directors until the next annual meeting of the Board of
Directors or until a successor for each is selected. There are no arrangements
or understandings between any of our executive officers and any other person
(not an officer or director of School Specialty acting as such) pursuant to
which any of our executive officers were selected as an officer of School
Specialty.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Market Information
Our common stock is traded under the symbol "SCHS" on the Nasdaq
National Market. The table below sets forth the reported high and low closing
sale prices for shares of the common stock, as reported by the National
Association of Securities Dealers, Inc. during the indicated quarters.
13
High Low
---- ---
Fiscal 2002 quarter ended
-------------------------
July 28, 2001 $28.66 $21.95
October 27, 2001 31.99 26.00
January 26, 2002 31.30 21.65
April 27, 2002 29.65 23.19
Fiscal 2001 quarter ended High Low
------------------------- ---- ---
July 29, 2000 $19.50 $14.50
October 28, 2000 21.31 15.06
January 27, 2001 21.69 15.00
April 27, 2001 23.39 19.69
Holders
As of July 19, 2002, there were 2,203 record holders of our common
stock.
Historical Dividends
We have not declared or paid any cash dividends on our common stock to
date. We currently intend to retain our future earnings to finance the growth,
development and expansion of our business. Accordingly, we do not expect to pay
cash dividends on our common stock in the foreseeable future. In addition, our
ability to pay dividends may be restricted or prohibited from time to time by
financial covenants in our credit agreements and debt instruments. Our current
credit facility contains restrictions on, and in some circumstances may prevent,
our payment of dividends.
Equity Compensation Plan Information
The equity compensation plan table required by this item is set forth
in our Proxy Statement for the Annual Meeting of Shareholders to be held on
August 27, 2002 under the caption "Equity Compensation Plan Information," which
information is incorporated herein by reference.
14
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
(in thousands, except per share data)(1)
Fiscal Year
-----------------------------------------------------------------------
2002 2001 2000 1999 1998
------- ------ ------ ------ ------
As Restated(3)
Statement of Operations Data:
Revenues ............................. $767,387 $692,674 $639,271 $521,704 $310,455
Cost of revenues ..................... 473,407 440,946 406,043 341,783 202,870
-------- -------- -------- -------- --------
Gross profit ....................... 293,980 251,728 233,228 179,921 107,585
Selling, general and
administrative expenses ............ 236,436 208,153 184,586 144,659 87,846
Restructuring and strategic
restructuring costs ................ -- 4,500 -- 5,274 3,491
-------- -------- -------- -------- --------
Operating income ................... 57,544 39,075 48,642 29,988 16,248
Interest expense (net) ............... 17,279 16,855 13,151 12,601 5,373
Other expense (income) ............... 3,965 1,214 1,856 (228) 156
-------- -------- -------- -------- --------
Income before provision for
income taxes ..................... 36,300 21,006 33,635 17,615 10,719
Provision for income taxes ........... 14,521 9,075 15,120 8,719 5,480
-------- -------- -------- -------- --------
Net income(2) ...................... $ 21,779 $ 11,931 $ 18,515 $ 8,896 $ 5,239
======== ======== ======== ======== ========
Net income per share:
Basic .............................. $ 1.22 $ 0.68 $ 1.06 $ 0.61 $ 0.40
Diluted ............................ $ 1.17 $ 0.67 $ 1.06 $ 0.60 $ 0.39
Weighted average shares
outstanding:
Basic .............................. 17,917 17,495 17,429 14,690 13,284
Diluted ............................ 18,633 17,782 17,480 14,840 13,547
April 27, April 28, April 29, April 24, April 25,
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
As Restated(3)
Balance Sheet Data:
Working capital ...................... $ 78,587 $ 85,962 $116,857 $115,853 $ 47,791
Total assets ......................... 673,642 523,359 454,849 437,708 223,729
Long-term debt ....................... 285,592 176,183 144,789 161,691 63,014
Total debt ........................... 290,063 198,038 162,180 173,285 83,302
Shareholders' equity ................. 271,170 239,252 224,993 202,687 106,466
_____________
(1) Our business has grown significantly since 1998 through acquisitions
and internal growth. For detailed information on acquisitions during
fiscal years 2002, 2001 and 2000, see the "Business Combinations" note
in our notes to consolidated financial statements. During fiscal 1999,
we made five acquisitions under the purchase method for an aggregate
purchase price of approximately $127.8 million and during fiscal 1998
we made eight acquisitions under the purchase method for an aggregate
purchase price of approximately $99.2 million.
(2) At the beginning of fiscal 2002, we adopted SFAS No. 142, which
resulted in goodwill no longer being subject to amortization. Goodwill
amortization, net of tax, included in net income during
15
fiscal years 2001, 2000, 1999 and 1998 was $5.0 million, $4.5 million,
$3.9 million and $1.7 million, respectively.
(3) Fiscal 2001 financial data has been restated. See "Restatement of
Financial Statements" note in our notes to consolidated financial
statements.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A")
You should read the following discussion and analysis in conjunction
with our consolidated financial statements and related notes, included elsewhere
in this Annual Report.
Overview
We are the largest direct marketing company for supplemental
educational supplies to schools and teachers for preK-12 in the United States.
We offer more than 80,000 items through an innovative two-pronged marketing
approach that targets both school administrators and individual teachers. Our
broad product range enables us to provide our customers with one source for
virtually all of their non-textbook school supplies and furniture needs.
We have grown significantly in recent years primarily through
acquisitions but also through internal growth. For information on our recent
acquisitions see the "Business Combinations" note in our notes to consolidated
financial statements. Our revenues for fiscal 2002 were $767.4 million and our
operating income was $57.5 million, which represented compound annual revenue
growth of 25.4% and compounded annual operating income growth, prior to
restructuring charges of 30.7%, compared to our fiscal 1998 results.
Our gross margin has improved in recent years primarily due to
acquisitions and increased buying power. We have acquired many specialty
businesses, which tend to have higher gross margins than our traditional
business. In addition, our acquisitions of both specialty and traditional
businesses have increased our buying power, resulting in reduced costs of the
products we purchase.
Our operating profit and margins also improved significantly over the
last several years. This improvement reflects our acquisitions of specialty
companies, which typically have higher operating margins than our traditional
business. In addition, through the integration of acquired businesses, we have
been able to further improve our operating profit and margins by eliminating
redundant expenses, leveraging overhead costs and improving purchasing power.
In recent years, we have grown through acquisitions. As a result of
integrating the acquired operations, we have recorded restructuring charges over
the last several years. These charges have primarily been to close existing
facilities and to consolidate operations that, when combined with acquired
operations, became redundant. To the extent our integrations have resulted in
certain exit costs such as the closure of acquired facilities, the costs were
accrued in purchase accounting.
Our business and working capital needs are highly seasonal with peak
sales levels occurring from June through October. During this period, we
receive, ship and bill the majority of our orders so that schools and teachers
receive their merchandise by the start of each school year. Our inventory levels
increase in April through June in anticipation of the peak shipping season. The
majority of shipments are made between May and October and the majority of cash
receipts are collected from September through December. As a result, we usually
earn more than 100% of our annual net income in the first two quarters of our
fiscal year and operate at a net loss in our third and fourth fiscal quarters.
Our fiscal 2001 financial statements have been restated. See
"Restatement of Financial Statements" note in our notes to consolidated
financial statements. The following MD&A gives affect to the restatement.
16
Results of Operations
The following table sets forth certain information as a percentage of
revenues on a historical basis concerning our results of operations for the
fiscal years 2002, 2001, and 2000.
Fiscal Year
-----------------------------------------
2002 2001 2000
---- ---- ----
Revenues ................................................... 100.0% 100.0% 100.0%
Cost of revenues ........................................... 61.7 63.7 63.5
------ ----- -----
Gross profit ............................................ 38.3 36.3 36.5
Selling, general and administrative expenses ............... 30.8 30.1 28.9
Restructuring costs ........................................ -- 0.6 --
------ ----- -----
Operating income ........................................ 7.5 5.6 7.6
Interest expense, net ...................................... 2.3 2.4 2.1
Other expense .............................................. 0.5 0.2 0.2
------- ----- -----
Income before provision for income taxes ................... 4.7 3.0 5.3
Provision for income taxes ................................. 1.9 1.3 2.4
------- ----- -----
Net income ................................................. 2.8% 1.7% 2.9%
======= ===== =====
Consolidated Historical Results of Operations
Fiscal 2002 Compared to Fiscal 2001
Revenues
Revenues increased 10.8% from $692.7 million for fiscal 2001 to $767.4
million for fiscal 2002. Traditional segment revenues increased 15.9% from
$415.0 million in fiscal 2001 to $480.9 million in fiscal 2002. The increase in
traditional segment revenues was primarily due to acquisitions. Specialty
segment revenues increased 3.2% from $277.7 million in fiscal 2001 to $286.5
million in fiscal 2002. The increase in specialty segment revenues was due to
internal growth and acquisitions, partially offset by the exclusion of revenues
from the three businesses disposed of since January 2001.
Gross Profit
Gross profit increased 16.8% from $251.7 million, or 36.3% of revenues
in fiscal 2001 to $294.0 million, or 38.3% of revenues in fiscal 2002. The
increase in gross profit was due to an increase in revenues and gross margin.
The increase in gross margin was primarily due to strong improvement in the
traditional segment from 30.8% of revenues in fiscal 2001 to 33.9% of revenues
in fiscal 2002. This increase in gross margin in the traditional segment was
primarily due to strong improvement in the consumable business, driven by
improved purchasing power and modest selling price increases. Specialty segment
gross margin improved to 45.6% of revenues in fiscal 2002 from 44.6% of revenues
in fiscal 2001. This improvement was primarily driven by the ClassroomDirect
business, which improved gross margin primarily through an increase in selling
price and the Childcraft business, which improved gross margin primarily through
improved operating efficiencies and purchasing power. On a consolidated basis,
gross margin was impacted by an increase in traditional segment revenue mix
(driven by the November 2000 acquisition of J.L. Hammett's K-12 wholesale
business) from 59.9% of revenues in fiscal 2001 to 62.7% of revenues in fiscal
2002. The traditional segment historically has lower gross margins than the
specialty segment.
17
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 shipments transportation costs), catalog costs, general
administrative overhead (which includes information systems, accounting, legal,
and human resources) and depreciation and amortization expense.
SG&A increased 13.6% from $208.2 million or 30.1% of revenues in fiscal
2001 to $236.4 million or 30.8% of revenues in fiscal 2002. Traditional segment
SG&A increased $10.6 million from $98.6 million or 23.8% of revenues in fiscal
2001 to $109.1 million or 22.7% of revenues in fiscal 2002. Increase in SG&A 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. Specialty segment SG&A increased $13.0 million from
$95.2 million or 34.3% of revenues in fiscal 2001 to $108.2 million or 37.8% of
revenues in fiscal 2002. Increase in specialty segment SG&A was primarily due to
the acquisition of Premier Agendas, and costs to consolidate existing operations
into acquired businesses. These traditional and specialty segment increases were
partially offset by our early adoption at the beginning of fiscal 2002 of
Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and
Intangible Assets," which resulted in the discontinuance of amortization of
goodwill. Corporate expenses increased $4.7 million from $14.4 million in fiscal
2001 to $19.1 million in fiscal 2002. This increase was primarily due to an
increase in salaries and wages, salary continuation obligations related to the
death of our chief executive officer and depreciation.
The decrease in traditional segment SG&A as a percentage of revenues
was primarily due to the adoption of SFAS No. 142 at the beginning of fiscal
2002. The increase in specialty segment SG&A as a percentage of revenues was
primarily due to 1) operating costs of Premier Agendas, a highly seasonal
business acquired during a seasonally low period, 2) costs associated with
closing our distribution center in Birmingham, Alabama, 3) costs associated with
integrating our Hammond & Stephens sales force with the Premier Agendas sales
force and 4) increased catalog costs primarily due to the inclusion of a full
fiscal year of catalog expense for Teacher's Video, which has higher catalog
costs as a percentage of revenues than our other specialty businesses. These
increases were partially offset by a reduction in amortization expense, due to
our adoption of SFAS No. 142 at the beginning of fiscal 2002.
Interest Expense
Net interest expense increased 2.5% from $16.9 million in fiscal 2001
to $17.3 million in fiscal 2002. The increase in interest expense is primarily
due to an increase in debt outstanding partially offset by a reduction in our
effective borrowing rate on our credit facility.
Other Expenses
Other expense increased $2.8 million from $1.2 million in fiscal 2001
to $4.0 million in fiscal 2002. Other expenses in fiscal 2002 primarily
consisted of the discount and loss on the accounts receivable securitization of
$2.0 million, $1.7 million to write-off a long-term investment and a $0.3
million realized loss on the sale of available-for-sale securities. Other
expense in fiscal 2001 primarily consisted of the discount and loss on an
accounts receivable securitization (the "receivable securitization") of $1.4
million.
18
Provision for Income Taxes
The provision for income taxes for fiscal 2002 increased 60.0% or $5.4
million over fiscal 2001, reflecting effective tax rates of 40.0% and 43.2% for
fiscal years 2002 and 2001, respectively. The change in the effective tax rate
of 40.0% in fiscal 2002 as compared to 43.2% in 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%, was primarily due to state and local income taxes.
Fiscal 2001 (52 weeks) Compared to Fiscal 2000 (53 weeks)
Revenues
Revenues increased 8.4% from $639.3 million for fiscal 2000 to $692.7
million for fiscal 2001. Traditional segment revenues increased 7.3% from $386.7
million in fiscal 2000 to $415.0 million in fiscal 2001. Specialty segment
revenues increased 9.9% from $252.6 million in fiscal 2000 to $277.7 million in
fiscal 2001. Increase in revenues was primarily due to the inclusion of revenues
from the eight businesses acquired since the beginning of fiscal 2000 and
internal growth on existing business. These increases were partially offset by
an extra week of shipments in fiscal 2000, as fiscal 2000 was a 53 week fiscal
year and fiscal 2001 had 52 weeks. On a comparable 52 week basis, revenues
increased 10.4% from fiscal 2000 to fiscal 2001.
Gross Profit
Gross profit increased 7.9% from $233.2 million, or 36.5% of revenues,
in fiscal 2000 to $251.7 million, or 36.3% of revenues, in fiscal 2001.
Traditional segment gross profit increased $7.3 million from $120.7 million or
31.2% of revenues in fiscal 2000 to $128.0 million or 30.8% of revenues in
fiscal 2001. The increase in traditional segment gross profit was primarily due
to an increase in revenues. The change in traditional segment gross margin was
primarily due to slightly lower gross margin on the furniture lines, partially
offset by enhanced consumable business gross margins and an increase in
consumable business product mix, which has higher gross margins than the
furniture lines. Specialty segment gross profit increased $11.2 million from
$112.6 million or 44.6% of revenues in fiscal 2000 to $123.8 million or 44.6% of
revenues in fiscal 2001. Increase in specialty segment gross profit was
primarily due to an increase in revenues and an increase in gross margin in the
Childcraft division (driven by improved operating efficiencies and purchasing
power) and the acquisition of Global Video in June 2000, which has higher gross
margins than most of our other specialty businesses. These increases were offset
by lower gross margins in the ClassroomDirect division, driven by Internet
pricing strategies.
Selling, General and Administrative Expenses
SG&A increased 12.8% from $184.6 million, or 28.9% of revenues, in
fiscal 2000 to $208.2 million, or 30.1% of revenues, in fiscal 2001. Traditional
segment SG&A increased $11.6 million, or 13.3%, from $87.0 million, or 22.5% of
revenues, in fiscal 2000 to $98.6 million, or 23.8% of revenues in fiscal 2001.
The increase in traditional segment SG&A was primarily due to an increase in
variable costs related to increased revenues and the acquisition of certain
assets of Hammett. The change in traditional segment SG&A as a percentage of
revenues was primarily due to the acquisition of Hammett during our seasonally
low period, which created redundancies in the traditional segment. We began to
integrate Hammett during the third quarter of fiscal 2001, and further
consolidated operations as a result of the acquisition in the third quarter of
fiscal 2002, following our heavy shipping season. Specialty segment SG&A
increased $10.0 million or 11.7% from $85.2 million, or 33.8% of revenues in
fiscal 2000 to $95.2
19
million or 34.3% of revenues in fiscal 2001. The increase in specialty segment
SG&A and SG&A as a percent of revenues was primarily due to an increase in
revenues and expenses incurred to develop our Internet operations and the
acquisition of Global Video in June 2000, a business which generally has higher
SG&A expense (due to catalog costs) than our other specialty businesses.
Restructuring Costs
During the fourth quarter of fiscal 2001, we recorded a restructuring
charge of $4.5 million, which includes $2.4 million to close redundant
facilities, $1.5 million for severance and termination benefits for
approximately 80 individuals and $0.6 million for other costs. Further details
of the restructuring charge are discussed in the notes to our consolidated
financial statements.
Interest Expense
Net interest expense increased $3.7 million from $13.2 million, or 2.1%
of revenues, in fiscal 2000, to $16.9 million, or 2.4% of revenues in fiscal
2001. Increase in net interest expense was primarily attributable to the debt
assumed and cash paid for the acquisitions of Global Video and Hammett, which
occurred in June 2000 and November 2000, respectively, and a slight increase in
the effective interest rate. These increases were partially offset by reduced
interest expense attributable to debt repaid from the net proceeds from the sale
of property of $6.6 million, the sale of Gresswell of $3.5 million and proceeds
from the receivable securitization of $50.0 million, which we entered into in
November 2000.
Other Expenses
Other expenses decreased $0.7 million from $1.9 million in fiscal 2000
to $1.2 million in fiscal 2001. Other expenses in fiscal 2001 primarily
consisted of the discount and loss on the receivable securitization of $1.4
million. Other expenses in fiscal 2000 primarily consisted of a $1.5 million
non-cash impairment charge on a minority equity investment.
Provision for Income Taxes
Provision for income taxes for fiscal 2001 decreased 40.0% or $6.0
million over fiscal 2000, reflecting income tax rates of 43.2% and 45.0% in
fiscal 2001 and fiscal 2000, respectively. The decrease in the effective tax
rate was primarily due to the impact of the difference in book and tax basis
related to the divestitures of SmartStuff and Gresswell. The higher effective
tax rate, as compared to the federal statutory rate of 35.0%, was primarily due
to state and local income taxes and non-deductible goodwill amortization.
Liquidity and Capital Resources
At April 27, 2002, we had working capital of $78.6 million. Our
capitalization at April 27, 2002 was $561.2 million and consisted of total debt
of $290.1 million and shareholders' equity of $271.2 million.
We currently have a five year secured $350 million 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
April 27, 2002 under the revolving portion of the credit facility was $118.0
million.
20
During fiscal 2002, the term loan portion of the credit facility was repaid in
full. 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.
On July 30, 2001, we sold an aggregate principal amount of $130 million
of six percent convertible subordinated notes due August 1, 2008. The notes are
convertible at any time prior to maturity into shares of our 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 $125.7 million. On
August 2, 2001, the purchasers of the notes exercised their over-allotment
option in full and purchased an additional $19.5 million. We used the total net
proceeds from the offering of $144.6 million 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 the outstanding
amount under the revolving portion of our credit facility. 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. The swap expired January 2, 2002.
As of April 27, 2002, our effective interest rate on borrowings under
our credit facility was 5.26%, which includes amortization of the loan
origination fee and costs and the commitment fee on unborrowed funds. During
fiscal 2002, we borrowed under our credit facility primarily for seasonal
working capital, acquisitions, and capital expenditures. During the same period,
we made certain changes to certain financial and other covenants under our
credit facility.
In November 2000, we entered into a 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 and was
renewed to extend to November 2002 and may be extended further with the
financial institution's consent. At April 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. The proceeds
from the sale were used to reduce borrowings on our credit facility. Costs
associated with the sale of receivables, primarily related to the discount and
loss on sale, were $2.0 million during fiscal 2002 and are included in other
expenses in our consolidated statement of operations. In May 2002, the
receivable securitization was amended to allow advances up to $100 million.
In November 2000, we entered into two sale-leaseback transactions which
are accounted for as financings. Under the agreements, we recorded $18.5 million
of debt, which has an effective interest rate of 8.97%, excluding amortization
of related fees. The leases expire in November 2020.
During fiscal 2002, net cash provided by operating activities was $75.6
million, an 109.9% increase over fiscal 2001. The increase in cash from
operating activities was primarily due to an improvement in working capital
management and an increase in net income. Net cash used in investing activities
was $160.8 million, including $162.2 million for acquisitions and $12.1 million
for additions to property, plant and equipment. We realized $9.6 million in net
proceeds from the sale of available-for-sale securities. Cash from financing
activities was $85.7 million. Net proceeds from our convertible debt offering of
$144.6 million were used to reduce borrowing under our credit facility.
Borrowing under our credit facility and cash from operations were used to fund
the above investing activities. During fiscal 2002, debt outstanding under our
credit facility was reduced by $61.0 million.
21
During fiscal 2001, net cash provided by operating activities was $36.0
million, a 16.3% increase over fiscal 2000. Net cash used in investing
activities was $118.9 million, including $113.1 million for acquisitions and
$15.2 million for additions to property and equipment. This use of cash was
partially offset by net proceeds provided by the sale of property of $6.6
million and the sale of Gresswell of $3.5 million. Net borrowings combined with
cash from operations, cash on hand and proceeds from the receivables
securitization of $50.0 million were used to finance the above investing
activities.
Our capital expenditures in fiscal 2003 are expected to be
approximately $12 million. The largest items include computer hardware and
software.
We anticipate that our cash flow from operations, borrowings available
from our existing credit facility and other sources of capital will be
sufficient to meet our liquidity requirements for operations, including capital
expenditures, and our contractual obligations.
Summary of Contractual Obligations
The following table summarizes our contractual debt and operating lease
obligations as of April 27, 2002:
Payments Due by Fiscal Year
(in thousands)
------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Debt $ 4,471 $118,460 $ 477 $ 431 $ 529 $165,695 $290,063
Operating leases 8,023 6,178 6,019 5,180 4,791 23,003 53,194
------- -------- ------ ------ ------ -------- --------
Total Contractual obligations $12,494 $124,638 $6,496 $5,611 $5,320 $188,698 $343,257
======= ======== ====== ====== ====== ======== ========
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 quarter are not indicative of the results that we may achieve
for any subsequent fiscal quarter or for a full fiscal year.
The following table sets forth certain unaudited consolidated quarterly
financial data for fiscal years 2002 and 2001. We derived this quarterly data
from unaudited consolidated financial statements. Certain fiscal 2002 and fiscal
2001 financial data has been restated. See "Restatement of Financial Statements"
note in our notes to consolidated financial statements.
22
Fiscal 2002
-----------------------------------------------------------------------------
First Second Third Fourth Total
------------- ------------- ------------- ------------- -------------
As Restated As Restated As Restated As Restated
Revenues ........................ $260,162 $269,656 $104,005 $133,564 $767,387
Gross profit .................... 100,294 99,834 39,746 54,106 293,980
Operating income (loss) ......... 32,470 36,608 (8,203) (3,331) 57,544
Net income (loss) ............... 16,446 19,162 (8,625) (5,204) 21,779
Per share amounts:
Basic ........................ $ 0.93 $ 1.07 $ (0.48) $ (0.29) $ 1.22
Diluted ...................... $ 0.89 $ 0.88 $ (0.48) $ (0.29) $ 1.17
Fiscal 2001
------------------------------------------------------------------------------
First Second Third Fourth Total
------------- ------------- ------------- ------------- -------------
As Restated As Restated As Restated
Revenues ........................ $217,067 $240,539 $104,658 $130,410 $692,674
Gross profit .................... 79,069 85,513 38,034 49,112 251,728
Operating income (loss) ......... 24,107 27,782 (3,967) (8,847) 39,075
Net income (loss) ............... 11,393 12,902 (4,908) (7,456) 11,931
Per share amounts:
Basic ........................ $ 0.65 $ 0.74 $ (0.28) $ (0.42) $ 0.68
Diluted ...................... $ 0.65 $ 0.73 $ (0.28) $ (0.42) $ 0.67
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.
Critical Accounting Policies
We believe the policies identified below are critical to our business
and the understanding of its results of operations. The impact and any
associated risks related to these policies on our business are discussed
throughout MD&A where applicable. Refer to our notes to consolidated financial
statements in Item 8 for detailed discussion on the application of these and
other accounting policies. The preparation of the consolidated financial
statements requires management to make estimates and assumptions that affect: a)
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements; and b) the
reported amounts of revenues and expenses during the reporting period. We
evaluate our estimates on an ongoing basis and base them on a combination of
historical experience and various other assumptions that are believed to be
reasonable under the circumstances. Actual results could differ from those
estimates. Our critical accounting policies that require significant judgments
and estimates used in the preparation of our consolidated financial statements
are as follows:
Catalog Costs and Related Amortization
We accumulate all direct costs incurred in the development, production
and circulation of our catalogs on our balance sheet until such time as the
related catalog is mailed, at which time, they are subsequently amortized into
SG&A over the expected sales realization cycle, typically one year or less. Our
initial estimation of the expected sales realization cycle for a particular
catalog is based on, among
23
other possible considerations, our historical sales experience with identical or
similar catalogs and our assessment of prevailing economic conditions, and
various competitive factors. We track our subsequent sales realization, reassess
the marketplace, and compare our findings to our previous estimate and adjust
our amortization going forward, if necessary.
Goodwill and Intangible Assets
At April 27, 2002, goodwill and intangible assets represented
approximately 63% of our total assets. The recoverability of these assets
requires considerable judgment and is evaluated on an annual basis or more
frequently if events or circumstances indicate that the assets may be impaired.
As it relates to goodwill and indefinite life intangible assets, we apply the
impairment rules in accordance with SFAS No. 142. As required by SFAS No. 142,
the recoverability of these assets is subject to a fair value assessment which
includes several significant judgments regarding financial projections and
comparable market values. As it relates to definite life intangible assets, we
apply the impairment rules as required by SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Assets to Be Disposed Of" which also
requires significant judgment and assumptions related to the expected future
cash flows attributable to the intangible asset. The impact of modifying any of
these assumptions can have a significant impact on the estimate of fair value
and, thus, the recoverability of the asset.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which addresses financial accounting and reporting for the impairment
of long-lived assets and for long-lived assets to be disposed of. SFAS No. 144
is effective for fiscal years beginning after December 31, 2001, with early
adoption permitted. The adoption of SFAS No. 144 is not expected to have a
material effect on our financial statements or financial position.
24
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Our financial instruments include cash and cash equivalents, accounts
receivable, accounts payable, accrued liabilities and debt. Market risks
relating to our operations result primarily from changes in interest rates. Our
borrowings under our credit facility and our discount expense related to our
receivable securitization are primarily dependent upon LIBOR rates. Assuming no
change in our financial structure, if variable interest rates were to average
100 basis points higher during fiscal 2003, pre-tax earnings would decrease by
approximately $2.8 million. This amount was determined by considering a
hypothetical 100 basis point increase in interest rates on average variable-rate
debt outstanding and the average advanced under the receivable securitization
during fiscal 2002, excluding any impact of the swap agreement. The estimated
fair value of long-term debt approximates its carrying value at April 27, 2002,
with the exception of our convertible debt which at April 27, 2002 had a
carrying value of $149.5 million and a fair market value of $168.6 million.
To manage interest rate risk on the variable rate borrowings under the
revolving portion of our credit facility, we have historically entered into
interest rate swap agreements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." These interest rate swap agreements had the effect of locking in,
for a specified period, the base interest rate we paid on a notional principal
amount established in the swaps. As a result, while these hedging arrangements
were structured to reduce our exposure to interest rate increases, it also
limits the benefit we might otherwise have received from any interest rate
decreases. The swaps were typically cash settled monthly, with interest expense
adjusted for amounts paid or received. The swap agreements had the effect of
increasing interest expense by approximately $0.9 million in fiscal 2002 and
decreasing fiscal 2001 interest expense by approximately $0.5 million. We do not
hold or issue derivative financial instruments for trading purposes.
25
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
School Specialty, Inc.:
We have audited the accompanying consolidated balance sheets of School
Specialty, Inc., and subsidiaries as of April 27, 2002 and April 28, 2001 and
the related consolidated statements of operations, shareholders' equity, and
cash flows for the years then ended. Our audits also included the financial
statement schedule for the years ended April 27, 2002 and April 28, 2001 listed
in the Index at Item 14(a)(2). These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such 2002 and 2001 consolidated financial statements present
fairly, in all material respects, the financial position of School Specialty,
Inc. and subsidiaries at April 27, 2002 and April 28, 2001, and the results of
their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule for the years ended
April 27, 2002 and April 28, 2001, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
As described in Note 3 to the consolidated financial statements, on April 29,
2001, the Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets". Also, as described in Note 15 to the
consolidated financial statements, the accompanying 2001 financial statements
have been restated.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
July 19, 2002
26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
of School Specialty, Inc.
In our opinion, the consolidated statements of operations, of
shareholders' equity and of cash flows for the year ended April 29, 2000,
present fairly, in all material respects, the results of operations and cash
flows of School Specialty, Inc. and its subsidiaries for the fiscal year ended
April 29, 2000, in conformity with accounting principles generally accepted in
the United States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 14(a)(2) presents
fairly, in all material respects, the information set forth therein for the
fiscal year ended April 29, 2000, when read in conjunction with the related
consolidated financial statements. These financial statements and the financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
June 9, 2000, except as to Note 3, which is as of April 29, 2001
27
FINANCIAL STATEMENTS
SCHOOL SPECIALTY, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
April 27, April 28,
2002 2001
---- ----
ASSETS As Restated
See Note 15
Current assets:
Cash and cash equivalents ..................................................................... $ 6,123 $ 5,688
Accounts receivable, less allowance for doubtful accounts of $2,719 and $3,523, respectively .. 34,356 40,358
Inventories ................................................................................... 98,148 102,192
Deferred catalog costs ........................................................................ 13,590 16,596
Prepaid expenses and other current assets ..................................................... 12,770 18,300
Deferred taxes ................................................................................ 7,341 7,873
---------- ----------
Total current assets ...................................................................... 172,328 191,007
Property, plant and equipment, net ............................................................... 67,083 60,013
Goodwill, net .................................................................................... 390,946 249,781
Intangible assets, net ........................................................................... 35,457 5,090
Other ............................................................................................ 7,828 17,468
---------- ----------
Total assets .............................................................................. $ 673,642 $ 523,359
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities - long-term debt ........................................................... $ 4,471 $ 21,855
Accounts payable .............................................................................. 47,097 57,896
Accrued compensation .......................................................................... 16,712 7,989
Deferred revenue .............................................................................. 10,681 1,771
Accrued restructuring ......................................................................... 863 2,513
Other accrued liabilities ..................................................................... 13,917 13,021
---------- ----------
Total current liabilities ................................................................. 93,741 105,045
Long-term debt ................................................................................... 285,592 176,183
Deferred taxes ................................................................................... 23,139 2,879
---------- ----------
Total liabilities ......................................................................... 402,472 284,107
Commitments and contingencies (Note 10)
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 18,046,315 and 17,587,008 shares issued and outstanding, respectively.................. 18 18
Capital paid-in excess of par value ........................................................... 208,053 198,119
Accumulated other comprehensive income ........................................................ 395 190
Retained earnings ............................................................................. 62,704 40,925
---------- ----------
Total shareholders' equity ................................................................ 271,170 239,252
---------- ----------
Total liabilities and shareholders' equity ................................................ $ 673,642 $ 523,359
========== ==========
See accompanying notes to consolidated financial statements.
28
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
For the Fiscal Year Ended
------------------------------------
April 27, April 28, April 29,
2002 2001 2000
---- ---- ----
(52 weeks) (52 weeks) (53 weeks)
As Restated
See Note 15
Revenues ..................................... $ 767,387 $ 692,674 $ 639,271
Cost of revenues ............................. 473,407 440,946 406,043
--------- --------- ---------
Gross profit .......................... 293,980 251,728 233,228
Selling, general and administrative expenses.. 236,436 208,153 184,586
Restructuring costs .......................... - 4,500 -
--------- --------- ---------
Operating income ...................... 57,544 39,075 48,642
Other (income) expense:
Interest expense .......................... 17,321 16,983 13,342
Interest income ........................... (42) (128) (191)
Other ..................................... 3,965 1,214 1,856
--------- --------- ---------
Income before provision for income taxes ..... 36,300 21,006 33,635
Provision for income taxes ................... 14,521 9,075 15,120
--------- --------- ---------
Net income ................................... $ 21,779 $ 11,931 $ 18,515
========= ========= =========
Weighted average shares outstanding:
Basic ..................................... 17,917 17,495 17,429
Diluted ................................... 18,633 17,782 17,480
Net income per share:
Basic ..................................... $ 1.22 $ 0.68 $ 1.06
Diluted ................................... $ 1.17 $ 0.67 $ 1.06
See accompanying notes to consolidated financial statements.
29
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands)
Capital Accumulated
Paid-in Other Total Total
Excess of Comprehensive Retained Shareholders' Comprehensive
Common Stock Par Value Income (Loss) Earnings Equity Income (Loss)
------------ --------- ------------- -------- ------ -------------
Shares Dollars
------ -------
Balance at April 24, 1999 ............... 17,229 $ 17 $ 192,196 $ (5) $ 10,479 $ 202,687
Issuance of common stock ............. 151 - 2,225 - - 2,225
Issuance of common stock in
conjunction with stock
option exercises ................... 55 - 896 - - 896
Tax benefit on option
exercises .......................... - - 22 - - 22
Issuance of common stock in
conjunction with
acquisitions ....................... 57 - 1,178 - - 1,178
Retirement of common stock ........... (27) - (505) - - (505)
Foreign currency translation
adjustment ......................... - - - (25) - (25) $ (25)
Net income ........................... - - - - 18,515 18,515 18,515
------- ----- --------- ----------- --------- ---------- -----------
Total comprehensive income ......... $ 18,490
===========
Balance at April 29, 2000 ............... 17,465 17 196,012 (30) 28,994 224,993
Issuance of common stock in
conjunction with stock
option exercises ................... 133 1 2,113 - - 2,114
Tax benefit on option
exercises .......................... - - 262 - - 262
Retirement of common stock ........... (11) - (268) - - (268)
Foreign currency translation
adjustment ......................... - - - 30 - 30 $ 30
Unrealized gain on
available-for-sale
securities, net of tax ............. - - - 190 - 190 190
Net income, as restated .............. - - - - 11,931 11,931 11,931
------- ----- --------- ----------- --------- ---------- -----------
Total comprehensive income ......... $ 12,151
===========
Balance at April 28, 2001, As
Restated ............................. 17,587 18 198,119 190 40,925 239,252
Issuance of common stock in
conjunction with stock
option exercises ................... 339 - 5,869 - - 5,869
Tax benefit on option
exercises .......................... - - 1,365 - - 1,365
Issuance of common stock in
conjunction with acquisition ....... 120 - 2,700 - - 2,700
Foreign currency translation
adjustment ......................... - - - 395 - 395 $ 395
Reclassification adjustment
for losses on
available-for-sale
securities included in net
income, net of tax ................. - - - (190) - (190) (190)
Net income ........................... - - - - 21,779 21,779 21,779
------- ----- --------- ----------- --------- ---------- -----------
Total comprehensive income ......... $ 21,984
===========
Balance at April 27, 2002 ............... 18,046 $ 18 $ 208,053 $ 395 $ 62,704 $ 271,170
======= ===== ========= =========== ========= ==========
See accompanying notes to consolidated financial statements.
30
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For the Fiscal Year Ended
-----------------------------------------
April 27, April 28, April 29,
2002 2001 2000
---- ---- ----
(52 weeks) (52 weeks) (53 weeks)
As Restated
See Note 15
Cash flows from operating activities:
Net income ...................................................................... $ 21,779 $ 11,931 $ 18,515
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense ......................................... 11,198 14,962 11,839
Amortization of debt fees and other ........................................... 2,410 1,078 671
Deferred taxes ................................................................ 8,335 3,831 5,746
Restructuring costs, net of payments .......................................... (1,650) 2,448 (2,687)
Loss (gain) on disposal of property, equipment and other ...................... 1,397 (55) 596
Loss on sale of available-for-sale securities ................................. 329 - -
Loss on impairment of investment .............................................. 1,657 - 1,500
Changes in current assets and liabilities (net of assets
acquired and liabilities assumed in business combinations
accounted for under the purchase method):
Accounts receivable ........................................................ 12,472 10,968 844
Inventories ................................................................ 5,195 (8,478) (6,137)
Prepaid expenses and other current assets .................................. 7,404 (5,147) (6,559)
Accounts payable ........................................................... (12,024) 7,471 9,943
Accrued liabilities ........................................................ 17,111 (2,992) (3,295)
---------- ---------- ---------
Net cash provided by operating activities ............................... 75,613 36,017 30,976
---------- ---------- ---------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash acquired ................................. (162,248) (113,062) (1,292)
Additions to property, plant and equipment ...................................... (12,110) (15,200) (17,351)
Proceeds from business dispositions, net of cash disposed ....................... 1,500 3,538 -
Proceeds from disposal of property and equipment ................................ 1,335 6,632 -
Proceeds from sale of available-for-sale securities ............................. 9,572 - -
Proceeds from note receivable ................................................... 1,115 108 118
Investment in long-term assets .................................................. - (924) (8,703)
---------- ---------- ---------
Net cash used in investing activities ................................... (160,836) (118,908) (27,228)
---------- ---------- ---------
Cash flows from financing activities:
Proceeds from borrowings ........................................................ 259,800 222,622 186,200
Repayment of debt and capital leases ............................................ (324,112) (188,547) (198,192)
Proceeds from convertible debt offering ......................................... 149,500 - -
Proceeds from sale of accounts receivable ....................................... - 50,000 -
Payment of debt fees ............................................................ (5,399) (1,493) -
Proceeds from exercise of stock options ......................................... 5,869 2,114 896
Repurchase of common stock ...................................................... - (268) (505)
Proceeds from issuance of common stock .......................................... - - 2,225
---------- ---------- ---------
Net cash provided by (used in) financing activities ..................... 85,658 84,428 (9,376)
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents ............................... 435 1,537 (5,628)
Cash and cash equivalents at beginning of period ................................... 5,688 4,151 9,779
---------- ---------- ---------
Cash and cash equivalents at end of period ......................................... $ 6,123 $ 5,688 $ 4,151
========== ========== =========
Non-cash investing activities:
Common stock received for net assets sold in business disposition ............... $ - $ 9,901 $ -
Supplemental disclosures of cash flow information:
Interest paid ................................................................... $ 15,493 $ 15,976 $ 13,215
Income taxes paid ............................................................... $ 2,533 $ 8,992 $ 13,255
31
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS--(Continued)
(In Thousands)
The Company issued common stock and/or cash in connection with certain
business combinations accounted for under the purchase method in the fiscal
years ended April 27, 2002, April 28, 2001, and April 29, 2000. The fair values
of the assets and liabilities of the acquired companies are presented as
follows:
For the Fiscal Year Ended
-----------------------------------------------
April 27, April 28, April 29,
2002 2001 2000
---- ---- ----
(52 weeks) (52 weeks) (53 weeks)
Accounts receivable ......................................................... $ 6,835 $ 27,725 $ 2,091
Inventories ................................................................. 3,819 8,680 1,434
Current deferred tax assets ................................................. 386 - -
Prepaid expenses and other current assets ................................... 1,086 5,143 65
Property, plant and equipment ............................................... 7,202 5,922 178
Goodwill .................................................................... 135,342 75,504 2,214
Intangible assets ........................................................... 33,877 2,750 -
Other assets ................................................................ 49 20 13
Short-term debt and capital lease obligations ............................... (2,483) (1,217) -
Accounts payable ............................................................ (624) (3,036) (1,881)
Accrued liabilities ......................................................... (5,940) (4,863) (759)
Long-term debt and capital lease obligations ................................ (342) (566) (885)
Long-term deferred tax liabilities .......................................... (13,147) - -
---------- --------- ----------
Net assets acquired ...................................................... $ 166,060 $ 116,062 $ 2,470
========== ========= ==========
The acquisitions were funded as follows:
Common stock ................................................................ $ 2,700 $ - $ 1,178
Cash paid, net of cash acquired (1).......................................... 159,248 113,062 1,292
Note and other payable to selling shareholders .............................. 4,112 3,000 -
---------- --------- ----------
Total .................................................................... $ 166,060 $ 116,062 $ 2,470
========== ========= ==========
(1) Fiscal 2002 cash paid in acquisitions, net of cash acquired, as reported
within cash flows from investing activities, includes the payment of the
fiscal 2001 note payable to selling shareholders.
See accompanying notes to consolidated financial statements.
32
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
School Specialty, Inc. (the "Company"), is a Wisconsin corporation. The
Company reincorporated from Delaware to Wisconsin effective August 29, 2000. The
Company is primarily a direct marketer of supplemental education supplies to
schools and teachers for pre-kindergarten through twelfth grade.
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of School Specialty,
Inc., its subsidiaries and the companies acquired in business combinations
accounted for under the purchase method from their respective dates of
acquisition. All significant inter-company accounts and transactions have been
eliminated.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Definition of Fiscal Year
The Company's fiscal year ends on the last Saturday in April in each
year. As used in these consolidated financial statements and related notes to
consolidated financial statements, "fiscal 2002," "fiscal 2001," and "fiscal
2000" refer to the Company's fiscal years ended April 27, 2002 (52 weeks), April
28, 2001 (52 weeks), and April 29, 2000 (53 weeks), respectively.
Cash and Cash Equivalents
The Company considers cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market with cost
generally determined on a weighted-average basis and consist primarily of
products held for sale.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Additions and
improvements are capitalized, whereas, maintenance and repairs are expensed as
incurred. Depreciation of property, plant and equipment is calculated using the
straight-line method over the estimated useful lives of the respective assets.
The estimated useful lives range from twenty-five to forty years for buildings
and its components and three to fifteen years for furniture, fixtures and
equipment. Property and equipment leased under capital leases is being amortized
over the lesser of its useful life or its lease term. As required by Statement
of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the
Impairment of Long-Lived Assets and Assets to be Disposed of," the Company
reviews property, plant and equipment for impairment if events or circumstances
indicate an asset might be impaired.
Goodwill and Other Intangible Assets
Goodwill represents the excess of cost over the fair value of net
assets acquired in business combinations accounted for under the purchase
method. The Company adopted SFAS No. 142 at the beginning of fiscal 2002. As a
result of this adoption, goodwill is no longer subject to amortization but
rather must be tested for impairment
33
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
annually or more frequently if events or circumstances indicate goodwill might
be impaired. Prior to fiscal 2002, goodwill was amortized using the
straight-line method over fifteen to forty years. Other amortizable intangible
assets include customer relationships, non-compete agreements and order backlog
and are being amortized over their estimated useful lives ranging from one to
fifteen years. Certain other intangible assets are not subject to amortization.
See note on goodwill and other intangible assets.
Investments
The Company held a preferred stock investment in a company which had
been accounted for under the cost method. Under this method, the Company's
investment was stated at cost and was periodically evaluated for impairment. As
a result of these evaluations, the Company has written-off this investment due
to the deteriorating financial condition of the company, reporting impairment
changes of $1,657 and $1,500 during fiscal 2002 and fiscal 2000, respectively,
within other expense in the consolidated statements of operations.
The Company had an investment in the common stock of Riverdeep
Group plc, which was classified and accounted for as an available-for-sale
security under SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Unrealized holding gains, net of tax, related to this
investment were reported as other comprehensive income, a component of
shareholders' equity. During fiscal 2002, the investment was sold, resulting in
a realized pre-tax loss of $329.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments including
cash and cash equivalents, accounts receivable, accounts payable, and accrued
liabilities approximate fair value.
Income Taxes
Income taxes have been computed utilizing the asset and liability
approach which requires the recognition of deferred tax assets and liabilities
for the tax consequences of temporary differences by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and liabilities.
Revenue Recognition
Revenue is recognized upon the delivery of products or upon the
completion of services provided to customers.
Cost of Revenues
Rebates received from vendors are recognized as a reduction in cost of
revenues.
Deferred Catalog Costs
Deferred catalog costs represent costs which have been paid to produce
Company catalogs which will be used in/benefit future periods. Deferred catalog
costs are amortized in amounts proportionate to expected revenues over the life
of the catalog, which is typically one year or less. Amortization expense
related to deferred catalog costs is included in the consolidated statement of
operations as a component of selling, general and administrative
34
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
expenses. Such amortization expense for fiscal years 2002, 2001 and 2000, was
$28,658, $22,905, and $16,076, respectively.
Shipping and Handling Costs
The Company accounts for shipping and handling costs as a cost of
revenues for shipments made directly from vendors to customers. For shipments
from the Company's warehouses, the Company accounts for shipping and handling
costs as a selling, general and administrative expense. The amount of shipping
and handling costs in selling, general and administrative expenses for fiscal
years 2002, 2001 and 2000 was $29,909, $28,561, and $23,410, respectively.
Foreign Currency Translation
The financial statements of foreign subsidiaries have been translated
into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency
Translation." All balance sheet accounts have been translated using the exchange
rates in effect at the balance sheet date. Income statement amounts have been
translated using the average exchange rate for the year. Resulting translation
adjustments are included in foreign currency translation adjustment, a component
of other comprehensive income.
New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which addresses financial accounting and reporting for the impairment
of long-lived assets and for long-lived assets to be disposed of. SFAS No. 144
is effective for fiscal years beginning after December 15, 2001, with early
adoption permitted. The adoption of SFAS No. 144 is not expected to have a
material effect on the Company's financial statements or financial position.
Reclassifications
Certain amounts previously reported have been reclassified to conform
with the current year presentation.
NOTE 3--GOODWILL AND OTHER INTANGIBLE ASSETS
Effective at the beginning of fiscal 2002, the Company adopted 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 earnings per share ("basic EPS") and diluted earnings
per share ("diluted EPS") would have been had SFAS No. 142 been adopted at the
beginning of fiscal 2000:
35
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
Fiscal Fiscal Fiscal
2002 2001 2000
---- ---- ----
Reported net income ...................... $ 21,779 $ 11,931 $ 18,515
Add back: Goodwill amortization,
net of tax ............................ - 5,046 4,498
--------- --------- ---------
Adjusted net income ...................... $ 21,779 $ 16,977 $ 23,013
========= ========= =========
Basic EPS:
Reported basic EPS .................... $ 1.22 $ 0.68 $ 1.06
Goodwill amortization ................. - 0.29 $ 0.26
--------- --------- ---------
Adjusted basic EPS ....................... $ 1.22 $ 0.97 $ 1.32
========= ========= =========
Diluted EPS:
Reported diluted EPS .................. $ 1.17 $ 0.67 $ 1.06
Goodwill amortization ................. - 0.28 0.26
--------- --------- ---------
Adjusted diluted EPS ..................... $ 1.17 $ 0.95 $ 1.32
========= ========= =========
The following table presents details of the Company's intangible
assets, excluding goodwill:
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
April 28, 2001 Gross Value Amortization Value
-------------- ----------- ------------ -----
Amortizable intangible assets:
Non-compete agreements ........................ $ 2,851 $ (327) $ 2,524
Other ......................................... 4,362 (1,796) 2,566
----------- ------------ -----------
Total intangible assets ................. $ 7,213 $ (2,123) $ 5,090
=========== ============ ===========
Intangible amortization expense included in selling, general and
administrative expenses for fiscal years 2002, 2001 and 2000 was $1,131, $1,518
and $1,399, respectively.
36
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
Estimated intangible amortization expense for each of the five
succeeding fiscal years is estimated to be:
2003 .................................. $2,497
2004 .................................. 2,044
2005 .................................. 1,995
2006 .................................. 1,765
2007 .................................. 1,344
The following information presents changes to net goodwill during the
period beginning April 30, 2000 through April 27, 2002:
Balance at Balance at Balance at
April 30, Business April 28, April 27,
Segment 2000 Acquired Dispositions Amortization Adjustments 2001 Acquired Adjustments 2002
------- ---- -------- ------------ ------------ ----------- ---- -------- ----------- ----
Traditional ......... $110,282 $ 46,709 $ - $ (3,418) $ - $153,573 $ 747 $ 5,596 $159,916
Specialty ........... 72,208 28,795 (2,636) (2,503) 344 96,208 134,032 790 231,030
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total ............. $182,490 $ 75,504 $ (2,636) $ (5,921) $ 344 $249,781 $134,779 $ 6,386 $390,946
======== ======== ======== ======== ======== ======== ======== ======== ========
During fiscal 2001, the Company sold the SmartStuff division for a
pre-tax gain for approximately $500, which included the disposition of net
goodwill of $963, and the Gresswell division, a pre-tax loss of approximately
$700, which included the disposition of net goodwill of $1,673. The adjustments
during fiscal 2001 in the Specialty segment primarily represent the accrual of
additional purchase price consideration associated with the Company's
acquisition of Scantron Quality Computers. The adjustments during fiscal 2002 in
the Traditional segment represent the reclassification of the net book value of
previously recorded intangible assets to goodwill upon adoption of SFAS No. 142
of $2,381. The balance of the adjustments within 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
additional cash consideration paid to the former owners of Global Video of $210
and final purchase accounting adjustments of $170. The balance of the fiscal
2002 adjustments represent foreign currency translation.
NOTE 4--BUSINESS COMBINATIONS
On December 21, 2001, the Company acquired all of the issued and
outstanding shares of capital stock of Premier Agendas, Inc. and Premier School
Agendas Ltd., Agenda Scolaire Premier Ltee (together "Premier Agendas"). Premier
Agendas, headquartered in Bellingham, Washington, is the largest provider of
academic agendas in the United States and Canada. The Company expects the
acquisition to create synergies with the existing student agenda brands Time
Tracker and Hammond & Stephens. The aggregate purchase price, net of cash
acquired, of $155,931, includes a $4,012 six-month note payable to the former
owners of Premier Agendas that bears interest at two percent over LIBOR. The
balance of the purchase price was funded primarily through borrowings under the
Company's existing credit facility. The results of this acquisition have been
included in the consolidated financial statements and are part of the Specialty
segment results since the date of acquisition. The Company is in the process of
finalizing restructuring related plans as a result of the acquisition and
expects these and other adjustments to occur in fiscal 2003.
The total purchase price was allocated to the tangible and intangible
assets and liabilities acquired based upon their respective fair values as of
the closing date of the acquisition. A preliminary allocation of the purchase
price has been made to major categories of assets and liabilities as follows:
37
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
Current assets ............................... $ 11,166
Property, plant and equipment and other ...... 6,684
Identifiable intangible assets ............... 32,077
Goodwill ..................................... 127,869
Liabilities assumed .......................... (21,865)
-----------
$ 155,931
===========
Details of the acquired identifiable intangible assets as part of the
Premier Agendas acquisition are as follows:
Allocated Amortization
Acquired Intangibles Value Life
-------------------- ----- ----
Amortizable intangibles:
Customer relationships ......... $ 18,900 15 years
Order backlog .................. 400 1 year
Non-compete agreements ......... 77 2 years
--------
Total ....................... 19,377 14.7 years
Non amortizable intangibles:
Perpetual license agreement .... 12,700 N/A
--------
Total acquired intangibles .. $ 32,077 N/A
========
The above acquired intangible valuations are based on a third-party
valuation. In addition to the above intangible assets, the Company preliminarily
recorded $127,869 of goodwill related to the Premier Agendas acquisition, which
will not be deductible for income tax purposes.
Also during fiscal 2002, the Company acquired three other businesses,
accounted for under the purchase method of accounting, for a total purchase
price, net of cash acquired, of $9,566 including $300 paid for non-compete
agreements. The following transactions were paid for with cash and 120 shares of
School Specialty, Inc. common stock:
. April 2002 - Certain assets of the K-12 wholesale business of
Bradburn School Supply, Inc., a marketer of supplemental
educational supplies which will be operated from the Greenville,
Wisconsin facility. Results are included in the Traditional segment
since the date of acquisition.
. October 2001 - Premier Science, a start-up science curriculum
company which will be operated from the Mansfield, Ohio facility.
Results are included in the Specialty segment since the date of
acquisition.
. May 2001 - Envision, Inc., based in Grand Junction, Colorado, a
designer, producer and marketer of student agenda books. Results
are included in the Specialty segment since the date of
acquisition. The purchase price included 120 shares of School
Specialty, Inc. common stock.
The acquisitions resulted in goodwill of approximately $6,910, which is
fully deductible for tax purposes. The resulting goodwill from the Bradburn
acquisition of $747 is included in the Traditional segment, and the goodwill
from the Premier Science and Envision acquisitions of $6,163 is included in the
Specialty segment.
38
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
During fiscal 2001, the Company made two acquisitions accounted for
under the purchase method for an aggregate purchase price, net of cash acquired,
of $116,625, including $2,750 paid for non-compete agreements. The above
purchase price includes subsequent cash payments related to final purchase price
adjustments of $3,210 and $353, which were made during fiscal 2002. The
businesses acquired were:
. November 2000 - Certain assets of the K-12 wholesale business of
the J.L. Hammett Company, a marketer of supplemental educational
supplies, with operations in Lyons, New York and Southaven,
Mississippi. Results are included in the Traditional segment since
the date of acquisition.
. June 2000 - Global Video, LLC, a designer, producer and marketer of
educational videos, based in Tempe, Arizona. Results are included
in the Specialty segment since the date of acquisition.
Goodwill resulting from the above two transactions, including the
affect of the fiscal 2002 adjustments, which is expected to be fully deductible
for tax purposes, was approximately $79,098, of which, $49,923 has been
allocated to the Traditional segment and $29,175 to the Specialty segment.
During fiscal 2000, the Company made two acquisitions accounted for
under the purchase method for an aggregate purchase price, net of cash acquired,
of $2,470. The following transactions were paid for with cash and 57 shares of
School Specialty, Inc. common stock:
. May 1999 - Audio Graphic Systems, a marketer of school furnishings
and audio/visual equipment located in Ontario, California. Results
are included in the Traditional segment since the date of
acquisition.
. December 1999 - Scantron Quality Computers, Inc., a marketer and
developer of educational software located in St. Claire Shores,
Michigan. Results are included in the Specialty segment since the
date of acquisition.
Goodwill resulting from the Audio Graphic Systems acquisition of
$1,934, which is included in the Traditional segment, is not deductible for tax
purposes. Goodwill of $624 resulting from the Scantron acquisition is fully
deductible for tax purposes and is included in the Specialty segment.
The following information presents the unaudited pro forma results of
operations of the Company for fiscal 2002 and 2001, and includes the Company's
consolidated results of operations and the results of the companies acquired
during fiscal 2002 and fiscal 2001 as if all such purchase acquisitions had been
made at the beginning of fiscal 2001, 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 goodwill (if the transaction
occurred during fiscal 2001) and amortizable intangible assets, adjustments to
interest expense, and the inclusion of an income tax provision on all earnings:
Fiscal 2002 Fiscal 2001
----------- -----------
Revenues .................... $ 851,260 $ 864,797
Net income .................. 32,503 16,572
Net income per share:
Basic .................... $ 1.81 $ 0.94
Diluted .................. $ 1.66 $ 0.93
39
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
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 2001 or the
results that may occur in the future.
NOTE 5--RESTRUCTURING COSTS
During 1999, the Company recorded a restructuring charge of $4,200 to
consolidate warehousing, customer service and sales operations. During fiscal
years 2000 and 1999, the Company terminated 43 and 152 employees, respectively,
under this plan.
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. The Company terminated 76 employees under this plan during
fiscal 2001. Remaining payments primarily relate to commitments on a leased
facility which expires in April 2005.
Selected information related to the above restructurings is as follows:
Facility Severance
Closure and and Other
Consolidation Terminations Costs Total
------------- ------------ ----- -----
Balance at April 24, 1999 ....................... $ 1,101 $ 1,285 $ 366 $ 2,752
Utilizations ................................. (1,084) (1,245) (358) (2,687)
--------- --------- ------ ---------
Balance at April 29, 2000 ....................... 17 40 8 65
Additions .................................... 2,391 1,544 565 4,500
Utilizations ................................. (714) (784) (554) (2,052)
---------- --------- ------ ----------
Balance at April 28, 2001 ....................... 1,694 800 19 2,513
Utilizations ................................. (991) (640) (19) (1,650)
--------- --------- ------ ----------
Balance at April 27, 2002 ....................... $ 703 $ 160 $ - $ 863
========= ========= ====== ==========
NOTE 6--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
April 27, April 28,
2002 2001
---- ----
Land ................................................................ $ 538 $ 678
Projects in progress ................................................ 6,108 4,428
Buildings and leasehold improvements ................................ 29,263 28,460
Furniture, fixtures, and other ...................................... 33,514 23,915
Machinery and warehouse equipment ................................... 21,764 18,643
----------- -----------
91,187 76,124
Less: Accumulated depreciation ...................................... (24,104) (16,111)
----------- -----------
Net property, plant and equipment .............................. $ 67,083 $ 60,013
=========== ===========
Depreciation expense for fiscal years 2002, 2001 and 2000 was $10,067,
$7,523, and $5,523, respectively.
40
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
NOTE 7--DEBT
Long-Term Debt
Long-term debt consists of the following:
April 27, April 28,
2002 2001
---- ----
Credit facility ............................................. $ 118,000 $ 179,002
Convertible debt ............................................ 149,500 -
Sale-leaseback obligations .................................. 18,015 18,255
Notes payable ............................................... 4,136 136
Capital lease obligations ................................... 412 645
--------- ---------
290,063 198,038
Less: Current maturities .................................... (4,471) (21,855)
--------- ---------
Total long-term debt ................................. $ 285,592 $ 176,183
========= =========
On September 30, 1998, the Company entered into a five year secured
$350,000 credit facility (the "credit facility") with a syndicate of financial
institutions, led by Bank of America, N.A. as Agent, consisting of a $250,000
revolving loan and a $100,000 term loan. Interest accrues at a rate of, at the
Company's option, either (i) LIBOR plus an applicable margin of up to 2.25%, or
(ii) the lender's base rate plus an applicable margin of up to 1.00%, plus a fee
of up to 0.5% on the unborrowed amount under the revolving loan. The credit
facility is secured by substantially all of the assets of the Company and
contains certain financial covenants. The Company was in compliance with these
covenants at April 27, 2002. At April 27, 2002, the balance outstanding under
the credit facility was $118,000 on the revolving loan. The term loan was paid
in full during fiscal 2002. The effective interest rate under the credit
facility for fiscal 2002 was 6.44%, which includes amortization of the loan
origination fee and commitment fee on unborrowed funds, and excludes the effect
of the interest rate swap agreement disclosed below.
On July 30, 2001, the Company sold an aggregate principal amount of
$130,000 of 6.0% convertible subordinated notes of the Company due in full
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. There are no scheduled
principal payments due prior to maturity. Net proceeds from the sale of these
notes was $125,675. 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 of $18,915. The
Company used the total net proceeds from the offering of $144,590 to repay a
portion of the debt outstanding under the credit facility.
In November 2000, the Company entered into two sale-leaseback transactions
which are accounted for as financings due to a technical default provision
within the leases which could allow for continuing ownership involvement by the
Company in the two properties. Under the agreements, the Company recorded debt
of $18,525, which has an effective interest rate of 8.97%, excluding
amortization of loan fees. The leases expire in November 2020.
The Company entered into an interest rate swap agreement on December 13,
2000 (effective date of January 2, 2001), with The Bank of New York covering
$50,000 of the outstanding borrowings under the credit facility. On April 29,
2001, the Company began accounting for the swap in accordance with SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities", which requires
derivative instruments, such as this interest rate swap, to be recorded on the
balance sheet as either an asset or a liability measured at fair value. The swap
was designated as a cash flow hedge and was considered highly effective
throughout its term. As a result of adopting SFAS No. 133, the Company
recognized the fair value of the swap liability of $660 ($396 net of tax) with
the net of tax offset to accumulated other comprehensive income (loss) on the
date of adoption. Subsequent net of tax changes in the swap's fair value of $163
were recorded as a component of accumulated other comprehensive loss during
fiscal 2002, all of which was reclassified to the fiscal 2002, consolidated
statement of operations when the hedged item affected earnings. The swap
agreement fixed the 30-day LIBOR interest rate at 6.07 percent per annum on the
$50,000 notional amount and had a one-year term which expired on January 2,
2002.
41
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
On October 28, 1998, the Company entered into an interest rate swap
agreement with The Bank of New York covering $50,000 of the outstanding credit
facility. The agreement fixed the 30-day LIBOR interest rate at 4.37% per annum
on a $50,000 notional amount and had a three year term that was cancelable by
The Bank of New York on the second anniversary. On October 30, 2000, The Bank of
New York cancelled the swap agreement.
As a result of the above swap agreements, interest expense was
increased (decreased) in fiscal years 2002, 2001 and 2000 by $931, $(484) and
$(592), respectively.
The carrying value of variable rate long-term debt approximates fair
value. The convertible subordinated notes had a fair value at April 27,
2002 of $168,561, determined using the closing bid price as reported on the
National Association of Securities Dealers' Portal Market on April 27, 2002.
Maturities of Long-Term Debt
Maturities of long-term debt, including capital lease obligations for
our fiscal years, are as follows:
2003 ............................................. $ 4,471
2004 ............................................. 118,460
2005 ............................................. 477
2006 ............................................. 431
2007 ............................................. 529
Thereafter ....................................... 165,695
----------
Total maturities of long-term debt ........... $ 290,063
==========
NOTE 8--SECURITIZATION OF ACCOUNTS RECEIVABLE
The Company and certain of its U.S. subsidiaries entered into an
agreement (the "Receivables Facility") in November 2000 with a financial
institution whereby it sells on a continuous basis an undivided interest in all
eligible trade accounts receivable. Pursuant to the Receivables Facility, the
Company formed New School, Inc. ("NSI"), a wholly-owned, special purpose,
bankruptcy-remote subsidiary. As such, the assets of NSI will be available first
and foremost to satisfy the claims of the creditors of NSI. NSI was formed for
the sole purpose of buying and selling receivables generated by the Company and
certain subsidiaries of the Company. Under the Receivables Facility, the Company
and certain subsidiaries transfer without recourse all their accounts
receivables to NSI. NSI, in turn, has sold and, subject to certain conditions,
may from time to time sell an undivided interest in these receivables and is
permitted to receive advances of up to $50,000 for the sale of such undivided
interest. The Company receives a fee from the financial institution for billing
and collection functions, which remain the responsibility of the Company, that
approximates fair value. The agreement initially expired in November 2001. In
November 2001 it was amended to extend the expiration to November 19, 2002. On
May 2, 2002, the Receivables Facility was amended to allow NSI to receive
advances up to $100,000 under the Receivables Facility. Our retained interests
in the receivables sold are recorded at fair value, which approximates cost, due
to the short-term nature of the receivables sold.
This two-step transaction is accounted for as a sale of receivables
under the provision of SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities." There was $50,000 advanced
under the Receivables Facility at April 27, 2002 and April 28, 2001, and
accordingly, that amount of accounts receivable has been removed from the
consolidated balance sheets. Costs associated with the sale of receivables,
primarily related to the discount and loss on sale, were $1,985 and $1,389 and
are included in other expenses in the consolidated statement of operations for
fiscal years 2002 and 2001, respectively.
42
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
NOTE 9--INCOME TAXES
The provision for income taxes consists of:
Fiscal Fiscal Fiscal
2002 2001 2000
---- ---- ----
Current income tax expenses:
Federal ............................................................ $ 4,485 $ 3,834 $ 7,371
State .............................................................. 1,701 1,410 2,003
--------- --------- ---------
6,186 5,244 9,374
Deferred income tax expense .......................................... 8,335 3,831 5,746
--------- --------- ---------
Total provision for income taxes ................................ $ 14,521 $ 9,075 $ 15,120
========= ========= =========
Deferred taxes are comprised of the following:
April 27, April 28,
2002 2001
---- ----
Current deferred tax assets (liabilities):
Inventory .......................................................... $ 2,855 $ 4,028
Allowance for doubtful accounts .................................... 1,374 1,493
Net operating loss carryforward .................................... 1,375 1,493
Accrued liabilities ................................................ (613) (885)
Accrued restructuring .............................................. 334 994
Charitable contribution carryforward ............................... 2,016 750
--------- ---------
Total current deferred tax assets ............................... 7,341 7,873
--------- ---------
Long-term deferred tax assets (liabilities):
Net operating loss carryforward ...................................... 1,494 2,284
Property and equipment ............................................... (3,267) (1,361)
Intangible assets .................................................... (21,366) (4,402)
Unrealized loss on investment ........................................ - 600
--------- ---------
Total long-term deferred tax liabilities ........................ (23,139) (2,879)
--------- ---------
Net deferred tax (liabilities) assets ........................... $ (15,798) $ 4,994
========= =========
The Company has federal net operating loss carryforwards of
approximately $5,387, on a consolidated basis, which expire during fiscal years
2011-2013. The carryforwards are also subject to an annual federal limitation on
utilization pursuant to IRS Code Section 382 of approximately $3,900. The
Company has state and foreign net operating losses of approximately $11,682,
which will expire during fiscal years 2007-2022.
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
Fiscal Fiscal Fiscal
2002 2001 2000
---- ---- ----
U.S. federal statutory rate .......................................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit ................ 4.5% 4.5 4.6
Non-deductible goodwill and intangible amortization .................. - 6.2 5.4
Impact of divestitures ............................................... - (2.5) -
Other ................................................................ .5% - -
----- ----- -----
Effective income tax rate ............................................ 40.0% 43.2% 45.0%
===== ===== =====
43
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
NOTE 10--OPERATING LEASE COMMITMENTS
The Company leases various types of warehouse and office facilities and
equipment, under noncancelable lease agreements which expire at various dates.
Future minimum lease payments under noncancelable operating leases for our
fiscal years are as follows:
2003 ................................................. $ 8,023
2004 ................................................. 6,178
2005 ................................................. 6,019
2006 ................................................. 5,180
2007 ................................................. 4,791
Thereafter ........................................... 23,003
----------
Total minimum lease payments ...................... $ 53,194
==========
Rent expense for fiscal 2002, 2001 and 2000, was $8,398, $6,527, and
$5,535, respectively.
NOTE 11--EMPLOYEE BENEFIT PLANS
On June 9, 1998, the Company implemented the School Specialty, Inc.
401(k) Plan (the "401(k) Plan") which allows employee contributions in
accordance with Section 401(k) of the Internal Revenue Code. The Company matches
a portion of employee contributions and virtually all full-time employees are
eligible to participate in the 401(k) Plan after 90 days of service. In fiscal
years 2002, 2001, and 2000, the Company's matching contribution expense was
$670, $657, and $564, respectively.
NOTE 12--SHAREHOLDERS' EQUITY
Earnings Per Share ("EPS")
Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities to issue common stock were exercised. The following
information presents the Company's computations of basic and diluted EPS for the
periods presented in the consolidated statements of operations:
44
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Fiscal 2002:
Basic EPS ........................................................... $ 21,779 17,917 $ 1.22
========
Effect of dilutive employee stock options ........................... - 716
---------- ----------
Diluted EPS ......................................................... $ 21,779 18,633 $ 1.17
========== ========== ========
Fiscal 2001:
Basic EPS ........................................................... $ 11,931 17,495 $ 0.68
========
Effect of dilutive employee stock options ........................... - 287
---------- ----------
Diluted EPS ......................................................... $ 11,931 17,782 $ 0.67
========== ========== ========
Fiscal 2000:
Basic EPS ........................................................... $ 18,515 17,429 $ 1.06
========
Effect of dilutive employee stock options ........................... - 51
---------- ----------
Diluted EPS ......................................................... $ 18,515 17,480 $ 1.06
========== ========== ========
The Company had additional employee stock options outstanding of 128,
259, and 948 during fiscal 2002, 2001 and 2000, respectively, that were not
included in the computation of diluted EPS because they were anti-dilutive.
Additionally, the impact of the conversion of the convertible debt to common
stock has been excluded from the computation of fiscal 2002 diluted EPS because
the impact was anti-dilutive.
Stock Offerings
On April 16, 1999, the Company issued 2,400 shares in conjunction with
a secondary public offering for net proceeds of $40,820. On May 17, 1999, the
underwriters of the Company's secondary offering exercised their over allotment
option for 151 shares of Company stock at $17.25 per share for net proceeds of
$2,225.
Employee Stock Plans
On June 10, 1998, the Company's Board of Directors approved the School
Specialty, Inc. 1998 Stock Incentive Plan (the "Plan"). The purpose of the Plan
is to provide directors, officers, key employees and consultants with additional
incentives by increasing their ownership interests in the Company. The maximum
number of options available for grant under the Plan, is equal to 20% of the
Company's outstanding common stock. The maximum number of options available for
grant in any fiscal year under the Plan is 1,200 shares.
The Company accounts for options issued in accordance with Accounting
Principles Board Opinion No. 25. Accordingly, because the exercise prices of the
options is equal to the market price on the date of grant, no compensation
expense has been recognized for the options granted to employees and directors.
Had compensation expense related to the Company's stock option grants to
employees and directors been recognized based upon the fair value of the stock
options on the grant date under the methodology prescribed by SFAS No. 123
"Accounting for Stock Based Compensation", the Company's net income and net
income per share would have been impacted as indicated in the following table:
45
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
Fiscal Fiscal Fiscal
2002 2001 2000
---- ---- ----
Net income:
As reported ............................. $ 21,779 $ 11,931 $ 18,515
Pro forma ............................... 18,923 9,197 14,954
EPS:
As reported:
Basic ................................. $ 1.22 $ 0.68 $ 1.06
Diluted ............................... $ 1.17 $ 0.67 $ 1.06
Pro forma:
Basic ................................. $ 1.06 $ 0.53 $ 0.86
Diluted ............................... $ 1.02 $ 0.52 $ 0.86
The fair value of options granted (which is amortized to expense over
the option vesting period in determining the pro forma impact) is estimated
on the date of grant using the Black-Scholes single option pricing model
with the following weighted average assumptions:
Fiscal Fiscal Fiscal
2002 2001 2000
---- ---- ----
Expected life of option ....................... 7 years 7 years 7 years
Risk free interest rate ....................... 4.85% 5.30% 6.49%
Expected volatility of stock .................. 58.38% 59.58% 67.14%
The weighted-average fair value of options granted during fiscal years
2002, 2001 and 2000 was $15.53, $11.98, and $11.45, respectively.
A summary of option transactions follows:
46
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
Options Outstanding Options Exercisable
-------------------------- -------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
----------- ------------ --------- -----------
Balance at April 24, 1999 ........................... 2,366 $ 16.70 118 $23.39
Granted ...................................... 803 16.23
Exercised .................................... (55) 16.21
Canceled ..................................... (50) 20.20
---------
Balance at April 29, 2000 ........................... 3,064 16.53 1,973 $16.20
Granted ...................................... 243 18.58
Exercised .................................... (133) 15.83
Canceled ..................................... (108) 16.99
---------
Balance at April 28, 2001 ........................... 3,066 16.70 2,173 $16.47
Granted ...................................... 338 24.67
Exercised .................................... (345) 17.47
Canceled ..................................... (55) 17.97
---------
Balance at April 27, 2002 ........................... 3,004 $ 17.48 2,192 $16.44
=========
The following table summarizes information about stock options outstanding
at April 27, 2002:
Options Outstanding Options Exercisable
----------------------------------------- ----------------------
Weighted- Weighted-
Weighted- Average Average
Average Exercise Exercise
Range of Exercise Prices Options Life Price Options Price
------------------------ ------- ----------- ----------- ------- -----------
$12.00 - $15.00 263 7.16 $14.37 135 $14.40
$15.50 - $15.50 1,484 6.12 15.50 1,484 15.50
$15.63 - $20.31 794 7.48 17.89 461 17.74
$21.78 - $59.84 463 8.28 24.91 112 26.06
----- ---- ------ ----- ------
3,004 6.90 $17.48 2,192 $16.44
===== ==== ====== ===== ======
Options granted are generally exercisable beginning one year from the
date of grant in cumulative yearly amounts of twenty-five percent of the shares
granted and generally expire ten years from the date of grant. Options granted
to directors and non-employee officers of the Company vest over a three year
period, twenty percent after the first year, fifty percent (cumulative) after
the second year and one-hundred percent (cumulative) after the third year.
On June 20, 2000, the Board of Directors approved the JuneBox.com, Inc.
2000 Equity Incentive Plan. JuneBox.com was a wholly owned subsidiary of School
Specialty, Inc., and its stock was not publicly traded. No options were granted
under this Plan during fiscal 2002 and 1,900 options were granted at fair market
value at the date of grant during fiscal 2001. No options were exercised under
this Plan. During fiscal 2002, JuneBox.com, Inc. was merged into School
Specialty, Inc. The options outstanding at that time were replaced with School
Specialty, Inc. options under the School Specialty, Inc. 1998 Stock Incentive
Plan. The option
47
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
holders were in the same economic position immediately before and after the
replacement of JuneBox.com, Inc. options with School Specialty, Inc. options.
The vesting provisions and option period of the original grants were not
changed.
NOTE 13--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 primarily target specific educational
disciplines, such as art, industrial arts, physical education, sciences, and
early childhood. This segment also supplies student academic planners. The
accounting policies of the segments are the same as those described in Summary
of Significant Accounting Policies. All intercompany transactions have been
eliminated.
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 within the
traditional and specialty segments. Amounts previously reported for the Internet
segment have been reclassified to conform with fiscal 2002's presentation. The
following table presents segment information:
Fiscal Fiscal Fiscal
2002 2001 2000
---- ---- ----
Revenues:
Traditional................................................ $ 480,922 $ 415,001 $ 386,715
Specialty.................................................. 286,465 277,673 252,556
----------- ----------- -----------
Total.................................................. $ 767,387 $ 692,674 $ 639,271
=========== =========== ===========
Operating income and income before taxes:
Traditional................................................ $ 54,075 $ 29,373 $ 33,669
Specialty.................................................. 22,576 28,582 27,338
----------- ----------- -----------
Total.................................................. 76,651 57,955 61,007
Corporate expenses......................................... 19,107 14,380 12,365
Restructuring costs........................................ - 4,500 -
----------- ----------- -----------
Operating income....................................... 57,544 39,075 48,642
Interest expense and other................................. 21,244 18,069 15,007
----------- ----------- -----------
Income before taxes.................................... $ 36,300 $ 21,006 $ 33,635
=========== =========== ===========
Identifiable assets (at fiscal year end):
Traditional................................................ $ 249,926 $ 258,212 $ 246,006
Specialty.................................................. 344,045 171,144 177,825
----------- ----------- -----------
Total.................................................. 593,971 429,356 423,831
Corporate assets (1)....................................... 79,671 94,003 31,018
----------- ----------- -----------
Total.................................................. $ 673,642 $ 523,359 $ 454,849
=========== =========== ===========
48
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
Depreciation and goodwill and intangible amortization:
Traditional................................................. $ 4,003 $ 6,689 $ 6,129
Specialty................................................... 3,882 6,588 5,080
----------- ----------- -----------
Total................................................... 7,885 13,277 11,209
Corporate................................................... 3,313 1,685 630
----------- ----------- -----------
Total................................................... $ 11,198 $ 14,962 $ 11,839
=========== =========== ===========
Expenditures for property, plant and equipment:
Traditional................................................. $ 1,847 $ 4,479 $ 6,215
Specialty................................................... 2,199 4,646 7,656
----------- ----------- -----------
Total................................................... 4,046 9,125 13,871
Corporate................................................... 8,064 6,075 3,480
----------- ----------- -----------
Total................................................... $ 12,110 $ 15,200 $ 17,351
=========== =========== ===========
(1) Includes assets of NSI.
NOTE 14--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data, as
restated, see "Restatement of Financial Statements," in notes to consolidated
financial statements for fiscal 2002 and fiscal 2001:
Fiscal 2002
-----------------------------------------------------------------------
First Second Third(1) Fourth(1) Total
----------- ----------- ----------- ---------- -----
As Restated As Restated As Restated
Revenues....................................... $ 260,162 $ 269,656 $ 104,005 $ 133,564 $ 767,387
Gross profit................................... 100,294 99,834 39,746 54,106 293,980
Operating income (loss)........................ 32,470 36,608 (8,203) (3,331) 57,544
Net income (loss).............................. 16,446 19,162 (8,625) (5,204) 21,779
Per share amounts:
Basic....................................... $ 0.93 $ 1.07 $ (0.48) $ (0.29) $ 1.22
Diluted..................................... $ 0.89 $ 0.88 $ (0.48) $ (0.29) $ 1.17
Fiscal 2001
-----------------------------------------------------------------------
First Second Third(2) Fourth(2)(3) Total
----- ------ ----------- ------------ -----
As Restated As Restated
Revenues....................................... $ 217,067 $ 240,539 $ 104,658 $ 130,410 $ 692,674
Gross profit................................... 79,069 85,513 38,034 49,112 251,728
Operating income (loss)........................ 24,107 27,782 (3,967) (8,847) 39,075
Net income (loss).............................. 11,393 12,902 (4,908) (7,456) 11,931
Per share amounts:
Basic....................................... $ 0.65 $ 0.74 $ (0.28) $ (0.42) $ 0.68
Diluted..................................... $ 0.65 $ 0.73 $ (0.28) $ (0.42) $ 0.67
The summation of quarterly net income per share may not equate to the
calculation for the full fiscal year as quarterly calculations are performed on
a discrete basis.
49
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(1) During the third quarter of fiscal 2002, the Company acquired Premier
Agendas, a highly seasonal business during a seasonally low period.
This transaction had the affect of reducing fiscal 2002's third and
fourth quarter's reported net income and related earnings per share.
(2) During the third quarter of fiscal 2001, the Company acquired certain
assets of the K-12 wholesale business of the J.L. Hammett Company, a
highly seasonal business during a seasonally low period. This
transaction had the affect of reducing fiscal 2001's third and fourth
quarter's reported net income and related earnings per share.
(3) During the fourth quarter of fiscal 2001, the Company recorded a
$4,500 pre-tax restructuring charge. See "Restructuring Costs" for
additional information related to this charge.
NOTE 15--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 during fiscal 2001 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 our fiscal 2001 financial statements:
As Reported As Restated
----------- -----------
At April 28, 2001:
Prepaid expenses and other current assets .......... $ 18,457 $ 18,300
Property, plant and equipment ...................... 43,522 60,013
Other assets ....................................... 16,735 17,468
Current maturities - long-term debt ................ 21,615 21,855
Other accrued liabilities .......................... 13,862 13,021
Long-term debt ..................................... 158,168 176,183
Deferred taxes ..................................... 3,018 2,879
Retained earnings .................................. 41,133 40,925
For the fiscal year ended April 28, 2001:
Selling, general and administrative expenses ....... $ 208,647 $ 208,153
Operating income ................................... 38,581 39,075
Interest expense ................................... 16,142 16,983
Income before provision for income taxes ........... 21,353 21,006
Provision for income taxes ......................... 9,214 9,075
Net income ......................................... 12,139 11,931
Basic EPS .......................................... $ 0.69 $ 0.68
Diluted EPS ........................................ $ 0.68 $ 0.67
Fiscal 2002's unaudited quarterly financial results, and fiscal 2001's
third and fourth quarter unaudited financial results have also been restated.
The following table summarizes the impact of this restatement on the Company's
previously filed Form 10-Q's as applicable for these respective unaudited
quarterly financial results:
50
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
For the Three Months Ended
--------------------------------------------------------------------------------------
January 27, 2001 July 28, 2001 October 27, 2001 January 26, 2002
---------------- ------------- ---------------- ----------------
As As As As As As As As
Reported Restated Reported Restated Reported Restated Reported Restated
Prepaid expenses and other current
assets ................................. $ - $ - $ 22,782 $ 22,624 $ - $ - $ - $ -
Property, plant and equipment ............ 44,755 61,457 44,008 60,287 43,315 59,383 49,185 65,042
Other assets ............................. 6,772 7,515 15,228 15,952 12,818 13,533 11,358 12,063
Current maturities - long-term debt ...... 14,823 15,078 10,356 10,602 23,062 23,335 4,412 4,691
Accrued income tax ....................... - - - - 14,050 13,777 8,115 7,776
Other accrued liabilities ................ 25,037 24,250 27,028 25,991 16,915 16,232 21,463 20,791
Long-term debt ........................... 167,102 185,185 204,410 222,355 154,934 172,808 278,221 296,023
Retained earnings ........................ 48,487 48,381 57,680 57,371 76,944 76,536 68,416 67,908
Selling, general and administrative
expenses ............................... 42,245 42,001 68,074 67,824 63,477 63,226 48,199 47,949
Operating income (loss) .................. (4,211) (3,967) 32,220 32,470 36,357 36,608 (8,453) (8,203)
Interest expense ......................... 4,214 4,635 3,805 4,223 4,156 4,573 3,769 4,185
Income (loss) before provision for
(benefit from) income taxes ............ (9,790) (9,967) 27,579 27,411 32,104 31,938 (14,208) (14,374)
Provision for (benefit from) income
taxes .................................. (4,988) (5,059) 11,032 10,965 12,843 12,776 (5,683) (5,749)
Net income (loss) ........................ (4,802) (4,908) 16,547 16,446 19,261 19,162 (8,525) (8,625)
Basic EPS ................................ $ (0.27) $ (0.28) $ 0.93 $ 0.93 $ 1.08 $ 1.07 $ (0.47) $ (0.48)
Diluted EPS .............................. $ (0.27) $ (0.28) $ 0.90 $ 0.89 $ 0.89 $ 0.88 $ (0.47) $ (0.48)
The originally reported unaudited year-to-date quarterly basic and diluted
EPS for the above periods have been restated as follows:
Basic EPS Diluted EPS
--------------------------- ----------------------------
As Reported As Restated As Reported As Restated
Nine months ended January 27, 2001 ............ $1.12 $1.11 $1.10 $1.10
Six months ended October 27, 2001 ............. $2.01 $2.00 $1.78 $1.77
Nine months ended January 26, 2002 ............ $1.53 $1.51 $1.39 $1.38
Item 9. Change in and Disagreements with Accountants on Accounting and Financial
Disclosure
Information previously reported.
51
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Executive Officers. Reference is made to "Executive Officers of the
Registrant" in Part I hereof.
(b) Directors. The information required by this Item is set forth in our
Proxy Statement for the Annual Meeting of Shareholders to be held on
August 27, 2002, under the caption "Election of Directors," which
information is incorporated by reference herein.
(c) Section 16 Compliance. The information required by this Item is set
forth in our Proxy Statement for the Annual Meeting of Shareholders to
be held on August 27, 2002, under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance," which information is
incorporated by reference herein.
Item 11. Executive Compensation
The information required by this Item is set forth in our Proxy Statement
for the Annual Meeting of Shareholders to be held on August 27, 2002, under the
captions "Executive Compensation," "Employment Contracts and Related Matters,"
"Non-Employee Director Compensation," "Compensation Committee Report,"
"Compensation Committee Interlocks and Insider Participation," and "Performance
Graph," which information is incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters
The information required by this Item is set forth in our Proxy Statement
for the Annual Meeting of Shareholders to be held on August 27, 2002, under the
captions "Security Ownership of Management and Certain Beneficial Owners" and
"Equity Compensation Plan Information," which information is incorporated by
reference herein.
Item 13. Certain Relationships and Related Transactions
Not applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements (See Part II, Item 8).
Consolidated Financial Statements
Reports of Independent Public Accountants
Consolidated Balance Sheets as of April 27, 2002, and April 28, 2001
As Restated
Consolidated Statements of Operations for the fiscal years ended April
27, 2002 (52 weeks), April 28, 2001 (52 weeks) As Restated, and April
29, 2000 (53 weeks)
Consolidated Statements of Shareholders' Equity for the fiscal years
ended April 27, 2002 (52 weeks), April 28, 2001 (52 weeks) As
Restated, and April 29, 2000 (53 weeks)
52
Consolidated Statements of Cash Flows for the fiscal years ended April
27, 2002 (52 weeks), April 28, 2001 (52 weeks) As Restated, and April
29, 2000 (53 weeks)
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedule (See Exhibit 99-1).
Schedule for the fiscal years ended April 27, 2002 (52 weeks), April 28,
2001 (52 weeks), and April 29, 2000 (53 weeks): Schedule II - Valuation
and Qualifying Accounts.
(a)(3) Exhibits.
See (c) below.
(b) Reports on Form 8-K.
The Company filed three reports on Form 8-K since the beginning of the
fourth quarter of fiscal 2002 as follows:
(1) Form 8-K/A dated December 21, 2001, filed on March 5, 2002, under
Items 2 and 7. The Company filed financial statements and pro forma
financial information relating to its acquisition of all the issued
and outstanding shares of capital stock of Premier Agendas, Inc. and
Premier School Agendas, Ltd., Agenda Scolaire Premier Ltee.
(2) Form 8-K dated March 8, 2002, filed on March 11, 2002, under Item 5.
The Company reported the unexpected death of its Chairman and Chief
Executive Officer, Daniel P. Spalding.
(3) Form 8-K dated and filed on June 11, 2002, under Item 4. The Company
dismissed Arthur Andersen LLP as its independent auditors and
engaged Deloitte & Touche LLP to act as its independent auditor.
(c) Exhibits.
See the Exhibit Index, which is incorporated by reference herein.
(d) Financial Statements Excluded from Annual Report to Shareholders.
Not applicable.
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Appleton,
State of Wisconsin, on July 22, 2002.
SCHOOL SPECIALTY, INC.
By: /s/ David J. Vander Zanden
--------------------------------------
David J. Vander Zanden
President and Chief Operating Officer
(Interim Chief Executive Officer)
Each person whose signature appears below hereby constitutes and
appoints David J. Vander Zanden and Mary M. Kabacinski, and each of them, as his
or her true and lawful attorney-in-fact and agent, with full power of
substitution, to sign on his or her behalf individually and in the capacity
stated below and to perform any acts necessary to be done in order to file any
and all amendments to this Annual Report on Form 10-K, and to file the same,
with all exhibits thereto and all other documents in connection therewith and
each of the undersigned does hereby ratify and confirm all that said
attorney-in-fact and agent, or his substitutes, shall do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated below.
Name Title Date
---- ----- ----
/s/ David J. Vander Zanden President, Chief Operating Officer July 22, 2002
- ------------------------------
David J. Vander Zanden and Director (Interim Chief Executive Officer)
/s/ Mary M. Kabacinski Chief Financial Officer July 22, 2002
- ------------------------------
Mary M. Kabacinski (Principal Financial and Accounting Officer)
/s/ Leo C. McKenna Interim Chairman of the Board July 22, 2002
- ------------------------------
Leo C. McKenna
/s/ Jonathan J. Ledecky Director July 22, 2002
- ------------------------------
Jonathan J. Ledecky
/s/ Rochelle Lamm Director July 22, 2002
- ------------------------------
Rochelle Lamm
/s/ Jerome M. Pool Director July 22, 2002
- ------------------------------
Jerome M. Pool
INDEX TO EXHIBITS
Exhibit
Number Document Description
2.1 Purchase Agreement by and among Franklin Covey Co., Franklin
Covey Canada Ltd., School Specialty, Inc., and 3956831 Canada
Inc., dated November 13, 2001, incorporated herein by reference
to Exhibit 2.1(a) of School Specialty's Current Report on Form
8-K dated December 21, 2001.
2.2 Amendment to Purchase Agreement by and among Franklin Covey Co.,
Franklin Covey Canada Ltd., School Specialty, Inc., and 3956831
Canada, Inc., dated December 21, 2001, incorporated herein by
reference to Exhibit 2.1(b) of School Specialty's Current Report
on Form 8-K dated December 21, 2001.
3.1 Articles of Incorporation of School Specialty, Inc.,
incorporated herein by reference to Appendix B of the School
Specialty, Inc. definitive Proxy Statement dated July 24, 2000.
3.2 Bylaws of School Specialty, Inc., incorporated herein by
reference to Exhibit 3.2 of School Specialty's current report on
Form 8-K dated August 31, 2000.
4.1 Amended and Restated Credit Agreement dated as of September 30,
1998 among School Specialty, Inc., certain subsidiaries and
affiliates of School Specialty, Inc., the lenders named therein
and Nationsbank, N.A., Bank One, Wisconsin and U.S. Bank
National Association, incorporated herein by reference to
Exhibit 10.12 of School Specialty's Form 10-Q for the period
ended January 23, 1999.
4.2 Amended and Restated Pledge Agreement dated as of September 30,
1998 given by School Specialty, Inc. and the other pledgors
named therein to Nationsbank, N.A. as Administrative Agent,
incorporated herein by reference to Exhibit 4.2 of School
Specialty, Inc.'s Annual Report on Form 10-K for the fiscal year
ended April 28, 2001.
4.3 Amended and Restated Security Agreement dated as of September
30, 1998 given by School Specialty, Inc. and the other grantors
named therein to Nationsbank, N.A. as Administrative Agent,
incorporated herein by reference to Exhibit 4.3 of School
Specialty, Inc.'s Annual Report on Form 10-K for the fiscal year
ended April 28, 2001.
4.4 Amendment No. 1 to Amended and Restated Credit Agreement dated
as of May 12, 2000, incorporated herein by reference to Exhibit
10.1 of School Specialty's Quarterly Report on Form 10-Q for the
period ended July 29, 2000.
4.5 Consent and Amendment to Amended and Restated Credit Agreement
dated November 20, 2000, incorporated herein by reference to
Exhibit No. 4.5 of School Specialty, Inc.'s Annual Report on
Form 10-K for the fiscal year ended April 28, 2001.
4.6 Amendment No. 2 to Amended and Restated Credit Agreement dated
as of July 12, 2001 incorporated herein by reference to Exhibit
No. 4.1 of School Specialty, Inc.'s Report on Form 10-Q for the
period ended July 28, 2001.
INDEX TO EXHIBITS
Exhibit
Number Document Description
4.7 Amendment No. 3 to Amended and Restated Credit Agreement dated
as of July 24, 2001 incorporated herein by reference to Exhibit
No. 4.2 of School Specialty, Inc.'s Report on Form 10-Q for the
period ended July 28, 2001.
4.8 Consent to Amended and Restated Credit Agreement dated December
10, 2001, incorporated herein by reference to Exhibit No. 4.1 of
School Specialty, Inc.'s Report on Form 10-Q for the period
ended January 26, 2002.
4.9 Consent to Amended and Restated Credit Agreement dated as of
April 26, 2002.
4.10 Indenture dated as of July 30, 2001 between the Company and BNY
Midwest Trust Company as Trustee, incorporated herein by
reference to Exhibit No. 4.3 of School Specialty, Inc.'s Report
on Form 10-Q for the period ended July 28, 2001.
4.11 Registration Agreement dated as of July 30, 2001 between the
Company and Salomon Smith Barney, incorporated herein by
reference to Exhibit No. 4.4 of School Specialty, Inc.'s Report
on Form 10-Q for the period ended July 28, 2001.
4.12 Certain other long-term debt as described in the Notes to
Consolidated Financial Statements. School Specialty, Inc. agrees
to furnish the Commission, upon request, copies of any
instruments defining the rights of holders of any such long-term
debt described in the Notes to Consolidated Financial Statements
and not filed herewith.
10.1* Employment Agreement dated September 3, 1999 between Daniel P.
Spalding and School Specialty, Inc., incorporated herein by
reference to Exhibit 10.1 of School Specialty, Inc.'s Quarterly
Report on Form 10-Q for the period ended October 23, 1999.
10.2* Employment Agreement dated September 3, 1999 between Mary M.
Kabacinski and School Specialty, Inc., incorporated herein by
reference to Exhibit 10.2 of School Specialty, Inc.'s Quarterly
Report on Form 10-Q for the period ended October 23, 1999.
10.3* Employment Agreement dated September 3, 1999 between Donald J.
Noskowiak and School Specialty, Inc., incorporated herein by
reference to Exhibit 10.3 of School Specialty, Inc.'s Quarterly
Report on Form 10-Q for the period ended October 23, 1999.
10.4* Employment Agreement dated March 26, 2001 between A. Brent
Pulsipher and School Specialty, Inc., incorporated herein by
reference to School Specialty, Inc.'s Annual Report on Form 10-K
for the period ended April 28, 2001.
10.5* Employment Agreement dated May 1, 2002 between David J. Vander
Zanden and School Specialty, Inc.
10.6* Amended and Restated 1998 Stock Incentive Plan dated June 20,
2000, incorporated herein by reference to Appendix C of the
School Specialty, Inc. definitive Proxy Statement dated July 24,
2000.
10.7* School Specialty, Inc. Incentive Bonus Plan.
INDEX TO EXHIBITS
Exhibit
Number Document Description
10.8 Receivables Purchase Agreement dated November 22, 2000,
incorporated herein by reference to Exhibit 10.1(a) of School
Specialty, Inc.'s Quarterly Report on Form 10-Q for the period
ended January 27, 2001.
10.9 Amendment No. 1 to the Receivables Purchase Agreement dated as
of January 1, 2001, incorporated herein by reference to Exhibit
No. 10.2 of School Specialty, Inc.'s Quarterly Report on Form
10-Q for the period ended July 28, 2001.
10.10 Amendment No. 2 to the Receivables Purchase Agreement dated as
of July 13, 2001, incorporated herein by reference to Exhibit
No. 10.3 of School Specialty, Inc.'s Quarterly Report on Form
10-Q for the period ended July 28, 2001.
10.11 Amendment No. 3 to the Receivables Purchase Agreement dated as
of November 20, 2001, incorporated herein by reference to
exhibit No. 10.1 of School Specialty, Inc.'s Quarterly Report on
Form 10-Q for the period ended October 27, 2001.
10.12 Amendment No. 4 to the Receivables Purchase Agreement dated as
of May 2, 2002.
10.13 Receivables Sale Agreement dated November 22, 2000, incorporated
herein by reference to Exhibit 10.1(b) of School Specialty,
Inc.'s Quarterly Report on Form 10-Q for the period ended
January 27, 2001.
10.14 Amendment No. 1 to the Receivables Sale Agreement dated as of
July 13, 2001 and incorporated herein by reference to Exhibit
No. 10.1 of School Specialty, Inc.'s Quarterly Report on Form
10-Q for the period ended July 28, 2001.
12.1 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges.
16.1 Letter from Arthur Andersen LLP dated June 11, 2002 to the SEC
incorporated herein by reference to Exhibit 16.1 of School
Specialty, Inc.'s current report on Form 8-K dated June 11,
2002.
16.2 Letter from PricewaterhouseCoopers LLP dated December 14, 2000
to the SEC incorporated herein by reference to Exhibit 16.1 of
School Specialty, Inc.'s current report on Form 8-K dated
December 14, 2000.
21.1 Subsidiaries of School Specialty, Inc.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
99.1 Schedule II - Valuation and Qualifying Accounts.
99.2 Forward-Looking Statements
*Management contract or compensatory plan or arrangement.