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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 26, 2002.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
__________
Commission File Number: 000-24385
SCHOOL SPECIALTY, INC.
(Exact Name of Registrant as Specified in its Charter)
Wisconsin 39-0971239
(State or Other (IRS Employer
Jurisdiction of Incorporation) Identification No.)
W6316 Design Drive
Greenville, Wisconsin
(Address of Principal Executive Offices)
54942
(Zip Code)
(920) 734-5712
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class December 3, 2002
----- ----------------
Common Stock, $0.001 par value 18,422,336
SCHOOL SPECIALTY, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED OCTOBER 26, 2002
PART I - FINANCIAL INFORMATION
- ------------------------------
Page
Number
------
ITEM 1. CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at October 26, 2002,
April 27, 2002 and October 27, 2001 ................................. 1
Condensed Consolidated Statements of Operations for the Three Months
Ended October 26, 2002 and October 27, 2001 and for the Six
Months Ended October 26, 2002 and October 27, 2001 .................. 2
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended October 26, 2002 and October 27, 2001 .................. 3
Notes to Condensed Consolidated Financial Statements ....................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ........................................ 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ................................................................ 17
ITEM 4. CONTROLS AND PROCEDURES .................................................... 17
PART II - OTHER INFORMATION
- ---------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........................ 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ........................................... 18
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. Condensed Consolidated Unaudited Financial Statements
SCHOOL SPECIALTY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
October 26, April 27, October 27,
2002 2002 2001
---- ---- ----
As Restated
See Note 10
ASSETS
-------
Current assets:
Cash and cash equivalents ........................................ $ 7,837 $ 6,123 $ 7,676
Accounts receivable, less allowance for doubtful accounts of
$3,353, $2,719, and $3,750, respectively ....................... 152,647 34,356 132,726
Inventories ...................................................... 74,641 98,148 68,302
Deferred catalog costs ........................................... 9,588 13,590 7,536
Prepaid expenses and other current assets ........................ 9,939 12,770 11,300
Assets held for sale ............................................. 1,775 - 1,429
Deferred taxes ................................................... 7,341 7,341 7,873
--------- --------- ---------
Total current assets ........................................... 263,768 172,328 236,842
Property and equipment, net ......................................... 64,424 67,083 59,383
Goodwill ............................................................ 422,538 390,946 261,063
Intangible assets, net .............................................. 41,162 35,457 3,285
Other ............................................................... 6,789 7,828 13,533
--------- --------- ---------
Total assets ................................................... $ 798,681 $ 673,642 $ 574,106
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities - long-term debt .............................. $ 157,391 $ 4,471 $ 23,335
Accounts payable ................................................. 50,922 47,097 45,453
Accrued compensation ............................................. 19,734 16,712 15,350
Deferred revenue ................................................. 3,740 10,681 1,395
Accrued income taxes ............................................. 23,843 - 13,777
Accrued restructuring ............................................ 674 863 1,528
Other accrued liabilities ........................................ 19,934 13,917 14,837
--------- --------- ---------
Total current liabilities ...................................... 276,238 93,741 115,675
Long-term debt ...................................................... 167,500 285,592 172,808
Deferred taxes and other ............................................ 23,139 23,139 3,018
--------- --------- ---------
Total liabilities .............................................. 466,877 402,472 291,501
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 18,419,836, 18,046,315 and 17,997,374
shares issued and outstanding, respectively .................... 18 18 18
Capital paid-in excess of par value .............................. 215,745 208,053 207,132
Accumulated other comprehensive income (loss) .................... 351 395 (1,081)
Retained earnings ................................................ 115,690 62,704 76,536
--------- --------- ---------
Total shareholders' equity .................................... 331,804 271,170 282,605
--------- --------- ---------
Total liabilities and shareholders' equity .................... $ 798,681 $ 673,642 $ 574,106
========= ========= =========
See accompanying notes to condensed consolidated financial statements.
1
SCHOOL SPECIALTY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Three For the Six
Months Ended Months Ended
------------------------- ------------------------
October 26, October 27, October 26, October 27,
2002 2001 2002 2001
---- ---- ---- ----
As Restated As Restated
See Note 10 See Note 10
Revenues ......................................... $ 317,399 $ 269,656 $ 615,426 $ 529,818
Cost of revenues ................................. 187,490 169,822 361,026 329,690
--------- --------- --------- ---------
Gross profit .................................. 129,909 99,834 254,400 200,128
Selling, general and administrative expenses...... 76,202 63,226 155,755 131,050
--------- --------- --------- ---------
Operating income .............................. 53,707 36,608 98,645 69,078
Other (income) expense:
Interest expense .............................. 4,740 4,573 9,248 8,796
Interest income ............................... (16) (15) (17) (31)
Other ......................................... 560 112 1,032 964
--------- --------- --------- ---------
Income before provision for income taxes ......... 48,423 31,938 88,382 59,349
Provision for income taxes ....................... 19,393 12,776 35,396 23,741
--------- --------- --------- ---------
Net income ....................................... $ 29,030 $ 19,162 $ 52,986 $ 35,608
========= ========= ========= =========
Weighted average shares outstanding:
Basic ......................................... 18,283 17,909 18,220 17,823
Diluted ....................................... 23,437 23,379 23,437 20,896
Net income per share:
Basic ......................................... $ 1.59 $ 1.07 $ 2.91 $ 2.00
Diluted ....................................... $ 1.30 $ 0.88 $ 2.38 $ 1.77
See accompanying notes to condensed consolidated financial statements.
2
SCHOOL SPECIALTY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Six
Months Ended
--------------------------
October 26, October 27,
2002 2001
---- ----
As Restated
See Note 10
Cash flows from operating activities:
Net income ................................................................ $ 52,986 $ 35,608
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization expense ................................... 7,667 5,036
Amortization of debt fees and other ..................................... 1,124 1,229
Restructuring related payments .......................................... (189) (985)
Loss on disposal or impairment of property, equipment and business
disposition ........................................................... 949 230
Gain on sale of available-for-sale securities ........................... - (287)
Change in current assets and liabilities (net of assets acquired and
liabilities assumed in business combinations):
Accounts receivable ..................................................... (105,647) (92,335)
Inventories ............................................................. 36,499 32,773
Prepaid expenses and other current assets ............................... 9,387 14,874
Accounts payable ........................................................ (3,234) (12,448)
Accrued liabilities ..................................................... 20,026 24,000
--------- ---------
Net cash provided by operating activities ............................. 19,568 7,695
--------- ---------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash acquired ........................... (46,259) (7,931)
Additions to property and equipment ....................................... (5,200) (3,805)
Proceeds from disposal of property, equipment and business disposition .... 107 1,657
Proceeds from sale of available-for-sale securities and note receivable ... - 6,353
--------- ---------
Net cash used in investing activities ................................. (51,352) (3,726)
--------- ---------
Cash flows from financing activities:
Proceeds from bank borrowings ............................................. 167,400 76,600
Repayment of debt and capital leases ...................................... (140,005) (228,013)
Proceeds from convertible debt offering ................................... - 149,500
Payment of debt fees and other ............................................ (115) (5,208)
Proceeds from exercise of stock options ................................... 6,218 5,140
--------- ---------
Net cash provided by (used in) financing activities ................... 33,498 (1,981)
--------- ---------
Net increase in cash and cash equivalents .................................... 1,714 1,988
Cash and cash equivalents, beginning of period ............................... 6,123 5,688
--------- ---------
Cash and cash equivalents, end of period ..................................... $ 7,837 $ 7,676
========= =========
3
SCHOOL SPECIALTY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(In thousands)
The Company entered into certain business combinations in the six months ended
October 26, 2002, and October 27, 2001. The transactions that occurred during
the six months ended October 26, 2002 were paid for using cash while the
transactions that occurred during the six months ended October 27, 2001 were
paid for using cash or cash and common stock. The fair values of the assets and
liabilities of the acquired companies at the dates of the acquisitions are
presented as follows:
For the Six
Months Ended
------------------------
October 26, October 27,
2002 2001
---- ----
Accounts receivable ..................................... $ 12,679 $ 33
Inventories ............................................. 13,037 358
Deferred catalog costs .................................. 2,348 -
Prepaid expenses and other current assets................ 186 24
Property and equipment .................................. 1,026 572
Goodwill ................................................ 30,867 5,983
Intangible assets ....................................... 7,334 907
Short-term debt ......................................... (1,078) (19)
Short-term capital lease obligations .................... (33) -
Accounts payable ........................................ (7,066) (5)
Accrued liabilities ..................................... (6,725) (432)
Long-term debt .......................................... (10,139) -
Long-term capital lease obligations ..................... (195) -
-------- -------
Net assets acquired .................................. $ 42,241 $ 7,421
======== =======
Acquisitions were funded as follows:
Cash paid, net of cash acquired (1) ..................... $ 42,241 $ 4,721
Common stock ............................................ - 2,700
-------- -------
Total ............................................... $ 42,241 $ 7,421
======== =======
(1) Fiscal 2003 cash paid in acquisitions, net of cash acquired, as reported
within cash flows from investing activities includes the repayment of a
$4,012 note payable to selling shareholders related to the acquisition of
Premier Agendas and a purchase price adjustment related to an immaterial
acquisition. Fiscal 2002 cash paid in acquisitions, net of cash acquired,
as reported within cash flows from investing activities includes the
payment of an earn-out provision to the former owners of Global Video.
See accompanying notes to condensed consolidated financial statements.
4
SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (which are normal and recurring in nature) considered necessary for
a fair presentation have been included. The balance sheet at April 27, 2002, has
been derived from the Company's audited financial statements for the fiscal year
ended April 27, 2002. For further information, refer to the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended April 27, 2002.
NOTE 2--SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Changes in shareholders' equity during the six months ended October 26, 2002,
were as follows:
Shareholders' equity balance at April 27, 2002 ........ $ 271,170
Net income ............................................ 52,986
Issuance of common stock in conjunction with
stock option exercises .............................. 6,218
Tax benefit on stock option exercises ................. 1,474
Foreign currency translation adjustment ............... (44)
---------
Shareholders' equity balance at October 26, 2002....... $ 331,804
=========
Comprehensive income for the periods presented in the condensed consolidated
statements of operations was as follows:
For the Three For the Six
Months Ended Months Ended
------------------------ ------------------------
October 26, October 27, October 26, October 27,
2002 2001 2002 2001
---- ---- ---- ----
Net income .................................................. $29,030 $ 19,162 $52,986 $35,608
Other comprehensive income (loss):
Unrealized loss on available-for-sale securities:
Unrealized holding loss arising during period, net
of tax ............................................... - (689) - (817)
Less: Reclassification adjustment for gains
included in net income, net of tax ................... - 172 - 172
------- -------- ------- -------
Net unrealized loss on securities available-for-sale
recognized in other comprehensive income ............... - (861) - (989)
Unrealized (gain) loss on derivative financial
instrument:
Unrealized holding gain arising during period, net
of tax ............................................... - 540 - 70
Less: Reclassification adjustment for losses
included in net income, net of tax ................... - (204) - (349)
------- -------- ------- -------
Net unrealized gain (loss) on derivative financial
instruments recognized in other comprehensive
income ................................................. - 336 - (279)
Foreign currency translation adjustment ................... 30 - (44) -
------- ------- ------- -------
Total comprehensive income .................................. $29,060 $ 18,637 $52,942 $34,340
======= ======== ======= =======
5
SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 3--EARNINGS PER SHARE
The following information presents the Company's computations of basic earnings
per share ("basic EPS") and diluted earnings per share ("diluted EPS") for the
periods presented in the condensed consolidated statements of operations:
Income Share Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Three months ended October 26, 2002:
Basic EPS ............................................... $ 29,030 18,283 $ 1.59
=========
Effect of dilutive stock options ........................ - 524
Effect of convertible debt .............................. 1,447 4,630
----------- -------------
Diluted EPS ............................................. $ 30,477 23,437 $ 1.30
=========== ============= =========
Three months ended October 27, 2001:
Basic EPS ............................................... $ 19,162 17,909 $ 1.07
=========
Effect of dilutive stock options ........................ - 840
Effect of convertible debt .............................. 1,440 4,630
----------- -------------
Diluted EPS ............................................. $ 20,602 23,379 $ 0.88
=========== ============= =========
Six months ended October 26, 2002:
Basic EPS ............................................... $ 52,986 18,220 $ 2.91
=========
Effect of dilutive stock options ........................ - 587
Effect of convertible debt .............................. 2,899 4,630
----------- -------------
Diluted EPS ............................................. $ 55,885 23,437 $ 2.38
=========== ============= =========
Six months ended October 27, 2001:
Basic EPS ............................................... $ 35,608 17,823 $ 2.00
=========
Effect of dilutive stock options ........................ - 758
Effect of convertible debt .............................. 1,440 2,315
----------- -------------
Diluted EPS ............................................. $ 37,048 20,896 $ 1.77
=========== ============= =========
The Company had additional stock options outstanding during the periods
presented of 232 and 62 for the three months ended October 26, 2002 and October
27, 2001, respectively, and 215 and 62 for the six months ended October 26, 2002
and October 27, 2001, respectively, that were not included in the computation of
diluted EPS because they were anti-dilutive.
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." Under SFAS No. 146, costs
associated with an exit or disposal activity shall be recognized and measured at
their fair value in the period in which the liability is incurred rather than at
the date of a commitment to an exit or disposal plan. The provisions of the
statement will be effective for exit or disposal activities that are initiated
after December 31, 2002. The Company is currently evaluating the impact of the
statement.
6
SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 5--GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents details of the Company's intangible assets,
excluding goodwill:
Accumulated Net Book
October 26, 2002 Gross Value Amortization Value
- ---------------- ----------- ------------ -----------
Amortizable intangible assets:
Customer relationships .......................... $ 23,245 $ (1,129) $ 22,116
Non-compete agreements .......................... 5,594 (1,114) 4,480
Trademarks and tradenames ....................... 1,045 (120) 925
Order backlog and other ......................... 1,121 (557) 564
----------- ------------ -----------
Total amortizable intangible assets ........... 31,005 (2,920) 28,085
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 ................... $ 44,082 $ (2,920) $ 41,162
=========== ============ ===========
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
October 27, 2001 Gross Value Amortization Value
- ---------------- ----------- ------------ -----------
Amortizable intangible assets:
Non-compete agreements .......................... $ 2,750 $ (505) $ 2,245
Trademarks ...................................... 1,032 (65) 967
Other ........................................... 392 (319) 73
----------- ------------ -----------
Total intangible assets ................... $ 4,174 $ (889) $ 3,285
=========== ============ ===========
Intangible amortization expense included in selling, general and administrative
expenses for the three months ended October 26, 2002 and October 27, 2001 was
$934 and $163, respectively, and $1,640 and $330 for the six months ended
October 26, 2002 and October 27, 2001, respectively.
7
SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Estimated intangible amortization expense for the remainder of fiscal 2003 and
each of the five succeeding fiscal years is estimated to be:
2003 .................................... $1,215
2004 .................................... 2,073
2005 .................................... 1,911
2006 .................................... 1,910
2007 .................................... 1,810
2008 .................................... 1,810
The following information presents changes to goodwill during the period
beginning October 27, 2001 through October 26, 2002:
Balance at Balance at Balance at
October 27, April 27, October 26,
Segment 2001 Acquired Adjustments 2002 Acquired Adjustments 2002
------- ---- -------- ----------- --------- -------- ----------- ----
Traditional ... $ 156,303 $ 747 $ 2,866 $ 159,916 $ 3,513 $ - $ 163,429
Specialty ..... 104,760 127,417 (1,147) 231,030 27,354 725 259,109
--------- -------- ----------- --------- -------- ----------- ----------
Total ....... $ 261,063 $128,164 $ 1,719 $ 390,946 $ 30,867 $ 725 $ 422,538
========= ======== =========== ========= ======== =========== ==========
The adjustments within the Traditional segment for the period October 28, 2001
through April 27, 2002 represent the final allocation of purchase price
associated with the fiscal 2001 acquisition of J.L. Hammett. The Specialty
segment adjustments for that period primarily represent final purchase
accounting adjustments of $(2,188) related to the Global Video acquisition,
final purchase accounting adjustment of $175, related to the Envision
acquisition and opening balance sheet and purchase accounting adjustments
related to Premier Agendas of $452. The balance of the adjustments represents
foreign currency translation.
The Specialty segment adjustments during fiscal 2003 of $725 are primarily
associated with Premier Agendas. Specifically, $447 is for exit costs,
consisting of employee termination and facility closure costs related to the
closure of regional sales offices, which was substantially completed during
fiscal 2003's second quarter. Also, $146 is for closing balance sheet
adjustments and foreign currency translation. In addition, $132 in adjustments
relates to the Premier Science acquisition, with $100 in adjustments
representing additional purchase price resulting from an earn-out provision,
which was earned during fiscal 2003's second quarter and will be paid in the
third quarter, and $32 of final purchase accounting adjustments.
NOTE 6--BUSINESS COMBINATIONS AND PROFORMA RESULTS
On August 14, 2002 the Company acquired ABC School Supply and related
subsidiaries ("ABC") for an aggregate purchase price, which is subject to
adjustment, of $30,735 funded in cash through borrowings under the Company's
credit facility. ABC, a producer and marketer of pre-K through eighth grade
educational products, is headquartered in Duluth, Georgia. The acquisition is
expected to create synergies with our Childcraft and newly-created Key Accounts
Division. The preliminary purchase price allocation, which is subject to change,
resulted in goodwill of approximately $30,554, which is not expected to be
deductible for tax purposes. The results of this acquisition and the related
goodwill have been included in both the Traditional and Specialty segment
results since the date of acquisition.
8
SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
During fiscal 2003's second quarter, the Company made the decision to close
ABC's manufacturing facility in Lineville, Alabama, to close ABC's distribution
center in Duluth, Georgia, and to consolidate various administrative functions
with the Childcraft division. Under this plan, which is expected to be completed
during fiscal 2003, approximately 150 employees will be terminated. In
accordance with this plan, the Company has recorded $949 in reserves for
severance and termination costs and $1,519 in reserves for facility closure and
consolidation costs. In addition, the Company continues to evaluate additional
synergies and/or exit activities, which are expected to require additional
purchase accounting adjustments and reserves.
The Company engaged a third-party to perform a valuation of the intangible
assets, which was preliminary as of the balance sheet date and is expected to be
finalized during fiscal 2003's third quarter. Details of ABC's acquired
intangible assets, based on the preliminary valuation, are as follows:
Allocated Amortization
Acquired Intangibles Value Life
-------------------- ----- ----
Customer relationships $3,800 13.5 years
Tradenames ....................... 910 6 years
Order backlog .................... 87 6 months
------ -----------
Total acquired intangibles .... $4,797 11.8 years
====== ===========
On August 30, 2002, the Company acquired the remaining wholesale operations of
J.L. Hammett ("Hammett") for an aggregate purchase price, which is subject to
change, of $11,868, funded in cash through borrowings under the Company's credit
facility. The business operated from Braintree, Massachusetts, and Romulus, New
York, primarily marketed pre-K through twelfth grade educational products to
charter schools and national child care centers. The acquisition is expected to
create synergies with our key accounts division. The preliminary purchase price
allocation, which is subject to change, resulted in goodwill of $313, which is
expected to be fully deductible for tax purposes, and intangible assets,
consisting primarily of non-compete agreements. The results of this acquisition
and the related goodwill have been included in the Traditional segment results
since the date of acquisition.
The following information presents the unaudited pro forma results of operations
of the Company for the three and six months ended October 26, 2002 and October
27, 2001, and includes the Company's consolidated results of operations and the
results of the companies acquired during fiscal 2003 and fiscal 2002 as if all
such acquisitions had been made at the beginning of fiscal 2002, with the
exception of the historical results from the Bradburn and Premier Science
acquisitions, which have been excluded as they are immaterial. The results
presented below include certain pro forma adjustments to reflect the
amortization of certain amortizable intangible assets, adjustments to interest
expense, and the inclusion of an income tax provision on all earnings.
Three Months Ended Six Months Ended
------------------------- --------------------------
October 26, October 27, October 26, October 27,
2002 2001 2002 2001
---- ---- ---- ----
Revenues ............... $325,729 $342,797 $641,420 $656,092
Net Income 29,468 27,785 53,290 50,271
Net income per share:
Basic ................ $ 1.61 $ 1.55 $ 2.92 $ 2.82
Diluted .............. $ 1.32 $ 1.25 $ 2.40 $ 2.47
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of fiscal 2002 or the
results that may occur in the future.
9
SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 7--SEGMENT INFORMATION
The Company's business activities are organized around two principal business
segments, Traditional and Specialty and operate principally in the United
States, with limited Specialty segment operations in Canada. Both internal and
external reporting conform to this organizational structure, with no significant
differences in accounting policies applied. The Company evaluates the
performance of its segments and allocates resources to them based on revenue
growth and profitability. While the segments serve a similar customer base,
notable differences exist in products, selling and marketing approaches, gross
margin, operating expenses and revenue growth rates. Products supplied within
the Traditional segment include consumables (consisting of classroom supplies,
instructional materials, educational games, art supplies and school forms),
school furniture and indoor and outdoor equipment. Products supplied within the
Specialty segment target specific educational disciplines, such as art,
industrial arts, physical education, sciences and early childhood. This segment
also supplies student academic planners. All intercompany transactions have been
eliminated.
The following table presents segment information:
Three Months Ended Six Months Ended
-------------------------- -------------------------
October 26, October 27, October 26, October 27,
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Traditional ................................... $ 174,498 $ 179,228 $ 336,705 $ 344,919
Specialty ..................................... 142,901 90,428 278,721 184,899
----------- ----------- ----------- -----------
Total ....................................... $ 317,399 $ 269,656 $ 615,426 $ 529,818
=========== =========== =========== ===========
Operating income and income before taxes:
Traditional ................................... $ 25,145 $ 26,308 $ 44,673 $ 46,845
Specialty ..................................... 32,930 14,486 64,309 31,297
----------- ----------- ----------- -----------
Total ....................................... 58,075 40,794 108,982 78,142
Corporate expenses ............................ 4,368 4,186 10,337 9,064
----------- ----------- ----------- -----------
Operating income ............................ 53,707 36,608 98,645 69,078
Interest expense and other .................... 5,284 4,670 10,263 9,729
----------- ----------- ----------- -----------
Income before taxes ......................... $ 48,423 $ 31,938 $ 88,382 $ 59,349
=========== =========== =========== ===========
Identifiable assets (at quarter end):
Traditional ................................... $ 235,198 $ 231,345
Specialty ..................................... 367,369 160,507
----------- -----------
Total ....................................... 602,567 391,852
Corporate assets .............................. 196,114 182,254
----------- -----------
Total ....................................... $ 798,681 $ 574,106
=========== ===========
Depreciation and intangible asset amortization:
Traditional ................................... $ 999 $ 986 $ 1,990 $ 1,963
Specialty ..................................... 2,020 753 3,697 1,508
----------- ----------- ----------- -----------
Total ....................................... 3,019 1,739 5,687 3,471
Corporate ..................................... 1,021 793 1,980 1,565
----------- ----------- ----------- -----------
Total ....................................... $ 4,040 $ 2,532 $ 7,667 $ 5,036
=========== =========== =========== ===========
Expenditures for property and equipment:
Traditional ................................... $ 311 $ 688 $ 610 $ 1,266
Specialty ..................................... 626 461 1,786 1,032
----------- ----------- ----------- -----------
Total ....................................... 937 1,149 2,396 2,298
Corporate ..................................... 839 350 2,804 1,507
----------- ----------- ----------- -----------
Total ....................................... $ 1,776 $ 1,499 $ 5,200 $ 3,805
=========== =========== =========== ===========
10
SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 8-- RESTRUCTURING COSTS
During the fourth quarter of fiscal 2001, the Company recorded a restructuring
charge of $4,500 to close redundant facilities and for related severance costs,
which is discussed in the fiscal 2001 and fiscal 2002 Form 10-K's. The Company
terminated 76 employees under this plan. No employees were terminated under this
plan during the six months ended October 26, 2002.
Selected information related to the restructuring reserve follows:
Facility
Severance and Closure and
Terminations Consolidation Other Costs Total
------------ ------------- ----------- --------
April 28, 2001 liability balance $ 800 $ 1,694 $ 19 $ 2,513
First quarter, fiscal 2002
Utilizations ............................... (337) (291) (19) (647)
Second quarter, fiscal 2002
Utilizations ............................... (140) (198) - (338)
Third quarter, fiscal 2002
Utilizations ............................... (227) (339) - (566)
Fourth quarter, fiscal 2002
Utilizations and adjustments ............... 64 (163) - (99)
------------ ------------ ----------- --------
April 27, 2002 liability balance 160 703 - 863
First quarter, fiscal 2003
Utilizations ............................... (35) (76) - (111)
Second quarter, fiscal 2003
Utilizations ............................... (28) (50) - (78)
------------ ------------ ----------- --------
October 26, 2002 liability balance .............. $ 97 $ 577 $ - $ 674
============ ============ =========== ========
NOTE 9--ASSETS HELD FOR SALE
During the second quarter of fiscal 2003, the Company made the decision to close
and market for sale the acquired ABC manufacturing facility in Lineville,
Alabama. This decision was part of a plan to consolidate manufacturing
operations to improve efficiency, reduce overall operating costs and to create
synergies with existing operations. $425 has been recorded in assets held for
sale related to this facility. Subsequent to October 26, 2002, the Company
entered into an agreement to sell the assets held for sale related to the
Lineville, Alabama facility for approximately $485. The transaction is expected
to close in fiscal 2003's third quarter. The balance in assets held for sale of
$1,350 relates to our Lufkin, Texas facility.
NOTE 10--RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's consolidated fiscal 2001 financial
statements, the Company determined that two sale-leaseback transactions which
occurred in November 2000 were improperly accounted for. The Company initially
accounted for the transactions as operating leases under sale-leaseback
accounting. The leases contain a specific technical default provision within the
agreements that could, under remote circumstances, allow for continuing
ownership involvement by the Company in the two properties. Due to this specific
default provision within the leases, the Company should have accounted for the
transactions as financings as opposed to sales and subsequent operating leases.
The following table summarizes the impact of this restatement on the Company's
previously filed fiscal 2002 second quarter Form 10-Q's unaudited quarterly
financial results:
11
SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
At October 27, 2001: As Reported As Restated
----------- -----------
Property and equipment ........................................................... $ 43,315 $ 59,383
Other assets ..................................................................... 12,818 13,533
Current maturities - long-term debt .............................................. 23,062 23,335
Other accrued liabilities ........................................................ 15,520 14,837
Long-term debt ................................................................... 154,934 172,808
Retained earnings ................................................................ 76,944 76,536
Three Months Ended Six Months Ended
-------------------------- ---------------------------
For the period ending October 27, 2001: As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
Selling, general and administrative expenses ....... $63,477 $63,226 $131,551 $131,050
Operating income ................................... 36,357 36,608 68,577 69,078
Interest expense ................................... 4,156 4,573 7,961 8,796
Income before provision for income taxes ........... 32,104 31,938 59,683 59,349
Provision for income taxes ......................... 12,843 12,776 23,875 23,741
Net income ......................................... 19,261 19,162 35,808 35,608
Basic EPS .......................................... $ 1.08 $ 1.07 $ 2.01 $ 2.00
Diluted EPS ........................................ $ 0.89 $ 0.88 $ 1.78 $ 1.77
As reported amounts reflect reclassifications made to conform with the current
year presentation.
12
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A")
Our financial statements for the three and six months ended October 27, 2001
have been restated. See Note 10 "Restatement of Financial Statements" note in
our notes to condensed consolidated financial statements. The following MD&A
gives effect to the restatement.
Results of Operations
The following table sets forth various items as a percentage of revenues on a
historical basis.
Three Months Ended Six Months Ended
---------------------------------- --------------------------------
October 26, October 27, October 26, October 27,
2002 2001 2002 2001
---- ---- ---- ----
Revenues .............................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues ...................................... 59.1 63.0 58.7 62.2
------ ------ ------ ------
Gross profit ....................................... 40.9 37.0 41.3 37.8
Selling, general and administrative expenses .......... 24.0 23.4 25.3 24.8
------ ------ ------ ------
Operating income .................................. 16.9 13.6 16.0 13.0
Interest expense, net ................................. 1.5 1.7 1.5 1.6
Other ................................................. 0.2 0.1 0.1 0.2
------ ------ ------- -------
Income before provision for income taxes .............. 15.2 11.8 14.4 11.2
Provision for income taxes ............................ 6.1 4.7 5.8 4.5
------ ------ ------- -------
Net income ............................................ 9.1% 7.1% 8.6% 6.7%
====== ====== ======= =======
Three Months Ended October 26, 2002 Compared to Three Months Ended October 27,
2001
Revenues
Revenues increased 17.7% from $269.7 million to $317.4 million. The increase in
revenues was primarily due to acquisitions, which occurred primarily in the
Specialty segment, partially offset by a slight decline in existing businesses.
Specialty segment revenues increased 58.0% from $90.4 million to $142.9 million,
primarily driven by acquired revenues from Premier Agendas and ABC. Traditional
segment revenues decreased 2.6% from $179.2 million to $174.5 million. The
decrease in Traditional segment revenues was primarily noted in the consumables
line, reflecting softness in the economy and related state funding concerns,
partially offset by acquired revenues.
Gross Profit
Gross profit increased 30.1% from $99.8 million to $129.9 million, reflecting
gross margins of 37.0% and 40.9%, respectively. Increase in gross profit was due
to increased revenues and a shift in revenue mix to higher margin Specialty
businesses, driven primarily by acquisitions.
Gross margin expansion of 390 basis points was driven by a shift in revenue mix
and gross margin enhancement in both segments. Specialty segment gross margins
grew from 44.4% to 50.0%, driven primarily by high margin acquired businesses.
Traditional segment gross margins grew from 33.3% to 33.5%, driven primarily by
gross margin improvement in the consumables line, driven by reduced product
costs, partially offset by product mix.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") include selling expenses
(the most significant component of which is sales wages and commissions),
operations expenses (which includes customer service, warehouse and warehouse
shipment transportation costs), catalog costs, general administrative overhead
(which includes information systems, accounting, legal, and human resources) and
depreciation and intangible asset amortization expense.
13
SG&A increased $13.0 million, or 20.5%, from $63.2 million or 23.5% of revenues
to $76.2 million or 24.0% of revenues. The increase in SG&A was primarily due to
increased revenues. The increase in SG&A as a percent of revenues was due to an
increase in revenue mix from the Specialty segment, which generally has higher
SG&A as a percent of revenues than the Traditional segment. Specialty segment
SG&A increased 50.4% from $25.6 million or 28.4% of revenues to $38.6 million,
or 27.0% of revenues. The increase in SG&A was primarily do to an increase in
revenues and redundancies created by operations acquired during fiscal 2003's
second quarter, which will be integrated during the balance of the fiscal year.
The reduction in Specialty segment SG&A as a percent of revenues was driven
primarily by the Premier Agendas acquisition, which was acquired in December
2001 and has lower operating expenses as a percentage of revenues than most of
the other Specialty businesses and a non-recurring charge that occurred in
fiscal 2002 related to closing the Birmingham, Alabama distribution center.
Traditional segment SG&A decreased $0.1 million from $33.4 million or 18.6% of
revenues to $33.3 million or 19.1% of revenues, driven primarily by a decrease
in revenues.
Interest Expense
Net interest expense increased $0.1 million from $4.6 million or 1.7% of
revenues to $4.7 million or 1.5% of revenues. The increase in interest expense
was due to an increase in debt outstanding, primarily driven by increased debt
levels to fund acquired businesses, partially offset by a reduction in our
effective borrowing rate and an increase in the average amount advanced during
the quarter in securitized receivables.
Other Expense
Other expense increased $0.4 million to $0.6 million in fiscal 2003's second
quarter. Other expense in fiscal 2003's and fiscal 2002's second quarter
included the discount and loss on the accounts receivable securitization of $0.6
million and $0.4 million, respectively. The increase in the discount and loss on
the accounts receivable securitization was due to an increase in the average
accounts receivable securitized from $50.0 million during fiscal 2002's second
quarter to $98.1 million during fiscal 2003's second quarter. Other expense in
fiscal 2002 included a $0.3 million realized gain on the sale of
available-for-sale securities.
Provision for Income Taxes
Provision for income taxes increased 51.8% or $6.6 million reflecting income tax
rates of 40.0% for each period. The higher effective tax rate, as compared to
the federal statutory rate of 35%, was primarily due to state, local and foreign
income taxes.
Six Months Ended October 26, 2002 Compared to the Six Months Ended October 27,
2001
Revenues
Revenues increased $85.6 million or 16.2% from $529.8 million to $615.4 million.
The increase in revenues was primarily due to acquisitions and growth in
existing Specialty segment businesses, partially offset by a decline in
Traditional segment revenues. Specialty segment revenues increased $93.8 million
or 50.7% from $184.9 million to $278.7 million, driven primarily by the
acquisitions of Premier Agendas and ABC and internal growth in certain Specialty
businesses. Traditional segment revenues declined 2.4% or $8.2 million from
$344.9 million to $336.7 million, reflecting softness in the economy and related
state funding concerns.
Gross Profit
Gross profit increased $54.3 million or 27.1% from $200.1 million to $254.4
million. The increase was due to an increase in revenues and gross margin
expansion. Gross margin grew 350 basis points from 37.8% to 41.3%, driven by
revenue mix, with an increase in revenues from the higher margin Specialty
segment and overall gross margin expansion in both segments. Specialty segment
gross margin grew 480 basis points from 45.3% to 50.1%, driven by strong gross
margins from acquired businesses and margin expansion in the ClassroomDirect
business, resulting primarily from reduced price discounting. Traditional
segment gross margin expanded 40 basis points from 33.7% to 34.1%, driven by
expansion of gross margin in the consumables line, primarily driven by reduced
product cost and product mix.
14
SG&A
SG&A increased $24.7 million or 18.9% from $131.1 million or 24.7% of revenues
to $155.8 million or 25.3% of revenues. The increase in SG&A and SG&A as a
percent of revenues was primarily due to an increase in revenues and a shift in
revenue mix to increased Specialty segment revenues, which generally has higher
operating costs primarily due to increased marketing costs, than the Traditional
segment.
Specialty segment SG&A increased $22.9 million, or 8.2% from $52.5 million, or
28.4% of revenues to $75.4 million or 27.0% of revenues. The increase in
Specialty segment SG&A was primarily due to an increase in revenues and
redundancies created with operations acquired during fiscal 2003's second
quarter, which will be integrated into existing operations during the balance of
fiscal 2003. The decrease in SG&A as a percent of revenues was primarily due to
Premier Agendas, which has lower SG&A as a percent of revenues than most of our
Specialty businesses. Traditional segment SG&A increased $0.5 million from $69.5
million, or 20.1% of revenues to $70.0 million or 20.8% of revenues. The
increase in SG&A was primarily due to costs associated with closing our Lufkin,
Texas facility, which supported the Traditional segment, of approximately $1.3
million.
Interest Expense
Net interest expense increased 5.3% or $0.5 million from $8.8 million to $9.2
million. The increase in net interest expense was due to an increase in average
debt outstanding, partially offset by a reduction in interest rates.
Other Expense
Other expense increased $0.1 million from $0.9 million to $1.0 million for the
six months ended October 26, 2002. Other expenses for the six months ended
October 26, 2002 primarily represented the discount and loss on securitized
accounts receivable of $1.0 million. Discount and loss on securitized accounts
receivable for the six months ended October 27, 2001 was $1.2 million. The
decrease in the discount and loss was primarily due to a reduction in the
discount rate partially offset by an increase in the average securitized
accounts receivable. Other expenses for the six months ended October 27, 2001
included a $0.3 million realized gain on the sale of available-for-sale
securities.
Provision for Income Taxes
Provision for income taxes increased 49.1% or $11.7 million, reflecting income
tax rates of 40.0% for each period. The higher effective tax rate, compared to
the federal statutory rate of 35%, was primarily due to state, local and foreign
income taxes.
Liquidity and Capital Resources
At October 26, 2002, we had a working capital deficit of $12.5 million, due to
the classification of debt outstanding under our credit facility of $156.9
million as short-term. The credit facility matures in September of 2003. We
expect to refinance a large portion of our outstanding debt under the credit
facility as long-term. Our capitalization at October 26, 2002 was $656.7 million
and consisted of total debt of $324.9 million and shareholders' equity of $331.8
million.
We currently have a five-year secured $250 million revolving loan credit
facility with Bank of America, N.A. The credit facility matures on September 30,
2003. The amount outstanding as of October 26, 2002 was $156.9 million. The
credit facility is secured by substantially all of our assets and contains
certain financial and other covenants. Borrowings under the credit facility are
usually significantly higher during the first two quarters of our fiscal year to
meet the working capital needs of our peak selling season. At October 26, 2002,
our effective interest rate on borrowings under our credit facility was
approximately 5.2%, including amortization of loan origination costs and
commitment fees.
We currently have a $100 million accounts receivable securitization facility
which expires in November 2003 (facility was amended during November 2002 to
extend expiration to November 2003) and may be extended further with the
financial institution's consent. At October 26, 2002, $50 million was advanced
under the receivable
15
securitization and accordingly, that amount of accounts receivable has been
removed from our consolidated balance sheet. Costs associated with the sale of
receivables, primarily related to the discount and loss on sale, were $1.0
million and are included in other expenses in our condensed consolidated
statement of operations.
During the six months ended October 26, 2002, cash flow from operations was
$19.6 million, driven by net income of $53.0 million, partially offset by a use
of working capital. The use of working capital is reflective of the seasonality
of our business, with heavy shipments during the first and second fiscal
quarters, and cash collections during the second and third fiscal quarters.
Net cash used in investing activities was $51.4 million. $46.3 million was
related to acquisitions (ABC, Hammett and a $4.0 million note repayment to the
former owners of Premier Agendas). $5.2 million was used for capital
expenditures, primarily consisting of computer hardware and software and
distribution and manufacturing equipment. These uses of cash were financed with
cash from operations and borrowings under our credit facility.
During the six months ended October 27, 2001, net cash provided by operating
activities was $7.7 million. Net cash used in investing activities was $3.7
million, including $7.9 million for acquisitions and purchase price adjustments
and $3.8 million for capital expenditures. These uses were partially offset by
proceeds of $5.2 from the sale of available-for-sale securities and $1.7 million
in proceeds from a business disposition and sale of property and equipment. Net
cash used in financing activities was $2.0 million. Net proceeds from our
convertible debt offering of approximately $144.7 million were used to repay the
debt outstanding on our credit facility.
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 anticipated capital
expenditures and our contractual obligations. We have initiated the process of
negotiating a new credit facility, which is anticipated to be completed near the
end of fiscal 2003.
Fluctuations in Quarterly Results of Operations
Our business is subject to seasonal influences. Our historical revenues and
profitability have been dramatically higher in the first two quarters of our
fiscal year primarily due to increased shipments to customers coinciding with
the start of each school year. Quarterly results also may be materially affected
by the timing of acquisitions, the timing and magnitude of costs related to such
acquisitions, variations in our costs for the products we sold, the mix of
products sold and general economic conditions. Moreover, the operating margins
of companies we acquire may differ substantially from our own, which could
contribute to further fluctuation in our quarterly operating results. Therefore,
results for any quarter are not indicative of the results that we may achieve
for any subsequent fiscal quarter or for a full fiscal year.
Inflation
Inflation has and is expected to have only a minor effect on our results of
operations and our internal and external sources of liquidity.
Forward-Looking Statements
Statements in this report which are not historical are "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995. The forward-looking statements include: (1) statements made under Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, including, without limitation, statements with respect to internal
growth plans, projected revenues, margin improvement, future acquisitions,
capital expenditures and adequacy of capital resources; (2) statements included
or incorporated by reference in our future filings with the Securities and
Exchange Commission; and (3) information contained in written material, releases
and oral statements issued by, or on behalf of School Specialty including,
without limitation, statements with respect to projected revenues, costs,
earnings and earnings per share. Forward-looking statements also include
statements regarding the intent, belief or current expectation of School
Specialty or its officers. Forward-looking statements include statements
preceded by, followed by or that include forward-looking terminology such as
"may," "will," "should," "believes," "expects," "anticipates," "estimates,"
"continues" or similar expressions.
16
All forward-looking statements included in this report are based on information
available to us as of the date hereof. We do not undertake to update any
forward-looking statements that may be made by or on behalf of us, in this
report or otherwise. Our actual results may differ materially from those
contained in the forward-looking statements identified above. Factors which may
cause such a difference to occur include, but are not limited to the factors
identified in Exhibit 99.2 to our Form 10-K for the fiscal year ended April 27,
2002.
ITEM 3. Quantitative And Qualitative Disclosures About Market Risk
There have been no changes in quantitative and qualitative disclosures about
market risk from what was reported in our Annual Report on Form 10-K for the
fiscal year ended April 27, 2002.
ITEM 4. Controls and Procedures
We have conducted an evaluation of the effectiveness of our disclosure controls
and procedures pursuant to Rule 13a-14 of the Securities and Exchange Act of
1934. Based on that evaluation, both the Chief Executive Officer and the Chief
Financial Officer have concluded that the disclosure controls and procedures are
effective in ensuring that all material information required to be filed in the
quarterly report has been made known to them in a timely manner. There have not
been any significant changes in internal controls, or in other factors that
could significantly affect internal controls and there were no corrective
actions with regard to significant deficiencies or material weaknesses,
subsequent to the date the above officers completed their evaluation.
17
PART II - OTHER INFORMATION
- ---------------------------
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) On August 27, 2002, we held our Annual Meeting of Shareholders.
(b) Not applicable.
(c) The Annual Meeting of Shareholders was held to:
(1) Elect two directors to serve until the 2005 Annual Meeting of
Shareholders as Class I directors;
(2) Approve School Specialty's 2002 Stock Incentive Plan;
(3) Ratify the appointment of Deloitte & Touche LLP as School
Specialty's independent auditors for fiscal 2003.
The results of these proposals, which were voted upon at the Annual
Meeting, are as follows:
(1) Election of Class I Directors
-----------------------------
For Withheld
--- --------
(1) Jonathan J. Ledecky 17,200,348 149,432
(2) Jerome M. Pool 17,202,104 147,676
(2) Approval of School Specialty's 2002 Stock Incentive Plan
--------------------------------------------------------
For Against Abstain
--- ------- -------
9,726,793 7,611,283 11,704
(3) Ratification of Independent Auditors
------------------------------------
For Against Abstain
--- ------- -------
Deloitte & Touche LLP 16,486,652 852,663 10,465
(d) Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
See the Exhibit Index, which is incorporated herein by reference.
(b) The Company filed one report on Form 8-K during the quarter covered by
this report as follows:
(1) Form 8-K dated September 3, 2002, filed on September 6, 2002 under
Item 5. The Company announced the appointment of David J. Vander
Zanden as President and Chief Executive Officer and Leo C. McKenna
as Chairman of the Board of Directors for School Specialty.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCHOOL SPECIALTY, INC.
(Registrant)
12/3/2002 /s/ David J. Vander Zanden
--------- -------------------------------------------------
Date David J. Vander Zanden
President and Chief Executive Officer
(Principal Executive Officer)
12/3/2002 /s/ Mary M. Kabacinski
--------- -------------------------------------------------
Date Mary M. Kabacinski
Executive Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
19
CERTIFICATION
I, David J. Vander Zanden, President and Chief Executive Officer of School
Specialty, certify that:
1. I have reviewed this quarterly report on Form 10-Q of School Specialty,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 3, 2002
/s/ David J. Vander Zanden
-------------------------------------
David J. Vander Zanden
President and Chief Executive Officer
20
CERTIFICATION
I, Mary M. Kabacinski, Executive Vice President and Chief Financial Officer of
School Specialty, certify that:
1. I have reviewed this quarterly report on Form 10-Q of School Specialty,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 3, 2002
/s/ Mary M. Kabacinski
----------------------------------
Mary M. Kabacinski
Executive Vice President and Chief
Financial Officer
21
INDEX TO EXHIBITS
Exhibit No. Description
10.1 Employment Agreement dated November 5, 2002, effective September 1,
2002, by and between School Specialty, Inc. and David J. Vander
Zanden.
10.2 Employment Agreement dated November 5, 2002 by and between School
Specialty, Inc. and Stephen R. Christiansen.
10.3 Employment Agreement Amendment dated September 11, 2002, effective
June 1, 2002, by and between School Specialty, Inc. and A. Brent
Pulispher.
10.4 Amendment No. 5 to the Receivables Purchase Agreement dated
November 19, 2002.
12.1 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges.
99.1 School Specialty, Inc.'s Certification of Periodic Report by the
Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 School Specialty, Inc.'s Certification of Periodic Report by the
Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
22