UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED JULY 25, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM ____________ TO
_______________
Commission File Number: 000-24385
SCHOOL SPECIALTY, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 39-0971239
(State or Other (IRS Employer
Jurisdiction of Incorporation) Identification No.)
1000 North Bluemound Drive
Appleton, Wisconsin
(Address of Principal Executive Offices)
54914
(Zip Code)
(920) 734-2756
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of
the issuer's classes of common stock, as of the latest
practicable date.
Outstanding at
Class August 31, 1998
Common Stock, $0.001 par value 14,572,784
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SCHOOL SPECIALTY, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JULY 25, 1998
PART I - FINANCIAL INFORMATION
Page
Number
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at July 25, 1998
(Unaudited) and April 25, 1998 1
Unaudited Consolidated Statements of Income for
the Three Months Ended July 25, 1998 and
July 26, 1997 2
Unaudited Consolidated Statements of Cash Flows
for the Three Months Ended July 25, 1998 and
July 26, 1997 3
Notes to Unaudited Consolidated Financial
Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 12
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SCHOOL SPECIALTY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
July 25, April
25,
1998 1998
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ - $ -
Accounts receivable, less allowance for 92,632 38,719
doubtful accounts of $754 and $716,
respectively
Inventories 56,092 49,306
Prepaid expenses and other current assets 12,435 13,504
Total current assets 161,159 101,529
Property and equipment, net 23,316 22,553
Intangible assets, net 112,450 99,613
Other assets 109 34
Total assets $297,034 $223,729
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 244 $ 11
Short-term payable to U.S. Office Products - 20,277
Accounts payable 42,636 23,788
Accrued compensation 4,772 4,458
Other accrued liabilities 15,327 5,204
Total current liabilities 62,979 53,738
Long-term debt 287 315
Long-term payable to U.S. Office Products - 62,699
Long-term debt to bank 77,600 -
Deferred income taxes 512 511
Total liabilities 141,378 117,263
Stockholders' equity:
Common stock, $0.001 par value per share,
151,000,000 shares authorized and 14,572,784
shares issued and outstanding 15 -
Capital paid in excess of par value 147,495 -
Divisional equity - 104,883
Accumulated other comprehensive income 4 3
Retained earnings 8,142 1,580
Total stockholders' equity 155,656 106,466
Total liabilities and stockholders'
equity $297,034 $223,729
See accompanying notes to consolidated financial statements.
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(In thousands, except per share amounts)
For the Three
Months
Ended
July July
25, 26,
1998 1997
Revenues $126,657 $87,029
Cost of revenues 82,615 56,692
Gross profit 44,042 30,337
Selling, general and administrative 29,642 18,465
expenses
Non-recurring charges 1,074 -
Operating income 13,326 11,872
Other income (expense):
Interest expense (1,177) (1,315)
Interest income 4 -
Income before provision for income 12,153 10,557
taxes
Provision for income taxes 5,590 4,753
Net income $ 6,563 $ 5,804
Weighted average shares outstanding:
Basic 14,728 11,809
Diluted 14,848 12,013
Net income per share:
Basic $ 0.45 $ 0.49
Diluted $ 0.44 $ 0.48
See accompanying notes to consolidated financial statements.
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
For the Three
Months Ended
July July
25, 26,
1998 1997
Cash flows from operating activities:
Net income $6,563 $5,804
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization expense 1,428 818
Non-recurring charges 1,074 -
Change in current assets and liabilities (net
of assets acquired and liabilities assumed in
business combinations accounted for under the
purchase method):
Accounts receivable (52,917) (39,307)
Inventory (3,405) (1,156)
Prepaid expenses and other current assets 1,273 (1,642)
Accounts payable 18,967 10,201
Accrued liabilities 10,214 6,289
Net cash used in operating activities (16,803) (18,993)
Cash flows from investing activities:
Cash paid in acquisitions, net of cash
received (16,895) (63,740)
Additions to property and equipment (902) (3,587)
Other 527 98
Net cash used in investing activities (17,270) (67,229)
Cash flows from financing activities:
Proceeds from (payments of) short-term debt, (20,277) -
net
Advances from (payments to) U.S. Office (62,699) (14,171)
Products
Capital contribution by U.S. Office Products 8,829 71,951
Proceeds from issuance of common stock 32,735 -
Proceeds from issuance of long-term debt 77,600 -
Capitalized loan fees (2,104) -
Net cash from financing activities 34,084 86,122
Net increase (decrease) in cash and cash - -
equivalents
Cash and cash equivalents, beginning of period - -
Cash and cash equivalents, end of period $ - $ -
Supplemental disclosures of cash flow
information:
Interest paid $ 530 $ -
See accompanying notes to consolidated financial statements.
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(unaudited)
(In thousands)
The Company issued common stock and cash in connection
with certain business combinations accounted for under
the purchase method in the three months ended July 25,
1998 and July 26, 1997. The fair values of the assets
and liabilities of the acquired companies at the dates
of the acquisitions are presented as follows:
For the Three
Months Ended
July 25, July 26,
1998 1997
Accounts receivable $ 996 $ 9,427
Inventories 3,381 14,913
Prepaid expenses and other current 302 2,180
assets
Property and equipment 596 3,368
Intangible assets 11,301 48,036
Other assets 520 210
Short-term debt - -
Accounts payable (201) (7,237)
Accrued liabilities - (3,591)
Long-term debt - -
Net assets acquired $16,895 $67,306
Acquisitions were funded as follows:
United States Office Products common $ - $ 3,566
stock
Cash 16,895 63,740
Total $16,895 $67,306
See accompanying notes to consolidated financial statements.
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(In thousands, except per share amounts)
NOTE 1-BASIS OF PRESENTATION
The accompanying unaudited condensed financial
statements have been prepared in accordance with
generally accepted accounting principles for interim
financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and
footnotes required by generally accepted accounting
principles for complete financial statements. In the
opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a
fair presentation have been included. The Balance
Sheet at April 25, 1998 has been derived from the
Company's audited financial statements for the fiscal
year ended April 25, 1998. For further information,
refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K
for the year ended April 25, 1998.
NOTE 2-STOCKHOLDERS' EQUITY
Changes in stockholders' equity during the three months
ended July 25, 1998 were as follows:
Stockholders' equity balance at April 25, 1998 $106,466
Shares distributed in public offering 32,735
Contribution by U.S. Office Products 9,891
Cumulative translation adjustments 1
Net income 6,563
Stockholders' equity balance at July 25, 1998 $155,656
On June 10, 1998, U.S. Office Products distributed to
its shareholders one share of School Specialty common
stock for every 9 shares of U.S. Office Products common
stock held by each respective shareholder. The share
data reflected in the accompanying financial statements
represents the historical share data for U.S. Office
Products for the period or as of the date indicated,
and retroactively adjusted to give effect to the one
for nine distribution ratio and includes shares issued
in the public offering during the three months ended
July 25, 1998.
NOTE 3-EARNINGS PER SHARE
In fiscal 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share." SFAS No. 128 simplifies the
standards required under current accounting rules for
computing earnings per share and replaces the
presentation of primary earnings per share and fully
diluted earnings per share with a presentation of basic
earnings per share ("basic EPS") and diluted earnings
per share ("diluted EPS").
<PAGE>
The following information presents the Company's
computations of basic and diluted EPS for the periods
presented in the consolidated statement of income:
Income Shares Per Share
(Numerator) (Denominator) Amount
Three months ended July 25, 1998:
Basic EPS $6,563 14,728 $ 0.45
Effect of dilutive employee stock
options - 120 $(0.01)
Diluted EPS $6,563 14,848 $ 0.44
Three months ended July 26, 1997:
Basic EPS $5,804 11,809 $ 0.49
Effect of dilutive employee stock
options - 204 $(0.01)
Diluted EPS $5,804 12,013 $ 0.48
The Company had additional employee stock options
outstanding during the periods presented that were not
included in the computation of diluted EPS because they
were anti-dilutive.
NOTE 4-ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board
issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for the reporting
and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of
general purpose financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15,
1997. The Company's other comprehensive income for the
period ended July 25, 1998 is $1 and $4, on a
cumulative basis. The Company's comprehensive income
is comprised solely of translation adjustments.
NOTE 5-CREDIT FACILITY
On June 9, 1998, the Company entered into a secured
$250,000 revolving credit facility with NationsBank,
N.A. as administrative agent. The credit facility will
terminate five years from inception. Interest on
borrowings under the credit facility will accrue at a
rate of, at the Company's option, either LIBOR plus
1.00% or the lender's base rate, plus a margin of 0% to
.25% for up to the first 6 months under the agreement.
Thereafter, interest will accrue at a rate of (i) LIBOR
plus a range of .625% to 2.000%, or (ii) the lender's
base rate plus a range of .125% to .250% (depending on
the Company's leverage ratio of funded debt to EBITDA).
Indebtedness will be secured by substantially all of
the assets of the Company. The credit facility is
subject to terms and conditions typical of facilities
of such size and includes certain financial covenants.
The Company borrowed under the credit facility to repay
the U.S. Office Products' debt which it was obligated
to repay as part of its spin-off from U.S. Office Products
on June 10, 1998. The balance of the credit facility will
be available for working capital, capital expenditures
and acquisitions, subject to compliance with financial
covenants. The amount outstanding as of July 25, 1998
under the credit facility was $77,600.
NOTE 6-BUSINESS COMBINATIONS
During the fiscal period ended April 25, 1998, the
Company completed 8 business combinations which were
accounted for under the purchase method.
In the first quarter of fiscal 1999, the Company made a
significant acquisition accounted for under the
purchase method of accounting for an aggregate cash
purchase price of $16,850. The total assets related to
this acquisition were $17,275 including goodwill of
$12,160 which will be amortized over 40 years. The
results of this acquisition have been included in the
Company's results from its respective date of
acquisition.
The following presents the unaudited pro forma results
of operations of the Company for the quarters ending
July 25, 1998 and July 26, 1997 and includes the
Company's consolidated financial statements, which give
retroactive effect to the acquisitions as if all such
purchase acquisitions had been made at the beginning of
fiscal 1998. The results presented
<PAGE>
below include
certain pro forma adjustments to reflect the
amortization of intangible assets, adjustments to
interest expense, adjustments to depreciation,
adjustments in executive compensation and the inclusion
of a federal income tax provision on all earnings:
For the Quarter
Ended
July July
25, 26,
1998 1997
Revenues $129,037 $131,956
Net incom 6,813 7,866
Net income per share:
Basic $ 0.47 $ 0.68
Diluted $ 0.47 $ 0.67
On March 30, 1998, the Company acquired certain assets
of Education Access out of a Federal bankruptcy
proceeding. Accordingly, revenues and net loss for
Education Access included in the above pro forma
results were $1,900 and ($90), respectively, for the
quarter ended July 25, 1998, compared with revenues and
net income of $9,700 and $469, respectively, for the
quarter ended July 26, 1997. In addition, the Company
incurred a one-time non-recurring charge in the quarter
ended July 25, 1998, consisting of compensation expense
attributed to the U.S. Office Products stock option
tender offer and the sale of shares of stock to certain
executive management of the Company, net of underwriting
discounts. The after tax charge included in net income
for the quarter ended July 25, 1998 is $642.
The unaudited pro forma results of operations are
prepared for companies for comparative purposes only
and do not necessarily reflect the results that would
have occurred had the acquisitions occurred at the
beginning of fiscal 1998 or the results which may occur
in the future.
NOTE 7-SUBSEQUENT EVENTS
Beckley Cardy Acquisition
Subsequent to July 25, 1998, the Company completed an
acquisition of The National School Supply Company
(otherwise known as Beckley-Cardy) that was accounted
for under the purchase method of accounting. The
aggregate consideration paid for this acquisition was
$76,400 in cash plus assumed debt of approximately
$60,000. The timing of this acquisition reflects
additional seasonal working capital borrowings of
approximately $13,000, which is included in the $60,000
debt assumed. The total assets related to this
acquisition were approximately $164,000, including
estimated goodwill of approximately $82,000. This
goodwill is being amortized over a period of 40 years.
The results of this acquisition will be included in the
Company's results from its respective date of
acquisition.
The following presents the unaudited pro forma results
of operations of the Company for the quarters ending
July 25, 1998 and July 26, 1997 and includes the
Company's consolidated financial statements, which give
retroactive effect to the Beckley-Cardy acquisition as
well as the acquisitions referred to in Note 6 above,
as if all such purchase acquisitions had been made at
the beginning of fiscal 1998. The results presented
below include certain pro forma adjustments to reflect
the amortization of intangible assets, adjustments to
interest expense, adjustments in executive compensation
and the inclusion of a federal income tax provision on
all earnings:
<PAGE>
For the Quarter
Ended
July July
25, 26,
1998 1997
Revenues $182,727 $184,778
Net income 8,452 8,859
Net income per share:
Basic $ 0.51 $ 0.62
Diluted $ 0.51 $ 0.61
On March 30, 1998, the Company acquired certain assets
of Education Access out of a Federal bankruptcy
proceeding. Accordingly, revenues and net loss for
Education Access included in the above pro forma
results were $1,900 and ($90), respectively, for the
quarter ended July 25, 1998, compared with revenues and
net income of $9,700 and $469, respectively, for the
quarter ended July 26, 1997. In addition, the Company
incurred a one-time non-recurring charge in the quarter
ended July 25, 1998, consisting of compensation expense
attributed to the U.S. Office Products stock option
tender offer and the sale of shares of stock to certain
executive management of the Company, net of underwriting
discounts. The after tax charge included in net income
for the quarter ended July 25, 1998 is $642.
The unaudited pro forma results of operations are
prepared for companies for comparative purposes only
and do not necessarily reflect the results that would
have occurred had the acquisitions occurred at the
beginning of fiscal 1998 or the results which may occur
in the future.
Term Loan
On August 14, 1998, the Company received a commitment
from NationsBank for an additional $100,000 term loan,
amending and increasing the existing $250,000 credit
facility to a total of $350,000. The amended credit
facility, consisting of a $250,000 senior revolving
credit facility and a $100,000 term loan, was executed
with the bank under essentially the same terms and
conditions as the Company's existing credit facility.
NationsBank is currently syndicating the $350,000
facility with an expected closing date of September 30,
1998. On the syndication closing date, the Company
will transfer $100,000 from the revolving credit
facility to the term loan. The expanded credit
facility will be available for funding future
acquisitions and working capital needs. The term loan
will amortize quarterly over five years under the
following amortization schedule with the first
principal payment due January 30, 1999:
Year 1 $10,000
Year 2 15,000
Year 3 15,000
Year 4 30,000
Year 5 30,000
$100,000
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Three Months Ended July 25, 1998 and July 26, 1997
The following table sets forth various items as a
percentage of revenues on a historical basis.
Three Months
Ended
July 25, July 26,
1998 1997
Revenues 100.0% 100.0%
Cost of revenues 65.2% 65.1%
Gross profit 34.8% 34.9%
Selling, general and 23.4% 21.2%
administrative expenses
Non-recurring charges 0.8% -
Operating income 10.5% 13.6%
Interest expense, net 0.9% 1.5%
Income before provision for income 9.6% 12.1%
taxes
Provision for income taxes 4.4% 5.5%
Net income 5.2% 6.7%
Revenues
Revenues increased 46% from $87.0 million for the three
months ended July 26, 1997 to $126.7 million for the
three months ended July 25, 1998. This increase was
primarily due to the inclusion of revenues from (i) the
one company acquired in a business combination accounted
for under the purchase method during the first quarter of
fiscal 1999 and (ii) the eight companies acquired in
business combinations accounted for under the purchase
method during fiscal 1998. Revenues also increased
due to sales to new accounts, increased sales to existing
customers and higher pricing on certain products in response
to increased product costs. Product costs and inbound freight
are the most significant elements of cost of revenues.
Gross Profit
Gross profit increased 45%, from $30.3 million or 34.9%
of revenues for the three months ended July 26, 1997
to $44.0 million or 34.8% of revenues for the three
months ended July 25, 1998. The decrease in gross
profit as a percentage of revenues was due primarily to
a shift in revenue mix, primarily attributed to (i) the
acquisition of traditional companies in fiscal 1998,
which have a lower gross profit as a percentage of
revenues, and (ii) an increase in lower margin bid
revenues, which offset gross profit generated from the
inclusion of the higher gross margin specialty companies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include
selling expenses (the most significant component of
which is sales wages and commissions), catalog costs,
general administrative overhead (which includes
information systems and customer service), and
accounting, legal, human resources and purchasing
expense. Selling, general and administrative expenses
increased 60.5%, from $18.5 million or 21.2% of revenues
for the three months ended July 26, 1997 to $29.6 million
or 23.4% of revenues for the three months ended July 25,
1998. The increase in selling, general and
<PAGE>
administrative
expenses as a percentage of revenues was primarily due
to (i) the inclusion of the results of the specialty
companies acquired in the first quarter of fiscal 1998,
which typically have higher SG&A expenses as a percentage
of revenue, and (ii) higher depreciation and amortization
expense.
Non-recurring Charges
The Company recorded a compensation charge of $1.1
million, representing (i) non-cash compensation related
to certain employees of School Specialty who tendered
in the U.S. Office Products equity self-tender offer
options that were previously granted by U.S. Office
Products and (ii) the difference between the amount
which certain executive officers of the Company paid
for the 250,000 shares of Common Stock purchased directly
from the Company in connection with the Company's
initial public offering and the amount which they would
have paid for such shares if the purchase price per
share had been the initial public offering price of the
shares offered in the offering. The charge related to
the equity self-tender was incurred solely as a result
of the tender of options into the equity self-tender
and was incurred prior to the spin-off of School Specialty
from U.S. Office Products on June 10, 1998.
Interest Expense
Interest expense, net of interest income, decreased by
$142,000 due to the reduction of debt from the proceeds
of stock issued in the Company's initial public offering.
Provision for Income Taxes
Provision for income taxes for the three months ended
July 26, 1998 increased 17.6 % or $837,000 over the
three months ended July 26, 1997, reflecting a income
tax rate of 46% for both periods. The higher effective
tax rate, compared to the federal statutory rate of
35.0%, is primarily due to state income taxes and non-
deductible goodwill amortization.
Liquidity and Capital Resources
At July 25, 1998, the Company had working capital of
$98.2 million. The Company's capitalization at July 25,
1998 was $233.5 million and consists of long-term debt
of $77.9 million and stockholders'equity of $155.6 million.
The Company anticipates that its cash flow from
operations and borrowings available from its existing
amended bank credit facility will be sufficient to meet
its liquidity requirements for its operations
(including anticipated capital expenditures) and for
its additional debt service obligations for the
remainder of the fiscal year.
On June 9, 1998, the Company entered into an agreement
for a secured $250 million revolving credit facility
with NationsBank, N.A. as administrative agent.
The credit facility will terminate five years from
inception. Interest on borrowings under the credit
facility will accrue at a rate of, at the Company's
option, either LIBOR plus 1.00% or the lender's base
rate plus a margin of 0% to .25% for up to the first
6 months under the agreement. Thereafter, interest will
accrue at a rate of (i) LIBOR plus a range of .625% to
2.000%, or (ii) the lender's base rate plus a range of
.125% to .250% (depending on the Company's leverage ratio
of funded debt to EBITDA). Indebtedness will be secured
by substantially all of the assets of the Company. The
credit facility is subject to terms and conditions typical
of facilities of such size and includes certain financial
covenants.
On June 9, 1998, the Company's registration statement
on Form S-1 filed pursuant to the Securities Act of
1933, as amended was declared effective by the
Securities and Exchange Commission. The registration
statement related to an offering of 2,125,000 shares of
the Common Stock, par value $.001, of the Company at an
aggregate offering price of $32,937,500. On June 10,
1998, School Specialty sold 2,125,000 shares of Common
Stock. The total proceeds to the Company of the
Offering, net of underwriting discounts and commissions
of $2,305,625, were
<PAGE>
$30,631,875. In addition, the
Company sold 250,000 shares directly to Daniel P.
Spalding, the Chairman of the Board and its Chief
Executive Officer, David J. Vander Zanden, its
President and Chief Operating Officer, and Donald Ray
Pate, Jr., its Executive Vice President for Re-Print.
The shares were sold at a price of $14.415 for
aggregate consideration of $3,603,750. The sale of
these shares was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
In connection with the offering, the Company incurred
approximately $1,500,000 of expenses. The total net
proceeds to the Company of the offering and the sale of
250,000 shares to certain members of management were
approximately $32,735,625. The net proceeds were used
to reduce indebtedness outstanding under the Company's
credit facility. The debt under the credit facility had
been incurred to pay debt of U.S. Office Products allocated
to the Company in connection with the Company's spin-off
from U.S. Office Products.
Cash used in operating activities during the three
months ended July 25, 1998 was $16.8 million. This net
use of cash by operating activities during the period
is indicative of the high seasonal nature of the
business, with sales occurring in the first and second
quarter of the fiscal year and cash receipts in the
latter half of the third quarter. Net cash used in
investing activities was $17.3 million, with $16.9
million used for the Hammond and Stephens acquisition
and $902,000 used to purchase fixed assets. Net cash
provided by financing activities was $40.6 million and
included $83.3 million borrowed under a $250 million
revolving credit facility to repay the U.S. Office
Products debt of $83.3 million. Net proceeds from
the Company's initial public offering and the sale of
250,000 shares of Common Stock to certain employees was
used to repay a portion of the $83.3 million borrowed
under the credit facility. After such repayment, the
Company borrowed $16.9 million for the acquisition of
Hammond & Stephens and increased borrowings by $10.1
million to fund seasonal working capital needs. U.S.
Office Products contributed capital of $8.2 required
under the distribution agreement entered into with the
Company in connection with the spin-off.
Subsequent to July 25, 1998, the Company completed an
acquisition of The National School Supply Company
(otherwise known as Beckley-Cardy) that was accounted
for under the purchase method of accounting. The
aggregate consideration paid for this acquisition was
$76.4 million in cash plus assumed debt of
approximately $60 million.
On August 14, 1998, the Company received a commitment
from NationsBank for an additional $100,000 term loan,
amending and increasing the existing $250,000 credit
facility to a total of $350,000. The amended credit
facility, consisting of a $250,000 senior revolving
credit facility and a $100,000 term loan, was executed
with the bank under essentially the same terms and
conditions as the Company's existing credit facility.
NationsBank is currently syndicating the $350,000
facility with an expected closing date of September 30,
1998. On the syndication closing date, the Company
will transfer $100,000 from the revolving credit
facility to the term loan. The expanded credit
facility will be available for funding future
acquisitions and working capital needs. The term loan
will amortize quarterly over five years under the
following amortization schedule with the first
principal payment due January 30, 1999.
Fluctuations in Quarterly Results of Operations
The Company's business is subject to seasonal influences.
The Company's historical revenues and profitability have
been dramatically higher in the first two quarters of its
fiscal year (May-October) primarily due to increased
shipments to customers coinciding with the start of each
school year.
Quarterly results may also be materially affected by the
timing of acquisitions, the timing and magnitude of costs
related to such acquisitions, variations in the prices
paid by the Company for the products it sells, the mix
of products sold and general economic conditions. Moreover,
the operating margins of companies acquired by the Company
may differ substantially from those of the Company, which
could contribute to the further fluctuation in its quarterly
operating results. Therefore, results for any quarter are
not indicitive of the results that the Company may acheive
for any subsequent fiscal quarter or for a full fiscal year.
Inflation
The Company does not believe that inflation has had a
material impact on its results of operations during the
three months ended July 25, 1998 and July 26, 1997,
respectively.
Year 2000
The Company has investigated the extent to which
its operations are subject to Year 2000 issues and
assessed the measures it believes will be necessary to
avoid any material disruption to its operations
relating to Year 2000 issues. On the basis of this
investigation and assessment, the Company has taken
steps to ensure that its products and systems will not
be adversely impacted by Year 2000 issues. The cost to
the Company for such compliance measures has not been
material, and management believes that the cost of
additional modifications, if any, will likewise not be
material. In addition to assessing its own readiness
for the Year 2000, the Company has begun the process of
initiating formal communications with all of its
significant suppliers to determine the extent
<PAGE>
to which
the Company is vulnerable to those third parties'
potential to remediate their own Year 2000 issues.
There can be no guarantee that the systems of other
companies, on which the Company's systems rely, will be
timely converted or that a failure to convert by
another company or a conversion that is incompatible
with the Company's systems would not have a material
adverse effect on the Company.
Forward-Looking Statements
In accordance with the Private Securities
Litigation Reform Act of 1995, the Company can obtain a
"safe-harbor" for forward-looking statements by
identifying those statements and by accompanying those
statements with cautionary statements which identify
factors that could cause actual results to differ
materially from those in the forward-looking
statements. Accordingly, the foregoing "Management's
Discussions and Analysis of Financial Condition and
Results of Operations" contains certain forward-looking
statements relating to growth plans and projected
revenues, earnings and costs. The Company's actual
results may differ materially from those contained in
the forward-looking statements herein. Factors which
may cause such a difference to occur include those
factors identified in Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of
Operation_Factors Affecting the Company's Business,"
contained in the Company's Form 10-K for the year ended
April 25, 1998, which factors are incorporated herein
by reference to such Form 10-K.
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
Not applicable.
Part II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) As reported in the Company's Form 10-K for the
period ended April 25, 1998, the Company's initial
public offering of 2,125,000 shares of Common
Stock, par value $0.001, at $15.50 per share,
closed on June 10, 1998. All of the net proceeds
from this offering (approximately $29,131,875)
were used to reduce indebtedness outstanding under
the Company's old credit facility.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit No. Description
27.1 Financial Data Schedule
(b) The Company filed 1 report on Form 8-K during the
quarter covered by this report, as follows:
(i) Form 8-K dated June 30, 1998, filed under
Items 2 and 7 (no financial statements filed).
<PAGE>
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)
9/8/98 /s/ Daniel P. Spalding
-------- ---------------------------
Date Daniel P. Spalding
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
9/8/98 /s/ Donald J. Noskowiak
--------- -------------------------------
Date Donald J. Noskowiak
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the audited
consolidated financial statements of the Company included in the Report on Form
10-Q and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-24-1999
<PERIOD-START> APR-27-1998
<PERIOD-END> JUL-25-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 93,386
<ALLOWANCES> (754)
<INVENTORY> 56,092
<CURRENT-ASSETS> 161,159
<PP&E> 23,316
<DEPRECIATION> 0
<TOTAL-ASSETS> 297,034
<CURRENT-LIABILITIES> 62,979
<BONDS> 77,600
0
0
<COMMON> 15
<OTHER-SE> 155,641
<TOTAL-LIABILITY-AND-EQUITY> 297,034
<SALES> 126,657
<TOTAL-REVENUES> 126,657
<CGS> 82,615
<TOTAL-COSTS> 82,615
<OTHER-EXPENSES> 30,716
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,177
<INCOME-PRETAX> 12,153
<INCOME-TAX> 5,590
<INCOME-CONTINUING> 6,563
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,563
<EPS-PRIMARY> .45
<EPS-DILUTED> .44
</TABLE>
