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 28, 2000.
[ ] 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.)
1000 North Bluemound Drive
Appleton, Wisconsin
(Address of Principal Executive Offices)
54914
(Zip Code)
(920) 734-5712
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of
the issuer's classes of common stock, as of the latest
practicable date.
Outstanding at
Class December 1, 2000
Common Stock, $0.001 par value 17,465,938
<PAGE>
SCHOOL SPECIALTY, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED OCTOBER 28, 2000
PART I - FINANCIAL INFORMATION
Page
Number
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at October 28, 2000
(Unaudited) and April 29, 2000 1
Unaudited Consolidated Statements of Operations
for the Three Months Ended October 28, 2000
and October 23, 1999 and for the Six Months
Ended October 28, 2000 and October 23, 1999 2
Unaudited Consolidated Statements of Cash Flows
for the Six Months Ended October 28, 2000
and October 23, 1999 3
Notes to Unaudited Consolidated Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 14
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
SCHOOL SPECIALTY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
October 28, April 29,
2000 2000
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,776 $ 4,151
Accounts receivable, less allowance for
doubtful accounts of $1,643 and
$1,744, respectively 165,287 76,028
Inventories 53,889 86,117
Prepaid expenses and other current assets 30,314 28,664
Deferred taxes 6,964 6,964
-------- --------
Total current assets 262,230 201,924
Property and equipment, net 56,032 51,725
Intangible assets, net 215,607 192,744
Deferred taxes 1,861 1,861
Other.. 6,371 6,595
-------- --------
Total assets $542,101 $454,849
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities - long-term debt $ 14,838 $ 17,391
Accounts payable 44,154 48,874
Accrued compensation 9,538 8,634
Other accrued liabilities 11,175 8,792
Accrued income taxes 14,641 1,150
Accrued restructuring - 65
-------- --------
Total current liabilities 94,346 84,906
Long-term debt 198,590 144,789
Other.. 95 161
-------- --------
Total liabilities 293,031 229,856
Stockholders' equity:
Preferred stock, $0.001 par value per
share, 1,000,000 shares authorized;
none outstanding - -
Common stock, $0.001 par value per share,
150,000,000 shares authorized and
17,465,005 and 17,464,505 shares
issued and outstanding 17 17
Capital paid-in excess of par value 195,998 196,012
Accumulated other comprehensive loss (234) (30)
Retained earnings 53,289 28,994
-------- --------
Total stockholders' equity 249,070 224,993
-------- --------
Total liabilities and stockholders' equity $542,101 $454,849
======== ========
See accompanying notes to consolidated financial statements.
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
For the Three For the Six
Months Ended Months Ended
October 28, October 23, October 28, October 23,
2000 1999 2000 1999
Revenues $240,539 $231,588 $457,606 $425,887
Cost of revenues 155,026 148,675 293,024 270,095
-------- -------- -------- --------
Gross profit 85,513 82,913 164,582 155,792
Selling, general and
administrative expenses 57,731 56,212 112,693 104,527
-------- -------- -------- --------
Operating income 27,782 26,701 51,889 51,265
Other (income) expense:
Interest expense 4,605 3,695 8,296 6,863
Interest income (28) (33) (64) (71)
Other (34) 17 (297) 11
-------- -------- -------- --------
Income before provision
for income taxes 23,239 23,022 43,954 44,462
Provision for income taxes 10,337 10,838 19,659 20,914
-------- -------- -------- --------
Net income $ 12,902 $ 12,184 $ 24,295 $ 23,548
======== ======== ======== ========
Weighted average shares
outstanding:
Basic 17,465 17,433 17,465 17,408
Diluted 17,735 17,438 17,665 17,423
Net income per share:
Basic $0.74 $0.70 $1.39 $1.35
Diluted $0.73 $0.70 $1.38 $1.35
See accompanying notes to consolidated financial statements.
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Six
Months Ended
October 28, October 23,
2000 1999
Cash flows from operating activities:
Net income $ 24,295 $ 23,548
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization expense 6,860 6,259
Amortization of loan fees and other 357 379
Gain on disposal of fixed assets (184) -
Change in current assets and liabilities
(net of assets acquired and liabilities
assumed in business combinations accounted
for under the purchase method):
Accounts receivable (84,856) (94,086)
Inventory 33,869 27,310
Prepaid expenses and other current assets (2,025) 2,457
Accounts payable (5,527) 3,419
Accrued liabilities 15,690 13,417
-------- --------
Net cash used in operating activities (11,521) (17,297)
-------- --------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash aquired (31,316) (1,085)
Additions to property and equipment (6,894) (7,784)
Proceeds from the sale of property and equipment 2,485 -
Other (602) (878)
-------- --------
Net cash used in investing activities (36,327) (9,747)
-------- --------
Cash flows from financing activities:
Proceeds from bank borrowings 173,797 115,900
Repayment of bank debt and capital leases (124,332) (94,619)
Proceeds from exercise of stock options 8 -
Proceeds from issuance of common stock - 2,225
-------- --------
Net cash provided by financing activities 49,473 23,506
-------- --------
Net increase (decrease) in cash and cash equivalents 1,625 (3,538)
Cash and cash equivalents, beginning of period 4,151 9,779
-------- --------
Cash and cash equivalents, end of period $ 5,776 $ 6,241
======== ========
See accompanying notes to consolidated financial statements.
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
(In thousands)
The Company entered into certain business combinations
accounted for under the purchase method in the six
months ended October 28, 2000, and October 23, 1999.
The transaction that occurred in the six months ending
October 28, 2000 was paid for using cash, and the
transaction during the six months ended October 23,
1999 was paid for using 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 28, October 23,
2000 1999
Accounts receivable $ 4,403 $ 2,016
Inventories 1,641 632
Prepaid expenses and other current assets 2,174 46
Property and equipment 897 85
Intangible assets 25,813 1,700
Other assets - 13
Short-term debt and capital lease
obligations and long-term debt (1,217) -
Accounts payable (806) (837)
Accrued liabilities (1,023) (597)
Long-term capital lease obligations (566) (885)
-------- --------
Net assets acquired $ 31,316 $ 2,173
======== ========
Acquisitions were funded as follows:
Cash paid, net of cash acquired $ 31,316 $ 1,085
Common stock - 1,088
-------- --------
Total $ 31,316 $ 2,173
======== ========
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 consolidated financial
statements have been prepared in accordance with
generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes
required by generally accepted accounting principles
for complete financial statements. In the opinion of
management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair
presentation have been included. The balance sheet at
April 29, 2000, has been derived from the Company's
audited financial statements for the fiscal year ended
April 29, 2000. 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 29, 2000.
NOTE 2-STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Changes in stockholders' equity during the six months
ended October 28, 2000, were as follows:
Stockholders' equity balance at April 29, 2000 $224,993
Net income 24,295
Other (218)
Stockholders' equity balance at October 28, 2000 $249,070
Comprehensive income for the periods presented in the
consolidated statements of operations were as follows:
For the Three For the Six
Months Ended Months Ended
October 28, October 23, October 28, October 23,
2000 1999 2000 1999
Net income $12,902 $12,184 $24,295 $23,548
Other comprehensive loss:
Cumulative translation
adjustment (103) - (204) (77)
------- ------- ------- -------
Total comprehensive income $12,799 $12,184 $24,091 $23,541
======= ======= ======= =======
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<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
NOTE 3-EARNINGS PER SHARE
The following information presents the Company's
computations of basic earnings per share ("basic EPS")
and diluted earnings per share ("diluted EPS") for the
periods presented in the consolidated statements of
operations:
Income Share Per Share
(Numerator) (Denominator) Amount
Three months ended October 28, 2000:
Basic EPS $ 12,902 17,465 $ 0.74
=======
Effect of dilutive employee stock options - 270
-------- --------
Diluted EPS $ 12,902 17,735 0.73
======== ======== =======
Three months ended October 23, 1999:
Basic EPS $ 12,184 17,433 0.70
=======
Effect of dilutive employee stock options - 5
-------- --------
Diluted EPS $ 12,184 17,438 0.70
======== ======== =======
Six months ended October 28, 2000:
Basic EPS $ 24,295 17,465 1.39
=======
Effect of dilutive employee stock options - 200
-------- --------
Diluted EPS $ 24,295 17,665 1.38
======== ======== =======
Six months ended October 23, 1999:
Basic EPS $ 23,548 17,408 1.35
=======
Effect of dilutive employee stock options - 15
-------- --------
Diluted EPS $ 23,548 17,423 1.35
======== ======== =======
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 PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards
("SFAS") No. 133 "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 137, which delays
the adoption date of SFAS No. 133 and was issued in
July, 1999, requires adoption of SFAS No. 133 for
annual periods beginning after June 15, 2000. SFAS No.
133 establishes standards for recognition and
measurement of derivatives and hedging activities. The
Company will implement this statement in fiscal year
2002 as required. The adoption of SFAS No. 133 is not
expected to have a material effect on the Company's
financial position or results of operations.
The SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition" ("SAB No. 101"), in December
1999, which provides guidance on the recognition,
presentation, and disclosure of revenue in financial
statements. On June 26, 2000, the SEC issued SAB No.
101B which delayed implementation of SAB No. 101. The
Company will implement SAB No. 101 in the fourth
quarter of fiscal year 2001 as required by SAB No.
101B. The Company is reviewing the requirements of SAB
No. 101 and has not yet determined the impact of this
standard on its consolidated financial statements. It
is not expected, however, that SAB No. 101 will have a
material effect on the Company's financial position or
results of operations.
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
NOTE 5-BUSINESS COMBINATIONS
On June 30, 2000, the Company acquired 100% of a
company, which was accounted for under the purchase
method of accounting, for a cash purchase price of
$32,000, which is subject to change, resulting in
goodwill of $25,813, which will be amortized over 40
years. The results of this acquisition have been
included in the Company's results from the date of
acquisition.
During fiscal 2000, the Company purchased 100% of a
company, and certain assets of another company. The
results of these acquisitions have been included in the
Company's results from their respective dates of
acquisition. The pro-forma results of the latter
transaction are not included in the table below due to
immateriality.
The following information presents the unaudited pro-
forma results of operations of the Company for the
three and six months ended October 28, 2000 and October
23, 1999, and includes the Company's consolidated
results of operations and the results of the companies
acquired during fiscal 2001 and fiscal 2000 as if all
such purchase acquisitions had been made at the
beginning of fiscal 2000. The results presented below
include certain pro-forma adjustments to reflect the
amortization of intangible assets, adjustments to
interest expense, and the inclusion of an income tax
provision on all earnings:
Three Months Ended Six Months Ended
October 28, October 23, October 28, October 23,
2000 1999 2000 1999
Revenues $240,539 $236,151 $463,110 $435,136
Net income 12,902 12,858 24,705 24,761
Net income per share:
Basic $0.74 $0.74 $1.41 $1.42
Diluted $0.73 $0.74 $1.40 $1.42
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 2000 or the results that may occur in the
future.
NOTE 6-SEGMENT INFORMATION
The Company's business activities are organized around
three principal business segments, traditional,
specialty and Internet. 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 three
segments serve a similar customer base, notable
differences exist in products, gross margin and revenue
growth rate. Products supplied within the traditional
segment include consumables (consisting of classroom
supplies, instructional materials, educational games,
art supplies and school forms), school furniture and
indoor and outdoor equipment. Products supplied within
the specialty segment target specific educational
disciplines, such as art, industrial arts, physical
education, sciences, library and early childhood. The
Internet segment supplies products from both the
traditional and specialty segments through the
Internet. In addition, the Internet segment includes
products supplied for customer use with the Internet
(i.e., filtering software for the Internet).
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
During the third quarter of fiscal 2000, the Company
modified its segment reporting by identifying
information for a third business segment, the Internet
business segment. This segment includes business
generated by products supplied through the Internet and
products supplied for use with the Internet. Effective
October 24, 1999 (the beginning of fiscal 2000's third
quarter), the Company began to separately track
financial information for this segment, and assign
certain management personnel the responsibility for
monitoring this information and focusing on the
expansion of the Company's Internet business. The
Company is unable to segregate information for the
Internet business segment for the first two quarters of
fiscal 2000; therefore, results for this segment for
those periods are included in both the traditional and
specialty business segments. The following table
presents segment information:
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<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
October 28, October 23, October 28, October 23,
2000 1999 2000 1999
Revenues:
Traditional $148,879 $148,119 $279,846 $269,358
Specialty 91,660 83,469 177,760 156,529
Internet 7,739 - 16,897 -
Inter-company revenue
elimination (7,739) - (16,897) -
-------- -------- -------- --------
Total $240,539 $231,588 $457,606 $425,887
======== ======== ======== ========
Operating profit (loss) and
income before taxes:
Traditional $ 17,326 $ 17,236 $ 32,646 $ 33,456
Specialty 13,032 12,508 25,623 23,987
Internet (508) - (1,566) -
-------- -------- -------- --------
Total 29,850 29,744 56,713 57,443
General corporate expense 2,068 3,043 4,824 6,178
Interest expense and other 4,543 3,679 7,935 6,803
-------- -------- -------- --------
Income before taxes $ 23,239 $ 23,022 $ 43,954 $ 44,462
======== ======== ======== ========
Identifiable assets (at
quarter end):
Traditional $277,518 $292,670 $277,518 $292,670
Specialty 221,593 191,799 221,593 191,799
Internet 11,376 - 11,376 -
-------- -------- -------- --------
Total 510,487 484,469 510,487 484,469
Corporate assets 31,614 20,945 31,614 20,945
-------- -------- -------- --------
Total $542,101 $505,414 $542,101 $505,414
======== ======== ======== ========
Depreciation and amortization:
Traditional $ 1,326 $ 1,645 $ 2,660 $ 3,357
Specialty 1,433 1,334 2,673 2,514
Internet 506 - 988 -
-------- -------- -------- --------
Total 3,265 2,979 6,321 5,871
Corporate 288 231 539 388
-------- -------- -------- --------
Total $ 3,553 $ 3,210 $ 6,860 $ 6,259
======== ======== ======== ========
Expenditures for property
and equipment:
Traditional $ 370 $ 2,954 $ 951 $ 3,020
Specialty 581 1,432 2,090 2,519
Internet 1,560 - 2,833 -
-------- -------- -------- --------
Total 2,511 4,386 5,874 5,539
Corporate 483 2,121 1,020 2,245
-------- -------- -------- --------
Total $ 2,994 $ 6,507 $ 6,894 $ 7,784
======== ======== ======== ========
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
NOTE 7- SUBSEQUENT EVENTS
On October 30, 2000, the Company's interest rate swap
agreement with the Bank of New York was canceled by the
Bank of New York under the terms of the October 28,
1998 swap agreement. The swap agreement, which fixed
the 30-day LIBOR interest rate at 4.37% per annum on a
$50,000 notional amount, was for a three-year term,
cancelable by the Bank on the second anniversary.
On November 3, 2000, the Company entered into a
sale/leaseback transaction for the Company's
distribution centers in Mansfield, Ohio and Agawam,
Massachusetts. The transaction netted approximately
$17,500 in cash, which was used to reduce outstanding
borrowings under the Company's credit facility.
On November 13, 2000, the Company signed a letter of
intent to sell Don Gresswell, Ltd., a U.K. subsidiary.
The proposed transaction, a sale of stock for
approximately $4,700 in cash, is subject to certain
contingencies and is expected to close in December
2000.
On November 22, 2000, the Company purchased the net
assets of the wholesale division of J.L. Hammett
Company. The purchase price, which is subject to
change, was approximately $79,000 and will result in
goodwill of approximately $45,000. As part of the
agreement, the Company entered into five-year non-
compete agreements with two management shareholders of
J.L. Hammett Company for cash consideration of $2.8
million. The transaction and non-compete agreements
were funded through borrowings under the Company's
existing credit facility.
In November 2000, the Company entered into an agreement
to sell, on a revolving basis, an interest in a defined
pool of trade accounts receivable. At November 22, 2000
a $50,000 interest was sold under this agreement with
proceeds used to reduce the amount outstanding on the
Company's credit facility. The borrowing rate on the
trade accounts receivable interest is expected to be
lower than the average rate on the Company's credit
facility.
[The remainder of this page is intentionally left blank.]
<PAGE>
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
The following table sets forth various items as a
percentage of revenues on a historical basis.
Three Months Ended Six Months Ended
October 28, October 23, October 28, October 23,
2000 1999 2000 1999
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 64.4 64.2 64.0 63.4
----- ----- ----- -----
Gross profit 35.6 35.8 36.0 36.6
Selling, general and
administrative expenses 24.0 24.3 24.7 24.6
----- ----- ----- -----
Operating income 11.5 11.5 11.3 12.0
Interest expense and other 1.8 1.5 1.7 1.6
----- ----- ----- -----
Income before provision for
income taxes 9.7 10.0 9.6 10.4
Provision for income taxes 4.3 4.7 4.3 4.9
----- ----- ----- -----
Net income 5.4% 5.3% 5.3% 5.5%
===== ===== ===== =====
Three Months Ended October 28, 2000 Compared to Three
Months Ended October 23, 1999
Revenues
Revenues increased 3.9% from $231.6 million for the
three months ended October 23, 1999, to $240.5 million
for the three months ended October 28, 2000. This
increase was primarily due to growth in the specialty
and the Internet segments and revenues from Global
Video, LLC, which was acquired on June 30, 2000.
Revenue growth for fiscal 2001's second quarter as
compared to fiscal 2000's second quarter was impacted
by fiscal 2000 being a 53-week year. This moved four
heavy shipping days that were in fiscal 2000's second
quarter to fiscal 2001's first quarter, resulting in
strong revenue growth in fiscal 2001's first quarter
and modest growth in fiscal 2001's second quarter.
Revenue growth for the six months ended October 28,
2000 was 7.4%.
Gross Profit
Gross profit was $85.5 million or 35.6% of revenues for
the three months ended October 28, 2000, an increase of
$2.6 million, or 3.1% over fiscal 2000's second quarter
of $82.9 million or 35.8% of revenues. The increase in
gross profit was primarily due to an increase in
revenues. The change in gross profit as a percent of
revenues was due primarily to 1) product mix in the
traditional segment, driven by revenue growth in the
lighter-margin project and furniture lines; 2) growth
in Internet revenues, which is typically lower-gross
margin business than the traditional and specialty
segments; and 3) an increase in specialty segment gross
margin, benefited by gross margin expansion in the
Childcraft division (driven by improved operating
efficiencies) and the acquisition of Global Video, LLC,
which has higher gross margins than most of our other
specialty businesses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include
selling expenses (the most significant component of
which is sales wages and commissions), operations
expenses (which includes customer service, warehouse
and outbound transportation costs on warehouse
shipments), catalog costs and general administrative
overhead (which includes information systems,
accounting, legal, human resources, marketing and
purchasing expense).
Selling, general and administrative expenses increased
2.7% from $56.2 million or 24.3% of revenues for the
three months ended October 23, 1999, to $57.7 million
or 24.0% of revenues for the three months ended October
28, 2000. The increase in selling, general and
administrative expenses was primarily due to an
increase in variable costs related to increased
revenues and investments in infrastructure to develop
the Internet segment. The decrease in
<PAGE>
selling, general and administrative expenses as a
percent of revenues was primarily due to a reduction in
general corporate expense combined with increased
operating efficiencies in the traditional and specialty
segments.
Interest Expense
Interest expense, net of interest income, increased
$0.9 million from $3.7 million or 1.5% of revenues for
the three months ended October 23, 1999 to $4.6 million
or 1.8% of revenues for the three months ended October
28, 2000. The increase in interest expense was
primarily due to a slight increase in our effective
borrowing rate and an increase in debt due to debt
assumed and cash paid to acquire Global Video, LLC
during the first quarter of fiscal 2001.
Provision for Income Taxes
Provision for income taxes for the three months ended
October 28, 2000 decreased 0.5% or $0.5 million over
the three months ended October 23, 1999, reflecting
income tax rates of 44.5% and 47.1% for the three
months ended October 28, 2000 and October 23, 1999,
respectively. The effective tax rate of 44.5% in the
second quarter of fiscal 2001 as compared to 47.1% in
the second quarter of fiscal 2000 is due to reduced
state taxes and a smaller percentage impact of non-
deductible goodwill amortization. The higher effective
tax rate, compared to the federal statutory rate of
35.0%, was primarily due to state income taxes and non-
deductible goodwill amortization.
Six Months Ended October 28, 2000 Compared to the Six
Months Ended October 23, 1999
Revenues
Revenues increased 7.4% from $425.9 million for the six
months ended October 23, 1999, to $457.6 million for
the six months ended October 28, 2000. Increase in
revenues was primarily driven by growth in all segments
of the business. The specialty segment grew 13.6%,
traditional 3.9% and the Internet segment delivered
$16.9 million in revenues. Growth in the specialty
segment revenues was primarily due to increased market
penetration, an increase in proprietary product
offering and revenues, and the June 30, 2000
acquisition of Global Video, LLC.
Gross Profit
Gross profit increased 5.6% from $155.8 million or
36.6% of revenues for the six months ended October 23,
1999 to $164.6 million or 36.0% of revenues for the six
months ended October 28, 2000. The increase in gross
profit was primarily due to an increase in revenues.
The change in gross profit as a percent of revenue was
due primarily to 1) product mix in the traditional
segment, driven by revenue growth in the lighter-margin
project and furniture lines and 2) improvement in
Internet gross margins, which were affected by
promotional pricing during the first quarter.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased
7.8% from $104.5 million or 24.6% of revenues for the
six months ended October 23, 1999, to $112.7 million or
24.7% of revenues for the six months ended October 28,
2000. The increase in selling, general and
administrative expenses was primarily due to an
increase in revenues and investment in the Internet
segment. The change in selling, general and
administrative expenses as a percent of revenues was
primarily due to growth in the specialty segment, which
typically has higher selling, general and
administrative expenses as a percentage of revenues
than our other business segments, and expenses incurred
in developing the Internet segment. These incremental
expenses were offset by a reduction in general
corporate expenses.
Interest Expense
Interest expense, net of interest income, increased
$1.4 million from $6.8 million or 1.6% of revenues for
the six months ended October 23, 1999 to $8.2 million
or 1.7% of revenues for the six months ended October
28, 2000. The increase in interest expense was
primarily attributed to a slight increase in our
effective borrowing rate and an increase in debt due to
debt assumed and cash paid to acquire Global Video, LLC
during the first quarter of fiscal 2001.
<PAGE>
Provision for Income Taxes
Provision for income taxes for the six months ended
October 28, 2000 decreased 6.0% or $1.3 million over
the six months ended October 23, 1999, reflecting
income tax rates of 44.7% and 47.0% for the six months
ended October 28, 2000 and October 23, 1999,
respectively. The effective tax rate of 44.7% in the
second quarter of fiscal 2001 as compared to 47.0% in
the second quarter of fiscal 2000 was due to reduced
state taxes and a smaller percentage impact of non-
deductible goodwill amortization. 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 October 28, 2000, we had working capital of $167.9
million. Our capitalization at October 28, 2000 was
$462.5 million and consisted of debt of $213.4 million
and stockholders' equity of $249.1 million.
We have a five-year secured $350 million revolving
credit facility with Bank of America, N.A. The credit
facility has a $100 million term loan payable quarterly
over five years commencing in January 1999 and
revolving loans which mature on September 30, 2003.
The amount outstanding as of October 28, 2000 under the
credit facility was approximately $212.5 million,
consisting of $136.1 million outstanding under the
revolving loan portion of the facility and $76.4
million outstanding under the term loan portion of the
facility. Borrowings under the credit facility are
usually significantly higher during our first and
second quarters to meet the working capital needs of
our peak selling season. To accommodate our business
growth, we have made and we intend, as necessary, to
make immaterial changes to certain financial and other
covenants under the credit facility.
On October 28, 1998, we entered into an interest rate
swap agreement with the Bank of New York covering $50
million of the outstanding credit facility. The
agreement fixed the 30 day LIBOR interest rate at 4.37%
per annum on a $50 million notional amount and had a
three year term that was cancelable by the Bank of New
York on the second anniversary. As of October 28,
2000, our effective interest rate on borrowings under
our credit facility was approximately 8.9% excluding
the effect of the swap agreement and 8.4% including the
effect of the swap agreement. On October 30, 2000, the
Bank of New York canceled the swap agreement.
We anticipate that our cash flow from operations and
borrowings available from our existing credit facility
will be sufficient to meet our liquidity requirements
for our operations (including anticipated capital
expenditures) and our debt service obligations for the
remainder of the fiscal year.
During the six months ended October 28, 2000, net cash
used in operating activities was $11.5 million. This
net use of cash by operating activities during the
period is indicative of the high seasonal nature of our
business, with sales occurring in the first and second
quarters of the fiscal year and cash receipts in the
second and third quarters. Net cash used in investing
activities was $36.3 million, including $31.3 million
for an acquisition and $6.9 million for capital
expenditures, offset by $2.5 million in proceeds from
the sale of a closed warehouse facility. Net cash
provided by financing activities was $49.5 million,
which consisted primarily of borrowings under our
credit facility.
During the six months ended October 23, 1999, net cash
used in operating activities was $17.3 million. This
net use of cash by operating activities during the
period is indicative of the high seasonal nature of our
business, with sales occurring in the first and second
quarters of the fiscal year and cash receipts in the
second and third quarters. Net cash used in investing
activities was $9.7 million, including $1.1 million for
an acquisition and $7.8 million for additions to
property and equipment. Net cash provided by financing
activities was $23.5 million, which consisted primarily
of borrowings under our credit facility.
Subsequent Events
On October 30, 2000, our interest rate swap agreement
with the Bank of New York was canceled by the Bank of
New York under the terms of the October 28, 1998 swap
agreement. The agreement, which fixed the 30-day LIBOR
interest rate at 4.37% per annum on a $50 million
notional amount, was for a three-year term, cancelable
by the Bank on the second anniversary.
<PAGE>
On November 3, 2000, we entered into a sale/leaseback
transaction for our distribution centers in Mansfield,
Ohio and Agawam, Massachusetts. The transaction netted
approximately $17.5 million in cash, which was used to
reduce borrowings under our credit facility.
On November 13, 2000, we signed a letter of intent to
sell Don Gresswell, Ltd., a U.K. subsidiary. The
proposed transaction, a sale of stock for approximately
$4.7 million in cash, is subject to certain
contingencies and is expected to close in December
2000.
On November 22, 2000, we purchased the net assets of
the wholesale division of J.L. Hammett Company. The
purchase price, which is subject to change, was
approximately $79.0 million and will result in goodwill
of approximately $45.0 million. As part of the
agreement, we entered into five-year non-compete
agreements with two management shareholders of J.L.
Hammett Company for cash consideration of $2.8 million.
The transaction and non-compete agreements were funded
through borrowings under our existing credit facility.
In November 2000, we entered into an agreement to sell,
on a revolving basis, an interest in a defined pool of
trade accounts receivable. At November 22, 2000 a $50
million interest was sold under this agreement with
proceeds used to reduce the amount outstanding on our
credit facility. The borrowing rate on the trade
accounts receivable interest is expected to be lower
than the average rate on our credit facility.
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 (May-October) 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 sell, the mix of products
sold and general economic conditions. Moreover, the
operating margins of companies acquired by us may
differ substantially from our own margins, 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
affect on our results of operations and our internal
and external sources of liquidity.
Forward-Looking Statements
Statements in this report which are not strictly
historical are "forward looking." In accordance with
the Private Securities Litigation Reform Act of 1995,
we 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 Discussion and Analysis of Financial
Condition and Results of Operations" contains certain
forward-looking statements relating to growth plans and
projected revenues, earnings and costs. Our 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 1, "Business - Forward
Looking Statements," contained in the Company's Form
10-K for the year ended April 29, 2000, which factors
are incorporated herein by reference to such Form 10-K.
ITEM 3. Quantitative And Qualitative Disclosures About
Market Risk
For information as to our Quantitative and Qualitative
Disclosures about Market Risk, please see our Annual
Report on Form 10-K for the fiscal year ending April
29, 2000. There have been no material changes in our
quantitative or qualitative exposure to market risk
since the end of fiscal 2000.
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds
On August 31, 2000, the Company
reincorporated from Delaware to Wisconsin, as
more fully described in the Company's current
report on Form 8-K dated August 31, 2000,
which is incorporated herein by reference.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) On August 29, 2000, we held our Annual Meeting of Stockholders.
(b) Not applicable.
(c) The Annual Meeting of Stockholders was held to:
(1) Elect two directors to serve until the 2003 Annual
Meeting of Stockholders as Class II directors;
(2) Vote upon a proposal to reincorporate School
Specialty in Wisconsin under a Merger Agreement which
will merge the current Delaware corporation into a
newly formed Wisconsin corporation and wholly owned
subsidiary of School Specialty;
(3) Vote upon a proposal to amend and restate School
Specialty's 1998 Stock Incentive Plan; and
(4) Ratify the appointment of PricewaterhouseCoopers LLP as
School Specialty's independent auditors for fiscal 2001.
The results of these proposals, which were voted
upon at the Annual Meeting, are as follows:
(1) Election of Class II Directors
For Withheld
(1) David J. VanderZanden 15,583,268 33,344
(2) Rochelle Lamm 15,583,772 32,840
(2) Reincorporation
For Against Abstain Broker Non-Vote
Change from Delaware
to Wisconsin 10,004,927 3,061,429 19,778 2,530,478
(3) 1998 Stock Incentive Plan
For Against Abstain Broker Non-Vote
Amend and Restate 9,664,126 3,401,241 20,767 2,530,478
(4) Ratification of
Independent Auditors
For Against Abstain
PricewaterhouseCoopers LLP 15,582,584 26,003 8,025
(d) Not applicable.
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
See "Index to Exhibits" 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 August 31, 2000, filed on
September 1, 2000 under Items 5 and 7. The
Company changed its state of incorporation
from Delaware to Wisconsin.
<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)
12/04/2000 /s/ Daniel P. Spalding
Date --------------------------------
Daniel P. Spalding
Chairman of the Board,
Chief Executive Officer
(Principal Executive Officer)
12/04/2000 /s/ Mary M. Kabacinski
Date --------------------------------
Mary M. Kabacinski
Executive Vice President,
Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
3.1 Articles of Incorporation of the Registrant incorporated
by reference to Appendix B of the School Specialty, Inc.
definitive Proxy Statement dated July 24, 2000.
3.2 By-Laws of the Registrant, incorporated by reference to
the Registrant's current report on Form 8-K dated
August 31, 2000.
10.1(a) Agreement of Purchase and Sale between SSI Agawam, L.L.C.
as Purchaser and School Specialty Inc. as Seller
10.1(b) Lease Between SSI Agawam, L.L.C., As Landlord, and
School Specialty Inc. a Wisconsin Corporation, as Tenant
10.1(c) Agreement of Purchase and Sale between SSI Mansfield,
L.L.C. as Purchaser and School Specialty Inc. as Seller
10.1(d) Lease Between SSI Mansfield, L.L.C., As Landlord, and
School Specialty Inc. a Wisconsin Corporation, as Tenant
21.1 Subsidiaries of School Specialty, Inc.
27.1 Financial Data Schedule
