Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Form 10-K 53 260K
2: EX-4.2 Amended and Restated Pledge Agreement 11 47K
3: EX-4.3 Amended and Restated Security Agreement 21 84K
4: EX-4.5 Consent & Amended and Restated Credit Agreement 12 34K
6: EX-10.10 Employment Agee. Michael Killoren Junebox.Com 6 30K
5: EX-10.8 Employment Agreement Brent Pulsipher 6 32K
7: EX-21.1 Subsidiaries of School Specialty, Inc. 1 6K
8: EX-23.1 Consent of Arthur Andersen LLP 1 7K
9: EX-23.2 Consent of Pricewaterhousecoopers LLP 1 7K
10: EX-99.1 Schedule Ii-Valuation and Qualifying Accounts 1 8K
11: EX-99.2 Forward Looking Statements 3 16K
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-K
______________________________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934: For the fiscal year ended April 28, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 000-24385
SCHOOL SPECIALTY, INC.
(Exact name of Registrant as specified in its charter)
Wisconsin 39-0971239
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
W6316 Design Drive
Greenville, Wisconsin 54942
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (920) 734-5712
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, as of June 15, 2001, was approximately $447,500,900. As of such
date, there were 17,767,317 of the Registrant's shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III is incorporated by reference from the Proxy Statement for the
Annual Meeting of Shareholders to be held on August 28, 2001.
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PART I
Item 1. Business
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Unless the context requires otherwise, all references to "School
Specialty," "we" or "our" refer to School Specialty, Inc. and its subsidiaries.
Our fiscal year ends on the last Saturday in April in each year. In this Annual
Report on Form 10-K ("Annual Report"), we refer to fiscal years by reference to
the calendar year in which they end (e.g. the fiscal year ended April 28, 2001
is referred to as "fiscal 2001"). Note that fiscal 2000 had 53 weeks, while all
other fiscal years reported and referenced represent 52 weeks.
Company Overview
School Specialty is the largest direct marketing company for
supplemental educational supplies to schools and teachers for pre-kindergarten
through twelfth grade ("preK-12") in the United States. We operate the
industry's only national distribution network and currently hold approximately a
13% market share of the $6.2 billion supplemental educational supply market. We
offer more than 80,000 items, mail over 38 million catalogs annually and have
developed both an on-line education portal and an e-commerce website. Our broad
product range enables us to provide customers with one source for virtually all
of their supplemental educational supply needs. Our leading market position has
been achieved by emphasizing high-quality products, superior order fulfillment
and exceptional customer service. As a result, we have been able to establish
relationships with virtually all of the country's preK-12 schools and reach
nearly all of the country's teachers.
We recognize that educational supply procurement decisions are made at
the district and school levels by administrators as well as at the classroom
level by teachers and curriculum specialists. As a result, we have created an
innovative multi-channel sales and marketing strategy enabling us to market our
products to the various levels of buyers within the education market.
The "traditional" or "top down" approach targets school districts and
school administrators through our traditional sales force of over 300
professionals, the School Specialty general supply catalog and the JuneBox.com
portal, a B2B (business to business) education portal.
The "specialty" or "bottom up" approach targets the classroom level
decision-makers through our specialty sales force of over 50 professionals and
through our catalogs featuring seven of our specialty brands as well as the
ClassroomDirect.com catalog and website, which is a B2T (business to teacher)
website. Our other specialty catalogs include Childcraft, Sax Arts and Crafts,
Sportime and Teacher's Video. The specialty businesses offer more specialized
products for individual disciplines. Many of these products are proprietary to
our specialty brands.
We believe most of our brands hold the leading market position in their
respective categories. We have also solidified this leading market position by
acquiring companies which have expanded our geographic presence and product
offering. The critical mass we have achieved allows us to benefit from increased
buying power while leveraging our national distribution network and sales force
to operate more efficiently.
We have grown significantly in recent years through both acquisitions
and internal growth. From fiscal 1997 through fiscal 2001, our revenues
increased from $191.7 million to $692.7 million, a compound annual growth rate,
or CAGR, of 38%. In fiscal 2001, revenues increased by 8.4% from the previous
fiscal year. These results reflect only a partial year of the revenues from
companies we acquired during fiscal 2001. We remain focused on growth
opportunities, including increasing our penetration rate
and expanding in attractive regions, which would allow us to enhance our
position as the number one marketer of supplemental educational supplies in the
United States.
School Specialty, Inc., founded in October 1959, was acquired by U.S.
Office Products in May 1996. In June 1998, School Specialty was spun-off from
U.S. Office Products in a tax-free transaction. Our common stock is listed on
the Nasdaq National Market under the symbol "SCHS." In August 2000, we
reincorporated from Delaware to Wisconsin. Our principal offices are located at
W6316 Design Drive, Greenville, Wisconsin 54942, and our telephone number is
(920) 734-5712. Our general website address is www.schoolspecialty.com.
Information contained in any of our websites is not deemed to be a part of this
Annual Report.
Industry Overview
The school supply market consists of the sale of supplemental
educational supplies, furniture and equipment to school districts, individual
schools, teachers and curriculum specialists who purchase products for school
and classroom use. The National School Supply Equipment Association, or NSSEA,
estimates that annual sales in the United States of supplemental educational
supplies and equipment to the school supply market are approximately $6.2
billion. Of this amount, approximately $3.7 billion is sold through
institutional channels and the remaining $2.5 billion is sold through retail
channels, such as teacher stores.
According to the U.S. Department of Education, there are approximately
16,000 school districts, 118,500 elementary and secondary schools and 3.3
million teachers in the United States. Administrators for both school districts
and individual schools usually make the decision to purchase the general school
supplies needed to operate the school. Teachers and curriculum specialists
generally decide on curriculum-specific products for use in their classrooms and
individual disciplines. According to the NSSEA, teachers spent approximately
$1.3 billion of their own money in 2000 on supplies to supplement classroom
materials.
The industry has highly predictable and favorable trends. Education
expenditures have risen each year for the past 15 years and are expected to
exceed $390 billion in 2001, according to the U.S. Department of Education. The
most common measure of education spending is current expenditures per student.
According to the National Education Association, current expenditures per
student in constant dollars have increased from $5,402 in 1985 to an estimated
$7,430 in 2000 and are expected to increase further to $8,316 in 2005, an
aggregate 54% increase. Incremental spending will thus exceed enrollment growth,
which according to the U.S. Department of Education is projected to grow by 19%
from 1985 to 2005 to a record level of 53.5 million students. As the market is
affected by prevailing political and social trends, the attitude of the
government towards education determines, to some extent, total expenditures on
education. The prevailing political and social environments are favorable for
incremental expenditures on education. The proposed fiscal 2002 federal budget
provides for a 4.6 billion, a 11%, increase in federal education funding.
The industry is also highly fragmented with over 3,400 direct marketers
of supplemental education supplies, many of which are family- or employee-owned
businesses that operate in a single geographic region. We believe the increasing
demand for single-source suppliers, prompt order fulfillment and competitive
pricing, along with the related need for suppliers to invest in automated
inventory and electronic ordering systems, is fostering consolidation within the
industry. In addition, the industry is currently experiencing a shift in growth
to the higher margin specialty business, which offers more focused products for
different educational disciplines. Increased purchasing at the school and
classroom levels, which increases individual school's and teacher's roles in
educational supply procurement decisions, is also driving this trend.
Recent Acquisitions
Envision Product Line. In May 2001, we acquired the TimeTracker product
line of student and teacher planners from Envision, Inc. We paid approximately
$4.1 million in cash and issued 120,106 shares of our common stock for a total
purchase price of approximately $6.8 million.
J.L. Hammett Division. In November 2000, we acquired the assets of the
wholesale division of J.L. Hammett Company ("Hammett"), our leading competitor
in the preK-12 supplemental educational supplies market. We paid approximately
$79 million in cash for these division assets and $2.8 million for 5-year non-
compete agreements with certain individuals.
Global Video, LLC. In June 2000, we acquired the assets of Global Video
which produces and markets educational videos under the brand name Teacher's
Video(TM). We paid approximately $34 million in net cash for Global Video
including a $3 million earnout payable in July 2001.
Competitive Strengths
We attribute our strong competitive position to the following key
factors:
Number One Market Share. We have the highest revenues of any direct
marketing company for supplemental education supplies. We have developed this
leading market position by emphasizing high-quality products, superior order
fulfillment and exceptional customer service. We believe that our large size
and brand recognition have resulted in significant buying power, economies of
scale and customer loyalty.
Leading Established Brands. We have the most established and recognized
brands in the industry. We believe that seven of our nine brands have a leading
market position in their respective categories, based on revenues. With a
historical track record of over 100 years for some brands, the Company's
traditional and specialty brands represent a significant competitive advantage.
Broad Product Lines. Our strategy is to provide a full range of high-
quality products to meet the complete supply needs of schools for preK-12. With
over 80,000 items ranging from classroom supplies and furniture to playground
equipment, we provide customers with one source for virtually all of their
supplemental educational supplies and furniture needs. In addition to our
traditional School Specialty brand, our specialty businesses enrich our general
product offering and create opportunities to cross merchandise our specialty
products to our traditional customers. Specialty businesses include the
following brands:
Brand Products
----- --------
Childcraft.................... Early childhood
ClassroomDirect.com........... General supplies
Sax Arts and Crafts........... Art supplies
Frey Scientific............... Science
Sportime...................... Physical education
Teacher's Video............... Educational videos
Brodhead Garrett.............. Industrial arts
Hammond & Stephens............ School forms
Innovative Full-Service Business Model. We believe that we are the only
company in our industry that has developed a full-service business model with an
integrated, multi-channel marketing approach. As a result, we reach district and
school administrative decision makers as well as teachers and
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curriculum specialists through separate sales forces, catalog mailings and the
Internet. We utilize our customer database across our family of catalogs to
maximize their effectiveness and increase our marketing reach. Our primary e-
commerce websites, JuneBox.com for administrative purchase decisions and
ClassroomDirect.com for teacher-based purchase decisions, establish a
comprehensive presence on the Internet which is a significant competitive
advantage for us.
Stable Industry with Favorable Trends and Dynamics. Because the market
for educational supplies is driven primarily by demographics and government
spending, we believe our industry is less exposed to economic cycles than many
others. We have established working relationships with many large public
education organizations and understand how to do business effectively with these
institutions.
Established Infrastructure and Customer Relationships. We believe our
seven leading brands, national sales force, the industry's largest product
offering, established customer relationships and a national distribution network
with multiple sales channels, including e-commerce, give us a significant
advantage in this industry. The supplemental education supply market is highly
seasonal, with a January through July selling season and a June through October
shipping season, and our infrastructure and logistical capacities and
capabilities permit us to meet the requirements of these peak periods
effectively.
Proven Acquisition and Integration Model. We have completed over 28
acquisitions since May 1996. We have established a 6 to 12 month target for our
integration process in which a transition team is assigned to sell or
discontinue incompatible business units, reduce the number of items in the
product offering, eliminate redundant expenses, integrate the acquired entity's
management information systems, and exploit buying power. To date, our
integration efforts have focused on acquired traditional companies and certain
administrative and warehousing functions at our specialty divisions. We believe
that through these processes, we can rapidly improve the operating margins of
the businesses we acquire.
Effective Use of Technology. We believe that our use of information
technology systems allows us to turn over inventory more quickly than our
competitors, offer customers more convenient and cost effective ways of ordering
products, and more precisely focus our sales and marketing strategies.
Experienced and Incentivised Management. Our management team provides
depth and continuity of experience. In addition, management's interests are
aligned with those of our shareholders, as many members of management own shares
of our common stock and/or have been granted options to purchase our common
stock.
Growth Strategy
We use the following strategies to grow and enhance our position as the
leading marketer of supplemental educational supplies:
Internal Growth. We plan to continue to increase our revenues by:
. Taking advantage of market growth through rising expenditures per
student, combined with increasing enrollment
. Increasing penetration in geographic markets where we are currently
underrepresented
. Cross-merchandising specialty products to traditional customers
. Adding new products to enhance the breadth of our product offering
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. Pursuing price increases to the extent supported by market
conditions
. Intensifying marketing efforts through partnerships with companies
such as Riverdeep Group plc, a curriculum-based educational software
company
. Adding sales through Internet channels
Margin Improvement. As we continue to grow our revenues, we plan to
increase margins by selling more specialty products, which typically generate
higher gross margins due to the large number of proprietary and branded products
in the product mix. In addition, we believe we can further improve operating
margins by leveraging the benefits of the recent Hammett acquisition and:
. Increasing buying power combined with price expansion
. Continuing the elimination of redundant expenses of acquired
businesses
. Reducing our overhead costs
. Improving the efficiency of our distribution network
. Reviewing and adjusting the level of customer discounts
. Taking advantage of the industry's shift toward site-based (versus
centralized) purchasing
Acquisitions. Our selective acquisition strategy and proven integration
model have allowed us to solidify our leading position within the industry and
establish a strong national marketing and distribution platform. This platform
allows us to integrate acquired brands more easily and strengthen our specialty
brand portfolio and enter supplemental education categories in which we do not
currently compete, such as music or math, in addition to enabling us to grow
faster than the industry. We believe that our size and national presence give us
an advantage as a potential acquirer in a consolidating industry.
Furthermore, our proven integration model allows us to realize
significant synergies. We believe we have demonstrated our ability to reduce
redundant costs, retain the customers of the acquired brands, and integrate
distribution networks and information technology platforms. For each
acquisition, we assume a reduction of approximately 10% of the acquired
company's revenues. The reduction is expected as we discontinue any unprofitable
business lines, divest any product lines outside our core competencies and
reduce overlapping sales forces. The integration model is designed to offset the
sales reduction and efficiently combine the companies. The model allows us to
smoothly consolidate distribution centers, improve geographic distribution,
integrate the back-office functions, expand purchasing power and, when a
specialty company is acquired, realize product and margin enhancement related to
cross merchandising.
Product Lines
We market two broad categories of products: general school supplies and
specialty products geared towards specific educational disciplines. Our
specialty products enrich our general supply product offering and create
opportunities to cross merchandise our specialty products to our traditional
customers. With over 80,000 items ranging from classroom supplies and furniture
to playground equipment, we provide customers with one source for virtually all
of their supplemental educational supply needs.
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Our general school supply product lines can be described as follows:
School Specialty. Through the School Specialty catalog, which is
targeted to administrative decision makers, we offer a comprehensive selection
of classroom supplies, instructional materials, educational games, art supplies,
school forms (such as reports, planners and academic calendars), educational
software, physical education equipment, audio-visual equipment, school furniture
and indoor and outdoor equipment. We believe we are the largest school furniture
resale source in the United States. We have been granted exclusive franchises
for certain furniture lines in specific territories and we enjoy significant
purchasing power in open furniture lines. We enhance our furniture offering with
a custom design and contract management service called Projects by Design, which
assists in the building or renovation of schools.
Our specialty businesses offer product lines for specific educational
disciplines, as follows:
Childcraft. Childcraft markets early childhood education products and
materials. Childcraft also markets over 1,000 proprietary or exclusive products
manufactured by its Bird-in-Hand Woodworks subsidiary, including wood classroom
furniture and equipment such as library shelving, cubbies, easels, desks and
play vehicles.
ClassroomDirect.com. ClassroomDirect.com offers general supplemental
educational supplies to teachers and curriculum specialists directly through its
mail-order catalogs and fully integrated B2T website.
Sax Arts and Crafts. Sax Arts and Crafts is a leading marketer of art
supplies and art instruction materials, including paints, brushes, paper,
ceramics, art metals and glass, leather and wood crafts. Sax Arts and Crafts
offers customers a toll free "Art Savvy Hotline" staffed with professional
artists to respond to customer questions.
Frey Scientific. Frey Scientific is a leading marketer of laboratory
supplies, equipment and furniture for science classrooms. Frey Scientific
offers value-added focus in the biology, chemistry, physics and earth science
areas.
Sportime. Sportime is a leading marketer of physical education,
athletic and recreational products. Sportime's catalog product offering includes
products for early childhood through middle school as well as targeted products
for physically challenged children.
Teacher's Video. Teacher's Video is a leading marketer and producer of
educational videos for educators targeting teachers, curriculum coordinators and
department heads through 16 different curriculum-oriented catalogs, with a total
annual mailing volume in excess of 22 million catalogs.
Brodhead Garrett. Brodhead Garrett is the nation's oldest marketer of
industrial arts products and technical materials to classrooms. Brodhead
Garrett's product line includes various items such as drill presses, sand paper,
lathes and robotic controlled arms.
Hammond & Stephens. Hammond & Stephens is a leading publisher of school
forms, including student assignment books, record books, grade books, teacher
planners and other printed forms.
Our merchandising managers, many of whom have prior experience in
education, continually review and update the product lines for each business.
The merchandising managers convene customer focus groups and advisory panels to
determine whether current offerings are well-received and to anticipate future
demand. The merchandising managers also travel to product fairs and conventions
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seeking out new product lines. This annual review process results in a constant
reshaping and expansion of the educational materials we offer.
Sales and Marketing
We have implemented an innovative multi-channel sales and marketing
strategy that employs a traditional sales force of over 300 professionals, a
specialty sales force of over 50 professionals, over 38 million catalogs mailed
annually, a B2T website and a B2B educational portal. We believe we have
developed a substantially different sales and marketing model from that of other
supplemental educational supply companies in the United States. Our strategy is
to use two separate sales and marketing approaches ("top down" and "bottom up")
to reach all the prospective purchasers in the education system.
Traditional Business. Our "top down" marketing approach targets
administrative decision-makers through our traditional sales force, the School
Specialty general supply catalog and the JuneBox.com education portal. This
approach accounts for the majority of our traditional business.
Our primary compensation program for sales representatives is based on
commissions as a percentage of gross profit on sales. For new and transitioning
sales representatives, we offer salary and expense reimbursement until the
representative is moved to a full commission compensation structure.
Schools typically purchase supplies based on established relationships with
relatively few vendors. We seek to establish and maintain these critical
relationships, by assigning accounts within a specific geographic territory to a
local area sales representative who is supported by a centrally located customer
service team. The customer service representatives frequently call on existing
customers to ascertain and fulfill their supplemental educational supply needs.
The representatives maintain contact with these customers throughout the order
cycle and assist in processing orders.
As part of the integration of Beckley-Cardy, which we acquired in 1998, we
restructured our traditional sales and marketing operations from a decentralized
regional system to a more centralized national structure. We believe that the
new structure significantly improves our effectiveness through better sales
management, resulting in higher regional penetration, and significant cost
savings through the reduction of distribution centers.
"Projects by Design" is a service we provide to help in the building or
renovation of schools. Our professionals prepare a detailed room-by-room
analysis to simplify supplemental educational supply planning and fulfillment.
Customers have the ability to view prospective classrooms through our innovative
software in order to efficiently manage the project.
Specialty Business. We use the "bottom up" approach to target the
classroom level decision-makers through our specialty sales force and catalogs
featuring seven specialty brands along with our ClassroomDirect.com catalog and
website. These catalogs allow teachers to procure supplies that are specific to
their curriculum and classroom needs and may not have been purchased by school
administration.
For each specialty brand, a major catalog containing its full product
offering is distributed near the end of the calendar year for the beginning of
the January through July selling season. During the course of the year we mail
additional supplemental catalogs. Schools can also access the Childcraft,
Teacher's Video and ClassroomDirect.com websites. Further, we believe that by
cross marketing our specialty brands to traditional customers, we can achieve
substantial incremental sales.
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Internet Operations. Our Internet approach comprises both a B2T website
and a B2B portal and creates a new sales channel for School Specialty. We have
invested approximately $11 million within the last three years to develop what
we believe to be the number one education portal and e-commerce website in the
industry. In January 1999, we launched our fully-integrated, e-commerce website
ClassroomDirect.com. The site offers access to approximately 18,000 items with
digital pictures of most items. The site is currently teacher-focused, but we
have the option to broaden the format to target the large parent/student market.
In August 1999, we launched JuneBox.com, a portal structured as an
education mall offering our products. We believe that this site will play an
important role within the education industry by providing education-related
content and information, thereby strengthening our brand name recognition. In
March 2000, we signed an agreement with Ariba, Inc. to power JuneBox.com.
JuneBox.com offers School Specialty's full product portfolio as well as
other suppliers' products such as United Stationers, one of the largest
suppliers of office products and janitorial supplies. This portal provides
enhanced value to educators as it offers over 140,000 items. JuneBox.com is a
one-stop shop for all supplemental educational supplies as well as teaching
tips, lesson plan help, product reviews and updates on current events affecting
the education community.
We also benefit from the Internet with increased quality of customer
service and lower operating costs. By shifting the majority of customer
service for e-commerce customers to the Internet and having orders reviewed and
verified on-line, we have been able to reduce the associated costs while
providing a 24-hour service. Substantially all of our investments in our
Internet operations have been dedicated towards building an efficient, advanced
and flexible Internet platform.
Pricing. Pricing for our general and specialty product offerings varies by
product and market channel. We generally offer a negotiated discount from
catalog prices for supplies from our School Specialty catalog and respond to
quote and bid requests. The pricing structure of specialty products offered
through direct marketing is generally not subject to negotiation.
School Specialty has built a broad customer base where no single customer
accounted for more than 2% of sales during fiscal 1999, 2000 or 2001. We believe
we sell into every school district in the United States and reach nearly all of
the country's teachers.
Procurement
Traditional Business. We purchase our general school supplies and furniture
and equipment from over 2,000 vendors. Product selection is typically evaluated
on an annual basis and we typically negotiate an annual supply contract with
each vendor. Our supply contracts with our larger vendors typically provide for
special pricing and/or extended terms and often include volume based incentive
and rebate programs. In fiscal 2000, we introduced a private label,
ClassroomSelect, which has allowed for margin expansion. We have exclusive
distribution rights on several furniture and equipment lines.
Specialty Business. Many of our products in the specialty business are
proprietary. We either develop the product or it is an exclusive product
developed on our behalf. Typically, we outsource the manufacturing of
proprietary products, except for our Childcraft division, which manufactures
wood furniture for sale by Childcraft and our other businesses. We produce our
Teacher's Video proprietary videos at our Global Video facility in Tempe,
Arizona. Our Hammond & Stephens forms are designed and produced at our facility
in Fremont, Nebraska. We purchase non-proprietary products in the specialty
business in a similar manner as our traditional business procurement process.
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To the extent the traditional and specialty businesses are sourcing product
from common vendors, we typically negotiate one contract to take full advantage
of our combined buying power. We maintain close and stable relationships with
our vendors to facilitate a streamlined procurement process. At the same time,
we continually review alternative supply sources in an effort to improve
quality, improve customer satisfaction, and reduce product cost.
Logistics
We have built what we believe is the largest and most sophisticated
distribution network among our direct marketing competitors, with twelve fully-
automated and seamlessly-integrated distribution centers that ship directly to
the customer. The distribution centers average approximately 190,000 square
feet. We also maintain three call centers to support customer service and sales.
We believe this network represents a significant competitive advantage for us,
allowing us to reach any school in a fast and efficient manner. We shipped
approximately 70% of stocked inventory via UPS in fiscal 2001 and had a 97% on-
time delivery rate. The fill-rate of our facilities has generally exceeded 95%
at the peak of our shipping season. We have the ability to expand the network
through necessary additions needed to support sales growth. New warehouse
capacity can be leased and no large capital investments are typically required.
In order to maintain the proprietary nature of some of our specialty
products, we operate two small manufacturing facilities. The Lancaster,
Pennsylvania facility manufactures products for the Childcraft brand, while the
Fremont, Nebraska facility is used for the production of school forms. Our
manufactured products account for approximately 5% of our sales.
Information Systems
We believe that through the utilization of technology in areas such as
purchasing and inventory management, customer order fulfillment and database
management, we are able to turn over inventory more quickly than competitors,
offer customers more convenient and cost effective ways of ordering products and
more precisely focus our sales and marketing strategies.
We use two principal information systems. In the traditional and certain
specialty businesses, we use a specialized distribution software package used
primarily by office products and paper marketers. This software package, System
for Distributors, offers a fully-integrated process from sales order entry
through customer invoicing, and inventory requirements planning through accounts
payable. Our system provides information through daily automatic posting to the
general ledger and integrated inventory control. We have made numerous
enhancements to this process that allow greater flexibility in addressing the
seasonal requirements of the industry and meeting specific customer needs.
The remaining specialty divisions use a mail-order and catalog system
provided by Smith-Gardner & Associates. This mail-order and catalog system
meets the needs of the direct marketing approach with extensive list management
and tracking of multiple marketing efforts. The system provides complete and
integrated order processing, inventory control, warehouse management and
financial applications.
Our software and hardware allow for continued incremental growth as well as
the opportunity to integrate new client-server and other technologies into the
information systems.
Competition
We believe the market we operate in is competitive on a regional basis.
However our heaviest competition is coming from alternate channel competitors
such as office product contract stationers and
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office supply superstores. Their primary advantages over us are size, location,
greater financial resources and buying power. Their primary disadvantage is that
their product mix typically covers less than 20% of the school's needs (measured
by volume). In addition, our competitors do not offer special order fulfillment
software, which we believe is increasingly important to adequately service
school needs. We believe we compete favorably with these companies on the basis
of service and product offering.
Employees
As of June 15, 2001, we had approximately 2,200 full-time employees. To
meet the seasonal demands of our customers, we employ many seasonal employees
during the late spring and summer months. Historically, we have been able to
meet our requirements for seasonal employment. As of June 15, 2001, none of our
employees were represented by a labor union. We consider our relations with our
employees to be very good.
Forward-Looking Statements
Statements in this Annual Report which are not historical are "forward-
looking" statements within the meaning of the Private Securities Litigation
Reform Act of 1995. The forward-looking statements include: (1) statements made
under Item 1, Business and Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, including, without limitation,
statements with respect to internal growth plans, projected revenues, margin
improvement, future acquisitions, capital expenditures and adequacy of capital
resources; (2) statements included or incorporated by reference in our future
filings with the Securities and Exchange Commission; and (3) information
contained in written material, releases and oral statements issued by, or on
behalf of, School Specialty including, without limitation, statements with
respect to projected revenues, costs, earnings and earnings per share. Forward-
looking statements also include statements regarding the intent, belief or
current expectation of School Specialty or its officers. Forward-looking
statements include statements preceded by, followed by or that include forward-
looking terminology such as "may," "will," "should," "believes," "expects,"
"anticipates," "estimates," "continues" or similar expressions.
All forward-looking statements included in this Annual Report are based on
information available to us as of the date hereof. We do not undertake to update
any forward-looking statements that may be made by or on behalf of us, in this
Annual Report or otherwise. Our actual results may differ materially from those
contained in the forward-looking statements identified above. Factors which may
cause such a difference to occur include, but are not limited to the factors
listed in Exhibit 99.2 to our Form 10-K for fiscal 2001.
10
Item 2. Properties
----------
We recently moved our corporate headquarters from 1000 North Bluemound
Drive, Appleton, Wisconsin to a leased facility at W6316 Design Drive,
Greenville, Wisconsin a combined office and warehouse facility of approximately
332,000 square feet. We also lease or own the following principal facilities:
[Enlarge/Download Table]
Approximate
Square 0wned/
Locations Footage Leased Lease Expiration
--------- ------- ------ ----------------
Agawam, Massachusetts (1)..................... 188,000 Leased November 30, 2020
Atlanta, Georgia (2).......................... 20,000 Leased January 31, 2006
Birmingham, Alabama (2)....................... 190,000 Leased November 30, 2006
Fremont, Nebraska (2)......................... 95,000 Leased June 30, 2003
Fresno, California (1)........................ 163,200 Leased November 1, 2009
Greenville, Wisconsin (3)..................... 332,000 Leased June 1, 2021
Lancaster, Pennsylvania (2)................... 73,000 Leased December 31, 2002
Lancaster, Pennsylvania (2)................... 204,000 Leased February 28, 2009
Lufkin, Texas (1)............................. 140,000 Owned --
Lyons, New York (1)........................... 179,000 Owned --
Mansfield, Ohio (3)........................... 315,000 Leased November 30, 2020
New Berlin, Wisconsin (2)..................... 97,500 Leased March 31, 2002
Salina, Kansas (1)............................ 123,000 Owned --
Southaven, Mississippi (1).................... 200,000 Leased December 31, 2010
Tempe, Arizona (2)............................ 57,000 Leased February 28, 2005
________________
(1) Location services the traditional segment.
(2) Location services the specialty segment.
(3) Location services both business segments.
The 73,000 square foot Lancaster, Pennsylvania facility is used for
manufacturing and the Fremont, Nebraska facility is used for production of
school forms. The other facilities are distribution centers and/or office space.
We believe that our properties, as enhanced for our ongoing expansion,
are adequate to support our operations for the foreseeable future. We regularly
review the utilization and consolidation of our facilities.
Item 3. Legal Proceedings
-----------------
We are, from time to time, a party to legal proceedings arising in the
normal course of business. We believe that none of these legal proceedings will
materially or adversely affect our financial position, results of operations or
cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
There were no matters submitted during the quarter ended April 28,
2001 to a vote of our security holders.
11
EXECUTIVE OFFICERS OF THE REGISTRANT
As of June 15, 2001, the following persons served as executive officers of
School Specialty:
Name and Age
------------
of Officer
----------
Daniel P. Spalding Mr. Spalding became Chairman of the Board and Chief
Age 46 Executive Officer of School Specialty in February
1998. From 1996 to February 1998, Mr. Spalding served
as President of the Educational Supplies and Products
Division of U.S. Office Products. From 1988 to 1996,
he served as President, Chief Executive Officer and a
director of School Specialty's predecessor. Prior to
1988, Mr. Spalding was an officer of JanSport, a
manufacturer of sports apparel and backpacking
equipment. Mr. Spalding was a co-founder of JanSport
and served as President and Chief Executive Officer
from 1977 to 1984. Mr. Spalding has been a director
of the National School Supply and Equipment
Association since 1992 and completed his term as the
association's Chairman in November 1997.
David J. Vander Zanden Mr. Vander Zanden became the President and Chief
Age 46 Operating Officer of School Specialty in March 1998.
From 1992 to March 1998, he served as President of
Ariens Company, a manufacturer of outdoor lawn and
garden equipment. Mr. Vander Zanden has served as a
director of School Specialty since completion of the
spin-off from U.S. Office Products in June 1998.
Mary M. Kabacinski Ms. Kabacinski, a Certified Public Accountant, has
Age 52 served as Executive Vice President and Chief
Financial Officer of School Specialty since August
1999. From 1989 to 1999, she served as Senior Vice
President and Chief Financial Officer for Marquette
Medical Systems, a manufacturer of medical devices.
A. Brent Pulsipher Mr. Pulsipher became Executive Vice President of
Age 59 Corporate Logistics and Technology of School
Specialty in March 2001. From 1998 to 2001, Mr.
Pulsipher was Chief Information Officer for Tropical
Sportswear International, an apparel producer and
brand manager. Mr. Pulsipher held the position of
Manager of Consulting Services for Distribution
Resources Company from 1988 to 1998. Prior to 1988,
Mr. Pulsipher held various executive operational and
consulting positions.
Michael J. Killoren Mr. Killoren has served as Executive Vice President
Age 44 and Chief Information Officer of JuneBox.com, Inc.,
since June 2000. From 1999 through June 2000, Mr.
Killoren served as Vice President and Chief
Information Officer of School Specialty. Mr. Killoren
was Chief Operating Officer of School Specialty
Distribution from 1997 to 1999 and Vice President
Operations from 1992 to 1997. Mr. Killoren joined
School Specialty in 1980.
Donald J. Noskowiak Mr. Noskowiak has served as Vice President of Finance
Age 43 and Business Development of School Specialty since
August 1999. Mr. Noskowiak has been with School
Specialty since 1992, and served as Chief Financial
Officer from 1997 to August 1999.
Daniel P. Spalding and Michael J. Killoren are cousins.
12
The term of office of each executive officer is from one annual
meeting of the Board of Directors until the next annual meeting of the Board of
Directors or until a successor for each is selected.
There are no arrangements or understandings between any of our
executive officers and any other person (not an officer or director of School
Specialty acting as such) pursuant to which any of our executive officers were
selected as an officer of School Specialty.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
---------------------------------------------------------------------
Market Information
Our common stock has traded under the symbol "SCHS" on the Nasdaq
National Market since June 10, 1998. There was no market for the common stock
prior to that date. The table below sets forth the reported high and low closing
sale prices for shares of the common stock, as reported by the Nasdaq National
Market during the indicated quarters.
High Low
---- ---
Fiscal 2001 quarter ended
-------------------------
July 29, 2000................................... $19.50 $14.50
October 28, 2000................................ 21.31 15.06
January 27, 2001................................ 21.69 15.00
April 28, 2001.................................. 23.39 19.69
High Low
---- ---
Fiscal 2000 quarter ended
-------------------------
July 24, 1999................................... $19.31 $14.31
October 23, 1999................................ 17.38 11.88
January 22, 2000................................ 16.63 12.13
April 29, 2000.................................. 23.13 14.13
Holders
As of June 15, 2001, there were 2,212 record holders of our common
stock.
Historical Dividends
We have not declared or paid any cash dividends on our common stock to
date. We currently intend to retain our future earnings to finance the growth,
development and expansion of our business. Accordingly, we do not expect to pay
cash dividends on our common stock in the foreseeable future. In addition, our
ability to pay dividends may be restricted or prohibited from time to time by
financial covenants in our credit agreements and debt instruments. Our current
credit facility contains restrictions on, and in some circumstances may prevent,
our payment of dividends.
13
Item 6. Selected Financial Data
-----------------------
SELECTED FINANCIAL DATA
(in thousands, except per share data) (1) (2)
[Enlarge/Download Table]
Fiscal Year Ended
------------------------------------------------------------------------------
(52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks) (52 Weeks)
-------- -------- -------- -------- --------
April 28, April 29, April 24, April 25, April 26,
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Statement of Operations Data:
Revenues.............................. $692,674 $639,271 $521,704 $310,455 $191,746
Cost of revenues...................... 440,946 406,043 341,783 202,870 126,862
-------- -------- -------- -------- --------
Gross profit........................ 251,728 233,228 179,921 107,585 64,884
Selling, general and administrative
expenses........................ 208,647 184,586 144,659 87,846 53,177
Non-recurring acquisition costs....... -- -- -- -- 1,792
Restructuring and strategic
restructuring costs............ 4,500 -- 5,274 3,491 194
-------- -------- -------- -------- --------
Operating income.................... 38,581 48,642 29,988 16,248 9,721
Interest expense (net)................ 16,014 13,151 12,601 5,373 4,197
Other expense (income)................ 1,214 1,856 (228) 156 (196)
-------- -------- -------- -------- --------
Income before provision for
income taxes...................... 21,353 33,635 17,615 10,719 5,720
Provision for (benefit from) income
taxes (3)......................... 9,214 15,120 8,719 5,480 (2,412)
-------- -------- -------- -------- --------
Net income.......................... $ 12,139 $ 18,515 $ 8,896 $ 5,239 $ 8,132
======== ======== ======== ======== ========
Net income per share:
Basic............................... $ 0.69 $ 1.06 $ 0.61 $ 0.40 $ 0.81
Diluted............................. $ 0.68 $ 1.06 $ 0.60 $ 0.39 $ 0.80
Weighted average shares outstanding:
Basic............................... 17,495 17,429 14,690 13,284 10,003
Diluted............................. 17,782 17,480 14,840 13,547 10,196
[Enlarge/Download Table]
April 28, April 29, April 24, April 25, April 26,
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Balance Sheet Data:
Working capital....................... $ 85,518 $116,857 $115,853 $ 47,791 $ 14,491
Total assets.......................... 506,292 454,849 437,708 223,729 87,685
Long-term debt........................ 158,168 144,789 161,691 63,014 33,792
Total debt............................ 179,783 162,180 173,285 83,302 60,746
Shareholders' equity.................. 239,460 224,993 202,687 106,466 16,329
__________
(1) The historical financial information of School Specialty, Inc. and The Re-
Print Corp., both of which were acquired by U.S. Office Products in
business combinations accounted for under the pooling-of-interests method
in May 1996 and July 1996, respectively, have been combined on a historical
cost basis in accordance with generally accepted accounting principles to
present this financial data as if the two companies had always been members
of the same operating group. All business acquisitions since July 1996
have been accounted for under the purchase method. The financial
information of the businesses acquired in business combinations accounted
for under the purchase method is included from the dates of their
respective acquisitions.
(2) Certain amounts previously reported have been reclassified to conform with
the fiscal 2001 presentation. These reclassifications have no effect on net
income or net income per share.
(3) Results for the fiscal year ended April 26, 1997 include a benefit from
income taxes of $2.4 million which primarily resulted from the reversal of
a $5.3 million valuation allowance in the quarter ended
14
April 26, 1997. The valuation allowance had been established in 1995 to
offset the tax benefit from net operating loss carryforwards included in
our deferred tax assets, because at the time it was not likely that such
tax benefit would be realized. The valuation allowance was reversed
subsequent to our being acquired by U.S. Office Products, because it was
deemed "more likely than not," based on improved results, that such tax
benefit would be realized.
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
You should read the following discussion and analysis in conjunction
with our consolidated financial statements and related notes, included elsewhere
in this Annual Report.
Overview
We are the largest direct marketing company for supplemental
educational supplies to schools and teachers for preK-12 in the United States.
We offer more than 80,000 items through an innovative two-pronged marketing
approach that targets both school administrators and individual teachers. Our
broad product range enables us to provide our customers with one source for
virtually all of their non-textbook school supplies and furniture needs.
We have grown significantly in recent years primarily through
acquisitions but also through internal growth. Our revenues for fiscal 2001 were
$692.7 million and our operating income before restructuring costs was $43.1
million, which represented compound annual increases of 38% and 39%,
respectively, compared to our fiscal 1997 results.
Our gross margin has improved in recent years primarily due to
acquisitions and increased buying power. We have acquired many specialty
businesses, which tend to have higher gross margins than our traditional
business. In addition, our acquisitions of both specialty and traditional
businesses have increased our buying power, resulting in reduced costs of the
products we purchase.
Our operating profit and margins also improved significantly over the
last several years, prior to fiscal 2001. This improvement reflects our
acquisitions of specialty companies, which typically have higher operating
margins than our traditional business. In addition, through the integration of
acquired businesses, we have been able to further improve our operating profit
and margins by eliminating redundant expenses, leveraging overhead costs and
improving purchasing power. Because our business is seasonal, the timing of our
acquisitions may affect the comparability of our operating profit and margins in
the short term. In particular, the decline in operating profit and margins in
fiscal 2001 was primarily due to the Hammett acquisition, a major acquisition
during a seasonally low period. In addition, fiscal 2001 operating profit and
margins were impacted by our investment in Internet operations.
In recent years, we have grown through acquisitions. As a result of
integrating the acquired operations, we have recorded restructuring charges over
the last several years. These charges have primarily been to close existing
facilities and to consolidate operations that, when combined with acquired
operations, became redundant. To the extent our integrations have resulted in
the closure of an acquired facility or consolidation of acquired operations, the
costs were charged to goodwill.
Our effective tax rate is higher than the federal statutory tax rate
of 35%. This historically has been due primarily to non-deductible goodwill
amortization and state taxes.
Our business and working capital needs are highly seasonal with peak
sales levels occurring from June through October. During this period, we
receive, ship and bill the majority of our orders so that schools and teachers
receive their merchandise by the start of each school year. Our inventory levels
increase in April through June in anticipation of the peak shipping season. The
majority of shipments are
15
made between May and October and the majority of cash receipts are collected
from September through December. As a result, we usually earn more than 100% of
our annual net income in the first two quarters of our fiscal year and operate
at a net loss in our third and fourth fiscal quarters.
Results of Operations
The following table sets forth certain information as a percentage of
revenues on a historical basis concerning our results of operations for the
fiscal years 2001, 2000, and 1999.
[Enlarge/Download Table]
Fiscal Year Ended
---------------------------------------------------------
April 28, 2001 April 29, 2000 April 24, 1999
-------------- -------------- --------------
(52 Weeks) (53 Weeks) (52 Weeks)
-------- -------- --------
Revenues............................................. 100.0% 100.0% 100.0%
Cost of revenues..................................... 63.7 63.5 65.5
----- ----- -----
Gross profit...................................... 36.3 36.5 34.5
Selling, generaland administrative expenses.......... 30.1 28.9 27.7
Restructuring and strategic restructuring costs...... 0.6 -- 1.0
----- ----- -----
Operating income.................................. 5.6 7.6 5.8
Interest expense, net................................ 2.3 2.1 2.4
Other expense........................................ 0.2 0.2 --
----- ----- -----
Income before provision for income taxes............. 3.1 5.3 3.4
Provision for income taxes........................... 1.3 2.4 1.7
----- ----- -----
Net income........................................... 1.8% 2.9% 1.7%
===== ===== =====
Consolidated Historical Results of Operations
Fiscal Year Ended April 28, 2001 (52 weeks) Compared to Fiscal Year Ended April
29, 2000 (53 weeks)
Revenues
--------
Revenues increased 8.4% from $639.3 million for fiscal 2000 to $692.7
million for fiscal 2001. This increase is primarily due to the inclusion of
revenues from the eight businesses acquired since the beginning of fiscal 2000
and internal growth on existing business. These increases were partially offset
by an extra week of shipments in fiscal 2000, as fiscal 2000 was a 53 week
fiscal year and fiscal 2001 had 52 weeks. On a comparable 52 week basis,
revenues increased 10.4% from fiscal 2000 to fiscal 2001.
Gross Profit
------------
Gross profit increased 7.9% from $233.2 million, or 36.5% of revenues, in
fiscal 2000 to $251.7 million, or 36.3% of revenues, in fiscal 2001. The
increase in gross profit was due primarily to an increase in revenues. The
change in gross margin was primarily due to slightly lower gross margins in the
traditional segment driven by lower margins on the furniture lines, partially
offset by enhanced consumable business gross margins and an increase in
consumable business product mix, which has higher gross margins than the
furniture lines in the traditional segment. This change in traditional segment
gross margin was offset by an increase in specialty segment gross margin in the
Childcraft division (driven by improved operating efficiencies and purchasing
power) and the acquisition of Global Video in June 2000, which has higher gross
margins than most of our other specialty businesses.
16
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 warehouse shipments
transportation costs), catalog costs, general administrative overhead (which
includes information systems, accounting, legal, and human resources) and
depreciation and amortization expense.
Selling, general and administrative expenses increased 13.0% from $184.6
million, or 28.9% of revenues, in fiscal 2000 to $208.6 million, or 30.1% of
revenues, in fiscal 2001. The increase in selling, general and administrative
expenses was primarily due to an increase in variable costs related to increased
revenues, expenses incurred to develop our Internet operations, and the
acquisition of certain assets of Hammett. The change in selling, general and
administrative expenses as a percentage of revenues was due to 1) growth in the
specialty segment, which typically has higher selling, general and
administrative expenses than our other business segments, 2) expenses incurred
in developing our Internet operations and 3) the acquisition of Hammett during
our seasonally low period, which created redundancies in the traditional
segment. We began to integrate Hammett during the third quarter of fiscal 2001,
and will further consolidate operations as a result of the acquisition in the
third quarter of fiscal 2002, following our heavy shipping season.
Restructuring Costs
-------------------
During the fourth quarter of fiscal 2001, we recorded a restructuring
charge of $4.5 million, which includes $2.4 million to close redundant
facilities, $1.5 million for severance and termination benefits for
approximately 80 individuals and $0.6 million for other costs. We began to
formulate the plan for restructuring during fiscal 2001's third quarter
following our acquisition of Hammett. Further details of the restructuring
charge are discussed in the notes to consolidated financial statements.
Interest Expense
----------------
Net interest expense increased $2.9 million from $13.2 million, or 2.1% of
revenues, in fiscal 2000, to $16.0 million, or 2.3% of revenues in fiscal 2001.
The increase in net interest expense was primarily attributable to the debt
assumed and cash paid for the acquisitions of Global Video and Hammett, which
occurred in June 2000 and November 2000, respectively, and a slight increase in
the effective interest rate. These increases were partially offset by reduced
interest expense attributable to debt repaid from the net proceeds from sale-
leaseback transactions of $17.8 million, the sale of property of $6.6 million,
the sale of Gresswell of $3.5 million and proceeds from an accounts receivable
securitization (the "receivable securitization") of $50.0 million, which we
entered into in November 2000.
Other Expenses
--------------
Other expenses decreased $0.7 million from $1.9 million in fiscal 2000 to
$1.2 million in fiscal 2001. Other expenses in fiscal 2001 primarily consisted
of a $0.7 million pre-tax loss on the disposition of Gresswell and the discount
and loss on the receivable securitization of $1.4 million, partially offset by a
$0.5 million pre-tax gain on the sale of SmartStuff. Other expenses in fiscal
2000 primarily consisted of a $1.5 million non-cash impairment charge on a
minority equity investment.
17
Provision for Income Taxes
--------------------------
Provision for income taxes for fiscal 2001 decreased 39.1% or $5.9 million
over fiscal 2000, reflecting income tax rates of 43.2% and 45.0% in fiscal 2001
and fiscal 2000, respectively. The decrease in the effective tax rate was
primarily due to the impact of the difference in book and tax basis related to
the divestitures of SmartStuff and Gresswell. The higher effective tax rate, as
compared to the federal statutory rate of 35.0%, is primarily due to state
income taxes and non-deductible goodwill amortization.
Fiscal Year Ended April 29, 2000 (53 weeks) Compared to Fiscal Year Ended April
24, 1999 (52 weeks)
Revenues
--------
Revenues increased 22.5% from $521.7 million for fiscal 1999 to $639.3
million for fiscal 2000. This increase was primarily due to internal growth on
existing business and the inclusion of revenues from the six companies acquired
since the beginning of fiscal 1999.
Gross Profit
------------
Gross profit increased 29.6% from $179.9 million, or 34.5% of revenues, in
fiscal 1999 to $233.2 million, or 36.5% of revenues, in fiscal 2000. The
increase in gross margin was due primarily to 1) a shift in product mix to
increased revenue from the specialty segment, where proprietary products
generate higher gross margins than the traditional segment, 2) an improvement in
traditional segment gross margins, driven primarily by more favorable pricing
and the elimination of less profitable products from our product offering, and
3) an improvement in specialty segment gross margin, which was driven by more
favorable product mix and contributions from Sportime, which was acquired in
February of fiscal 1999, and has higher gross margins than most of our other
businesses. These increases were slightly offset by contributions from our
Internet segment, which as a group has lower gross margins than our other
businesses.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses increased 27.6% from $144.7
million, or 27.7% of revenues, in fiscal 1999 to $184.6 million, or 28.9% of
revenues, in fiscal 2000. The increase in selling, general and administrative
expense was primarily due to an increase in revenues. The increase in selling,
general and administrative expense as a percentage of revenues is primarily due
to 1) a shift in revenue mix to the specialty segment, which has higher selling,
general and administrative expenses than the traditional segment, 2) higher
amortization expense due to goodwill amortization related to the acquisitions we
completed since the beginning of fiscal 1999, and 3) expenses related to
expanding the Internet segment, which were incremental in fiscal 2000. These
increases were offset by reduced selling, general and administrative expenses in
the traditional segment, which was primarily due to the integration of Beckley-
Cardy and the restructuring of the traditional segment, which began in the
second quarter of fiscal 1999.
Restructuring Costs
-------------------
During fiscal 1999, we recorded a strategic restructuring charge of $1.1
million in the first quarter and a $4.2 million restructuring charge in the
second quarter, for a total of $5.3 million during fiscal 1999. The $1.1
million charge related to a one-time, non-cash charge for compensation expense
attributed to U.S. Office Product's stock option tender offer and the sale of
shares of common stock to some of our executive
18
management personnel. The $4.2 million charge was to consolidate existing
warehousing, customer service and sales operations. Further details of the
restructuring charge are discussed in the notes to consolidated financial
statements.
Interest Expense
----------------
Net interest expense increased $0.6 million from $12.6 million, or 2.4% of
revenues, in fiscal 1999, to $13.2 million, or 2.1% of revenues in fiscal 2000.
The increase in net interest expense was primarily attributable to the debt
assumed and cash paid for the six companies acquired since the beginning of
fiscal 1999, partially offset by reduced interest expense attributable to debt
repaid from the net proceeds from our follow-on offering of common stock in
April 1999.
Other Expenses
--------------
Other expenses of $1.9 million for fiscal 2000 primarily represented a non-
cash impairment charge on a minority investment.
Provision for Income Taxes
--------------------------
Provision for income taxes for fiscal 2000 increased 73.4% or $6.4 million
over fiscal 1999, reflecting income tax rates of 45.0% and 49.5% in fiscal 2000
and fiscal 1999, respectively. The decrease in the effective tax rate was
primarily due to a decline in the effective state tax rate and a reduction in
the amount of non-deductible goodwill amortization. The higher effective tax
rate, as compared to the federal statutory rate of 35.0%, was primarily due to
state income taxes and non-deductible goodwill amortization.
Liquidity and Capital Resources
At April 28, 2001, we had working capital of $85.5 million. Our
capitalization at April 28, 2001 was $419.2 million and consisted of total debt
of $179.8 million and shareholders' equity of $239.5 million.
We currently have a five year secured $350 million credit facility with
Bank of America, N.A. The credit facility had an initial $100 million term loan
maturing quarterly and $250 million of availability under revolving loans. The
credit facility matures on September 30, 2003. The amount outstanding as of
April 28, 2001 under the credit facility was approximately $179.0 million,
consisting of $110.0 million and $69.0 million outstanding under the revolving
and term loans, respectively. 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.
Effective January 2, 2001, we entered into an interest rate swap agreement
with The Bank of New York covering $50 million of the outstanding amount under
the revolving portion of our credit facility. The one-year non-cancelable swap
agreement fixes the 30-day LIBOR interest rate at 6.07% per annum on a $50
million notional amount.
On October 28, 1998, we entered into an interest rate swap agreement with
The Bank of New York covering $50 million of the outstanding amount under the
revolving portion of our credit facility. The 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. On October 30, 2000, The Bank of New York cancelled the swap
agreement.
19
As of April 28, 2001, our effective interest rate on borrowings under our
credit facility was approximately 6.8% excluding the effect of the swap
agreement and 7.0% including the effect of the swap agreement.
In fiscal 2001, we borrowed under our credit facility primarily for
seasonal working capital, acquisitions, and capital expenditures. During the
same period, we made certain immaterial changes to certain financial and other
covenants under our credit facility.
In November 2000, we entered into the receivable securitization, with a
financial institution whereby we sell on a continuous basis an undivided
interest in all of our eligible trade accounts receivable. Under the receivable
securitization, we transfer without recourse all of our accounts receivable to a
wholly-owned subsidiary. This subsidiary, in turn, has sold and, subject to
certain conditions, may from time to time sell an undivided interest in these
receivables and is permitted to receive advances of up to $50.0 million for the
sale of such undivided interest. The facility expires in November 2001. At
April 28, 2001, $50.0 million was advanced under the receivable securitization
and accordingly, that amount of accounts receivable has been removed from our
consolidated balance sheet. The proceeds from the sale were used to reduce
borrowings on our credit facility. Costs associated with the sale of
receivables, primarily related to the discount and loss on sale, were $1.4
million and are included in other expenses in our consolidated statement of
operations.
During fiscal 2001, net cash provided by operating activities was $38.5
million, a 23.8% increase over fiscal 2000. Net cash used in investing
activities was $104.1 million, including $116.1 million for acquisitions and
$15.2 million for additions to property and equipment. This use of cash was
offset by net proceeds provided by sale-leaseback transactions of $17.8 million,
the sale of property of $6.6 million, and the sale of Gresswell of $3.5 million.
Net borrowings of $15.8 million under the credit facility, combined with cash
from operations, cash on hand and proceeds from the receivables securitization
of $50.0 million were used to finance the above investing activities.
During fiscal 2000, net cash provided by operating activities was $31.1
million. Net cash used in investing activities was $27.3 million, including
$1.3 million for acquisitions, $17.4 million for additions to property and
equipment and $8.7 million for other long-term assets. Investments in other
long-term assets include $3.0 million for a minority equity interest in A Better
Way of Learning which is an e-commerce fulfillment partner of School Specialty,
$2.8 million for software licensing to power JuneBox.com, our purchasing portal
for schools, $1.7 million to purchase the net assets of a division of a
furniture manufacturer and a compilation of other long-term investments. Net
payments of $9.4 million were made to reduce indebtedness under the credit
facility, using $2.2 million in proceeds from our follow-on offering of common
stock, as well as cash from operations and cash on hand.
Our capital expenditures in fiscal 2002 are expected to be approximately
$10 million. The largest items include computer hardware and software and
distribution equipment and improvements.
We anticipate that our cash flow from operations, borrowings available from
our existing credit facility and other sources of capital will be sufficient to
meet our liquidity requirements for operations, including capital expenditures,
and our debt service obligations.
Fluctuations in Quarterly Results of Operations
Our business is subject to seasonal influences. Our historical revenues
and profitability have been dramatically higher in the first two quarters of our
fiscal year primarily due to increased shipments to customers coinciding with
the start of each school year.
20
Quarterly results also may be materially affected by the timing of
acquisitions, the timing and magnitude of costs related to such acquisitions,
variations in our costs for the products sold, the mix of products sold and
general economic conditions. Moreover, the operating margins of companies we
acquire may differ substantially from our own, which could contribute to further
fluctuation in quarterly operating results. Therefore, results for any quarter
are not indicative of the results that we may achieve for any subsequent fiscal
quarter or for a full fiscal year.
The following table sets forth certain unaudited consolidated quarterly
financial data for fiscal 2001 and fiscal 2000. We derived this data from
unaudited consolidated financial statements.
[Enlarge/Download Table]
Fiscal Year Ended April 28, 2001
----------------------------------------------------------------------------------------
First Second Third Fourth Total
---------------- ---------------- ---------------- ---------------- ----------------
(13 weeks) (13 weeks) (13 weeks) (13 weeks) (52 weeks)
Revenues......................... $217,067 $240,539 $104,658 $130,410 $692,674
Gross profit..................... 79,069 85,513 38,034 49,112 251,728
Operating income (loss).......... 24,107 27,782 (4,211) (9,097) 38,581
Net income (loss)................ 11,393 12,902 (4,802) (7,354) 12,139
Per share amounts:
Basic......................... $ 0.65 $ 0.74 $ (0.27) $ (0.42) $ 0.69
Diluted....................... $ 0.65 $ 0.73 $ (0.27) $ (0.42) $ 0.68
[Enlarge/Download Table]
Fiscal Year Ended April 29, 2000
----------------------------------------------------------------------------------------
First Second Third Fourth Total
---------------- ---------------- ---------------- ---------------- ----------------
(13 weeks) (13 weeks) (13 weeks) (14 weeks) (53 weeks)
Revenues......................... $194,299 $231,588 $97,244 $116,140 $639,271
Gross profit..................... 72,879 82,913 33,429 44,007 233,228
Operating income (loss).......... 24,564 26,701 (2,245) (378) 48,642
Net income (loss)................ 11,364 12,184 (3,032) (2,001) 18,515
Per share amounts:
Basic......................... $ 0.65 $ 0.70 $ (0.17) $ (0.11) $ 1.06
Diluted....................... $ 0.65 $ 0.70 $ (0.17) $ (0.11) $ 1.06
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.
Recent 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.
We 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 our financial
position or results of operations.
21
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
--------------------------------------------------------
Our financial instruments include cash and cash equivalents, accounts
receivable, accounts payable, equity securities and long-term debt. Market risks
relating to our operations result primarily from changes in interest rates. Our
borrowings are primarily dependent upon LIBOR rates. A hypothetical 1% decrease
in interest rates during fiscal 2001 would have decreased our fiscal 2001
interest expense by approximately $2.5 million. The estimated fair value at
April 28, 2001.
We do not hold or issue derivative financial instruments for trading
purposes. To manage interest rate risk on the variable rate borrowings under the
revolving portion of our credit facility, we entered in the interest rate swap
agreements during fiscal 1999 and fiscal 2001. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources." These interest rate swap agreements have the effect of locking in,
for a specified period, the base interest rate we pay on a notional principal
amount established in the swaps. As a result, while these hedging arrangements
are structured to reduced our exposure to interest rate increases, it also
limits the benefit we might otherwise have received from any interest rate
decrease. The swaps are usually cash settled monthly, with interest expense
adjusted for amounts paid or received. Effect of these swaps have been minor
during fiscal 2001.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
Our financial instruments include cash and cash equivalents, accounts
receivable, accounts payable, equity securities and long-term debt. Market
risks relating to our operations result primarily from changes in interest
rates. Our borrowings are primarily dependent upon LIBOR rates. A hypothetical
1% decrease in interest rates during fiscal 2001 would have decreased our fiscal
2001 interest expense by approximately $2.5 million. The estimated fair value of
long-term debt approximates its carrying value at April 28, 2001.
We do not hold or issue derivative financial instruments for trading
purposes. To manage interest rate risk on the variable rate borrowings under
the revolving portion of our credit facility, we entered into interest rate swap
agreements during fiscal 1999 and fiscal 2001. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." These interest rate swap agreements have the effect of
locking in, for a specified period, the base interest rate we pay on a notional
principal amount established in the swaps. As a result, while these hedging
arrangements are structured to reduce our exposure to interest rate increases,
it also limits the benefit we might otherwise have received from any interest
rate decreases. The swaps are usually cash settled monthly, with interest
expense adjusted for amounts paid or received. Effects of these swaps have been
minor during fiscal 2001.
23
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
of School Specialty, Inc.:
We have audited the accompanying consolidated balance sheet of School
Specialty, Inc., a Wisconsin corporation, and its subsidiaries as of April 28,
2001 and the related consolidated statements of operations, shareholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
financial statements of School Specialty, Inc. as of and for the two years
ended April 29, 2000, were audited by other auditors whose report dated June 9,
2000, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of School Specialty, Inc. as
of April 28, 2001, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements as of and for the year ended April 28, 2001, taken as a
whole. The schedule listed in Part IV Item 14(a)(2) of this Form 10-K is
presented for the purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in our audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data as of and for the year ended
April 28, 2001, required to be set forth therein in relation to the basic
financial statements taken as a whole.
Arthur Andersen LLP
Milwaukee, Wisconsin
June 4, 2001
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of School Specialty, Inc.
In our opinion, the consolidated balance sheet as of April 29, 2000 and the
related consolidated statements of operations, of shareholders' equity and of
cash flows for each of the two years in the period ended April 29, 2000,
present fairly, in all material respects, the financial position, results of
operations and cash flows of School Specialty, Inc. and its subsidiaries at
April 29, 2000 and for each of the two years in the period ended April 29,
2000, in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 14(a)(2) presents fairly, in
all material respects, the information set forth therein as of April 29, 2000
and April 24, 1999, and for each of the two years in the period ended April 29,
2000, when read in conjunction with the related consolidated financial
statements. These financial statements and the financial statement schedule are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements and the financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. We have not audited the
consolidated financial statements or financial statement schedule of School
Specialty, Inc. for any period subsequent to April 29, 2000.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
June 9, 2000
F-2
FINANCIAL STATEMENTS
SCHOOL SPECIALTY, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
[Download Table]
April April
28, 29,
2001 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,688 $ 4,151
Accounts receivable, less allowance for doubtful accounts
of $3,523 and $1,744, respectively....................... 40,358 76,028
Inventories............................................... 102,192 86,117
Prepaid expenses and other current assets................. 35,053 28,664
Deferred taxes............................................ 7,873 6,964
-------- --------
Total current assets.................................... 191,164 201,924
Property and equipment, net................................. 43,522 51,725
Intangible assets, net...................................... 254,871 192,744
Deferred taxes.............................................. -- 1,861
Other....................................................... 16,735 6,595
-------- --------
Total assets............................................ $506,292 $454,849
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities--long-term debt........................ $ 21,615 $ 17,391
Accounts payable.......................................... 57,896 48,874
Accrued compensation...................................... 7,989 8,634
Accrued restructuring..................................... 2,513 65
Other accrued liabilities................................. 15,633 10,103
-------- --------
Total current liabilities............................... 105,646 85,067
Long-term debt.............................................. 158,168 144,789
Deferred taxes.............................................. 3,018 --
-------- --------
Total liabilities....................................... 266,832 229,856
Commitments and contingencies
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 17,587,008 and 17,464,505 shares
issued and outstanding................................... 18 17
Capital paid-in excess of par value....................... 198,119 196,012
Accumulated other comprehensive loss (income)............. 190 (30)
Retained earnings......................................... 41,133 28,994
-------- --------
Total shareholders' equity.............................. 239,460 224,993
-------- --------
Total liabilities and shareholders' equity.............. $506,292 $454,849
======== ========
See accompanying notes to consolidated financial statements.
F-3
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
[Download Table]
For the Fiscal Year Ended
----------------------------
April April April
28, 2001 29, 2000 24, 1999
-------- -------- --------
(52 (53 (52
weeks) weeks) weeks)
Revenues.......................................... $692,674 $639,271 $521,704
Cost of revenues.................................. 440,946 406,043 341,783
-------- -------- --------
Gross profit.................................. 251,728 233,228 179,921
Selling, general and administrative expenses...... 208,647 184,586 144,659
Restructuring and strategic restructuring costs... 4,500 -- 5,274
-------- -------- --------
Operating income.............................. 38,581 48,642 29,988
Other (income) expense:
Interest expense................................ 16,142 13,342 12,735
Interest income................................. (128) (191) (134)
Other........................................... 1,214 1,856 (228)
-------- -------- --------
Income before provision for income taxes.......... 21,353 33,635 17,615
Provision for income taxes........................ 9,214 15,120 8,719
-------- -------- --------
Net income........................................ $ 12,139 $ 18,515 $ 8,896
======== ======== ========
Weighted average shares outstanding:
Basic........................................... 17,495 17,429 14,690
Diluted......................................... 17,782 17,480 14,840
Net income per share:
Basic........................................... $ 0.69 $ 1.06 $ 0.61
Diluted......................................... $ 0.68 $ 1.06 $ 0.60
See accompanying notes to consolidated financial statements.
F-4
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands)
[Enlarge/Download Table]
Capital Accumulated
Common Stock Paid-in Other Total Total
---------------- Excess of Divisional Comprehensive Retained Shareholders' Comprehensive
Shares Dollars Par Value Equity Income (Loss) Earnings Equity Income (Loss)
------- ------- --------- ---------- ------------- -------- ------------- -------------
Balance at April 25,
1998................... $ -- $-- $ -- $ 104,883 $-- $ 1,583 $106,466
Shares distributed in
spin-off from U.S.
Office Products....... 12,204 12 104,867 (104,883) 4 -- -- $ 4
Capital contribution
by U.S. Office
Products.............. -- -- 7,217 -- -- -- 7,217
Compensation charge
for options tendered
in strategic
restructuring......... -- -- 803 -- -- -- 803
Compensation expense
from School
Specialty, Inc. stock
purchase.............. -- -- 271 -- -- -- 271
Issuance of common
stock in conjunction
with acquisitions..... 250 -- 5,487 -- -- -- 5,487
Issuances of common
stock................. 4,775 5 73,551 -- -- -- 73,556
Cumulative translation
adjustment............ -- -- -- -- (9) -- (9) (9)
Net income............. -- -- -- -- -- 8,896 8,896 8,896
------- ---- -------- --------- ---- ------- -------- -------
Total comprehensive
income.............. 8,891
=======
Balance at April 24,
1999................... 17,229 17 192,196 -- (5) 10,479 202,687
Issuance of common
stock................. 151 -- 2,225 -- -- -- 2,225
Issuance of common
stock in conjunction
with stock option
exercises, net of
tax................... 55 -- 918 -- -- -- 918
Issuance of common
stock in conjunction
with acquisitions..... 57 -- 1,178 -- -- -- 1,178
Retirement of common
stock in connection
with odd-lot tender
offer................. (27) -- (505) -- -- -- (505)
Cumulative translation
adjustment............ -- -- -- -- (25) -- (25) (25)
Net income............. -- -- -- -- -- 18,515 18,515 18,515
------- ---- -------- --------- ---- ------- -------- -------
Total comprehensive
income.............. 18,490
=======
Balance at April 29,
2000................... 17,465 17 196,012 -- (30) 28,994 224,993
Issuance of common
stock in conjunction
with stock option
exercises, net of
tax................... 133 1 2,375 -- -- -- 2,376
Retirement of common
stock in connection
with odd-lot tender
offer................. (11) -- (268) -- -- -- (268)
Cumulative translation
adjustment............ -- -- -- -- 30 -- 30 30
Unrealized gain on
securities available
for sale, net of tax.. -- -- -- -- 190 -- 190 190
Net income............. -- -- -- -- -- 12,139 12,139 12,139
------- ---- -------- --------- ---- ------- -------- -------
Total comprehensive
income.............. $12,359
=======
Balance at April 28,
2001................... $17,587 $ 18 $198,119 $ -- $190 $41,133 $239,460
======= ==== ======== ========= ==== ======= ========
See accompanying notes to consolidated financial statements.
F-5
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
[Download Table]
For the Fiscal Year Ended
-------------------------------
April 28, April 29, April 24,
2001 2000 1999
--------- --------- ---------
(52 (53 (52
weeks) weeks) weeks)
Cash flows from operating activities:
Net income.................................. $ 12,139 $ 18,515 $ 8,896
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense..... 14,539 11,839 9,604
Deferred taxes............................ 3,970 5,746 468
Restructuring costs, net of payments...... 2,513 -- 5,274
(Gain) loss on disposal/impairment of
property and equipment and other......... (305) 2,096 --
Amortization of loan fees and other....... 1,041 671 762
Loss on business dispositions............. 250 -- --
Changes in current assets and liabilities
(net of assets acquired and liabilities
assumed in business combinations
accounted for under the purchase method):
Accounts receivable..................... 10,968 844 13,583
Inventories............................. (8,478) (6,137) 1,374
Prepaid expenses and other current
assets................................. (5,182) (6,441) (2,822)
Accounts payable........................ 7,471 9,943 (12,591)
Accrued liabilities..................... (458) (6,006) 3,075
--------- --------- ---------
Net cash provided by operating
activities........................... 38,468 31,070 27,623
--------- --------- ---------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash
acquired................................... (116,062) (1,291) (122,337)
Additions to property and equipment......... (15,200) (17,351) (4,872)
Proceeds from business disposition, net of
cash disposed.............................. 3,538 -- --
Proceeds from sale and leaseback of
property................................... 17,790 -- --
Proceeds from sale of property.............. 6,632 -- --
Investment in long-term assets.............. (816) (8,704) (27)
--------- --------- ---------
Net cash used in investing activities. (104,118) (27,346) (127,236)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from bank borrowings............... 204,097 186,200 355,700
Repayment of bank debt and capital leases... (188,277) (198,192) (261,422)
Proceeds from sale of accounts receivable... 50,000 -- --
Capitalized accounts receivable
securitization/loan fees................... (741) -- (2,960)
Proceeds from exercise of stock options..... 2,376 920 --
Repurchase of common stock.................. (268) (505) --
Proceeds from issuance of common stock...... -- 2,225 73,556
Payments to U.S. Office Products............ -- -- (62,699)
Capital contribution by U.S. Office
Products................................... -- -- 7,217
--------- --------- ---------
Net cash provided by (used in)
financing activities................. 67,187 (9,352) 109,392
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.................................. 1,537 (5,628) 9,779
Cash and cash equivalents at beginning of
period....................................... 4,151 9,779 --
--------- --------- ---------
Cash and cash equivalents at end of period.... $ 5,688 $ 4,151 $ 9,779
========= ========= =========
Non-cash investing activities:
Common stock received for net assets sold in
business disposition....................... $ 9,901 $ -- $ --
Supplemental disclosures of cash flow
information:
Interest paid............................... $ 15,154 $ 13,215 $ 11,151
Income taxes paid........................... $ 8,992 $ 13,255 $ 5,123
F-6
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS--(Continued)
(In Thousands)
The Company issued common stock and/or cash in connection with certain
business combinations accounted for under the purchase method in the fiscal
years ended April 28, 2001, April 29, 2000, and April 24, 1999. The fair values
of the assets and liabilities of the acquired companies are presented as
follows:
[Download Table]
For the Fiscal Year Ended
-----------------------------
April April 29, April
28, 2001 2000 24, 1999
-------- ---------- --------
(52 (52
weeks) (53 weeks) weeks)
Accounts receivable.............................. $ 27,725 $ 2,091 $ 49,645
Inventories...................................... 8,680 1,434 30,850
Prepaid expenses and other current assets........ 5,143 65 11,142
Property and equipment........................... 5,922 178 21,033
Intangible assets................................ 78,254 2,214 103,455
Other assets..................................... 20 13 3,775
Short-term debt and capital lease obligations.... (1,217) -- (832)
Accounts payable................................. (3,036) (1,881) (25,853)
Accrued liabilities.............................. (4,863) (759) (7,564)
Long-term debt and capital lease obligations..... (566) (885) (57,599)
Other liabilities................................ -- -- (228)
-------- ------- --------
Net assets acquired............................ $116,062 $ 2,470 $127,824
======== ======= ========
The acquisitions were funded as follows:
Common stock..................................... $ -- $ 1,178 $ 5,487
Cash paid, net of cash acquired.................. 116,062 1,292 122,337
-------- ------- --------
Total.......................................... $116,062 $ 2,470 $127,824
======== ======= ========
See accompanying notes to consolidated financial statements.
F-7
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
Note 1--Background
School Specialty, Inc. (the "Company"), previously a Delaware corporation,
reincorporated as a Wisconsin corporation effective August 29, 2000. The
Company was a wholly-owned subsidiary of U.S. Office Products Company ("U.S.
Office Products") until June 9, 1998. On June 9, 1998, U.S. Office Products
spun-off its Educational Supplies and Products Division (the "Education
Division") as an independent publicly owned company. This transaction was
effected through the distribution of shares of the Company to U.S. Office
Products' shareholders (the "Distribution"). Prior to the Distribution, U.S.
Office Products contributed its equity interests in certain wholly-owned
subsidiaries associated with the Education Division to the Company. U.S. Office
Products and the Company entered into a number of agreements to facilitate the
Distribution and the transition of the Company to an independent business
enterprise. Additionally, concurrently with the Distribution, the Company sold
2,125 shares in an initial public offering (the "IPO"). Following the IPO,
management purchased 250 shares.
Note 2--Basis of Presentation
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of School Specialty,
Inc. and the companies acquired in business combinations accounted for under
the purchase method from their respective dates of acquisition. For the periods
prior to the Distribution, the consolidated financial statements reflect the
assets, liabilities, divisional equity, revenues and expenses that were
directly related to the Company as it was operated within U.S. Office Products.
In cases involving assets and liabilities not specifically identifiable to any
particular business of U.S. Office Products, only those assets and liabilities
that were transferred to the Company were included in the Company's separate
consolidated balance sheet. The Company's consolidated statements of operations
includes all of the related costs of doing business, including an allocation of
certain general corporate expenses of U.S. Office Products which were not
directly related to these businesses including certain corporate executives'
salaries, accounting and legal fees, departmental costs for accounting,
finance, legal, purchasing, marketing, and human resources as well as other
general overhead costs. These allocations were based on a variety of factors,
dependent upon the nature of the costs being allocated, including revenues,
number and size of acquisitions and number of employees. Management believes
these allocations were made on a reasonable basis.
The consolidated statement of operations in fiscal 1999 does not include an
allocation of interest expense on all debt allocated to the Company prior to
the distribution. See Note 9 for further discussion of interest expense.
Note 3--Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Definition of Fiscal Year
The Company's fiscal year ends on the last Saturday in April in each year.
As used in these consolidated financial statements and related notes to
consolidated financial statements, "fiscal 2001," "fiscal 2000," and
F-8
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
"fiscal 1999" refer to the Company's fiscal years ended April 28, 2001 (52
weeks), April 29, 2000 (53 weeks), and April 24, 1999 (52 weeks), respectively.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
and accounts are eliminated in consolidation.
Cash and Cash Equivalents
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
Inventories
Inventories are generally stated at the lower of cost or market with cost
determined on a weighted-average basis and consist primarily of products held
for sale.
Property and Equipment
Property and equipment is stated at cost. Additions and improvements are
capitalized. Maintenance and repairs are expensed as incurred. Depreciation of
property and equipment is calculated using the straight-line method over the
estimated useful lives of the respective assets. The estimated useful lives
range from twenty-five to forty years for buildings and its components and
three to fifteen years for furniture, fixtures and equipment. Property and
equipment leased under capital leases is being amortized over the lesser of its
useful life or its lease term.
Intangible Assets
Intangible assets consist primarily of goodwill, which represents the excess
of cost over the fair value of net assets acquired in business combinations
accounted for under the purchase method and other identifiable intangible
assets. Goodwill is amortized on a straight-line basis over an estimated useful
life, which is typically forty years. Identifiable intangible assets include
non-compete agreements, trademarks, and franchise agreements which are being
amortized over their estimated useful lives ranging from one to forty years.
Management periodically evaluates the recoverability of goodwill, which
would be adjusted for a permanent decline in value, if any, by comparing
anticipated undiscounted future cash flows from operations to net book value.
If the operation is determined to be unable to recover the carrying amount of
its assets, then intangible assets are written down first, followed by the
other long-lived assets of the operation, to fair value. Fair value is
determined based on discounted cash flows or appraised values, depending upon
the nature of the assets. Based upon its most recent assessment, the Company
does not believe an impairment of long-lived assets exists at April 28, 2001.
Investments
The Company uses the cost method to account for its investment in preferred
stock in a less than 20%-held entity. Under this method, the Company's
investment is stated at cost and is periodically evaluated to determine if a
write-down of the investment is needed. In connection with this evaluation, the
Company took a $1,500 charge during fiscal 2000.
F-9
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
The Company has an equity investment in the common stock of Riverdeep Group
plc, which is classified and accounted for as an available-for-sale security.
This investment is reported at fair market value. Unrealized holding gains, net
of tax, related to this investment are reported as other comprehensive income,
a component of shareholders' equity. As of April 28, 2001, the unrealized
holding gain on this investment, net of tax, was $190.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments including cash
and cash equivalents, accounts receivable, accounts payable, investments in
equity securities and long-term debt approximate fair value.
Income Taxes
Income taxes, during the period subsequent to the Distribution, have been
computed utilizing the asset and liability approach which requires the
recognition of deferred tax assets and liabilities for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts
and the tax basis of existing assets and liabilities.
As a division of U.S. Office Products, the Company did not file separate
federal income tax returns, but rather was included in the federal income tax
returns filed by U.S. Office Products and its subsidiaries from the respective
dates that the entities within the Company were acquired by U.S. Office
Products. For purposes of the consolidated financial statements, the Company's
allocated share of U.S. Office Products' income tax provision in fiscal 1999
was based on the "separate return" method. Certain companies acquired in
pooling-of-interests transactions elected to be taxed as Subchapter S
corporations and, accordingly, no federal income taxes were recorded by those
companies for periods prior to their acquisition by U.S. Office Products.
Revenue Recognition
Revenue is recognized upon the delivery of products or upon the completion
of services provided to customers.
Cost of Revenues
Vendor rebates are recognized as a reduction in cost of revenues.
Advertising Costs
The Company expenses advertising costs when the advertisement occurs.
Advertising costs are included in the consolidated statement of operations as a
component of selling, general and administrative expenses.
Deferred Catalog Costs
Deferred catalog costs are amortized in amounts proportionate to revenues
over the life of the catalog, which is typically one year. Amortization expense
related to deferred catalog costs is included in the consolidated statement of
operations as a component of selling, general and administrative expenses. Such
amortization expense for fiscal years 2001, 2000 and 1999, was $22,905,
$16,076, and $12,146, respectively.
F-10
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
Shipping and Handling Costs
The Company accounts for shipping and handling costs as a cost of revenues
for shipments made directly from vendors to customers. For warehouse shipments,
the Company accounts for shipping and handling costs as a selling, general and
administrative expense. The amount of shipping and handling costs in selling,
general and administrative expenses for fiscal years 2001, 2000 and 1999 was
$28,561, $23,410 and $19,286, respectively.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") 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.
Distribution Ratio
On June 9, 1998, the Company issued approximately 12,204 shares of its
common stock to U.S. Office Products, which then distributed such shares to its
shareholders in the ratio of one share of Company common stock for every nine
shares of U.S. Office Products common stock held by each shareholder. The share
data reflected in the accompanying financial statements for the periods prior
to the Distribution represents the historical share data for U.S. Office
Products for the period or as of the date indicated, retroactively adjusted to
give effect to the one for nine distribution ratio.
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current year presentation.
Note 4--Business Combinations
In fiscal 2001, the Company made two acquisitions accounted for under the
purchase method. In June 2000, the Company acquired Global Video, LLC, for an
aggregate purchase price, net of cash acquired, of approximately $34,316. The
preliminary purchase price allocation has resulted in goodwill of approximately
$28,795, which will be amortized over 40 years. In November 2000, the Company
acquired certain assets and liabilities of J.L. Hammett for an aggregate
purchase price of $78,996 and $2,750 in non-compete agreements with certain
individuals. The preliminary purchase price allocation has resulted in goodwill
of approximately $46,709, which will be amortized over 40 years. The Company
does not expect the final allocations of purchase price to be materially
different.
In fiscal 2000, the Company made two acquisitions accounted for under the
purchase method of accounting, for an aggregate purchase price of $2,470,
consisting of $1,292 of cash and 57 shares of common stock with a market value
of $1,178, resulting in goodwill of $2,214, which will be amortized over 40
years.
In fiscal 1999, the Company made five acquisitions accounted for under the
purchase method of accounting for an aggregate purchase price of $127,824,
consisting of $122,337 of cash and 250 shares of common stock with a market
value of $5,487. The total assets related to these five acquisitions were
$219,900, including goodwill of $103,455.
The results of these acquisitions have been included in the Company's
results from their respective dates of acquisition.
F-11
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
Note 5--Restructuring Costs
During the fourth quarter of fiscal 1998, the Company incurred restructuring
costs of $2,491 to close redundant facilities and severance costs. This
restructuring plan was completed by the end of fiscal 1999. The Company also
incurred a strategic restructuring charge during the fourth quarter of fiscal
1998 of $1,000. This represented the transaction costs allocated to the Company
under the distribution agreement entered into with U.S. Office Products and the
other spin-off companies.
During 1999, the Company incurred a strategic restructuring charge of
$1,074. This non-cash charge related to compensation expense attributed to U.S.
Office Products' stock option tender offer and sale of shares of Common Stock
to some of the Company's executive management personnel. Additionally, during
1999, the Company recorded a restructuring charge of $4,200 to consolidate
existing warehousing, customer service and sales operations. During the fiscal
years ended April 29, 2000, and April 24,1999, the Company terminated 43 and
152 employees, respectively, under this plan.
During the fourth quarter of fiscal 2001, the Company recorded a
restructuring charge of $4,500 to close redundant facilities and for related
severance costs. The Company terminated 76 employees under this plan.
Selected information related to the restructuring reserve for closing
redundant facilities and consolidating existing warehousing, customer service
and sales operations is as follows:
[Download Table]
Facility Severance
Closure and and Other
Consolidation Terminations Costs Total
------------- ------------ ----- -------
Balance at April 25, 1998......... $ -- $ 214 $ 258 $ 472
Additions....................... 1,300 2,100 800 4,200
Utilizations.................... (199) (1,029) (692) (1,920)
------- ------- ----- -------
Balance at April 24, 1999......... 1,101 1,285 366 2,752
Additions....................... -- -- -- --
Utilizations.................... (1,084) (1,245) (358) (2,687)
------- ------- ----- -------
Balance at April 29, 2000......... 17 40 8 65
Additions....................... 2,391 1,544 565 4,500
Utilizations.................... (714) (784) (554) (2,052)
------- ------- ----- -------
Balance at April 28, 2001......... $ 1,694 $ 800 $ 19 $ 2,513
======= ======= ===== =======
Note 6--Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
[Download Table]
April April
28, 29,
2001 2000
------- -------
Deferred catalog costs.................................... $16,596 $14,742
Assets held for sale...................................... 1,429 4,333
Other..................................................... 17,028 9,589
------- -------
Total prepaid expenses and other current assets......... $35,053 $28,664
======= =======
Deferred catalog costs represent costs which have been paid to produce
Company catalogs which will be used in future periods.
F-12
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
Note 7--Property and Equipment
Property and equipment consists of the following:
[Download Table]
April April
28, 29,
2001 2000
-------- --------
Land.................................................. $ 678 $ 2,540
Projects in progress.................................. 4,428 2,954
Buildings and leasehold improvements.................. 11,546 26,635
Furniture, fixtures, and other........................ 23,915 17,848
Machinery and warehouse equipment..................... 18,643 14,660
-------- --------
59,210 64,637
Less: Accumulated depreciation........................ (15,688) (12,912)
-------- --------
Net property and equipment.......................... $ 43,522 $ 51,725
======== ========
Depreciation expense for fiscal years 2001, 2000 and 1999 was $7,100,
$5,523, and $4,948, respectively.
Note 8--Intangible Assets
Intangible assets consist of the following:
[Download Table]
April April
28, 29,
2001 2000
-------- --------
Goodwill.............................................. $267,272 $194,350
Other................................................. 7,213 13,148
-------- --------
274,485 207,498
Less: Accumulated amortization........................ (19,614) (14,754)
-------- --------
Net intangible assets............................... $254,871 $192,744
======== ========
Amortization expense for fiscal years 2001, 2000 and 1999 was $7,439,
$6,316, and $4,656, respectively.
Note 9--Credit Facilities
Long-Term Debt
Long-term debt consists of the following:
April April
28, 29,
2001 2000
-------- --------
Credit facility....................................... $179,002 $161,850
Capital lease obligations............................. 645 182
Other debt............................................ 136 148
-------- --------
179,783 162,180
Less: Current maturities.............................. (21,615) (17,391)
-------- --------
Total long-term debt................................ $158,168 $144,789
======== ========
On September 30, 1998, the Company entered into a five year secured
$350,000 credit facility (the "credit facility") with a syndicate of financial
institutions, led by Bank of America, N.A. as Agent, consisting of a $250,000
revolving loan and a $100,000 term loan. Interest accrues at a rate of, at the
Company's option, either
F-13
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
(i) LIBOR plus an applicable margin of up to 2.000%, or (ii) the lender's base
rate plus an applicable margin of up to 0.750%, plus a fee of up to 0.475% on
the unborrowed amount under the revolving loan. The credit facility is secured
by substantially all of the assets of the Company and contains terms and
covenants typical of facilities of such size. The Company was in compliance
with these covenants at April 28, 2001. At April 28, 2001, the balance
outstanding under the credit facility was $179,002, including $110,000 and
$69,002 outstanding under the revolving and term loans, respectively, and
included six eurodollar contracts, expiring within 92 days, totaling $110,000
at an average interest rate of 6.48% . The effective interest rate under the
credit facility for fiscal 2001 was 8.41%, which includes the loan origination
fee and commitment fee on unborrowed funds, and excludes the effect of the
interest rate swap agreements disclosed below.
On October 28, 1998, the Company entered into an interest rate swap
agreement with The Bank of New York covering $50,000 of the outstanding credit
facility. The agreement fixed the 30-day LIBOR interest rate at 4.37% per annum
on a $50,000 notional amount and had a three year term that was cancelable by
The Bank of New York on the second anniversary. On October 30, 2000, The Bank
of New York cancelled the swap agreement.
The Company entered into an interest rate swap agreement on December 13,
2000 (effective date of January 2, 2001), with The Bank of New York covering
$50,000 of the outstanding borrowings under the credit facility. The agreement
fixes the 30-day LIBOR interest rate at 6.07% per annum on the $50,000 notional
amount and has a one-year term which expires on January 2, 2002. The floating
LIBOR interest rate at April 28, 2001, April 29, 2000, and April 24, 1999 was
5.08%, 6.18%, and 4.91%, respectively. The fair market value of the swap
agreement at April 28, 2001 was ($660).
Maturities of Long-Term Debt
Maturities of long-term debt, including capital lease obligations for our
fiscal years, are as follows:
[Download Table]
2002............................ $ 21,615
2003............................ 27,387
2004............................ 130,564
2005............................ 139
2006............................ 18
Thereafter...................... 60
--------
Total maturities of long-term
debt......................... $179,783
========
The credit facility contains certain restrictive covenants, including
limitations on the ability of the Company to pay dividends or redeem stock as
well as limitations on incurring debt, capital expenditures, mergers or
consolidations, sale of assets and transactions with affiliates. The Company is
in compliance with all of the credit facility's restrictive covenants at April
28, 2001.
Note 10--Securitization of Accounts Receivable
The Company and certain of its U.S. subsidiaries entered into an agreement
(the "Receivables Facility") in November 2000 with a financial institution
whereby it sells on a continuous basis an undivided interest in all eligible
trade accounts receivable. Pursuant to the Receivables Facility, the Company
formed New School, Inc. ("NSI"), a wholly-owned, special purpose, bankruptcy-
remote subsidiary. As such, the assets of NSI will be available first and
foremost to satisfy the claims of the creditors of NSI. NSI was formed for the
sole purpose of buying and selling receivables generated by the Company and
certain subsidiaries of the Company. Under
F-14
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
the Receivables Facility, the Company and certain subsidiaries transfer without
recourse all their accounts receivables to NSI. NSI, in turn, has sold and,
subject to certain conditions, may from time to time sell an undivided interest
in these receivables and is permitted to receive advances of up to $50,000 for
the sale of such undivided interest. The Company receives a fee from the
financial institution for billing and collection functions, which remain the
responsibility of the Company, that approximates fair value. The agreement
expires in November 2001.
This transaction is accounted for as a sale of receivables under the
provision of SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities." There was $50,000 advanced under the
Receivables Facility at April 28, 2001, and accordingly, that amount of
accounts receivable has been removed from the Consolidated Balance Sheet. Costs
associated with the sale of receivables, primarily related to the discount and
loss on sale, were $1,389 and are included in other expenses in the
Consolidated Statement of Operations for the fiscal year ended April 28, 2001.
Note 11--Income Taxes
The provision for income taxes consists of:
[Download Table]
For the Fiscal Year Ended
-------------------------------
April 28, April 29, April 24,
2001 2000 1999
---------- --------- ---------
(52 weeks) (53 weeks) (52 weeks)
Income taxes currently payable:
Federal................................ $3,834 $ 7,371 $6,511
State.................................. 1,410 2,003 1,740
------ ------- ------
5,244 9,374 8,251
Deferred income tax expense.............. 3,970 5,746 468
------ ------- ------
Total provision for income taxes..... $9,214 $15,120 $8,719
====== ======= ======
Deferred taxes are comprised of the following:
[Download Table]
April 28, April 29,
2001 2000
--------- ---------
Current deferred tax assets (liabilities):
Inventory.......................................... $ 4,028 $ 3,001
Allowance for doubtful accounts.................... 1,493 716
Net operating loss carryforward.................... 1,493 1,493
Accrued liabilities................................ (885) 620
Accrued restructuring.............................. 994 26
Charitable contribution carryforward............... 750 1,108
------- -------
Total current deferred tax assets................ 7,873 6,964
------- -------
Long-term deferred tax assets (liabilities):
Net operating loss carryforward...................... 2,284 4,097
Property and equipment............................... (1,500) (1,200)
Intangible assets.................................... (4,402) (1,636)
Unrealized loss on investment........................ 600 600
------- -------
Total long-term deferred tax assets
(liabilities)................................... (3,018) 1,861
------- -------
Net deferred tax assets.......................... $ 4,855 $ 8,825
======= =======
F-15
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
The Company has net operating loss carryforwards of approximately $9,317, on
a consolidated basis, which expire during fiscal years 2011-2013. The
carryforwards are also subject to an annual federal limitation on utilization
pursuant to IRS Code Section 382 of approximately $3,900.
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
[Download Table]
For the Fiscal Year Ended
-------------------------------
April 28, April 29, April 24,
2001 2000 1999
---------- --------- ---------
(52 weeks) (53 weeks) (52 weeks)
U.S. federal statutory rate............. 35.0% 35.0% 35.0%
State income taxes, net of federal
income tax benefit..................... 4.5 4.6 5.2
Non-deductible goodwill................. 7.1 5.4 6.5
Impact of divestitures.................. (3.4) -- --
Other................................... -- -- 2.8
---- ---- ----
Effective income tax rate............... 43.2% 45.0% 49.5%
==== ==== ====
Note 12--Operating Lease Commitments
The Company leases various types of warehouse and office facilities and
equipment, under noncancelable lease agreements which expire at various dates.
Future minimum lease payments under noncancelable operating leases for our
fiscal years are as follows:
[Download Table]
2002...................................... $ 9,089
2003...................................... 7,787
2004...................................... 6,492
2005...................................... 6,329
2006...................................... 5,888
Thereafter................................ 55,382
-------
Total minimum lease payments............ $90,967
=======
Rent expense for fiscal 2001, 2000 and 1999, was $7,462, $5,535, and $4,498,
respectively.
In November 2000, the Company entered into two sale-leaseback transactions.
Net proceeds from the transactions were approximately $17,800 and resulted in a
deferred gain of $877, which is being amortized over the life of the leases.
The leases have initial terms of 20 years, with four, five year options to
extend the initial term.
Note 13--Employee Benefit Plans
On June 9, 1998, the Company implemented the School Specialty, Inc. 401(k)
Plan (the "Company 401(k) Plan") which allows employee contributions in
accordance with Section 401(k) of the Internal Revenue Code. The Company
matches a portion of employee contributions and virtually all full-time
employees are eligible to participate in the Company 401(k) Plan after 90 days
of service. In fiscal years 2001, 2000 and 1999, the Company's matching
contribution expense was $657, $564 and $416, respectively. Prior to June 9,
1998 the Company participated in the U.S. Office Products 401(k) Retirement
Plan (the "401(k) Plan"), which was similar to the plan adopted by the Company.
F-16
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
Certain subsidiaries of the Company had, prior to implementation of the
Company 401(k) Plan, qualified defined contribution benefit plans, which allow
for voluntary pre-tax contributions by the employees. The subsidiaries paid all
general and administrative expenses of the plans and in some cases made
matching contributions on behalf of the employees.
Note 14--Shareholders' Equity
Earnings Per Share
Basic earnings per share ("EPS") excludes dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities to issue common stock were exercised.
The following information presents the Company's computations of basic and
diluted EPS for the periods presented in the consolidated statement of
operations.
[Download Table]
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Fiscal 2001:
Basic EPS................................ $12,139 17,495 $0.69
=====
Effect of dilutive employee stock
options................................. -- 287
------- ------
Diluted EPS.............................. $12,139 17,782 $0.68
======= ====== =====
Fiscal 2000:
Basic EPS................................ $18,515 17,429 $1.06
=====
Effect of dilutive employee stock
options................................. -- 51
------- ------
Diluted EPS.............................. $18,515 17,480 $1.06
======= ====== =====
Fiscal 1999:
Basic EPS................................ $ 8,896 14,690 $0.61
=====
Effect of dilutive employee stock
options................................. -- 150
------- ------
Diluted EPS.............................. $ 8,896 14,840 $0.60
======= ====== =====
The Company had additional employee stock options outstanding during the
periods presented of 373, 948 and 280, respectively, that were not included in
the computation of diluted EPS because they were anti-dilutive.
Stock Offerings
On April 16, 1999, the Company issued 2,400 shares in conjunction with a
secondary public offering for net proceeds of $40,820. On May 17, 1999, the
underwriters of the Company's secondary offering exercised their over allotment
option for 151 shares of Company stock at $17.25 per share for net proceeds of
$2,225.
Employee Stock Plans
On June 10, 1998, the Board of Directors approved the School Specialty, Inc.
1998 Stock Incentive Plan (the "Plan"). The purpose of the Plan is to provide
officers, key employees and consultants with additional incentives by
increasing their ownership interests in the Company. The maximum number of
options available for grant under the Plan, is equal to 20% of the Company's
outstanding common stock. The maximum number
F-17
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
of options available for grant in any fiscal year under the Plan is 1,200
shares. Prior to the approval of the Plan, the Company had stock options
outstanding under the U.S. Office Products 1994 Long-Term Compensation Plan.
The Company replaced the options to purchase shares of common stock of U.S.
Office Products held by employees with options issued under the Plan to
purchase shares of common stock of the Company. In order to keep the option
holders in the same economic position immediately before and after the
Distribution, the number of U.S. Office Products options held by Company
personnel was multiplied by 0.903 and the exercise price of those options was
divided by 0.903 for purposes of the replacement options. The vesting
provisions and option period of the original grants were not changed. All
option data reflected below has been retroactively restated to reflect the
effects of the Distribution.
The Company accounts for options issued in accordance with APB Opinion No.
25. Accordingly, because the exercise prices of the options equal the market
price on the date of grant, no compensation expense has been recognized for the
options granted to employees and directors. Had compensation cost for the
Company's stock options been recognized based upon the fair value of the stock
options on the grant date under the methodology prescribed by SFAS No. 123
"Accounting for Stock Based Compensation", the Company's net income and net
income per share would have been impacted as indicated in the following table.
[Download Table]
For the Fiscal Year Ended
-------------------------------
April 28, April 29, April 24,
2001 2000 1999
---------- --------- ---------
(52 weeks) (53 weeks) (52 weeks)
Net income (loss):
As reported........................... $12,139 $18,515 $ 8,896
Pro forma............................. 9,405 14,954 (1,737)
Net income (loss) per share:
As reported:
Basic............................... $ 0.69 $ 1.06 $ 0.61
Diluted............................. $ 0.68 $ 1.06 $ 0.60
Pro forma:
Basic............................... $ 0.54 $ 0.86 $ (0.12)
Diluted............................. $ 0.53 $ 0.86 $ (0.12)
The fair value of options granted (which is amortized to expense over the
option vesting period in determining the pro forma impact) is estimated on the
date of grant using the Black-Scholes single option pricing model with the
following weighted average assumptions:
[Download Table]
For the Fiscal Year
Ended
-----------------------
April April April
28, 29, 24,
2001 2000 1999
------- ------- -------
Expected life of option 7 years 7 years 7 years
Risk free interest rate........................... 5.30% 6.49% 5.50%
Expected volatility of stock...................... 59.58% 67.14% 59.00%
The weighted-average fair value of options granted was $11.98, $11.45, and
$10.23, for fiscal 2001, 2000, and 1999, respectively.
F-18
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
A summary of option transactions follows:
[Download Table]
Options Options
Outstanding Exercisable
----------------- -----------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
------- --------- ------- ---------
Balance at April 25, 1998................ 442 21.83 46 $27.14
Granted................................ 2,031 15.86
Exercised.............................. (82) 20.62
Canceled............................... (25) 26.49
-----
Balance at April 24, 1999................ 2,366 $16.70 118 $23.39
Granted................................ 803 16.23
Exercised.............................. (55) 16.21
Canceled............................... (50) 20.20
-----
Balance at April 29, 2000................ 3,064 $16.53 1,973 $16.20
Granted................................ 243 18.58
Exercised.............................. (133) 15.83
Canceled............................... (108) 16.99
-----
Balance at April 28, 2001................ 3,066 $16.70 2,173 $16.47
=====
The following table summarizes information about stock options outstanding
at April 28, 2001:
[Download Table]
Options
Options Outstanding Exercisable
--------------------------- -----------------
Weighted- Weighted-
Weighted- Average Average
Average Exercise Exercise
Range of Exercise Prices Options Life Price Options Price
------------------------ ------- --------- --------- ------- ---------
$12.00-$15.00 283 8.15 $14.40 68 $14.38
$15.50-$15.50 1,648 7.12 15.50 1,633 15.50
$15.63-$19.93 811 8.13 17.38 321 17.43
$20.25-$29.43 324 7.73 23.11 151 25.94
----- ---- ------ ----- ------
3,066 7.55 $16.70 2,173 $16.47
===== ==== ====== ===== ======
Options granted are generally exercisable beginning one year from the date
of grant in cumulative yearly amounts of 25% of the shares under option and
generally expire ten years from the date of grant. Options granted to directors
of the Company vest over a three year period, 20% after the first year, 50%
(cumulative) after the second year and 100% (cumulative) after the third year.
As of the date of Distribution, Jonathan J. Ledecky, a member of the
Company's Board of Directors and formerly the Chairman and Chief Executive
Officer of U.S. Office Products, received 914 shares under an option grant with
an exercise price of $15.50. This grant represented 7.5% of the outstanding
Company stock as of the date of Distribution. The options were exercisable in
full on June 10, 1999.
Immediately following the effective date of the registration statements
filed in connection with the IPO and the Distribution, the Company's Board of
Directors granted 850 options, covering 7% of the outstanding shares of the
Company's common stock, to certain executive management personnel (excluding
the 7.5% granted to Mr. Ledecky). The options granted were granted under the
Plan and have a per share exercise price of $15.50 and were exercisable in full
on June 10, 1999.
F-19
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
On June 20, 2000, the Board of Directors approved the JuneBox.com, Inc.,
2000 Equity Incentive Plan. The purpose of the plan is to recruit, reward and
retain employees, directors and other service providers by increasing their
ownership interests in JuneBox.com. JuneBox.com is a wholly-owned subsidiary of
School Specialty, Inc., and its stock is not publicly traded. During fiscal
2001, approximately 1,900 options were granted at fair market value at the date
of grant under this Plan and no options were exercised.
Note 15--Segment Information
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 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 fiscal 1999, and the first two quarters of fiscal
2000; therefore, results for this segment prior to the third and fourth
quarters of fiscal 2000 are included in both the Traditional and Specialty
business segments.
The Company's business activities are organized around three principal
business segments, Traditional, Specialty and Internet and operate principally
in the United States. 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).
F-20
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
The following table presents segment information.
[Download Table]
For the Fiscal Year Ended
----------------------------
April April April
28, 29, 24,
2001 2000 1999
-------- -------- --------
(52 (53 (52
weeks) weeks) weeks)
Revenues:
Traditional.................................... $415,001 $386,715 $339,031
Specialty...................................... 277,673 252,556 182,673
Internet....................................... 25,262 5,607 --
Inter-company revenue elimination.............. (25,262) (5,607) --
-------- -------- --------
Total........................................ $692,674 $639,271 $521,704
======== ======== ========
Operating profit (loss) and income before taxes:
(a)
Traditional.................................... $ 27,829 $ 34,653 $ 21,222
Specialty...................................... 29,867 28,573 20,944
Internet....................................... (2,974) (3,261) --
-------- -------- --------
Total........................................ 54,722 59,965 42,166
General corporate expense...................... 11,641 11,323 6,904
Restructuring charges.......................... 4,500 -- 5,274
Interest expense and other..................... 17,228 15,007 12,373
-------- -------- --------
Income before taxes.......................... $ 21,353 $ 33,635 $ 17,615
======== ======== ========
Identifiable assets (at year end):
Traditional.................................... $241,878 $246,006 $247,204
Specialty...................................... 168,297 174,603 164,320
Internet....................................... 10,669 10,039 --
-------- -------- --------
Total........................................ 420,844 430,648 411,524
Corporate assets............................... 85,448 24,201 26,184
-------- -------- --------
Total........................................ $506,292 $454,849 $437,708
======== ======== ========
Depreciation and amortization:
Traditional.................................... $ 6,266 $ 6,129 $ 6,043
Specialty...................................... 5,483 4,499 3,058
Internet....................................... 1,516 711 --
-------- -------- --------
Total........................................ 13,265 11,339 9,101
Corporate...................................... 1,274 500 503
-------- -------- --------
Total........................................ $ 14,539 $ 11,839 $ 9,604
======== ======== ========
Expenditures for property and equipment:
Traditional.................................... $ 4,479 $ 6,215 $ 782
Specialty...................................... 3,571 5,284 2,326
Internet....................................... 3,852 3,280 --
-------- -------- --------
Total........................................ 11,902 14,779 3,108
Corporate...................................... 3,298 2,572 1,764
-------- -------- --------
Total........................................ $ 15,200 $ 17,351 $ 4,872
======== ======== ========
--------
(a) Operating profit is defined as operating income before restructuring costs.
F-21
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
Note 16--Quarterly Financial Data (unaudited)
The following presents certain unaudited quarterly financial data for fiscal
2001 and fiscal 2000:
[Download Table]
Fiscal Year Ended April 28, 2001
----------------------------------------------
First Second Third Fourth Total
-------- -------- -------- -------- --------
(13 (13 (13 (13 (52
weeks) weeks) weeks) weeks) weeks)
Revenues...................... $217,067 $240,539 $104,658 $130,410 $692,674
Gross profit.................. 79,069 85,513 38,034 49,112 251,728
Operating income (loss)....... 24,107 27,782 (4,211) (9,097) 38,581
Net income (loss)............. 11,393 12,902 (4,802) (7,354) 12,139
Per share amounts:
Basic....................... $ 0.65 $ 0.74 $ (0.27) $ (0.42) $ 0.69
Diluted..................... $ 0.65 $ 0.73 $ (0.27) $ (0.42) $ 0.68
Fiscal Year Ended April 29, 2000
----------------------------------------------
First Second Third Fourth Total
-------- -------- -------- -------- --------
(13 (13 (13 (14 (53
weeks) weeks) weeks) weeks) weeks)
Revenues...................... $194,299 $231,588 $ 97,244 $116,140 $639,271
Gross profit.................. 72,879 82,913 33,429 44,007 233,228
Operating income (loss)....... 24,564 26,701 (2,245) (378) 48,642
Net income (loss)............. 11,364 12,184 (3,032) (2,001) 18,515
Per share amounts:
Basic....................... $ 0.65 $ 0.70 $ (0.17) $ (0.11) $ 1.06
Diluted..................... $ 0.65 $ 0.70 $ (0.17) $ (0.11) $ 1.06
The summation of quarterly net income per share may not equate to the
calculation for the full fiscal year as quarterly calculations are performed on
a discrete basis.
Note 17--Subsequent Event
On May 9, 2001, the Company purchased certain assets and liabilities of
Envision, Inc. The purchase price, which is subject to change, was
approximately $6,750, funded 60% in cash, through borrowings under the
Company's credit facility, and 40% in School Specialty, Inc., common stock,
representing 120 shares.
F-22
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Per Share Amounts)
Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure
Information previously reported.
F-23
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Executive Officers. Reference is made to "Executive Officers of the
Registrant" in Part I hereof.
(b) Directors. The information required by this Item is set forth in our
Proxy Statement for the Annual Meeting of Shareholders to be held on August 28,
2001, under the caption "Election of Directors," which information is
incorporated by reference herein.
(c) Section 16 Compliance. The information required by this Item is set
forth in our Proxy Statement for the Annual Meeting of Shareholders to be held
on August 28, 2001, under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance," which information is incorporated by reference herein.
Item 11. Executive Compensation
The information required by this Item is set forth in our Proxy Statement
for the Annual Meeting of Shareholders to be held on August 28, 2001, under the
captions "Executive Compensation," "Employment Contracts and Related Matters,"
"Director Compensation and Other Arrangements," "Compensation Committee
Report," "Compensation Committee Interlocks and Insider Participation," and
"Performance Graph," which information is incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is set forth in our Proxy Statement
for the Annual Meeting of Shareholders to be held on August 28, 2001, under the
caption "Security Ownership of Management and Certain Beneficial Owners," which
information is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is set forth in our Proxy Statement
for the Annual Meeting of Shareholders to be held on August 28, 2001, under the
captions "Certain Relationships and Related Transactions" and "Director
Compensation and Other Arrangements."
F-24
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements.
Consolidated Financial Statements
Reports of Independent Public Accountants
Consolidated Balance Sheets as of April 28, 2001, and April 29, 2000
Consolidated Statements of Operations for the fiscal years ended
April 28, 2001 (52 weeks), April 29, 2000 (53 weeks), and April 24,
1999 (52 weeks)
Consolidated Statements of Shareholders' Equity for the fiscal years
ended April 28, 2001 (52 weeks), April 29, 2000 (53 weeks), and
April 24, 1999 (52 weeks)
Consolidated Statements of Cash Flows for the fiscal years ended
April 28, 2001 (52 weeks), April 29, 2000 (53 weeks), and April 24,
1999 (52 weeks)
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedule.
Schedule for the fiscal years ended April 28, 2001 (52 weeks), April
29, 2000 (53 weeks), and April 24, 1999 (52 weeks): Schedule II--
Valuation and Qualifying Accounts.
(a)(3) Exhibits.
See (c) below.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
See the Exhibit Index, which is incorporated by reference herein.
(d) Financial Statements Excluded from Annual Report to Shareholders.
Not applicable.
F-25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Appleton,
State of Wisconsin, on July 9, 2001.
SCHOOL SPECIALTY, INC.
By: /s/ Daniel P. Spalding
-------------------------------------------
Daniel P. Spalding, Chief Executive Officer
Each person whose signature appears below hereby constitutes and appoints
Daniel P. Spalding and Mary M. Kabacinski, and each of them, as his or her true
and lawful attorney-in-fact and agent, with full power of substitution, to sign
on his or her behalf individually and in the capacity stated below and to
perform any acts necessary to be done in order to file any and all amendments to
this Annual Report on Form 10-K, and to file the same, with all exhibits thereto
and all other documents in connection therewith and each of the undersigned does
hereby ratify and confirm all that said attorney-in-fact and agent, or his
substitutes, shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated below.
Name Title Date
---- ----- ----
/s/ Daniel P. Spalding Chief Executive Officer (Principal July 9, 2001
----------------------------
Daniel P. Spalding Executive Officer) and Director
/s/ Mary M. Kabacinski Chief Financial Officer (Principal July 9, 2001
----------------------------
Mary M. Kabacinski Financial and Accounting Officer)
/s/ David J. Vander Zanden President, Chief Operating Officer July 9, 2001
----------------------------
David J. Vander Zanden and Director
/s/ Jonathan J. Ledecky Director July 9, 2001
----------------------------
Jonathan J. Ledecky
/s/ Rochelle Lamm Director July 9, 2001
----------------------------
Rochelle Lamm
/s/ Leo C. McKenna Director July 9, 2001
----------------------------
Leo C. McKenna
/s/ Jerome M. Pool Director July 9, 2001
----------------------------
Jerome M. Pool
INDEX TO EXHIBITS
Exhibit
Number Document Description
------ --------------------
3.1 Articles of Incorporation of School Specialty, Inc., incorporated
herein by reference to Appendix B of the School Specialty, Inc.
definitive Proxy Statement dated July 24, 2000.
3.2 Bylaws of School Specialty, Inc., incorporated herein by reference to
Exhibit 3.2 of School Specialty's current report on Form 8-K dated
August 31, 2000.
4.1 Amended and Restated Credit Agreement dated as of September 30, 1998
among School Specialty, Inc., certain subsidiaries and affiliates of
School Specialty, Inc., the lenders named therein and Nationsbank,
N.A., Bank One, Wisconsin and U.S. Bank National Association,
incorporated herein by reference to Exhibit 10.12 of School Specialty's
Form 10-Q for the period ended January 23, 1999.
4.2 Amended and Restated Pledge Agreement dated as of September 30, 1998
given by School Specialty, Inc. and the other pledgors named therein to
Nationsbank, N.A. as Administrative Agent.
4.3 Amended and Restated Security Agreement dated as of September 30, 1998
given by School Specialty, Inc. and the other grantors named therein to
Nationsbank, N.A. as Administrative Agent.
4.4 Amendment No. 1 to Amended and Restated Credit Agreement dated as of
May 12, 2000, incorporated herein to Exhibit 10.1 of School Specialty's
Quarterly Report on Form 10-Q for the period ended July 29, 2000.
4.5 Consent and Amendment to Amended and Restated Credit Agreement dated
November 20, 2000.
4.6 Certain other long-term debt is described in Note 9 of the Notes to
Consolidated Financial Statements. School Specialty agrees to furnish
the Commission, upon request, copies of any instruments defining the
rights of holders of any such long-term debt described in Note 9 and
not filed herewith.
10.1 Distribution Agreement among U.S. Office Products Company, Workflow
Management, Inc., Aztec Consulting, Inc., Navigant International, Inc.
and School Specialty, Inc., incorporated herein by reference to Exhibit
10.1 of School Specialty's Pre-Effective Amendment No. 2 to the
Registration Statement on Form S-1 filed with the SEC on May 18, 1998;
Registration No. 333-47509.
10.2 Tax Allocation Agreement among U.S. Office Products Company, Workflow
Management, Inc., Aztec Technology Partners, Inc., Navigant
International, Inc. and School Specialty, Inc., incorporated herein by
reference to Exhibit 10.2 of School Specialty's Pre-Effective Amendment
No. 3 to the Registration Statement on Form S-1 filed with the SEC on
June 4, 1998; Registration No. 333-47509.
Exhibit
Number Document Description
------ --------------------
10.3 Tax Indemnification Agreement among Workflow Management, Inc., Aztec
Technology Partners, Inc., Navigant International, Inc. and School
Specialty, Inc., incorporated herein by reference to Exhibit 10.3 of
School Specialty's Pre-Effective Amendment No. 2 to the Registration
Statement on Form S-1 filed with the SEC on May 18, 1998; Registration
No. 333-47509.
10.4 Employee Benefits Agreement among Workflow Management, Inc., Aztec
Technology Partners, Inc., Navigant International, Inc. and School
Specialty, Inc., incorporated herein by reference to Exhibit 10.4 of
School Specialty's Pre-Effective Amendment No. 2 to the Registration
Statement on Form S-1 filed with the SEC on May 18, 1998; Registration
No. 333-47509.
10.5 Employment Agreement dated September 3, 1999 between Daniel P. Spalding
and School Specialty, Inc., incorporated herein by reference to Exhibit
10.1 of School Specialty's Quarterly Report on Form 10-Q for the period
ended October 23, 1999.
10.6 Employment Agreement dated September 3, 1999 between Mary M. Kabacinski
and School Specialty, Inc., incorporated herein by reference to Exhibit
10.2 of School Specialty's Quarterly Report on Form 10-Q for the period
ended October 23, 1999.
10.7 Employment Agreement dated September 3, 1999 between Donald J.
Noskowiak and School Specialty, Inc., incorporated herein by reference
to Exhibit 10.3 of School Specialty's Quarterly Report on Form 10-Q for
the period ended October 23, 1999.
10.8 Employment Agreement dated March 26, 2001 between A. Brent Pulsipher
and School Specialty, Inc.
10.9 Employment Agreement between David J. Vander Zanden and School
Specialty, Inc., incorporated herein by reference to Exhibit 10.8 of
School Specialty's Annual Report on Form 10-K for the fiscal year ended
April 25, 1998.
10.10 Employment Agreement dated August 22, 2000 between Michael J. Killoren
and JuneBox.com, Inc.
10.11 Amended Services Agreement dated as of June 8, 1998 between U.S. Office
Products and Jonathan J. Ledecky, incorporated herein by reference to
Exhibit 10.11 of School Specialty's Pre-Effective Amendment No. 4 to
the Registration Statement on Form S-1 filed with the SEC on June 9,
1998; Registration No. 333-47509.
10.12 Amended and Restated 1998 Stock Incentive Plan dated June 20, 2000,
incorporated herein by reference to Appendix C of the School Specialty,
Inc. definitive Proxy Statement dated July 24, 2000.
10.13 Receivables Purchase Agreement dated November 22, 2000, incorporated
herein by reference to Exhibit 10.1(a) of School Specialty's Quarterly
Report on Form 10-Q for the period ended January 27, 2001.
Exhibit
Number Document Description
------ --------------------
10.14 Receivables Sales Agreement dated November 22, 2000, incorporated
herein by reference to Exhibit 10.1(b) of School Specialty's Quarterly
Report on Form 10-Q for the period ended January 27, 2001.
16.1 Letter from PricewaterhouseCoopers, LLP dated December 14, 2000 to the
SEC incorporated herein by reference to Exhibit 16.1 of School
Specialty's current report on Form 8-K dated December 11, 2000.
21.1 Subsidiaries of School Specialty, Inc.
23.1 Consent of ArthurAndersen LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
99.1 Schedule II - Valuation and Qualifying Accounts.
99.2 Forward-Looking Statements
Dates Referenced Herein and Documents Incorporated by Reference
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