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UNITED STATES
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 25, 1998
COMMISSION FILE NUMBER 000-24385
SCHOOL SPECIALTY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 39-0971239
(State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization) Identification No.
1000 NORTH BLUEMOUND DRIVE 54914
APPLETON, WI (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (920) 734-2756
Securities registered pursuant to Section 12(b) of the Act:
NONE.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001
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____ No_X_
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 of this
Form 10-K. _X_
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of July 17, 1998 was $202,007,352.
As of July 17, 1998, 14,572,784 shares of the Registrant's common stock,
$.001 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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TABLE OF CONTENTS
DESCRIPTION PAGE
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Part I
Item 1. Business......................................................................................... 1
Item 2. Properties....................................................................................... 7
Item 3. Legal Proceedings................................................................................ 7
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 7
Part II
Item 5. Market for the Company's Common Equity and Related Shareholder Matters........................... 8
Item 6. Selected Financial Data.......................................................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 10
Item 8. Financial Statements and Supplementary Data...................................................... 21
Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 48
Part III
Item 10. Directors and Executive Officers of the Registrant.............................................. 48
Item 11. Executive Compensation.......................................................................... 50
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 55
Item 13. Certain Relationships and Related Transactions.................................................. 56
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................ 57
PART I
THIS ANNUAL REPORT ON FORM 10-K (THE "ANNUAL REPORT") CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. WHEN USED
HEREIN, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "INTEND," "MAY," "WILL"
AND "EXPECT" AND SIMILAR EXPRESSIONS AS THEY RELATE TO SCHOOL SPECIALTY, INC.
("SCHOOL SPECIALTY" OR THE "COMPANY") OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY
SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THE RESULTS EXPRESSED IN, OR IMPLIED
BY, THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-- FACTORS AFFECTING
THE COMPANY'S BUSINESS." THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO REVISE
THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY FUTURE EVENTS OR CIRCUMSTANCES.
ITEM 1. BUSINESS
COMPANY OVERVIEW
The Company believes that it is the largest U.S. distributor focusing on
non-textbook educational supplies and furniture for grades pre-kindergarten
through 12 ("pre-K-12"). The Company provides a comprehensive offering of high
quality educational supplies and furniture to school districts, school
administrators and teachers through the broad distribution of its catalogs.
School Specialty distributes general school supplies, including classroom and
art supplies, instruction materials, furniture and equipment. The Company also
distributes supplies and furniture for certain educational disciplines,
including early childhood education under the Childcraft name, art supplies
under the Sax Arts & Crafts name and library-related products under the
Gresswell name. In order to broaden its geographic presence and product
offering, the Company has acquired 17 companies since May 1996. For the fiscal
year ended April 25, 1998, the Company's revenues aggregated $310.5 million and
operating income aggregated $16.2 million, which represented compound annual
increases of 35.8% and 122.8%, respectively, over revenues and operating income
for the year ended December 31, 1994.
With over 32,000 stock keeping units ("SKUs"), School Specialty offers
customers one source for virtually all of their non-textbook school supply and
furniture needs. School Specialty markets its products through an innovative
two-pronged approach, targeting both administrators and teachers to cover the
full spectrum of decision makers. The Company's "top down" approach, utilizing
its 290 sales representatives and its School Specialty general supply and
furniture catalog (the "School Specialty Catalog"), focuses on procurement
officials at the state, regional and local levels, while its "bottom up"
approach focuses on curriculum specialists and teachers. Sales to curriculum
specialists and over 2.1 million teachers are made primarily through the 6.3
million general supply catalogs of Re-Print LLC ("Re-Print") and specialty
catalogs that are mailed each year.
The Company believes that annual sales of non-textbook educational supplies
and equipment to the school supply market aggregate approximately $6.1 billion,
with over $3.6 billion sold to institutions and $2.5 billion sold to consumers.
The Company also believes there are over 3,400 distributors of school supplies,
the majority of which are family- or employee-owned companies with revenues
under $20 million that operate in a single region. The Company believes the
demand for timely order fulfillment at competitive prices, combined with the
need to invest in automated inventory and electronic ordering systems, is
accelerating the trend toward consolidation in the industry. School Specialty
also believes that it is well positioned to capitalize on this consolidation as
the largest distributor in its industry with annual revenues which it believes
exceed those of its next two largest competitors combined. Although the Company
is the largest distributor in the industry, its share of the $6.1 billion school
supply market is less than 6%, giving the Company substantial growth
opportunities.
The volume of school supplies is directly influenced by the size of the
student population. Kindergarten through 12th grade ("K-12") student enrollment
reached an all-time peak in 1996 with 51.5 million students and the U.S.
Department of Education projects that student enrollment will continue to grow
to
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54.3 million by the year 2006. As a result of these trends, the U.S. Department
of Education projects that expenditures in public elementary and secondary
schools will continue to rise through the year 2007. These rising expenditures
include a projected increase in total per pupil spending in current dollars from
$5,961 per pupil in 1997 to $7,179 by the year 2001. The Company believes that
as the largest U.S. distributor of non-textbook educational supplies it will be
a major beneficiary of this growth in expenditures.
School Specialty is a Delaware corporation formed in February 1998 to hold
the Educational Supplies and Products Division of U.S. Office Products. School
Specialty, Inc., a Wisconsin corporation ("Old School") formed in October 1959,
was acquired by U.S. Office Products in May 1996. School Speciality's
wholly-owned subsidiary, The Re-Print Corp., was acquired by U.S. Office
Products in July 1996 and has been in operation since 1921. In connection with
the Strategic Restructuring Plan (defined below), The Re-Print Corp. was
reorganized as Re-Print LLC. The specialty product lines, Childcraft, Sax Arts &
Crafts and Gresswell, were all acquired by U.S. Office Products in 1997, and
have been in operation since 1946, 1945, and 1938, respectively. On June 9,
1998, U.S. Office Products distributed the shares of School Specialty to the
stockholders of U.S. Office Products (the "School Specialty Distribution"). The
School Specialty Distribution was part of a comprehensive restructuring plan
adopted by the U.S. Office Products Board of Directors (the "Strategic
Restructuring Plan") in which U.S. Office Products spun-off (the
"Distributions") all of the shares of School Specialty and three other companies
that operate in the print management, technology solutions and corporate travel
services business (the "Spin Off Companies").
COMPANY GROWTH STRATEGY
School Specialty's objective is to further enhance its position as the
leading distributor of non-textbook educational supplies through the continued
implementation of the following strategies:
PURSUE ACQUISITIONS AGGRESSIVELY. The Company believes that there are
extensive acquisition opportunities among the over 3,400 school distributors in
the U.S. The Company intends to pursue two types of acquisitions: (i) general
school supply and furniture companies in geographic markets in which the Company
has a limited presence, and (ii) specialty companies focusing on disciplines
such as physical education, science, technology and music. School Specialty
believes it can improve the margins of acquired entities through its efficient
integration process to achieve economies of scale. Although the Company is the
largest distributor in the industry, its share of the $6.1 billion school supply
market is less than 6%, giving the Company substantial growth opportunities.
In furtherance of its acquisition strategy, School Specialty routinely
reviews and conducts investigations of potential acquisitions of school supply
businesses. When School Specialty believes a favorable opportunity exists, it
enters into discussion with the owners of such businesses regarding the
possibility of an acquisition by School Specialty.
IMPROVE PROFITABILITY. School Specialty improved its operating margin from
1.5% in 1995 to 5.3% for the fiscal year ended April 25, 1998. School Specialty
believes that there are substantial opportunities to further improve margins by
(i) increasing the efficiency of recent acquisitions, (ii) expanding purchasing
power and (iii) improving warehousing and distribution.
PENETRATE NEW MARKETS AND EXPAND CUSTOMER BASE IN EXISTING MARKETS. School
Specialty believes that it can increase sales by adding sales representatives in
geographic markets in which the Company does not have a significant presence. In
addition, the Company believes that it can further increase sales by cross
merchandising its specialty supplies to its general supplies customers. Lastly,
the Company intends to increase international sales in English-speaking
countries.
PRODUCT LINES
SCHOOL SPECIALTY. The School Specialty Catalog offers a comprehensive
selection of classroom supplies, instructional materials, educational games, art
supplies, school forms (such as reports, planners
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and academic calendars), physical education equipment, audio-visual equipment,
school furniture, and indoor and outdoor equipment and is targeted to
administrative decision makers. School Specialty believes it is the largest
school furniture resale source in the United States. School Specialty has been
granted exclusive franchises for certain furniture lines in specific territories
and School Specialty enjoys significant purchasing power in open furniture
lines.
The Company's specialty brands offer product lines for specific educational
disciplines.
RE-PRINT. Re-Print offers its customers substantially the same products as
the School Specialty Catalog but focuses on reaching teachers and curriculum
specialists directly through its mail-order catalogs.
CHILDCRAFT. Childcraft distributes early childhood education products and
materials. Childcraft also distributes 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.
SAX ARTS & CRAFTS. Sax Arts & Crafts is a leading distributor of art
supplies and art instruction materials, including paints, brushes, paper,
ceramics, art metals and glass, leather and wood crafts. Sax Arts & Crafts
offers customers a toll free "Art Savvy Hotline" staffed with 15 professional
artists to respond to customer questions.
GRESSWELL. Gresswell distributes library-related products in the U.K.
including furniture, and media display and storage. Gresswell's dedicated sales
and design team helps customers plan, design and install library projects using
Computer Assisted Design equipment.
EDUCATION ACCESS. Education Access is a catalog reseller of technology
solutions for the K-12 education market. This new product line will offer
curriculum software, productivity software, peripherals, networking products,
and other related products. Education Access publishes a 110-page catalog twice
a year and mails interim Technology Flash Updates to the K-12 market in the
United States.
School Specialty employs merchandising managers who continually review and
update the product lines for each operating division. The merchandising managers
convene customer focus groups and advisory panels to ascertain whether current
offerings are well-received and to anticipate future demand. The merchandising
managers also travel to product fairs and conventions seeking out new product
lines. This annual review process results in an organic reshaping and expansion
of the educational materials being offered by School Specialty.
OPERATIONS
SALES AND MARKETING
School Specialty believes it has developed a substantially different sales
and marketing model from that of traditional school supply and school
furnishings distribution companies in the United States. School Specialty's
strategy is to use its position of owning two distribution platforms with which
it can approach the school market. School Specialty's 290 sales representatives
focus on "top down" selling (through districts, school purchasing authorities
and schools), while School Specialty's Re-Print Division uses the "bottom up"
approach through its direct mail catalog selling directly to teachers. To
further strengthen its position in the market, School Specialty also owns
premier specialty education brands (Childcraft, Sax Arts & Crafts, and
Gresswell) that have the potential to enrich the general product offering
through cross-merchandising.
School Specialty has a broad customer base and no single customer accounted
for more than 2% of sales during fiscal 1998. Schools typically purchase school
supplies and furniture based on an established relationship with relatively few
suppliers. School Specialty establishes and maintains its relationship with its
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customers by assigning accounts within a specific geographic territory to a
local area sales representative. Additionally, each account is assigned its
designated inside customer service representative.
School Specialty's customer service representatives call on existing
customers frequently to ascertain and fulfill their school supply needs. The
representatives maintain contact with customers throughout the order cycle and
assist in processing orders.
School Specialty's primary compensation program for sales representatives is
based on commissions as a percentage of gross profit on sales. For new and
transitioning sales representatives, School Specialty offers salary and expense
reimbursement until the representative is moved to a full commission
compensation structure.
School Specialty utilizes direct mail catalogs to reach its broader customer
base. School Specialty distributes five major catalogs, one for each of its
School Specialty general supply, Re-Print, Childcraft, Gresswell, and Sax Arts &
Crafts lines. The catalog distribution calendar is generally the same across all
product lines. A major catalog containing all product offerings is distributed
toward the end of the calendar year so that it is available for school buyers at
the beginning of the year. During the year, various catalog supplements are
distributed to coincide with the peak school buying season in June through
September and following the return of students to school in the fall.
The approximate number of catalogs distributed for School Specialty,
Re-Print, Childcraft, Gresswell and Sax Arts & Crafts for each of the past three
calendar years and projected catalog distribution for 1998 is set out below. The
figures set forth below include all books of over 32 pages sent out (or, with
respect to 1998, expected to be sent out) during the calendar year but do not
include catalogs that were distributed by discontinued operations.
1995 1996 1997 1998
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(PROJECTED)
School Specialty Catalog........................... 115,000 296,750 450,750 600,000
Re-Print........................................... 998,000 1,175,000 2,275,000 3,400,000
Childcraft......................................... 1,583,000 1,308,000 1,360,000 1,728,000
Gresswell.......................................... 100,000 180,000(1) 130,000 150,000
Sax Arts & Crafts.................................. 750,000 823,000 1,043,500 1,064,000
---------- ---------- ---------- ----------
Total.......................................... 3,546,000 3,782,750 5,259,250 6,942,000
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(1) Includes an extra catalog published against a competitive launch.
Pricing for School Specialty's general and specialty product offerings
varies by product and channel of distribution. The Company generally offers a
negotiated discount from catalog prices for supplies and responds to quote and
bid requests for furniture and equipment. In addition, local sales
representatives work with the Company's corporate sales force and school supply
buyers to achieve an acceptable pricing structure based upon the mix of products
being procured.
School Specialty distributes products through its distribution centers as
well as placing customer orders directly with School Specialty's suppliers.
Furniture is generally shipped directly from the manufacturer to the user,
bypassing School Specialty's distribution centers.
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PURCHASING AND INVENTORY MANAGEMENT
School Specialty manages its inventory by continually reviewing daily
inventory levels compared to a running 90-day inventory for the previous year,
adjusted for incoming orders. School Specialty constantly refines the focus of
inventory products through its automated inventory management system to pursue
the optimum level of scope and depth of product offered. Every item in each of
the various distribution regions is forecasted on a daily basis to account for
the anticipated demand curve, current order activity, and available stock as
well as the expected lead time from the supplier. The forecast allows inventory
purchases to respond quickly to the high seasonal demand while keeping
off-season inventory to a minimum. The information systems for all of School
Specialty's distribution centers are interconnected to allow transfer of
inventory between facilities to fill regional demand. In addition, all orders
can be redirected to the distribution center which is the primary stocking
location for a product. School Specialty's inventory management results in
inventory turnover that management believes is higher than industry turnover
rates and reduces the level of discontinued, excess and obsolete inventory
compared to businesses acquired by School Specialty.
School Specialty believes its large size enhances its purchasing power with
suppliers and results in lower product costs than most of the Company's
competitors. Further, School Specialty believes it can leverage this purchasing
power to acquired companies in the future to improve the operating margins for
both general supply and specialty businesses. The Company also believes its
purchasing power for general supplies should result in improved margins for its
specialty businesses.
Market surveys by Krebs and Company have shown that the primary determinants
of customer satisfaction in the educational supply industry are the completeness
and accuracy of shipments received and the timeliness of delivery. School
Specialty continues to invest in sophisticated computer systems to automate the
order taking, inventory allocation and management, and order shipment processes.
As a result, School Specialty has been able to provide superior order
fulfillment to its customers. In addition, School Specialty has developed OMS,
which allows schools to customize their orders and enter them electronically
with School Specialty and provides historical usage reports to schools useful
for their budgeting process. During the academic year, School Specialty seeks to
fill orders within twenty-four hours of receipt of the order at a 95.0% fill
rate and a 99.5% order accuracy rate. During the summer months, School Specialty
shifts to a production environment and schedules shipments to coincide with the
start of the school year. During the summer months, School Specialty's
objectives are to meet a 100% fill rate at a 99.5% order accuracy rate. In the
aggregate, School Specialty's order fill rate for June, July and August 1997
exceeded 97.0%. The Company defines "fill rate" as the percentage of line items
in a customer's order that are initially shipped to the customer in response to
the order by the requested ship date.
During the peak shipping season between June 1 and September 30, each of
School Specialty's distribution centers contracts with local common carriers to
deliver its product to schools and school warehouses. Re-Print and Sax Arts &
Craft rely on carriers such as Roadway Package Service, United Parcel Service
and the U.S. Postal Service for distribution to customers.
INFORMATION SYSTEMS
The Company believes that through the utilization of technology in areas
such as (i) purchasing and inventory management, (ii) customer order fulfillment
and (iii) database management, School Specialty is able to turn inventory more
quickly than competitors, offer customers more convenient and cost effective
product ordering methods and conduct more precisely targeted sales and marketing
campaigns. School Specialty uses two principal information systems, one for its
general distribution and another for its specialty market distribution. In
general school supply distribution, School Specialty utilizes a specialized
distribution software package used primarily by office products and paper
distributors. The software offers a fully integrated process from sales order
entry through customer invoicing, and inventory requirements
5
planning through accounts payable. School Specialty's system provides
information through daily automatic posting to the general ledger and integrated
inventory control. School Specialty has made numerous enhancements to this
process that allow greater flexibility in addressing seasonal requirements of
the industry and meeting specific customer needs.
The specialty divisions are moving towards a common mail order system
provided by Smith-Gardner & Associates. The Mail-order and Catalog System
("MACS") meets the unique 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.
Although School Specialty has two principal information systems, these
systems integrate general ledger, purchasing and inventory management functions.
The 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. Currently, all acquired School Specialty general
distribution companies (except one acquired in December 1997) are on the same
computer system. The specialty businesses and Re-Print operate on different
systems but intend to implement the common MACS system. School Specialty intends
to continue to use two principal information systems in its business.
YEAR 2000 COMPLIANCE
School Specialty's current information systems as well as those being
considered for acquisition by School Specialty's mail order and specialty
distribution divisions, currently meet information standards for Year 2000
compliance. School Specialty does not expect that it will incur any material
costs and expenses to meet information standards for Year 2000 compliance. See "
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting the Company's Business."
COMPETITION
School Specialty operates in a highly competitive environment. The Company's
principal competitors are other national and regional school supply distribution
companies. School Specialty is also faced with increasing competition from
non-traditional alternate channel competitors, such as office products contract
stationers and superstores. Among traditional school supply distributors, School
Specialty believes that there are only two other companies with sales in excess
of $130 million: Beckley-Cardy and the J.L. Hammett Co. School Specialty
believes that it competes favorably with these companies on the basis of service
and price.
The market is highly competitive on a regional basis, but School Specialty
believes its heaviest competition is coming from alternate channel competitors
such as office product contract stationers and superstores. Their primary
advantages over School Specialty are size, location, greater financial resources
and buying power. Their primary disadvantage is that their product mix covers
only 15% to 20% of the school's needs (measured by volume). In addition, the
Company's competitors do not offer special order fulfillment software, which
School Specialty believes is increasingly important to adequately service school
needs. School Specialty believes it competes favorably with these companies on
the basis of service and product offering.
EMPLOYEES
As of April 25, 1998, School Specialty had 1,220 full-time employees, 272 of
whom were employed primarily in management and administration, 416 in regional
warehouse and distribution operations, and 532 in marketing, sales, order
processing, and customer service. To meet the seasonal demands of its customers,
School Specialty employs many seasonal employees during the late spring and
summer seasons. Historically, School Specialty has been able to meet its
requirements for seasonal employment. As of April 25, 1998, approximately 43 of
School Specialty's employees were members of the Teamsters Labor
6
Union at Sax Arts & Crafts' New Berlin, Wisconsin facility. School Specialty
considers its relations with its employees to be very good.
ITEM 2. PROPERTIES
School Specialty's corporate headquarters are located at 1000 North
Bluemound Drive, Appleton, Wisconsin, a combined office and warehouse facility
of approximately 120,000 square feet. School Specialty's lease on the Appleton
headquarters expires on December 31, 2001. School Specialty leases or owns the
following distribution facilities.
APPROXIMATE
SQUARE OWNED/ LEASE
LOCATIONS FOOTAGE LEASED EXPIRATION
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Agawam, Massachusetts............................................. 163,300 Owned --
Bethlehem, Pennsylvania........................................... 25,600 Leased February 28, 1999
Birmingham, Alabama............................................... 180,365 Leased November 20, 2006
Bowling Green, Kentucky........................................... 42,000 Leased June 30, 2001
Cary, Illinois.................................................... 75,767 Owned --
Enfield, London, England.......................................... 8,000 Owned --
Fresno, California................................................ 18,480 Leased December 31, 2001
Hoddesdon, London, England........................................ 10,000 Leased September 1999
Hoddesdon, London, England........................................ 10,000 Leased September 2015
Lancaster, Pennsylvania........................................... 75,434 Leased December 31, 2002
Lancaster, Pennsylvania........................................... 165,750 Leased February 28, 1999
Mt. Laurel, New Jersey............................................ 48,000 Leased May 31, 2001
New Berlin, Wisconsin............................................. 97,500 Leased March 31, 2002
Oklahoma City, Oklahoma........................................... 37,340 Leased July 16, 2001
Pollocksville, North Carolina..................................... 84,071 Owned --
Portland, Oregon.................................................. 30,456 Leased May 31, 2001
Salina, Kansas.................................................... 123,000 Owned --
The Lancaster, Pennsylvania facility is used for manufacturing and the
Salina, Kansas facility is used for production of school forms. In addition,
School Specialty has ten sales offices throughout the United States.
School Specialty believes that its properties are adequate to support its
operations for the foreseeable future. School Specialty reviews on a regular
basis the consolidation of its facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, a party to legal proceedings arising in
the normal course of its business. Management believes that none of these legal
proceedings will have a material adverse effect on the financial position,
results of operations or cash flows of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's stockholders for consideration
during the quarter ended April 25, 1998.
7
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
(a) The Company's common stock (the "Common Stock") has traded on the Nasdaq
National Market since June 10, 1998 under the symbol "SCHS." There was no market
for the Company's Common Stock prior to that date.
The number of record holders of the Company's Common Stock as of July 17,
1998 was 3,940. The Company believes that a substantially larger number of
beneficial owners hold such shares of Common Stock in depository or nominee
form.
The Company has not declared or paid any cash dividends on the Company's
Common Stock to date and does not anticipate paying any cash dividends on its
shares of Common Stock in the foreseeable future because it intends to retain
its earnings, if any, to finance the expansion of its business and for general
corporate purposes. Any payment of future dividends will be at the discretion of
the Board of Directors and will depend upon, among other things, the Company's
earnings, financial condition, capital requirements, level of indebtedness,
contractual restrictions with respect to the payment of dividends and other
factors that the Company's Board of Directors deems relevant. Further, the
Company's credit facility restricts the Company's ability to pay dividends to
the extent that there is a default under the credit facility.
(b) On June 9, 1998, the Company's registration statement (the "Registration
Statement") on Form S-1 filed pursuant to the Securities Act of 1933, as amended
(file number 333-47509) was declared effective by the Commission. The
Registration Statement related to an offering (the "Offering") of 2,125,000
shares of the Common Stock, par value $.001 of the Company at an aggregate
offering price of $32,937,500. Additionally, School Specialty registered 318,750
shares to cover over-allotments. On June 10, 1998, School Specialty sold
2,125,000 shares of Common Stock. The underwriters for the Offering were
Goldman, Sachs & Co., NationsBanc Montgomery Securities LLC, Salomon Smith
Barney and Piper Jaffray, Inc. In addition, the Company sold 250,00 shares
directly to Daniel P. Spalding, the Chariman of the Board and its Chief
Executive Officer, David J. Vander Zanden, its President and Chief Operating
Officer, and Donald Ray Pate, Jr., its Executive Vice President for Re-Print.
The shares were sold at a price of $14.415 for aggregate consideration of
$3,603,750. The sale of these shares was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
The total proceeds to the Company of the Offering, net of underwriting
discounts and commissions of $2,305,625, were $30,631,875. In addition, the
Company incurred approximately $1,500,000 of expenses in connection with the
Offering, consisting primarily of the costs of registering the Offering under
the Securities Act of 1993, as amended, and with the National Association of
Securities Dealers, Inc., printing fees and professional expenses. The net
proceeds to the Company of the Offering were approximately $29,131,875. None of
such payments were made to directors or officers of the Company or their
associates or to persons owning 10% or more of any class of equity securities of
the Company or to affiliates of the Company. None of the proceeds were received
prior to April 25, 1998. The net proceeds were used to reduce indebtedness
outstanding under the Company's credit facility. The debt under the credit
facility had been incurred to pay debt of U.S. Office Products allocated to the
Company in connection with the Distributions. See "Item 7--Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data provided herein should be read in conjunction
with the historical financial statements, including the notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," all of which appear elsewhere in this Annual Report.
8
The historical Selected Financial Data for the fiscal years ended April 25,
1998 and April 26, 1997, the four months ended April 30, 1996, and the years
ended December 31, 1995 and 1994 have been derived from School Specialty's
consolidated financial statements that have been audited. The historical
Selected Financial Data for the fiscal years ended April 25, 1998 and April 26,
1997, the four months ended April 30, 1996, and the year ended December 31, 1995
are included elsewhere in the Annual Report. The historical Selected Financial
Data for the year ended December 31, 1993 have been derived from unaudited
consolidated financial statements which are not included elsewhere in this
Annual Report. These unaudited consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements and,
in the opinion of management, contain all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the results of
operations for the periods presented. The historical financial information of
Old School and Re-Print has been combined on a historical cost basis in
accordance with generally accepted accounting principles ("GAAP") to present
this financial data as if the Pooled Companies had always been members of the
same operating group. The financial information of the Purchased Companies is
included from the dates of their respective acquisitions.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOUR MONTHS YEAR ENDED
FISCAL YEAR ENDED ENDED DECEMBER
---------------------- ------------- 31,
APRIL 25, APRIL 26, APRIL 30, ----------
1998 1997 1996 1995
---------- ---------- ------------- ----------
STATEMENT OF INCOME DATA:
Revenues....................................................................... $ 310,455 $ 191,746 $ 28,616 $ 150,482
Cost of revenues............................................................... 219,313 136,577 20,201 105,757
---------- ---------- ------------- ----------
Gross profit................................................................. 91,142 55,169 8,415 44,725
Selling, general, and administrative expenses.................................. 71,403 43,462 10,307 39,869
Non-recurring acquisition costs................................................ 1,792 1,122
Restructuring costs............................................................ 2,491 194 2,532
Strategic restructuring costs.................................................. 1,000
---------- ---------- ------------- ----------
Operating income............................................................. 16,248 9,721 (3,014) 2,324
Interest expense............................................................... 5,505 4,197 1,461 5,536
Interest income................................................................ (132) (6)
Other (income) expense......................................................... 156 (196) 67 (18)
---------- ---------- ------------- ----------
Income (loss) before provision for income taxes................................ 10,719 5,720 (4,536) (3,194)
Provision for (benefit from) income taxes (1).................................. 5,480 (2,412) 139 173
---------- ---------- ------------- ----------
Net income (loss).............................................................. $ 5,239 $ 8,132 $ (4,675) $ (3,367)
---------- ---------- ------------- ----------
---------- ---------- ------------- ----------
Net income (loss) per share:
Basic........................................................................ $ 0.40 $ 0.81 $ (0.54) $ (0.51)
Diluted...................................................................... $ 0.39 $ 0.80 $ (0.53) $ (0.50)
Weighted average shares outstanding:
Basic........................................................................ 13,284 10,003 8,611 6,562
Diluted...................................................................... 13,547 10,196 8,789 6,669
1994 1993
---------- ---------
STATEMENT OF INCOME DATA:
Revenues....................................................................... $ 119,510 $ 76,926
Cost of revenues............................................................... 87,750 56,280
---------- ---------
Gross profit................................................................. 31,760 20,646
Selling, general, and administrative expenses.................................. 27,281 18,294
Non-recurring acquisition costs................................................
Restructuring costs............................................................
Strategic restructuring costs..................................................
---------- ---------
Operating income............................................................. 4,479 2,352
Interest expense............................................................... 3,007 1,845
Interest income................................................................
Other (income) expense......................................................... (86) 228
---------- ---------
Income (loss) before provision for income taxes................................ 1,558 279
Provision for (benefit from) income taxes (1).................................. 218 199
---------- ---------
Net income (loss).............................................................. $ 1,340 $ 80
---------- ---------
---------- ---------
Net income (loss) per share:
Basic........................................................................ $ 0.26 $ 0.02
Diluted...................................................................... $ 0.26 $ 0.02
Weighted average shares outstanding:
Basic........................................................................ 5,062 4,918
Diluted...................................................................... 5,078 4,918
DECEMBER
31,
APRIL 25, APRIL 26, APRIL 30, ----------
1998 1997 1996 1995
---------- ---------- ------------- ----------
BALANCE SHEET DATA:
Working capital (deficit)...................................................... $ 47,791 $ 14,491 $ (3,663) $ (1,052)
Total assets................................................................... 223,729 87,685 54,573 54,040
Long-term debt, less current portion........................................... 315 566 15,031 15,294
Long-term payable to U.S. Office Products...................................... 62,699 33,266
Stockholders' (deficit) equity................................................. 106,466 16,329 (4,267) (620)
1994 1993
---------- ---------
BALANCE SHEET DATA:
Working capital (deficit)...................................................... $ 3,512 $ 1,140
Total assets................................................................... 44,267 23,190
Long-term debt, less current portion........................................... 11,675 7,175
Long-term payable to U.S. Office Products......................................
Stockholders' (deficit) equity................................................. 1,827 545
- ------------------------
(1) Results for the fiscal year ended April 26, 1997 include benefit from income
taxes of $2.4 million primarily arising from the reversal of a $5.3 million
valuation allowance in the quarter ended April 26,
9
1997. The valuation allowance had been established in 1995 to offset the tax
benefit from net operating loss carryforwards included in the Company's
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 the Company's 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
The following discussion and analysis of the financial condition and results
of operation of the company should be read in conjunction with the financial
statements and the notes thereto which appear elsewhere in this annual report.
OVERVIEW
School Specialty is the largest U.S. distributor focusing on non-textbook
educational supplies and furniture for grades pre-K-12. The Company provides a
comprehensive offering of high quality educational supplies and furniture to
school districts, school administrators and teachers through the broad
distribution of its catalogs. Specialty brands, which target specific curriculum
disciplines, include Childcraft, which sells to the early childhood market; Sax
Arts & Crafts, which distributes a broad line of art supplies and materials; and
Gresswell, which distributes library-related products in the United Kingdom.
Revenues have increased from $65.0 million in the fiscal year ended December
31, 1992 to $310.5 million for the fiscal year ended April 25, 1998. This
increase resulted primarily from 16 acquisitions, 14 of which occurred during
fiscal 1997 and 1998, as well as internally generated growth.
School Specialty's gross profit margins have improved by achieving increased
buying power and by acquiring specialty companies which usually have higher
gross margins than the Company's general products divisions. The Company expects
gross profit margins to be further enhanced by acquiring additional specialty
companies and continuing to improve its purchasing power.
School Specialty's operating margin has improved significantly over the last
several years. This improvement reflects the Company's acquisition of specialty
companies which have higher operating margins than the Company's general
products divisions. In addition, operating margins have increased as the Company
has reduced selling, general and administrative expenses of acquired companies
by eliminating redundant administrative functions. Currently, nine of the ten
general school supply companies acquired since May 1996 have been integrated.
The benefit from income taxes in Fiscal 1997 of $2.4 million reflects the
reversal of a $5.3 million deferred tax valuation allowance in the fourth
quarter. The Company believes an effective income tax rate of 46.0% is more
representative of future effective income tax rates.
School Specialty's business and working capital needs are highly seasonal
with peak sales levels occurring from May through October. During this period,
the Company receives, ships and bills the majority of its orders so that schools
and teachers receive their merchandise by the start of each school year. School
Specialty's inventory levels increase in April through July in anticipation of
the peak selling season. The majority of cash receipts are collected from
September through December.
In the past, the Company has recorded restructuring costs associated with
consolidation of warehouse facilities. These costs typically include: costs to
exit the facility, such as rent under remaining lease terms, occupancy,
relocation costs and facility restoration; employee costs, such as severance;
and asset impairment costs. The Company expects to incur such costs in the
future as it continues to integrate acquired companies. Based on the additional
time and resources expected to be involved in the development, review and
approval of any such restructuring plans, the Company cannot presently predict
the timing or overall magnitude of such a charge.
10
In the first quarter of fiscal 1999, the Company will record a compensation
charge of approximately $1.1 million, representing (i) non-cash compensation
related to certain employees of School Specialty who tendered in the U.S. Office
Products equity self-tender offer options that were previously granted by U.S.
Office Products and (ii) the difference between the amount which Messrs.
Spalding, Vander Zanden and Pate paid for the 250,000 shares of Common Stock
purchased directly from the Company in connection with the Company's initial
public offering and the amount which they would have paid for such shares if the
purchase price per share had been the initial public offering price of the
shares offered in the offering. The charge related to the equity self-tender was
incurred solely as a result of the tender of options into the equity self-tender
and was incurred prior to the School Specialty Distribution.
School Speciality is a Delaware corporation formed in February 1998 to hold
the Educational Supplies and Products Division of U.S. Office Products, which
acquired School Specialty, Inc., a Wisconsin corporation ("Old School"), in May
1996 and Re-Print in July 1996. The Company's consolidated financial statements
give retroactive effect to these two business combinations under the
pooling-of-interests method (Old School and Re-Print are referred to as the
"Pooled Companies") and include the results of companies acquired in business
combinations accounted for under the purchase method from their respective dates
of acquisition. Prior to their respective dates of acquisition by U.S. Office
Products, the Pooled Companies reported results on years ending on December 31.
Upon acquisition by U.S. Office Products and effective for the fiscal year ended
April 26, 1997 ("fiscal 1997"), the Pooled Companies changed their year-ends
from December 31 to conform to U.S. Office Products' fiscal year, which ends on
the last Saturday in April.
The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes thereto.
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of revenues on
a historical basis for fiscal 1997 and 1998 and the year ended December 31,
1995.
FISCAL YEAR FISCAL YEAR FOR THE YEAR
ENDED ENDED ENDED
APRIL APRIL DECEMBER
25, 1998 26, 1997 31, 1995
----------- ----------- ---------------
Revenues.......................................................... 100.0% 100.0% 100.0%
Cost of revenues.................................................. 70.6 71.2 70.3
----- ----- -----
Gross profit...................................................... 29.4 28.8 29.7
Selling, general and administrative expenses...................... 23.0 22.7 26.5
Non-recurring acquisition costs................................... 0.9
Restructuring costs............................................... 1.1 0.1 1.7
----- ----- -----
Operating income.................................................. 5.3 5.1 1.5
Interest expense, net............................................. 1.8 2.2 3.7
Other (income) expense............................................ 0.1 (0.1)
----- ----- -----
Income (loss) before provision for income taxes................... 3.4 3.0 (2.2)
Provision for (benefit from) income taxes......................... 1.8 (1.3) 0.1
----- ----- -----
Net income (loss)................................................. 1.6% 4.3% (2.3)%
----- ----- -----
----- ----- -----
11
CONSOLIDATED HISTORICAL RESULTS OF OPERATIONS
YEAR ENDED APRIL 25, 1998 COMPARED TO YEAR ENDED APRIL 26, 1997
Consolidated revenues increased 61.9%, from $191.7 million in fiscal 1997,
to $310.5 million in fiscal 1998. This increase was primarily due to the
inclusion of revenues from the eight companies acquired in business combinations
accounted for under the purchase method during fiscal 1998 (the "Fiscal 1998
Purchased Companies") from their respective dates of acquisition and revenues
from the six companies acquired during fiscal 1997 in business combinations
accounted for under the purchase method (the "Fiscal 1997 Purchased Companies"
and together with the Fiscal 1998 Purchased Companies, the "Purchased
Companies") for the entire period. Revenues also increased due to sales to new
accounts, increased sales to existing customers and higher pricing on certain
products in response to increased product costs. Product cost is the most
significant element in cost of revenues. Inbound freight, occupancy and delivery
charges are also included in cost of revenues.
Gross profit increased 65.2%, from $55.2 million, or 28.8% of revenues, for
fiscal 1997 to $91.1 million, or 29.4% of revenues, for fiscal 1998. The
increase in gross profit as a percentage of revenues was due primarily to an
increase in revenues from higher margin products, primarily as a result of the
purchase acquisitions of three companies selling higher margin specialty product
lines during fiscal 1998, and as a result of improved purchasing power and
rebate programs negotiated with vendors. These factors were partly offset by an
increase in the cost of revenues as a result of the increased freight costs
caused by the UPS strike in the summer of 1997 and an increase in the portion of
revenues represented by lower margin bid revenues.
Selling, general and administrative expenses include selling expenses (the
most significant component of which is sales wages and commissions), catalog
costs, general administrative overhead (which includes information systems and
customer service), and accounting, legal, human resources and purchasing
expenses. Selling, general and administrative expenses increased 64.3%, from
$43.5 million, or 22.7% of revenues, for fiscal 1997 to $71.4 million, or 23.0%
of revenues, for fiscal 1998. The increase in selling, general and
administrative expenses as a percentage of revenues was due primarily to the
purchase acquisition of three specialty companies during fiscal 1998, which
typically have higher operating expenses as a percentage of revenue, partially
offset by the efficiencies generated from the elimination of certain redundant
administrative functions, including purchasing, accounting, finance and
information systems, of the Fiscal 1997 Purchased Companies and the
consolidation of two warehouses into one regional facility in the Northeastern
U.S during the third quarter of fiscal 1997. School Specialty has established a
24-month integration process in which a transition team is assigned to (i) sell
or discontinue incompatible business units, (ii) reduce the number of SKUs,
(iii) eliminate redundant administrative functions, (iv) integrate the acquired
entity's MIS system, and (v) improve buying power. However, the length of time
it takes the Company to fully implement its strategy for assimilating an
acquired company can vary depending on the nature of the company acquired and
the season in which it is acquired.
The Company has historically utilized grants of employee stock options as a
method of incentivizing employees by increasing their ownership interests in the
Company, which also has the effect of more closely aligning their interests with
the interests of stockholders of the Company. As a result, if the Company had
recorded compensation expense based upon the fair market value of the stock
options on the dates of grant under the methodology prescribed by SFAS 123, the
Company's net income for the fiscal year ended April 25, 1998 would have been
reduced by approximately $0.8 million or 15.3%.
The Company recorded in the fourth quarter of fiscal 1998 approximately $2.5
million of one-time non-recurring costs, primarily consisting of a write-down of
deferred catalog costs, employee severance and asset impairment costs, and $1.0
million of the transaction costs allocated to the Company under the Distribution
Agreement. The Company incurred non-recurring acquisition costs of $1.8 million
in fiscal 1997, in conjunction with the acquisition of the Pooled Companies.
These non-recurring acquisition costs included accounting, legal,
investment-banking fees, real estate and environmental assessments and
12
appraisals and various regulatory fees. Generally accepted accounting principles
("GAAP") require the Company to expense all acquisition costs (both those paid
by the Company and those paid by the sellers of the acquired companies) related
to business combinations accounted for under the pooling-of-interests method of
accounting. In accordance with GAAP, the Company will be unable to utilize the
pooling-of-interests method to account for acquisitions for a period of two
years following the completion of U.S. Office Products' Strategic Restructuring
Plan. During this period, the Company will not reflect any non-recurring
acquisition costs in its results of operations, as all costs incurred of this
nature would be related to acquisitions accounted for under the purchase method
and would, therefore, be capitalized as a portion of the purchase consideration.
See "Factors Affecting the Company's Business--Risks Related to Inability to Use
Pooling-of-Interests Method to Account for Future Acquisitions".
Since U.S. Office Products' acquisition of the Pooled Companies, interest
has been allocated to the Company based upon the Company's average outstanding
payable balance with U.S. Office Products at U.S. Office Products' weighted
average interest rate during such period. Interest expense, net of interest
income, increased 28.0%, from $4.2 million for fiscal 1997 to $5.4 million for
fiscal 1998. The increase was due primarily to higher amounts payable to U.S.
Office Products incurred as a result of the acquisition of the eight companies
acquired in fiscal 1998.
Provision for income taxes increased from a tax benefit of $2.4 million for
fiscal 1997 to $5.5 million for fiscal 1998. The high effective income tax rate
of 51.1% for fiscal 1998, compared to the federal statutory rate of 35.0%, was
primarily due to state income taxes, non-deductible goodwill amortization and
USOP share distribution costs. In 1995, the Company recorded a valuation
allowance of $5.3 million on a deferred tax asset resulting from the net
operating loss carryforwards created during 1995. The valuation allowance had
been established by one of the Pooled Companies prior to its acquisition by U.S.
Office Products to offset the tax benefit from such loss carryforwards, because
at the time it was not likely that such tax benefit would be realized. The
benefit from income taxes in Fiscal 1997 of $2.4 million arose primarily from
the reversal of the $5.3 million deferred tax asset valuation allowance in the
fourth quarter. The valuation allowance was reversed subsequent to the Company's
being acquired by U.S. Office Products, because it was deemed "more likely than
not", based on improved results, that the tax benefit from such operating loss
carryforwards would be realized.
YEAR ENDED APRIL 26, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Consolidated revenues increased 27.4%, from $150.5 million in 1995, to
$191.7 million in fiscal 1997. This increase was primarily due to the inclusion,
for fiscal 1997, of revenues from the Fiscal 1997 Purchased Companies from their
respective dates of acquisition, sales to new accounts, increased sales to
existing customers and higher pricing on certain products in response to
increased product costs.
Gross profit increased 23.4%, from $44.7 million, or 29.7% of revenues, in
1995 to $55.2 million, or 28.8% of revenues, in fiscal 1997. The decrease in
gross profit as a percentage of revenues was due primarily to a shift in revenue
mix, resulting from the acquisition of the Fiscal 1997 Purchased Companies,
which traditionally had lower gross profits as a percentage of revenues. This
decrease was partially offset by improved purchasing and rebate programs
negotiated with vendors and the Company's ability to take advantage of term
discounts due to improved cash flows.
Selling, general and administrative expenses increased 9.0%, from $39.9
million, or 26.5% of revenues, in 1995 to $43.5 million, or 22.7% of revenues,
in fiscal 1997. The decrease in selling, general and administrative expenses as
a percentage of revenues was due primarily to the consolidation of two
warehouses into one regional facility in the Northeastern U.S. during third
quarter of fiscal 1997, the elimination of certain redundant administrative
functions of a company acquired during 1995 in a business combination accounted
for under the purchase method (the "1995 Purchased Company") and reduced
executive compensation expense at one of the Pooled Companies after being
acquired by U.S. Office Products in July 1996.
13
The Company has historically utilized grants of employee stock options as a
method of incentivizing employees by increasing their ownership interests in the
Company, which also has the effect of more closely aligning their interests with
the interests of stockholders of the Company. As a result, if the Company had
recorded compensation expense based upon the fair market value of the stock
options on the dates of grant under the methodology prescribed by SFAS 123, the
Company's net income for the fiscal year ended April 26, 1997 would have been
reduced by approximately $0.7 million or 9.2%.
The Company incurred non-recurring acquisition costs of $1.8 million in
fiscal 1997, in conjunction with business combinations accounted for under the
pooling-of-interests method. These non-recurring acquisition costs included
accounting, legal, investment-banking fees, real estate and environmental
assessments and appraisals and various regulatory fees.
The Company incurred restructuring costs of $2.5 million and $194,000 during
1995 and fiscal 1997, respectively. These costs represent the external costs and
liabilities to close redundant Company facilities, severance costs related to
the Company's employees and other costs associated with the Company's
restructuring plans. The Company expects to incur similar costs in the future as
the Company continues to review its operations, with the intention of continuing
to eliminate redundant facilities.
Interest expense, net of interest income, decreased 24.2%, from $5.5 million
in 1995 to $4.2 million in fiscal 1997. The decrease was due primarily to the
repayment of substantially all of the Company's debt in conjunction with the
acquisition of the Pooled Companies by U.S. Office Products and lower interest
rates being charged on the Company's short-term and long-term debt with U.S.
Office Products.
Provision for income taxes decreased from a tax expense of $173,000 in 1995
to a tax benefit of $2.4 million in fiscal 1997. The Company incurred a tax
expense in 1995, notwithstanding the fact that it reported a pre-tax loss,
because one of the Pooled Companies' earnings were not offset by the other
Pooled Companies' loss. In 1995, the Company recorded a full valuation allowance
of $5.3 million on the deferred tax asset resulting from the net operating loss
carryforwards created during 1995. The valuation allowance had been established
by one of the Pooled Companies prior to its acquisition by U.S. Office Products
to offset the tax benefit from such loss carryforwards, because at the time it
was not likely that such tax benefit would be realized. The benefit from income
taxes in Fiscal 1997 of $2.4 million arose primarily from the reversal of the
$5.3 million deferred tax asset valuation allowance in the fourth quarter. The
valuation allowance was reversed subsequent to the Company's being acquired by
U.S. Office Products, because it was deemed "more likely than not", based on
improved results, that the tax benefit from such operating loss carryforwards
would be realized.
LIQUIDITY AND CAPITAL RESOURCES
Subsequent to the acquisition by U.S. Office Products of the Pooled
Companies and prior to the School Specialty Distribution, U.S. Office Products
funded the cash portions of School Specialty's acquisitions, paid the
acquisition costs, repaid outstanding debt of acquired companies, allocated a
portion of U.S. Office Products' corporate expenses to School Specialty and made
daily advances or sweeps of cash to keep School Specialty's cash balance at or
near zero on a daily basis. The net amount of such transactions was recorded as
a payable from School Specialty to U.S. Office Products.
At April 25, 1998, the Company had working capital of $47.8 million. The
Company's capitalization, defined as the sum of long-term debt, long-term
payable to U.S. Office Products and stockholders' equity, at April 25, 1998 was
$169.5 million.
During fiscal 1998, net cash provided by operating activities was $3.7
million. Net cash used in investing activities was $99.7 million, including
$95.7 million for acquisitions and $4.0 million for additions to property and
equipment. Net cash provided by financing activities was $96 million, including
$95.7 million provided by U.S. Office Products to fund the cash portion of the
purchase price and the repayment of debt assumed with the acquisition of the
fiscal 1998 Purchased Companies, $81.3 million of which was
14
considered a contribution of capital by U.S. Office Products, partially offset
by $8.4 million used to repay indebtedness.
During fiscal 1997, net cash provided by operating activities was $918,000.
Net cash used in investing activities was $16.7 million, including $7.7 million
for acquisitions, $7.2 million for additions to property and equipment and $1.8
million to pay non-recurring acquisition costs. Net cash provided by financing
activities was $15.8 million, including $59.9 million provided by U.S. Office
Products to fund the cash portion of the purchase price and the repayment of
debt associated with the fiscal 1997 Purchased Companies and the payment of debt
of the Pooled Companies, partially offset by $46.9 million used for the net
repayment of indebtedness, primarily at the fiscal 1997 Purchased Companies.
During 1995, net cash provided by operating activities was $4.8 million. Net
cash used in investing activities was $6.0 million, including $5.4 million for
acquisitions and $881,000 for additions to property and equipment. Net cash
provided by financing activities was $1.2 million, including net proceeds from
the issuance of debt of $2.4 million and $500,000 received from the issuance of
common stock, partially offset by payments of indebtedness of $1.5 million.
On June 9, 1998, the Company closed on a five year $250 million revolving
credit facility (the "Credit Facility") from NationsBank, N.A. Interest on
borrowings under the Credit Facility will accrue at a rate of, at the Company's
option, either LIBOR plus 1.00% or the lender's base rate, for up to the first 6
months under the agreement. Thereafter, interest will accrue at a rate of (i)
LIBOR plus a range of .625% to 1.625%, or (ii) the lender's base rate plus a
range of 0% to .250% (depending on the Company's leverage ratio of funded debt
to EBITDA). Indebtedness is secured by substantially all of the assets of the
Company. The Credit Facility is subject to terms and conditions typical of
facilities of such size and includes certain financial covenants. The Company
made borrowings of $83.3 million under the Credit Facility to repay the U.S.
Office Products debt which it was obligated under the Distribution Agreement to
repay. On June 15, 1998, School Specialty used net proceeds of approximately
$32.7 million from the Offering and the sale of 250,000 shares of Common Stock
to Messrs. Spalding, Vander Zanden and Pate to repay a portion of the $83.3
million borrowed under the Credit Facility. After such repayment, the Company
had approximately $50 million borrowed under the Credit Facility, with the
remaining $200 million available under the Credit Facility (subject to
compliance with the financial covenants), for general corporate purposes,
including working capital, and for acquisitions.
The Company's anticipated capital expenditures budget for the next twelve
months is approximately $3.0 million. The largest items include operational and
financial reporting software, computer hardware and warehouse equipment.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's business is subject to seasonal influences. The Company's
historical revenues and profitability have been dramatically higher in the first
two quarters of its fiscal year (May-October) primarily due to increased
shipments to customers coinciding with the start of each school year.
Quarterly results also may be materially affected by the timing of
acquisitions, the timing and magnitude of costs related to such acquisitions,
variations in the prices paid by the Company for the products it sells, the mix
of products sold and general economic conditions. Moreover, the operating
margins of companies acquired by the Company may differ substantially from those
of the Company, which could contribute to the further fluctuation in its
quarterly operating results. Therefore, results for any quarter are not
indicative of the results that the Company 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 1997 and 1998 (in thousands). The information has been
derived from unaudited consolidated financial statements that in the opinion of
management reflect all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of such quarterly information. This
quarterly information is not
15
comparative because of the high degree of seasonability in School Specialty's
business. Revenues and profitability are significantly higher in the months of
May through October, with the most significant portion of revenue and profit
occurring in the months of July through September. On a fiscal year basis (years
ending in April), this six-month (May through October) period falls in the first
and second quarters of the fiscal year. On a calendar year basis, the most
profitable three months (July through September) fall in the third quarter.
YEAR ENDED APRIL 25, 1998
-------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------- ---------- --------- --------- ----------
Revenues................................................ $ 87,029 $ 111,460 $ 49,391 $ 62,575 $ 310,455
Gross profit............................................ 26,090 33,619 11,670 19,763 91,142
Operating income (loss)................................. 11,872 12,155 (4,048) (3,731) 16,248
Net income (loss)....................................... 5,804 5,965 (2,934) (3,596) 5,239
Per share amounts:
Basic................................................. 0.49 0.49 (0.20) (0.24) 0.40
Diluted............................................... 0.48 0.47 (0.20) (0.24) 0.39
YEAR ENDED APRIL 26, 1997
------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ----------
Revenues.................................................. $ 58,991 $ 71,682 $ 29,304 $ 31,769 $ 191,746
Gross profit.............................................. 18,110 19,823 7,664 9,572 55,169
Operating income (loss)................................... 5,197 6,732 (1,520) (688) 9,721
Net income (loss)......................................... 1,981 2,692 (1,067) 4,526(1) 8,132
Per share amounts:
Basic................................................... 0.21 0.28 (0.11) 0.40 0.81
Diluted................................................. 0.21 0.27 (0.11) 0.39 0.80
- ------------------------
(1) For the year ended April 26, 1997, fourth quarter net income was increased
by $5.3 million due to the reversal of a deferred tax asset valuation
allowance. See Note 1 to "Selected Financial Data."
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during the fiscal years ended April 25, 1998 and April 26,
1997 or the year ended December 31, 1995.
NEW ACCOUNTING PRONOUNCEMENTS
REPORTING COMPREHENSIVE INCOME. In June 1997, FASB issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company intends to adopt SFAS No. 130 in
fiscal 1999.
16
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual and interim financial
statements. Operating segments are determined consistent with the way management
organizes and evaluates financial information internally for making decisions
and assessing performance. It also requires related disclosures about products,
geographic areas, and major customers. SFAS 131 is effective for fiscal years
beginning after December 15, 1997. The Company intends to adopt SFAS No. 131 in
fiscal 1999. Implementation of this disclosure standard will not affect the
Company's financial position or results of operations.
FACTORS AFFECTING THE COMPANY'S BUSINESS
POTENTIAL LIABILITY FOR TAXES RELATED TO THE DISTRIBUTIONS. In connection
with the School Specialty Distribution, U.S. Office Products entered into a tax
allocation agreement with School Specialty and the other Spin-Off Companies (the
"Tax Allocation Agreement") which provides that the Spin-Off Companies will
jointly and severally indemnify U.S. Office Products for any losses associated
with taxes related to the Distributions ("Distribution Taxes") if an action or
omission (an "Adverse Tax Act") of any of the Spin-Off Companies materially
contributes to a final determination that any or all of the Distributions are
taxable. School Specialty also entered into a tax indemnification agreement with
the other Spin-Off Companies (the "Tax Indemnification Agreement") under which
the Spin-Off Company that is responsible for the Adverse Tax Act will indemnify
the other Spin-Off Companies for any liability to indemnify U.S. Office Products
under the Tax Allocation Agreement. As a consequence, School Specialty will be
liable for any Distribution Taxes resulting from any Adverse Tax Act by School
Specialty and liable (subject to indemnification by the other Spin-Off
Companies) for any Distribution Taxes resulting from an Adverse Tax Act by the
other Spin-Off Companies. If there is a final determination that any or all of
the Distributions are taxable and it is determined that there has not been an
Adverse Tax Act by either U.S. Office Products or any of the Spin-Off Companies,
U.S. Office Products and each of the Spin-Off Companies will be liable for its
pro rata portion of the Distribution Taxes based on the value of each company's
Common Stock after the Distributions. As a result, School Specialty could become
liable for a pro rata portion of Distribution Taxes with respect not only to the
School Specialty Distribution, but also any of the other Distributions.
RISKS RELATED TO ALLOCATION OF CERTAIN LIABILITIES. The Company, U.S.
Office Products and the other Spin-Off Companies entered into an agreement (the
"Distribution Agreement") relating to the School Specialty Distribution. Under
the Distribution Agreement, if one of the Spin-Off Companies defaults on an
obligation owed to U.S. Office Products, School Specialty could be obligated to
U.S. Office Products in respect of obligations and liabilities not related to
its business or operations and over which neither it nor its management has or
has had any control or responsibility. The aggregate of such liabilities for
which the Company may be liable is, however, limited to $1.75 million.
RISKS RELATED TO INTEGRATION OF OPERATIONS AND ACQUISITIONS. An important
element of School Specialty's business strategy for its distribution divisions
is to integrate its acquisitions into its existing operations. There can be no
assurance that School Specialty will be able to integrate future acquisitions in
a timely manner without substantial costs, delays, or other problems. Once
integrated, acquisitions may not achieve sales, profitability, and asset
productivity commensurate with School Specialty's existing divisions. In
addition to integration risks for distribution divisions, acquisitions of both
distribution divisions and specialty brand companies involve a number of special
risks, including adverse short-term effects on School Specialty's reported
operating results (including those adverse short-term effects caused by
severance payments to employees of acquired companies, restructuring charges
associated with the acquisitions and other expenses associated with a change of
control, as well as non-recurring acquisition costs including accounting and
legal fees, investment banking fees, recognition of transaction-related
obligations, and various other acquisition-related costs), the diversion of
management's time and attention, the dependence on retaining, hiring, and
training key personnel, the amortization of acquired intangible assets, and
risks associated with unanticipated problems or liabilities, some or all of
which could have a material adverse
17
effect on School Specialty's operations and financial condition. Furthermore,
although School Specialty conducts due diligence and generally requires
representations, warranties, and indemnifications from the former owners of
acquired companies, there can be no assurance that such owners will have
accurately represented the financial and operating conditions of their
companies. If an acquired company's financial or operating results were
misrepresented, the acquisition could have a material adverse effect on the
results of operations and financial condition of School Specialty.
DEPENDENCE UPON ACQUISITIONS FOR FUTURE GROWTH. One of School Specialty's
strategies is to increase its revenues and the markets it serves through the
acquisition of additional school supply distribution businesses. There can be no
assurance that suitable candidates for acquisitions can be identified or, if
suitable candidates are identified, that acquisitions can be completed on
acceptable terms, if at all. There can be no assurance that future acquisitions
will prove profitable at the time of their acquisition or will achieve sales and
profitability that justify the investment therein. The failure to complete
acquisitions and continue its expansion could have a material adverse effect on
School Specialty's financial condition. In addition, prior to the School
Specialty Distribution, School Specialty's acquisitions were completed with
substantial business, legal, and accounting assistance from U.S. Office
Products, and some of the acquisitions were paid for with U.S. Office Products
Common Stock. The pace of School Specialty's acquisition program may be
adversely affected by the absence of U.S. Office Products' support for the
acquisitions. Also, School Specialty intends to use School Specialty Common
Stock to pay for a portion of the consideration for its acquisitions, and
therefore, if the owners of potential acquisition candidates are not willing to
receive, or School Specialty is not able to issue, shares of School Specialty
Common Stock in exchange for their business, School Specialty's acquisition
program could be adversely affected. Furthermore, the Company's ability to pay
for acquisitions with stock may be materially limited in the two-year period
following the School Specialty Distribution.
POSSIBLE LIMITATIONS ON ISSUANCES OF COMMON STOCK. Section 355(e) of the
Internal Revenue Code of 1986, as amended (the "Code"), which was added in 1997,
generally provides that a company that distributes shares of a subsidiary in a
spin-off that is otherwise tax-free will incur U.S. federal income tax liability
if 50% or more, by vote or value, of the capital stock of either the company
making the distribution or the spun-off subsidiary is acquired by one or more
persons acting pursuant to a plan or series of related transactions that
includes the spin-off. Stock acquired by certain related persons is aggregated
in determining whether the 50% test is met. There is a presumption that any
acquisition occurring two years before or after the spin-off is pursuant to a
plan that includes the spin-off. However, the presumption may be rebutted by
establishing that the spin-off and such acquisition are not part of a plan or
series of related transactions. As a result of the provisions of Section 355(e),
there can be no assurance that issuances of stock by School Specialty, including
issuances in connection with an acquisition of another business by School
Specialty, will not create a tax liability for U.S. Office Products. This
limitation could adversely affect the pace of School Specialty's acquisitions
and its ability to issue Common Stock for other purposes, including equity
offerings.
School Specialty entered into the Tax Allocation Agreement and the Tax
Indemnification Agreement pursuant to which School Specialty will be liable to
U.S. Office Products and the other Spin-Off Companies if its actions or
omissions materially contribute to a final determination that the School
Specialty Distribution is taxable.
RISKS RELATED TO INABILITY TO USE POOLING-OF-INTERESTS METHOD TO ACCOUNT FOR
FUTURE ACQUISITIONS. Generally accepted accounting principles require that an
entity be autonomous for a period of two years before it is eligible to complete
business combinations under the pooling-of-interests method. As a result of
School Specialty being a wholly-owned subsidiary of U.S. Office Products prior
to the Distribution, School Specialty will be unable to satisfy this criterion
for a period of two years following the Distribution. Therefore, School
Specialty will be precluded from completing business combinations under the
pooling-
18
of-interests method for a period of two years and any business combinations
completed by School Specialty during such period will be accounted for under the
purchase method resulting in the recording of goodwill.
SEASONALITY: FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. School
Specialty's business is subject to seasonal influences, with sales and
profitability substantially higher from May to October due to increased school
orders during these months. As a result of this seasonality, historically,
School Specialty has earned more than 100% of its annual net income in the first
six months of its fiscal year and has historically operated at a loss in its
third fiscal quarter. Also, quarterly results may be materially affected by the
timing of acquisitions and the timing and magnitude of acquisition assimilation
costs. Therefore, operating results for any quarter are not necessarily
indicative of the results that may be achieved for any subsequent fiscal quarter
or full fiscal year. Fluctuations caused by variations in quarterly results may
adversely affect the market price of the School Specialty Common Stock.
RELIANCE ON KEY PERSONNEL. School Specialty's operations depend on the
continued efforts of Daniel P. Spalding, its Chief Executive Officer, its other
executive officers, and the senior management of certain of its subsidiaries.
Furthermore, School Specialty's operations will likely depend on the senior
management of certain of the companies that may be acquired in the future. If
any of these people become unable to continue in his or her present role, or if
School Specialty is unable to attract and retain other skilled employees, its
business could be adversely affected. School Specialty does have employment
contracts with some executive officers, but most of the Companies' executive
officers and senior management do not have employment contracts with School
Specialty. School Specialty does not have and does not intend to obtain key man
life insurance covering any of its executive officers or other members of senior
management of its subsidiaries. In addition, Jonathan J. Ledecky serves as a
director and an employee of School Specialty and provides services to School
Specialty pursuant to an employment agreement with School Specialty. Mr. Ledecky
also serves as a director of each of the other Spin-Off Companies, and is the
director or an officer of other public companies. Mr. Ledecky may be unable to
devote substantial time to the activities of School Specialty.
DEPENDENCE ON SYSTEMS. School Specialty believes that one of the
competitive advantages of its distribution divisions is its information systems,
including its proprietary PC-based customer Order Management System ("OMS").
School Specialty's operations in each of its integrated divisions under School
Specialty are generally dependent on these systems, which are run on a host
system located at School Specialty's headquarters in Appleton, Wisconsin. Each
division of School Specialty is linked to School Specialty's host system and
disruption or unavailability of these links could have a material adverse effect
on School Specialty's business and results of operations.
None of School Specialty's subsidiaries has a redundant computer system or a
redundant dedicated communication line. School Specialty has taken precautions
to protect itself from events that could interrupt its operations.
Notwithstanding these precautions, there can be no assurance that a fire, flood
or other natural disaster affecting School Specialty's system or its
communication lines would not disable the system or prevent the system from
communicating with School Specialty's divisions or the specialty brand
subsidiaries. The occurrence of any of these events would have a material
adverse effect on School Specialty's operations and financial condition.
School Specialty does not expect that it will incur any material costs and
expenses to meet information standards for Year 2000 compliance; however, there
is no assurance that School Specialty's customers or vendors meet information
standards for Year 2000 compliance, and their failure to meet such standards
could adversely affect School Specialty's revenues and product costs.
RISK OF RAPID GROWTH; ABSENCE OF HISTORY AS A STAND-ALONE COMPANY. Since
1991, School Specialty and U.S. Office Products have significantly expanded the
scope of School Specialty's operations by acquiring sixteen regional
distributors of educational supplies in different regions of the United States
and four specialty brand school supply companies. All of School Specialty's
specialty brand acquisitions and
19
eleven of its regional distribution acquisitions have occurred since June 1996.
There can be no assurance that School Specialty's management and financial
controls, personnel, computer systems, and other corporate support systems will
be adequate to manage the increased size and scope of School Specialty's
operations as a result of School Specialty's recently completed acquisitions.
Prior to the School Specialty Distribution, certain general and
administrative functions relating to School Specialty's business (including
legal, accounting, purchasing and management information services) were handled
by U.S. Office Products. School Specialty's future performance will depend on
its ability to function as a stand-alone entity, to finance and manage its
expanding operations and to adapt its information systems to changes in its
business. As a result, School Specialty's expenses are likely to be higher than
when it was a part of U.S. Office Products, and School Specialty may experience
disruptions of general and administrative functions that it would not have
encountered as a part of U.S. Office Products. Furthermore, the financial
information included herein may not necessarily reflect what the results of
operations and financial condition would have been had School Specialty been a
separate, stand-alone entity during the periods presented or be indicative of
future results of operations and financial condition of School Specialty.
DEPENDENCE ON KEY SUPPLIERS AND SERVICE PROVIDERS. School Specialty is
dependent on (i) a limited number of suppliers for certain of its product lines,
particularly its franchise furniture lines, and (ii) a limited number of service
providers, such as delivery service from United Parcel Service. Any interruption
of supply from current vendors or any material increased costs, particularly in
the peak season of June through September, could cause significant delays in the
shipment of such products and could have a material adverse effect on School
Specialty's business, financial condition, and results of operations. Increases
in freight costs charged to School Specialty or inability to ship products,
whether real or perceived, could have a material adverse effect on School
Specialty's business, financial condition, and results of operations. In
addition, as part of its business strategy, School Specialty strives to reduce
its number of suppliers and minimize duplicative lines, which may have the
effect of increasing its dependence on remaining vendors. The United Parcel
Service strike during August 1997 had an adverse effect on School Specialty due
to the perceived inability of School Specialty to ship products.
COMPETITION. The market for school supplies is highly competitive and
fragmented. School Specialty estimates that over 3,400 companies distribute
educational materials to pre-K-12 schools as a primary focus of their business.
In addition, School Specialty competes with alternate channel distributors such
as office product contract stationers and superstores, which may continue to
broaden their product lines in school supplies. Some of these competitors have
greater financial resources and buying power than School Specialty. School
Specialty believes that the educational supplies market will consolidate over
the next several years, which may make School Specialty's general and specialty
supply businesses more competitive. In addition, there may be increasing
competition for acquisition candidates and there can be no assurance that
acquisitions will continue to be available to School Specialty on favorable
terms, if at all.
MATERIAL AMOUNT OF GOODWILL. Approximately $99.6 million, or 44.5%, of
School Specialty's pro forma total assets as of April 25, 1998 represents
intangible assets, the significant majority of which is goodwill. Goodwill
represents the excess of cost over the fair market value of net assets acquired
in business combinations accounted for under the purchase method. School
Specialty generally amortizes goodwill on a straight line method over a period
of 40 years with the amount amortized in a particular period constituting a
non-cash expense that reduces School Specialty's net income. Amortization of
goodwill resulting from certain past acquisitions, and additional goodwill
recorded in certain acquisitions may not be deductible for tax purposes. In
addition, School Specialty will be required to periodically evaluate the
recoverability of goodwill by reviewing the anticipated undiscounted future cash
flows from the operations of the acquired companies and comparing such cash
flows to the carrying value of the associated goodwill. If goodwill becomes
impaired, School Specialty would be required to write down the carrying value of
the goodwill and incur a related charge to its income.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
PAGE
---------
Financial Statements:
Reports of Independent Accountants...................................................................... 22-24
Consolidated Balance Sheets at April 25, 1998 and April 26, 1997........................................ 25
Consolidated Statements of Income for the fiscal years ended April 25, 1998 and April 26, 1997, the four
months ended April 30, 1996 and the year ended December 31, 1995...................................... 26
Consolidated Statements of Stockholder's (Deficit) Equity for the fiscal years ended April 25, 1998 and
April 26, 1997, the four months ended April 30, 1996 and the year ended December 31, 1995............. 27
Consolidated Statements of Cash Flows for the fiscal years ended April 25, 1998 and April 26, 1997, the
four months ended April 30, 1996 and the year ended December 31, 1995................................. 28
Notes to Consolidated Financial Statements.............................................................. 30
Financial Statement Schedules
For the fiscal years ended April 25, 1998 and April 26, 1997, the four months ended April 30, 1996 and
the year ended December 31, 1995.....................................................................
II--Valuation and Qualifying Accounts--Exhibit 99.1...................................................
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of School Specialty, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of School Specialty, Inc. (the "Company") and its subsidiaries at April
25, 1998 and April 26, 1997, and the results of their operations and their cash
flows for the four months ended April 30, 1996 and the fiscal years ended April
26, 1997 and April 25, 1998, in conformity with generally accepted accounting
principles. 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 audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards 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 the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
June 24, 1998
22
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
School Specialty, Inc.
We have audited the accompanying consolidated statements of operations,
stockholder's (deficit) equity and cash flows of School Specialty, Inc. (the
Company) for the year ended December 31, 1995. 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 audits. We did not audit
the financial statements of Re-Print Corporation, a wholly owned subsidiary,
which statements reflect total revenues of $30,798,000 for the year ended
December 31, 1995. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to data
included for Re-Print Corporation, is based solely on the report of the other
auditors.
We conducted our audit in accordance with generally accepted auditing
standards. 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, based on our audit and report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the results of the Company's operations and its cash flows for the year December
31, 1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
February 2, 1996
23
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Re-Print Corporation
Birmingham, Alabama
We have audited the accompanying balance sheet of The Re-Print Corporation
as of December 31, 1995, and the related statements of income, stockholders'
equity, and cash flows for the year ended December 31, 1995 (not presented
separately herein). 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.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Re-Print Corporation at
December 31, 1995, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Atlanta, Georgia
February 8, 1996
24
SCHOOL SPECIALTY, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
APRIL 25, APRIL 26,
1998 1997
---------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................................................ $ $
Accounts receivable, less allowance for doubtful accounts of $716 and $471,
respectively........................................................................... 38,719 17,232
Inventories.............................................................................. 49,307 24,461
Prepaid expenses and other current assets................................................ 13,503 10,331
---------- ---------
Total current assets................................................................. 101,529 52,024
Property and equipment, net................................................................ 22,553 14,478
Intangible assets, net..................................................................... 99,613 20,824
Other assets............................................................................... 34 359
---------- ---------
Total assets......................................................................... $ 223,729 $ 87,685
---------- ---------
---------- ---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term debt.......................................................................... $ 11 $ 262
Short-term payable to U.S. Office Products............................................... 20,277 26,692
Accounts payable......................................................................... 23,788 9,091
Accrued compensation..................................................................... 4,458 860
Other accrued liabilities................................................................ 5,204 628
---------- ---------
Total current liabilities............................................................ 53,738 37,533
Long-term debt............................................................................. 315 566
Long-term payable to U.S. Office Products.................................................. 62,699 33,226
Deferred income taxes...................................................................... 511 31
---------- ---------
Total liabilities.................................................................... 117,263 71,356
Commitments and contingencies
Stockholder's equity:
Divisional equity........................................................................ 104,883 19,985
Retained earnings (deficit).............................................................. 1,583 (3,656)
---------- ---------
Total stockholder's equity........................................................... 106,466 16,329
---------- ---------
Total liabilities and stockholder's equity........................................... $ 223,729 $ 87,685
---------- ---------
---------- ---------
See accompanying notes to consolidated financial statements.
25
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE FOR THE
FISCAL YEAR ENDED FOUR MONTHS FOR THE
---------------------- ENDED YEAR ENDED
APRIL 25, APRIL 26, APRIL 30, DECEMBER 31,
1998 1997 1996 1995
---------- ---------- ------------ ------------
Revenues.................................................... $ 310,455 $ 191,746 $ 28,616 $ 150,482
Cost of revenues............................................ 219,313 136,577 20,201 105,757
---------- ---------- ------------ ------------
Gross profit............................................ 91,142 55,169 8,415 44,725
Selling, general and administrative expenses................ 71,403 43,462 10,307 39,869
Restructuring costs......................................... 2,491 194 2,532
Strategic restructuring costs............................... 1,000
Non-recurring acquisition costs............................. 1,792 1,122
---------- ---------- ------------ ------------
Operating income (loss)................................. 16,248 9,721 (3,014) 2,324
Other (income) expense:
Interest expense.......................................... 5,505 4,197 1,461 5,536
Interest income........................................... (132) (6)
Other..................................................... 156 (196) 67 (18)
---------- ---------- ------------ ------------
Income (loss) before provision for (benefit from) income
taxes..................................................... 10,719 5,720 (4,536) (3,194)
Provision for (benefit from) income taxes................... 5,480 (2,412) 139 173
---------- ---------- ------------ ------------
Net income (loss)........................................... $ 5,239 $ 8,132 $ (4,675) $ (3,367)
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
Weighted average shares outstanding:
Basic..................................................... 13,284 10,003 8,611 6,562
Diluted................................................... 13,547 10,196 8,789 6,669
Net income (loss) per share:
Basic..................................................... $ 0.40 $ 0.81 $ (0.54) $ (0.51)
Diluted................................................... $ 0.39 $ 0.80 $ (0.53) $ (0.50)
See accompanying notes to consolidated financial statements.
26
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S (DEFICIT) EQUITY
(IN THOUSANDS)
TOTAL
RETAINED STOCKHOLDER'S
DIVISIONAL (DEFICIT) (DEFICIT)
EQUITY EARNINGS EQUITY
---------- --------- -------------
Balance at December 31, 1994................................................ $ 5,327 $ (3,500) $ 1,827
Transactions of Pooled Companies:
Issuance of warrants.................................................... 672 672
Issuance of Pooled Company common stock for cash........................ 500 500
Repurchase of treasury stock............................................ (92) (92)
Cash dividends declared and paid........................................ (160) (160)
Net loss.................................................................. (3,367) (3,367)
---------- --------- -------------
Balance at December 31, 1995................................................ 6,407 (7,027) (620)
Transactions of Pooled Companies:
Exercise of warrants.................................................... 1,080 1,080
Cash dividends declared and paid........................................ (52) (52)
Net loss.................................................................. (4,675) (4,675)
---------- --------- -------------
Balance at April 30, 1996................................................... 7,487 (11,754) (4,267)
Transactions of Pooled Companies:
Exercise of warrants and stock options.................................. 1,979 1,979
Retirement of treasury stock............................................ 34 (34)
Issuances of U.S. Office Products Company common stock in conjunction with
acquisitions............................................................ 10,485 10,485
Net income................................................................ 8,132 8,132
---------- --------- -------------
Balance at April 26, 1997................................................... 19,985 (3,656) 16,329
Issuances of U.S. Office Products Company common stock in conjunction with
acquisitions............................................................ 3,566 3,566
Capital contribution by U.S. Office Products.............................. 81,332 81,332
Net income................................................................ 5,239 5,239
---------- --------- -------------
Balance at April 25, 1998................................................... $ 104,883 $ 1,583 $ 106,466
---------- --------- -------------
---------- --------- -------------
See accompanying notes to consolidated financial statements.
27
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
FOR THE