UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JULY 24, 2004.
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 000-24385
SCHOOL SPECIALTY, INC.
(Exact Name of Registrant as Specified in its Charter)
| Wisconsin | 39-0971239 | |
| (State or Other Jurisdiction of Incorporation) |
(IRS Employer Identification No.) |
W6316 Design Drive
Greenville, Wisconsin
(Address of Principal Executive Offices)
54942
(Zip Code)
(920) 734-5712
(Registrant’s Telephone Number, including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class |
Outstanding at August 26, 2004 | |
| Common Stock, $0.001 par value |
22,653,351 |
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JULY 24, 2004
-Index-
PART I – FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Unaudited Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| July 24, 2004 |
April 24, 2004 |
July 26, 2003 | |||||||
| ASSETS |
|||||||||
| Current assets: |
|||||||||
| Cash and cash equivalents |
$ | 4,276 | $ | 2,369 | $ | 4,789 | |||
| Accounts receivable, less allowance for doubtful accounts of $7,282, $6,627 and $3,174, respectively |
202,032 | 52,995 | 183,771 | ||||||
| Inventories |
155,853 | 139,786 | 135,223 | ||||||
| Deferred catalog costs |
8,430 | 15,578 | 10,363 | ||||||
| Prepaid expenses and other current assets |
13,256 | 12,491 | 10,972 | ||||||
| Deferred taxes |
5,757 | 5,757 | 4,324 | ||||||
| Total current assets |
389,604 | 228,976 | 349,442 | ||||||
| Property, plant and equipment, net |
64,663 | 65,294 | 62,568 | ||||||
| Goodwill |
463,949 | 462,039 | 437,415 | ||||||
| Intangible assets, net |
55,593 | 55,657 | 46,164 | ||||||
| Other |
20,120 | 20,641 | 8,882 | ||||||
| Total assets |
$ | 993,929 | $ | 832,607 | $ | 904,471 | |||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
|||||||||
| Current liabilities: |
|||||||||
| Current maturities - long-term debt |
$ | 498 | $ | 524 | $ | 535 | |||
| Accounts payable |
100,970 | 58,225 | 109,959 | ||||||
| Accrued compensation |
8,983 | 13,840 | 9,151 | ||||||
| Deferred revenue |
7,341 | 7,018 | 8,400 | ||||||
| Accrued income taxes |
14,798 | — | 15,730 | ||||||
| Other accrued liabilities |
24,417 | 17,368 | 19,511 | ||||||
| Total current liabilities |
157,007 | 96,975 | 163,286 | ||||||
| Long-term debt - less current maturities |
380,496 | 314,104 | 356,233 | ||||||
| Deferred taxes |
42,553 | 42,553 | 28,561 | ||||||
| Other liabilities |
651 | — | — | ||||||
| Total liabilities |
580,707 | 453,632 | 548,080 | ||||||
| Shareholders’ equity: |
|||||||||
| Preferred stock, $0.001 par value per share, 1,000,000 shares authorized; none outstanding |
— | — | — | ||||||
| Common stock, $0.001 par value per share, 150,000,000 shares authorized and 19,102,523, 19,069,987 and 18,758,657 shares issued and outstanding, respectively |
19 | 19 | 19 | ||||||
| Capital paid-in excess of par value |
231,156 | 230,258 | 222,581 | ||||||
| Accumulated other comprehensive income |
6,957 | 5,607 | 4,355 | ||||||
| Retained earnings |
175,090 | 143,091 | 129,436 | ||||||
| Total shareholders’ equity |
413,222 | 378,975 | 356,391 | ||||||
| Total liabilities and shareholders’ equity |
$ | 993,929 | $ | 832,607 | $ | 904,471 | |||
See accompanying notes to condensed consolidated financial statements.
1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
| For the Three Months Ended |
||||||||
| July 24, 2004 |
July 26, 2003 |
|||||||
| Revenues |
$ | 337,759 | $ | 304,430 | ||||
| Cost of revenues |
192,355 | 176,501 | ||||||
| Gross profit |
145,404 | 127,929 | ||||||
| Selling, general and administrative expenses |
88,287 | 78,871 | ||||||
| Operating income |
57,117 | 49,058 | ||||||
| Other (income) expense: |
||||||||
| Interest expense |
4,754 | 4,211 | ||||||
| Interest income |
(25 | ) | (32 | ) | ||||
| Other |
341 | 420 | ||||||
| Income before provision for income taxes |
52,047 | 44,459 | ||||||
| Provision for income taxes |
20,047 | 17,317 | ||||||
| Net income |
$ | 32,000 | $ | 27,142 | ||||
| Weighted average shares outstanding: |
||||||||
| Basic |
19,084 | 18,611 | ||||||
| Diluted |
24,508 | 23,744 | ||||||
| Net income per share: |
||||||||
| Basic |
$ | 1.68 | $ | 1.46 | ||||
| Diluted |
$ | 1.37 | $ | 1.21 | ||||
See accompanying notes to condensed consolidated financial statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| For the Three Months Ended |
||||||||
| July 24, 2004 |
July 26, 2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | 32,000 | $ | 27,142 | ||||
| Adjustments to reconcile net income to net cash used in operating activities: |
||||||||
| Depreciation and amortization expense |
4,333 | 4,335 | ||||||
| Amortization of development costs |
832 | 207 | ||||||
| Amortization of debt fees and other |
473 | 706 | ||||||
| Gain on disposal of property and equipment |
(15 | ) | (7 | ) | ||||
| Net borrowings under accounts receivable securitization facility |
— | 4,000 | ||||||
| Change in current assets and liabilities (net of assets acquired and liabilities assumed in business combinations): |
||||||||
| Accounts receivable |
(149,020 | ) | (138,981 | ) | ||||
| Inventories |
(16,113 | ) | (23,304 | ) | ||||
| Deferred catalog costs |
7,147 | 7,082 | ||||||
| Prepaid expenses and other current assets |
(817 | ) | (2,217 | ) | ||||
| Accounts payable |
42,786 | 51,053 | ||||||
| Accrued liabilities |
16,803 | 17,710 | ||||||
| Net cash used in operating activities |
(61,591 | ) | (52,274 | ) | ||||
| Cash flow from investing activities: |
||||||||
| Cash paid in acquisitions, net of cash acquired |
(75 | ) | (9,558 | ) | ||||
| Additions to property, plant and equipment |
(2,799 | ) | (1,659 | ) | ||||
| Investment in development costs |
(922 | ) | (795 | ) | ||||
| Proceeds from business dispositions |
193 | — | ||||||
| Proceeds from disposal of property and equipment |
18 | 1,113 | ||||||
| Net cash used in investing activities |
(3,585 | ) | (10,899 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Proceeds from bank borrowings |
122,200 | 170,300 | ||||||
| Repayment of debt and capital leases |
(55,834 | ) | (216,939 | ) | ||||
| Proceeds from convertible debt offering |
— | 110,000 | ||||||
| Payment of debt fees and other |
— | (3,123 | ) | |||||
| Proceeds from exercise of stock options |
717 | 5,335 | ||||||
| Net cash provided by financing activities |
67,083 | 65,573 | ||||||
| Net increase in cash and cash equivalents |
1,907 | 2,400 | ||||||
| Cash and cash equivalents, beginning of period |
2,369 | 2,389 | ||||||
| Cash and cash equivalents, end of period |
$ | 4,276 | $ | 4,789 | ||||
3
SCHOOL SPECIALTY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(In thousands)
The Company entered into one business combination in the three months ended July 26, 2003, which was paid for using cash. The fair values of the assets and liabilities of the acquired company are presented as follows:
| For the Three Months Ended July 26, 2003 |
||||
| Accounts receivable |
$ | 250 | ||
| Inventories |
1,835 | |||
| Prepaid expenses and other current assets |
200 | |||
| Property and equipment |
344 | |||
| Goodwill |
5,582 | |||
| Intangible assets |
3,494 | |||
| Capital lease obligations |
(52 | ) | ||
| Accounts payable |
(1,566 | ) | ||
| Accrued liabilities |
(529 | ) | ||
| Net assets acquired |
$ | 9,558 | ||
No business combinations were entered into during the three months ended July 24, 2004. Fiscal 2005 cash paid in acquisitions, net of cash acquired, as reported within cash flows from investing activities of $75 represents the payment of a fiscal 2004 payable to selling shareholders.
See accompanying notes to condensed consolidated financial statements.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (which are normal and recurring in nature) considered necessary for a fair presentation have been included. The balance sheet at April 24, 2004 has been derived from the Company’s audited financial statements for the fiscal year ended April 24, 2004. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended April 24, 2004.
NOTE 2 – SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
Changes in shareholders’ equity during the three months ended July 24, 2004, were as follows:
| Shareholders’ equity balance at April 24, 2004 |
$ | 378,975 | |
| Net income |
32,000 | ||
| Issuance of common stock in conjunction with stock option exercises |
717 | ||
| Tax benefit on option exercises |
181 | ||
| Foreign currency translation adjustment |
1,349 | ||
| Shareholders’ equity balance at July 24, 2004 |
$ | 413,222 | |
Comprehensive income for the periods presented in the consolidated statements of operations was as follows:
| For the Three Months Ended | ||||||
| July 24, 2004 |
July 26, 2003 | |||||
| Net income |
$ | 32,000 | $ | 27,142 | ||
| Foreign currency translation adjustment |
1,349 | 1,206 | ||||
| Total comprehensive income |
$ | 33,349 | $ | 28,348 | ||
5
SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 3 – EARNINGS PER SHARE AND EMPLOYEE STOCK PLANS
Earnings Per Share
The following information presents the Company’s computations of basic earnings per share (“basic EPS”) and diluted earnings per share (“diluted EPS”) for the periods presented in the condensed consolidated statements of operations:
| Income (Numerator) |
Shares (Denominator) |
Per Share Amount | ||||||
| Three months ended July 24, 2004: |
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