UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________
FORM 10-K
______________________________________________
[(cid:57)]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934: For the fiscal year ended April 26, 2003
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
Commission File No. 000-24385
SCHOOL SPECIALTY, INC.
(Exact name of Registrant as specified in its charter)
Wisconsin
(State or other jurisdiction of
incorporation or organization)
W6316 Design Drive
Greenville, Wisconsin
(Address of principal executive offices)
39-0971239
(I.R.S. Employer
Identification No.)
54942
(Zip Code)
Registrant’s telephone number, including area code: (920) 734-5712
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes (cid:57) No
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act).
Yes (cid:57) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. []
The aggregate market value of the voting stock held by nonaffiliates of the Registrant, as of October 26, 2002,
was approximately $478,014,739. As of July 7, 2003, there were 18,742,407 shares of the Registrant’s common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on August 26, 2003 are
incorporated by reference into Part III.
[This page left intentionally blank]
Item 1. Business
PART I
Unless the context requires otherwise, all references to “School Specialty,” “we” or “our” refer to
School Specialty, Inc. and its subsidiaries. Our fiscal year ends on the last Saturday in April of each year.
In this Annual Report on Form 10-K (“Annual Report”), we refer to fiscal years by reference to the
calendar year in which they end (e.g. the fiscal year ended April 26, 2003 is referred to as “fiscal 2003”).
Note that all fiscal years reported and referenced represent 52 weeks, with the exception of fiscal 2000,
which had 53 weeks.
Company Overview
School Specialty is the largest direct marketing company for supplemental educational supplies to
schools and teachers for pre-kindergarten through twelfth grade (“preK-12”) in the United States. We
hold approximately a 14 percent market share of the $6.8 billion other instructional materials market. We
offer more than 80,000 items, many of which are proprietary, mail over 40 million catalogs annually,
operate a national distribution network and have developed both an on-line education portal and e-
commerce websites. Our broad product range enables us to provide customers with one source for
virtually all of their supplemental educational supply needs. Our leading market position has been
achieved by emphasizing high-quality products, superior order fulfillment and exceptional customer
service. As a result, we have been able to establish relationships with virtually all of the country’s preK-
12 schools and reach nearly all of the country’s teachers.
We recognize that educational supply procurement decisions are made at the district and school
levels by administrators as well as at the classroom level by teachers and curriculum specialists. As a
result, we have created an innovative multi-channel sales and marketing strategy enabling us to market
our products to the various levels of buyers within the education market. The “traditional” or “top down”
approach targets school districts and school administrators through our traditional sales force of over 300
professionals, the School Specialty general supply catalog and JuneBox.com, which offers a B2B
(business to business) educational portal that allows custom catalogs and pricing, a business system
interface as well as a B2T (business to teacher) option. The “specialty” or “bottom up” approach targets
the classroom level decision-makers through our specialty sales force of over 200 professionals, through
our catalogs featuring our specialty brands as well as the ClassroomDirect catalog and B2T websites. Our
other specialty catalogs include Premier Agendas, Childcraft, abc, Sax Arts and Crafts, and Sportime.
The specialty businesses offer more specialized products for individual disciplines. Many of these
products are proprietary to our specialty brands.
We believe most of our brands hold the leading market position in their respective categories.
We have also solidified this leading market position by acquiring companies which have expanded our
geographic presence and product offering. The critical mass we have achieved allows us to benefit from
increased buying power while leveraging our national distribution network and sales force to operate
more efficiently.
We have grown significantly in recent years through acquisitions and internal growth. From
fiscal 1999 through fiscal 2003, our revenues increased from $521.7 million to $870.0 million, a
compound annual growth rate, or CAGR, of 13.6 percent. In fiscal 2003, revenues increased by 13.4
percent over the previous fiscal year. We remain focused on growth opportunities, including increasing
our penetration rate and expanding in attractive regions, which would allow us to enhance our position as
the number one marketer of supplemental educational supplies in the United States.
School Specialty, Inc., founded in October 1959, was acquired by U.S. Office Products in May
1996. In June 1998, School Specialty was spun-off from U.S. Office Products in a tax-free transaction. Our
common stock is listed on The Nasdaq National Market under the symbol “SCHS.” In August 2000, we
reincorporated from Delaware to Wisconsin. Our principal offices are located at W6316 Design Drive,
Greenville, Wisconsin 54942, and our telephone number is (920) 734-5712. Our general website address is
www.schoolspecialty.com. You may obtain, free of charge, copies of this Annual Report on Form 10-K as
well as our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K (and amendments to
those reports) filed with, or furnished to, the Securities Exchange Commission as soon as reasonably
practicable after we have filed, or furnished, such reports by accessing our website at
http://www.schoolspecialty.com, clicking on “General,” then selecting “Investor Information” and then
selecting the “SEC Filings” link. Information contained in any of our websites is not deemed to be a part of
this Annual Report.
Industry Overview
The school supply market consists of the sale of supplemental educational supplies, furniture and
equipment to school districts, individual schools, teachers and curriculum specialists who purchase products
for school and classroom use. Market Data Retrieval reports that 2001 public school expenditures in the
United States of other instructional materials were approximately $6.8 billion. Of this amount,
approximately $4.1 billion is sold through institutional channels and the remaining $2.7 billion is sold
through retail channels, such as teacher stores.
According to the U.S. Department of Education, there are approximately 16,000 school districts,
118,500 elementary and secondary schools and 3.6 million teachers in the United States. Administrators for
both school districts and individual schools usually make the decision to purchase the general school
supplies and furniture needed to operate the school. Teachers and curriculum specialists generally decide on
curriculum-specific products for use in their classrooms and individual disciplines. According to the
National School Supply Equipment Association, or NSSEA, teachers spent approximately $1.9 billion of
their own money in 2002 on supplies to supplement classroom materials.
The industry has highly predictable and generally favorable trends. Education expenditures have
risen each year for the past 15 years and are expected to have exceeded $454 billion in 2002, according to
the U.S. Department of Education. The most common measure of education spending is current
expenditures per student. According to the National Education Association, current expenditures per
student in constant dollars have increased from $6,696 in 1989 to an estimated $7,340 in 2003 and are
expected to increase further to $8,875 in 2010, a 21 percent increase over 2003 expenditures. Incremental
spending will thus exceed enrollment growth, which according to the U.S. Department of Education is
projected to grow by 17 percent from 1989 to 2011 to a record level of 53.0 million students. The industry
is affected by prevailing political and social trends. The attitude of the government towards education
determines, to some extent, total expenditures on education. The attitude toward education is generally
favorable; however, the industry has been recently affected by the generally weakened economic
environment, which has placed pressure on some state and local budgets, the primary sources of school
funding.
In January 2002 President Bush signed into law the No Child Left Behind Act of 2001 designed to
improve student achievement in classrooms across the country. The fiscal 2002 federal budget provided for
$4.6 billion in federal education funding, an 11 percent increase over the prior year.
The industry is highly fragmented with over 3,400 direct marketers of supplemental education
supplies, many of which are family- or employee-owned businesses that operate in a single geographic
region. We believe the increasing demand for single-source suppliers, prompt order fulfillment and
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competitive pricing, along with the related need for suppliers to invest in automated inventory and electronic
ordering systems, is fostering consolidation within the industry. The industry has been trending toward
decentralized, or site-based purchasing, which increases individual school’s and teacher’s roles in
educational supply procurement decisions. We believe these changes are driving a shift in growth to the
higher margin specialty businesses, which offer more focused products for different educational disciplines.
Recent Acquisitions
Select Agendas. In May 2003 we acquired Select Agendas, a Canadian-based company that
produces and markets student agendas, for a preliminary aggregate purchase price of approximately $10
million, which is subject to an earn-out provision. The business will be integrated with Premier Agendas
and reported as part of our Specialty segment.
Sunburst Visual Media. In February 2003 we acquired the visual media division of Sunburst
Technology Corporation for approximately $8 million. Sunburst is a leading developer and marketer of
proprietary videos, DVDs and related curriculum materials covering the character education, health and
guidance curriculums in K-12 schools. Sunburst has been integrated with Teacher’s Video as a separate
brand offering and has been reported in our Specialty segment since the date of acquisition.
J.L. Hammett. In August 2002 we acquired the remaining wholesale operations of J.L. Hammett
(“Hammett”) for approximately $14 million. The Hammett business acquired primarily marketed preK-12
educational products to charter schools and national child care centers. The business has been integrated into
our national account business within the Traditional segment.
ABC School Supply. In August 2002 we acquired ABC School Supply and related affiliates
(“ABC”). ABC, a producer and marketer of pre-K through eighth grade educational products, has been
integrated into our Childcraft division and national accounts business. We paid approximately $30 million
for ABC and also assumed approximately $11 million of debt.
Premier Agendas. In December 2001 we acquired all of the stock of Premier Agendas, Inc. and
Premier School Agendas, Ltd. (together “Premier Agendas”) for approximately $156 million.
Headquartered in Bellingham, Washington, Premier Agendas is the largest provider of academic agendas in
the United States and Canada. Premier Agendas has been included in our Specialty segment since the date
of acquisition. We integrated our existing student agenda brands, Hammond & Stephens and Time Tracker,
into the Premier Agendas business.
We attribute our strong competitive position to the following key factors:
Competitive Strengths
Number One Market Share. We have the highest revenues of any direct marketing company for
supplemental education supplies. We have developed this leading market position by emphasizing high-
quality products, superior order fulfillment and exceptional customer service. We believe that our large
size and brand recognition have resulted in significant buying power, economies of scale and customer
loyalty. In addition, our recent acquisitions have allowed us to increase our market presence and solidify
our pricing leverage.
Leading Established Brands. We have the most established and recognized brands in the
industry. We believe that a majority of our brands have a leading market position in their respective
categories, based on revenues. With a historical track record of over 100 years for some brands, the
Company’s traditional and specialty brands represent a significant competitive advantage.
3
Broad Product Lines. Our strategy is to provide a full range of high-quality products to meet the
complete supply needs of schools for preK-12. With over 80,000 items ranging from classroom supplies
and furniture to playground equipment, we provide customers with one source for virtually all of their
supplemental educational supplies and furniture needs. In addition to our traditional School Specialty
brand, our specialty businesses enrich our general product offering and create opportunities to cross
merchandise our specialty products to our traditional customers. Specialty businesses include the
following brands:
Brand
Products
Premier Agendas.................................................. Student agendas
Childcraft and abc................................................ Early childhood
Sax Arts and Crafts .............................................. Art supplies
ClassroomDirect .................................................. General supplies
Sportime............................................................... Physical education
Teacher’s Video and Sunburst Visual Media ...... Educational videos
Frey Scientific...................................................... Science
Brodhead Garrett.................................................. Industrial arts
Innovative Full-Service Business Model. We believe that we are the only company in our
industry that has developed a full-service business model with an integrated, multi-channel marketing
approach. As a result, we reach district and school administrative decision makers as well as teachers and
curriculum specialists through separate sales forces, catalog mailings and the Internet. We utilize our
customer database across our family of catalogs to maximize their effectiveness and increase our
marketing reach. Additionally, our e-commerce websites provide a comprehensive presence on the
Internet which we believe is a significant competitive advantage for us.
Stable Industry with Favorable Trends and Dynamics. Because the market for educational
supplies is driven primarily by demographics and government spending, we believe our industry is less
exposed to economic cycles than many others. We have established working relationships with many
large public education organizations and understand how to do business effectively with these
institutions. In addition, approximately 70 percent of our revenues are generated from the sale of
consumable products, which are generally used each year in the education process and consequently they
typically need to be repurchased annually.
Established Infrastructure and Customer Relationships. We believe our numerous leading
brands, national sales force, large and broad product offering, established customer relationships and a
national distribution network with multiple sales channels, including e-commerce, give us a significant
competitive advantage. The supplemental education supply market is highly seasonal, with a January
through July selling season and a June through October shipping season, and our infrastructure and
logistical capacities and capabilities permit us to meet the requirements of these peak periods effectively.
Proven Acquisition and Integration Model. We have completed 17 acquisitions since May 1998.
We have established a 6 to 12 month target for our integration process in which we form a focused
transition team that is assigned to sell or discontinue incompatible business units, reduce the number of
items in the product offering, eliminate redundant expenses, integrate the acquired entity’s business
systems, and exploit buying power. We believe we have proven that we can rapidly improve the operating
margins of the businesses we acquire by employing an effective integration process.
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Effective Use of Technology. We believe that our use of information technology systems allows
us to turn over inventory more quickly than our competitors, offer customers more convenient and cost
effective ways of ordering products, and more precisely focus our sales and marketing strategies.
Experienced and Incentivised Management. Our management team provides depth and
continuity of experience. In addition, management’s interests are aligned with those of our shareholders,
as many members of management own shares of our common stock and/or have been granted options to
purchase our common stock.
We use the following strategies to grow and enhance our position as the leading marketer of
supplemental educational supplies:
Growth Strategy
Internal Growth. We plan to continue to increase our revenues by:
• Taking advantage of market growth resulting from rising expenditures per student, combined
with increasing enrollment
•
•
•
Increasing penetration in geographic markets within the United States and Canada where we
are currently underrepresented
Increasing penetration in large districts by offering our single-source product solution
Increasing penetration in the early childhood market
• Cross-merchandising specialty products to traditional customers
• Developing proprietary products that are curriculum and age specific
•
Increasing marketing directed toward teachers
• Encouraging brand loyalty to the total School Specialty brand offering
• Adding new products to enhance the breadth of our product offering
• Pursuing price increases to the extent supported by market conditions
• Adding sales through Internet channels
Margin Improvement. As we continue to grow our revenues, we plan to increase margins by
selling more specialty products, which typically generate higher gross margins due to the large number of
proprietary and branded products in the product mix. In addition, we believe we can further improve
operating margins by leveraging the benefits of our recent acquisitions and:
•
Increasing buying power combined with price expansion
• Reviewing and adjusting the level of customer discounts
• Taking advantage of the industry’s shift toward site-based (versus centralized) purchasing
•
Increasing our sourcing of product from overseas
5
•
Improving the efficiency of our distribution network
• Continuing the elimination of redundant expenses of acquired businesses
• Reducing our overhead costs
Acquisitions. Our selective acquisition strategy and proven integration model have allowed us to
solidify our leading position within the industry and establish a strong national marketing and distribution
platform. This platform allows us to integrate acquired brands more easily and strengthen our specialty
brand portfolio and enter supplemental education categories in which we do not currently compete, such
as music or math, in addition to enabling us to grow faster than the industry. We believe that our size and
national presence give us an advantage as a potential acquirer in a consolidating industry.
Furthermore, our proven integration model allows us to realize significant synergies. We believe
we have demonstrated our ability to reduce redundant costs, retain the customers of the acquired brands,
and integrate distribution networks and information technology platforms. For each acquisition, we
generally assume a reduction of approximately 10 percent of the acquired company’s revenues. The
reduction is expected as we discontinue any unprofitable business lines, divest any product lines outside
our core competencies and reduce overlapping sales forces. The integration model is designed to offset
the sales reduction and efficiently combine the businesses. The model allows us to smoothly consolidate
distribution centers, improve geographic distribution, integrate the back-office functions, expand
purchasing power and, when a specialty company is acquired, realize product and margin enhancement
related to cross merchandising.
Product Lines
We market two broad categories of products: general school supplies and specialty products
geared towards specific educational disciplines. Our specialty products enrich our general supply product
offering and create opportunities to cross merchandise our specialty products, many of which are
proprietary, to our traditional customers. With over 80,000 items ranging from classroom supplies and
furniture to playground equipment, we provide customers with one source for virtually all of their
supplemental educational supply needs. Our business is highly seasonal with peak sales levels occurring
from June through October.
Our general school supply product lines can be described as follows:
School Specialty. Through the School Specialty catalog, which is targeted to administrative
decision makers, we offer a comprehensive selection of classroom supplies, instructional materials,
educational games, art supplies, school forms, educational software, physical education equipment, audio-
visual equipment, school furniture and indoor and outdoor equipment. We believe we are the largest
school furniture resale source in the United States. We have been granted exclusive franchises for certain
furniture lines in specific territories and we enjoy significant purchasing power in open furniture lines.
We enhance our furniture offering with a custom design and contract management service called Projects
by Design, which assists in the building or renovation of schools.
Our specialty businesses offer product lines for specific educational disciplines, as follows:
Premier Agendas. Premier Agendas is the largest provider of academic agendas in the United
States and Canada. The agendas include proprietary content to promote student success. Premier is also a
leading publisher of school forms, including record books, grade books, teacher planners and other
printed forms under the brand name Hammond & Stephens.
6
Childcraft and abc. We market early childhood education products and materials under the
Childcraft and abc brands. Childcraft and abc also market over 2,000 proprietary or exclusive products
manufactured by Childcraft’s Bird-in-Hand Woodworks subsidiary, including wood classroom furniture
and equipment such as library shelving, cubbies, easels, desks and play vehicles.
Sax Arts and Crafts. Sax Arts and Crafts is a leading marketer of art supplies and art instruction
materials, including paints, brushes, paper, ceramics, art metals and glass, leather and wood crafts. Sax
Arts and Crafts offers customers a toll free “Art Savvy Hotline” staffed with professional artists to
respond to customer questions.
ClassroomDirect. ClassroomDirect offers general supplemental educational supplies to teachers
and curriculum specialists directly through its mail-order catalogs and fully integrated B2T website.
Sportime. Sportime is a leading marketer of physical education, athletic and recreational
products. Sportime’s catalog product offering includes products for early childhood through middle
school as well as targeted products for physically or learning challenged children.
Teacher’s Video and Sunburst Visual Media. Teacher’s Video and Sunburst Visual Media are
leading marketers and producers of educational videos and DVDs for educators. Teacher’s Video targets
teachers, curriculum coordinators and department heads through 17 different curriculum-oriented
catalogs, with a total annual mailing volume in excess of 18 million catalogs. Sunburst Visual Media
markets videos, DVDs and related curriculum materials covering character education, health and
guidance curriculums to schools.
Frey Scientific. Frey Scientific is a marketer of laboratory supplies, equipment and furniture for
science classrooms. Frey Scientific offers value-added focus in the biology, chemistry, physics and earth
science areas.
Brodhead Garrett. Brodhead Garrett is the nation’s oldest marketer of industrial arts products
and technical materials to classrooms. Brodhead Garrett’s product line includes various items such as
drill presses, sand paper, lathes and robotic controlled arms.
Our merchandising managers, many of whom have prior experience in education, continually
review and update the product lines for each business. The merchandising managers convene customer
focus groups and advisory panels to determine whether current offerings are well-received and to
anticipate future demand. The merchandising managers also travel to product fairs and conventions
seeking out new product lines. This annual review process results in a constant reshaping and expansion
of the educational materials and products we offer.
For further information regarding our Traditional and Specialty segments, see our “Segment
Information” in the notes to our consolidated financial statements.
Sales and Marketing
We have implemented an innovative multi-channel sales and marketing strategy that employs a
traditional sales force of over 300 professionals, a specialty sales force of over 200 professionals, over 40
million catalogs mailed annually, B2T websites and a B2B educational portal. We believe we have
developed a substantially different sales and marketing model from that of other supplemental educational
supply companies in the United States. Our strategy is to use two separate sales and marketing
approaches (“top down” and “bottom up”) to reach all the prospective purchasers in the education system.
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Traditional Business. Our “top down” marketing approach targets administrative decision-
makers through our traditional sales force, the School Specialty general supply catalog and the
JuneBox.com B2B education portal. This approach accounts for the majority of our traditional business.
Our primary compensation program for sales representatives is based on commissions as a
percentage of gross profit on sales. For new and transitioning sales representatives, we offer salary and
expense reimbursement until the representative is moved to a full commission compensation structure.
Schools typically purchase supplies based on established relationships with relatively few
vendors. We seek to establish and maintain these critical relationships by assigning accounts within a
specific geographic territory to a local area sales representative who is supported by a centrally located
customer service team. The customer service representatives frequently call on existing customers to
ascertain and fulfill their supplemental educational supply needs. The representatives maintain contact
with these customers throughout the order cycle and assist in order processing.
We have a centralized and national sales, marketing, distribution and customer service structure.
We believe that this structure significantly improves our effectiveness through better sales management,
resulting in higher regional penetration, and significant cost savings through the reduction of distribution
centers.
“Projects by Design” is a service we provide to help in the building or renovation of schools. Our
professionals prepare a detailed room-by-room analysis to simplify supplemental educational supply
planning and fulfillment. Customers have the ability to view prospective classrooms through our
innovative software in order to efficiently manage the project.
Specialty Business. We use the “bottom up” approach to target the classroom level decision-
makers through our specialty sales force, catalogs featuring our specialty brands and B2T websites, along
with our ClassroomDirect catalog and website. These catalogs allow teachers to procure supplies that are
specific to their curriculum and classroom needs and may not have been purchased by school
administration.
Generally, for each specialty brand, a major catalog containing its full product offering is
distributed near the end of the calendar year for the beginning of the January through July selling season.
During the course of the year we mail additional supplemental catalogs. Schools and teachers can also
access websites for product information and purchasing. Further, we believe that by cross marketing our
specialty brands to traditional customers, we can achieve substantial incremental sales.
Internet Operations. We believe the Internet is an effective and efficient sales channel for us and
our customers. Our Internet approach comprises both B2T websites and a B2B portal that create
additional sales channels for us. We have been involved in e-commerce for over five years and have
developed the leading e-commerce websites in the industry. All of our specialty companies operate
complete information and e-commerce websites. Additionally, we also offer JuneBox.com, a set of e-
commerce solutions specifically designed to meet the unique needs of educational organizations. One
component, the “MarketPlace,” is a full-featured e-procurement system which provides all the Internet
purchasing benefits to schools. Another component, “The Stores” offers a complete on-line catalog for
individual teacher purchases. Other components allow the districts to integrate JuneBox product
information and systems directly into their business systems, allowing for a more streamlined and
accurate procurement process.
Pricing. Pricing for our general and specialty product offerings varies by product and market
channel. We generally offer a negotiated discount from catalog prices for supplies from our School
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Specialty catalog and respond to quote and bid requests. The pricing structure of specialty products
offered through direct marketing is generally not subject to negotiation.
School Specialty has built a broad customer base where no single customer accounted for more
than 2 percent of sales during fiscal 2001, 2002 or 2003. We believe we sell into every school district in
the United States and reach nearly all of the country’s teachers.
Procurement
Traditional Business. We purchase our general school supplies and furniture and equipment from
over 2,000 vendors. Product selection is evaluated on an annual basis and we typically negotiate an
annual supply contract with each vendor. Our supply contracts with our larger vendors usually provide for
special pricing and/or extended terms and often include volume based incentive and rebate programs. In
fiscal 2000, we introduced a private label, ClassroomSelect, and subsequently expanded product selection
which has allowed for margin expansion. We have exclusive distribution rights on several furniture and
equipment lines.
Specialty Business. Many of our products in the specialty business are proprietary. We either
develop the product or it is an exclusive product developed on our behalf. Typically, we outsource the
manufacturing of proprietary products. However, our Childcraft division manufactures wood furniture for
sale by Childcraft, abc and our other businesses. We also produce our Teacher’s Video proprietary videos
at our facility in Tempe, Arizona and our Premier agendas and forms are designed and produced at our
facilities in Bellingham, Washington, Fremont, Nebraska, and Langley, British Columbia, as well as
through third party printers. We purchase non-proprietary products in the specialty business in a similar
manner as our traditional business procurement process.
To the extent the traditional and specialty businesses are sourcing product from common vendors,
we typically negotiate one contract to take full advantage of our combined buying power. We maintain
close and stable relationships with our vendors to facilitate a streamlined procurement process. At the
same time, we continually review alternative supply sources in an effort to improve quality, improve
customer satisfaction, and reduce product cost. We are currently working with our larger vendors to
provide for an electronic procurement process, which will automate our procurement cycle transactions,
from purchase order through payment, utilizing an electronic interface. We believe this electronic process
will reduce cost and improve accuracy and efficiency in our procurement and fulfillment process.
Logistics
We have built what we believe is the largest and most sophisticated distribution network among
our direct marketing competitors, with seven fully-automated and seamlessly-integrated distribution
centers that ship directly to the customer. The distribution centers average approximately 200,000 square
feet. We also maintain call centers to support customer service and sales. We believe this network
represents a significant competitive advantage for us, allowing us to reach any school in a fast and
efficient manner. We shipped approximately 70 percent of stocked inventory via UPS in fiscal 2003 and
had a 97 percent on-time delivery rate. The fill-rate of our facilities has generally exceeded 95 percent at
the peak of our shipping season. We have the ability to expand the network through additions needed to
support sales growth. New warehouse capacity can be leased and no large capital investments are
typically required.
In order to maintain the proprietary nature of some of our specialty products, we operate four
manufacturing facilities. The Lancaster, Pennsylvania facility manufactures products primarily for the
Childcraft and abc brands, while the Bellingham, Washington, Fremont, Nebraska, and Langley, British
9
Columbia facilities are used for the production of student agendas and school forms. Our manufactured
products account for approximately 7 percent of our revenues.
Information Systems
We believe that through the utilization of technology in areas such as purchasing and inventory
management, customer order fulfillment and database management, we are able to turn over inventory
more quickly, offer customers more convenient and cost effective ways of ordering products, and more
precisely focus our sales and marketing strategies.
In the traditional and certain specialty businesses, we use a specialized distribution software
package. This software package, System for Distributors, offers a fully-integrated process from sales
order entry through customer invoicing, and inventory requirements planning through accounts payable.
Our system provides information through daily automatic posting to the general ledger and integrated
inventory control. We have made numerous enhancements that allow greater flexibility in addressing the
seasonal requirements of the industry and meeting specific customer needs.
Most of the remaining specialty divisions use a mail-order and catalog system provided by
Ecometry Corporation. This system meets the needs of our direct marketing companies with extensive
list management and tracking of multiple marketing offers. The system provides complete and integrated
order processing, inventory control, warehouse management and financial applications.
During fiscal 2003, we began the implementation of new business systems utilizing Yantra
Corporation’s order management and warehouse management software. Three distribution centers were
automated during the year and businesses shipping from these centers manage orders using Yantra multi-
enterprise order management software. This model will be extended to include additional operations and
additional processes and functions during fiscal 2004. By utilizing common systems across our
businesses, we expect to achieve an improved order process, reduced order cycle time, enhanced
integration between businesses and more effective inventory management. We believe technologies of the
new systems will readily support continued growth and integration of new businesses.
Competition
We believe competition in the market in which we operate is fragmented with approximately
3,400 regional suppliers to preK-12 schools. These companies are generally smaller in terms of revenues
and serve customers in limited geographic regions. We also compete with alternate channel competitors
such as office product contract stationers and office supply superstores. Their primary advantages over us
are size, location, greater financial resources and buying power. Their primary disadvantage is that their
product mix typically covers less than 20 percent of the school’s needs (measured by volume). For the
most part, our competitors do not offer special order fulfillment software, which we believe is
increasingly important to adequately service school needs. We believe we compete favorably with these
companies on the basis of service and product offering.
Employees
As of June 1, 2003, we had approximately 2,500 full-time employees. To meet the seasonal
demands of our customers, we employ many seasonal employees during the late spring and summer
months. Historically, we have been able to meet our requirements for seasonal employment. None of our
employees are represented by a labor union. We consider our relations with our employees to be very
good.
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Forward-Looking Statements
Statements in this Annual Report which are not historical are “forward-looking” statements
within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking
statements include: (1) statements made under Item 1, Business and Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations, including, without limitation, statements
with respect to internal growth plans, projected revenues, margin improvement, future acquisitions,
capital expenditures and adequacy of capital resources; (2) statements included or incorporated by
reference in our future filings with the Securities and Exchange Commission; and (3) information
contained in written material, releases and oral statements issued by, or on behalf of, School Specialty
including, without limitation, statements with respect to projected revenues, costs, earnings and earnings
per share. Forward-looking statements also include statements regarding the intent, belief or current
expectation of School Specialty or its officers. Forward-looking statements include statements preceded
by, followed by or that include forward-looking terminology such as “may,” “will,” “should,” “believes,”
“expects,” “anticipates,” “estimates,” “continues” or similar expressions.
All forward-looking statements included in this Annual Report are based on information available
to us as of the date hereof. We do not undertake to update any forward-looking statements that may be
made by or on behalf of us, in this Annual Report or otherwise. Our actual results may differ materially
from those contained in the forward-looking statements identified above. Factors which may cause such a
difference to occur include, but are not limited to, the factors listed in Exhibit 99.4 to our Form 10-K for
fiscal 2003.
Item 2. Properties
Our corporate headquarters is located in a leased facility. The lease on this facility expires in April
2021. The facility is located at W6316 Design Drive, Greenville, Wisconsin, a combined office and
warehouse facility of approximately 332,000 square feet, which also services both our Traditional and
Specialty segments. In addition, we lease or own the following principal facilities:
Locations
Agawam, Massachusetts (1) .................................
Atlanta, Georgia (2) ..............................................
Bellingham, Washington (2).................................
Duluth, Georgia (3) ...............................................
Fremont, Nebraska (2) ..........................................
Fresno, California (3)............................................
Lancaster, Pennsylvania (2)..................................
Lancaster, Pennsylvania (2)..................................
Lancaster, Pennsylvania (2)..................................
Langley, British Columbia (2)..............................
Lyons, New York (1) ............................................
Mansfield, Ohio (3)...............................................
New Berlin, Wisconsin (2) ...................................
Salina, Kansas (1) .................................................
Southaven, Mississippi (3)....................................
Tempe, Arizona (2)...............................................
________________
Approximate
Square
Footage
Owned/
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Leased
Owned
Leased
Leased
188,000
20,000
48,000
238,000
95,000
163,200
73,000
126,000
204,000
8,700
179,000
315,000
16,200
123,000
200,000
57,000
11
Lease Expiration
November 30, 2020
January 31, 2006
March 31, 2011
November 30, 2004
June 30, 2008
November 1, 2009
December 31, 2007
October 31, 2005
October 31, 2005
August 31, 2003
—
November 30, 2020
September 30, 2007
—
December 31, 2010
February 28, 2005
(1) Location primarily services the Traditional segment.
(2) Location primarily services the Specialty segment.
(3) Location primarily services both business segments.
The 73,000 square foot Lancaster, Pennsylvania facility is used for manufacturing and the Fremont,
Nebraska, Langley, British Columbia and Bellingham, Washington facilities are used for production of
agendas and school forms. The other facilities are distribution centers and/or office space. We believe that
our properties, as enhanced for our ongoing expansion, are adequate to support our operations for the
foreseeable future. We regularly review the utilization and consolidation of our facilities.
Item 3. Legal Proceedings
We are, from time to time, a party to legal proceedings arising in the normal course of business.
We believe that none of these legal proceedings will materially or adversely affect our financial position,
results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted during the quarter ended April 26, 2003 to a vote of our security
holders.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of June 1, 2003, the following persons served as executive officers of School Specialty:
Name and Age
of Officer
David J. Vander Zanden
Age 48
Mr. Vander Zanden became President and Chief Executive Officer of School
Specialty in September 2002, after serving as Interim Chief Executive Officer
since March 2002. Mr. Vander Zanden served as President and Chief
Operating Officer from March 1998 to March 2002. From 1992 to March
1998, he served as President of Ariens Company, a manufacturer of outdoor
lawn and garden equipment. Mr. Vander Zanden has served as a director of
School Specialty since June 1998.
Mary M. Kabacinski
Age 54
Ms. Kabacinski, a Certified Public Accountant, has served as Executive Vice
President and Chief Financial Officer of School Specialty since August 1999.
From 1989 to 1999, she served as Senior Vice President and Chief Financial
Officer for Marquette Medical Systems, a manufacturer of medical devices.
A. Brent Pulsipher
Age 61
Mr. Pulsipher became Executive Vice President of Corporate Logistics and
Technology of School Specialty in March 2001. From 1998 to 2001, Mr.
Pulsipher was Chief Information Officer for Tropical Sportswear
International, an apparel producer and brand manager. Mr. Pulsipher held the
position of Manager of Consulting Services for Distribution Resources
Company, a software developer, from 1988 to 1998.
12
Stephen R. Christiansen
Age 41
Mr. Christiansen joined School Specialty in November 2002 as Executive
Vice President, Specialty Companies, following a thirteen-year tenure with
Kimberly-Clark Corporation, a world-wide manufacturer of personal care and
health care products, where he held progressive marketing and general
management positions in the United States and Latin America.
The term of office of each executive officer is from one annual meeting of the Board of Directors
until the next annual meeting of the Board of Directors or until a successor for each is selected. There are
no arrangements or understandings between any of our executive officers and any other person (not an
officer or director of School Specialty acting as such) pursuant to which any of our executive officers were
selected as an officer of School Specialty.
13
PART II
Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters
Market Information
Our common stock is traded under the symbol “SCHS” on The Nasdaq National Market. The table
below sets forth the reported high and low closing sale prices for shares of the common stock, as reported by
The National Association of Securities Dealers, Inc. during the indicated quarters.
Fiscal 2003 quarter ended
July 27, 2002.......................................................................................
October 26, 2002 ................................................................................
January 25, 2003.................................................................................
April 26, 2003.....................................................................................
High Low
$21.19
20.58
19.06
17.25
$28.84
26.51
25.80
20.21
Fiscal 2002 quarter ended
July 28, 2001.......................................................................................
October 27, 2001 ................................................................................
January 26, 2002.................................................................................
April 27, 2002.....................................................................................
High
$28.66
31.99
31.30
29.65
Low
$21.95
26.00
21.65
23.19
Holders
As of July 7, 2003, there were 2,122 record holders of our common stock.
Historical Dividends
We have not declared or paid any cash dividends on our common stock to date. We currently
intend to retain our future earnings to finance the growth, development and expansion of our business.
Accordingly, we do not expect to pay cash dividends on our common stock in the foreseeable future. In
addition, our ability to pay dividends may be restricted or prohibited from time to time by financial
covenants in our credit agreements and debt instruments. Our current credit facility contains restrictions on,
and in some circumstances, may prevent, our payment of dividends.
14
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
(in thousands, except per share data)(1)
Statement of Operations Data:
Revenues ......................................
Cost of revenues ...........................
Gross profit.................................
Selling, general and
administrative expenses.............
Restructuring and strategic
restructuring costs......................
Operating income .......................
Interest expense (net)....................
Other expense (income) ...............
Income before provision for
income taxes .............................
Provision for income taxes ...........
Net income (2)............................
Net income per share:
Basic ...........................................
Diluted ........................................
Weighted average shares
outstanding:
Basic ...........................................
Diluted ........................................
Fiscal Year
2003
2002
2001
$870,030
512,167
357,863
$767,387
473,407
293,980
$692,674
440,946
251,728
2000
(53 weeks)
$639,271
406,043
233,228
1999
$521,704
341,783
179,921
271,916
236,436
208,153
184,586
144,659
—
85,947
18,001
1,909
66,037
26,447
$ 39,590
—
57,544
17,279
3,965
4,500
39,075
16,855
1,214
36,300
14,521
$ 21,779
21,006
9,075
$ 11,931
—
48,642
13,151
1,856
33,635
15,120
$ 18,515
5,274
29,988
12,601
(228)
17,615
8,719
$ 8,896
$ 2.16
$ 1.94
$ 1.22
$ 1.17
$ 0.68
$ 0.67
$ 1.06
$ 1.06
$ 0.61
$ 0.60
18,324
23,378
17,917
18,633
17,495
17,782
17,429
17,480
14,690
14,840
Selected Operating Data:
EBITDA (3).................................. $ 101,468
Free cash flow (3)......................... $ 54,721
$ 68,742
$ 63,503
$ 54,037
$ 20,817
$ 60,481
$ 13,625
$ 39,592
$ 22,751
Balance Sheet Data:
Working capital ............................
Total assets ...................................
Long-term debt .............................
Total debt......................................
Shareholders’ equity.....................
__________
April 26,
2003
April 27,
2002
April 28,
2001
April 29,
2000
April 24,
1999
$ 98,609
736,335
292,844
293,356
321,453
$ 78,587
673,642
285,592
290,063
271,170
$ 85,962
523,359
176,183
198,038
239,252
$116,857
454,849
144,789
162,180
224,993
$115,853
437,708
161,691
173,285
202,687
15
(1) Our business has grown significantly since 1999 through acquisitions and internal growth. For
detailed information on acquisitions during fiscal years 2003, 2002 and 2001, see the “Business
Combinations” note in our notes to consolidated financial statements. During fiscal 2000, we made
two acquisitions under the purchase method for an aggregate purchase price of approximately $2.5
million and during fiscal 1999 we made five acquisitions under the purchase method for an
aggregate purchase price of approximately $127.8 million.
(2) At the beginning of fiscal 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible
Assets,” which resulted in goodwill no longer being subject to amortization. Goodwill amortization,
net of tax, included in net income during fiscal years 2001, 2000, and 1999 was $5.0 million, $4.5
million, and $3.9 million, respectively.
(3) The following tables disclose certain financial measures, such as EBITDA (earnings before
interest and other, taxes, depreciation and amortization) and free cash flow, which may be
considered non-GAAP financial measures. Generally, a non-GAAP financial measure is a
numerical measure of a company’s performance, financial position or cash flows that either
excludes or includes amounts that are not normally excluded or included in the most directly
comparable measure calculated and presented in accordance with GAAP. In order to fully assess
our financial results, we believe that EBITDA and free cash flow are appropriate measures of
evaluating operating performance and liquidity, respectively. Furthermore, we believe that
EBITDA provides useful information because this information is used in calculating certain
financial covenants under our credit facility. However, these measures should be considered in
addition to, and not as a substitute for, operating income, cash flows or other measures of
financial performance prepared in accordance with GAAP. The non-GAAP measures included
below have been reconciled to the nearest GAAP measure, as included in our consolidated
financial statements included elsewhere in this report. As used herein, “GAAP” refers to
accounting principles generally accepted in the United States.
Earnings before interest and other, taxes,
2003
2002
Fiscal Year
2001
2000
(53 weeks)
depreciation and amortization (EBITDA):
$ 57,544 $ 39,075 $ 48,642
Operating income ................................................... $ 85,947
11,839
14,962
11,198
15,521
Add: Depreciation and amortization expense........
EBITDA ................................................................ $101,468 $ 68,742 $ 54,037 $ 60,481
1999
$ 29,988
9,604
$ 39,592
Free cash flow reconciliation:
Net cash provided by operating activities .............. $ 62,026
(11,305)
Additions to property and equipment.....................
Net accounts receivable securitization
$ 75,613 $ 86,017
(15,200)
(12,110)
$ 30,976 $ 27,623
(4,872)
(17,351)
4,000
facility activity....................................................
Free cash flow ....................................................... $ 54,721
—
(50,000)
$ 63,503 $ 20,817
—
—
$ 13,625 $ 22,751
16
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(“MD&A”)
You should read the following discussion and analysis in conjunction with our consolidated
financial statements and related notes, included elsewhere in this Annual Report.
Overview
We are the largest direct marketing company for supplemental educational supplies to schools
and teachers for preK-12 in the United States. We offer more than 80,000 items through an innovative
two-pronged marketing approach that targets both school administrators and individual teachers. Our
broad product range enables us to provide our customers with one source for virtually all of their non-
textbook school supplies and furniture needs.
We have grown significantly in recent years through acquisitions and internal growth. For
information on our recent acquisitions see the “Business Combinations” note in the notes to our
consolidated financial statements. Our revenues for fiscal 2003 were $870.0 million and our operating
income was $85.9 million, which represented compound annual revenue growth of 13.6% and
compounded annual operating income growth of 30.1%, compared to our fiscal 1999 results.
Our gross margin has improved in recent years primarily due to acquisitions, product mix and
increased buying power. We have acquired many specialty businesses, which tend to have higher gross
margins than our traditional business. The specialty businesses have also experienced higher revenue
growth than the traditional business, resulting in an improved product mix. In addition, our acquisitions
of both specialty and traditional businesses have increased our buying power, resulting in reduced costs of
the products we purchase.
Our operating profit and margins also improved significantly over the last several years. This
improvement reflects our acquisitions of specialty businesses, which typically have higher operating
margins than our traditional business. In addition, through the integration of acquired businesses, we
have been able to further improve our operating profit and margins by eliminating redundant expenses,
leveraging overhead costs and improving purchasing power.
As a result of integrating acquired operations, we have recorded restructuring charges in fiscal
2001 and fiscal 1999. These charges have primarily been to close existing facilities and to consolidate
operations that, when combined with acquired operations, became redundant. To the extent our
integrations have resulted in certain exit costs such as the closure of acquired facilities, the costs were
accrued in purchase accounting.
Our business and working capital needs are highly seasonal with peak sales levels occurring from
June through October. During this period, we receive, ship and bill the majority of our orders so that
schools and teachers receive their merchandise by the start of each school year. Our inventory levels
increase in April through June in anticipation of the peak shipping season. The majority of shipments are
made between June and October and the majority of cash receipts are collected from September through
December. As a result, we usually earn more than 100% of our annual net income in the first two
quarters of our fiscal year and operate at a net loss in our third and fourth fiscal quarters.
Results of Operations
The following table sets forth certain information as a percentage of revenues on a historical basis
concerning our results of operations for the fiscal years 2003, 2002, and 2001.
17
Revenues...............................................................
Cost of revenues ...................................................
Gross profit ........................................................
Selling, general and administrative expenses .......
Restructuring costs................................................
Operating income...............................................
Interest expense, net..............................................
Other expense .......................................................
Income before provision for income taxes............
Provision for income taxes ...................................
Net income ...........................................................
2003
100.0%
58.9
41.1
31.2
—
9.9
2.1
0.2
7.6
3.0
4.6%
Fiscal Year
2002
100.0%
61.7
38.3
30.8
—
7.5
2.3
0.5
4.7
1.9
2.8%
2001
100.0%
63.7
36.3
30.1
0.6
5.6
2.4
0.2
3.0
1.3
1.7%
Consolidated Historical Results of Operations
Fiscal 2003 Compared to Fiscal 2002
Revenues
Revenues increased 13.4% from $767.4 million in fiscal 2002 to $870.0 million in fiscal 2003.
Traditional segment revenues decreased 1.8% from $480.9 million in fiscal 2002 to $472.5 million in
fiscal 2003. Decrease in Traditional segment revenues was primarily due to a generally weakened
economic environment which has placed pressure on some state and local budgets, partially offset by
revenues from acquired businesses. Specialty segment revenues increased 38.8% from $286.5 million in
fiscal 2002 to $397.6 million in fiscal 2003. Increase in Specialty segment revenues was primarily due to
acquisitions and modest growth in existing businesses.
Gross Profit
Gross profit increased 21.7% from $294.0 million in fiscal 2002 to $357.9 million in fiscal 2003.
Increase in gross profit was due to an increase in revenues and gross margins, and a shift in revenues to
the higher margin Specialty segment. In fiscal 2003, Specialty segment revenues accounted for 45.7% of
total revenues, up from 37.3% in fiscal 2002. Gross margin grew 280 basis points from 38.3% of
revenues in fiscal 2002 to 41.1% of revenues in fiscal 2003. Increase in gross margin was primarily due to
improvement in the Specialty segment gross margin from 45.6% of revenues in fiscal 2002 to 49.4% of
revenues in fiscal 2003. Increase in gross margin in the Specialty segment was primarily driven by mix,
with higher gross margins from acquired businesses, and successful pricing initiatives in core businesses.
Traditional segment gross margin expanded 30 basis points from 33.9% of revenues in fiscal 2002 to
34.2% of revenues in fiscal 2003, driven primarily by improved consumable pricing and reduced product
cost.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) include selling expenses, the most
significant component of which is sales wages and commissions, operations expenses, which includes
customer service, warehouse and warehouse shipments transportation costs, catalog costs, general
administrative overhead, which includes information systems, accounting, legal, and human resources and
depreciation and intangible asset amortization expense.
18
SG&A increased 15.0% from $236.4 million or 30.8% of revenues in fiscal 2002 to $271.9
million or 31.2% of revenues in fiscal 2003. Increase in SG&A and SG&A as a percent of revenues was
primarily due to acquisitions, an increase in revenues, and a shift in revenue mix to increased Specialty
segment revenues, which generally have higher operating costs than the Traditional segment primarily
due to increased marketing costs. These increases were partially offset by efficiencies obtained from
integration efforts and successful expense reduction efforts.
Traditional segment SG&A increased $4.3 million from $109.1 million or 22.7% of revenues in
fiscal 2002 to $113.4 million or 24.0% of revenues in fiscal 2003. Increase in Traditional segment SG&A
was primarily due to costs associated with closing our Lufkin, Texas facility, which supported the
Traditional segment, of approximately $1.2 million and costs related to operating businesses acquired
during the off season. Specialty segment SG&A increased $30.2 million from $108.2 million in fiscal
2002 to $138.4 million. Increase in Specialty segment SG&A was primarily due to an increase in
revenues and costs related to operating acquired businesses which were purchased during the off season.
Specialty segment SG&A as a percent of revenues decreased 300 basis points from 37.8% of revenues in
fiscal 2002 to 34.8% of revenues in fiscal 2003. Decrease in SG&A as a percent of revenues was
primarily due to the inclusion of Premier Agendas for a full fiscal year, which was acquired during the off
season in fiscal 2002 and contributed minimal revenue and a non-recurring charge that occurred in fiscal
2002 related to closing the Birmingham, Alabama distribution center.
Interest Expense
Net interest expense increased 4.2% from $17.3 million in fiscal 2002 to $18.0 million in fiscal
2003. Increase in net interest expense was due to an increase in average debt outstanding, partially offset
by a reduction in our effective borrowing rate on our credit facility.
Other Expenses
Other expense decreased $2.1 million from $4.0 million in fiscal 2002 to $1.9 million in fiscal
2003. Other expenses for fiscal 2003 primarily represented the discount and loss on securitized accounts
receivable of $1.8 million. Discount and loss on securitized accounts receivable for fiscal 2002 was $2.0
million. The decrease in the discount and loss was primarily due to a reduction in the discount rate partially
offset by an increase in the average securitized accounts receivable. Other expenses for fiscal 2002 included
a $1.7 million write-off of a long-term investment, and $0.3 million realized gain on the sale of available-
for-sale securities.
Provision for Income Taxes
The provision for income taxes increased to $26.4 million in fiscal 2003 from $14.5 million in
fiscal 2002, reflecting effective income tax rates of 40.0% for each period. The higher effective tax rate,
compared to the federal statutory rate of 35%, was primarily due to state, local and foreign income taxes.
Fiscal 2002 Compared to Fiscal 2001
Revenues
Revenues increased 10.8% from $692.7 million for fiscal 2001 to $767.4 million for fiscal 2002.
Traditional segment revenues increased 15.9% from $415.0 million in fiscal 2001 to $480.9 million in
fiscal 2002, primarily due to acquisitions. Specialty segment revenues increased 3.2% from $277.7
million in fiscal 2001 to $286.5 million in fiscal 2002. Increase in Specialty segment revenues was due to
19
internal growth and acquisitions, partially offset by the exclusion of revenues from three businesses
disposed of since January 2001.
Gross Profit
Gross profit increased 16.8% from $251.7 million, or 36.3% of revenues in fiscal 2001 to $294.0
million, or 38.3% of revenues in fiscal 2002. Increase in gross profit was due to an increase in revenues
and gross margin. Increase in gross margin was primarily due to strong improvement in the Traditional
segment from 30.8% of revenues in fiscal 2001 to 33.9% of revenues in fiscal 2002. This increase in
gross margin in the Traditional segment was primarily due to improvement in the consumable business,
driven by improved purchasing power and modest selling price increases. Specialty segment gross margin
improved to 45.6% of revenues in fiscal 2002 from 44.6% of revenues in fiscal 2001. This improvement
was primarily driven by the ClassroomDirect business, which improved gross margin primarily through
an increase in selling price and the Childcraft business, which improved gross margin primarily through
improved operating efficiencies and purchasing power. On a consolidated basis, gross margin was
impacted by an increase in Traditional segment revenue mix (driven by the November 2000 acquisition of
J.L. Hammett’s K-12 wholesale business) from 59.9% of revenues in fiscal 2001 to 62.7% of revenues in
fiscal 2002. The Traditional segment historically has lower gross margins than the Specialty segment.
Selling, General and Administrative Expenses
SG&A increased 13.6% from $208.2 million or 30.1% of revenues in fiscal 2001 to $236.4
million or 30.8% of revenues in fiscal 2002. Traditional segment SG&A increased $10.6 million from
$98.6 million or 23.8% of revenues in fiscal 2001 to $109.1 million or 22.7% of revenues in fiscal 2002.
Increase in Traditional segment SG&A was primarily due to an increase in variable costs related to
increased revenues and an increase in fixed operating costs, primarily due to redundancies created with
the Hammett acquisition. Specialty segment SG&A increased $13.0 million from $95.2 million or 34.3%
of revenues in fiscal 2001 to $108.2 million or 37.8% of revenues in fiscal 2002. Increase in Specialty
segment SG&A was primarily due to the acquisition of Premier Agendas, and costs to consolidate
existing operations into acquired businesses. These Traditional and Specialty segment increases were
partially offset by our early adoption at the beginning of fiscal 2002 of SFAS No. 142 which resulted in
the discontinuance of amortization of goodwill. Corporate expenses increased $4.7 million from $14.4
million in fiscal 2001 to $19.1 million in fiscal 2002. Increase was primarily due to an increase in salaries
and wages, salary continuation obligations related to the death of our chief executive officer and
depreciation.
Decrease in Traditional segment SG&A as a percent of revenues was primarily due to the
adoption of SFAS No. 142 at the beginning of fiscal 2002. The increase in Specialty segment SG&A as a
percent of revenues was primarily due to 1) operating costs of Premier Agendas, a highly seasonal
business acquired during a seasonally low period, 2) costs associated with closing our distribution center
in Birmingham, Alabama, 3) costs associated with integrating our Hammond & Stephens sales force with
the Premier Agendas sales force and 4) increased catalog costs, primarily due to the inclusion of a full
fiscal year of catalog expense for Teacher’s Video, which has higher catalog costs as a percentage of
revenues than our other specialty businesses. These increases were partially offset by a reduction in
amortization expense, due to our adoption of SFAS No. 142 at the beginning of fiscal 2002.
20
Interest Expense
Net interest expense increased 2.5% from $16.9 million in fiscal 2001 to $17.3 million in fiscal
2002. Increase in interest expense was primarily due to an increase in average debt outstanding, partially
offset by a reduction in our effective borrowing rate on our credit facility.
Other Expenses
Other expense increased $2.8 million from $1.2 million in fiscal 2001 to $4.0 million in fiscal 2002.
Other expenses in fiscal 2002 primarily consisted of the discount and loss on the accounts receivable
securitization of $2.0 million, a $1.7 million write-off of a long-term investment and a $0.3 million realized
loss on the sale of available-for-sale securities. Other expense in fiscal 2001 primarily consisted of the
discount and loss on an accounts receivable securitization of $1.4 million.
Provision for Income Taxes
The provision for income taxes for fiscal 2002 increased $5.4 million over fiscal 2001, reflecting
effective tax rates of 40.0% and 43.2% for fiscal years 2002 and 2001, respectively. The change in the
effective tax rate to 40.0% in fiscal 2002 as compared to 43.2% in fiscal 2001 was due primarily to the
impact of our adoption of SFAS No. 142, and its impact on non-deductible goodwill amortization. The
higher effective tax rate, compared to the federal statutory rate of 35%, was primarily due to state, local
and foreign income taxes.
Liquidity and Capital Resources
At April 26, 2003, we had working capital of $98.6 million. Our capitalization at April 26, 2003
was $614.9 million, consisting of total debt of $293.4 million and shareholders’ equity of $321.5 million.
On April 11, 2003 we amended and extended our revolving credit facility with Bank of America,
N.A., acting as agent. The new credit agreement matures on April 11, 2006 and provides for $250 million
of availability. The amount outstanding as of April 26, 2003 under the credit facility was $125.7 million.
The credit facility is secured by substantially all of our assets and contains certain financial and other
covenants. During fiscal 2003, we borrowed under our credit facility primarily for seasonal working
capital, acquisitions, and capital expenditures. Our borrowings are usually significantly higher during the
first two quarters of our fiscal year to meet the working capital needs of our peak selling season. As of
April 26, 2003, our effective interest rate on borrowings under our credit facility was approximately
4.23%, which includes amortization of loan origination fee costs and the commitment fees on unborrowed
funds.
On July 30, 2001, we sold an aggregate principal amount of $130 million of six percent
convertible subordinated notes due August 1, 2008. The notes are convertible at any time prior to maturity
into shares of our common stock at a conversion price of $32.29 per share and accrue interest payable
semi-annually. Net proceeds from the sale of these notes were approximately $125.7 million. On August
2, 2001, the initial purchasers of the notes exercised their option to purchase additional notes in full and
purchased an additional $19.5 million of these notes. We used the total net proceeds from the offering of
$144.6 million to repay a portion of the debt outstanding under the credit facility.
We currently have a $100 million accounts receivable securitization facility which expires in
November 2003. The facility was amended during November 2002 to extend the expiration date to
November 2003 and may be extended further with the financial institution’s consent. At April 26, 2003,
$46 million was advanced under the accounts receivable securitization and accordingly, that amount of
21
accounts receivable has been removed from our consolidated balance sheet. Costs associated with the sale
of receivables, primarily related to the discount and loss on sale, for fiscal 2003 were $1.8 million and are
included in other expenses in our condensed consolidated statement of operations.
In November 2000, we entered into two sale-leaseback transactions which are accounted for as
financings. Under the agreements, we recorded $18.5 million of debt, which has an effective interest rate
of 8.97%, excluding amortization of related fees. The leases expire in November 2020. The amount
outstanding as of April 26, 2003 under the agreements was $17.7 million.
Net cash provided by operating activities was $62.0 million in fiscal 2003 compared to $75.6
million in fiscal 2002. The decrease in cash from operating activities was primarily due to significant
liquidation of acquired working capital in fiscal 2002 and a $4 million reduction in amounts advanced
under the accounts receivable securitization in fiscal 2003, partially offset by an increase in net income in
fiscal 2003.
Net cash used in investing activities during fiscal 2003 was $66.5 million. Of this amount, $55.8
million was used for acquisitions and $11.3 million was used for capital expenditures, primarily
consisting of computer hardware and software related to the implementation of our new business systems
and distribution and manufacturing equipment. Net cash used in investing activities during fiscal 2002
was $160.8 million, including $162.2 million for acquisitions (primarily Premier Agendas) and $12.1
million for capital expenditures. These uses were partially offset by net proceeds of $9.6 million from the
sale of available-for-sale securities.
Net cash provided by financing activities during fiscal 2003 was $0.7 million. Net repayments on
bank borrowings and capital leases of $4.1 million and payment of related debt fees of $1.6 million,
primarily relating to new credit facility, were offset by $6.4 million of proceeds from stock option
exercises. Net cash provided by financing activities during fiscal 2002 was $85.7 million. Net proceeds
from our convertible debt offering of approximately $144.6 million were used to repay a portion of the
debt outstanding on our credit facility.
We anticipate that our cash flow from operations, borrowings available from our existing credit
facility and other sources of capital will be sufficient to meet our liquidity requirements for operations,
including anticipated capital expenditures and our contractual obligations.
We expect our fiscal 2004 capital expenditures to be approximately $8-$10 million and to consist
primarily of computer hardware and software costs related to continued implementation of our new
business systems.
Summary of Contractual Obligations
The following table summarizes our contractual debt and operating lease obligations as of April
26, 2003:
Debt obligations....................... $293,356
Operating lease obligations...... 44,189
Total contractual obligations ... $337,545
Total
Payments Due
(in thousands)
1 – 3
years
Less than
1 year
$ 512
7,976
$ 8,488
More than
3 – 5
5 years
years
$126,682 $ 1,065 $165,097
17,203
7,271
11,739
$138,421 $ 8,336 $182,300
22
Fluctuations in Quarterly Results of Operations
Our business is subject to seasonal influences. Our historical revenues and profitability have
been dramatically higher in the first two quarters of our fiscal year, primarily due to increased shipments
to customers coinciding with the start of each school year. Quarterly results also may be materially
affected by the timing of acquisitions, the timing and magnitude of costs related to such acquisitions,
variations in our costs for the products sold, the mix of products sold and general economic conditions.
Moreover, the operating margins of companies we acquire may differ substantially from our own, which
could contribute to further fluctuation in quarterly operating results. Therefore, results for any quarter are
not indicative of the results that we may achieve for any subsequent fiscal quarter or for a full fiscal year.
The following table sets forth certain unaudited consolidated quarterly financial data for fiscal
years 2003 and 2002. We derived this quarterly data from our unaudited consolidated financial
statements.
First
Second
Fiscal 2003
Third
Fourth
Total
Revenues...................................... $298,027
124,491
Gross profit..................................
44,938
Operating income (loss)...............
23,956
Net income (loss).........................
$317,399
129,909
53,707
29,030
$110,554
42,715
(9,517)
(8,541)
$144,050
60,748
(3,181)
(4,855)
$870,030
357,863
85,947
39,590
Per share amounts:
Basic ......................................... $ 1.32
Diluted ...................................... $ 1.08
$ 1.59
$ 1.30
$ (0.46)
$ (0.46)
$ (0.26)
$ (0.26)
$ 2.16
$ 1.94
First
Second
Fiscal 2002
Third
Fourth
Total
Revenues...................................... $260,162
100,294
Gross profit..................................
32,470
Operating income (loss)...............
16,446
Net income (loss).........................
$269,656
99,834
36,608
19,162
$104,005
39,746
(8,203)
(8,625)
$133,564
54,106
(3,331)
(5,204)
$767,387
293,980
57,544
21,779
Per share amounts:
Basic ......................................... $ 0.93
Diluted ...................................... $ 0.89
$ 1.07
$ 0.88
$ (0.48)
$ (0.48)
$ (0.29)
$ (0.29)
$ 1.22
$ 1.17
Inflation
Inflation has had and is expected to have only a minor effect on our results of operations and our
internal and external sources of liquidity.
Critical Accounting Policies
We believe the policies identified below are critical to our business and the understanding of our
results of operations. The impact and any associated risks related to these policies on our business are
discussed throughout MD&A where applicable. Refer to the notes to our consolidated financial
statements in Item 8 for detailed discussion on the application of these and other accounting policies. The
preparation of the consolidated financial statements requires management to make estimates and
23
assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. We evaluate our estimates on an ongoing basis and base them on a
combination of historical experience and various other assumptions that are believed to be reasonable
under the circumstances. Actual results could differ from those estimates. Our critical accounting policies
that require significant judgments and estimates used in the preparation of our consolidated financial
statements are as follows:
Revenue Recognition
Revenue is recognized upon the shipment of products or upon the completion of services
provided to customers, which corresponds to the time when risk of ownership transfers.
Catalog Costs and Related Amortization
We accumulate all direct costs incurred, net of vendor cooperative advertising payments, in the
development, production and circulation of our catalogs on our balance sheet until such time as the
related catalog is mailed. They are subsequently amortized into SG&A over the expected sales realization
cycle, which is one year or less. Our initial estimation of the expected sales realization cycle for a
particular catalog is based on, among other possible considerations, our historical sales experience with
identical or similar catalogs and our assessment of prevailing economic conditions and various
competitive factors. We track our subsequent sales realization, reassess the marketplace, and compare our
findings to our previous estimate and adjust our prospective amortization, if necessary.
Vendor Rebates
We receive rebates from our vendors which are generally a percentage of volume purchased.
Amounts expected to be received from vendors relating to the purchase of inventories are recognized as a
reduction of cost of goods sold over the estimated inventory sale cycle.
Goodwill and Intangible Assets
At April 26, 2003, goodwill and intangible assets represented approximately 64% of our total
assets. The recoverability of these assets requires considerable judgment and is evaluated on an annual
basis or more frequently if events or circumstances indicate that the assets may be impaired. As it relates
to goodwill and indefinite life intangible assets, we apply the impairment rules in accordance with SFAS
No. 142. As required by SFAS No. 142, the recoverability of these assets is subject to a fair value
assessment which includes several significant judgments regarding financial projections and comparable
market values. As it relates to definite life intangible assets, we apply the impairment rules as required by
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” which also requires
significant judgment and assumptions related to the expected future cash flows attributable to the
intangible asset. The impact of modifying any of these assumptions can have a significant impact on the
estimate of fair value and, thus, the recoverability of the asset.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable,
accrued liabilities and debt. Market risks relating to our operations result primarily from changes in interest
rates. Our borrowings under our credit facility and our discount expense related to our accounts receivable
securitization are primarily dependent upon LIBOR rates. Assuming no change in our financial structure, if
variable interest rates were to average 100 basis points higher during fiscal 2003, pre-tax earnings would
decrease by approximately $1.9 million. This amount was determined by considering a hypothetical 100
24
basis point increase in interest rates on average variable-rate debt outstanding and the average advanced
under the receivable securitization during fiscal 2003. The estimated fair value of long-term debt
approximated its carrying value at April 26, 2003, with the exception of our convertible debt which at April
26, 2003 had a carrying value of $149.5 million and a fair market value of $142.2 million.
To manage interest rate risk on the variable rate borrowings under our credit facility, we have
historically entered into interest rate swap agreements. These interest rate swap agreements had the effect of
locking in, for a specified period, the base interest rate we paid on a notional principal amount established in
the swaps. As a result, while these hedging arrangements were structured to reduce our exposure to interest
rate increases, it also limits the benefit we might otherwise have received from any interest rate decreases.
The swaps were typically cash settled monthly, with interest expense adjusted for amounts paid or received.
The swap agreements had the effect of increasing interest expense by approximately $0.9 million in fiscal
2002 and decreasing interest expense by approximately $0.5 million in fiscal 2001. No swap agreements
were in place during fiscal 2003. We do not hold or issue derivative financial instruments for trading
purposes.
25
Item 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors and Shareholders of
School Specialty, Inc.:
We have audited the accompanying consolidated balance sheets of School Specialty, Inc., and
subsidiaries (the “Company”) as of April 26, 2003 and April 27, 2002, and the related consolidated
statements of operations, shareholders’ equity, and cash flows for each of the three years in the period
ended April 26, 2003. Our audits also included the financial statement schedule listed in the Index at Item
15(a)(2). These financial statements and financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. 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, such consolidated financial statements present fairly, in all material respects, the financial
position of School Specialty, Inc. and subsidiaries as of April 26, 2003 and April 27, 2002, and the results
of their operations and their cash flows for each of the three years in the period ended April 26, 2003, in
conformity with accounting principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the information set forth therein.
As described in Note 3 to the consolidated financial statements, on April 29, 2001, the Company adopted
Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
May 30, 2003
26
FINANCIAL STATEMENTS
SCHOOL SPECIALTY, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
April 26,
2003
April 27,
2002
ASSETS
Current assets:
Cash and cash equivalents.................................................................................................................... $ 2,389
48,533
Accounts receivable, less allowance for doubtful accounts of $3,796 and $2,719, respectively .....
109,419
Inventories ............................................................................................................................................
17,445
Deferred catalog costs ..........................................................................................................................
8,891
Prepaid expenses and other current assets...........................................................................................
1,100
Assets held for sale...............................................................................................................................
4,324
Deferred taxes.......................................................................................................................................
192,101
Total current assets .......................................................................................................................
Property, plant and equipment, net..........................................................................................................
Goodwill ...................................................................................................................................................
Intangible assets, net ................................................................................................................................
Other .........................................................................................................................................................
63,969
430,672
43,640
5,953
Total assets.................................................................................................................................... $ 736,335
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities – long-term debt .................................................................................................... $ 512
57,355
Accounts payable .................................................................................................................................
15,117
Accrued compensation.........................................................................................................................
6,735
Deferred revenue ..................................................................................................................................
457
Accrued restructuring...........................................................................................................................
13,316
Other accrued liabilities .......................................................................................................................
93,492
Total current liabilities..................................................................................................................
$ 6,123
34,356
98,148
13,590
12,770
-
7,341
172,328
67,083
390,946
35,457
7,828
$ 673,642
$ 4,471
47,097
16,712
10,681
863
13,917
93,741
Long-term debt.........................................................................................................................................
Deferred taxes...........................................................................................................................................
Total liabilities ..............................................................................................................................
292,844
28,546
414,882
285,592
23,139
402,472
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 ...................................
18
and 18,435,066 and 18,046,315 shares issued and outstanding, respectively ...........................
215,992
Capital paid-in excess of par value......................................................................................................
3,149
Accumulated other comprehensive income .......................................................................................
102,294
Retained earnings .................................................................................................................................
Total shareholders’ equity............................................................................................................
321,453
Total liabilities and shareholders’ equity..................................................................................... $ 736,335
-
-
18
208,053
395
62,704
271,170
$ 673,642
See accompanying notes to consolidated financial statements.
27
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
For the Fiscal Year Ended
April 26, April 27,
Revenues........................................................................................................................
Cost of revenues ............................................................................................................
Gross profit ........................................................................................................
Selling, general and administrative expenses ..............................................................
Restructuring costs ........................................................................................................
Operating income ..............................................................................................
Other (income) expense:
Interest expense .........................................................................................................
Interest income ..........................................................................................................
Other ..........................................................................................................................
Income before provision for income taxes ...........................................................
Provision for income taxes ...........................................................................................
Net income.....................................................................................................................
2003
2002
$870,030
512,167
357,863
271,916
-
85,947
$767,387
473,407
293,980
236,436
-
57,544
18,043
(42)
1,909
66,037
26,447
$ 39,590
17,321
(42)
3,965
36,300
14,521
$ 21,779
April 28,
2001
$692,674
440,946
251,728
208,153
4,500
39,075
16,983
(128)
1,214
21,006
9,075
$ 11,931
Weighted average shares outstanding:
Basic..................................................................................................................
Diluted ..............................................................................................................
18,324
23,378
17,917
18,633
17,495
17,782
Net income per share:
Basic...........................................................................................................................
Diluted........................................................................................................................
$
$
2.16
1.94
$
$
1.22
1.17
$
$
0.68
0.67
See accompanying notes to consolidated financial statements.
28
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In Thousands)
Capital Paid-
in Excess of
Par Value
Accumulated Other
Comprehensive
Income (Loss)
Retained
Earnings
Total Shareholders’
Equity
Total
Comprehensive
Income (Loss)
Common Stock
Shares
Dollars
Balance at April 29, 2000 .....................
17,465
$ 17
$ 196,012
$ (30)
$ 28,994
$ 224,993
Issuance of common stock in
conjunction with stock option
exercises .......................................
Tax benefit on option exercises........
Retirement of common stock ...........
Foreign currency translation
adjustment ....................................
Unrealized gain on available-for-
sale securities, net of tax ..............
Net income........................................
Total comprehensive income.......
Balance at April 28, 2001 .....................
Issuance of common stock in
conjunction with stock option
exercises .......................................
Tax benefit on option exercises........
Issuance of common stock in
conjunction with acquisition........
Foreign currency translation
adjustment ....................................
Reclassification adjustment for
losses on available-for-sale
securities included in net
income, net of tax.........................
Net income........................................
Total comprehensive income.......
Balance at April 27, 2002 .....................
Issuance of common stock in
conjunction with stock option
exercises .......................................
Tax benefit on option exercises........
Foreign currency translation
adjustment ....................................
Net income........................................
Total comprehensive income.......
Balance at April 26, 2003 .....................
133
-
(11)
-
1
-
-
-
2,113
262
(268)
-
-
-
-
30
-
-
-
-
2,114
262
(268)
30
$ 30
-
-
-
-
-
-
190
-
-
11,931
190
11,931
17,587
18
198,119
190
40,925
239,252
190
11,931
$ 12,151
339
-
120
-
-
-
-
-
5,869
1,365
2,700
-
-
-
-
395
-
-
-
-
5,869
1,365
2,700
395
$ 395
-
-
-
-
-
-
(190)
-
-
21,779
(190)
21,779
18,046
18
208,053
395
62,704
271,170
389
-
-
-
6,445
1,494
-
-
-
-
6,445
1,494
-
-
-
-
-
-
2,754
-
-
39,590
2,754
39,590
18,435
$ 18
$ 215,992
$ 3,149
$ 102,294
$ 321,453
(190)
21,779
$ 21,984
$ 2,754
39,590
$ 42,344
See accompanying notes to consolidated financial statements.
29
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For the Fiscal Year Ended
April 26,
2003
April 27,
2002
April 28,
2001
Cash flows from operating activities:
Net income.....................................................................................................................
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense....................................................................
Amortization of debt fees and other .........................................................................
Deferred taxes............................................................................................................
Restructuring costs, net of payments ........................................................................
Loss (gain) on disposal of property, equipment and other ......................................
Net (repayment) borrowings under receivable securitization facility .....................
Loss on sale of available-for-sale securities .............................................................
Loss on impairment of investment ...........................................................................
Changes in current assets and liabilities (net of assets
acquired and liabilities assumed in business combinations
accounted for under the purchase method):
Accounts receivable...............................................................................................
Inventories..............................................................................................................
Prepaid expenses and other current assets............................................................
Accounts payable...................................................................................................
Accrued liabilities..................................................................................................
Net cash provided by operating activities .....................................................
$ 39,590 $ 21,779 $ 11,931
15,521
3,027
8,222
(356)
1,122
(4,000)
-
-
11,198
2,410
8,335
(1,650)
1,397
-
329
1,657
14,962
1,078
3,831
2,448
(55)
50,000
-
-
2,101
2,260
3,477
2,845
12,472
5,195
7,404
(12,024)
(11,783) 17,111
62,026
75,613
10,968
(8,478)
(5,147)
7,471
(2,992)
86,017
Cash flows from investing activities:
Cash paid in acquisitions, net of cash acquired............................................................
Additions to property, plant and equipment.................................................................
Proceeds from business dispositions, net of cash disposed .........................................
Proceeds from disposal of property and equipment.....................................................
Proceeds from sale of available-for-sale securities......................................................
Proceeds from note receivable......................................................................................
Investment in long-term assets .....................................................................................
Net cash used in investing activities..............................................................
(55,843)
(11,305)
-
655
-
-
-
(66,493)
(162,248)
(12,110)
1,500
1,335
9,572
1,115
-
(160,836)
(113,062)
(15,200)
3,538
6,632
-
108
(924)
(118,908)
Cash flows from financing activities:
Proceeds from borrowings ............................................................................................
Repayment of debt and capital leases...........................................................................
Proceeds from convertible debt offering ......................................................................
Payment of debt fees and other.....................................................................................
Proceeds from exercise of stock options ......................................................................
Repurchase of common stock.......................................................................................
Net cash provided by financing activities .....................................................
247,200
(251,339)
-
(1,573)
6,445
-
733
259,800
(324,112)
149,500
222,622
(188,547)
-
(5,399) (1,493)
2,114
5,869
(268)
-
34,428
85,658
(3,734)
Net (decrease) increase in cash and cash equivalents......................................................
Cash and cash equivalents at beginning of period...........................................................
6,123
Cash and cash equivalents at end of period ..................................................................... $ 2,389
435
5,688
$ 6,123
1,537
4,151
$ 5,688
Non-cash investing activities:
Common stock received for net assets sold in business disposition ........................... $ -
$ -
$ 9,901
Supplemental disclosures of cash flow information:
Interest paid ................................................................................................................... $ 16,382
Income taxes paid.......................................................................................................... $ 16,438
$ 15,493
$ 2,533
$ 15,976
$ 8,992
30
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS—(Continued)
(In Thousands)
The Company issued common stock and/or cash in connection with certain business combinations
accounted for under the purchase method in the fiscal years ended April 26, 2003, April 27, 2002, and April
28, 2001. The fair values of the assets and liabilities of the acquired companies are presented as follows:
For the Fiscal Year Ended
April 26
2003
April 27, April 28,
2002
2001
Accounts receivable ......................................................................................
Inventories .....................................................................................................
Current deferred tax assets............................................................................
Prepaid expenses and other assets................................................................
Property, plant and equipment......................................................................
Goodwill........................................................................................................
Intangible assets ............................................................................................
Short-term debt and capital lease obligations ..............................................
Accounts payable ..........................................................................................
Accrued liabilities .........................................................................................
Long-term debt and capital lease obligations ..............................................
Long-term deferred tax liabilities.................................................................
Net assets acquired ....................................................................................
$ 12,324
13,558
286
3,011
1,088
36,550
11,040
(1,115)
(7,413)
(6,880)
(10,334)
(488)
$ 51,627
$ 6,835
3,819
386
1,135
7,202
135,342
33,877
(2,483)
(624)
(5,940)
(342)
(13,147)
$166,060
$ 27,725
8,680
-
5,163
5,922
75,504
2,750
(1,217)
(3,036)
(4,863)
(566)
-
$116,062
The acquisitions were funded as follows:
Cash paid, net of cash acquired (1) ..............................................................
Note and other payable to selling shareholders ...........................................
Common stock ..............................................................................................
Total ...........................................................................................................
$ 51,627
-
-
$ 51,627
$159,248
4,112
2,700
$166,060
$113,062
3,000
-
$116,062
(1) Fiscal 2003 cash paid in acquisitions, net of cash acquired, as reported within cash flows from
investing activities includes the payment of $4,112 for a fiscal 2002 note and other payable to
selling shareholders and purchase price adjustments of $104 related to immaterial acquisitions.
Fiscal 2002 cash paid in acquisitions, net of cash acquired, as reported within cash flows from
investing activities, includes the payment of $3,000 for a fiscal 2001 payable to selling shareholders.
See accompanying notes to consolidated financial statements.
31
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION
School Specialty, Inc. (the “Company”), is a Wisconsin corporation. The Company reincorporated
from Delaware to Wisconsin effective August 29, 2000. The Company is primarily a direct marketer of
supplemental educational products to schools and teachers for pre-kindergarten through twelfth grade.
The accompanying consolidated financial statements and related notes to consolidated financial
statements include the accounts of School Specialty, Inc., its subsidiaries and the companies acquired in
business combinations from their respective dates of acquisition. All significant inter-company accounts and
transactions have been eliminated.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Definition of Fiscal Year
The Company’s fiscal year ends on the last Saturday in April in each year. As used in these
consolidated financial statements and related notes to consolidated financial statements, “fiscal 2003,” “fiscal
2002,” and “fiscal 2001” refer to the Company’s fiscal years ended April 26, 2003, April 27, 2002, and April
28, 2001, respectively. All fiscal years reported represent 52 weeks.
Cash and Cash Equivalents
The Company considers cash investments with original maturities of three months or less from the
date of purchase to be cash equivalents.
Inventories
Inventories, which consist primarily of products held for sale, are stated at the lower of cost or
market, with cost generally determined on a weighted-average basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Additions and improvements are capitalized,
whereas, maintenance and repairs are expensed as incurred. Depreciation of property, plant and equipment is
calculated using the straight-line method over the estimated useful lives of the respective assets. The
estimated useful lives range from twenty-five to forty years for buildings and its components and three to
fifteen years for furniture, fixtures and equipment. Property and equipment leased under capital leases is
being amortized over the lesser of its useful life or its lease term. As required by Statement of Financial
Accounting Standards (“SFAS”) No. 144 “Accounting for the Impairment or Disposal of Long-Lived
32
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
Assets,” the Company reviews property, plant and equipment for impairment if events or circumstances
indicate an asset might be impaired.
Goodwill and Other Intangible Assets
Goodwill represents the excess of cost over the fair value of net assets acquired in business
combinations accounted for under the purchase method. The Company adopted SFAS No. 142, “Goodwill
and Other Intangible Assets” at the beginning of fiscal 2002. As a result of this adoption, goodwill is no
longer subject to amortization but rather must be tested for impairment annually or more frequently if events
or circumstances indicate goodwill might be impaired. Prior to fiscal 2002, goodwill was amortized using the
straight-line method over fifteen to forty years. Other amortizable intangible assets include customer
relationships, non-compete agreements and order backlog and are being amortized over their estimated useful
lives ranging from one to fifteen years. Certain other intangible assets are estimated to have indefinite lives
and are not subject to amortization.
Investments
The Company held a preferred stock investment in a company which had been accounted for
under the cost method. Under this method, the Company’s investment was stated at cost and was
periodically evaluated for impairment. As a result of this evaluation, the Company wrote-off the
investment due to the deteriorating financial condition of the company, reporting an impairment charge of
$1,657 during fiscal 2002, which is included in other expense in the consolidated statements of
operations.
The Company had an investment in the common stock of Riverdeep Group plc, which was
classified and accounted for as an available-for-sale security under SFAS No. 115, “Accounting for
Certain Investments in Debt and Equity Securities.” Unrealized holding gains, net of tax, related to this
investment were reported as other comprehensive income, a component of shareholders’ equity. During
fiscal 2002, the investment was sold, resulting in a realized pre-tax loss of $329.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments including cash and cash equivalents,
accounts receivable, accounts payable, and accrued liabilities approximate fair value. The estimated fair value
of long-term debt approximated its carrying value at April 26, 2003, with the exception of the Company’s
convertible debt, which at April 26, 2003 had a carrying value of $149,500 and a fair market value of
$142,212.
Income Taxes
Income taxes have been computed utilizing the asset and liability approach which requires the
recognition of deferred tax assets and liabilities for the tax consequences of temporary differences by
applying enacted statutory tax rates applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities.
33
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
Revenue Recognition
Revenue is recognized upon the shipment of products or upon the completion of services
provided to customers, which corresponds to the time when risk of ownership transfers.
Concentration of Credit Risks
The Company grants credit to customers in the ordinary course of business. The majority of the
Company’s customers are schools. Concentration of credit risk with respect to trade receivables is limited due
to the significant number of customers and their geographic dispersion. During fiscal 2003, 2002 and 2001,
no customer represented more than 10% of revenues or accounts receivable.
Vendor Rebates
Vendor rebates relating to product purchases are recognized as a reduction in cost of revenues over
the estimated period the related product is sold.
Deferred Catalog Costs
Deferred catalog costs represent costs which have been paid to produce Company catalogs, net of
vendor cooperative advertising payments, which will be used in and benefit future periods. Deferred catalog
costs are amortized in amounts proportionate to expected revenues over the life of the catalog, which is one
year or less. Amortization expense related to deferred catalog costs is included in the consolidated statement
of operations as a component of selling, general and administrative expenses. Such amortization expense for
fiscal years 2003, 2002 and 2001, was $28,686, $28,658 and $22,905, respectively.
Shipping and Handling Costs
The Company accounts for shipping and handling costs as a cost of revenues for shipments made
directly from vendors to customers. For shipments made from the Company’s warehouses, the Company
accounts for shipping and handling costs as a selling, general and administrative expense. The amount of
shipping and handling costs in selling, general and administrative expenses for fiscal years 2003, 2002
and 2001 was $35,958, $29,909 and $28,561, respectively.
Foreign Currency Translation
The financial statements of foreign subsidiaries have been translated into U.S. dollars in accordance
with SFAS No. 52, “Foreign Currency Translation.” All balance sheet accounts have been translated using
the exchange rates in effect at the balance sheet date. Amounts in the statement of operations have been
translated using the average exchange rate for the year. Resulting translation adjustments are included in
foreign currency translation adjustment, a component of other comprehensive income.
Stock-Based Compensation
The Company accounts for its employee stock option plans under the recognition and measurement
principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related Interpretations. Under APB Opinion No. 25, no stock-based compensation is
reflected in net income, as all options granted under the plans had an exercise price equal to the market value
34
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
of the underlying common stock on the date of grant and the related number of shares granted is fixed at that
point in time.
Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities,” which supercedes Emerging Issues
Task Force (“EITF”) No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146
addresses the accounting and reporting for one-time employee termination benefits, certain contract
termination costs and other costs associated with exit or disposal activities. SFAS No. 146 is effective for
exit or disposal activities initiated after December 31, 2002. The Company adopted the provisions of
SFAS No. 146 during fiscal 2003 with no material impact on the Company’s financial position, results of
operations or cash flows.
In November 2002, the FASB issued EITF No. 02-16, “Accounting by a Reseller for Cash
Consideration Received from a Vendor.” EITF No. 02-16 addresses the accounting issues pertaining to
cash consideration received by a reseller from a vendor. EITF No. 02-16 must be applied in financial
statements for periods beginning after December 15, 2002. The Company adopted the provisions of EITF
No. 02-16 during fiscal 2003 with no material impact on the Company’s financial position, results of
operations or cash flows.
In November 2002, the FASB issued Financial Interpretation No. (“FIN”) 45, “Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others.” FIN 45 clarifies and elaborates on the requirement for entities to recognize a liability and
provide disclosures relating to the fair value of the obligation undertaken in a guarantee. The initial
recognition and measurement provisions apply on a prospective basis to guarantees issued or modified
after December 31, 2002. The Company adopted the provisions of FIN 45 during fiscal 2003 with no
material impact on the Company’s financial position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation
- Transition and Disclosure.” This statement amends SFAS No. 123, “Accounting for Stock-Based
Compensation,” to provide alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting and records compensation expense for all stock-based employee
compensation. It also amends the disclosure provisions of that statement to require prominent disclosure
about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-
based employee compensation. Finally, this statement amends APB Opinion No. 28, “Interim Financial
Reporting,” to require disclosure about those effects in interim financial statements. The amendment of
the transition and annual disclosure requirements of SFAS No. 123 are effective for fiscal years ending
after December 15, 2002. The amendment of the disclosure requirements of APB Opinion No. 28 is
effective for financial reports containing condensed consolidated financial statements for interim periods
beginning after December 15, 2002. Since the Company has not elected to change to the fair value based
method of accounting, the transition provisions of SFAS No. 148 have no impact on the Company’s
financial position, results of operations or cash flows.
35
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities.” FIN 46
requires companies with variable interests in variable interest entities to evaluate whether they must
consolidate these entities subject to the provisions included in FIN 46. The consolidation requirements of
FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation
requirements apply to entities created prior to January 31, 2003 in the first fiscal year or interim period
beginning after June 15, 2003. The Company early adopted the provisions of FIN 46 during fiscal 2003
by evaluating the impact of FIN 46 as it related to the Company’s accounts receivable securitization. The
Company concluded that the adoption of FIN 46 would have no material impact on the Company’s
financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity.” This statement establishes standards for how an
issuer classifies and measures certain financial instruments with characteristics of both liabilities and
equity. This statement is effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The
Company is currently evaluating the impact of this statement.
Reclassifications
Certain amounts previously reported have been reclassified to conform with the current year
presentation.
NOTE 3—GOODWILL AND OTHER INTANGIBLE ASSETS
Effective at the beginning of fiscal 2002, the Company adopted SFAS No. 142, which resulted in
goodwill no longer being subject to amortization, but rather an annual impairment test. The following
information presents what reported net income, basic earnings per share (“basic EPS”) and diluted
earnings per share (“diluted EPS”) would have been had SFAS No. 142 been adopted at the beginning of
fiscal 2001:
Fiscal
2003
Fiscal
2002
Fiscal
2001
Reported net income ............................ $ 39,590
Add back: Goodwill amortization,
-
net of tax.....................................
Adjusted net income............................. $ 39,590
$ 21,779
$11,931
-
$ 21,779
5,046
$16,977
Basic EPS:
Reported basic EPS ......................... $ 2.16
-
Goodwill amortization.....................
Adjusted basic EPS .............................. $ 2.16
$ 1.22
-
$ 1.22
$ 0.68
0.29
$ 0.97
Diluted EPS:
Reported diluted EPS ...................... $ 1.94
-
Goodwill amortization.....................
Adjusted diluted EPS ........................... $ 1.94
$ 1.17
-
$ 1.17
$ 0.67
0.28
$ 0.95
36
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
The following table presents details of the Company’s intangible assets, excluding goodwill:
April 26, 2003
Amortizable intangible assets:
Customer relationships
Non-compete agreements
Order backlog and other
Total amortizable intangible assets
Non-amortizable intangible assets:
Perpetual license agreement
Tradenames and trademarks
Total non-amortizable intangible assets
Total intangible assets
April 27, 2002
Amortizable intangible assets:
Customer relationships
Non-compete agreements
Order backlog and other
Total amortizable intangible assets
Non-amortizable intangible assets:
Perpetual license agreement
Trademarks
Total non-amortizable intangible assets
Total intangible assets
Gross
Value
Accumulated
Amortization
Net Book
Value
$ 25,550
5,916
759
32,225
12,700
2,312
15,012
$ 47,237
$ (1,951)
(1,408)
(238)
(3,597)
−
−
−
$ (3,597)
$ 23,599
4,508
521
28,628
12,700
2,312
15,012
$ 43,640
Gross
Value
Accumulated
Amortization
Net Book
Value
$ 19,384
3,221
1,452
24,057
12,700
377
13,077
$ 37,134
$ (420)
(793)
(464)
(1,677)
−
−
−
$ (1,677)
$ 18,964
2,428
988
22,380
12,700
377
13,077
$ 35,457
Intangible amortization expense included in selling, general and administrative expenses for fiscal
years 2003, 2002 and 2001 was $2,900, $1,131 and $1,518, respectively.
Estimated intangible amortization expense for each of the five succeeding fiscal years is
estimated to be:
.........................................................................
2,520
2004
2005 ......................................................................... 2,429
2006 ......................................................................... 2,411
2007 ......................................................................... 2,308
2008 ......................................................................... 2,292
The following information presents changes to net goodwill during the period beginning April 29,
2001 through April 26, 2003:
Segment
Traditional .........
Specialty ............
Total................
Balance at
April 28, 2001
$ 153,573
96,208
$ 249,781
Fiscal 2002
Acquisitions
$ 747
134,032
$134,779
Adjustments
$ 5,596
790
$ 6,386
Balance at
April 27, 2002
$ 159,916
231,030
$ 390,946
Fiscal 2003
Acquisitions
$ 4,930
31,620
$ 36,550
Adjustments
$ (14)
3,190
$ 3,176
Balance at
April 26, 2003
$164,832
265,840
$430,672
37
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
The adjustments during fiscal 2002 in the Traditional segment represent the reclassification of the
net book value of previously recorded intangible assets to goodwill upon adoption of SFAS No. 142 of
$2,381. The balance of the adjustments within the Traditional segment represent the final allocation of
purchase price associated with the fiscal 2001 acquisition of J.L. Hammett. The Specialty segment
adjustments during fiscal 2002 represent additional cash consideration paid to the former owners of
Global Video of $210 and final purchase accounting adjustments of $170. The balance of the fiscal 2002
adjustments represent foreign currency translation. The Specialty segment adjustments during fiscal 2003
of $3,190 are primarily associated with Premier Agendas. Specifically, $447 is for exit costs, consisting
of employee termination and facility closure costs related to the closure of regional sales offices, which
was substantially completed during fiscal 2003. Additional adjustments of $2,611 are primarily from
foreign currency translation. In addition to the Premier Agenda adjustments, $132 in adjustments relate to
the Premier Science acquisition, with $100 in adjustments representing additional purchase price related
to an earn-out provision, which was paid in fiscal 2003, and $32 of final purchase accounting
adjustments.
NOTE 4—BUSINESS COMBINATIONS
Fiscal 2003
On August 14, 2002 the Company acquired ABC School Supply and related affiliates (“ABC”)
for an aggregate purchase price, net of cash acquired, of $30,224, which was funded in cash through
borrowings under the Company’s credit facility. As part of the acquisition, the Company also assumed
$11,449 of debt. ABC, a producer and marketer of pre-K through eighth grade educational products, is
headquartered in Duluth, Georgia. The acquisition has created synergies with our early childhood and
national accounts customer base. The preliminary purchase price allocation, which is subject to change,
resulted in goodwill of $30,994, which is not deductible for tax purposes. The results of this acquisition
and the related goodwill have been included in both the Traditional and Specialty segment results since
the date of acquisition.
During fiscal 2003, the Company closed ABC’s manufacturing facility in Lineville, Alabama,
closed ABC’s distribution center in Duluth, Georgia, and consolidated various administrative functions
with its Childcraft division and Traditional segment. In accordance with this plan, the Company recorded
$949 in liabilities for severance and termination costs to cover approximately 150 terminated employees
and $1,519 in liabilities for facility closure and consolidation costs. The Company continues to evaluate
additional integration opportunities, which are expected to require additional purchase accounting
adjustments and liabilities.
The Company engaged a third-party to perform a valuation of ABC’s intangible assets. Details of
ABC’s acquired intangible assets are as follows:
Acquired Intangibles
Amortizable intangibles:
Customer relationships ................
Order backlog ..............................
Total .........................................
Non-amortizable intangibles:
Tradenames .................................
Total acquired intangibles ........
Allocated
Value
Amortization
Life
$ 4,630
140
4,770
1,620
$ 6,390
15 years
6 months
14.6 years
N/A
N/A
38
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
On August 30, 2002, the Company acquired the remaining wholesale operations of J.L. Hammett
(“Hammett”) for an aggregate purchase price of $13,503, which was funded in cash through borrowings
under the Company’s credit facility. The business operated from Braintree, Massachusetts and Romulus,
New York, primarily marketed pre-K through twelfth grade educational products to charter schools and
national child care centers. The acquisition has created synergies with our national accounts business. The
preliminary purchase price allocation, which is subject to change, resulted in goodwill of $1,461 which is
expected to be fully deductible for tax purposes, and intangible assets of $2,693, consisting primarily of
non-compete agreements. The results of this acquisition and the related goodwill have been included in
the Traditional segment results since the date of acquisition.
On February 26, 2003 the Company acquired the video division of Sunburst Technology
Corporation for an aggregate purchase price of $7,750, which was funded in cash through borrowings
under the Company’s credit facility. The business operated from Pleasantville, New York and primarily
marketed and developed proprietary videos covering character education and health and guidance
curriculums for middle and high schools. The acquisition has created synergies with our Teacher’s Video
division. The preliminary purchase price allocation, which is subject to change, resulted in goodwill of
$4,095 which is expected to be fully deductible for tax purposes, and intangible assets of $1,898,
consisting primarily of customer relationships. The results of this acquisition and the related goodwill
have been included in the Specialty segment results since the date of acquisition.
Fiscal 2002
On December 21, 2001, the Company acquired all of the issued and outstanding shares of capital
stock of Premier Agendas, Inc. and Premier School Agendas Ltd. (together “Premier Agendas”). Premier
Agendas, headquartered in Bellingham, Washington, is the largest provider of academic agendas in the
United States and Canada. The aggregate purchase price, net of cash acquired, of $155,931, included a
$4,012 six-month note payable to the former owners of Premier Agendas. The note was paid in full in
fiscal 2003. The balance of the purchase price was funded primarily through borrowings under the
Company’s existing credit facility. The Company has integrated its existing student agenda brands Time
Tracker and Hammond & Stephens into the Premier Agendas business. The results of this acquisition
have been included in the consolidated financial statements and are part of the Specialty segment results
since the date of acquisition.
The total purchase price was allocated to the tangible and intangible assets and liabilities acquired
based upon their respective fair values as of the closing date of the acquisition. The total purchase price
resulted in goodwill of $127,869, which is not deductible for income tax purposes. An allocation of the
purchase price has been made to major categories of assets and liabilities as follows:
Current assets..................................................... $ 11,166
6,684
Property, plant and equipment and other ..........
Identifiable intangible assets..............................
32,077
Goodwill ............................................................ 127,869
(21,865)
Liabilities assumed ............................................
$ 155,931
39
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
The Company engaged a third-party to perform a valuation of Premier Agendas intangible assets.
Details of Premier Agendas acquired identifiable intangible assets are as follows:
Allocated
Value
Acquired Intangibles
Amortizable intangibles:
Customer relationships ............. $ 18,900
400
Order backlog ...........................
77
Non-compete agreements .........
19,377
Total ......................................
Non amortizable intangibles:
Perpetual license agreement .....
12,700
Total acquired intangibles ..... $ 32,077
Amortization
Life
15 years
1 year
2 years
14.7 years
N/A
N/A
Also during fiscal 2002, the Company acquired three other businesses, accounted for under the
purchase method of accounting, for a total purchase price, net of cash acquired, of $9,566 including $300
paid for non-compete agreements. The following transactions were paid for with cash and 120 shares of
School Specialty, Inc. common stock:
• April 2002 – Certain assets of the K-12 wholesale business of Bradburn School Supply, Inc., a
marketer of supplemental educational supplies which will be operated from the Greenville,
Wisconsin facility. Results are included in the Traditional segment since the date of
acquisition.
• October 2001 – Premier Science, a start-up science curriculum company which will be
operated from the Mansfield, Ohio facility. Results are included in the Specialty segment since
the date of acquisition.
• May 2001 – Envision, Inc., based in Grand Junction, Colorado, a designer, producer and
marketer of student agenda books. Results are included in the Specialty segment since the date
of acquisition. The purchase price included 120 shares of School Specialty, Inc. common
stock.
The acquisitions resulted in goodwill of approximately $6,910, which is fully deductible for tax
purposes. The resulting goodwill from the Bradburn acquisition of $747 is included in the Traditional
segment, and the goodwill from the Premier Science and Envision acquisitions of $6,163 is included in
the Specialty segment.
Fiscal 2001
During fiscal 2001, the Company made two acquisitions accounted for under the purchase
method for an aggregate purchase price, net of cash acquired, of $116,625, including $2,750 paid for non-
compete agreements. The above purchase price includes subsequent cash payments related to final
purchase price adjustments of $3,210 and $353, which were made during fiscal 2002. The businesses
acquired were:
• November 2000 – Certain assets of the K-12 wholesale business of the J.L. Hammett
Company, a marketer of supplemental educational supplies, with operations in Lyons, New
40
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
•
York and Southaven, Mississippi. Results are included in the Traditional segment since the
date of acquisition.
June 2000 – Global Video, LLC, a designer, producer and marketer of educational videos,
based in Tempe, Arizona. Results are included in the Specialty segment since the date of
acquisition.
Goodwill resulting from the above two transactions, which is fully deductible for tax purposes,
was approximately $79,098, of which, $49,923 has been allocated to the Traditional segment and $29,175
to the Specialty segment.
The following information presents the unaudited pro forma results of operations of the Company
for fiscal 2003 and 2002, and includes the Company’s consolidated results of operations and the results of
the companies acquired during fiscal 2003 and fiscal 2002 as if all such purchase acquisitions had been
made at the beginning of fiscal 2002. The results presented below include certain pro forma adjustments
to reflect the amortization of certain amortizable intangible assets, adjustments to interest expense, and
the inclusion of an income tax provision on all earnings:
Revenues ..........................
Net income .......................
Net income per share:
Fiscal 2003
$901,652
39,576
Fiscal 2002
$930,796
31,669
Basic .............................
Diluted ..........................
$ 2.16
$ 1.94
$ 1.77
$ 1.63
The pro forma results of operations have been prepared using primarily unaudited historical
results of acquired companies. These unaudited pro forma results of operations are prepared for
comparative purposes only and do not necessarily reflect the results that would have occurred had the
acquisitions occurred at the beginning of fiscal 2002 or the results that may occur in the future.
NOTE 5—RESTRUCTURING COSTS
During fiscal 2001, the Company recorded a restructuring charge of $4,500 to close redundant
facilities and for related severance costs. The Company terminated 76 employees under this plan during
fiscal 2001. Remaining payments primarily relate to commitments on a leased facility which expire in
April 2005.
41
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
Selected information related to the above restructurings is as follows:
Facility
Closure and
Consolidation
Severance
and
Terminations
Other
Costs
Total
Balance at April 29, 2000 ..........................
Additions.................................................
Utilizations..............................................
Balance at April 28, 2001 ..........................
Utilizations..............................................
Balance at April 27, 2002 ..........................
Utilizations..............................................
Balance at April 26, 2003 ..........................
$
17
2,391
(714)
1,694
(991)
703
(279)
$ 424
NOTE 6—PROPERTY, PLANT AND EQUIPMENT
$
$
40
1,544
(784)
800
(640)
160
(127)
33
$
$
8
565
(554)
19
(19)
-
-
-
$
65
4,500
(2,052)
2,513
(1,650)
863
(406)
457
$
Property, plant and equipment consist of the following:
April 26,
2003
502
Land ...................................................................................................... $
2,375
Projects in progress ..............................................................................
27,291
Buildings and leasehold improvements ..............................................
45,159
Furniture, fixtures, and other ...............................................................
24,144
Machinery and warehouse equipment ................................................
99,471
Total property, plant and equipment ............................................
Less: Accumulated depreciation .........................................................
(35,502)
Net property, plant and equipment............................................... $ 63,969
April 27,
2002
538
$
6,108
29,263
33,514
21,764
91,187
(24,104)
$ 67,083
Depreciation expense for fiscal years 2003, 2002 and 2001 was $12,621, $10,067, and $7,523,
respectively.
NOTE 7—DEBT
Long-Term Debt
Long-term debt consists of the following:
April 26,
2003
$ 125,700
149,500
17,729
-
427
293,356
(512)
Total long-term debt .................................................................... $ 292,844
Credit facility..........................................................................................
Convertible debt .....................................................................................
Sale-leaseback obligations.....................................................................
Notes payable .........................................................................................
Capital lease obligations ........................................................................
Total debt .....................................................................................
Less: Current maturities.........................................................................
April 27,
2002
$ 118,000
149,500
18,015
4,136
412
290,063
(4,471)
$ 285,592
42
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
On September 30, 1998, the Company entered into a five year secured $350,000 credit facility (the
“credit facility”) with a syndicate of financial institutions, led by Bank of America, N.A. as Agent, consisting
of a $250,000 revolving loan and a $100,000 term loan. Interest accrued at a rate of, at the Company’s option,
either LIBOR plus an applicable margin of up to 2.25% or the lender’s base rate plus an applicable margin of
up to 1.00%. The Company also pays a fee of up to 0.5% on the unborrowed amount under the revolving
loan. On April 11, 2003, the Company amended the credit facility. The amended credit facility matures on
April 11, 2006 and provides for a $250,000 revolving loan. Interest accrues at a rate of, at the Company’s
option, either LIBOR plus an applicable margin of up to 2.75%, or the lender’s base rate plus an applicable
margin of up to 1.50%. The Company also pays a commitment fee of up to 0.5% on unborrowed funds.
The credit facility is secured by substantially all of the assets of the Company and contains certain
financial covenants. The Company was in compliance with these covenants at April 26, 2003. At April 26,
2003, the balance outstanding under the credit facility was $125,700. The effective interest rate under the
credit facility for fiscal 2003 was 5.22%, which includes amortization of the loan origination fee and
commitment fee on unborrowed funds.
On July 30, 2001, the Company sold an aggregate principal amount of $130,000 of 6.0% convertible
subordinated notes of the Company that are due in full on August 1, 2008. The notes are convertible at any
time prior to maturity into shares of School Specialty, Inc. common stock at a conversion price of $32.29 per
share and accrue interest payable semi-annually. There are no scheduled principal payments due prior to
maturity. Net proceeds from the sale of these notes were $125,675. On August 2, 2001, the initial purchasers
of the notes exercised their option to purchase additional notes in full and purchased an additional $19,500
aggregate principal amount of the notes, with net proceeds of $18,915. The Company used the total net
proceeds from the offering of $144,590 to repay a portion of the debt outstanding under the credit facility.
In November 2000, the Company entered into two sale-leaseback transactions which are accounted
for as financings due to a technical default provision within the leases which could allow, under remote
circumstances, for continuing ownership involvement by the Company in the two properties. Under the
agreements, the Company recorded debt of $18,525, which has an effective interest rate of 8.97%, excluding
amortization of loan fees. The leases expire in November 2020.
The Company entered into an interest rate swap agreement on December 13, 2000 (effective date of
January 2, 2001), with The Bank of New York covering $50,000 of the outstanding borrowings under the
credit facility. On April 29, 2001, the Company began accounting for the swap in accordance with SFAS No.
133 “Accounting for Derivative Instruments and Hedging Activities,” which requires derivative instruments,
such as this interest rate swap, to be recorded on the balance sheet as either an asset or a liability measured at
fair value. The swap was designated as a cash flow hedge and was considered highly effective throughout its
term. As a result of adopting SFAS No. 133, the Company recognized the fair value of the swap liability of
$660 ($396 net of tax) with the net of tax offset to accumulated other comprehensive income (loss) on the
date of adoption. Subsequent net of tax changes in the swap’s fair value of $163 were recorded as a
component of accumulated other comprehensive loss during fiscal 2002, all of which was reclassified to the
fiscal 2002’s consolidated statement of operations when the hedged item affected earnings. The swap
agreement fixed the 30-day LIBOR interest rate at 6.07% per annum on the $50,000 notional amount and had
a one-year term which expired on January 2, 2002.
On October 28, 1998, the Company entered into an interest rate swap agreement with The Bank of
New York covering $50,000 of the outstanding credit facility. The agreement fixed the 30-day LIBOR
interest rate at 4.37% per annum on a $50,000 notional amount and had a three year term that was cancelable
43
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
by The Bank of New York on the second anniversary. On October 30, 2000, The Bank of New York
cancelled the swap agreement.
As a result of the above swap agreements, interest expense was increased (decreased) in fiscal years
2002 and 2001 by $931 and $(484), respectively.
The carrying value of variable rate long-term debt approximates fair value. The convertible
subordinated notes had a fair value at April 26, 2003 of $142,212, determined using the closing bid price as
reported on The NASD’s Portal Market on April 25, 2003.
Maturities of Long-Term Debt
Maturities of long-term debt, including capital lease obligations, for subsequent fiscal years, are as
follows:
2004 ..........................................................................
2005 ..........................................................................
2006 ..........................................................................
2007 ..........................................................................
2008 ..........................................................................
Thereafter..................................................................
Total maturities of long-term debt....................
$
512
504
126,178
509
556
165,097
$ 293,356
NOTE 8—SECURITIZATION OF ACCOUNTS RECEIVABLE
The Company and certain of its U.S. subsidiaries entered into an agreement (the “Receivables
Facility”) in November 2000 with a financial institution whereby it sells on a continuous basis an undivided
interest in all eligible trade accounts receivable. Pursuant to the Receivables Facility, the Company formed
New School, Inc. (“NSI”), a wholly-owned, special purpose, bankruptcy-remote subsidiary. As such, the
assets of NSI will be available first and foremost to satisfy the claims of the creditors of NSI. NSI was formed
for the sole purpose of buying and selling receivables generated by the Company and certain subsidiaries of
the Company. Under the Receivables Facility, the Company and certain subsidiaries transfer without recourse
all their accounts receivables to NSI. NSI, in turn, has sold and, subject to certain conditions, may from time
to time sell an undivided interest in these receivables and is permitted to receive advances of up to $100,000
for the sale of such undivided interest. The Company receives a fee from the financial institution for billing
and collection functions, which remain the responsibility of the Company, that approximates fair value. The
agreement, as amended, expires on November 18, 2003. The Company’s retained interests in the receivables
sold are recorded at fair value, which approximates cost, due to the short-term nature of the receivables sold.
This two-step transaction is accounted for as a sale of receivables under the provision of SFAS No.
140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.” There
was $46,000 advanced under the Receivables Facility at April 26, 2003 and $50,000 advanced at April 27,
2002, accordingly, these amounts of accounts receivable have been removed from the consolidated balance
sheets. Costs associated with the sale of receivables, primarily related to the discount and loss on sale, were
$1,839, $1,985 and $1,389 and are included in other expenses in the consolidated statement of operations for
fiscal years 2003, 2002 and 2001, respectively.
44
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
NOTE 9—INCOME TAXES
The provision for income taxes consists of:
Current income tax expense:
Federal................................................................................................... $ 16,453
State....................................................................................................... 1,772
18,225
8,222
Total provision for income taxes .................................................. $ 26,447
Total current income tax expense .................................................
Deferred income tax expense .................................................................
$ 4,485
1,701
6,186
8,335
$ 14,521
$ 3,834
1,410
5,244
3,831
$ 9,075
Fiscal
2003
Fiscal
2002
Fiscal
2001
Deferred taxes are comprised of the following:
April 26,
2003
April 27,
2002
Current deferred tax assets (liabilities):
Inventory ............................................................................................... $ 1,796
1,860
Allowance for doubtful accounts.........................................................
510
Net operating loss carryforward...........................................................
Accrued liabilities.................................................................................
-
158
Accrued restructuring ...........................................................................
Charitable contribution carryforward .................................................. -
Total current deferred tax assets ................................................... 4,324
Long-term deferred tax assets (liabilities):
2,179
Net operating loss carryforward...........................................................
Property and equipment .......................................................................
(2,370)
Intangible assets.................................................................................... (28,355)
Total long-term deferred tax liabilities ......................................... (28,546)
Net deferred tax liabilities ............................................................. $ (24,222)
$ 2,855
1,374
1,375
(613)
334
2,016
7,341
1,494
(3,267)
(21,366)
(23,139)
$ (15,798)
At April 26, 2003, the Company had federal net operating loss carryforwards, which are subject to
annual federal limitations on utilization pursuant to IRS Code Section 382, of $5,680, of which $1,457
expires during fiscal years 2011-2013 and $4,223 expires during fiscal years 2020-2021. The Company has
state net operating losses of approximately $9,942, which expire during fiscal years 2007-2022.
The Company’s effective income tax rate varied from the U.S. federal statutory tax rate as follows:
U.S. federal statutory rate ..............................................................
State income taxes, net of federal income tax benefit....................
Non-deductible goodwill and intangible amortization...................
Impact of divestitures.....................................................................
Other ..............................................................................................
Effective income tax rate ...............................................................
Fiscal
2003
35.0%
3.7
-
-
1.3
40.0%
Fiscal
2002
35.0%
4.5
-
-
0.5
40.0%
Fiscal
2001
35.0%
4.5
6.2
(2.5)
-
43.2%
45
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
NOTE 10—OPERATING LEASE COMMITMENTS
The Company leases various types of warehouse and office facilities and equipment, under
noncancelable lease agreements which expire at various dates. Future minimum lease payments under
noncancelable operating leases for our fiscal years are as follows:
2004................................................................................................................... $
2005...................................................................................................................
2006...................................................................................................................
2007...................................................................................................................
2008...................................................................................................................
Thereafter..........................................................................................................
Total minimum lease payments.................................................................. $
7,976
6,658
5,081
4,197
3,074
17,203
44,189
Rent expense for fiscal 2003, 2002 and 2001, was $9,228, $8,398 and $6,527, respectively.
NOTE 11—EMPLOYEE BENEFIT PLANS
On June 9, 1998, the Company implemented the School Specialty, Inc. 401(k) Plan (the “401(k)
Plan”) which allows employee contributions in accordance with Section 401(k) of the Internal Revenue
Code. The Company matches a portion of employee contributions and virtually all full-time employees
are eligible to participate in the 401(k) Plan after 90 days of service. In fiscal 2003, 2002, and 2001, the
Company’s matching contribution expense was $1,743, $670 and $657, respectively.
NOTE 12—SHAREHOLDERS’ EQUITY
EPS
Basic EPS excludes dilution and is computed by dividing income available to common shareholders
by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities to issue common stock were exercised. The following
information presents the Company’s computations of basic and diluted EPS for the periods presented in the
consolidated statements of operations:
46
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
Income
(Numerator)
Shares
(Denominator)
Per Share
Amount
Fiscal 2003:
Basic EPS...........................................................
Effect of dilutive employee stock options.........
Effect of dilutive convertible debt.....................
Diluted EPS........................................................
$ 39,590
-
5,797
$ 45,387
18,324
425
4,629
23,378
Fiscal 2002:
Basic EPS...........................................................
Effect of dilutive employee stock options.........
Diluted EPS........................................................
$ 21,779
-
$ 21,779
17,917
716
18,633
Fiscal 2001:
Basic EPS...........................................................
Effect of dilutive employee stock options ........
Diluted EPS........................................................
$ 11,931
-
$ 11,931
17,495
287
17,782
$ 2.16
$ 1.94
$ 1.22
$ 1.17
$ 0.68
$ 0.67
The Company had additional employee stock options outstanding of 529, 128, and 259 during fiscal
2003, 2002 and 2001, respectively, that were not included in the computation of diluted EPS because they
were anti-dilutive. Additionally, the impact of the conversion of the convertible debt to common stock has
been excluded from the computation of fiscal 2002 diluted EPS because it was anti-dilutive.
Employee Stock Plans
The Company has two stock-based employee compensation plans. On June 10, 1998, the
Company’s Board of Directors approved the School Specialty, Inc. 1998 Stock Incentive Plan (the “1998
Plan”) and on August 27, 2002 the Company’s Board of Directors approved the School Specialty, Inc.
2002 Stock Incentive Plan (the “2002 Plan”). Both plans have been approved by the Company’s
shareholders. The purpose of the 1998 Plan and the 2002 Plan is to provide directors, officers, key
employees and consultants with additional incentives by increasing their ownership interests in the
Company. Under the 1998 Plan, the maximum number of options available for grant is equal to 20% of
the Company’s outstanding common stock. Under the 2002 Plan, the maximum number of options
available for grant is 1,500 shares.
The Company accounts for options issued in accordance with APB Opinion No. 25. Accordingly,
because the exercise price of the options are equal to the market value of the underlying stock on the date
of grant, no compensation expense has been recognized for the options granted to employees and
directors. Had compensation expense related to the Company’s stock option grants to employees and
directors been recognized based upon the fair value of the stock options on the grant date under the
methodology prescribed by SFAS No. 123 “Accounting for Stock Based Compensation,” the Company’s
net income and net income per share would have been impacted as indicated in the following table:
47
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
Fiscal
2003
Fiscal
2002
Fiscal
2001
Net income, as reported...................................................... $ 39,590
Deduct: Total stock-based employee compensation
expense determined under fair value based method
$ 21,779
$ 11,931
for all awards, net of related tax effects ........................
(2,632)
Pro forma net income ......................................................... $ 36,958
(2,856)
$ 18,923
(2,734)
$ 9,197
EPS:
As reported:
Basic........................................................................... $
Diluted........................................................................ $
2.16
1.94
Pro forma:
Basic........................................................................... $ 2.02
Diluted........................................................................ $ 1.83
$
$
$
$
1.22
1.17
1.06
1.02
$
$
$
$
0.68
0.67
0.53
0.52
The fair value of options granted (which is amortized to expense over the option vesting period in
determining the pro forma impact) is estimated on the date of grant using the Black-Scholes single
option pricing model with the following weighted average assumptions:
Fiscal
2003
Fiscal
2002
Fiscal
2001
Expected life of option ...................................................
Risk free interest rate.......................................................
Expected volatility of stock.............................................
7 years
3.86%
55.04%
7 years
4.85%
58.38%
7 years
5.30%
59.58%
The weighted-average fair value of options granted during fiscal years 2003, 2002 and 2001 was
$14.20, $15.53 and $11.98, respectively.
48
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
A summary of option transactions follows:
Options
3,064
Balance at April 29, 2000..........................................
243
Granted...........................................................
(133)
Exercised........................................................
(108)
Canceled.........................................................
3,066
Balance at April 28, 2001..........................................
338
Granted...........................................................
(339)
Exercised........................................................
(61)
Canceled.........................................................
3,004
Balance at April 27, 2002..........................................
387
Granted...........................................................
Exercised........................................................
(389)
Canceled......................................................... (55)
2,947
Balance at April 26, 2003..........................................
Options Outstanding
Weighted-
Average
Exercise
Price
$ 16.53
18.58
15.83
16.99
$ 16.70
24.67
17.47
17.97
$ 17.48
23.88
16.64
20.56
$ 18.38
Options Exercisable
Weighted-
Average
Exercise
Price
$ 16.20
Options
1,973
2,173
$ 16.47
2,192
$ 16.44
2,108
$ 16.76
The following table summarizes information about stock options outstanding at April 26, 2003:
Range of Exercise Prices
$12.00 - $15.00
$15.50 - $15.50
$15.63 - $20.33
$23.95 - $59.84
Options Outstanding
Weighted-
Average
Exercise
Price
Weighted-
Average
Life
Options
Options Exercisable
Weighted-
Average
Exercise
Price
Options
223
1,390
835
499
2,947
6.17
5.12
7.56
8.11
6.40
$14.30
15.50
19.93
25.62
$18.38
169
1,390
429
120
2,108
$14.33
15.50
18.90
27.08
$16.76
Options granted are generally exercisable beginning one year from the date of grant in cumulative
yearly amounts of twenty-five percent of the shares granted and generally expire ten years from the date
of grant. Options granted to directors and non-employee officers of the Company vest over a three year
period, twenty percent after the first year, fifty percent (cumulative) after the second year and one-
hundred percent (cumulative) after the third year.
On June 20, 2000, the Board of Directors approved the JuneBox.com, Inc. 2000 Equity Incentive
Plan. JuneBox.com was a wholly owned subsidiary of School Specialty, Inc., and its stock was not
publicly traded. No options were granted under this Plan during fiscal 2002 and 1,900 options were
granted at fair market value at the date of grant during fiscal 2001. No options were exercised under this
Plan. During fiscal 2002, JuneBox.com, Inc. was merged into School Specialty, Inc. The options
outstanding at that time were replaced with School Specialty, Inc. options under the School Specialty, Inc.
49
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
1998 Stock Incentive Plan. The option holders were in the same economic position immediately before
and after the replacement of JuneBox.com, Inc. options with School Specialty, Inc. options. The vesting
provisions and option period of the original grants were not changed.
NOTE 13—SEGMENT INFORMATION
The Company’s business activities are organized around two principal business segments,
Traditional and Specialty, and operate principally in the United States, with limited Specialty segment
operations in Canada. Both internal and external reporting conforms to this organizational structure, with
no significant differences in accounting policies applied. The Company evaluates the performance of its
segments and allocates resources to them based on revenue growth and profitability. While the segments
serve a similar customer base, notable differences exist in products, gross margin and revenue growth
rates. Products supplied within the Traditional segment include consumables (consisting of classroom
supplies, instructional materials, educational games, art supplies and school forms), school furniture and
indoor and outdoor equipment. Products supplied within the Specialty segment primarily target specific
educational disciplines, such as art, industrial arts, physical education, sciences, and early childhood. This
segment also supplies student academic planners, videos and DVDs. The accounting policies of the
segments are the same as those described in Summary of Significant Accounting Policies. All
intercompany transactions have been eliminated.
The following table presents segment information:
Fiscal
2003
Fiscal
2002
Fiscal
2001
Revenues:
Traditional...........................................................................
Specialty..............................................................................
Total .............................................................................
$ 472,459
397,571
$ 870,030
$ 480,922
286,465
$ 767,387
$ 415,001
277,673
$ 692,674
Operating income and income before taxes:
Traditional...........................................................................
Specialty..............................................................................
Total ........................................................................
Corporate expenses.............................................................
Restructuring costs ............................................................
Operating income ........................................................
Interest expense and other .................................................
Income before taxes.....................................................
$ 48,193
57,852
$ 106,045
20,098
-
85,947
19,910
$ 66,037
$ 54,075
22,576
76,651
19,107
-
57,544
21,244
$ 36,300
$ 29,373
28,582
57,955
14,380
4,500
39,075
18,069
$ 21,006
Identifiable assets (at fiscal year end):
Traditional...........................................................................
Specialty..............................................................................
Total ........................................................................
Corporate assets (1) ............................................................
Total .............................................................................
$ 256,335
396,412
652,747
83,588
$ 736,335
$ 249,926
344,045
593,971
79,671
$ 673,642
$ 258,212
171,144
429,356
94,003
$ 523,359
50
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
Depreciation and goodwill and intangible amortization:
Traditional...........................................................................
Specialty..............................................................................
Total .............................................................................
Corporate.............................................................................
Total .............................................................................
Fiscal
2003
Fiscal
2002
Fiscal
2001
$
3,883
7,296
11,179
4,342
$ 15,521
$
4,003
3,882
7,885
3,313
$ 11,198
$
6,689
6,588
13,277
1,685
$ 14,962
Expenditures for property, plant and equipment:
Traditional...........................................................................
Specialty..............................................................................
Total .......................................................................
Corporate.............................................................................
Total .............................................................................
$
1,285
3,572
4,857
6,448
$ 11,305
$
1,847
2,199
4,046
8,064
$ 12,110
$
4,479
4,646
9,125
6,075
$ 15,200
(1) Includes assets of NSI.
NOTE 14—ASSETS HELD FOR SALE
During fiscal 2003, the Company decided to close and market its Lufkin, Texas warehouse as part
of a plan to reduce the number of warehouses and to align capacity and efficiency to better serve
customers and reduce overall warehousing costs. The Company recorded an impairment loss, as a
component of selling, general and administrative expenses, of $1,046, related to the closure. The facility
is classified as held for sale on the April 26, 2003 consolidated balance sheet. Subsequent to April 26,
2003, the Company entered into an agreement to sell the assets held for sale related to the Lufkin, Texas
warehouse for a gross sales price of $1,200. The transaction is expected to close by the end of the
Company’s fiscal 2004 first quarter.
NOTE 15—SUBSEQUENT EVENT
On May 30, 2003, the Company acquired the stock of Select Agendas, a Canadian-based
company, for an aggregate purchase price, net of cash acquired, of $9,557. The purchase price is subject
to an earn-out provision and is subject to change. This transaction was funded in cash through borrowings
under the Company’s credit facility.
51
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
NOTE 16—QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data for fiscal 2003 and fiscal 2002:
First
Second
Third
Fourth
Total
Fiscal 2003 (1)
Revenues .................................................
Gross profit .............................................
Operating income (loss) ..........................
Net income (loss) ....................................
$ 298,027
124,491
44,938
23,956
$ 317,399
129,909
53,707
29,030
$ 110,554
42,715
(9,517)
(8,541)
$ 144,050
60,748
(3,181)
(4,855)
$ 870,030
357,863
85,947
39,590
Per share amounts:
Basic.....................................................
Diluted .................................................
$ 1.32
$ 1.08
$ 1.59
$ 1.30
$ (0.46)
$ (0.46)
$ (0.26)
$ (0.26)
$ 2.16
$ 1.94
First
Second
Third
Fourth
Total
Fiscal 2002 (1)
Revenues .................................................
Gross profit .............................................
Operating income (loss) ..........................
Net income (loss) ....................................
$ 260,162
100,294
32,470
16,446
$ 269,656
99,834
36,608
19,162
$ 104,005
39,746
(8,203)
(8,625)
$ 133,564
54,106
(3,331)
(5,204)
$ 767,387
293,980
57,544
21,779
Per share amounts:
Basic.....................................................
Diluted .................................................
________________
$ 0.93
$ 0.89
$ 1.07
$ 0.88
$ (0.48)
$ (0.48)
$ (0.29)
$ (0.29)
$ 1.22
$ 1.17
(1) During the third quarter of fiscal 2002, the Company acquired Premier Agendas. The quarterly
financial data for fiscal 2003 includes the results of Premier Agendas for a full fiscal year.
The summation of quarterly net income per share may not equate to the calculation for the full fiscal
year as quarterly calculations are performed on a discrete basis.
Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure
Information previously reported.
52
Item 10. Directors and Executive Officers of the Registrant
PART III
(a)
(b)
(c)
Executive Officers. Reference is made to “Executive Officers of the Registrant” in Part I hereof.
Directors. The information required by this Item is set forth in our Proxy Statement for the Annual
Meeting of Shareholders to be held on August 26, 2003, under the caption “Proposal One: Election
of Directors,” which information is incorporated by reference herein.
Section 16 Compliance. The information required by this Item is set forth in our Proxy Statement
for the Annual Meeting of Shareholders to be held on August 26, 2003, under the caption “Section
16(a) Beneficial Ownership Reporting Compliance,” which information is incorporated by
reference herein.
Item 11. Executive Compensation
The information required by this Item is set forth in our Proxy Statement for the Annual Meeting of
Shareholders to be held on August 26, 2003, under the captions “Executive Compensation,” “Employment
Contracts and Related Matters,” “Non-Employee Director Compensation,” and “Compensation Committee
Interlocks and Insider Participation,” which information is incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters
The information required by this Item is set forth in our Proxy Statement for the Annual Meeting of
Shareholders to be held on August 26, 2003, under the captions “Security Ownership of Management and
Certain Beneficial Owners” and “Equity Compensation Plan Information,” which information is
incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions
Not applicable.
Item 14. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on an evaluation as of a date within 90 days prior to the filing of this annual report, the
Company’s principal executive officer and principal financial officer have concluded that the Company’s
disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934 (the “Exchange Act”)) are adequate and effective for the purposes set forth in the definition of the
Exchange Act rules.
Changes in Internal Controls
There have not been any significant changes in internal controls, or in other factors that could
significantly affect internal controls, and there were no corrective actions with regard to significant
deficiencies or material weaknesses subsequent to the date the above officers completed their evaluation.
53
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements (See Part II, Item 8).
Consolidated Financial Statements
Independent Auditors’ Report
Consolidated Balance Sheets as of April 26, 2003, and April 27, 2002
Consolidated Statements of Operations for the fiscal years ended April 26, 2003, April 27,
2002 and April 28, 2001
Consolidated Statements of Shareholders’ Equity for the fiscal years ended April 26, 2003,
April 27, 2002 and April 28, 2001
Consolidated Statements of Cash Flows for the fiscal years ended April 26, 2003, April 27,
2002 and April 28, 2001
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedule (See Exhibit 99.3).
Schedule for the fiscal years ended April 26, 2003, April 27, 2002 and April 28, 2001: Schedule II
– Valuation and Qualifying Accounts.
(a)(3) Exhibits.
See (c) below.
(b)
Reports on Form 8-K.
The Company filed or furnished three reports on Form 8-K since the beginning of the fourth quarter
of fiscal 2003 as follows:
(1)
(2)
(3)
Form 8-K dated February 11, 2003, furnished on February 12, 2003, under Items 7 and 9.
The Company issued a press release announcing its fiscal 2003 third quarter financial
results.
Form 8-K dated May 2, 2003, filed on May 5, 2003, under Items 5 and 7. The Company
reported that it had signed a credit agreement with its lending banks.
Form 8-K dated June 3, 2003, furnished on June 3, 2003, under Items 7 and 9. The
Company issued a press release announcing its fiscal 2003 fourth quarter financial results.
(c)
Exhibits.
See the Exhibit Index, which is incorporated by reference herein.
(d)
Financial Statements Excluded from Annual Report to Shareholders.
Not applicable.
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on
July 9, 2003.
SCHOOL SPECIALTY, INC.
By: /s/ David J. Vander Zanden
David J. Vander Zanden
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Mary M. Kabacinski
Mary M. Kabacinski
Executive Vice President and Chief Financial
Officer
(Principal Financial and Accounting Officer)
Each person whose signature appears below hereby constitutes and appoints David J. Vander Zanden
and Mary M. Kabacinski, and each of them, as his or her true and lawful attorney-in-fact and agent, with full
power of substitution, to sign on his or her behalf individually and in the capacity stated below and to perform
any acts necessary to be done in order to file any and all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto and all other documents in connection therewith and each of the
undersigned does hereby ratify and confirm all that said attorney-in-fact and agent, or his substitutes, shall do
or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by
the following persons in the capacities and on the dates indicated below.
Name
Title
/s/ David J. Vander Zanden
David J. Vander Zanden
President, Chief Executive Officer
and Director (Principal Executive Officer)
Date
July 9, 2003
/s/ Mary M. Kabacinski
Mary M. Kabacinski
Executive Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)
July 9, 2003
/s/ Leo C. McKenna
Leo C. McKenna
/s/ Jonathan J. Ledecky
Jonathan J. Ledecky
/s/ Rochelle Lamm
Rochelle Lamm
/s/ Jerome M. Pool
Jerome M. Pool
Chairman of the Board
Director
Director
Director
July 9, 2003
July 9, 2003
July 9, 2003
July 9, 2003
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