UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________
FORM 10-K
______________________________________________
[(cid:1)]
[ ]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934: For the fiscal year ended April 26, 2008
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 if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
Yes No (cid:1)
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d)
of the Act.
Yes No (cid:1)
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:1) No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-
accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:1) Accelerated filer Non-accelerated filer __ Smaller reporting company __
(Do not check if smaller reporting company)
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. [(cid:1)]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
Yes No (cid:1)
The aggregate market value of the voting stock held by nonaffiliates of the Registrant, as of October 27, 2007,
was approximately $677,025,000. As of June 12, 2008, there were 19,222,359 shares of the Registrant’s common stock
outstanding.
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on August 19, 2008 are
incorporated by reference into Part III.
DOCUMENTS INCORPORATED BY REFERENCE
Item 1. Business
PART I
Unless the context requires otherwise, all references to “School Specialty,” the “Company,” “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, 2008, is referred to as “fiscal 2008”). Note that fiscal 2005 had 53 weeks,
while all other fiscal years reported and referenced represent 52 weeks.
Company Overview
School Specialty is a leading education company providing products, programs and services that enhance student
achievement and development. We are the largest provider of supplemental educational products and equipment to
the pre-kindergarten through twelfth grade (“preK-12”) education market in the United States and Canada. We
believe we are more than seven times larger than our nearest competitor in the supplemental educational products
and equipment market. With the industry’s broadest offering of more than 75,000 products, we are able to be the
single source supplier for substantially all of our customers’ supplemental educational product needs. Nearly 50% of
our revenues are derived from our proprietary products. We reach our customers through the industry’s largest sales
force of approximately 600 professionals, catalog mailings and our proprietary e-commerce websites. In fiscal 2008,
we believe we sold products to approximately 80% of the estimated 120,000 schools in the United States and we
believe we reached substantially all of the 3.7 million teachers in those schools. Our leading market position has
been achieved by emphasizing high-quality products, effective order fulfillment and exceptional customer service.
For fiscal 2008, we generated revenues of $1.088 billion.
We service the supplemental educational products market through two product categories, as described below.
Financial information about our segments is included in the notes under Item 8, Financial Statements and
Supplementary Data.
Specialty Products. Our Specialty products are value-added, curriculum- and age-focused products such as
customized academic agendas, hands-on science curriculums, research-based reading intervention materials, arts and
crafts materials and physical education and special needs equipment. Specialty products are sold to teachers and
curriculum specialists to assist with educational development in the classroom. Our Specialty product lines include
PremierTM Agendas, Sportime®, Childcraft®, Delta EducationTM, FOSS®, CPO ScienceTM, Frey Scientific®, Sax® Arts
& Crafts, School Specialty PublishingTM, Educator’s Publishing Service (“EPS®”), SPARKTM and Califone®. Our
Specialty products accounted for 58% of our revenues for fiscal 2008.
Essentials Products. Our Essentials products include a comprehensive line of everyday consumables, instructional
materials, classroom supplies, educational games, school forms, school furniture and outdoor equipment. Essentials
products are typically sold to administrators of school districts and individual schools. We market our Essentials
products under the Education Essentials® and School Smart® brands, along with many well recognized brand name
products that we distribute. Our Essentials products accounted for 42% of our revenues for fiscal 2008.
Supplemental educational product procurement decisions are generally made at the classroom level by teachers and
curriculum specialists and at the district and school levels by administrators. To best reach these buyer groups, we
developed an innovative two-tiered sales and marketing approach. We target classroom level decision makers
through a “bottom up” marketing approach for Specialty products, and we target school districts and school
administrators through a “top down” marketing approach for Essentials products. Our “bottom up” approach utilizes
a dedicated Specialty sales force, targeted individual Specialty catalogs and our brand-specific websites to deliver
premium educational products to teachers and curriculum specialists. Our “top down” approach utilizes a focused
Essentials sales force, our Education Essentials catalog and School Specialty Online®, an e-commerce solution that
enables us to tailor our product offerings and pricing to individual school districts and school administrators. This
two-tiered approach is designed to maximize our customer coverage and sales penetration.
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We have grown in recent years through acquisitions and internal growth. From fiscal 2004 through fiscal 2008, our
historical revenues, including revenues from acquired businesses, increased from $882.0 million to $1.088 billion,
representing a compound annual growth rate (“CAGR”) of 5.4%. Our acquisition strategy has allowed us to solidify
our leading position within the industry, expand our educational content and curriculum development capabilities,
enhance our product offering and broaden our market reach. In addition, our disciplined integration execution has
consistently enabled us to reduce redundant costs, increase buying power and consolidate distribution facilities,
resulting in improved profitability for the businesses we have acquired. We remain focused on organic growth and
will continue to pursue selective acquisition opportunities that we believe will enhance our position as the leading
provider of supplemental educational products and services in the United States and Canada. Our business is highly
seasonal, with peak sales levels occurring from June through October coinciding with the onset of traditional new
school years.
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 Global Select 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, 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 United States preK-12 education market is a large industry that has exhibited attractive and stable growth
characteristics, despite fluctuations in the U.S. economy. For example, during the recessions of 1981-1983, 1991-
1992 and 2001-2002, preK-12 education funding in the United States grew at CAGRs of 5.3%, 5.0% and 4.7%,
respectively. Total educational expenditures (excluding capital outlays and interest on debt) are expected to rise
from $396.1 billion (in constant 2003-2004 dollars) in 2002-03 to $565.2 billion in 2015-16. Spending per student
and student enrollment are the two primary drivers of future education expenditures, and each is predicted to
steadily rise over the next eight years. Expenditures per student are predicted to increase from $8,220 in 2002-03 to
$11,034 in 2015-16. Public and private K-12 enrollment is projected to rise from 55.0 million in 2003 to 58.1
million by 2015. Total public school enrollment is projected to set new records each year from 2008 to 2017.
Our focus within the United States preK-12 education market is on supplemental educational products and
equipment. Our customers are teachers, curriculum specialists, individual schools and school districts who purchase
products for school and classroom use. We believe that the supplemental educational products and equipment
market has generally grown in line with education funding and represented a market in excess of $8 billion in 2007.
We believe the supplemental educational products and equipment market is highly fragmented with over 3,000 retail
and wholesale companies providing products and equipment, a majority of which are family- or employee-owned,
regional companies that generate annual revenues under $10 million. We believe the increasing customer demand
for single source suppliers, prompt order fulfillment and competitive pricing are acting as catalysts for industry
consolidation. School districts are increasingly decentralizing their purchasing, which increases schools’ and
teachers’ roles in educational product procurement decisions. We believe these changes are driving above-average
growth in the demand for curriculum- and age-focused Specialty products. We believe that these industry trends will
have a favorable competitive impact on our business, as we believe we are well positioned to utilize our operational
capabilities, educational content and curriculum development expertise, and broad product offering to meet evolving
customer demands.
We have acquired seven businesses since May 2003. Purchase prices, net of cash acquired, ranged from $1 million
to $270 million.
Recent Acquisitions
3
Fiscal 2008
Sitton Spelling. On November 30, 2007, we completed the acquisition of Sitton Spelling (“Sitton”) from Egger
Publishing, Inc. for an all-cash, aggregate purchase price of approximately $6 million. Sitton offers spelling and
word skills programs to help educators in the area of reading intervention. Sitton also has professional development
programs for educators through nationwide seminars conducted by independent trainers. This business has been
integrated into the Company’s Educator’s Publishing Service business within the Specialty segment.
Fiscal 2006
The Speech Bin, Inc. On December 14, 2005, we acquired certain assets of The Speech Bin, Inc. (“Speech Bin”) for
an aggregate purchase price of $1 million. Speech Bin® offers books, products and tools to help educators in the
special needs market, focusing on speech and language. This business has been integrated into our Abilitations
offering, giving Abilitations a focused vehicle to expand into this segment of the special needs market.
Delta Education, LLC. On August 31, 2005, we acquired all of the membership interests of Delta Education, LLC
(“Delta”) for $270 million (approximately $10 million of which was to fund above average seasonal working capital
acquired). Delta is a leading provider of science education instructional materials for the preK-12 education market
in the United States. The Delta acquisition positions us as a leading provider of highly differentiated instructional
materials for the preK-12 education market in the United States, with a significant focus on elementary and
secondary science, an area that supplements our existing range of product offerings. Consistent with our overall
growth strategy, the Delta acquisition increased our revenue mix from proprietary and Specialty products. It also
established us as the second largest provider of supplemental science education products. We integrated our Frey
Scientific business into the Delta business, to form our Science business unit within the Specialty segment.
Fiscal 2005
The Guidance Channel, Inc. In September 2004 we acquired certain assets of The Guidance Channel, Inc. and its
subsidiaries or related companies, for approximately $19 million. The Guidance Channel is an educational
publishing and media company, providing children, students, parents and teachers with timely and effective tools
that help with critical life choices. During fiscal 2007, the Company’s Board of Directors authorized the sale of the
School Specialty Media business which included The Guidance Channel, Inc. The sale was completed in fiscal
2008 as discussed elsewhere in this annual report.
Fiscal 2004
School Specialty Publishing. In January 2004 we acquired select assets of the Children’s Publishing business of
McGraw-Hill Education, a division of The McGraw-Hill Companies, for approximately $46 million. The
Children’s Publishing business, renamed School Specialty Publishing, develops, produces, markets and distributes
supplemental education materials (including literature, workbooks and manipulatives), to education companies,
retailers and consumers. This business is reported as part of our Specialty segment. This acquisition included an
operation based in the United Kingdom, which we sold in a stock transaction on February 29, 2004 for
approximately $4 million.
Califone. In January 2004 we acquired Califone International, Inc. (“Califone”) for an aggregate purchase price, net
of cash acquired, of approximately $26 million. Califone is the leading developer of quality sound presentation
systems including state of the art multimedia, audio-visual and presentation equipment for schools and industry.
Califone markets primarily to education companies. This business is reported as a part of our Specialty segment.
Select Agendas. In May 2003 we acquired Select Agendas, a Canadian-based company that produces and markets
student agendas, for an aggregate purchase price of approximately $17 million. The business was integrated with
Premier Agendas and is reported as part of our Specialty segment.
We attribute our strong competitive position to the following key factors:
Competitive Strengths
4
Clear Market Leader in Fragmented Industry. We are the largest provider of supplemental educational products
and equipment to the preK-12 education market in the United States and Canada, and we believe that we are more
than seven times larger than our nearest competitor in this market. Within our industry, there are over 3,000 retail
and wholesale competitors, a majority of which are family or employee-owned, regional companies that generate
annual revenues under $10 million. We believe that our significantly greater scale and scope of operations relative to
our education competitors provide several competitive advantages including a broader product offering, significant
purchasing power, a national distribution network and the ability to manage the seasonality and peak shipping
requirements of the school purchasing cycle.
Stable Industry with Attractive Trends and Dynamics. Government funding for education is a consistently popular
political issue enjoying broad-based voter support. Public school expenditure data from the 1986-87 school year to
the 2005-06 school year reveal spending increases in all but one of those years, and a 19-year average annual
increase of 6.6%. Supplemental educational products represent a small percentage of a school’s annual budget and a
large majority of these products are consumable, further limiting our exposure to fluctuations in demand relative to
other segments in the education market.
Largest Product Offering and Premier Brands. With over 75,000 items ranging from classroom supplies and
furniture to playground equipment, we believe we are the only national provider of a full range of supplemental
educational products and equipment to meet substantially all of the needs of schools and teachers in the preK-12
education market. We believe we have many of the most established brands in the industry that are recognized by
educators across the country, with some brands more than 100 years old. We believe that the brand loyalty our
products enjoy represents a significant competitive advantage. In addition, nearly 50% of our revenues are derived
from our proprietary products which typically generate higher margins than our non-proprietary products.
Unparalleled Customer Reach and Relationships. We have developed a highly integrated, two-tiered sales and
marketing approach which we believe provides us with an unparalleled ability to reach teachers and curriculum
specialists as well as school district and individual school administrators. We reach our customers through the
industry’s largest sales force of approximately 600 professionals, catalog mailings and our proprietary e-commerce
websites. In fiscal 2008, we believe we sold products to approximately 80% of the estimated 120,000 schools in the
United States and reached substantially all of the 3.7 million teachers in those schools. We utilize our extensive
customer databases to selectively target the appropriate customers for our Specialty catalog offerings. Additionally,
we have invested heavily in the development of our e-commerce websites, which provide broad product offerings
and generate higher internet sales than any of our education competitors. Our internet revenues, which were
approximately $180 million in fiscal 2008, have grown at a CAGR of 26.7% since fiscal 2004.
Ability to Effectively Integrate and Improve Operating Margins of Acquired Businesses. We have completed
seven acquisitions since May 2003. We typically establish a 6- to 12-month target for our integration process for
which we form a focused transition team. The transition team is assigned the responsibility of integrating the
acquired entity’s business systems, consolidating distribution centers, eliminating redundant expenses and any non-
strategic product lines, as well as realizing sales and margin enhancements through cross merchandising and
increased purchasing power. We have been able to rapidly improve the operating margins of the businesses we
acquire by applying our extensive integration experience. We have also been able to improve revenue growth for
certain acquired businesses through customer relationships, cross-merchandising and leveraging of our scale.
Highly Diversified Business Mix. Our broad product portfolio and extensive geographic reach minimize our
concentration and exposure to any one school district, state, product or supplier. In fiscal 2008, our top 10 school
district customers collectively accounted for less than 8% of revenues and our customers within any one state
collectively accounted for less than 15% of revenues. For the same period, our top 100 products accounted for less
than 10% of revenues. Products from our top 10 suppliers generated less than 15% of revenues in fiscal 2008. We
believe this diversification limits our exposure to state and local funding cycles and to product demand trends.
Strong Historical Financial Performance, Attractive Cash Flow Attributes and Multiple Growth Opportunities.
We have historically demonstrated strong financial performance with high recurring revenues. Over 70% of our
revenues are generated from the sale of consumable products, which typically need to be replaced at least once each
school year. From fiscal 2004 through fiscal 2008, we grew our revenues through acquisitions and organic growth at
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a CAGR of 5.4%. The financial performance of our business remained relatively stable even during the state budget
crisis from 2001 to 2003. We are continually focused on growing revenues within both our Specialty and Essentials
segments, increasing our mix of proprietary products and improving our operations. Due to our low maintenance
capital expenditure requirements, we convert a significant percentage of our operating income to cash flow available
for debt service, acquisitions and/or share repurchases. We also enjoy highly predictable working capital cycles. In
addition, we believe we have multiple revenue growth and margin improvement opportunities, including enhancing
our sales efforts in under-penetrated states, expanding our private-label business, increasing sourcing from overseas,
optimizing direct marketing operations, increasing supply chain efficiency and pursuing strategic acquisitions. We
also believe our movement toward category management, which will organize us around product and customer
categories, will better synchronize our go-to-market strategies, product development efforts and supplier
relationships. We believe this transformation will create new revenue streams and profitability.
Strong Management Team. We have a deep, experienced management team. Our executive management team and
business unit leaders have an average of over 10 years of experience in the industry. Since David Vander Zanden,
our Chief Executive Officer, joined us in 1998, our senior management team has been successful in growing our
market share, diversifying our revenue streams into more profitable areas and improving the efficiency of our
operations.
Growth Strategy
We use the following strategies to enhance our position as the leading provider of supplemental educational
products and equipment:
Internal Growth. We plan to organically grow our revenues by:
• Expanding our faster growing, higher margin Specialty products business;
• Unifying our marketing efforts within an integrated category management structure;
• Developing new curriculum and supplemental learning solutions in response to industry trends and
educator needs;
•
Increasing our focus and selling resources in under-penetrated states and districts; and
• Utilizing database marketing techniques and strategies to increase customer acquisition and retention.
Margin Improvement. As we continue to grow our revenues, we plan to increase margins by:
• Continuing to increase our mix of Specialty products, which, because of the large proportion of proprietary
products, typically generate higher gross margins than our Essentials products;
• Continuing to expand our private label business through the introduction of new products;
• Expanding our direct sourcing of products from low-cost, overseas manufacturers;
•
•
Increasing the sophistication and effectiveness of our direct marketing operations;
Improving efficiencies of our supply chain activities, and driving overall efficiencies through our company-
wide, lean-based process improvement program;
• Continuing the consolidation of distribution centers and the elimination of redundant expenses of acquired
businesses; and
• Utilizing our purchasing scale to negotiate favorable supplier terms and conditions.
6
Acquisitions. Our selective acquisition strategy and disciplined integration approach have allowed us to solidify our
leading position within the supplemental educational products and equipment industry and enhance our strong
national marketing and distribution platform. This platform allows us to more readily integrate acquired brands,
strengthen our Specialty brand portfolio and enter supplemental learning categories in which we do not currently
compete, such as music and math. We believe that our size and national presence give us an advantage as a
potential acquirer in a consolidating industry.
The majority of our acquisitions have historically occurred in the second half of our fiscal year, which follows our
peak shipping season. This allows us to devote our resources to the effective integration of acquired businesses prior
to the upcoming selling season. We plan to continue to focus on acquisition candidates that expand our presence in
Specialty products.
Product Lines
We market two broad categories of supplemental educational products and equipment: Specialty products and
Essentials products. Our Specialty products enrich our Essentials product offering and create opportunities to cross
merchandise our Specialty products, many of which are proprietary, to our Essentials customers.
Our Specialty offerings are focused in the following areas:
Agendas and Forms. We are the largest provider of academic agendas in the United States and Canada. Our
agendas and related offerings are focused on developing better personal, social and organizational skills, as well as
serving as an effective tool for students and parents to track and monitor their daily activities, assignments and
achievements. Many of our agendas are customized at the school level to include each school’s academic, athletic
and extra-curricular activities. Our agendas are primarily marketed under the Premier brand name. We are also a
leading publisher of school forms, including record books, grade books, teacher planners and other printed forms
under the brand name Hammond & StephensTM.
Science. Our leading science position, largely comprised of highly recognized proprietary or exclusive offerings,
provides learning resources focused on promoting scientific education and inquiry, literacy and achievement to the
preK-12 education market. Our products range from laboratory supplies, equipment and furniture to highly effective
hands-on learning curriculums. Our science brands include FOSS® (Full Option Science System), Frey Scientific®,
Delta Science ModulesTM, Delta Education, CPO ScienceTM and Neo/SCI®.
Early Childhood. Our early childhood offering provides educators of young children products that promote learning
and development. Our full-line, highly proprietary offering provides educators everything from advanced literacy
and dramatic play to manipulatives, basic arts and crafts and classroom furniture. We manufacture award-winning
early childhood wood furniture in our Bird-in-Hand Woodworks facility. Our well-known early childhood brands
include Childcraft and ABC®.
Reading & Literacy. Our reading intervention programs, which are standards- and curriculum-based products, are
focused on providing educators and parents effective tools to encourage and enhance literacy, particularly in the K-6
grade levels. Educators Publishing Service (EPS) provides tailored reading and language arts instruction for
students with special needs and proprietary instructional materials for educators. Our print and technology resources
meet the instructional needs of students possessing language-based learning disabilities or are at risk for reading
failure. We also develop supplemental reading products including literature, workbooks and manipulatives for
educators and parents under our leading imprints, including Instructional FairTM, Frank Schaffer®, Judy Instructo,
Brighter Child®, American Education PublishingTM, School Specialty PublishingTM and SpectrumTM.
Arts Education. Our leading market position is led by Sax® Arts & Crafts, which offers products and programs
focused on nurturing creativity and self-expression through hands-on learning. The product line ranges from
original cross-curricular lesson plans and teaching resource materials to basic art materials, such as paints, brushes
and papers. Our Arts Education group is supported by our team of art consultants who proactively serve the
education process locally and nationally by conducting workshops and providing curriculum assistance to art
educators.
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Physical Education & Health. We offer a full range of programs, solutions, resources and equipment designed to
help improve student and staff wellness. Our products, which are primarily offered under our Sportime® brand,
range from traditional sports equipment to unique and innovative products designed to encourage participation by
all. We also offer proven, research-based solutions such as SPARKTM(Sports, Play and Recreation for Kids), which
is a curriculum- and product-based program focused on promoting healthy, active lifestyles and also targets
childhood obesity.
Special Learning Needs. We offer a full range of solutions for children with special learning needs through our
Abilitations® brand. Our proprietary solutions and products are designed to help educate children with learning,
behavioral, sensory or physical differences and are focused on helping educators and therapists make a real
difference in a child’s life.
Audio Technology. We are the leading developer of educator-inspired quality audio technology products, including
state of the art multi-media, audio visual and presentation equipment for the preK-12 education market. These
products are marketed under the brand name Califone®.
Teacher Focused Classroom Supplies. We provide a full-line offering of general supplemental educational products
to teachers and curriculum specialists directly through our ClassroomDirect® catalog and website.
Our Essentials offerings are focused in the following areas:
School & Classroom Essentials. We are the largest marketer of school and classroom supplies. Through our School
Specialty Education Essentials catalog, which offers both national brands and many of our proprietary School Smart
products, we provide an extensive offering of basic supplies that are consumed in the school and classrooms. This
offering includes pencils, glue, paper, crayons, scissors, stickers and classroom decorations. Our School Smart
brand was launched in 2005 and has grown to over 3,000 products. Additional growth will be driven by new
products, product line extensions, expanded distribution and new product configurations. These products are
primarily sourced directly from low-cost, overseas manufacturers, which we believe will allow us to enhance our
product offering and improve profitability. Our School Smart brand is also represented in many of our Specialty
offerings.
School and Classroom Furniture & Equipment. We believe we are the largest source for school furniture in the
United States, offering a full range of school-specific furniture and equipment. Our offering allows us to equip an
entire facility, refurbish a specific location within a school, such as a cafeteria, gymnasium or media center, or to
replace individual items such as student desks and chairs. Our Classroom Select® proprietary furniture offering is a
highly functional and outstanding quality classroom furniture line. We also have been granted exclusive franchises
for certain furniture lines in specific territories. We also offer our proprietary service, Projects by Design®, which
provides turn-key needs assessment, budget analysis and project management for new construction projects.
Our product development managers apply their extensive education industry experience to design curriculum- and
age-specific products to enhance the learning experience. New product ideas are reviewed with customer focus
groups and advisory panels comprised of educators to ensure new offerings will be well received and meet an
educational need.
Our merchandising managers, many of whom were educators, continually review and update the product lines for
each business. They determine whether current offerings are attractive to educators and 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 Essentials and Specialty segments, see our “Segment Information” in the notes
under Item 8, Financial Statements and Supplementary Data.
8
Intellectual Property
We maintain a number of patents, trademarks, trade names, service marks and other intangible property rights that
we believe have significant value and are important to our business. Our trademarks, trade names and service marks
include the following: School Specialty, Education Essentials, School Smart, Projects by Design, School Specialty
Publishing, American Education Publishing, Brighter Child, Frank Schaffer, Instructional Fair, IdealTM, Judy
Instructo, abc School Supply, Integrations, Abilitations, Brodhead Garrett®, Califone, Childcraft, ClassroomDirect,
Frey Scientific, Hammond & Stephens, Premier Agendas, Sax Arts & Crafts, Sax Family & Consumer Sciences,
SPARK Spectrum, Sportime, Delta Education, Neo/SCI, CPO Science® and EPS. We also sell products under
brands we license, such as FOSS® and FranklinCovey® Seven Habits.
Sales and Marketing
We developed our innovative two-tiered sales and marketing strategy that includes the industry’s largest sales force
of approximately 600 professionals, approximately 25 million catalog mailings and proprietary e-commerce
websites. We believe our sales and marketing model is different from that of our competitors. Our strategy is to use
two separate sales and marketing approaches (“bottom up” and “top down”) to reach all the prospective purchasers
in the education system.
“Bottom Up.” We use the “bottom up” approach to target the classroom level decision-makers through our
dedicated Specialty sales force, catalog mailings featuring our proprietary products and our Specialty brands and
brand-specific websites. These catalogs allow teachers to choose products 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 and during the course of the year we mail additional supplemental catalogs. Schools, teachers and
curriculum specialists can also access websites for product information and purchasing. Further, we believe that by
cross-marketing our Specialty brands to Essentials customers, we can achieve substantial incremental sales.
“Top Down.” Our “top down” marketing approach targets administrators through our focused Essentials sales
force, the Education Essentials catalog and School Specialty Online, an e-commerce solution that enables us to
generate higher internet sales than any of our education competitors.
Schools typically purchase supplemental educational products 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 sales representatives frequently call on existing customers to ascertain and fulfill their supplemental
educational resource needs. The customer service 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. Projects by Design® is a service we provide our customers free of charge to aid in the design,
building and renovation of schools. Our professional designers prepare a detailed analysis of the building and
individual classrooms to optimize the layout of student and teacher desks, student lockers and other classroom
equipment and fixtures. Customers have the ability to view prospective classrooms through our innovative software
in order to efficiently manage the project. We believe this service makes us an attractive alternative to other
furniture and school fixture suppliers.
Internet Operations. Our internet channel activities through School Specialty Online are focused on enhancing
customer loyalty, driving down cost by receiving more orders electronically and creating a full customer self-service
portal. Our brands are available through School Specialty Online which allows our customers a single access point
for purchasing. Our systems provide functionality to meet the specific needs of school districts and school customers
who generally purchase Essentials products as well as the needs of individual teachers and curriculum specialists
9
who tend to buy Specialty products. School Specialty Online allows our customers to manage funding through the
use of purchase order spending limitation, approval workflows, order management and reporting. It also includes
other features that are more helpful to teachers, curriculum specialists and others with more sophisticated needs,
including product search, custom catalogs and email notification, allowing users to have access to the full line of
School Specialty products. In addition, we have maintained an electronic ordering system for over 15 years and offer
e-commerce solutions directed exclusively at the education market. Each of our Specialty brands has a dedicated
website for its own products.
Pricing. Pricing for our Essentials and Specialty product offerings varies by product and market channel. We
generally offer a negotiated discount from catalog prices for products from our Education Essentials catalog and
respond to quote and bid requests. The pricing structure of proprietary Specialty products offered through direct
marketing is generally less subject to negotiation.
Procurement
Essentials Products. Each year, we add new items to our Education Essentials catalog. We purchase and stock
these items before the catalog is released so that we can immediately satisfy customer demand. We typically
negotiate annual supply contracts with our vendors. Contracts with larger vendors usually provide negotiated
pricing and/or extended terms and often include volume discounts and rebate programs. We have exclusive
distribution rights on several furniture and equipment lines.
Specialty Products. Our Specialty segment develops many proprietary products and generally outsources the
manufacturing of these items. We purchase non-proprietary Specialty products in a similar manner to that of our
purchasing process for Essentials products.
Global Sourcing. We are decreasing our product unit costs while improving product quality by directly sourcing
product through overseas channels. Increasingly, we are looking to foreign vendors to manufacture proprietary
products and develop exclusive products on our behalf.
Private Label Product. We launched the School Smart brand in 2005 to build brand loyalty and leverage our global
sourcing efforts. The School Smart brand strategy involves taking third party Essentials products sourced overseas,
enhancing them and selling them under the School Smart brand. The brand has grown to over 3,000 products and
generated approximately $100 million of revenues in fiscal 2008. Additional growth will be driven by new
products, product line extensions, expanded distribution and new product configurations. The School Smart brand
will represent an increasing proportion of the Essentials segment revenue, which we believe will drive competitive
strength for this segment.
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 and customer
satisfaction and reduce product cost. Transactions with our larger vendors are processed through an electronic
procurement process. This electronic process reduces costs and improves accuracy and efficiency in our
procurement and fulfillment process. When more than one of our business units buys from the same vendor, we
typically negotiate one contract to fully leverage our combined purchasing power.
Logistics
We believe we have one of the largest and most sophisticated distribution network among our direct competitors
with eight fully automated and seamlessly integrated distribution centers, totaling over two million square feet of
operating space. We believe this network represents a significant competitive advantage for us, allowing us to reach
any school in a fast and efficient fashion. We recently enhanced our distribution model, allowing most of our
customers to receive their orders one day after shipment. We utilize a third-party logistics provider in Asia to
consolidate inbound shipments, lowering our transportation and inventory storage costs.
In order to maintain the proprietary nature of some of our products, we operate three manufacturing facilities. Our
Lancaster, Pennsylvania plant manufactures wood furniture for our early childhood offerings. The Bellingham,
10
Washington and Fremont, Nebraska facilities produce products for our agenda and forms offerings. Products that
we manufacture accounted for less than 10% of sales during fiscal 2008, 2007 and 2006.
Information Systems
We believe that through the utilization of technology for process improvement in areas such as procurement,
inventory management, customer order management, order fulfillment, and information management, we are able to
offer customers more convenient and cost-effective ways to order products, improve the order fulfillment process to
increase on-time and complete performance and effectively focus our sales and marketing strategies.
In fiscal 2006, we began implementing a common ERP platform across the majority of our businesses over a three
year period. This platform will replace most of our existing systems and primarily includes software from Oracle’s
E-Business suite. One of the major benefits from the common ERP platform is the consolidation of both product
and customer information, which will enhance our ability to execute our sales and marketing strategies. In addition,
by utilizing common business systems across the corporation, we expect to achieve improved business processes,
reduce cycle time and enhance integration between the business units. We believe the technologies of the new
systems will readily support continued growth and integration of our existing and newly-acquired businesses. By the
end of fiscal 2008, seven of our business units, representing approximately 80% of the Company’s revenues, were
converted to the new ERP platform. It is currently estimated that over 90% of our revenue will be generated by
business units converted to the new ERP platform by the end of fiscal 2009. Our distribution centers utilize
interfaced warehouse management software to manage orders from the respective business systems.
Competition
We believe the supplemental educational products and equipment market is highly fragmented with over 3,000
companies providing products and equipment, many of which are family- or employee-owned, regional companies
that generate annual revenues under $10 million. We also compete, to a much lesser extent, with alternate channel
competitors such as office product contract stationers, office supply superstores, purchasing cooperatives and
internet-based businesses. Their primary advantages over us include size, location, greater financial resources and
purchasing power. Their primary disadvantage is that their product mix typically covers a very small portion of the
school’s needs (measured by volume). We believe we compete favorably with these companies on the basis of
service, product offering and customer reach.
Employees
As of June 12, 2008, 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 and we consider our relations with our employees to be very good.
Backlog
We have no material backlog at April 26, 2008. Our customers typically purchase products on an as-needed basis.
Item 1A. Risk Factors
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
11
Specialty or its officers. Forward-looking statements include statements preceded by, followed by or that include
forward-looking terminology such as “may,” “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 risk factors set forth below.
Our business depends upon the growth of the student population and school expenditures and can be adversely
impacted by fixed school budgets.
Our growth strategy and profitability depend in part on growth in the student population and expenditures per
student in preK-12 schools. The level of student enrollment is largely a function of demographics, while
expenditures per student are affected by federal, state and local government budgets. For example, from 2002 to
2004, the industry was negatively affected by a generally weakened economic environment which placed pressure
on some state and local budgets, the primary sources of school funding. This was evidenced, among other things, by
the 5.7% decline in state tax revenue in 2002. In school districts in states that primarily rely on local tax proceeds for
funding, significant reductions in those proceeds for any reason can restrict district expenditures and impact our
results of operations. Any significant and sustained decline in student enrollment and/or expenditures per student
could have a material adverse effect on our business, financial condition, and results of operations. Because school
budgets are fixed on a yearly basis, any shift by schools in expenditures during a given fiscal year to areas that are
not part of our business, such as facility operating costs and employee related expenditures, could also materially
affect our business.
Increased costs associated with the distribution of our products would adversely affect our results of operations.
Higher than expected costs and other difficulties associated with the distribution of our products could affect our
results of operations. To the extent we incur difficulties or higher-than-expected costs related to updating our
distribution centers, such costs may have a material adverse effect on our business, financial condition and results of
operations. Any disruption in our ability to service our customers may also impact our revenues or profits.
Moreover, as we update our distribution model or change the product mix of our distribution centers, we may
encounter unforeseen costs or difficulties that may have an adverse impact on our financial performance.
Our business is highly seasonal.
Because most of our customers want their school supplies delivered before or shortly after the commencement of the
school year, we record most of our revenues from June to October. During this period, we receive, ship and bill the
majority of orders for our products so that schools and teachers receive their products by the start of each school
year. To the extent we do not sell our products to schools during the peak shipping season, many of such sales
opportunities will be lost and will not be available in subsequent quarters. Our inventory levels increase in April
through June in anticipation of the peak shipping season. 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. This
seasonality causes our operating results and operating cash flows to vary considerably from quarter to quarter within
our fiscal years.
12
If our key suppliers or service providers were unable to provide the products and services we require, our
business could be adversely affected.
We depend upon a limited number of suppliers for some of our products, especially furniture and proprietary
products. We also depend upon a limited number of service providers for the delivery of our products. If these
suppliers or service providers are unable to provide the products or services that we require or materially increase
their costs (especially during our peak season of June through October), our ability to deliver our products on a
timely and profitable basis could be impaired and thus could have a material adverse effect on our business,
financial condition and results of operations. Many of our agreements with our suppliers are terminable at any time
or on short notice, with or without cause, and, while we consider our relationships with our suppliers to be good, we
cannot assure that any or all of our relationships will not be terminated or that such relationships will continue as
presently in effect.
Our business is highly competitive.
The market for supplemental educational products and equipment is highly competitive and fragmented. We
estimate that over 3,000 companies market supplemental educational products and equipment to schools with preK-
12 as a primary focus of their business. We also face competition from alternate channel marketers, including office
supply superstores, office product contract stationers, and purchasing cooperatives that have not traditionally
focused on marketing supplemental educational products and equipment. Our competitors impact the prices we are
able to charge and we expect to continue to face pricing pressure from our competitors in the future. These
competitors are likely to continue to expand their product lines and interest in supplemental educational products
and equipment. Some of these competitors have greater financial resources and buying power than we do. We
believe that the supplemental educational products and equipment market will consolidate over the next several
years, which could increase competition in both our markets and our search for attractive acquisition candidates. We
also face increased competition and pricing pressure as a result of the accessibility of the internet.
If any of our key personnel discontinue their role with us, our business could be adversely affected.
Our business depends to a large extent on the abilities and continued efforts of current executive officers and senior
management. We are also likely to depend heavily on the executive officers and senior management of businesses
that we acquire in the future. If any of these people becomes unable or unwilling to continue in his or her role, or if
we are unable to attract and retain other key personnel and qualified employees, our business could be adversely
affected. W e have employment contracts with many of our key officers.. Other than the life insurance we have in
place for our Chief Executive Officer, we do not have and do not intend to obtain key man life insurance covering
any of our executive officers or other members of our management.
A failure to successfully implement our business strategy could materially and adversely affect our operations
and growth opportunities.
Our ability to achieve our business and financial objectives is subject to a variety of factors, many of which are
beyond our control, and we may not be successful in implementing our strategy. In addition, the implementation of
our strategy may not lead to improved operating results. We may decide to alter or discontinue aspects of our
business strategy and may adopt alternative or additional strategies due to business or competitive factors or factors
not currently expected, such as unforeseen costs and expenses or events beyond our control. Any failure to
successfully implement our business strategy could materially and adversely affect our results of operations and
growth opportunities.
We face risks associated with our increasing emphasis on imported goods and private label products.
Increases in the cost or a disruption in the flow of our imported goods may adversely impact our revenues and
profits and have an adverse impact on our cash flows. Our business strategy includes an increased emphasis on
offering private label products and sourcing quality merchandise directly from low-cost suppliers. As a result, we
expect to rely more heavily on imported goods from China and other countries and we expect the sale of imported
goods to continue to increase as a percentage of our total revenues. To the extent we rely more heavily on the sale of
13
private label products, our potential exposure to product liability claims may increase. In addition, our reputation
may become more closely tied to our private label products and may suffer to the extent our customers are not
satisfied with the quality of such products. Private label products will also increase our risks associated with returns
and inventory obsolescence. Our reliance on imported merchandise subjects us to a number of risks, including: (a)
increased difficulties in ensuring quality control; (b) disruptions in the flow of imported goods due to factors such as
raw material shortages, work stoppages, strikes, and political unrest in foreign countries; (c) problems with oceanic
shipping, including shipping container shortages; (d) economic crises and international disputes; (e) increases in the
cost of purchasing or shipping foreign merchandise resulting from a failure of the United States to maintain normal
trade relations with China and the other countries we do business in; (f) import duties, import quotas, and other trade
sanctions; and (g) increases in shipping rates imposed by the trans-Pacific shipping cartel. If imported merchandise
becomes more expensive or unavailable, we may not be able to transition to alternative sources in time to meet our
demands. A disruption in the flow of our imported merchandise or an increase in the cost of those goods due to these
or other factors would significantly decrease our revenues and profits and have an adverse impact on our cash flows.
Currency exchange rates may impact our financial condition and results of operations and may affect the
comparability of our results between financial periods.
To the extent we source merchandise from overseas manufacturers and sell products internationally, exchange rate
fluctuations could have an adverse effect on our results of operations and ability to service our U.S. dollar-
denominated debt. The majority of our debt will be in U.S. dollars while a portion of our revenue is derived from
imported products and international sales. Therefore, fluctuations in the exchange rate of foreign currencies versus
the U.S. dollar could impact our costs and revenues. In addition, for the purposes of financial reporting, any change
in the value of the foreign currencies against the U.S. dollar during a given financial reporting period would result in
a foreign currency loss or gain. Consequently, our reported earnings could fluctuate as a result of foreign exchange
translation gains or losses and may not be comparable from period to period.
It is difficult to forecast our revenue stream given the seasonal purchasing patterns of our customers.
The seasonal purchasing patterns of our customers, and the fact that our customers typically purchase products on an
as-needed basis, make it difficult for us to accurately forecast our revenue stream, which may vary significantly
from period to period. Financial analysts and others that may seek to project our future performance face similar
difficulties. The difficulty in accurately forecasting our revenue increases the likelihood that our financial results
will differ materially from any projected financial results. Any shortfall in our financial results from our, or third-
party, projected results could cause a decline in the trading price of our common stock and our convertible
subordinated notes.
If we are unable to successfully identify and integrate acquisitions, our results of operations could be adversely
affected.
A significant amount of our past growth has come from acquisitions. Future growth in our revenues and earnings
will be impacted by our ability to continue to acquire and successfully integrate businesses. We cannot guarantee
that we will be able to identify and acquire businesses on reasonable terms or at all. If we are unable to do so, our
future growth may be limited, or our revenues could decline. In addition, the integration of acquired businesses with
our existing business operations presents many challenges and can demand significant attention from our key
managers. The demands placed upon the time of our management team may adversely affect the operation of our
existing business. Managing and integrating acquired businesses may result in substantial costs, delays, or other
operating or financial problems that could materially and adversely affect our financial condition and results of
operations.
14
Key risks involve:
•
•
•
•
•
failure to execute as well or as quickly as anticipated on our integration plans, including the integration of
acquired employees, operations, technologies and products with our existing business and products;
retention of business relationships with suppliers and customers of the acquired business;
loss of key personnel of the acquired business;
the diversion of our management during the integration process; and
resistance to cultural changes in the acquired organization.
We have a material amount of goodwill, other intangible assets and capitalized product development costs which
might be written-down.
At April 26, 2008, goodwill and intangible assets represented approximately 64.5% of our total assets. Goodwill is
the amount by which the costs of an acquisition exceed the fair value of the net assets we acquire. In addition, we
are required to evaluate whether our goodwill and other intangible assets have been impaired. Reductions in our net
income caused by the write-down of our existing goodwill or intangible assets or any goodwill or intangible assets
acquired in any future acquisition we may make could materially adversely affect our results of operations. For
example, during fiscal 2007 and fiscal 2006 we recorded pre-tax impairment charges of $23.5 million and $25.6
million, respectively, related to goodwill and other intangibles assets of our discontinued School Specialty Media
(“SSM”) business unit. In addition, we had capitalized product development costs of $19.1 million and $18.0
million at April 26, 2008 and April 28, 2007, respectively, related to both internally developed and acquired
proprietary products, which are amortized to expense over the lesser of five years or the product’s life cycle. Any
changes in the estimated sales volume or life cycle of the underlying products could cause the currently capitalized
costs or costs capitalized in the future to be impaired. For example, during fiscal 2007 and 2006 we recorded pre-
tax impairments charges of $3.6 million and $1.0 million, respectively, related to product development costs of
SSM.
Our operations are dependent on our information systems.
We have integrated the operations of most of our divisions and subsidiaries, which operate on systems located at
both our Greenville, Wisconsin, headquarters and our third-party hosted ERP system provider’s facilities. In
addition, there are divisions running legacy systems hosted at their locations. All systems rely on continuous
telecommunication connections to the main computers. If any of these connections becomes disrupted, or
unavailable, for an extended period of time, the disruption could materially and adversely affect our business,
operations and financial performance. We also continue to introduce new information systems to achieve a common
processing infrastructure for all of our businesses, particularly the new ERP platform described elsewhere in this
report, which will displace existing legacy systems. As we implement the new systems, there is the possibility that it
can be disruptive should the new systems not perform as expected.
Even though we have taken precautions to protect ourselves from unexpected events that could interrupt new,
existing and acquired business operations and systems, we cannot be sure that fire, flood or other natural disasters
would not disable our systems and/or prevent them from communicating between business segments. The
occurrence of any such event could have a material adverse effect on our business, results of operations and
financial condition. We also face challenges in integrating the information systems of any companies we acquire.
The costs associated with performing such integrations or any disruptions resulting from a failure to successfully
make any such integration could materially impact our business.
We rely on our intellectual property in the design and marketing of our products.
We rely on certain trademarks, trade names and service names, along with licenses to use and exploit certain
trademarks, trade names and service names (collectively, the “marks”) in the design and marketing of some of our
products. We could lose our ability to use our brands if our marks were found to be generic or non-descriptive.
While no single mark is material to our business, the termination of a number of these marks could have an adverse
effect on our business. We also rely on certain copyrights, patents and licenses other than those described above, the
termination of which could have an adverse effect on our business.
15
The agreements governing our debt contain various covenants that limit our discretion in the operation of our
business, could prohibit us from engaging in transactions we believe to be beneficial and could lead to the
acceleration of our debt.
redeem and/or prepay certain debt;
sell or dispose of a minority equity interest in any subsidiary or other assets;
Our existing and future debt agreements impose and will impose operating and financial restrictions on our
activities. These restrictions require us to comply with or maintain certain financial tests and ratios, and restrict our
ability and our subsidiaries’ ability to:
•
incur additional debt;
•
create liens;
• make acquisitions;
•
•
• make capital expenditures;
• make certain investments;
•
•
•
•
•
•
enter new lines of business;
engage in consolidations, mergers and acquisitions;
repurchase or redeem capital stock;
guarantee obligations;
engage in certain transactions with affiliates; and
pay dividends and make other distributions.
Our amended and restated senior credit facility also requires us to comply with certain financial ratios, including a
total leverage ratio, a senior leverage ratio and a minimum fixed charge coverage ratio. These restrictions on our
ability to operate our business could seriously harm our business by, among other things, limiting our ability to take
advantage of financing, mergers and acquisitions, and other corporate opportunities.
16
Item 1B. Unresolved Staff Comments
None.
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 of our Specialty and Essentials segments. In addition, we leased or owned
the following principal facilities as of June 12, 2008:
Locations
Bellingham, Washington (1) ........................................
Bellingham, Washington (1) ........................................
Bellingham, Washington (1) ........................................
Birmingham, Alabama (1) ...........................................
Cambridge, Massachusetts (1) .....................................
Columbus, Ohio (1)......................................................
Fremont, Nebraska (1)..................................................
Fresno, California (2) ...................................................
Lancaster, Pennsylvania (2) .........................................
Lyons, New York (2) ...................................................
Mansfield, Ohio (2) ......................................................
Mount Joy, Pennsylvania (2)........................................
Nashua, New Hampshire (1)........................................
New Berlin, Wisconsin (1)...........................................
Norcross, Georgia (2) ...................................................
Salina, Kansas (2).........................................................
Salina, Kansas (2).........................................................
San Fernando, California (1)........................................
Walker, Michigan (1) ...................................................
________________
Approximate
Square
Footage
48,000
25,000
14,000
15,000
18,000
18,000
95,000
163,000
73,000
195,000
315,000
400,000
348,000
16,000
41,000
115,000
45,000
37,000
198,000
Lease Expiration
Owned/
Leased
Leased March 31, 2011
January 31, 2009
Leased
December 31, 2008
Leased
October 31, 2012
Leased
April 30, 2013
Leased
July 31, 2011
Leased
June 30, 2011
Leased
October 31, 2009
Leased
December 31, 2012
Leased
Owned
—
November 30, 2020
Leased
December 31, 2029
Leased
December 31, 2018
Leased
September 30, 2011
Leased
December 31, 2010
Leased
Owned
—
February 28, 2009
Leased
July 31, 2012
Leased
July 31, 2011
Leased
(1) Location primarily services the Specialty segment.
(2) Location services both business segments.
The 73,000 square foot Lancaster, Pennsylvania facility is used for manufacturing wood products and the Fremont,
Nebraska; 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 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, 2008 to a vote of our security holders.
17
EXECUTIVE OFFICERS OF THE REGISTRANT
As of June 12, 2008, the following persons served as executive officers of School Specialty:
Name and Age
of Officer
David J. Vander Zanden
Age 53
Thomas M. Slagle
Age 46
David N. Vander Ploeg
Age 49
Gregory D. Cessna
Age 51
Steven F. Korte
Age 53
Mr. Vander Zanden became Chief Executive Officer of School Specialty in
September 2002, after serving as Interim Chief Executive Officer since March 2002.
Mr. Vander Zanden served as Chief Operating Officer from March 1998 to March
2002, as well as President from March 1998 to March 2007. 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.
Mr. Slagle joined School Specialty as President and Chief Operating Officer in March
2007. Prior to joining School Specialty, Mr. Slagle served as Group President, Supply
Chain Services - Medical for Cardinal Health, Inc., where he held profit and loss
responsibility for five business segments with over $7 billion of revenue. Mr. Slagle's
11 years with Cardinal Health, as well as prior executive management positions with
Johnson & Johnson Ortho Diagnostics Division and Baxter Healthcare, included
advancing through positions of increasing responsibility in operations, sales, supply
chain and distribution management.
Mr. Vander Ploeg joined School Specialty as Executive Vice President and Chief
Financial Officer in April 2008. Mr. Vander Ploeg was most recently Chief Operating
Officer of Dutchland Plastics Corp., a molded products manufacturer based in
Oostburg, Wisconsin. Before joining Dutchland, he was Executive Vice President and
Chief Financial Officer at Schneider National, Inc., Green Bay, Wisconsin, a global
leader in transportation and logistics services. During a 24-year career at Schneider
National, he advanced through several positions of increasing responsibility,
including Director of Planning and Budgeting, Group Controller, Vice President of
Finance, and Senior Vice President-Operating Chief Financial Officer, prior to being
named Executive Vice President and Chief Financial Officer in 2004.
Mr. Cessna joined School Specialty in July 2005 as the President of Education
Essentials and corporate Executive Vice President. From 1999 until joining School
Specialty, Mr. Cessna served as the Executive Vice President of PolyVision
Corporation, A Steelcase Company. PolyVision Corporation was a manufacturer of
Visual Communication products for the education and office products market. Mr.
Cessna was President of ABB Process Analytics, a manufacturer of on-line analytical
instruments, from 1990 until 1999.
Mr. Korte joined School Specialty in September 2005 as a result of the Delta
Education LLC acquisition and was appointed President, Educational Publishing
Group and corporate Executive Vice President shortly thereafter. From January 2004
to August 2005, Mr. Korte held the position of President and COO of Delta Education
LLC. For the prior ten years 1994-2003, Mr. Korte was the President of Rigby
Education/Harcourt Supplemental Publishers, a division of Reed Elsevier plc.
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 was selected as an officer of School Specialty.
18
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
PART II
Securities
Market Information
Our common stock is traded under the symbol “SCHS” on The Nasdaq Global Select 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 2008 quarter ended
July 28, 2007…………………………………………
October 27, 2007………………………………..
January 26, 2008………………………………..
April 26, 2008…………………………………….
$
36.50
36.70
36.01
33.68
High
Fiscal 2007 quarter ended
July 29, 2006………………………………………..
$
October 28, 2006………………………………………
January 27, 2007…………………………………….
April 28, 2007…………………………………………
36.26
39.28
39.50
40.24
High
Low
$
32.89
33.47
31.31
29.58
Low
$
30.36
32.00
36.59
32.89
Holders
As of June 12, 2008, there were 1,950 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 or for other endeavors deemed
prudent including, but not limited, repurchases of our common stock. 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.
Share Repurchase Program
For the three months ended
April 26, 2008
Fiscal February……………………..
Fiscal March…………………..
Fiscal April…………………….
Total
Total Number of
Shares Purchased
33,500
1,074,208
-
1,107,708
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
33,500
1,074,208
-
1,107,708
Average Price
Paid Per Share
30.60
$
31.28
-
31.26
$
Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under the Plans or
Programs
$
33,633,298
-
-
During fiscal 2008, the Company repurchased a total of 2,796,489 shares of its outstanding common stock at an
aggregate purchase price of $94,879,000. During fiscal 2007, the Company repurchased a total of 2,126,121 shares
of its outstanding common stock at an aggregate purchase price of $76,508,000. The fiscal 2008 repurchases were
made pursuant to share repurchase programs approved by the Company’s Board of Directors on June 4, 2007 and
November 28, 2007, which authorized the repurchase of up to $45.0 million and an additional $50.0 million,
19
respectively, of the Company’s outstanding shares of common stock. The fiscal 2007 repurchases were made
pursuant to share repurchase programs approved by the Company’s Board of Directors on June 14, 2006 and
November 15, 2006, which authorized the repurchase of up to $50.0 million and an additional $26.5 million,
respectively, of the Company’s outstanding shares of common stock. There were no authorizations outstanding as of
April 26, 2008, under which additional shares could be repurchased.
During the two fiscal years ended April 26, 2008, the Company has repurchased a total of 4,922,610 shares of its issued
and outstanding common stock at an aggregate purchase price of $171,387,000. Common stock acquired through the
share repurchase programs is available for general corporate purposes.
On June 12, 2008 the Company announced that its Board of Directors approved a new share repurchase program, which
allows the Company to purchase up to $50.0 million of our outstanding common stock. Purchases under the share
repurchase program may be made from time to time in the open market or privately negotiated transactions. Common
stock acquired through the share repurchase program will be available for general corporate purposes.
20
PERFORMANCE GRAPH
The following graph compares the total shareholder return on our Common Stock since April 26, 2003 with that
of the Russell 3000 Stock Market Index, the Russell 2000 Stock Market Index, and a peer group index
constructed by us. The companies included in our peer group index are: Renaissance Learning, Inc. (RLRN),
Scholastic Corporation (SCHL), and The Aristotle Corporation (ARTL).
The total return calculations set forth below assume $100 invested on April 26, 2003, with reinvestment of any
dividends into additional shares of the same class of securities at the frequency with which dividends were paid
on such securities through April 26, 2008. The stock price performance shown in the graph below should not
be considered indicative of potential future stock price performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among School Specialty, Inc., The Russell 3000 Index,
The Russell 2000 Index And A Peer Group
$250
$200
$150
$100
$50
$0
4/26/03
4/24/04
4/30/05
4/29/06
4/28/07
4/26/08
School Specialty, Inc.
Russell 3000
Russell 2000
Peer Group
School Specialty, Inc.
Russell 3000
Russell 2000
Peer Group
4/26/03
4/24/04
4/30/05
4/29/06
4/28/07
4/26/08
100.00
100.00
100.00
100.00
205.47
131.85
153.80
117.68
207.09
136.70
152.67
119.76
202.96
161.41
203.76
99.86
184.04
186.49
223.79
107.74
166.74
176.73
197.14
105.53
21
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
(In thousands, except per share data)(1)
$
Gross profit…………………………………………………………………………
2008
(52 weeks)
1,087,903
626,661
461,242
361,754
Selling, general and administrative expenses……………………………………
Merger-related expenses…………………………………… -
99,488
19,829
5,718
2007
Statement of Operations Data:
(52 weeks)
Revenues……………………………………………………………………………
1,043,152
597,515
Cost of revenues………………………………………………………………
445,637
351,839
-
93,798
Interest expense, net………………………………………………………………
22,086
6,019
Other expense…………………………………………………………………………
Redemption costs and fees for convertible
Operating income……………………………………………………………………
$
$
Fiscal Year
2006
(52 weeks)
977,302
568,623
408,679
349,302
5,202
54,175
19,186
4,160
2005
(53 weeks)
970,435
$
573,488
396,947
309,582
-
87,365
12,882
2,115
debt redemption……………………………………………………-
Income before provision for income taxes……………………………………………
1,839
70,529
27,402
43,127
Earnings from continuing operations……………………………………………………………………………
Provision for income taxes……………………………………………………………………
-
65,693
26,468
39,225
-
30,829
12,581
18,248
73,941
28,129
45,812
2004
(52 weeks)
882,049
$
525,099
356,950
272,133
-
84,817
18,284
1,136
-
65,397
25,408
39,989
Earnings (loss) from operations of discontinued
School Specialty Media business unit,
net of income taxes……………………………………………………………………………
(21,179)
(4,691)
(18,187)
Net income……………………………………………………………………………
41,121
18,046
$
$
$
61
(126)
808
$
43,001
$
40,797
Weighted average shares outstanding:
21,873
Basic………………………………………………………………………………
22,545
Diluted…………………………………………………………………………
20,196
20,708
22,898
23,739
21,612
23,910
18,828
24,125
Basic earnings per share of common stock:
$
Earnings from continuing operations………………………………………………………………………………
Earnings (loss) from discontinued operations…………………………………………………………………………
$
Total…………………………………………………………………………
2.00
(0.01)
1.99
1.79
(0.96)
0.83
2.27
(0.23)
2.04
0.80
(0.80)
0.00
$
$
$
$
$
$
$
$
Diluted earnings per share of common stock:
$
Earnings from continuing operations………………………………………………………………………………
Earnings (loss) from discontinued operations…………………………………………………………………………
$
Total…………………………………………………………………………
1.88
(0.00)
1.88
0.77
(0.77)
0.00
2.21
(0.22)
1.99
1.74
(0.94)
0.80
$
$
$
$
$
$
$
$
2.12
0.05
2.17
1.90
0.04
1.94
April 28,
2007
Balance Sheet Data:
Working capital (2)……………………………………………………………………
34,103
Total assets…………………………………………………………………………
1,110,879
Long-term debt…………………………………………………………………………
293,139
426,729
Total debt………………………………………………………………………………
512,545
Shareholders' equity……………………………………………………………………
35,211
1,117,327
312,210
445,838
478,688
April 26,
2008
$
$
$
April 29,
2006
34,767
1,130,375
283,629
417,207
553,733
$
April 30,
2005
114,513
884,605
149,680
195,671
544,545
$
April 24,
2004
132,001
832,607
314,104
314,628
378,975
_______________
22
(1) Our business has grown since 2004 through acquisitions and internal growth. For detailed information on
acquisitions during fiscal years 2008 and 2006, see the “Business Combinations” note in our notes to consolidated
financial statements.
(2) At April 26, 2008, April 28, 2007, and April 29, 2006, working capital includes the convertible subordinated
notes balance of $133.0 million as a current liability. During fiscal 2006, the notes became convertible as the
closing price of the Company’s stock exceeded $48.00 for the specified amount of time. The notes may be
converted at any time into cash for the accreted principal amount and cash or our common stock for the balance,
if any, of the obligation. Working capital at April 30, 2005 includes the balance on the revolving credit facility
of $45.5 million as a current liability. Working capital for other periods reflected above excludes the balance on
the revolving credit facility as it was considered long-term in nature.
23
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.
Background
We are a leading education company serving the preK-12 education market by providing products, services and
ideas that enhance student achievement and development to educators and schools across the United States and
Canada. We offer more than 75,000 items through an innovative two-pronged marketing approach that targets both
school administrators and individual teachers.
We have grown 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
2008 were $1.088 billion, which represented a compound annual revenue growth, including acquisitions, of 5.4%
compared to our fiscal 2004 results.
Our gross margin has improved from 40.5% in fiscal 2004 to 42.4% in fiscal 2008. This improvement was due to an
increase in our offering of proprietary products and increased buying power. We have acquired many Specialty
businesses, which tend to have more proprietary products in their offerings and consequently higher gross margins
than our Essentials businesses. The Specialty businesses have also experienced higher revenue growth than the
Essentials businesses, resulting in a product mix with higher gross margins. In addition, our growth has increased
our purchasing power, resulting in reduced costs of the products we purchase. Further, through the vertical
acquisitions of School Specialty Publishing and Califone, we have acquired suppliers and have thereby captured the
suppliers’ margins. Another factor contributing to the increase in gross margin is the direct sourcing of product
through overseas channels.
Our historical operating profit and margins have been substantially impacted by the timing of our acquisitions and
the integration of acquired businesses. In fiscal 2004, our operating profit and margin from continuing operations
were $84.8 million and 9.6%, respectively. In fiscal 2008, our operating income and margin from continuing
operations were $99.5 million and 9.1%, respectively.
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 business so that schools and teachers
receive their products 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.
Our business is highly seasonal, and the acquisitions of seasonal businesses during the off season has depressed
operating and net income in the year of acquisition, the most dramatic of which in recent years was the Delta
Education acquisition in fiscal 2006.
During the third quarter of fiscal 2008, the Company completed the acquisition of Sitton Spelling (“Sitton”) from
Egger Publishing, Inc. for an all-cash, aggregate purchase price of $5.8 million. Sitton offers spelling and word
skills programs to help educators in the area of reading intervention. Sitton also has professional development
programs for educators through nationwide seminars conducted by independent trainers. This business has been
integrated into the Company’s Educator’s Publishing Service business within the Specialty segment. The results of
Sitton have been included in the accompanying consolidated financial statements under Item 8 since the date of
acquisition and would not have had a material effect on the Company’s overall performance on a pro forma basis
and did not have a material effect on the Company’s fiscal 2008 performance.
The Company announced in fiscal 2007 its intention to sell the Hawthorne, New York-based School Specialty
Media (“SSM”) business unit. The sale, which was completed in the fourth quarter of fiscal 2008, reflects the
Company’s desire to focus investments and management’s attention on those businesses that advance the
24
Company’s long-term growth strategies. The Company has reflected SSM as a discontinued operation in the
accompanying consolidated statements of operations under Item 8 and throughout this MD&A.
Results of Continuing 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 2008, 2007 and 2006:
2008
Fiscal Year
2007
Selling, general and administrative expenses………………………………
Gross profit…………………………………..………………………………
Revenues……………………………………….…………………………
Cost of revenues……………………………….…………………………
100.0 %
57.6
42.4
33.3
Merger-related expenses………………………………………………………
-
9.1
Operating income ……………………………………………………
1.8
Interest expense, net……………………………………………………
0.5
Other expense………………………………………………………………
6.8
Income before provision for income taxes………………………………
2.6
Provision for income taxes………………………………………………
4.2 %
Earnings from continuing operations…………………………………………………………………
100.0 %
57.3
42.7
33.7
-
9.0
2.1
0.6
6.3
2.5
3.8 %
2006
100.0 %
58.2
41.8
35.7
0.5
5.6
2.0
0.4
3.2
1.3
1.9 %
Consolidated Historical Results of Continuing Operations
Fiscal 2008 Compared to Fiscal 2007
The following discussion and analysis of fiscal 2008 results compared to fiscal 2007 results is based on a
comparison of the Company’s results of operations from continuing operations.
Overview of Fiscal 2008
Revenues from continuing operations for fiscal 2008 increased 4.3% to $1.088 billion as compared to $1.043 billion
in fiscal 2007. This increase was related primarily to incremental state adoption revenue derived from our science
curriculum offerings and organic growth in other Specialty businesses, partially offset by a year over year decline in
our mass-merchant retail business, and a decrease in revenues generated by our Essentials segment.
The Company’s overall revenue mix continued to shift toward the Specialty segment, with the segment comprising
58.1% of revenues in fiscal 2008 as compared with 54.8% in fiscal 2007. Although this shift has historically
resulted in consolidated margin improvement as the Specialty segment develops and sells a greater percentage of
higher margin proprietary products, gross margins decreased from 42.7% in fiscal 2007 to 42.4% in fiscal 2008.
This decrease was attributable to inventory charges taken as a result of eliminating certain Specialty product
offerings along with a decline of Essentials gross margins as a result of product mix changes within that segment.
These decreases have offset the gross margin gain that the Company realized related to the revenue mix shift
towards Specialty products.
Operating income was $99.5 million in fiscal 2008 as compared to $93.8 million in fiscal 2007. Operating margins
increased from 9.0% in fiscal 2007 to 9.1% in fiscal 2008. The increases in operating income and operating margin
were driven by the increased revenues and a decrease in selling, general and administrative expenses as a percent of
revenues, partially offset by the modest decrease in gross margins.
25
Revenue
Revenues increased 4.3% from $1.043 billion in fiscal 2007 to $1.088 billion in fiscal 2008. Specialty segment
revenues increased 10.1% from $591.9 million in fiscal 2007 (which included $20.5 million of intersegment
revenues) to $651.7 million in fiscal 2008 (which included $19.6 million of intersegment revenues). The increase in
Specialty segment revenues was due primarily to $48 million of incremental revenue from state adoptions of our
science curriculums in fiscal 2008 as compared to fiscal 2007. The majority of this increase was derived from
California and South Carolina. State adoption cycles occur on average every five to seven years and vary by state as
to the years in which adoptions occur. The remaining increase in Specialty revenue was driven by growth in other
core Specialty businesses. Partially offsetting these gains, was an approximate $11 million decline in our mass
merchant retail business which is significantly impacted by the amount of store space our products are provided and
current economic conditions that reduce discretionary consumer spending.
Essentials segment revenues were $455.4 million in fiscal 2008 (which includes $0.0 million of intersegment
revenues) compared to $471.1 million in fiscal 2007 (which includes $0.1 million of intersegment revenues). The
decrease in Essentials segment revenues was attributable to a reduction in school rebuilding activity in Louisiana
during fiscal 2008 as compared with fiscal 2007, the elimination of an unproductive catalog, and the decision to not
pursue low-margin bid business, all of which occurred during our larger revenue generating first and second quarters
of fiscal 2008.
Gross Profit
Gross profit increased 3.5% to $461.2 million compared with $445.6 million in fiscal 2007. The increase in gross
profit was primarily due to the increase in revenues, partially offset by a modest decline in consolidated gross
margins. Gross margins were 42.4% in fiscal 2008 compared with 42.7% in fiscal 2007. The decrease in
consolidated gross margin was due to an inventory charge of approximately $3.0 million related to the Company’s
decision to terminate certain Specialty segment product lines.
Specialty segment gross profit increased $25.2 million or 8.5% from $295.2 million in fiscal 2007 to $320.4 million
in fiscal 2008 mainly as a result of increased revenues, partially offset by the $3.0 million inventory charge. Gross
margin for the Specialty segment declined 70 basis points from 49.9% in fiscal 2007 to 49.2% in fiscal 2008, of
which 50 basis points was attributable to the inventory charge and the remainder was a result of product mix
changes within the segment.
Essentials segment gross profit was $144.3 million in fiscal 2008 compared with $152.0 million in fiscal 2007, a
decrease of $7.7 million or 5.1%. The majority of the decrease was a result of decreased revenues along with a shift
in product mix within the segment towards furniture, which has historically carried lower gross margins than our
consumables products. Gross margin for the Essentials segment declined 60 basis points from 32.3% in fiscal 2007
to 31.7% in fiscal 2008 as a result of the product mix shift towards furniture, as well as a reduction in volume-based
vendor rebates related to the decline in purchases associated with both the revenue decline and inventory reduction
initiatives.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) include selling expenses, the most significant of which are
sales wages and commissions; operations expenses, which include customer service, warehouse and out-bound
freight costs; catalog costs; general administrative overhead, which includes information systems, accounting, legal
and human resources; depreciation and intangible asset amortization expense.
SG&A as a percent of revenues decreased 40 basis points from 33.7% of revenues in fiscal 2007 to 33.3% of
revenues in fiscal 2008. The decrease in SG&A as a percent of revenues was primarily due to cost reduction
initiatives including supply chain productivity enhancements and headcount reduction, as well as the leverage of
increased sales on the non-variable portion of SG&A costs, partially offset by increased administrative expenses.
SG&A increased $9.9 million from $351.8 million in fiscal 2007 to $361.8 million in fiscal 2008. The increase in
SG&A costs was due primarily to the incremental variable costs associated with the $44.8 million increase in
26
revenues, costs to support the conversion to a new ERP system, additional investments in the Company’s direct
marketing and product management initiatives and increased variable performance-based compensation costs as
compared to fiscal 2007. These increases were partially offset by cost reductions achieved through supply chain
productivity enhancements and headcount reductions.
Specialty segment SG&A decreased as a percent of revenues from 35.8% in fiscal 2007 to 32.8% in fiscal 2008
primarily as a result of the leverage of increase revenues. Specialty segment SG&A increased from $211.6 million
in fiscal 2007 to $213.7 million in fiscal 2008. The increase in SG&A expenditures was due to incremental variable
selling and distribution costs associated with the increase in revenues.
Essentials segment SG&A decreased $1.1 million from $105.2 million or 22.3% of revenues in fiscal 2007 to $104.1
million or 22.9% of revenues for fiscal 2008. The decrease was primarily related to reduced selling and distribution
costs as a result of lower revenues and further reduced distribution costs as a result of the shift towards furniture
products that are shipped directly to customers by our vendors. The increase in SG&A as a percent of revenue was
the result of the decision to maintain non-variable selling costs in spite of reduced revenues in order to generate
potential future growth by executing the Company’s cross-segment marketing strategies.
Corporate SG&A increased by $9.0 million from $35.0 million in fiscal 2007 to $44.0 million in fiscal 2008. The
increase was mainly driven by incremental depreciation expenses associated with the new ERP system and costs to
support the system conversion, along with an increases variable performance-based compensation expense. In
addition, the Company continues to make investments in its marketing and product management initiatives in order
to provide a better overall interaction and service experience for our customers.
Net Interest Expense
Interest expense, net of interest income, decreased $2.3 million from $22.1 million in fiscal 2007 to $19.8 million in
fiscal 2008. The decrease in interest expense was primarily due to a lower effective borrowing rate attributable to
the Company’s November, 2006 sale of $200.0 million principal amount of subordinated convertible debentures due
2026 at an interest rate of 3.75%. The debentures were outstanding for all of fiscal 2008 as compared to only half of
fiscal 2007. In addition, the Company’s revolving debt carries variable interest rates which were lower in fiscal 2008
as compared to fiscal 2007. Partially offsetting the decreases related to the interest rates is a $13.8 million increase
in the Company’s average outstanding borrowings in fiscal 2008 compared to fiscal 2007. The increase in average
borrowings is primarily attributable to the volume of share repurchases during fiscal 2008 exceeding the Company’s
operating cash flows generated less cash used in investing activities.
In May 2008, the Financial Accounting Standards Board (the “FASB”) issued FASB Staff Position APB 14-1,
Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) (“FSP APB 14-1”). FSP APB 14-1 requires an issuer of certain convertible debt instruments to
separately account for the liability and equity components of convertible debt instruments in a manner that reflects
the issuer’s nonconvertible debt borrowing rate. FSP APB 14-1 will be effective for the Company at the beginning
of fiscal 2010 (April 26, 2009) and requires retrospective application to all periods presented during which any such
convertible debt instruments were outstanding. The Company expects FSP APB 14-1 to have a negative impact on
historical results of operations when applied retrospectively and future operating results as long as the Company
continues to have convertible debentures outstanding primarily as a result of the recognition of increased non-cash
interest expense. The Company is currently evaluating the full impact of adoption of FSP APB 14-1 on its financial
position, results of operations and cash flows.
Other Expense
Other expense, which primarily consists of the discount and loss on the accounts receivable securitization, was $5.7
million in fiscal 2008 as compared to $6.0 million in fiscal 2007. The $0.3 million decrease in the discount and loss
was primarily due to lower effective discount rates associated with the Company’s securitization facility in fiscal
2008 as compared to fiscal 2007.
Provision for Income Taxes
27
Provision for income taxes increased to $28.1 million in fiscal 2008 from $26.5 million in fiscal 2007. The increase
was due to higher pre-tax income as compared to fiscal 2007 partially offset by a reduction in the effective income
tax rate. The effective income tax rate was 38.0% in fiscal 2008 as compared to 40.3% in fiscal 2007. The reduction
between years is primarily related to approximately $1.2 million of incremental tax benefit, or 1.6% of fiscal 2008
earnings before taxes, due to the favorable tax treatment of charitable contributions of inventory.
The effective income tax rate exceeded the federal statutory rate of 35% in both years primarily due to the impact of
state and foreign taxes.
Fiscal 2007 Compared to Fiscal 2006
The following discussion and analysis of fiscal 2007 results compared to fiscal 2006 results, is based on a
comparison of the Company’s results of operations from continuing operations.
Overview of Fiscal 2007
Revenues from continuing operations for fiscal 2007 increased 6.7% to $1.043 billion as compared to $977.3 million
in fiscal 2006. This increase was related primarily to the inclusion of a full year of revenues from the August, 2005
acquisition of Delta Education LLC (“Delta”). The Company’s product mix continued to shift to the higher margin
proprietary products, with the Specialty segment comprising 54.8% of revenues in fiscal 2007 as compared with
52.0% in fiscal 2006. This shift in product mix to higher margin Specialty products expanded gross margins to
42.7% from 41.8%.
Operating income was $93.8 million in fiscal 2007 as compared to $54.2 million in fiscal 2006. Operating margins
increased from 6.1% in fiscal 2006 (before terminated merger costs) to 9.0% in fiscal 2007. The increase in the
operating income and operating margin were related to the increased revenues and expansion in the gross margin
due to the aforementioned product mix shift, as well as expense reductions due to cost control initiatives and non-
recurring expenses in fiscal 2006.
Revenue
Revenues increased 6.7% from $977.3 million in fiscal 2006 to $1.043 billion in fiscal 2007. The growth in
revenues was attributable primarily to the acquisition of Delta. Specialty segment revenues increased 12.3% from
$527.2 million in fiscal 2006 (which included $19.2 million of intersegment revenues) to $591.9 million in fiscal
2007 (which included $20.5 million of intersegment revenues). The increase in Specialty segment revenues was due
primarily to the Delta acquisition as fiscal 2007 included a full twelve months of activity from Delta, in addition to
organic growth in the Specialty segment. Essentials segment revenues increased 0.5% from $468.8 million in fiscal
2006 (which includes $0.1 million of intersegment revenues) to $471.1 million in fiscal 2007 (which includes $0.1
million of intersegment revenues). The increase in Essentials segment revenues was related to modest increases in
the consumable and furniture product offerings.
Gross Profit
Gross profit increased 9.0% to $445.6 million compared with $408.7 million in fiscal 2006. The increase in gross
profit was primarily due to the increase in revenues and the shift in revenue mix to the higher margin Specialty
products. The revenue mix shift to the higher margin Specialty products was the main reason for the 90 basis point
improvement in gross margins from 41.8% in fiscal 2006 to 42.7% in fiscal 2007. In addition to the revenue mix,
our gross margins were affected by the continuation of the global sourcing initiative, which translates into lower
product costs, and the increase in offerings of private label products that carry higher margins. Offsetting the gross
28
margin expansion associated with global sourcing and increased private label products were the continued pricing
and competitive pressures that we experienced in more of our commodity type products. Specialty segment gross
profit increased $37.0 million or 14.3% from $258.2 million in fiscal 2006 to $295.2 million in fiscal 2007. The
increase in Specialty segment gross profit was due to the increased revenues and gross margin improvement. The 90
basis point improvement from 49.0% in fiscal 2006 to 49.9% in fiscal 2007 was due primarily to the acquisition of
Delta. Essentials segment gross profit was up from $151.6 million to $152.0 million. The increase in Essentials
segment gross profit was related to the increased revenues.
Selling, General and Administrative Expenses
SG&A increased 0.7% or $2.5 million from $349.3 million, or 35.7% of revenues, in fiscal 2006 to $351.8 million,
or 33.7% of revenues, in fiscal 2007. The increase in SG&A was due primarily to the incremental variable costs
associated with the $65.9 million incremental revenues, the fixed costs associated with the inclusion of Delta, and
stock-based compensation expense. These increases were offset by cost reduction initiatives, which included
headcount reductions, supply chain productivity enhancements and non-recurring expenses incurred in fiscal 2006.
Specialty segment SG&A increased from $204.1 million in fiscal 2006 to $211.6 million in fiscal 2007. However,
Specialty segment SG&A decreased as a percent of revenues from 38.7% in fiscal 2006 to 35.8% in fiscal 2007.
The increase in SG&A was due to the incremental four months of expenses related to the Delta acquisition and
stock-based compensation expense of $1.6 million. The decrease in SG&A as a percent of revenue was primarily
attributable to supply chain efficiencies, reduced catalog costs and headcount reductions. The reduction in catalog
costs was achieved through the optimization of the circulation which reduced the number of unproductive catalogs
mailed. The headcount reductions were primarily related to the integration of Delta.
Essentials segment SG&A decreased $0.5 million from $105.7 million or 22.5% of revenues in fiscal 2006 to $105.2
million or 22.3% of revenues for fiscal 2007. The decrease was primarily related to a headcount reduction as a
result of sales force integration. In addition, there was a reduction in supply chain costs as the Essentials segment
revenue shifted towards a higher mix of furniture which is shipped to the customers directly from the Company’s
vendors. These decreases were partially offset by increased marketing costs associated with the Company’s School
Smart brand and $0.8 million of stock-based compensation expense.
Corporate SG&A decreased by $4.5 million from $39.5 million in fiscal 2006 to $35.0 million in fiscal 2007. The
decrease was related to non-recurring charges in fiscal 2006 related to the closure of the Southaven, Mississippi
distribution center and reduction in headcount. These reductions were partially offset by planned investments in
technology and $2.1 million of stock-based compensation expense.
Costs Related to the Terminated Merger of School Specialty, Inc.
During fiscal 2006, we incurred $5.2 million of merger-related expenses consisting of accounting, legal and other
transaction-related costs.
Net Interest Expense
Net interest expense increased $2.9 million from $19.2 million in fiscal 2006 to $22.1 million in fiscal 2007. The
increase in interest expense was primarily due to an increase in average debt outstanding, offset to some extent by a
lower effective borrowing rate attributable to the Company’s November 2006 sale of $200.0 million principal
amount of subordinated debentures due 2026 at an interest rate of 3.75%. The Company used the proceeds of this
debt offering to pay down its higher rate revolving debt and to repurchase shares of the Company’s common stock
under its 2007 share repurchase programs.
Other Expense
Other expense, which primarily consists of the discount and loss on the accounts receivable securitization, was $6.0
million in fiscal 2007 as compared to $4.2 million in fiscal 2006. The $1.8 million increase in the discount and loss
29
was primarily due to the increased average securitized receivables primarily related to the Delta acquisition as well
an increase in the effective discount rate on the accounts receivable securitization.
Provision for Income Taxes
Provision for income taxes increased to $26.5 million in fiscal 2007 from $12.6 million in fiscal 2006. The increase
was due to higher pre-tax income. The effective income tax rate was 40.3% in fiscal 2007 as compared to 40.8% in
fiscal 2006. The reduction between years is related to a decrease in state and foreign income taxes offset by the tax
treatment of incentive stock options in accordance with SFAS No. 123R. The effective income tax rate exceeds the
federal statutory rate of 35% in both years primarily due to the impact of state and foreign taxes.
Discontinued Operation
As mentioned under ‘Background’ in this Item 7, the Company completed the sale of the School Specialty Media
(“SSM”) business unit in fiscal 2008, which has been reflected as a discontinued operation in the accompanying
consolidated statements of operations included under Item 8.
In fiscal 2008, the discontinued operation resulted in a $4.7 million loss, net of tax. The operations of the SSM
business unit resulted in a net of tax loss of $3.2 million and the sale and ultimate disposition of SSM resulted in a
net of tax loss of $1.5 million.
In fiscal 2007 the discontinued operation resulted in a $21.2 million loss, net of tax. The operations of the SSM
business unit resulted in a net of tax loss of $3.4 million and a net of tax impairment charge of $17.8 million was
recorded in anticipation of the intended sale.
Liquidity and Capital Resources
At April 26, 2008, we had working capital of $35.2 million. Our capitalization at April 26, 2008 was $924.5 million
and consisted of debt of $445.8 million and shareholders’ equity of $478.7 million.
Our credit facility matures on February 1, 2011 and provides for $350.0 million of revolving loan availability and
$100.0 million incremental term loan availability. The amount outstanding as of April 26, 2008 under the revolving
and incremental term loans was $97.2 million and $0, respectively. The credit facility is secured by substantially all
of our assets and contains certain financial and other covenants. Our borrowings are usually significantly higher
during the first two quarters of our fiscal year to meet the working capital requirements of our peak selling season.
As of April 26, 2008, our effective interest rate on borrowings under our credit facility was approximately 3.92%,
which excludes amortization of loan origination and commitment fees on unborrowed funds. During fiscal 2008, we
incurred commitment fees on unborrowed funds under the credit facility of $0.6 million and amortized loan
origination fee costs of $0.3 million. The credit facility contains certain financial covenants, including a
consolidated total and senior leverage ratio, a consolidated fixed charge ratio and a limitation on capital
expenditures. The Company was in compliance with these covenants at April 26, 2008.
Our $133.0 million, 3.75% convertible subordinated notes became convertible during the second quarter of fiscal
2006 as the closing price of the Company’s common stock exceeded $48.00 for the specified amount of time. As a
result, holders of the notes may surrender the notes for conversion at any time from October 1, 2005 until July 31,
2023. The notes are recorded as a current liability. Holders that exercise their right to convert the notes will receive
up to the accreted principal amount in cash, with the balance of the conversion obligation, if any, to be satisfied in
shares of Company common stock or cash, at the Company’s discretion. No notes have been converted into cash or
shares of common stock as of April 26, 2008. The notes can be redeemed at the option of the Company no earlier
than August 7, 2008.
In November 2006, we sold $200.0 million of convertible subordinated debentures due 2026. The debentures are
unsecured, subordinated obligations of the Company, pay interest at 3.75% per annum on each May 30th and November
30th, and are convertible upon satisfaction of certain conditions. In connection with any such conversion, we will deliver
cash equal to the lesser of the aggregate principal amount of debentures to be converted and our total conversion
obligation, and will deliver, at our option, cash or shares of our common stock in respect of the remainder, if any, of our
30
conversion obligation. The initial conversion rate is 19.4574 shares per $1,000 principal amount of debentures, which
represents an initial conversion price of approximately $51.39 per share. The debentures are redeemable at our option on
or after November 30, 2011. On November 30, 2011, 2016 and 2021 and upon the occurrence of certain circumstances,
holders will have the right to require us to repurchase all or some of the debentures. We used a portion of the proceeds to
repurchase approximately 1.1 million shares of our common stock at a cost of $40.0 million. The remaining proceeds
were used to pay down a portion of our existing debt under the credit facility.
Net cash provided by operating activities increased $12.8 million from $90.9 million in fiscal 2007 to $103.7 million
for fiscal 2008. The increase in cash provided by operating activities was primarily related to increased earnings
from continuing operations along with an increase in the non-cash expenses included in those earnings, such as
amortization and equity compensation expense. Working capital remained consistent between years with a
significant reduction in inventory levels primarily related to improvements in procurement strategies, offset by the
related reduction in accounts payables and an overall increase in accounts receivable balances. The increase in
accounts receivable is related to a combination of factors including the decreased rate of payment due to current
economic conditions, short-term challenges with migration to a centralized collections function, and the overall
increased revenue. Other accrued liabilities increased as a result of additional accrued compensation costs and the
timing of payments for other expenditures, partially offset by increases in catalog balances and the timing of tax
payments.
Net cash used in investing activities for fiscal 2008, which included $5.8 million of cash paid for the acquisition of
Sitton Spelling, was $32.7 million, compared to $27.0 million for fiscal 2007. Additions to property, plant and
equipment decreased $0.5 million from $18.2 million in fiscal 2007 to $17.7 million in fiscal 2008 and primarily
consisted of expenditures related to the ERP implementation and the upgrade of distribution related assets.
Net cash used in financing activities was $69.4 million in fiscal 2008 as compared to $63.8 million in fiscal 2007.
The net cash used in financing activities reflects the repurchase of 2.8 million shares of our common stock at a net
cost of $94.9 million during fiscal 2008, compared to 2.1 million shares repurchased in fiscal 2007 at a net cost of
$76.5 million. The decrease in the number of our weighted average common shares outstanding effected by share
repurchases has had and will continue to have a positive impact on our earnings per share computations as compared
to prior periods. See Part II, Item 5, Issuer Purchases of Equity Securities for additional information regarding share
repurchases. The increased use of cash for share repurchases was offset by additional short-term borrowings.
On June 12, 2008 we announced that our Board of Directors approved a new share repurchase program, which allows us
to purchase up to $50.0 million of our outstanding common stock. Purchases under the share repurchase program may
be made from time to time in the open market or through privately negotiated transactions. Common stock acquired
through the share repurchase program will be available for general corporate purposes.
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, share repurchases and our contractual obligations for the foreseeable future.
We expect our fiscal 2009 capital expenditures to be approximately $18.0 million and to consist primarily of
computer hardware and software costs related to the continued implementation of the new ERP platform and
warehouse equipment costs. We expect our investment in product development to be approximately $13.0 million.
Off Balance Sheet Arrangements
We have an accounts receivable securitization facility. The facility expires January 28, 2009 and it may be extended
further with the financial institution’s consent. The facility permits advances up to $175.0 million from July 1
through November 30 of each year, and advances up to $75.0 million from December 1 through June 30 of each
year. We entered into the facility for the purpose of reducing our variable rate interest expense. At April 26, 2008
and April 28, 2007, respectively, $50.0 million was advanced under the accounts receivable securitization and
accordingly, that amount of accounts receivable has been removed from our consolidated balance sheets. Costs
associated with the sale of receivables, primarily related to the discount and loss on sale, for the fiscal years 2008,
2007 and 2006 were $5.7, $6.0 and $3.6 million, respectively. The increase in these costs was related to a higher
31
average balance of accounts receivable securitized in 2007 and 2008 as compared to 2006 due to an increase in the
advance limits permitted by the facility. These costs are included as a component of other expense in our
consolidated statements of operations.
Summary of Contractual Obligations
The following table summarizes our contractual debt and operating lease obligations as of April 26, 2008:
Long-term debt obligations (1)………………………
Convertible subordinated notes (2)(3)……………………
Capital lease obligations………………………………
Operating lease obligations………………………
Purchase obligations (4)…………………………………
$
Total contractual obligations………………………
$
Total
133,905
356,622
44
72,792
-
563,363
$
Payments Due
(in thousands)
1 - 3
years
107,862
14,926
22
16,288
-
139,098
$
Less than
1 year
$
5,789
141,696
22
9,184
-
156,691
$
3 - 5
years
$
4,137
-
-
9,618
-
13,755
$
More than
5 years
$
16,117
200,000
-
37,702
-
253,819
$
________________
(1)
(2)
(3)
(4)
Long-term debt obligations include principal and interest payments on our credit facility and sale-leaseback
obligations, assuming these obligations remain outstanding until maturity at current or contractually
defined interest rates.
Convertible subordinated notes of $133,000 are recorded as a current liability at April 26, 2008. During
fiscal 2006 the notes became convertible and may be surrendered for conversion at any time. The notes can
be redeemed at the option of the Company no earlier than August 7, 2008. The amount reflected includes
principal and accrued interest as of the balance sheet date only. If the notes are held to maturity in 2023,
our obligation, including interest at current rates and accreted principal, is $241.8 million.
Convertible subordinated notes of $200,000 are recorded as maturing in more than five years as the bonds
are not currently convertible. The notes can be redeemed at the option of the Company no earlier than
November 30, 2011. The amounts reflected for these notes include accrued interest at the balance sheet
date and interest at 3.75% through November 30, 2011.
As of April 26, 2008, we did not have any material long-term purchase obligations. The short-term
purchase obligations the Company had as of April 26, 2008 were primarily for the purchase of inventory in
the normal course of business.
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.
32
The following table sets forth certain unaudited consolidated quarterly financial data for fiscal years 2008 and 2007
(in thousands, except per share data). We derived this quarterly data from our unaudited consolidated financial
statements.
First
(13 weeks)
Revenues………………………………………………..
Gross profit…………………………………………………………
Operating income (loss)……………………………….
Earnings (loss) from continuing operations,
386,513
173,368
73,223
$
Second
(13 weeks)
$
392,919
167,541
67,830
Fiscal 2008
Third
(13 weeks)
$
134,839
51,688
(24,871)
Fourth
(13 weeks)
Total
(52 weeks)
$
173,632
68,645
(16,694)
$
1,087,903
461,242
99,488
40,580
net of income taxes…………………………………………..
36,956
(19,042)
(12,682)
45,812
Loss from discontinued operations,
net of income taxes…………………………………………..
(259)
40,321
Net income (loss)……………………………………….…….
(402)
36,554
(1,220)
(20,262)
(2,810)
(15,492)
(4,691)
41,121
Basic earnings per share of common stock:
Earnings (loss) from continuing operations………………………………………………………………………………..
$
1.92
1.81
(0.01)
Loss from discontinued operations…………………………………………………………………………..
(0.02)
$
1.79
Total…………………………………………………………………………..
1.91
(0.66)
(0.15)
(0.81)
(0.95)
(0.06)
(1.01)
$
$
$
$
$
$
$
$
2.27
(0.23)
2.04
Diluted earnings per share of common stock:
Earnings (loss) from continuing operations………………………………………………………………………………..
$
1.87
1.76
(0.01)
Loss from discontinued operations…………………………………………………………………………..
(0.02)
$
1.74
Total…………………………………………………………………………..
1.86
(0.66)
(0.15)
(0.81)
(0.95)
(0.06)
(1.01)
$
$
$
$
$
$
$
$
2.21
(0.22)
1.99
First
(13 weeks)
Revenues………………………………………………..
Gross profit…………………………………………………………
Operating income (loss)……………………………….
Earnings (loss) from continuing operations,
377,071
167,911
69,072
$
Second
(13 weeks)
$
371,225
154,821
56,931
Fiscal 2007
Third
(13 weeks)
$
128,816
50,856
(20,725)
Fourth
(13 weeks)
Total
(52 weeks)
$
166,040
72,049
(11,480)
$
1,043,152
445,637
93,798
37,745
net of income taxes…………………………………………..
29,644
(16,906)
(11,258)
39,225
Loss from discontinued operations,
net of income taxes…………………………………………..
(878)
36,867
Net income (loss)……………………………………….…….
(442)
29,202
(1,917)
(18,823)
(17,942)
(29,200)
(21,179)
18,046
Basic earnings per share of common stock:
$
1.65
Earnings (loss) from continuing operations………………………………………………………………………………..
1.33
Loss from discontinued operations…………………………………………………………………………..
(0.02)
(0.04)
$
1.31
1.61
Total…………………………………………………………………………..
(0.53)
(0.85)
(1.38)
(0.79)
(0.09)
(0.88)
$
$
$
$
$
$
$
$
1.79
(0.96)
0.83
Diluted earnings per share of common stock:
$
1.60
Earnings (loss) from continuing operations………………………………………………………………………………..
1.29
Loss from discontinued operations…………………………………………………………………………..
(0.01)
(0.03)
$
1.28
1.57
Total…………………………………………………………………………..
(0.53)
(0.85)
(1.38)
(0.79)
(0.09)
(0.88)
$
$
$
$
$
$
$
$
1.74
(0.94)
0.80
33
Inflation
Inflation has had 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 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 and assumptions
on an ongoing basis and base them on a combination of historical experience and various other assumptions that we
believe to be reasonable under the circumstances. Actual results could differ from those estimates. Our critical
accounting policies that require significant judgments and estimates and assumptions used in the preparation of our
consolidated financial statements are as follows:
Revenue Recognition
Revenue, net of estimated returns and allowances, 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, the
selling price is fixed, the customer is obligated to pay and we have no significant remaining obligations. Cash
received in advance from customers is deferred on our balance sheet as a current liability and recognized upon the
shipment of products or upon the completion of services provided to the customers.
Catalog Costs and Related Amortization
We spend over $30.0 million annually to produce and distribute catalogs. 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. Consequently, any difference between our estimated
and actual revenue stream for a particular catalog and the related impact on amortization expense is neutralized
within a period of one year or less. Our estimate 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 the amortization
of our future catalogs, if necessary.
Development Costs
We accumulate external and certain internal costs incurred in the development of our products which can include a
master copy of a book, video or other media, on our balance sheet. As of April 26, 2008, we had $19.1 million in net
development costs on our balance sheet. A majority of these costs are associated with publishing and science
businesses. The capitalized development costs are subsequently amortized into cost of revenues over the expected
sales realization cycle of the products, which is typically five years. During fiscal 2008, we amortized development
costs of $6.0 million to expense related to our continuing businesses. We continue to monitor the expected sales
realization cycle for each product, and will adjust the remaining expected life of the development costs or recognize
an impairment, if warranted. During fiscal 2007, we recorded a $3.6 million impairment charge related to product
development costs at our SSM business unit in addition to a $1.0 million impairment charge related to product
development costs at SSM recorded in fiscal 2006.
34
Goodwill and Intangible Assets, and Long-Lived Assets
At April 26, 2008, goodwill and intangible assets represented approximately 64.5% of our total assets. Determining
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, “Goodwill and Other Intangible Assets.” As required by SFAS No. 142, the recoverability of these
assets is subject to a fair value assessment which includes judgments regarding financial projections, including
forecasted cash flows and discount rates, and comparable market values. As it relates to finite 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 judgments 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 estimated recoverability, or impairment, if any, of the asset.
During fiscal 2007, we recorded a $13.1 million goodwill impairment charge, a $10.4 million intangible asset
impairment charge and a $0.3 million impairment of property, plant and equipment related to the SSM business unit in
addition to a $25.6 million goodwill impairment charge related to SSM recorded in fiscal 2006. As of April 27, 2007, no
remaining goodwill or intangible assets were recorded as assets related to SSM. The impairment was the result of
deteriorating financial performance. During the fourth quarter of fiscal 2007, the Board of Directors authorized the
sale of SSM which was completed in the fourth quarter of fiscal 2008. We have reflected SSM as a discontinued
operation in the accompanying consolidated statements of operations under Item 8.
Item 7A. Quantitative and Qualitative Disclosures 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 2008, pre-tax earnings would have decreased by approximately $1.6 million. This amount
was determined by considering a hypothetical 100 basis point increase in interest rates on average variable-rate debt
outstanding and the average advanced under the accounts receivable securitization facility during fiscal 2008. The
estimated fair value of long-term debt approximated its carrying value at April 26, 2008, with the exception of our
convertible debt which at April 26, 2008 had a carrying value of $333.0 million and a fair market value of $303.4
million.
35
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
School Specialty, Inc.
Greenville, Wisconsin
We have audited the accompanying consolidated balance sheets of School Specialty, Inc. and subsidiaries (the
“Company”) as of April 26, 2008 and April 28, 2007, and the related consolidated statements of operations,
shareholders’ equity, and cash flows for each of the three years in the period ended April 26, 2008. Our audits also
included the consolidated 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 the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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, 2008 and April 28, 2007, and the results of their operations
and their cash flows for each of the three years in the period ended April 26, 2008 in conformity with accounting
principles generally accepted in the United States of America. Also, in our opinion, such consolidated 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 discussed in Note 13 to the consolidated financial statements, on April 30, 2006, the Company adopted
Statement of Financial Accounting Standard No. 123(R), Share-Based Payment.
As discussed in Note 9 to the consolidated financial statements, on April 29, 2007, the Company adopted Financial
Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an
Interpretation of FASB Statement No. 109.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Company’s internal control over financial reporting as of April 26, 2008, based on the criteria
established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated June 23, 2008 expressed an unqualified opinion on the Company’s
internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
June 23, 2008
36
FINANCIAL STATEMENTS
SCHOOL SPECIALTY, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
ASSETS
Current assets:
Cash and cash equivalents………………………………………………….
Accounts receivable, less allowance for doubtful accounts
$
4,034
$
2,386
April 26,
2008
April 28,
2007
of $4,235 and $4,801, respectively………………………………………..
Inventories ……………………………………………………………………..
Deferred catalog costs ……………………………………………………
Prepaid expenses and other current assets …………………………….
Refundable income taxes …………………………………………………
Deferred taxes ………………………………………………………………
Total current assets …………………………………………………….
Property, plant and equipment, net ………………………………………………
Goodwill ………………………………………………………………………
Intangible assets, net ………………………………………………………..
Development costs and other …………………………………………………………………………
77,591
149,548
14,845
18,857
9,288
15,726
289,889
77,311
543,630
176,771
29,726
1,117,327
65,900
177,319
14,848
16,548
1,850
10,201
289,052
77,345
534,488
183,660
26,334
1,110,879
$
$
Total assets …………………………………………………………….
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities - long-term debt………………………………………
Accounts payable……………………………………………………………
Accrued compensation………………………………………………………
Deferred revenue……………………………………………………………..
Other accrued liabilities…………………………………………………….
$
Total current liabilities…………………………………………………….
Long-term debt - less current maturities………………………………….
Deferred taxes………………………………………………………………
Other liabilities………………………………………………………………………..
Total liabilities………………………………………………………………
133,628
64,340
19,476
6,641
30,593
254,678
312,210
70,671
1,080
638,639
$
133,590
77,794
14,709
5,464
23,392
254,949
293,139
50,101
145
598,334
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.001 par value per share, 1,000,000
shares authorized; none outstanding………………………………….
-
-
Common stock, $0.001 par value per share, 150,000,000 shares
authorized; 23,631,135 and 23,310,461 shares issued, respectively…..
Capital paid-in excess of par value………………………………………….
Treasury stock, at cost - 4,922,610 and 2,126,121 shares, respectively………..
Accumulated other comprehensive income………………………………..
Retained earnings……………………………………………………………..
Total shareholders' equity……………………...…………………………….
$
Total liabilities and shareholders' equity……………………………..…
24
380,073
(171,387)
25,158
244,820
478,688
1,117,327
23
367,068
(76,508)
17,763
204,199
512,545
1,110,879
$
See accompanying notes to consolidated financial statements.
37
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
For the Fiscal Year Ended
April 28,
2007
(52 weeks)
$
1,043,152
Revenues………………………………………………………………………………………
597,515
Cost of revenues……………………………………………………………………………
445,637
351,839
-
93,798
Selling, general and administrative expenses………………………………………………
Merger-related expenses………………………………………………………
April 26,
2008
(52 weeks)
$
1,087,903
626,661
461,242
361,754
-
99,488
Gross profit…………………………………………………………………………………
Operating income…………………………………………………………………………
April 29,
2006
(52 weeks)
$
977,302
568,623
408,679
349,302
5,202
54,175
Other (income) expense:
Interest expense………………………………………………………………………………
Interest income………………………………………………………………………………
Other…………………………………………………………………………………………
Income before provision for income taxes…………………………………………………
Provision for income taxes……………………………………………………………………
19,857
(28)
5,718
73,941
28,129
45,812
22,203
(117)
6,019
65,693
26,468
39,225
Earnings from continuing operations………………………………………………………………………………………
19,314
(128)
4,160
30,829
12,581
18,248
Loss from operations of discontinued School Specialty
Media business unit, net of income taxes……………………………………………………………………………
(18,187)
(21,179)
(4,691)
Net income………………………………………………………………………………………
41,121
18,046
$
$
Weighted average shares outstanding:
Basic……………………………………………………………………………………………
Diluted ………………………………………………………………………………………
20,196
20,708
21,873
22,545
$
61
22,898
23,739
Basic earnings per share of common stock:
Earnings from continuing operations …………………………………………………………………………………………
Loss from discontinued operations………………………………………………………………………………………
Total………………………………………………………………………………………
$
$
$
$
$
$
$
$
$
0.80
(0.80)
0.00
1.79
(0.96)
0.83
2.27
(0.23)
2.04
Diluted earnings per share of common stock:
$
Earnings from continuing operations …………………………………………………………………………………………
$
Loss from discontinued operations………………………………………………………………………………………
$
Total…………………………………………………………………………………………
$
$
$
$
$
$
0.77
(0.77)
0.00
1.74
(0.94)
0.80
2.21
(0.22)
1.99
See accompanying notes to consolidated financial statements.
38
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE FISCAL YEARS ENDED APRIL 26, 2008, APRIL 28, 2007 and APRIL 29, 2006
(In Thousands)
Balance at April 30, 2005…………………………….
Issuance of common stock in conjunction
Common Stock
Shares
22,851
Dollars
23
with stock option exercises………………………
111
-
Tax benefit on option exercises…………………..
Foreign currency translation adjustment…………..
Net income……………………………………………
Total comprehensive income……………………..
Balance at April 29, 2006…………………………..
22,962
Capital Paid-in
Excess of Par
Value
Treasury
Stock,
at Cost
Accumulated Other
Comprehensive
Income
Retained
Earnings
Total
Shareholders'
Equity
Total
Comprehensive
Income
349,421
-
9,009
186,092
544,545
2,871
573
5,683
61
2,871
573
5,683
61
$
$
5,683
61
5,744
$
23
$
352,865
$
-
$
14,692
$
186,153
$
553,733
Issuance of common stock in conjunction
with stock option exercises………………………
Tax benefit on option exercises……………………..
Share-based compensation expense………………….
Treasury stock purchases……………………………..
Foreign currency translation adjustment…………..
Net income……………………………………………..
348
-
7,798
1,898
4,507
(76,508)
7,798
1,898
4,507
(76,508)
3,071
18,046
3,071
18,046
Total comprehensive income………………….
Balance at April 28, 2007………………………..
23,310
Adoption of FIN48……………………………………..
Issuance of common stock in conjunction
with stock option exercises………………………
Tax benefit on option exercises……………………..
Share-based compensation expense………………….
Treasury stock purchases……………………………..
Foreign currency translation adjustment…………..
Net income……………………………………………..
$
23
$
367,068
$
(76,508)
$
17,763
$
204,199
(500)
$
512,545
(500)
321
1
5,558
1,957
5,490
(94,879)
5,559
1,957
5,490
(94,879)
7,395
41,121
7,395
41,121
Total comprehensive income………………….
Balance at April 26, 2008………………………..
23,631
$
24
$
380,073
$
(171,387)
$
25,158
$
244,820
$
478,688
See accompanying notes to consolidated financial statements.
39
$
$
3,071
18,046
21,117
$
$
7,395
41,121
48,516
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For the Fiscal Year Ended
April 28,
2007
(52 weeks)
April 26,
2008
(52 weeks)
April 29,
2006
(52 weeks)
$
61
Cash flows from operating activities:
Net income………………………………………………………………………………………..
$
Adjustments to reconcile net income to net cash provided
41,121
$
18,046
by operating activities:
Depreciation and intangible asset amortization expense………………………………………………………
Amortization of development costs……………………………………………………………..
Amortization of debt fees and other……………………………………………………..
Loss on disposal of School Specialty Media business unit, net……………………………………………………………..
Impairment charge……………………………………………………………..
Share-based compensation expense……………………………………………………..
Deferred taxes……………………………………………………………………………………
Loss on disposal of property, equipment and other…………………………………………………………………..
Changes in current assets and liabilities (net of assets
acquired and liabilities assumed in business combinations):
Change in amounts sold under receivables securitization, net…..
Accounts receivable……………………………………………………………………….
Inventories………………………………………………………………………………..
Deferred catalog costs……………………………………………………………………..
Prepaid expenses and other current assets……………………………………………..
Accounts payable………………………………………………………………………….
Accrued liabilities………………………………………………………………………….
25,843
6,237
1,361
-
29,000
4,507
(1,630)
292
23,382
4,610
1,493
-
26,600
-
(3,887)
424
25,348
8,963
1,959
1,519
-
5,490
14,924
263
Net cash provided by operating activities………………………………………………….
-
(12,688)
23,234
(2,294)
(4,134)
(13,702)
13,703
103,706
-
(5,995)
(19,503)
6,291
14,124
2,874
9,413
90,860
2,800
22,313
601
469
(7,087)
11,802
(6,740)
76,841
Cash flows from investing activities:
(271,560)
Cash paid for acquisitions, net of cash acquired………………………………………….
(15,694)
Additions to property, plant and equipment………………………………………………….
(4,391)
Investment in intangible and other assets…………………………………………………..
(10,321)
Investment in product development costs…………………………………………………………
453
Proceeds from business dispositions………………………………………………………….
245
Proceeds from disposal of property, plant and equipment…………………………………………………………………
(301,268)
Net cash used in investing activities……………………………………………………..
-
(18,169)
(202)
(9,684)
-
1,013
(27,042)
(5,828)
(17,723)
-
(10,849)
1,350
375
(32,675)
Cash flows from financing activities:
-
Proceeds from convertible debt offering……………………………………………………………..
691,200
Proceeds from bank borrowings……………………………………………………………..
(672,091)
Repayment of debt and capital leases…………………………………………………….
(94,879)
Purchase of treasury stock…………………………………………………….
-
Payment of debt fees and other…………………………………………………………..
5,559
Proceeds from exercise of stock options………………………………………………….
828
Excess income tax benefit from exercise of stock options………………………………………………….
(69,383)
200,000
704,400
(894,878)
(76,508)
(5,223)
7,798
576
(63,835)
Net cash provided by (used in) financing activities…………………………………………..
Net increase (decrease) in cash and cash equivalents………………………………………………….
1,648
2,386
Cash and cash equivalents, beginning of period…………………………………………..
4,034
Cash and cash equivalents, end of period……………………………………………………
$
$
(17)
2,403
2,386
Supplemental disclosures of cash flow information:
$
Interest paid…………………………………………………………………………………………
$
Income taxes paid……………………………………………………………………………………
20,573
12,965
$
$
17,610
3,443
40
-
2,275,000
(2,053,574)
-
(1,660)
2,871
-
222,637
(1,790)
4,193
2,403
$
$
$
17,703
10,344
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS—(Continued)
(In Thousands)
The Company paid cash in connection with certain business combinations accounted for under the purchase method in the
fiscal years ended April 26, 2008 and April 29, 2006. There was no cash paid in connection with business combinations
during the fiscal year ended April 28, 2007. The fair values of the assets and liabilities of the acquired companies are
presented as follows:
For the Fiscal Year Ended
April 29,
2006
(52 weeks)
April 26,
2008
(52 weeks)
$
-
Accounts receivable……………………………………………
256
Inventories……………………………………………………
-
Prepaid expenses and other current assets………………
-
Property, plant and equipment……………………………………
Goodwill (2)………………………………………………………
2,972
Intangible assets (2)……………………………………………………
1,600
1,000
Other assets………………………………………………
-
Short-term debt and capital lease obligations……………
-
Accounts payable…………………………………………
-
Accrued liabilities…………………………………………
Long-term debt and capital lease obligations…………
-
-
Other liabilities…………………………………………………
5,828
Net assets acquired (1) ……………………………………
$
___________________
$
24,829
22,139
3,785
4,042
124,041
109,326
118
(25)
(6,934)
(9,586)
(85)
(190)
271,460
$
(1) Fiscal 2006 cash paid in acquisitions, net of cash acquired, as reported within cash flows from investing
activities includes a deferred purchase price payment of $100 related to the October 2001 acquisition of
Premier Science.
(2) During fiscal 2007, valuations of the intangible assets acquired in the purchase of Delta Education LLC were
finalized. As a result, the Company increased intangible assets recorded by $38,544 from what is reflected in
the table with an offsetting decrease to goodwill.
See accompanying notes to consolidated financial statements.
NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION
41
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 26, 2008, APRIL 28, 2007 AND APRIL 29, 2006
(In Thousands, Except Per Share Amounts)
School Specialty, Inc. (the “Company”) is an education company, serving the preK-12 market, with leading brands that provide
educators with innovative and proprietary products, programs and services designed to help educators engage and inspire students
of all ages and abilities, with operations primarily in the United States and Canada.
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 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 2008,” “fiscal 2007” and “fiscal 2006” refer to the Company’s fiscal
years ended April 26, 2008, April 28, 2007 and April 29, 2006, respectively, and each of these years 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 on a first-in, first-out basis.
Reserves recorded related to inventories were $12,301 and $11,634 as of April 26, 2008 and April 28, 2007, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at the lower of cost or net realizable value. 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 sale-leaseback obligations and capital leases are being amortized over the lesser of its useful life or its
lease term.
Goodwill and Non-amortizable 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. Certain intangible assets including a perpetual license agreement and various trademarks and tradenames are
estimated to have indefinite lives and are not subject to amortization. Under Statement of Financial Accounting Standards
(“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” goodwill and indefinite-lived intangible assets are not subject to
amortization but rather must be tested for impairment annually or more frequently if events or circumstances indicate they might
be impaired. The Company performs the annual impairment test during the first quarter of each fiscal year. Amortizable intangible
assets include customer relationships, publishing rights, non-compete agreements, trademarks and tradenames, order backlog and
copyrights and are being amortized over their estimated useful lives. During fiscal 2007, the Company recorded a $13,051
42
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 26, 2008, APRIL 28, 2007 AND APRIL 29, 2006
(In Thousands, Except Per Share Amounts)
goodwill impairment charge related to the School Specialty Media (“SSM”) business unit in addition to a $25,600 goodwill
impairment charge related to SSM recorded in fiscal 2006. As of April 28, 2007, no remaining goodwill was recorded as an asset
related to SSM. The impairment charges and operations of SSM have been reflected as discontinued operations in the
accompanying consolidated statements of operations for all periods presented. See Note 3.
Impairment of Long-Lived Assets
As required by SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company reviews
property, plant and equipment, definite-lived intangible assets and development costs for impairment if events or circumstances
indicate an asset might be impaired. The Company assesses impairment based on undiscounted cash flows and records any
impairment based on estimated fair value determined using discounted cash flows. The Company recorded a $14,349 and a
$1,000 impairment charge related to long-lived assets of SSM in fiscal 2007 and 2006, respectively. See Note 3.
Development Costs
Development costs represent external and internal costs incurred in the development of a master copy of a book, workbook, video
or other supplemental educational materials and products. The Company capitalizes development costs and amortizes these costs
into costs of revenues over the lesser of five years or the product’s life cycle in amounts proportionate to expected revenues. At
April 26, 2008 and April 28, 2007, net development costs totaled $19,103 and $17,982, respectively, and are included as a
component of development costs and other assets in the consolidated balance sheets.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments including cash and cash equivalents, accounts receivable, including
retained interests in securitized receivables, accounts payable, and accrued liabilities approximate fair value given the short
maturity of these instruments. The estimated fair value of the credit facility approximated its carrying value at April 26, 2008 and
April 28, 2007 given the variable interest rates included with this facility. The Company’s convertible debt had a carrying value of
$333,000 and a fair market value of $303,436 at April 26, 2008, and a carrying value of $333,000 and a fair market value of
$326,660 at April 28, 2007, as determined using the closing bid prices as reported on the National Association of Securities
Dealers, Inc.’s Portal Market on April 26, 2008 and April 28, 2007, respectively. The Company’s sale-leaseback obligations had a
carrying value of $15,598 and $16,154 and a fair market value of $17,258 and $17,214 at April 26, 2008 and April 28, 2007,
respectively, as determined using estimated interest rates available at April 26, 2008 and April 28, 2007 for similar long-term
borrowings.
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. Valuation
allowances are provided when it is anticipated that some or all of a deferred tax asset is not likely to be realized.
Revenue Recognition
Revenue, net of estimated returns and allowances, 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, the selling price is fixed, the
customer is obligated to pay and the Company has no significant remaining obligations. Cash received in advance from
customers is deferred on the balance sheet as a current liability and recognized upon the shipment of products or upon the
completion of services provided to customers.
Concentration of Credit Risks
The Company grants credit to customers in the ordinary course of business. The majority of the Company’s customers are school
districts and schools. Concentration of credit risk with respect to trade receivables is limited due to the significant number of
43
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 26, 2008, APRIL 28, 2007 AND APRIL 29, 2006
(In Thousands, Except Per Share Amounts)
customers and their geographic dispersion. During fiscal 2008, 2007 and 2006, no customer represented more than 10% of
revenues or accounts receivable.
Vendor Rebates
The Company receives reimbursements from vendors (vendor rebates) based on annual purchased volume of products from its
respective vendors. The Company’s vendor rebates are earned based on pre-determined percentage rebates on the purchased
volume of products within a calendar year. The majority of the rebates are not based on minimum purchases or milestones, and
therefore the Company recognizes the rebates on an accrual basis and reduces cost of revenues over the estimated period the
related products are 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 statements of operations as a component of selling, general and administrative expenses. Such
amortization expense for fiscal years 2008, 2007 and 2006 was $25,676, $28,141 and $29,132, respectively.
Restructuring
The Company accounts for restructuring costs associated with the closure or disposal of distribution centers in accordance with
SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.” During fiscal 2006, $4,002 of expenses related
to severance and lease costs was incurred. At April 28, 2007, there was $225 of accrued restructuring costs recorded in other
accrued liabilities on the consolidated balance sheet primarily related to lease exit costs of the Southaven, Mississippi distribution
center. No restructuring liabilities were recorded as of April 26, 2008.
Shipping and Handling Costs
The Company accounts for shipping and handling costs billed to customers as a component of revenues. The Company
accounts for shipping and handling costs incurred 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
incurred as a selling, general and administrative expense. The amount of shipping and handling costs included in selling,
general and administrative expenses for fiscal years 2008, 2007 and 2006 was $47,695, $49,128 and $44,967, 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 statements of operations have been translated using the weighted average exchange rate for the year. Resulting
translation adjustments are included in foreign currency translation adjustment within other comprehensive income.
Share-Based Compensation
Beginning in fiscal 2007, the Company accounts for its share-based compensation plans under the recognition and measurement
principles of SFAS No. 123(R), Share-Based Payment (“SFAS No. 123(R)”). Prior to the adoption of SFAS No. 123(R), the
Company accounted for share-based compensation in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (“APB 25”). See Note 13.
44
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 26, 2008, APRIL 28, 2007 AND APRIL 29, 2006
(In Thousands, Except Per Share Amounts)
Recent Accounting Pronouncements
In May 2008, the Financial Accounting Standards Board (the “FASB”) issued FASB Staff Position APB 14-1, Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP
APB 14-1”). FSP APB 14-1 requires an issuer of certain convertible debt instruments to separately account for the liability
and equity components of convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt borrowing
rate. FSP APB 14-1 will be effective for the Company at the beginning of fiscal 2010 (April 26, 2009) and requires
retrospective application to all periods presented during which any such convertible debt instruments were outstanding. The
Company expects FSP APB 14-1 to have a negative impact on historical results of operations when applied retrospectively
and future operating results as long as the Company continues to have convertible debentures outstanding primarily as a
result of the recognition of increased non-cash interest expense. The Company is currently evaluating the full impact of
adoption of FSP APB 14-1 on its financial position, results of operations and cash flows.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS 161”), which requires additional
disclosures about the objectives of derivative instruments and hedging activities, the method of accounting for such
instruments under SFAS No. 133 and its related interpretations, and a tabular disclosure of the effects of such instruments
and related hedged items on a company’s financial position, financial performance, and cash flows. SFAS No. 161 does not
change the accounting treatment for derivative instruments and is effective for us at the beginning of fiscal 2010. The
Company is currently evaluating the impact of the disclosure requirements of SFAS No. 161.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), Business Combinations
(“SFAS No. 141(R)”). SFAS No. 141(R) states that all business combinations (whether full, partial or step acquisitions) will
result in all assets and liabilities of an acquired business being recorded at their fair values. Certain forms of contingent
consideration and certain acquired contingencies will be recorded at fair value at the acquisition date. SFAS No. 141(R) also
states that acquisition costs will generally be expensed as incurred and restructuring costs will be expensed in periods after
the acquisition date. SFAS No. 141(R) will be effective for the Company at the beginning of fiscal 2010 (April 26, 2009).
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51 (“SFAS No. 160”). SFAS No. 160 requires a company to
clearly identify and present ownership interests in subsidiaries held by parties other than the company in the consolidated
financial statements within the equity section but separate from the company’s equity. It also requires the amount of
consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the
face of the consolidated statement of income; changes in ownership interest be accounted for similarly, as equity transactions;
and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain
or loss on the deconsolidation of the subsidiary be measured at fair value. SFAS No. 160 will be effective for the Company at
the beginning of fiscal 2010 (April 26, 2009). The Company is currently evaluating the requirements of SFAS No. 160 and
does not expect adoption to have a material impact, if any, on its financial position, results of operations or cash flows.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements
(“SFAS No. 157”). SFAS No. 157 provides enhanced guidance for using fair value to measure assets and liabilities. The
standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard
does not expand the use of fair value in any new circumstances. Under the standard, fair value refers to the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in
which the reporting entity is engaged. SFAS No. 157 is effective for the Company at the beginning of fiscal 2009 (April 27,
2008), although early adoption is permitted. The adoption of SFAS No. 157 did not have a material impact on the Company’s
financial position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Options for Financial Assets and Financial Liabilities,
Including an Amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items generally on an instrument-by-instrument basis at fair value that are not
currently required to be measured at fair value. SFAS No. 159 is intended to provide entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex
45
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 26, 2008, APRIL 28, 2007 AND APRIL 29, 2006
(In Thousands, Except Per Share Amounts)
hedge accounting provisions. SFAS No. 159 does not change requirements for recognizing and measuring dividend income,
interest income or interest expense. SFAS No. 159 is effective for the Company at the beginning of fiscal 2009 (April 27,
2008), although early adoption was permitted. The adoption of SFAS No. 159 did not have a material impact on the
Company’s financial position, results of operations or cash flows.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”).
SAB 108 provides guidance on how to evaluate prior period financial statement misstatements for purposes of assessing their
materiality in the current period. If the prior period effect is material to the current period, then the prior period is required to
be corrected. Correcting prior year financial statements would not require an amendment of prior year financial statements,
but such corrections would be made the next time the Company files the prior year financial statements. SAB 108 allows a
one-time transitional cumulative effect adjustment to retained earnings for corrections of prior period misstatements required
under this statement. SAB 108 was effective for the Company at the beginning of fiscal 2008. The adoption of SAB 108 did
not have an impact on the Company’s results of operations or financial position.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation
of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The provisions of FIN 48 were effective for the Company at the
beginning of fiscal 2008. As a result of the adoption of FIN 48, the Company recognized a $500 increase in the liability for
unrecognized tax benefits, which was accounted for as a reduction to the fiscal 2008 beginning balance of retained earnings.
NOTE 3—DISCONTINUED OPERATION
On April 12, 2007, the Company’s Board of Directors authorized the Company’s management to proceed with the sale and
ultimate disposition of the Company’s SSM business unit, which was previously reported as a component of the Specialty
segment. Based upon this action, the Company recorded an asset impairment charge during the fourth quarter of fiscal 2007
of $29,000. The charge includes the write-off of SSM’s goodwill of $13,051 and intangible assets of $10,410. In addition,
the Company wrote down the carrying value of SSM’s product development costs by $3,639 and other assets by $1,900. The
Company also recorded a $26,600 impairment charge related to SSM in the fourth quarter of fiscal 2006 at the initial onset of
deteriorating financial performance and revised expected future results of the business unit. The $26,600 charge included the
write-off of goodwill of $25,600 and a reduction in the carrying value of product development costs of $1,000.
On April 25, 2008, the Company completed the sale and ultimate disposal of substantially all remaining assets of SSM for
proceeds of $8,597, of which $1,350 was received in cash prior to the end of fiscal 2008. The Company expects to receive
additional cash proceeds of $1,685 during the first half of fiscal 2009, and signed a note receivable of $5,562 with installment
payments to be received over the next three years, including $1,300 during fiscal 2009. In addition to the remaining proceeds
receivable at April 26, 2008, the Company also has $2,052 of current liabilities primarily related to severance and other
compensation costs of former SSM employees and other expenses incurred as a result of the sale of SSM.
The sale and ultimate disposal of substantially all assets of SSM resulted in a loss of $5,074 ($1,519 net of income taxes). In
conjunction with the transaction, the Company committed to donating approximately $4,600 of inventory which resulted in
an income tax benefit of $3,341 due to the favorable tax treatment of certain inventory charitable donations.
In accordance with SFAS No. 144, the Company has reflected the impairment charges, operations and disposal of SSM as
discontinued operations in the accompanying consolidated statements of earnings for all periods presented. The
accompanying consolidated balance sheets include the following assets and liabilities of SSM at April 28, 2007 and April 29,
2006:
46
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 26, 2008, APRIL 28, 2007 AND APRIL 29, 2006
(In Thousands, Except Per Share Amounts)
April 28,
2007
April 29,
2006
Accounts receivable…………………………………………………………
Inventory………………………………………………………
Prepaid catalog and other current assets………………………………………………………
Property, plant and equipment………………………………………………………
Goodwill and other intangible assets, net……………………………………………
Product development costs…………………………………………
$
3,174
6,109
3,402
185
-
2,839
15,709
$
5,438
6,477
6,345
616
24,115
7,012
50,003
$
$
$
772
$
1,403
Total assets
Total current liabilities
The following table illustrates the amounts of revenues and earnings (losses) reported in discontinued operations in the
accompanying consolidated statements of operations:
Fiscal 2008
(52 weeks)
Fiscal 2007
(52 weeks)
Fiscal 2006
(52 weeks)
Revenues…………………………………………………………..
$
16,830
$
25,358
$
38,427
Loss from operations of SSM……………………………………………………….
Loss from disposal of SSM……………………………………………………….
Impairment charge…………………………………………
(5,156)
(5,074)
-
(5,437)
-
(29,000)
Loss from discontinued operations
before income taxes…………………………………………….
Benefit from income taxes…………………………………………
Loss from discontinued operations,
net of income taxes……………………………………………………….
(4,691)
$
(10,230)
(5,539)
(34,437)
(13,258)
(2,972)
-
(26,600)
(29,572)
(11,385)
$
(21,179)
$
(18,187)
NOTE 4—BUSINESS COMBINATIONS
Fiscal 2008
During the third quarter of fiscal 2008, the Company completed the acquisition of Sitton Spelling (“Sitton”) from Egger
Publishing, Inc. for an all-cash, aggregate purchase price of $5,828. Sitton offers spelling and word skills programs to help
educators in the area of reading intervention. Sitton also has professional development programs for educators through
nationwide seminars conducted by independent trainers. This business will be integrated into the Company’s Educator’s
Publishing Service business within the Specialty segment. Net assets acquired included $256 of current assets, $1,000 of
capitalized product development costs, $1,600 of amortizable intangible assets and $2,972 of goodwill, all of which are
deductible for tax purposes. The results of Sitton have been included in the accompanying consolidated financial statements
since the date of acquisition and would not have had a material effect on the Company’s overall performance on a pro forma
basis and did not have a material effect on the Company’s fiscal 2008 performance.
Fiscal 2006
On December 14, 2005, the Company acquired certain assets of The Speech Bin, Inc. (“Speech Bin”) for an aggregate
purchase price of $1,150. This transaction was funded in cash through borrowings under the Company’s credit facility. The
Speech Bin offers books, products and tools to help educators in the special needs market, focusing on speech and language.
This business has been integrated into the Company’s Abilitations offering, giving Abilitations a focused vehicle to expand
47
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 26, 2008, APRIL 28, 2007 AND APRIL 29, 2006
(In Thousands, Except Per Share Amounts)
into this segment of the special needs market. The purchase price allocation resulted in $856 of acquired tradenames, which
are deductible for tax purposes, with amortizable lives of 10 years. The results of this acquisition have been included in the
Specialty segment since the date of acquisition.
On August 31, 2005, the Company acquired all of the membership interests of Delta Education, LLC (“Delta”) from Wicks
Learning Group, LLC, an affiliate of the Wicks Group of Companies L.L.C., a New York-based private equity firm, for an
aggregate purchase price, net of cash acquired, of $270,310. The transaction was funded in cash through borrowings under
the Company’s credit facility as well as through a $100,000 term loan facility, both of which were subsequently replaced by
the Company’s Amended and Restated Credit Agreement. The business operates primarily from Nashua, New Hampshire
and is the exclusive publisher of inquiry based hands-on science curriculum for the elementary school market developed by
the University of California, Berkeley. Its products include comprehensive science kits, books, instructional materials and
education software. As part of the transaction, the Company also acquired Delta’s Educators Publishing Service division, a
supplemental publisher of reading titles for grades K-8. The Delta business complements the Company’s Frey Scientific
brand, and the Educators Publishing Service division enhances the offerings of the School Specialty Publishing division. The
preliminary purchase price allocation resulted in goodwill of $124,041 recorded at April 29, 2006, which is deductible for tax
purposes. The final purchase price allocation resulted in goodwill of $86,264 recorded at April 28, 2007, which is deductible
for tax purposes. The results of this acquisition have been included in the Specialty segment since the date of acquisition.
NOTE 5—GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents details of the Company’s intangible assets, including the range of useful lives, excluding
goodwill:
April 26, 2008
Amortizable intangible assets:
Gross Value
Accumulated
Amortization
Net Book
Value
Customer relationships (10 to 17 years)……………………………………………………
Publishing rights (15 to 25 years)………………………………………………
Non-compete agreements (3.5 to 10 years)……………………………………………
Tradenames and trademarks (5 to 30 years)……………………………………………
Order backlog and other (less than 1 to 13 years)……………………………………………………………………
$
$
$
Total amortizable intangible assets………………………………
Non-amortizable intangible assets:
Perpetual license agreement……………………………………………
Tradenames and trademarks……………………………………………………………
Total non-amortizable intangible assets……………………………
$
Total intangible assets……………………………………………
$
36,236
106,510
8,043
3,024
3,221
157,034
12,700
40,697
53,397
210,431
(13,390)
(13,175)
(5,092)
(509)
(1,494)
(33,660)
-
-
-
(33,660)
22,846
93,335
2,951
2,515
1,727
123,374
12,700
40,697
53,397
176,771
$
48
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 26, 2008, APRIL 28, 2007 AND APRIL 29, 2006
(In Thousands, Except Per Share Amounts)
April 28, 2007
Amortizable intangible assets:
Gross Value
Accumulated
Amortization
Net Book
Value
Customer relationships (10 to 17 years)……………………………………………………
Publishing rights (15 to 25 years)………………………………………………
Non-compete agreements (3.5 to 10 years)……………………………………………
Tradenames and trademarks (5 to 30 years)……………………………………………
Order backlog and other (less than 1 to 13 years)……………………………………………………………………
$
$
$
Total amortizable intangible assets………………………………
Non-amortizable intangible assets:
Perpetual license agreement……………………………………………
Tradenames and trademarks……………………………………………………………
Total non-amortizable intangible assets……………………………
$
Total intangible assets……………………………………………
$
36,014
105,010
8,576
3,034
3,666
156,300
12,700
40,697
53,397
209,697
(11,012)
(8,519)
(4,728)
(360)
(1,418)
(26,037)
-
-
-
(26,037)
25,002
96,491
3,848
2,674
2,248
130,263
12,700
40,697
53,397
183,660
$
Intangible asset amortization expense included in selling, general and administrative expenses for fiscal years 2008, 2007 and
2006 was $8,662, $9,308 and $6,942, respectively.
During fiscal 2007, valuations of the intangible assets acquired in the purchase of Delta were finalized. As a result, the
Company increased intangible assets recorded by $38,544 in fiscal 2007 with an offsetting decrease to goodwill.
During the fourth quarter of fiscal 2007, the Company wrote off intangible assets related to SSM with a gross value of
$12,363 and an unamortized value of $10,410. See Note 3.
Estimated intangible asset amortization expense for each of the five succeeding fiscal years is:
2009 ................................................................................ $8,460
2010 .................................................................................. 8,343
2011 .................................................................................. 8,029
2012 .................................................................................. 7,851
2013 .................................................................................. 7,448
The following information presents changes to goodwill during the two-year period ended April 26, 2008:
Balance at
April 29,
2006
Segment
417,308
Specialty………………
165,143
Essentials………………
582,451
Total………………
$
$
Fiscal 2007
Acquisitions
-
$
-
$
-
Adjustments
(47,963)
$
-
(47,963)
$
Balance at
April 28,
2007
369,345
165,143
534,488
$
$
Fiscal 2008
Acquisitions Adjustments
6,170
$
-
6,170
2,972
-
2,972
$
$
$
Balance at
April 26,
2008
378,487
165,143
543,630
$
$
The Specialty segment adjustments during fiscal 2007 of $(47,963) are comprised of a $(37,777) purchase price adjustment
for the finalization of the valuation of intangible and other assets and liabilities acquired from Delta, a $(13,051) impairment
charge related to SSM, $2,765 related to foreign currency translation, and $100 for a deferred purchase price payment related
to the acquisition of Premier Science. The Specialty segment adjustments during fiscal 2008 of $6,170 are comprised of
$6,292 related to foreign currency translation and $(122) of adjustments related to goodwill amounts recorded in previous
fiscal years.
As a result of the deteriorating financial performance of the SSM business unit during fiscal 2006’s fourth quarter,
particularly the video line, the Company performed an interim goodwill impairment test. The Company prepared a fair value
49
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 26, 2008, APRIL 28, 2007 AND APRIL 29, 2006
(In Thousands, Except Per Share Amounts)
assessment of the reporting unit, as defined in SFAS No. 142, using a discounted cash flow approach which includes
judgments regarding financial projections, including forecasted cash flows and discount rates, and comparable market values.
Utilizing updated operating profit and cash flow assumptions of the SSM business unit, the Company recorded a $25,600
goodwill impairment charge. During the fourth quarter of fiscal 2007, it was determined that SSM was not a core business in
the Company’s growth strategy and therefore, the Company would reduce future investment in SSM. On April 12, 2007, the
Company’s Board of Directors authorized the Company’s management to proceed with the sale and ultimate disposition of
SSM. The Company once again performed an interim goodwill impairment test and as a result, recorded an additional
$13,051 goodwill impairment charge. At April 28, 2007, all goodwill originally recorded for the SSM business unit was
written off as a result of the impairment charges noted above. See Note 3.
NOTE 6—PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
Land……………………………………………………
Projects in progress……………………………………
Buildings and leasehold improvements……………………
Furniture, fixtures and other……………………………
Machinery and warehouse equipment……………
Total property, plant and equipment……………
Less: Accumulated depreciation……………………
Net property, plant and equipment……………
$
April 26,
2008
$
502
4,276
33,323
94,670
43,983
176,754
(99,443)
77,311
April 28,
2007
$
502
3,976
33,182
81,541
44,371
163,572
(86,227)
77,345
$
Depreciation expense related to continuing operations for fiscal years 2008, 2007 and 2006 was $16,407, $15,627 and $15,360,
respectively.
NOTE 7—DEBT
Long-Term Debt
Long-term debt consists of the following:
April 26,
April 28,
2008
2007
Amended and Restated Credit Agreement, maturing in 2011…………………………………………
97,200
77,500
133,000
3.75% Convertible Subordinated Notes due 2023……………………………………
133,000
3.75% Convertible Subordinated Notes due 2026……………………………………
200,000
200,000
16,154
15,598
Sale-leaseback obligations, effective rate of 8.97%, expiring in 2020…………………………………………………………
75
40
Capital lease obligations………………………...………………………………
426,729
445,838
Total debt…………………………………………………………………
(133,590)
(133,628)
Less: Current maturities…………………………………………………………
$
293,139
$
312,210
Total long-term debt………………………………………………………
$
$
On February 1, 2006, the Company entered into an Amended and Restated Credit Agreement which replaced the existing
credit facility and the $100,000 term loan used as partial financing for the Delta acquisition. The Amended and Restated
Credit Agreement matures on February 1, 2011 and provides for a $350,000 revolving loan and an available $100,000
incremental term loan. Interest accrues at a rate of, at the Company’s option, either a Eurodollar rate plus an applicable
margin of up to 1.75%, or the lender’s base rate plus an applicable margin of up to 0.50%. The Company also pays a
50
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 26, 2008, APRIL 28, 2007 AND APRIL 29, 2006
(In Thousands, Except Per Share Amounts)
commitment fee on the revolving loan of up to 0.375% on unborrowed funds. The Amended and Restated Credit Agreement
is secured by substantially all of the assets of the Company and contains certain financial covenants, including a consolidated
total and senior leverage ratio, a consolidated fixed charges coverage ratio and a limitation on consolidated capital
expenditures. The Company was in compliance with these covenants at April 26, 2008. The effective interest rate under the
credit facility for fiscal 2008 was 7.16%, which includes amortization of the loan origination fees of $312 and commitment fees
on unborrowed funds of $642. The effective interest rate under the credit facility for fiscal 2007 was 7.17%, which includes
amortization of the loan origination fees of $309 and commitment fees on unborrowed funds of $492. The revolving loan provides
for a letter of credit sub-facility of up to $15,000, under which $2,215 was issued and outstanding as of April 26, 2008. As of
April 26, 2008 and April 28, 2007, $97,200 and $77,500, respectively, were outstanding on the revolving loan and reflected as
non-currently maturing, long-term debt in the accompanying balance sheets.
During 2003, the Company sold an aggregate principal amount of $133,000 of convertible subordinated notes due in 2023.
The Company used the total net proceeds from the offering of $128,999 to repay a portion of the debt outstanding under the
Company’s credit facility. The notes carry an annual interest rate of 3.75% until August 1, 2010, at which time the notes will
cease bearing interest and the original principal amount of each note will commence increasing daily by the annual rate of
3.75%. Depending on the market price of the notes, the Company will make additional payments of interest commencing
August 1, 2008. The notes became convertible into shares of the Company’s common stock at an initial conversion price of
$40.00 per share during fiscal 2006 and are recorded as a current liability. Holders of the notes may surrender the notes for
conversion at any time from October 1, 2005 until July 31, 2023. Holders that exercise their right to convert the notes will
receive up to the accreted principal amount in cash, with the balance of the conversion obligation, if any, to be satisfied in
shares of Company common stock or cash, at the Company’s discretion. No notes have been converted into cash or shares of
common stock as of April 26, 2008. The notes can be redeemed at the option of the Company no earlier than August 7, 2008.
On November 22, 2006, the Company sold $200,000 of convertible subordinated debentures due 2026. The debentures are
unsecured, subordinated obligations of the Company, pay interest at 3.75% per annum on each May 30th and November
30th, and are convertible upon satisfaction of certain conditions. In connection with any such conversion, the Company will
deliver cash equal to the lesser of the aggregate principal amount of debentures to be converted or the Company’s total
conversion obligation, and will deliver, at its option, cash or shares of its common stock in respect of the remainder, if any, of
its conversion obligation. The initial conversion rate is .0194574 shares per $1 principal amount of debentures, which
represents an initial conversion price of approximately $51.39 per share. The debentures are redeemable at the Company’s
option on or after November 30, 2011. On November 30, 2011, 2016 and 2021 and upon the occurrence of certain
circumstances, holders will have the right to require the Company to repurchase all or some of the debentures.
The Company entered into two sale-leaseback transactions during fiscal 2001 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.
51
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 26, 2008, APRIL 28, 2007 AND APRIL 29, 2006
(In Thousands, Except Per Share Amounts)
Maturities of Long-Term Debt
Maturities of long-term debt, including capital lease obligations, for subsequent fiscal years, are as follows:
2009…………………………………………………………
133,628
679
2010…………………………………………………………
772
2011………………………………………………………
98,095
2012………………………………………………………
2013………………………………………………………
979
211,685
Thereafter…………………………………………………
445,838
Total maturities of long-term debt…………………
$
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.
NSI does not meet the conditions of a qualifying Special Purpose Entity and therefore the results of NSI have been included in the
Company’s consolidated results for financial reporting purposes. 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. 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 of the Company’s
obligations. The facility has been amended to extend its expiration to January 28, 2009 and it may be extended further with the
financial institution’s consent. In addition, the facility was amended to permit advances up to $175,000 from July 1 through
November 30 of each year, and advances up to $75,000 from December 1 through June 30 of each year. 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.” At April 26, 2008 and April 28, 2007,
respectively, $50,000 was advanced under the accounts receivable securitization and accordingly, that amount of accounts
receivable has been removed from the accompanying consolidated balance sheets. Costs associated with the sale of receivables,
primarily related to the discount and loss on sale, were $5,718, $6,028 and $3,592 and are included in other expenses in the
consolidated statement of operations for fiscal years 2008, 2007 and 2006, respectively. Supplemental information related to the
accounts receivable securitization transactions is provided below. Proceeds under accounts receivable securitization and
collections as servicer of receivables sold have been netted in the accompanying consolidated statements of cash flows under the
caption, “Change in amounts sold under receivables securitization, net.”
52
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 26, 2008, APRIL 28, 2007 AND APRIL 29, 2006
(In Thousands, Except Per Share Amounts)
Fiscal 2008
(52 weeks)
Fiscal 2007
(52 weeks)
Fiscal 2006
(52 weeks)
492,337
Proceeds under accounts receivable securitization…………………………………………………………………………
(489,537)
Collections as servicer of receivables sold…………………………………………………………………………………
614,033
(614,033)
558,202
(558,202)
$
$
$
Retained interest in accounts receivable at end of period…………………………………………………………………………
Cash flows from retained interests…………………………………………………………………………………
67,139
448,500
80,419
529,922
61,511
518,452
$
$
$
NOTE 9—INCOME TAXES
The provision for income taxes consists of:
Current income tax expense from continuing operations:
Fiscal 2008
(52 weeks)
Fiscal 2007
(52 weeks)
Fiscal 2006
(52 weeks)
Federal…………………………………………………………………………
$
State…………………………………………………………………………………
Foreign…………………………………………………………………………
Total…………………………………………………………………………
Deferred income tax expense from continuing operations…………………………………………
Total provision for income taxes from continuing operations………………………………
19,246
2,642
2,079
23,967
4,162
28,129
$
13,049
1,988
2,339
17,376
9,092
26,468
$
3,239
2,261
2,483
7,983
4,598
12,581
Current income tax expense (benefit) from discontinued operations……
Deferred income tax expense (benefit) from discontinued operations……
(16,301)
10,762
(2,536)
(10,722)
(2,900)
(8,485)
Total provision for (benefit from) income taxes
from discontinued operations………………………………………………
(5,539)
(13,258)
(11,385)
Total provision for income taxes……………………….……………
$
22,590
$
13,210
$
1,196
53
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 26, 2008, APRIL 28, 2007 AND APRIL 29, 2006
(In Thousands, Except Per Share Amounts)
Deferred taxes are comprised of the following:
April 26,
2008
April 28,
2007
Current deferred tax assets:
Inventory……………………………………………………………..
Allowance for doubtful accounts…………………………………..
Accrued liabilities…………………………………………………….
Accrued restructuring……………………………………………….
Total current deferred tax assets……………………………….
$
8,384
2,105
5,237
-
15,726
Long-term deferred tax assets (liabilities):
Net operating loss carryforward…………………………………….
Property and equipment……………………………………………..
Accrued liabilities…………………………………………………….
Intangible assets……………………………………………………..
Total long-term deferred tax liabilities…………………………..
Net deferred tax liablities…………………………………………
3,671
(10,422)
(10,447)
(53,473)
(70,671)
(54,945)
$
$
6,224
2,155
1,655
167
10,201
2,701
(10,665)
(7,388)
(34,749)
(50,101)
(39,900)
$
At April 26, 2008, the Company has state net operating losses of approximately $84,761, which expire during fiscal years 2009 –
2026. The Company believes that the realization of the deferred tax assets is more likely than not, based on the expectation that
the Company will generate the necessary taxable income in future periods and, accordingly, no valuation reserve has been
provided. In fiscal 2008, fiscal 2007 and fiscal 2006, the Company had not recorded U.S. tax provisions of $1,149, $980 and
$1,026 relating to $3,283, $2,799 and $3,445 of unremitted earnings from foreign investments, respectively, as these earnings are
expected to be reinvested indefinitely.
The Company’s effective income tax rate varied from the U.S. federal statutory tax rate as follows:
Fiscal 2008
(52 weeks)
Fiscal 2007
(52 weeks)
Fiscal 2006
(52 weeks)
U.S. federal statutory rate………………………………………
State income taxes, net of federal income tax benefit……….
Foreign income tax……………………………………………...
Share-based compensation……………………………………………
Meals and entertainment, inventory donations and other……………………………………………………………
Effective income tax rate………………………………………
35.0%
3.8%
0.2%
0.4%
-1.4%
38.0%
35.0%
3.2%
1.0%
0.7%
0.4%
40.3%
35.0%
3.6%
1.8%
-
0.4%
40.8%
The provisions of FIN 48 were effective for the Company at the beginning of fiscal 2008. As a result of the adoption of FIN
48, the Company recognized a $500 increase in the liability for unrecognized tax benefits, which was accounted for as a
reduction to the fiscal 2008 beginning balance of retained earnings.
The Company files income tax returns with the U.S., various U.S. states, and foreign jurisdictions. The most significant tax
return the Company files is with the U.S. The Company’s tax returns are no longer subject to examination by the U.S. for
fiscal years before 2007. The Company has various state tax audits and appeals in process at any given time. It is not
anticipated that any adjustments resulting from tax examinations or appeals would result in a material change to the
Company’s financial position or results of operations.
The balance of the Company’s liability for unrecognized income tax benefits subsequent to the recording of the $500 upon
adoption of FIN 48 effective April 29, 2007, was $912, all of which would impact the effective tax rate if recognized. As of
54
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 26, 2008, APRIL 28, 2007 AND APRIL 29, 2006
(In Thousands, Except Per Share Amounts)
April 26, 2008, the Company’s liability for unrecognized income tax benefits, net of federal tax benefits, was $1,080, all of
which would impact the effective tax rate if recognized. The Company does not expect any material changes in the amount
of unrecognized tax benefits within the next twelve months. The Company classifies accrued interest and penalties related to
unrecognized tax benefits as income tax expense in the consolidated statements of operations. The amounts of accrued
interest and penalties included in the liability for uncertain tax positions are not material.
The following table summarizes the activity related to the Company’s gross liability for unrecognized tax benefits:
Balance at April 29, 2007
Increase related to current year tax positions
Expiration of the statute of limitations for tax assessments
Adjustments to provsion related to state assessements
Balance at April 26, 2008
$
$
1,403
202
(52)
109
1,662
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 the Company’s fiscal years are
as follows:
9,184
2008…………………………………………………………
2009…………………………………………………………
8,734
7,554
2010………………………………………………………
2011………………………………………………………
5,324
4,294
2012………………………………………………………
37,702
Thereafter…………………………………………………
72,792
Total minimum lease payments…………………
$
Rent expense related to continuing operations for fiscal 2008, 2007 and 2006, was $10,142, $9,995 and $11,478, respectively.
NOTE 11—EMPLOYEE BENEFIT PLANS
The Company sponsors 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 2008,
2007 and 2006, the Company’s matching contribution expense was $2,545, $2,611 and $2,727, respectively.
NOTE 12—SHAREHOLDERS’ EQUITY
Share Repurchase Programs
During fiscal 2008, the Company repurchased a total of 2,797 shares of its outstanding common stock at an aggregate
purchase price of $94,879 under Board of Director approved share repurchase authorizations. During fiscal 2007, the
Company repurchased a total of 2,126 shares of its outstanding common stock at an aggregate purchase price of $76,508
under Board of Director approved share repurchase authorizations. There were no authorizations outstanding as of April 26,
2008, under which additional shares could be repurchased. On June 12, 2008, the Company’s Board of Directors approved a
new share repurchase authorization. See Note 18.
During the two fiscal years ended April 26, 2008, the Company has repurchased a total of 4,923 shares of its issued and
outstanding common stock at an aggregate purchase price of $171,387. Common stock acquired through the share repurchase
programs is available for general corporate purposes and is reflected as Treasury Stock in the accompanying consolidated
balance sheets.
55
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 26, 2008, APRIL 28, 2007 AND APRIL 29, 2006
(In Thousands, Except Per Share Amounts)
Earnings Per Share (“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 or otherwise issued. The following information presents the Company’s computations of
basic and diluted EPS for the periods presented in the consolidated statements of operations:
Fiscal 2008:
Income
(Numerator)
Shares
(Denominator)
Per Share
Amount
41,121
Basic EPS…………………………………………………….
Effect of dilutive employee stock options………………………………
-
Effect of dilutive non-vested stock units………………………………
-
41,121
Diluted EPS…………………………………………………..
$
$
Fiscal 2007:
18,046
Basic EPS…………………………………………………….
Effect of dilutive employee stock options………………………………
-
18,046
Diluted EPS…………………………………………………..
$
$
Fiscal 2006:
Basic EPS…………………………………………………….
61
-
Effect of dilutive employee stock options………………………………
61
Diluted EPS…………………………………………………..
$
$
20,196
502
10
20,708
21,873
672
22,545
22,898
841
23,739
$
2.04
$
1.99
$
0.83
$
0.80
$
0.00
$
0.00
The Company had additional employee stock options outstanding of 1,272, 904, and 0 during fiscal 2008, 2007 and 2006,
respectively, which were not included in the computation of diluted EPS because they were anti-dilutive.
The $133,000, 3.75% convertible subordinated notes have no current impact on the Company’s denominator for computing
diluted EPS because, although the notes are currently convertible, the average market price of the Company’s stock during
the periods presented was less than the initial conversion price per share. See Note 7.
The $200,000, 3.75% convertible subordinated notes have no current impact on the Company’s denominator for computing
diluted EPS because conditions under which the notes may be converted have not been satisfied. See Note 7.
NOTE 13—SHARE-BASED COMPENSATION EXPENSE
Employee Stock Plans
The Company has two share-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. No new
grants may be made under the 1998 Plan, which expired on June 8, 2008. Under the 2002 Plan, the maximum number of
equity awards available for grant is 1,500 shares.
A summary of option transactions for fiscal 2006, fiscal 2007 and fiscal 2008 follows:
56
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 26, 2008, APRIL 28, 2007 AND APRIL 29, 2006
(In Thousands, Except Per Share Amounts)
Options Outstanding
Options Exercisable
Weighted-
Average
Exercise
Price
$
Balance at April 30, 2005…………………………………
Granted………………………………………………
Exercised………………………………………………
Canceled……………………………
Balance at April 29, 2006………………………………
Granted………………………………………………
Exercised………………………………………………
Canceled……………………………
Balance at April 28, 2007…………………………………
Granted………………………………………………
Exercised………………………………………………
Canceled……………………………
Options
2,628
477
(111)
(112)
2,882
560
(348)
(103)
2,991
123
(321)
(86)
2,707
Balance at April 26, 2008…………………………………
$
$
$
21.38
36.87
25.89
33.35
23.29
36.97
22.39
33.17
25.62
34.97
17.34
36.18
26.69
Weighted-
Average
Exercise
Price
$
17.55
Options
1,886
2,054
$
18.67
1,975
$
20.00
1,980
$
23.01
The following tables detail supplemental information regarding stock options outstanding at April 26, 2008:
Weighted Average
Remaining
Contractual Term
Aggregate
Instrinsic
Value
Options outstanding…………………………………………………………
Options vested and expected to vest………………………………………………………
Options exercisable………………………………………………………
17,362
17,362
17,362
4.23
4.09
2.78
$
Range of
Exercise
Prices
$15.00 - $16.06
$17.00 - $24.10
$27.20 - $31.51
$34.00 - $36.82
$37.51 - $59.84
Options
994
311
187
803
412
2,707
Options Outstanding
Weighted-
Average
Life
(Years)
Weighted-
Average
Exercise
Price
0.20
2.65
6.34
7.37
8.09
4.23
$
$
15.49
20.87
29.18
36.05
38.73
26.69
Options Exercisable
Weighted-
Average
Exercise
Price
$
15.49
20.87
28.13
36.00
38.74
23.01
$
Options
994
311
130
398
147
1,980
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. The Company has historically issued new
57
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 26, 2008, APRIL 28, 2007 AND APRIL 29, 2006
(In Thousands, Except Per Share Amounts)
shares of common stock to settle shares due upon option exercise. For fiscal 2008, approximately 321 new shares were issued
upon the exercise of stock options.
During fiscal 2008, the Company granted 73 non-vested stock unit (“NSU”) awards to certain members of the Company’s
management under the amended and restated 2002 Plan. The NSUs are performance-based and vest at the end of a three-year
cycle and will result in a payment if performance metrics are achieved at a threshold level or above. The NSUs will be paid
in Company common stock with payouts ranging from 80% of the target number of shares if performance is at the threshold
level up to 200% of the target number of shares if performance is at or above the maximum level. The approximate fair value
of awards granted during fiscal 2008 is $2,646, assuming the metrics are achieved at the target level. The Company is
recognizing share-based compensation expense related to NSU awards ratably over the vesting period adjusted for changes in
the expected level of performance on a cumulative basis in the period such determination is made. During the fiscal year
ended April 26, 2008, the Company recognized $882 ($540, net of tax) of expense related to NSU awards.
The Company adopted SFAS No. 123(R) using the modified prospective application transition method effective with the
beginning of fiscal 2007. Prior to the adoption of SFAS No. 123(R), the Company accounted for share-based compensation
in accordance with APB 25. Under APB 25, no employee or director share-based compensation expense was reflected in the
Company’s consolidated statements of operations prior to fiscal 2007.
During the fiscal years ended April 26, 2008 and April 27, 2007, the Company recognized $5,490 and $4,507, respectively,
in share-based compensation expense which is reflected in selling, general and administrative expenses in the accompanying
consolidated statements of operations. The fiscal 2008 and fiscal 2007 income tax benefit recognized related to share-based
compensation expense was $1,787 and $1,233, respectively. The Company recognizes share-based compensation expense on
a ratable basis over the vesting period of each award. As of April 26, 2008, total unrecognized share-based compensation
expense was $10,666, net of estimated forfeitures, which the Company expects to recognize over a weighted average period
of approximately 2.2 years.
Prior Year Pro Forma Expense
The following table illustrates the effect on net income and earnings per share if the fair value-based method provided by
SFAS No. 123 had been applied for all outstanding and unvested awards prior to the adoption of SFAS No. 123(R):
Net income, as reported……………………………………………
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects…………………………………………
Pro forma net (loss) income………………………………………………
EPS:
As reported:
Basic………………………………………………………………
Diluted………………………………………………………………
Pro forma:
Basic………………………………………………………………
Diluted………………………………………………………………
58
Fiscal 2006
(52 weeks)
$
61
(2,860)
(2,799)
$
$ 0.00
$ 0.00
$
$
(0.12)
(0.12)
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 26, 2008, APRIL 28, 2007 AND APRIL 29, 2006
(In Thousands, Except Per Share Amounts)
The weighted average fair value of options granted during fiscal 2008, 2007 and 2006, was $12.42, $14.43 and $15.70,
respectively. The fair value of options is estimated on the date of grant using the Black-Scholes single option pricing model
with the following weighted average assumptions:
Fiscal 2008
Average-risk free interest rate………………………………………………
4.29%
0.00%
Expected dividend yield……………………………………………
28.94%
Expected volatility………………………….…………………
5.5 years
Expected term…………………...………………………………
Fiscal 2007
4.68%
0.00%
32.84%
5.5 years
Fiscal 2006
4.40%
0.00%
38.30%
5.5 years
Fiscal 2008
5,966
$
Total intrinsic value of stock options exercised………………………………
5,559
Cash received from stock option exercises……………………………………
1,957
Income tax benefit from the exercise of stock options………………………
Fiscal 2007
5,057
$
7,798
1,962
Fiscal 2006
1,493
$
2,871
579
NOTE 14—SEGMENT INFORMATION
The Company determines its operating segments based on the information utilized by the chief operating decision maker, the
Company’s Chief Executive Officer, to allocate resources and assess performance. Based on this information, the Company
has determined that it operates in two operating segments, Specialty and Essentials, which also constitute its reportable
segments. The Company operates principally in the United States, with limited Specialty segment operations in Canada.
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, DVDs,
published educational materials and sound presentation equipment. Products supplied within the Essentials segment include
consumables (consisting of classroom supplies, instructional materials, educational games, art supplies and school forms),
school furniture and indoor and outdoor equipment. The accounting policies of the segments are the same as those described
in Summary of Significant Accounting Policies. Intercompany eliminations represent intercompany sales primarily from our
Specialty segment to our Essential segment, and the resulting profit recognized on such intercompany sales.
The following table presents segment information:
Revenues:
Fiscal 2008
(52 weeks)
Fiscal 2007
(52 weeks)
Fiscal 2006
(52 weeks)
Specialty………………………………………………………………………………………………………………
Essentials..………………………………………………………………………………………….
Corporate and intercompany eliminations……………………………………….
$
$
$
651,731
455,385
(19,213)
1,087,903
591,866
471,141
(19,855)
1,043,152
Total……………………………………………………………………………………………
$
$
$
Operating income (loss) and income before taxes:
Specialty………………………………………………………………………………………….
Essentials..……………………………………………………………………………………….
Corporate and intercompany eliminations……………………………………………
83,566
46,726
(36,494)
93,798
28,105
Interest expense and other……………………………………………………………………..
65,693
Operating income……………………………………………………………………………..
Income before taxes……………………………………………………………………………
106,707
40,210
(47,429)
99,488
25,547
73,941
$
$
$
$
59
527,201
468,757
(18,656)
977,302
54,075
45,954
(45,854)
54,175
23,346
30,829
$
$
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 26, 2008, APRIL 28, 2007 AND APRIL 29, 2006
(In Thousands, Except Per Share Amounts)
Identifiable assets:
April 26,
2008
April 28,
2007
April 29,
2006
Specialty………………………………………………………..
Essentials………………………………………………………
Corporate assets (1)……………………………………………..
Total assets of continuing segments…………………………………………………………….
Discontinued operations………………………………………………………
Total…………………………………………………………….
$
$
766,034
287,233
64,060
1,117,327
-
1,117,327
$
782,625
275,300
37,245
1,095,170
15,709
1,110,879
$
$
777,660
261,133
41,579
1,080,372
50,003
1,130,375
$
Depreciation and amortization of intangible assets
and development costs:
Specialty (1)………………………………………………………..
$
Essentials (1)...………………………………………………………
Corporate………………………………………………………….
Total continuing segments…………………………………………………………….
Discontinued operations………………………………………………………….
$
Total…………………………………………………………….
$
$
19,208
3,147
8,749
31,104
3,207
34,311
$
$
18,500
3,382
6,769
28,651
3,429
32,080
17,255
2,928
5,719
25,902
2,090
27,992
Expenditures for property, plant and equipment, intangible
and other assets and development costs:
Specialty………………………………………………………..
Essentials...………………………………………………………
Corporate………………………………………………………………..
9,019
75
16,974
Total continuing segments………………………………………………………………..
26,068
1,987
28,055
Discontinued operations………………………………………………………………..
$
$
Total…………………………………………………………….
10,109
241
14,550
24,900
3,672
28,572
$
$
$
$
16,161
719
10,770
27,650
2,756
30,406
(1) Identifiable corporate assets include distribution related assets of $28,601, $29,919, and $31,116, as of April 26, 2008, April
28, 2007 and April 29, 2006, respectively, for which depreciation is allocated to the Specialty and Essentials segments.
Depreciation expense allocated to the Specialty segment was $1,221, $1,284, and $1,385 for fiscal 2008, fiscal 2007 and fiscal
2006, respectively. Depreciation expense allocated to the Essentials segment was $2,142, $2,279, and $1,797 for fiscal 2008,
fiscal 2007 and fiscal 2006, respectively.
_________________
NOTE 15—COMMITMENTS AND CONTINGENCIES
Various claims and proceedings arising in the normal course of business are pending against the Company. The results of
these matters are not expected to have a material adverse effect on the Company’s consolidated financial position, results of
operations or cash flows.
60
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 26, 2008, APRIL 28, 2007 AND APRIL 29, 2006
(In Thousands, Except Per Share Amounts)
NOTE 16—QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data for fiscal 2008 and fiscal 2007:
First
(13 weeks)
Revenues………………………………………………..
Gross profit…………………………………………………………
Operating income (loss)……………………………….
Earnings (loss) from continuing operations,
386,513
173,368
73,223
$
Second
(13 weeks)
$
392,919
167,541
67,830
Fiscal 2008
Third
(13 weeks)
$
134,839
51,688
(24,871)
Fourth
(13 weeks)
Total
(52 weeks)
$
173,632
68,645
(16,694)
$
1,087,903
461,242
99,488
40,580
net of income taxes…………………………………………..
36,956
(19,042)
(12,682)
45,812
Loss from discontinued operations,
net of income taxes…………………………………………..
(259)
40,321
Net income (loss)……………………………………….…….
(402)
36,554
(1,220)
(20,262)
(2,810)
(15,492)
(4,691)
41,121
Basic earnings per share of common stock:
Earnings (loss) from continuing operations………………………………………………………………………………..
$
1.92
1.81
Loss from discontinued operations…………………………………………………………………………..
(0.02)
(0.01)
$
1.79
1.91
Total…………………………………………………………………………..
(0.66)
(0.15)
(0.81)
(0.95)
(0.06)
(1.01)
$
$
$
$
$
$
$
$
2.27
(0.23)
2.04
Diluted earnings per share of common stock:
Earnings (loss) from continuing operations………………………………………………………………………………..
$
1.87
1.76
Loss from discontinued operations…………………………………………………………………………..
(0.02)
(0.01)
$
1.74
1.86
Total…………………………………………………………………………..
(0.66)
(0.15)
(0.81)
(0.95)
(0.06)
(1.01)
$
$
$
$
$
$
$
$
2.21
(0.22)
1.99
First
(13 weeks)
Revenues………………………………………………..
Gross profit…………………………………………………………
Operating income (loss)……………………………….
Earnings (loss) from continuing operations,
377,071
167,911
69,072
$
Second
(13 weeks)
$
371,225
154,821
56,931
Fiscal 2007
Third
(13 weeks)
$
128,816
50,856
(20,725)
Fourth
(13 weeks)
Total
(52 weeks)
$
166,040
72,049
(11,480)
$
1,043,152
445,637
93,798
37,745
net of income taxes…………………………………………..
29,644
(16,906)
(11,258)
39,225
Loss from discontinued operations,
net of income taxes…………………………………………..
(878)
36,867
Net income (loss)……………………………………….…….
(442)
29,202
(1,917)
(18,823)
(17,942)
(29,200)
(21,179)
18,046
Basic earnings per share of common stock:
$
1.65
Earnings (loss) from continuing operations………………………………………………………………………………..
1.33
Loss from discontinued operations…………………………………………………………………………..
(0.02)
(0.04)
$
1.31
1.61
Total…………………………………………………………………………..
(0.53)
(0.85)
(1.38)
(0.79)
(0.09)
(0.88)
$
$
$
$
$
$
$
$
1.79
(0.96)
0.83
Diluted earnings per share of common stock:
$
1.60
Earnings (loss) from continuing operations………………………………………………………………………………..
1.29
Loss from discontinued operations…………………………………………………………………………..
(0.01)
(0.03)
$
1.28
1.57
Total…………………………………………………………………………..
(0.53)
(0.85)
(1.38)
(0.79)
(0.09)
(0.88)
$
$
$
$
$
$
$
$
1.74
(0.94)
0.80
_____
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.
61
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 26, 2008, APRIL 28, 2007 AND APRIL 29, 2006
(In Thousands, Except Per Share Amounts)
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.
NOTE 17—MERGER TRANSACTION
On May 31, 2005, the Company announced that it had entered into an Agreement and Plan of Merger, as amended, dated as
of May 31, 2005 (the “Merger Agreement”), with LBW Holdings, Inc. and LBW Acquisition, Inc. On October 25, 2005, a
Termination and Release Agreement was entered into by and among the Company, LBW Holdings, Inc. and LBW
Acquisition, Inc. pursuant to which the Merger Agreement was terminated by mutual agreement and the parties released each
other from certain claims. No termination fees were payable by the Company or by LBW Holdings, Inc., and each party was
responsible for its own merger-related expenses.
During fiscal 2006, the Company incurred $5,202 of costs related to the terminated merger transaction consisting of
accounting, legal and other transaction-related costs, including costs related to financial and legal advisors to the special
committee of our Board of Directors. These costs have been included in the statement of operations for fiscal 2006.
NOTE 18—SUBSEQUENT EVENTS
On June 12, 2008 School Specialty, Inc. announced that its Board of Directors approved a new share repurchase program
which gives School Specialty the ability to purchase up to $50,000 of its issued and outstanding common stock. Purchases
under this program may be made from time to time in open market or privately negotiated transactions. Common stock
acquired through the repurchase program will be available for general corporate purposes.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on an evaluation as of the end of the period covered by 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-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective for the purposes set forth in the
definition of the Exchange Act rules.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. As such term
is defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the
supervision of, the principal executive and principal financial officers, or persons performing similar functions, and effected
by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles
generally accepted in the United States. Internal control over financial reporting includes those policies and procedures that:
(1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of assets of the Company;
62
(2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of the
financial statements in accordance with accounting principles generally accepted in the United States, and
that receipts and expenditures of the Company are being made only in accordance with authorizations of
management and the directors of the Company; and
(3)
provide reasonable assurance regarding prevention of unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the financial statements.
Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based
on the criteria in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation under the criteria, management concluded that the Company’s internal
control over financial reporting was effective as of April 26, 2008.
The Company’s internal control over financial reporting as of April 26, 2008 has been audited by Deloitte & Touche LLP, an
independent registered public accounting firm, as stated in their report dated June 23, 2008, which is included herein.
Changes in Internal Controls
During fiscal 2007, the Company began implementation of a common enterprise resource planning (“ERP”) platform. Over a
three year period, this platform will replace most of our existing systems. As a result, the Company’s business units will be
more closely aligned with standardized processes and internal controls at the completion of the implementation. As of April
26, 2008, seven of the Company’s business units, representing approximately 80% of the Company’s revenues, had been
converted to the new ERP system. It is currently estimated that over 90% of the Company’s revenue will be generated by
business units converted to the new ERP platform by the end of fiscal 2009.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
School Specialty, Inc.
Greenville, Wisconsin
We have audited the internal control over financial reporting of School Specialty, Inc. and subsidiaries (the “Company”) as of
April 26, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s
principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s
board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
63
the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on
a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
April 26, 2008, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated financial statements and consolidated financial statement schedule as of and for the year ended April 26,
2008 of the Company and our report dated June 23, 2008, expresses an unqualified opinion on those consolidated financial
statements and consolidated financial statement schedule and included an explanatory paragraph relating to the Company’s
adoption of Financial Accounting Standard No. 123(R), Share-Based Payment on April 30, 2006, and the adoption of
Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an
Interpretation of FASB Statement No. 109 on April 29, 2007.
/s/ DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
June 23, 2008
Item 9B. Other Information
Not applicable
64
Item 10. Directors, Executive Officers and Corporate Governance
PART III
(a)
(b)
(c)
(d)
(e)
(f)
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 19, 2008, 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 19, 2008, under the caption “Section 16(a) Beneficial Ownership
Reporting Compliance,” which information is incorporated by reference herein.
We have adopted a Code of Ethics that applies to our directors, officers and employees, including the principal
executive officer, principal financial officer, principal accounting officer and controller. The Code of Ethics is posted
on our internet website at www.schoolspecialty.com. We intend to satisfy the disclosure requirement under Item 10 of
Form 8-K by posting such information on our internet website.
There were no material changes in fiscal 2008 to the procedures by which the Company’s shareholders may
recommend nominees to the Company’s Board of Directors.
The Company has a separately-designated standing Audit Committee of its Board of Directors. The Audit Committee
is responsible for oversight of the Company’s accounting and financial reporting processes and the audit of the
Company’s financial statements. The Audit Committee currently consists of three members, including Mr.
Trucksess (Chairman), Mr. Lay and Ms. Dout, each of whom is “independent” under the listing standards of the
Nasdaq National Market. Mr. Trucksess, Mr. Lay and Ms. Dout have each been deemed by the Board of Directors to
be an “audit committee financial expert” for purposes of the SEC’s rules. The Audit Committee has adopted, and the
Board of Directors has approved, a charter for the Audit Committee. The Audit Committee held six meetings in
fiscal 2008.
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 19, 2008, under the captions “Executive Compensation Discussion and Analysis,” 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 19, 2008, under the captions “Security Ownership of Management and Certain Beneficial Owners” and “Executive
Compensation Discussion and Analysis,” which information is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is set forth in our Proxy Statement for the Annual Meeting of Shareholders to be held
on August 19, 2008, under the captions “Related Party Transactions” and “Corporate Governance,” which information is
incorporated by reference herein.
Item 14. Principal Accounting Fees and Services
The information required by this Item is set forth in our Proxy Statement for the Annual Meeting of Shareholders to be held on
August 19, 2008, under the caption “Audit Committee Report,” which information is incorporated by reference herein.
65
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements (See Part II, Item 8).
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of April 26, 2008 and April 28, 2007
Consolidated Statements of Operations for the fiscal years ended April 26, 2008, April 28, 2007 and April 29,
2006
Consolidated Statements of Shareholders’ Equity for the fiscal years ended April 26, 2008, April 28, 2007 and
April 29, 2006
Consolidated Statements of Cash Flows for the fiscal years ended April 26, 2008, April 28, 2007 and April 29,
2006
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedule (See Exhibit 99.1).
Schedule for the fiscal years ended April 26, 2008, April 28, 2007 and April 29, 2006: Schedule II – Valuation and
Qualifying Accounts.
(a)(3) Exhibits.
See (b) below
(b)
Exhibits.
See the Exhibit Index, which is incorporated by reference herein
(c)
Financial Statements Excluded from Annual Report to Shareholders.
Not applicable
66
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 June 24, 2008.
SIGNATURES
SCHOOL SPECIALTY, INC.
By: /s/ David J. Vander Zanden
David J. Vander Zanden
Chief Executive Officer
(Principal Executive Officer)
By: /s/ David N. Vander Ploeg
David N. Vander Ploeg
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 David N. Vander
Ploeg, 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
Chief Executive Officer and Director
(Principal Executive Officer)
Date
June 24, 2008
/s/ David N. Vander Ploeg
David N. Vander Ploeg
Executive Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)
June 24, 2008
/s/ Terry L. Lay
Terry L. Lay
/s/ Jonathan J. Ledecky
Jonathan J. Ledecky
/s/ Edward C. Emma
Edward C. Emma
/s/ Herbert A. Trucksess, III
Herbert A. Trucksess, III
/s/ Jacqueline F. Woods
Jacqueline F. Woods
/s/ A. Jacqueline Dout
A. Jacqueline Dout
Chairman of the Board
Director
Director
Director
Director
Director
June 24, 2008
June 24, 2008
June 24, 2008
June 24, 2008
June 24, 2008
June 24, 2008