| The forward-looking statements include: (1) statements made under Item 1, Business and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, including, without limitation, statements with respect to internal growth plans, projected revenues, margin improvement, future acquisitions, capital expenditures and adequacy of capital resources; (2) statements included or incorporated by reference in our future filings with the Securities and Exchange Commission; and (3) information contained in written material, releases and oral statements issued by, or on behalf of, School Specialty including, without limitation, statements with respect to projected revenues, costs, earnings and earnings per share |
| Forward-looking statements also include statements regarding the intent, belief or current expectation of School Specialty or its officers |
| Forward-looking statements include statements preceded by, followed by or that include forward-looking terminology such as “may,” “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 13 ______________________________________________________________________ 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 5dtta7prca 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 could also materially affect our business |
| For example, as was the case in fiscal 2006, our results were adversely affected and our organic revenues throughout our business declined in part because we believe schools unexpectedly increased their expenditures on fuel and health-related costs, and consequently decreased their spending on supplemental educational products and equipment |
| If we are unable to successfully identify and integrate acquisitions, our results of operations could be adversely affected |
| In recent years, a significant amount of our 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 |
| In addition, we may be unable to achieve the estimated cost savings associated with the integration of Delta |
| 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 |
| 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 14 ______________________________________________________________________ receive, ship and bill the majority of orders for our products so that schools and teachers receive their merchandise 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 100prca 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 to vary considerably from quarter to quarter and significantly impacts our liquidity position |
| 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 3cmam300 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, and office product contract stationers, 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 become unable or unwilling to continue in his or her role, or if we are unable to attract and retain other qualified employees, including a new chief operating officer and other key personnel, our business could be adversely affected |
| Although we have employment contracts with many of our executive officers, we generally do not have employment agreements with other members of our management |
| Other than the life insurance we have in place for our President and 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 15 ______________________________________________________________________ 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 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 US dollar-denominated debt |
| The majority of our debt will be in US 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 US 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 US 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 |
| We have a material amount of goodwill and intangible assets which might be written-down |
| At April 29, 2006, goodwill and intangible assets represented approximately 66dtta1prca of our total assets |
| Goodwill is the amount by which the costs of an acquisition exceeds the fair value of the net assets we acquire |
| In 16 ______________________________________________________________________ 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 the fourth quarter of fiscal 2006 we recorded a pre-tax impairment charge of dlra25dtta6 million related to our Visual Media business unit |
| Because the current valuation of Delta’s intangible assets is preliminary and is subject to adjustment, further adjustments to our intangible assets may be necessary |
| Our operations are dependent on our information systems |
| We have integrated the operations of most of our divisions and subsidiaries, which operate on a host system located at our Greenville, Wisconsin headquarters |
| In addition, there are several 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, which will displace existing legacy systems |
| As we implement the new systems to the businesses, 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 confront 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 |
| 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 |
| 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; • redeem and/or prepay certain debt; • sell or dispose of a minority equity interest in any subsidiary or other assets; • make capital expenditures; • make certain investments; 17 ______________________________________________________________________ • 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 |