SCHOOL SPECIALTY INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 25, 2003.

OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________

Commission File Number: 000-24385

SCHOOL SPECIALTY, INC.
(Exact Name of Registrant as Specified in its Charter)

Wisconsin 39-0971239
(State or Other (IRS Employer
Jurisdiction of Incorporation) Identification No.)

W6316 Design Drive
Greenville, Wisconsin
(Address of Principal Executive Offices)

54942
(Zip Code)

(920) 734-5712
(Registrant's Telephone Number, including Area Code)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes [X] No [_]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes [X] No [_]

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Outstanding at
Class March 4, 2003
----- -------------
Common Stock, $0.001 par value 18,431,066

SCHOOL SPECIALTY, INC.

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JANUARY 25, 2003

PART I - FINANCIAL INFORMATION
- ------------------------------

Page
Number
------

ITEM 1. CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets at January 25, 2003, April 27, 2002
and January 26, 2002 ................................................................. 1

Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended January 25, 2003 and January 26, 2002 .......................................... 2

Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended January 25, 2003 and January 26, 2002 ................................... 3

Notes to Condensed Consolidated Financial Statements ..................................... 5

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ...................................................... 16

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK .............................................................................. 20

ITEM 4. CONTROLS AND PROCEDURES .................................................................. 20

PART II - OTHER INFORMATION
- ---------------------------

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ......................................................... 21

-Index-

PART I - FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Unaudited Financial Statements

SCHOOL SPECIALTY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

January 25, April 27, January 26,
2003 2002 2002
---- ---- ----
As Restated
See Note 11

ASSETS
------
Current assets:
Cash and cash equivalents ................................................... $ 5,411 $ 6,123 $ 5,315
Accounts receivable, less allowance for doubtful accounts of
$3,263, $2,719 and $3,838, respectively ................................... 56,593 34,356 45,174
Inventories ................................................................. 82,809 98,148 72,131
Deferred catalog costs ...................................................... 16,213 13,590 11,978
Prepaid expenses and other current assets ................................... 15,066 12,770 17,117
Assets held for sale ........................................................ 1,350 - -
Deferred taxes .............................................................. 6,905 7,341 8,259
---------- ---------- ----------
Total current assets ...................................................... 184,347 172,328 159,974
Property and equipment, net .................................................... 63,909 67,083 65,042
Goodwill ....................................................................... 423,185 390,946 389,286
Intangible assets, net ......................................................... 42,320 35,457 35,384
Other .......................................................................... 5,303 7,828 12,063
---------- ---------- ----------
Total assets .............................................................. $ 719,064 $ 673,642 $661,749
========== ========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities - long-term debt ......................................... $ 116,016 $ 4,471 $ 4,691
Accounts payable ............................................................ 39,232 47,097 27,823
Accrued compensation ........................................................ 12,607 16,712 13,032
Deferred revenue ............................................................ 4,087 10,681 5,435
Accrued income taxes ........................................................ 14,030 - 7,776
Accrued restructuring ....................................................... 589 863 962
Other accrued liabilities ................................................... 17,288 13,917 15,356
---------- ---------- ----------
Total current liabilities ................................................. 203,849 93,741 75,075
Long-term debt ................................................................. 167,315 285,592 296,023
Deferred taxes and other ....................................................... 23,621 23,139 16,282
---------- ---------- ----------
Total liabilities ......................................................... 394,785 402,472 387,380
Shareholders' equity:
Preferred stock, $0.001 par value per share, 1,000,000 shares
Authorized; none outstanding .............................................. - - -
Common stock, $0.001 par value per share, 150,000,000 shares
authorized and 18,425,566, 18,046,315 and 18,004,156
shares issued and outstanding, respectively ............................... 18 18 18
Capital paid-in excess of par value ......................................... 215,821 208,053 207,202
Accumulated other comprehensive income (loss) ............................... 1,291 395 (759)
Retained earnings ........................................................... 107,149 62,704 67,908
---------- ---------- ----------
Total shareholders' equity ................................................ 324,279 271,170 274,369
---------- ---------- ----------
Total liabilities and shareholders' equity ................................ $ 719,064 $ 673,642 $ 661,749
========== ========== ==========

See accompanying notes to condensed consolidated financial statements.

SCHOOL SPECIALTY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

For the Three For the Nine
Months Ended Months Ended
----------------------------- ----------------------------
January 25, January 26, January 25, January 26,
2003 2002 2003 2002
---- ---- ---- ----
As Restated As Restated
See Note 11 See Note 11

Revenues ..................................................... $ 110,554 $ 104,005 $ 725,980 $ 633,823
Cost of revenues ............................................. 67,839 64,259 428,865 393,949
--------- ---------- --------- ----------
Gross profit .............................................. 42,715 39,746 297,115 239,874
Selling, general and administrative expenses ................. 52,232 47,949 207,987 178,999
--------- ---------- --------- ----------
Operating income (loss) ................................... (9,517) (8,203) 89,128 60,875

Other (income) expense:
Interest expense .......................................... 4,206 4,185 13,454 12,981
Interest income ........................................... (21) (11) (38) (42)
Other ..................................................... 545 1,997 1,577 2,961
--------- ---------- --------- ----------
Income (loss) before provision for (benefit
from) income taxes ........................................ (14,247) (14,374) 74,135 44,975
Provision for (benefit from) income taxes .................... (5,706) (5,749) 29,690 17,992
--------- ---------- --------- ----------
Net income (loss) ............................................ $ (8,541) $ (8,625) $ 44,445 $ 26,983
========= ========== ========= ==========

Weighted average shares outstanding:
Basic ..................................................... 18,424 17,998 18,288 17,882
Diluted ................................................... 18,424 17,998 23,417 21,683

Net income (loss) per share:
Basic ..................................................... $ (0.46) $ (0.48) $ 2.43 $ 1.51
Diluted ................................................... $ (0.46) $ (0.48) $ 2.08 $ 1.38

See accompanying notes to condensed consolidated financial statements.

2

SCHOOL SPECIALTY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

For the Nine
Months Ended
-----------------------------
January 25, January 26,
2003 2002
---- ----
As Restated
See Note 11

Cash flows from operating activities:
Net income ................................................................................... $ 44,445 $ 26,983
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense ...................................................... 11,430 7,876
Amortization of debt fees and other ........................................................ 1,886 1,834
Restructuring related payments ............................................................. (274) (1,551)
Loss on disposal or impairment of property, equipment and business disposition ............. 936 1,078
Gain on sale of available-for-sale securities .............................................. - (287)
Loss on impairment of investment ........................................................... - 1,657
Change in current assets and liabilities (net of assets acquired and liabilities
assumed in business combinations accounted for under the purchase method):
Accounts receivable ........................................................................ (9,692) 1,252
Inventories ................................................................................ 28,179 31,057
Prepaid expenses and other current assets .................................................. (1,698) 6,619
Accounts payable ........................................................................... (14,958) (31,296)
Accrued liabilities ........................................................................ 1,633 18,195
--------- ---------
Net cash provided by operating activities ................................................ 61,887 63,417
--------- ---------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash acquired .............................................. (47,432) (160,203)
Additions to property and equipment .......................................................... (7,809) (7,261)
Proceeds from disposal of property, equipment and business disposition ....................... 638 1,685
Proceeds from sale of available-for-sale securities and note receivable ...................... - 6,353
--------- ---------
Net cash used in investing activities .................................................... (54,603) (159,426)
--------- --------
Cash flows from financing activities:
Proceeds from bank borrowings ................................................................ 197,100 228,500
Repayment of debt and capital leases ......................................................... (211,264) (282,161)
Proceeds from convertible debt offering ...................................................... - 149,500
Payment of debt fees and other ............................................................... (115) (5,403)
Proceeds from exercise of stock options ...................................................... 6,283 5,200
--------- ---------
Net cash (used in) provided by financing activities ...................................... (7,996) 95,636
---------- ---------
Net decrease in cash and cash equivalents ....................................................... (712) (373)
Cash and cash equivalents, beginning of period .................................................. 6,123 5,688
--------- ---------
Cash and cash equivalents, end of period ........................................................ $ 5,411 $ 5,315
========= =========

3

SCHOOL SPECIALTY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(In thousands)

The Company entered into certain business combinations in the nine months ended
January 25, 2003, and January 26, 2002. The transactions that occurred during
the nine months ended January 25, 2003 were paid for using cash while the
transactions that occurred during the nine months ended January 26, 2002 were
paid for using cash, cash and common stock or cash and a note. The fair values
of the assets and liabilities of the acquired companies at the dates of the
acquisitions are presented as follows:

For the Nine
Months Ended
--------------------------
January 25, January 26,
2003 2002
---- ----

Accounts receivable .................................................. $ 12,581 $6,435
Inventories .......................................................... 12,880 3,674
Deferred catalog costs ............................................... 2,325 -
Prepaid expenses and other assets .................................... 152 1,521
Property and equipment ............................................... 1,026 7,202
Goodwill ............................................................. 30,797 133,530
Intangible assets .................................................... 9,142 33,276
Short-term debt ...................................................... (1,082) (2,483)
Short-term capital lease obligations ................................. (33) -
Accounts payable ..................................................... (7,098) (624)
Accrued liabilities .................................................. (6,122) (5,573)
Deferred taxes ....................................................... (919) (13,264)
Long-term debt ....................................................... (10,139) (342)
Long-term capital lease obligations .................................. (195) -
--------- ---------
Net assets acquired ............................................... $ 43,315 $ 163,352
========= =========
Acquisitions were funded as follows:
Cash paid, net of cash acquired (1) .................................. $ 43,315 $ 156,640
Note payable to selling shareholders ................................. - 4,012
Common stock ......................................................... - 2,700
--------- ---------
Total ............................................................ $ 43,315 $ 163,352
========= =========

(1) Fiscal 2003 cash paid in acquisitions, net of cash acquired, as reported
within cash flows from investing activities includes the payment of
$4,012 for the fiscal 2002 note payable to selling shareholders related
to the acquisition of Premier Agendas and purchase price adjustments of
$105 related to immaterial acquisitions. Fiscal 2002 cash paid in
acquisitions, net of cash acquired, as reported within cash flows from
investing activities includes the payment of $3,210 for an earn-out
provision to the former owners of Global Video and the payment of $353
for additional purchase price related to the November 2000 J.L. Hammett
acquisition.

See accompanying notes to condensed consolidated financial statements.

4

SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)

NOTE 1--BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (which are normal and recurring in nature) considered necessary for
a fair presentation have been included. The balance sheet at April 27, 2002, has
been derived from the Company's audited financial statements for the fiscal year
ended April 27, 2002. For further information, refer to the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended April 27, 2002.

NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS

In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This statement amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for an entity that voluntarily changes to the fair value
based method of accounting and records compensation expense for all stock-based
employee compensation. It also amends the disclosure provisions of that
statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. Finally, this statement amends Accounting Principles
Board ("APB") Opinion No. 28, "Interim Financial Reporting," to require
disclosure about those effects in interim financial statements. The amendment of
the transition and annual disclosure requirements of SFAS No. 123 are effective
for fiscal years ending after December 15, 2002. The amendment of the disclosure
requirements of APB Opinion No. 28 is effective for financial reports containing
condensed consolidated financial statements for interim periods beginning after
December 15, 2002. Since the Company has not elected to change to the fair value
based method of accounting, the transition provisions of SFAS No. 148 have no
impact on the Company's financial position, results of operations or cash flows.
The Company adopted the disclosure provisions of this statement in the third
quarter of fiscal 2003. See Note 4 "Earnings Per Share and Employee Stock
Plans."

In January 2003, the FASB issued Financial Interpretation No. ("FIN") 46,
"Consolidation of Variable Interest Entities." FIN 46 requires companies with
variable interests in variable interest entities to evaluate whether they must
consolidate these entities subject to the provisions included in FIN 46. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
entities created prior to January 31, 2003 in the first fiscal year or interim
period beginning after June 15, 2003. The Company is currently evaluating the
potential impact of FIN 46 as it relates to its accounts receivable
securitization. If FIN 46 were applicable to the Company, the Company's accounts
receivable and total debt outstanding would increase for the amount advanced
under the securitization, which as of January 25, 2003 was $50,000.

5

SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)

NOTE 3--SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME

Changes in shareholders' equity during the nine months ended January 25, 2003,
were as follows:

Shareholders' equity balance at April 27, 2002 ........... $271,170
Net income ............................................... 44,445
Issuance of common stock in conjunction with
stock option exercises ................................. 6,283
Tax benefit on stock option exercises .................... 1,485
Foreign currency translation adjustment .................. 896
--------
Shareholders' equity balance at January 25, 2003 ......... $324,279
========

Comprehensive income for the periods presented in the condensed consolidated
statements of operations was as follows:

For the Three For the Nine
Months Ended Months Ended
------------------------- --------------------------
January 25, January 26, January 25, January 26,
2003 2002 2003 2002
---- ---- ---- ----

Net income (loss) ............................................... $ (8,541) $ (8,625) $ 44,445 $ 26,983
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale
securities:
Unrealized holding gain (loss) arising during
period, net of tax ....................................... - 38 - (779)
Less: Reclassification adjustment for gains
included in net income, net of tax ....................... - - - 172
----------- --------- --------- -----------
Net unrealized gain (loss) on securities available-
for-sale recognized in other comprehensive
income (loss) ............................................... - 38 - (951)
Unrealized gain (loss) on derivative financial
instrument:
Unrealized holding gain (loss) arising during
period, net of tax ....................................... - 69 - (559)
Less: Reclassification adjustment for losses
included in net income, net of tax ....................... - (210) - (559)
----------- --------- --------- -----------
Net unrealized gain on derivative financial
instruments recognized in other comprehensive
income (loss) ............................................... - 279 - -
Foreign currency translation adjustment ....................... 940 2 896 2
----------- --------- --------- -----------
Total comprehensive income (loss) ............................... $ (7,601) $ (8,306) $ 45,341 $ 26,034
=========== ========= ========= ===========

6

SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)

NOTE 4--EARNINGS PER SHARE AND EMPLOYEE STOCK PLANS

Earnings Per Share

The following information presents the Company's computations of basic earnings
per share ("basic EPS") and diluted earnings per share ("diluted EPS") for the
periods presented in the condensed consolidated statements of operations:

Income (Loss) Share Per Share
(Numerator) (Denominator) Amount
--------- ----------- ------

Three months ended January 25, 2003:
Basic and Diluted EPS .................................... $ (8,541) 18,424 $ (0.46)

Three months ended January 26, 2002:
Basic and Diluted EPS .................................... $ (8,625) 17,998 $ (0.48)

Nine months ended January 25, 2003:
Basic EPS ................................................ $ 44,445 18,288 $ 2.43
=======
Effect of dilutive stock options ......................... - 499
Effect of convertible debt ............................... 4,346 4,630
--------- ---------
Diluted EPS .............................................. $ 48,791 23,417 $ 2.08
========= ========= =======

Nine months ended January 26, 2002:
Basic EPS ................................................ $ 26,983 17,882 $ 1.51
=======
Effect of dilutive stock options ......................... - 714
Effect of convertible debt ............................... 2,903 3,087
--------- ---------
Diluted EPS .............................................. $ 29,886 21,683 $ 1.38
========= ========= =======

The Company had additional stock options outstanding during the nine months
ended January 25, 2003 and January 26, 2002, of 396 and 111, respectively, that
were not included in the computation of diluted EPS because they were
anti-dilutive.

Employee Stock Plans

The Company has two stock-based employee compensation plans. The Company
accounts for these plans in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations. Accordingly, because
the exercise price of the options is equal to the market price on the date of
grant, no compensation expense has been recognized for the options granted to
employees and directors. Had compensation expense related to the Company's stock
option grants to employees and directors been recognized based upon the fair
value of the stock options on the grant date under the methodology prescribed by
SFAS No. 123 "Accounting for Stock-Based Compensation", the Company's net income
and net income per share would have been impacted as indicated in the following
table:

7

SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)

For the Three For the Nine
Months Ended Months Ended
------------ ------------
January 25, January 26, January 25, January 26,
2003 2002 2003 2002
---- ---- ---- ----

Net income (loss), as reported .................................. $ (8,541) $ (8,625) $ 44,445 $ 26,983
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects ................................... (708) (650) (1,956) (1,797)
-------- -------- -------- --------
Pro forma net income (loss) ..................................... $ (9,249) $ (9,275) $ 42,489 $ 25,186
======== ======== ======== ========

EPS:

Basic, as reported .............................................. $ (0.46) $ (0.48) $ 2.43 $ 1.51
======= ======= ======== ========
Basic, pro forma ................................................ $ (0.50) $ (0.52) $ 2.32 $ 1.41
======= ======= ======== ========

Diluted, as reported ............................................ $ (0.46) $ (0.48) $ 2.08 $ 1.38
======= ======= ======== ========
Diluted, pro forma .............................................. $ (0.50) $ (0.52) $ 2.00 $ 1.30
======= ======= ======== ========

The fair value of options granted (which is amortized to expense over the option
vesting period in determining the pro forma impact) is estimated on the date of
grant using the Black-Scholes single option pricing model with the following
weighted average assumptions:

For the Three For the Nine
Months Ended Months Ended
------------ ------------
January 25, January 26, January 25, January 26,
2003 2002 2003 2002
---- ---- ---- ----

Expected life of option ......................................... 7 years 7 years 7 years 7 years
Risk free interest rate ......................................... 3.59% 4.89% 3.88% 4.85%
Expected volatility of stock .................................... 54.59% 57.98% 55.09% 58.43%

The weighted-average fair value of options granted was $13.92 and $14.09 during
the three months ended January 25, 2003 and January 26, 2002, respectively, and
was $14.30 and $15.49 during the nine months ended January 25, 2003 and January
26, 2002, respectively.

8

SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)

NOTE 5--GOODWILL AND OTHER INTANGIBLE ASSETS

The following table presents details of the Company's intangible assets,
excluding goodwill:

Accumulated Net Book
January 25, 2003 Gross Value Amortization Value
---------------- ----------- ------------ -----

Amortizable intangible assets:
Customer relationships .......................... $ 24,075 $ (1,533) $ 22,542
Non-compete agreements .......................... 5,809 (1,261) 4,548
Order backlog and other ......................... 1,309 (776) 533
----------- ----------- -----------
Total amortizable intangible assets ........... 31,193 (3,570) 27,623
Non-amortizable intangible assets:
Perpetual license agreement ..................... 12,700 - 12,700
Tradenames and trademarks ....................... 1,997 - 1,997
----------- ----------- -----------
Total non-amortizable intangible assets ....... 14,697 - 14,697
----------- ----------- -----------
Total intangible assets ..................... $ 45,890 $ (3,570) $ 42,320
=========== =========== ===========

Accumulated Net Book
April 27, 2002 Gross Value Amortization Value
-------------- ----------- ------------ -----
Amortizable intangible assets:
Customer relationships .......................... $ 19,384 $ (420) $ 18,964
Non-compete agreements .......................... 3,221 (793) 2,428
Order backlog and other ......................... 1,452 (464) 988
----------- ----------- -----------
Total amortizable intangible assets ........... 24,057 (1,677) 22,380
Non-amortizable intangible assets:
Perpetual license agreement ..................... 12,700 - 12,700
Trademarks ...................................... 377 - 377
----------- ----------- -----------
Total non-amortizable intangible assets ....... 13,077 - 13,077
----------- ----------- -----------
Total intangible assets ..................... $ 37,134 $ (1,677) $ 35,457
=========== =========== ===========

Accumulated Net Book
January 26, 2002 Gross Value Amortization Value
---------------- ----------- ------------ -----
Amortizable intangible assets:
Customer relationships .......................... $ 16,000 $ (89) $ 15,911
Non-compete agreements .......................... 2,819 (645) 2,174
Order backlog and other ......................... 1,650 (428) 1,222
----------- ------------ -----------
Total amortizable intangible assets ........... 20,469 (1,162) 19,307
Non-amortizable intangible assets:
Perpetual license agreement ..................... 15,700 - 15,700
Trademarks ...................................... 377 - 377
----------- ----------- -----------
Total non-amortizable intangible assets ....... 16,077 - 16,077
----------- ----------- -----------
Total intangible assets ..................... $ 36,546 $ ( 1,162) $ 35,384
=========== =========== ===========

Intangible amortization expense included in selling, general and administrative
expenses for three months ended January 25, 2003 and January 26, 2002 was $650
and $275, respectively, and $2,290 and $605 for the nine months ended January
25, 2003 and January 26, 2002, respectively.

9

SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)

Estimated intangible amortization expense for the remainder of fiscal 2003 and
each of the five succeeding fiscal years is estimated to be:

2003 (three months remaining) ..................... $ 580
2004 .............................................. 2,267
2005 .............................................. 2,199
2006 .............................................. 2,198
2007 .............................................. 2,099
2008 .............................................. 2,097

The following information presents changes to goodwill during the period
beginning January 27, 2002 through January 25, 2003:

Balance at Balance at Balance at
January 26, April 27, January 25,
Segment 2002 Acquired Adjustments 2002 Acquired Adjustments 2003
------- ---- -------- ----------- ---- -------- ----------- ----

Traditional .... $ 159,169 $ 747 $ - $ 159,916 $ 3,626 $ - $ 163,542
Specialty....... 230,117 - 913 231,030 27,171 1,442 259,643
--------- -------- ----------- ---------- -------- ----------- ----------
Total ........ $ 389,286 $ 747 $ 913 $ 390,946 $ 30,797 $ 1,442 $ 423,185
========= ======== =========== ========== ======== =========== ==========

The adjustments within the Specialty segment for the period January 27, 2002
through April 27, 2002 include purchase accounting adjustments related to
Premier Agendas of $452. The balance of the adjustments primarily represent
foreign currency translation.

The Specialty segment adjustments during fiscal 2003 of $1,442 are primarily
associated with Premier Agendas. Specifically, $447 is for exit costs,
consisting of employee termination and facility closure costs related to the
closure of regional sales offices, which was substantially completed during
fiscal 2003's second quarter. Also, $863 is for final purchase accounting
adjustments and foreign currency translation. In addition to the Premier Agenda
adjustments, $132 in adjustments relates to the Premier Science acquisition,
with $100 in adjustments representing additional purchase price resulting from
an earn-out provision, which was paid in fiscal 2003's third quarter, and $32 of
final purchase accounting adjustments.

10

SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)

NOTE 6--BUSINESS COMBINATIONS AND PROFORMA RESULTS

On August 14, 2002 the Company acquired ABC School Supply and related affiliates
("ABC") for an aggregate purchase price, which is subject to adjustment, of
$30,735 funded in cash through borrowings under the Company's credit facility.
As part of the acquisition, the Company also assumed $11,449 of debt. ABC, a
producer and marketer of pre-K through eighth grade educational products, is
headquartered in Duluth, Georgia. The acquisition is expected to create
synergies with our early childhood and national accounts customer base. The
preliminary purchase price allocation, which is subject to change, resulted in
goodwill of approximately $30,361, which is not expected to be deductible for
tax purposes. The results of this acquisition and the related goodwill have been
included in both the Traditional and Specialty segment results since the date of
acquisition.

During fiscal 2003's second quarter, the Company made the decision to close
ABC's manufacturing facility in Lineville, Alabama, to close ABC's distribution
center in Duluth, Georgia, and to consolidate various administrative functions
with its Childcraft division and Traditional segment. In accordance with this
plan, the Company recorded $949 in liabilities for severance and termination
costs to cover approximately 150 terminated employees and $1,519 in liabilities
for facility closure and consolidation costs. The Company continues to evaluate
additional exit activities, which are expected to require additional purchase
accounting adjustments and liabilities.

The Company engaged a third-party to perform a valuation of ABC's intangible
assets, which was preliminary as of the balance sheet date and is expected to be
finalized during fiscal 2003's fourth quarter. Details of ABC's acquired
intangible assets, based on the preliminary valuation, are as follows:

Allocated Amortization
Acquired Intangibles Value Life
-------------------- ----- ----
Amortizable intangibles:
Customer relationships ........ $4,630 15 years
Order backlog ................. 140 6 months
------
Total ....................... 4,770 14.6 years
Non-amortizable intangibles:
Tradenames .................... 1,620 N/A
------
Total acquired intangibles .. $6,390 N/A
======

On August 30, 2002, the Company acquired the remaining wholesale operations of
J.L. Hammett ("Hammett") for an aggregate purchase price, which is subject to
change, of $12,942, funded in cash through borrowings under the Company's credit
facility. The $12,942 includes an additional $1,074 in purchase price paid
during fiscal 2003's third quarter. The business operated from Braintree,
Massachusetts, and Romulus, New York, primarily marketed pre-K through twelfth
grade educational products to charter schools and national child care centers.
The acquisition is expected to create synergies with our national accounts
business. The preliminary purchase price allocation, which is subject to change,
resulted in goodwill of $436, which is expected to be fully deductible for tax
purposes, and intangible assets of $2,693, consisting primarily of non-compete
agreements. The results of this acquisition and the related goodwill have been
included in the Traditional segment results since the date of acquisition.

The following information presents the unaudited pro forma results of operations
of the Company for the three and nine months ended January 25, 2003 and January
26, 2002, and includes the Company's consolidated results of operations and the
results of the companies acquired during fiscal 2003 and fiscal 2002 as if all
such acquisitions had been made at the beginning of fiscal 2002, with the
exception of the historical results from the Bradburn and Premier Science
acquisitions, which have been excluded as they are immaterial. The results
presented below include certain pro forma adjustments to reflect the
amortization of certain amortizable intangible assets, adjustments to interest
expense, and the inclusion of an income tax provision on all earnings.

11

SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)

Three Months Ended Nine Months Ended
----------------------------- ----------------------------
January 25, January 26, January 25, January 26,
2003 2002 2003 2002
---- ---- ---- ----

Revenues ............... $ 110,554 $ 118,105 $ 751,974 $ 774,197
Net Income (loss) ...... (8,541) (12,602) 44,749 37,669

EPS:
Basic ................ $ (0.46) $ (0.70) $ 2.45 $ 2.11
Diluted .............. $ (0.46) $ (0.70) $ 2.10 $ 1.87

The pro forma results of operations have been prepared using primarily unaudited
historical results of acquired companies. These unaudited pro forma results of
operations are prepared for comparative purposes only and do not necessarily
reflect the results that would have occurred had the acquisitions occurred at
the beginning of fiscal 2002 or the results that may occur in the future.

NOTE 7--SEGMENT INFORMATION

The Company's business activities are organized around two principal business
segments, Traditional and Specialty, that operate principally in the United
States, with limited Specialty segment operations in Canada. Both internal and
external reporting conforms to this organizational structure, with no
significant differences in accounting policies applied. The Company evaluates
the performance of its segments and allocates resources to them based on revenue
growth and profitability. While the segments serve a similar customer base,
notable differences exist in products, selling and marketing approaches, gross
margin, operating expenses and revenue growth rates. Products supplied within
the Traditional segment include consumables (consisting of classroom supplies,
instructional materials, educational games, art supplies and school forms),
school furniture and indoor and outdoor equipment. Products supplied within the
Specialty segment target specific educational disciplines, such as art,
industrial arts, physical education, sciences and early childhood. This segment
also supplies student academic planners. All intercompany transactions have been
eliminated.

The following table presents segment information:

12

SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)

Three Months Ended Nine Months Ended
-------------------------- --------------------------
January 25, January 26, January 25, January 26,
2003 2002 2003 2002
---- ---- ---- ----

Revenues:
Traditional ..................................... $ 60,402 $ 62,318 $ 397,107 $ 407,237
Specialty ....................................... 50,152 41,687 328,873 226,586
--------- ---------- ---------- ---------
Total ......................................... $ 110,554 $ 104,005 $ 725,980 $ 633,823
========= ========== ========== =========
Operating income (loss) and income (loss)
before taxes:
Traditional ..................................... $ 664 $ 2,132 $ 45,337 $ 48,969
Specialty ....................................... (5,677) (6,027) 58,632 25,300
--------- ---------- ---------- ---------
Total ......................................... (5,013) (3,895) 103,969 74,269
Corporate expenses .............................. 4,504 4,308 14,841 13,394
--------- ---------- ---------- ---------
Operating income (loss) ....................... (9,517) (8,203) 89,128 60,875
Interest expense and other ...................... 4,730 6,171 14,993 15,900
--------- ---------- ---------- ---------
Income (loss) before taxes .................... $ (14,247) $ (14,374) $ 74,135 $ 44,975
========= ========== ========== =========

Depreciation and intangible asset amortization:
Traditional ..................................... $ 950 $ 1,084 $ 2,940 $ 3,046
Specialty ....................................... 1,794 915 5,491 2,423
--------- ---------- ---------- ---------
Total ......................................... 2,744 1,999 8,431 5,469
Corporate ....................................... 1,019 841 2,999 2,407
--------- ---------- ---------- ---------
Total ......................................... $ 3,763 $ 2,840 $ 11,430 $ 7,876
========= ========== ========== =========

Expenditures for property and equipment:
Traditional ..................................... $ 166 $ 239 $ 776 $ 1,505
Specialty ....................................... 931 358 2,717 1,390
--------- ---------- ---------- ---------
Total ......................................... 1,097 597 3,493 2,895
Corporate ....................................... 1,512 2,859 4,316 4,366
--------- ---------- ---------- ---------
Total ......................................... $ 2,609 $ 3,456 $ 7,809 $ 7,261
========= ========== ========== =========

As of As of
January 25, April 27,
2003 2002
---- ----
Identifiable assets:
Traditional ..................................... $ 241,643 $ 249,926
Specialty ....................................... 382,911 344,045
---------- ---------
Total ......................................... 624,554 593,971
Corporate assets ................................ 94,510 79,671
---------- ---------
Total ......................................... $ 719,064 $ 673,642
========== =========

13

SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)

NOTE 8--RESTRUCTURING COSTS

During the fourth quarter of fiscal 2001, the Company recorded a restructuring
charge of $4,500 to close redundant facilities and for severance costs related
to the termination of 76 employees, which is discussed in the Company's fiscal
2001 and fiscal 2002 Annual Reports on Forms 10-K. No additional provisions were
made under this plan during the nine months ended January 25, 2003.

Selected information related to the restructuring reserve follows:

Facility
Severance and Closure and
Terminations Consolidation Other Costs Total
------------ ------------- ----------- -----

April 28, 2001 liability balance $ 800 $ 1,694 $ 19 $ 2,513
First quarter, fiscal 2002
Utilizations ........................... (337) (291) (19) (647)
Second quarter, fiscal 2002
Utilizations ........................... (140) (198) - (338)
Third quarter, fiscal 2002
Utilizations ........................... (227) (339) - (566)
Fourth quarter, fiscal 2002
Utilizations and adjustments ........... 64 (163) - (99)
-------- ------- --------- -------
April 27, 2002 liability balance 160 703 - 863
First quarter, fiscal 2003
Utilizations ........................... (35) (76) - (111)
Second quarter, fiscal 2003
Utilizations ........................... (28) (50) - (78)
Third quarter, fiscal 2003
Utilizations ........................... (34) (51) - (85)
-------- ------- ----------- -------
January 25, 2003 liability balance .......... $ 63 $ 526 $ - $ 589
======== ======= =========== =======

NOTE 9--ASSETS HELD FOR SALE

During fiscal 2003's third quarter, the Company sold ABC's manufacturing
facility in Lineville, Alabama for net proceeds of $484. The transaction
resulted in a purchase accounting adjustment, a reduction of goodwill, of $53.
The balance in assets held for sale of $1,350 relates to our Lufkin, Texas
facility.

NOTE 10--SUBSEQUENT EVENT

On February 26, 2003, the Company acquired the video division of Sunburst
Technology Corporation for an aggregate purchase price, which is subject to
change, of $7,750. This transaction was funded in cash through borrowings under
the Company's credit facility.

14

SCHOOL SPECIALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)

NOTE 11--RESTATEMENT OF FINANCIAL STATEMENTS

Subsequent to the issuance of the Company's consolidated fiscal 2001 financial
statements, the Company determined that two sale-leaseback transactions which
occurred in November 2000 were improperly accounted for. The Company initially
accounted for the transactions as operating leases under sale-leaseback
accounting. The leases contain a specific technical default provision within the
agreements that could, under remote circumstances, allow for continuing
ownership involvement by the Company in the two properties. Due to this specific
default provision within the leases, the Company should have accounted for the
transactions as financings as opposed to sales and subsequent operating leases.
The following table summarizes the impact of this restatement on the Company's
previously filed fiscal 2002 third quarter Form 10-Q's unaudited quarterly
financial results:

At January 26, 2002: As Reported As Restated
----------- -----------
Property and equipment .................... $ 49,185 $ 65,042
Other assets .............................. 11,358 12,063
Current maturities - long-term debt ....... 4,412 4,691
Other accrued liabilities ................. 16,028 15,356
Long-term debt ............................ 278,221 296,023
Retained earnings ......................... 68,416 67,908

Three Months Ended Nine Months Ended
------------------------ -------------------------
For the period ending January 26, 2002: As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------

Selling, general and administrative expenses ...... $ 48,199 $ 47,949 $179,750 $178,999
Operating income (loss) ........................... (8,453) (8,203) 60,124 60,875
Interest expense .................................. 3,769 4,185 11,730 12,981
Income (loss) before provision for (benefit from)
income taxes .................................... (14,208) (14,374) 45,475 44,975
Provision for (benefit from) income taxes ......... (5,683) (5,749) 18,192 17,992
Net income (loss) ................................. (8,525) (8,625) 27,283 26,983
Basic EPS ......................................... $ (0.47) $ (0.48) $ 1.53 $ 1.51
Diluted EPS ....................................... $ (0.47) $ (0.48) $ 1.39 $ 1.38

As Reported amounts reflect reclassifications made to conform with the current
year presentation.

15

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A")

Our financial statements for the three and nine months ended January 26, 2002
have been restated. See Note 11 "Restatement of Financial Statements" in our
notes to condensed consolidated financial statements. The following MD&A gives
effect to the restatement.

Results of Operations

The following table sets forth various items as a percentage of revenues on a
historical basis.

Three Months Ended Nine Months Ended
------------------------- ------------------------
January 25, January 26, January 25, January 26,
2003 2002 2003 2002
---- ---- ---- ----

Revenues ............................................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues .................................... 61.4 61.8 59.1 62.2
------ ------ ------ ------
Gross profit ..................................... 38.6 38.2 40.9 37.8
Selling, general and administrative expenses ........ 47.2 46.1 28.6 28.2
------ ------ ------ ------
Operating income (loss) .......................... (8.6) (7.9) 12.3 9.6
Interest expense, net ............................... 3.8 4.0 1.9 2.0
Other ............................................... 0.5 1.9 0.2 0.5
------ ------ ------ ------
Income (loss) before provision for (benefit from)
income taxes ..................................... (12.9) (13.8) 10.2 7.1
Provision for (benefit from) income taxes ........... (5.2) (5.5) 4.1 2.8
------ ------ ------ ------
Net income (loss) ................................... (7.7)% (8.3)% 6.1% 4.3%
====== ====== ====== ======

Three Months Ended January 25, 2003 Compared to Three Months Ended January 26,
2002

Revenues

Revenues increased 6.3% from $104.0 million for the three months ended January
26, 2002, to $110.6 million for the three months ended January 25, 2003. The
increase in revenues was primarily due to acquisitions and growth in existing
Specialty businesses, partially offset by a decline in Traditional segment
revenues. Specialty segment revenues increased 20.3% from $41.7 million to $50.2
million, primarily driven by acquired revenues from ABC School Supply ("ABC").
Traditional segment revenues decreased 3.1% from $62.3 million to $60.4 million,
reflecting continued softness in the economy and uncertainties over state
funding, partially offset by revenues from acquired businesses.

Gross Profit

Gross profit increased 7.5% from $39.7 million for the three months ended
January 26, 2002, to $42.7 million for the three months ended January 25, 2003.
Gross margin expanded by 40 basis points from 38.2% to 38.6%. The increase in
gross profit and gross margin was primarily due to acquired businesses and a
shift in revenue mix to higher margin Specialty business. Specialty segment
gross margin expanded by 90 basis points from 45.6% to 46.5%, driven primarily
by acquired business and successful pricing initiatives in core businesses.
Traditional segment gross profit decreased 6.5% from $20.7 million to $19.4
million, primarily due to reduced volume in the consumable product line.

SG&A

Selling, general and administrative expenses ("SG&A") include selling expenses
(the most significant component of which is sales wages and commissions),
operations expenses (which includes customer service, warehouse and warehouse
shipment transportation costs), catalog costs, general administrative overhead
(which includes information systems, accounting, legal, and human resources) and
depreciation and intangible asset amortization expense.

16

SG&A increased $4.3 million from $47.9 million for the three months ended
January 26, 2002, to $52.2 million for the three months ended January 25, 2003.
As a percent of revenues, SG&A increased 110 basis points from 46.1% to 47.2%.
The increase in SG&A as a percent of revenues was primarily due to the inclusion
of Premier Agendas for a full quarter, a highly seasonal business with limited
revenues in the Company's third and fourth quarters and the acquisition of ABC,
which was not fully integrated into existing operations. These increases were
partially offset by overall efficiencies in core operations, including the
Lufkin, Texas warehouse closing.

Specialty segment SG&A increased 15.8% from $25.0 million or 60.1% of revenues
to $29.0 million, or 57.8% of revenues. The increase in Specialty SG&A was
driven primarily by the inclusion of Premier Agendas for a full quarter and the
inclusion of ABC. The reduction in Specialty segment SG&A as a percent of
revenues was primarily due to a non-recurring charge that occurred in fiscal
2002 related to closing the Birmingham, Alabama distribution center, which
partially offset the inclusion of Premier Agendas for a full quarter.
Traditional segment SG&A increased $0.1 million from $18.6 million or 29.9% of
revenues to $18.7 million or 31.0% of revenues. The increase in Traditional SG&A
was primarily due to increased costs associated with the expansion of our
national accounts business.

Interest Expense

Net interest expense was $4.2 million or 4.0% of revenues for the three months
ended January 26, 2002 and $4.2 million or 3.8% of revenues for the three months
ended January 25, 2003. A reduction in our effective borrowing rate was offset
by an increase in debt outstanding.

Other Expense

Other expense decreased $1.5 million to $0.5 million in fiscal 2003's third
quarter from $2.0 million in fiscal 2002's third quarter. Other expense for the
three months ended January 25, 2003 primarily represented the discount and loss
on the accounts receivable securitization of $0.5 million. Other expense for the
three months ended January 26, 2002 primarily represented the discount and loss
on the accounts receivable securitization of $0.4 million and $1.7 million
related to the loss on impairment of a long-term investment.

Benefit from Income Taxes

Benefit from income taxes was $5.7 million for the three months ended January
25, 2003 and January 26, 2002, respectively, reflecting income tax rates of
40.0% for each period. The higher effective tax rate, as compared to the federal
statutory rate of 35%, was primarily due to state, local and foreign income
taxes.

Nine Months Ended January 25, 2003 Compared to the Nine Months Ended January 26,
2002

Revenues

Revenues increased $92.2 million or 14.5% from $633.8 million to $726.0 million.
The increase in revenues was primarily due to acquisitions, partially offset by
a decline in Traditional segment revenues. Specialty segment revenues increased
$102.3 million or 45.1% from $226.6 million to $328.9 million, driven primarily
by the acquisitions of Premier Agendas and ABC. Traditional segment revenues
declined 2.5% or $10.1 million from $407.2 million to $397.1 million, reflecting
continued softness in the economy and related state funding concerns, partially
offset by acquired revenues.

17

Gross Profit

Gross profit increased $57.2 million or 23.9% from $239.9 million to $297.1
million. The increase was due to an increase in revenues and gross margin
expansion. Gross margin grew 310 basis points from 37.8% to 40.9%, driven by
revenue mix, with an increase in revenues from the higher margin Specialty
segment. Specialty segment gross margin grew 420 basis points from 45.4% to
49.6%, driven by strong gross margins from acquired businesses and margin
expansion in the ClassroomDirect business, resulting primarily from reduced
price discounting. Traditional segment gross margin expanded 10 basis points
from 33.7% to 33.8%, driven primarily by product mix and consumable line gross
margin expansion.

SG&A

SG&A increased $29.0 million or 16.2% from $179.0 million or 28.2% of revenues
to $208.0 million or 28.6% of revenues. The increase in SG&A and SG&A as a
percent of revenues was primarily due to acquisitions, an increase in revenues
and a shift in revenue mix to increased Specialty segment revenues, which
generally has higher operating costs than the Traditional segment primarily due
to increased marketing costs, These increases were partially offset by
efficiencies obtained from integration efforts.

Specialty segment SG&A increased $26.9 million, or 34.6% from $77.5 million, or
34.2% of revenues to $104.4 million or 31.7% of revenues. The increase in
Specialty segment SG&A was primarily due to an increase in revenues and
redundancies created with operations acquired during fiscal 2003's second
quarter, which were not fully integrated into existing operations. The decrease
in SG&A as a percent of revenues was primarily due to Premier Agendas, which has
lower SG&A as a percent of revenues than most of our Specialty businesses and a
non-recurring charge that occurred in fiscal 2002 related to closing the
Birmingham, Alabama distribution center. Traditional segment SG&A increased $0.7
million from $88.1 million, or 21.6% of revenues to $88.8 million or 22.4% of
revenues. The increase in SG&A was primarily due to costs associated with
closing our Lufkin, Texas facility, which supported the Traditional segment, of
approximately $1.2 million.

Interest Expense

Net interest expense increased 3.7% or $0.5 million from $12.9 million to $13.4
million. The increase in net interest expense was due to an increase in average
debt outstanding, partially offset by a reduction in interest rates.

Other Expense

Other expense decreased $1.4 million from $3.0 million to $1.6 million for the
nine months ended January 25, 2003. Other expenses for the nine months ended
January 25, 2003 primarily represented the discount and loss on securitized
accounts receivable of $1.5 million. Discount and loss on securitized accounts
receivable for the nine months ended January 26, 2002 was $1.6 million. The
decrease in the discount and loss was primarily due to a reduction in the
discount rate partially offset by an increase in the average securitized
accounts receivable from $50.0 million in fiscal 2002 to $81.1 million in fiscal
2003. Other expenses for the nine months ended January 26, 2002 included a $0.3
million realized gain on the sale of available-for-sale securities and a $1.7
million loss on impairment related to a long-term investment.

Provision for Income Taxes

Provision for income taxes increased 65.0% or $11.7 million, reflecting income
tax rates of 40.0% for each period. The higher effective tax rate, compared to
the federal statutory rate of 35%, was primarily due to state, local and foreign
income taxes.

18

Liquidity and Capital Resources

At January 25, 2003, we had a working capital deficit of $19.5 million, due to
the classification as short-term of $115.5 million of debt outstanding under our
credit facility, which matures in September 2003. We expect to refinance a large
portion of our outstanding debt under the credit facility as long-term by the
end of fiscal 2003. Our capitalization at January 25, 2003 was $607.6 million
and consisted of total debt of $283.3 million and shareholders' equity of $324.3
million.

We currently have a five-year secured $250 million revolving loan credit
facility with Bank of America, N.A. The credit facility matures on September 30,
2003. The amount outstanding as of January 25, 2003 was $115.5 million. The
credit facility is secured by substantially all of our assets and contains
certain financial and other covenants. Borrowings under the credit facility are
usually significantly higher during the first two quarters of our fiscal year to
meet the working capital needs of our peak-selling season. At January 25, 2003,
our effective interest rate on borrowings under our credit facility was
approximately 5.1%, including amortization of loan origination costs and
commitment fees.

We currently have a $100 million accounts receivable securitization facility
which expires in November 2003. The facility was amended during November 2002 to
extend the expiration date to November 2003 and may be extended further with the
financial institution's consent. At January 25, 2003, $50 million was advanced
under the accounts receivable securitization and accordingly, that amount of
accounts receivable has been removed from our consolidated balance sheet. Costs
associated with the sale of receivables, primarily related to the discount and
loss on sale, for the nine months ended January 25, 2003 were $1.5 million and
are included in other expenses in our condensed consolidated statement of
operations.

Net cash provided by operating activities during the nine months ended January
25, 2003 decreased $1.5 million, from $63.4 million during the nine months ended
January 26, 2002 to $61.9 million. The decrease in cash from operations was
driven primarily by an increase in accounts receivable balances, partially
offset by an increase in net income.

Net cash used in investing activities during the nine months ended January 25,
2003 was $54.6 million. Of this amount, $47.4 million related to acquisitions
and $7.8 million was used for capital expenditures, primarily consisting of
computer hardware and software and distribution and manufacturing equipment. Net
cash used in investing activities during the nine months ended January 26, 2002
was $159.4 million, including $160.2 million for acquisitions and $7.3 million
for capital expenditures. These uses were partially offset by proceeds of $5.2
from the sale of available-for-sale securities and $1.7 million in proceeds from
a business disposition and sale of property and equipment.

Net cash used in financing activities during the nine months ended January 25,
2003 was $8.0 million. Net repayments on bank borrowings and capital leases of
$14.2 million were partially offset with $6.3 million of proceeds from stock
option exercises. Net cash provided by financing activities during the nine
months ended January 26, 2002 was $95.6 million. Net proceeds from our
convertible debt offering of approximately $144.6 million were used to repay a
portion of the debt outstanding on our credit facility.

We anticipate that our cash flow from operations, borrowings available from our
existing credit facility and other sources of capital will be sufficient to meet
our liquidity requirements for operations, including anticipated capital
expenditures and our contractual obligations. We have initiated the process of
negotiating a new credit facility, which is anticipated to be completed by the
end of fiscal 2003.

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.

19

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 we 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 our 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.

Inflation

Inflation has and is expected to have only a minor effect on our results of
operations and our internal and external sources of liquidity.

Forward-Looking Statements

Statements in this 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 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, including, without limitation, statements with respect to internal
growth plans, projected revenues, margin improvement, future acquisitions,
capital expenditures and adequacy of capital resources; (2) statements included
or incorporated by reference in our future filings with the Securities and
Exchange Commission; and (3) information contained in written material, releases
and oral statements issued by, or on behalf of School Specialty including,
without limitation, statements with respect to projected revenues, costs,
earnings and earnings per share. Forward-looking statements also include
statements regarding the intent, belief or current expectation of School
Specialty or its officers. Forward-looking statements include statements
preceded by, followed by or that include forward-looking terminology such as
"may," "will," "should," "believes," "expects," "anticipates," "estimates,"
"continues" or similar expressions.

All forward-looking statements included in this 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
report or otherwise. Our actual results may differ materially from those
contained in the forward-looking statements identified above. Factors which may
cause such a difference to occur include, but are not limited to the factors
identified in Exhibit 99.2 to our Form 10-K for the fiscal year ended April 27,
2002.

ITEM 3. Quantitative And Qualitative Disclosures About Market Risk

There have been no changes in quantitative and qualitative disclosures about
market risk from what was reported in our Annual Report on Form 10-K for the
fiscal year ended April 27, 2002.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on an evaluation as of a date within 90 days prior to the filing of this
quarterly report, the Company's principal executive officer and principal
financial officer have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) under the Securities Exchange Act of
1934 (the "Exchange Act")) are adequate and effective for the purposes set forth
in the definition of the Exchange Act rules.

Changes in Internal Controls

There have not been any significant changes in internal controls, or in other
factors that could significantly affect internal controls and there were no
corrective actions with regard to significant deficiencies or material
weaknesses, subsequent to the date the above officers completed their
evaluation.

20

PART II - OTHER INFORMATION

ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits.

See the Exhibit Index which is incorporated herein by reference.

(b) The Company did not file any reports on Form 8-K during the quarter covered
by this report.

21

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

SCHOOL SPECIALTY, INC.
(Registrant)

3/7/2003 /s/ David J. Vander Zanden
-------- -------------------------------------
Date David J. Vander Zanden
President and Chief Executive Officer
(Principal Executive Officer)

3/7/2003 /s/ Mary M. Kabacinski
-------- -------------------------------------
Date Mary M. Kabacinski
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)

22

CERTIFICATION

I, David J. Vander Zanden, President and Chief Executive Officer of School
Specialty, certify that:

1. I have reviewed this quarterly report on Form 10-Q of School Specialty,
Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: March 7, 2003

/s/ David J. Vander Zanden
-------------------------------------
David J. Vander Zanden
President and Chief Executive Officer

23

CERTIFICATION

I, Mary M. Kabacinski, Executive Vice President and Chief Financial Officer of
School Specialty, certify that:

1. I have reviewed this quarterly report on Form 10-Q of School Specialty,
Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: March 7, 2003

/s/ Mary M. Kabacinski
----------------------------------
Mary M. Kabacinski
Executive Vice President and Chief
Financial Officer

24

INDEX TO EXHIBITS

Exhibit No. Description

10.1 Executive Term Life Insurance Plan for David J. Vander Zanden.

12.1 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges.

99.1 School Specialty, Inc.'s Certification of Periodic Report by the
Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

99.2 School Specialty, Inc.'s Certification of Periodic Report by the
Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

25