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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JANUARY 24, 2004.

OR

FOR THE TRANSITION PERIOD FROM              TO             

Commission File Number: 000-24385

SCHOOL SPECIALTY, INC.

(Exact Name of Registrant as Specified in its Charter)

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.

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SCHOOL SPECIALTY, INC.

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JANUARY 24, 2004

-Index-

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PART I - FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Unaudited Financial Statements

SCHOOL SPECIALTY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

See accompanying notes to condensed consolidated financial statements.

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SCHOOL SPECIALTY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

See accompanying notes to condensed consolidated financial statements.

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SCHOOL SPECIALTY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

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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 24, 2004, and January 25, 2003, which were paid for using cash. The fair values of the assets and liabilities of the acquired companies at the dates of the acquisitions are presented as follows:

Fiscal 2004 cash paid in acquisitions, net of cash acquired, as reported within cash flows from investing activities includes a purchase price adjustment of $100. Fiscal 2003 cash paid in acquisitions, net of cash acquired, includes the payment of $4,012 for the fiscal 2002 note payable to selling shareholders related to the acquisition of Premier Agendas and other purchase price adjustments of $105.

See accompanying notes to condensed consolidated financial statements.

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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 26, 2003, has been derived from the Company’s audited financial statements for the fiscal year ended April 26, 2003. 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 26, 2003.

NOTE 2—SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

Changes in shareholders’ equity during the nine months ended January 24, 2004, were as follows:

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

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

NOTE 3—EARNINGS PER SHARE AND EMPLOYEE STOCK PLANS

Earnings Per Share

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

The Company had additional stock options outstanding during the nine months ended January 24, 2004 and January 25, 2003, of 53 and 396, respectively, that were not included in the computation of diluted EPS because they were anti-dilutive. The effect of convertible debt on the Company’s diluted EPS relates to the Company’s fiscal 2002 sale of 6% convertible subordinated notes due in full on August 1, 2008.

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 (loss) and net income (loss) per share would have been impacted as indicated in the following table:

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

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:

The weighted-average fair value of options granted was $18.58 and $13.92 during the three months ended January 24, 2004 and January 25, 2003, respectively, and was $16.45 and $14.30 during the nine months ended January 24, 2004 and January 25, 2003, respectively.

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

NOTE 4—GOODWILL AND OTHER INTANGIBLE ASSETS

The following tables present details of the Company’s intangible assets, excluding goodwill:

Intangible amortization expense included in selling, general and administrative expenses for three months ended January 24, 2004 and January 25, 2003 was $677 and $650, respectively, and $2,742 and $2,290 for the nine months ended January 24, 2004 and January 25, 2003, respectively.

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

Estimated intangible amortization expense for the remainder of fiscal 2004 and each of the five succeeding fiscal years is as follows:

The following information presents changes to goodwill during the period beginning January 26, 2003 through January 24, 2004:

The adjustments within the Traditional segment for the period April 27, 2003 to January 24, 2004 primarily represent the final allocation of purchase price associated with the fiscal 2003 acquisition of the remaining wholesale operations of J.L. Hammett. The adjustments within the Specialty segment for the period January 26, 2003 to April 26, 2003 and for the period April 27, 2003 to January 24, 2004 primarily represent foreign currency translation of $1,748 and $3,979, respectively. The remaining adjustments within the Specialty segment for the period April 27, 2003 to January 24, 2004 primarily represent the final allocation of purchase price associated with the fiscal 2003 acquisition of ABC School Supply.

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

NOTE 5—BUSINESS COMBINATIONS

On January 16, 2004, the Company acquired the stock of Califone International, Inc. for an aggregate purchase price, net of cash acquired, of $26,454. This transaction was funded in cash through borrowings under the Company’s credit facility. The business operates from Chatsworth, California and is the leading developer of quality sound presentation systems including state of the art multimedia, audio-visual and presentation equipment for schools and industry. The preliminary purchase price allocation, which is subject to change, resulted in goodwill of $16,092 and intangible assets of $7,335. The Company has engaged a third-party to perform a valuation of the intangible assets, which was preliminary as of the balance sheet date and is expected to be finalized during fiscal 2004’s fourth quarter. The results of this acquisition have been included in the Specialty segment since the date of acquisition.

On May 30, 2003, the Company acquired the stock of Select Agendas, a Canadian-based company, for an initial aggregate purchase price, net of cash acquired, of $9,558. The purchase price is subject to an earn-out provision and is subject to change. This transaction was funded in cash through borrowings under the Company’s credit facility. The business operates from Montreal, Quebec and primarily markets student agenda products to customers in the United States and Canada. The acquisition is expected to create synergies with our existing agenda business. The preliminary purchase price allocation, which is subject to change, resulted in goodwill of $5,466 and intangible assets of $3,494, consisting primarily of order backlog and customer relationships. The results of this acquisition have been included in the Specialty segment results since the date of acquisition. Subsequent to January 24, 2004, the Company paid $6,590 of additional purchase price to the selling shareholders related to the earn-out provision and the Company anticipates that additional purchase price is likely to be paid as the earn-out provision is finalized in fiscal 2005.

Pro forma results of operations of the Company for the three and nine months ended January 24, 2004 and January 25, 2003 have not been reported for the acquisitions made in fiscal 2003 and fiscal 2004 because the acquisitions were not significant.

NOTE 6—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.

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The following table presents segment information:

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)