School Specialty Inc. Annual Report 2002

FY2002 Annual Report · School Specialty Inc.

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A N N U A L
R E P O R T

SS 10K Cover Wrap 2002 Inside 7/19/02 3:16 PM Page 1

To Our Shareholders:

Fiscal 2002 was a very good year

for School Specialty from a
business standpoint. It was also a
devastating year from the personal
loss we all felt with the passing of
our Founder, Chairman and CEO,
Dan Spalding. Dan’s vision for
School Specialty and his inspirational
personality will live on with us and
continue to guide the company
into the future, building upon the
strong foundation he laid in the
past. We will miss his smile, wit
and wisdom. But most of all, we
will miss him. The picture of Dan
shown on this page was taken for
an interview he gave last year. His
smile in this picture is as genuine as
he was.

Company Goals
We only win when the company
is appreciated by its associates,
favored by its customers, and
admired by its shareholders.

— DANIEL P. SPALDING
2002

In fiscal 2002 we continued to build
School Specialty, achieving record
results with a dual strategy of internal growth through increased
geographic and account penetration and acquired growth targeting
specific brands and products that are attractive to our pre K-12 school
customers. In December we bought Premier Student Agendas, an
excellent addition to our number one brand offerings. We combined
Premier with Hammond & Stephens, an agenda company we acquired
three years ago, to become the largest supplier of student agendas in
the United States and Canada selling more than 25 million agendas,
nearly a 50% market share. Premier, as the leading innovator of student
agendas, has positioned itself as the top provider of student personal
success tools for the K-12 market. The Premier products provide School
Specialty with additional opportunity to promote all of our product
brands to students and teachers.

Our expertise in integration of acquired operations and consolidation
of shared activities has produced consistent, measurable cost savings
each year as we continue our favorable trend of adding 50 basis points
to operating margins each year. This year we closed our
ClassroomDirect distribution center in Birmingham, Alabama and
successfully combined it with our Southhaven, Mississippi location. We
also integrated our Hammond & Stephens printing operation with
Premier’s Bellingham, Washington location and combined the two sales
forces, as well as the management teams, to form one student agenda
group. We completed the integration of the JL Hammett acquisition that
we started last year. Finally, we began the initial stages of converting
our legacy enterprise systems to more current software, as well as the
implementation of new warehouse management systems.

Our internet strategy continues to perform as internet revenues grew to
$54 million in fiscal 2002. We saw nearly all of the new B2B software
providers struggle and leave the industry this year. The slowly changing
education industry has finally begun to accelerate acceptance of the
internet and requests for electronic ordering capabilities from its
suppliers is increasing dramatically. We are well positioned to take
advantage of this change by continuing to offer all of our products
through JuneBox.com.

We reported record revenues in fiscal 2002 of $767 million, an 11%
increase over the prior year. We also saw our operating income and net
income reach record levels of $58 million and $22 million, respectively.
These increases were, in great part, due to the over 300 basis point
increase in gross margin that we were able to generate in our traditional
segment where we capitalized on our improved competitive market
positioning. Cost savings from integration of operations were nicely
additive to operating income. Our cash flow also reached a record level
of $64 million in free cash for fiscal 2002.

As we look to the future, we are cautious about the economy and the
effect it will have on state and school budgets for next year. While we
expect overall school spending in the United States to be affected, we
also expect overall spending to be higher than the prior year. We
project 2003 to be another record year for School Specialty for both
revenues and net income. School Specialty is well positioned to
support many of the new initiatives that schools are considering for the
future: standards-based assessment, continued growth in the use of
technology, character education and higher emphasis on reading are all
areas that School Specialty is prepared to support.

We will continue to acquire companies that follow our strategy of
becoming the single source provider to schools. Music, math and
geography are top acquisition target areas as well as companies that
complement and strengthen positions we already have.

School Specialty reflects the best of America in its people and their
commitment to serving our customers and supporting the education of
our children. Our associates take great pride in the fact that they are
participating in a child’s education, and are determined to succeed in
this endeavor. It is through their dedication and fortitude that we will
remain a force in the education of America’s children.

Sincerely,

David J. Vander Zanden
Interim CEO
President & COO
School Specialty, Inc.

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

______________________________

FORM 10-K
______________________________

[(cid:1)]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934: For the fiscal year ended April 27, 2002

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

Commission File No. 000-24385

SCHOOL SPECIALTY, INC.

(Exact name of Registrant as specified in its charter)

Wisconsin
(State or other jurisdiction of
incorporation or organization)

W6316 Design Drive
Greenville, Wisconsin
(Address of principal executive offices)

39-0971239
(I.R.S. Employer
Identification No.)

54942
(Zip Code)

Registrant’s telephone number, including area code: (920) 734-5712

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value
(Title of class)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes (cid:1) No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ (cid:1) ]

The aggregate market value of the voting stock held by nonaffiliates of the Registrant, as of July 8, 2002, was
approximately $454,151,825. As of such date, there were 18,234,015 shares of the Registrant’s common stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on August 27, 2002 are

incorporated by reference into Part II and Part III.

Item 1. Business

PART I

Unless the context requires otherwise, all references to “School Specialty,” “we” or “our” refer to
School Specialty, Inc. and its subsidiaries. Our fiscal year ends on the last Saturday in April in each year.
In this Annual Report on Form 10-K (“Annual Report”), we refer to fiscal years by reference to the
calendar year in which they end (e.g. the fiscal year ended April 27, 2002 is referred to as “fiscal 2002”).
Note that fiscal 2000 had 53 weeks, while all other fiscal years reported and referenced represent 52 weeks.

Company Overview

School Specialty is the largest direct marketing company for supplemental educational supplies to

schools and teachers for pre-kindergarten through twelfth grade (“preK-12”) in the United States. We
operate the industry’s only national distribution network and currently hold approximately a 14 percent
market share of the $6.2 billion supplemental educational supply market. We offer more than 80,000
items, mail over 38 million catalogs annually and have developed both an on-line education portal and e-
commerce websites. Our broad product range enables us to provide customers with one source for
virtually all of their supplemental educational supply needs. Our leading market position has been
achieved by emphasizing high-quality products, superior order fulfillment and exceptional customer
service. As a result, we have been able to establish relationships with virtually all of the country’s preK-
12 schools and reach nearly all of the country’s teachers.

We recognize that educational supply procurement decisions are made at the district and school

levels by administrators as well as at the classroom level by teachers and curriculum specialists. As a
result, we have created an innovative multi-channel sales and marketing strategy enabling us to market
our products to the various levels of buyers within the education market.

The “traditional” or “top down” approach targets school districts and school administrators

through our traditional sales force of over 300 professionals, the School Specialty general supply catalog
and the JuneBox.com portal, a B2B (business to business) education portal.

The “specialty” or “bottom up” approach targets the classroom level decision-makers through our

specialty sales force of over 200 professionals and through our catalogs featuring seven of our specialty
brands as well as the ClassroomDirect catalog and website, which is a B2T (business to teacher) website.
Our other specialty catalogs include Childcraft, Sax Arts and Crafts, Sportime and Premier Agendas. The
specialty businesses offer more specialized products for individual disciplines. Many of these products
are proprietary to our specialty brands.

We believe most of our brands hold the leading market position in their respective categories.
We have also solidified this leading market position by acquiring companies which have expanded our
geographic presence and product offering. The critical mass we have achieved allows us to benefit from
increased buying power while leveraging our national distribution network and sales force to operate
more efficiently.

We have grown significantly in recent years through both acquisitions and internal growth. From

fiscal 1997 through fiscal 2002, our revenues increased from $191.7 million to $767.4 million, a
compound annual growth rate, or CAGR, of 32 percent. In fiscal 2002, revenues increased by 10.8
percent from the previous fiscal year. These results reflect only a partial year of the revenues from
companies we acquired during fiscal 2002. We remain focused on growth opportunities, including

increasing our penetration rate and expanding in attractive regions, which would allow us to enhance our
position as the number one marketer of supplemental educational supplies in the United States.

School Specialty, Inc., founded in October 1959, was acquired by U.S. Office Products in May

1996. In June 1998, School Specialty was spun-off from U.S. Office Products in a tax-free transaction. Our
common stock is listed on the Nasdaq National Market under the symbol “SCHS.” In August 2000, we
reincorporated from Delaware to Wisconsin. Our principal offices are located at W6316 Design Drive,
Greenville, Wisconsin 54942, and our telephone number is (920) 734-5712. Our general website address is
www.schoolspecialty.com. Information contained in any of our websites is not deemed to be a part of this
Annual Report.

Industry Overview

The school supply market consists of the sale of supplemental educational supplies, furniture and

equipment to school districts, individual schools, teachers and curriculum specialists who purchase products
for school and classroom use. The National School Supply Equipment Association, or NSSEA, estimates
that annual sales in the United States of supplemental educational supplies and equipment to the school
supply market are approximately $6.2 billion. Of this amount, approximately $3.7 billion is sold through
institutional channels and the remaining $2.5 billion is sold through retail channels, such as teacher stores.

According to the U.S. Department of Education, there are approximately 16,000 school districts,

118,500 elementary and secondary schools and 3.6 million teachers in the United States. Administrators for
both school districts and individual schools usually make the decision to purchase the general school
supplies needed to operate the school. Teachers and curriculum specialists generally decide on curriculum-
specific products for use in their classrooms and individual disciplines. According to the NSSEA, teachers
spent approximately $1.3 billion of their own money in 2001 on supplies to supplement classroom
materials.

The industry has highly predictable and generally favorable trends. Education expenditures have
risen each year for the past 15 years and are expected to have exceeded $390 billion in 2001, according to
the U.S. Department of Education. The most common measure of education spending is current
expenditures per student. According to the National Education Association, current expenditures per
student in constant dollars have increased from $6,620 in 1988 to an estimated $7,400 in 2000 and are
expected to increase further to $9,760 in 2010, a 32 percent increase over 2000 expenditures. Incremental
spending will thus exceed enrollment growth, which according to the U.S. Department of Education is
projected to grow by 17 percent from 1988 to 2010 to a record level of 53.0 million students. As the market
is affected by prevailing political and social trends, the attitude of the government towards education
determines, to some extent, total expenditures on education. The prevailing political and social
environments are generally favorable for incremental expenditures on education.

In January 2002 President Bush signed into law the No Child Left Behind Act of 2001 designed to
improve student achievement in classrooms across the country. The fiscal 2002 federal budget provides for
$4.6 billion in federal education funding, an 11 percent increase from last year.

The industry is also highly fragmented with over 3,400 direct marketers of supplemental education

supplies, many of which are family- or employee-owned businesses that operate in a single geographic
region. We believe the increasing demand for single-source suppliers, prompt order fulfillment and
competitive pricing, along with the related need for suppliers to invest in automated inventory and electronic
ordering systems, is fostering consolidation within the industry. In addition, the industry is currently
experiencing a shift in growth to the higher margin specialty business, which offers more focused products
for different educational disciplines. Increased purchasing at the school and classroom levels, which

increases individual school’s and teacher’s roles in educational supply procurement decisions, is also driving
this trend.

Recent Acquisitions

Premier Agendas. In December 2001 we acquired all of the stock of Premier Agendas, Inc. and
Premier School Agendas, Ltd (together “Premier Agendas”). Headquartered in Bellingham, Washington,
Premier Agendas is the largest provider of academic agendas in the United States and Canada. Premier
Agendas has been included in our specialty segment since the date of acquisition. We paid approximately
$156 million in total purchase price for Premier Agendas, including cash of approximately $152 million and
a $4 million six-month note payable to the former owners of Premier Agendas that bears interest at two
percent over LIBOR. The note was paid in full on June 21, 2002.

Envision Product Line. In May 2001, we acquired the TimeTracker product line of student and

teacher planners from Envision, Inc. We paid approximately $4 million in cash and issued 120,106 shares of
our common stock for a total purchase price of approximately $6.7 million. TimeTracker is now a product
line of Premier Agendas and has been reported in our specialty segment since the date of acquisition.

Other Acquisitions. We acquired two other businesses in fiscal 2002 for a total purchase price of

approximately $3.3 million The businesses are Premier Science, a start-up science curriculum company
which will be operated as a product line within our Frey Scientific specialty brand and Bradburn School
Supply which will become part of our traditional School Specialty brand.

We attribute our strong competitive position to the following key factors:

Competitive Strengths

Number One Market Share. We have the highest revenues of any direct marketing company for
supplemental education supplies. We have developed this leading market position by emphasizing high-
quality products, superior order fulfillment and exceptional customer service. We believe that our large
size and brand recognition have resulted in significant buying power, economies of scale and customer
loyalty.

Leading Established Brands. We have the most established and recognized brands in the

industry. We believe that seven of our nine brands have a leading market position in their respective
categories, based on revenues. With a historical track record of over 100 years for some brands, the
Company’s traditional and specialty brands represent a significant competitive advantage.

Broad Product Lines. Our strategy is to provide a full range of high-quality products to meet the
complete supply needs of schools for preK-12. With over 80,000 items ranging from classroom supplies
and furniture to playground equipment, we provide customers with one source for virtually all of their
supplemental educational supplies and furniture needs. In addition to our traditional School Specialty
brand, our specialty businesses enrich our general product offering and create opportunities to cross
merchandise our specialty products to our traditional customers. Specialty businesses include the
following brands:

Brand

Products

Childcraft.............................................................. Early childhood
ClassroomDirect................................................... General supplies
Sax Arts and Crafts .............................................. Art supplies
Frey Scientific ...................................................... Science
Sportime ............................................................... Physical education
Teacher’s Video ................................................... Educational videos
Brodhead Garrett.................................................. Industrial arts
Premier Agendas .................................................. Student agendas

Innovative Full-Service Business Model. We believe that we are the only company in our

industry that has developed a full-service business model with an integrated, multi-channel marketing
approach. As a result, we reach district and school administrative decision makers as well as teachers and
curriculum specialists through separate sales forces, catalog mailings and the Internet. We utilize our
customer database across our family of catalogs to maximize their effectiveness and increase our
marketing reach. Our primary e-commerce websites, JuneBox.com for administrative purchase decisions
and ClassroomDirect.com for teacher-based purchase decisions, establish a comprehensive presence on
the Internet which we believe is a significant competitive advantage for us.

Stable Industry with Favorable Trends and Dynamics. Because the market for educational

supplies is driven primarily by demographics and government spending, we believe our industry is less
exposed to economic cycles than many others. We have established working relationships with many
large public education organizations and understand how to do business effectively with these
institutions.

Established Infrastructure and Customer Relationships. We believe our seven leading brands,

national sales force, the industry’s largest product offering, established customer relationships and a
national distribution network with multiple sales channels, including e-commerce, give us a significant
advantage in this industry. The supplemental education supply market is highly seasonal, with a January
through July selling season and a June through October shipping season, and our infrastructure and
logistical capacities and capabilities permit us to meet the requirements of these peak periods effectively.

Proven Acquisition and Integration Model. We have completed over 30 acquisitions since May

1996. We have established a 6 to 12 month target for our integration process in which a transition team is
assigned to sell or discontinue incompatible business units, reduce the number of items in the product
offering, eliminate redundant expenses, integrate the acquired entity’s management information systems,
and exploit buying power. To date, our integration efforts have focused on acquired traditional companies
and certain administrative and warehousing functions at our specialty divisions. We believe that through
these processes, we can rapidly improve the operating margins of the businesses we acquire.

Effective Use of Technology. We believe that our use of information technology systems allows

us to turn over inventory more quickly than our competitors, offer customers more convenient and cost
effective ways of ordering products, and more precisely focus our sales and marketing strategies.

Experienced and Incentivised Management. Our management team provides depth and
continuity of experience. In addition, management’s interests are aligned with those of our shareholders,
as many members of management own shares of our common stock and/or have been granted options to
purchase our common stock.

We use the following strategies to grow and enhance our position as the leading marketer of

supplemental educational supplies:

Growth Strategy

Internal Growth. We plan to continue to increase our revenues by:

• Taking advantage of market growth through rising expenditures per student, combined with

increasing enrollment

•

Increasing penetration in geographic markets where we are currently underrepresented

Increasing penetration in large districts by offering our single-source product solution

• Cross-merchandising specialty products to traditional customers

• Encouraging brand loyalty to the total School Specialty brand offering

• Adding new products to enhance the breadth of our product offering

• Pursuing price increases to the extent supported by market conditions

• Adding sales through Internet channels

Margin Improvement. As we continue to grow our revenues, we plan to increase margins by

selling more specialty products, which typically generate higher gross margins due to the large number of
proprietary and branded products in the product mix. In addition, we believe we can further improve
operating margins by leveraging the benefits of recent acquisitions and:

•

Increasing buying power combined with price expansion

• Continuing the elimination of redundant expenses of acquired businesses

• Reducing our overhead costs

•

Improving the efficiency of our distribution network

• Reviewing and adjusting the level of customer discounts

• Taking advantage of the industry’s shift toward site-based (versus centralized) purchasing

Acquisitions. Our selective acquisition strategy and proven integration model have allowed us to
solidify our leading position within the industry and establish a strong national marketing and distribution
platform. This platform allows us to integrate acquired brands more easily and strengthen our specialty
brand portfolio and enter supplemental education categories in which we do not currently compete, such
as music or math, in addition to enabling us to grow faster than the industry. We believe that our size and
national presence give us an advantage as a potential acquirer in a consolidating industry.

Furthermore, our proven integration model allows us to realize significant synergies. We believe
we have demonstrated our ability to reduce redundant costs, retain the customers of the acquired brands,
and integrate distribution networks and information technology platforms. For each acquisition, we
generally assume a reduction of approximately 10 percent of the acquired company’s revenues. The
reduction is expected as we discontinue any unprofitable business lines, divest any product lines outside

our core competencies and reduce overlapping sales forces. The integration model is designed to offset
the sales reduction and efficiently combine the companies. The model allows us to smoothly consolidate
distribution centers, improve geographic distribution, integrate the back-office functions, expand
purchasing power and, when a specialty company is acquired, realize product and margin enhancement
related to cross merchandising.

Product Lines

We market two broad categories of products: general school supplies and specialty products

geared towards specific educational disciplines. Our specialty products enrich our general supply product
offering and create opportunities to cross merchandise our specialty products to our traditional customers.
With over 80,000 items ranging from classroom supplies and furniture to playground equipment, we
provide customers with one source for virtually all of their supplemental educational supply needs. Our
business is highly seasonal with peak sales levels occurring from June through October.

Our general school supply product lines can be described as follows:

School Specialty. Through the School Specialty catalog, which is targeted to administrative
decision makers, we offer a comprehensive selection of classroom supplies, instructional materials,
educational games, art supplies, school forms, educational software, physical education equipment, audio-
visual equipment, school furniture and indoor and outdoor equipment. We believe we are the largest
school furniture resale source in the United States. We have been granted exclusive franchises for certain
furniture lines in specific territories and we enjoy significant purchasing power in open furniture lines.
We enhance our furniture offering with a custom design and contract management service called Projects
by Design, which assists in the building or renovation of schools.

Our specialty businesses offer product lines for specific educational disciplines, as follows:

Childcraft. Childcraft markets early childhood education products and materials. Childcraft also

markets over 1,000 proprietary or exclusive products manufactured by its Bird-in-Hand Woodworks
subsidiary, including wood classroom furniture and equipment such as library shelving, cubbies, easels,
desks and play vehicles.

ClassroomDirect. ClassroomDirect offers general supplemental educational supplies to teachers

and curriculum specialists directly through its mail-order catalogs and fully integrated B2T website.

Sax Arts and Crafts. Sax Arts and Crafts is a leading marketer of art supplies and art instruction
materials, including paints, brushes, paper, ceramics, art metals and glass, leather and wood crafts. Sax
Arts and Crafts offers customers a toll free “Art Savvy Hotline” staffed with professional artists to
respond to customer questions.

Frey Scientific. Frey Scientific is a leading marketer of laboratory supplies, equipment and
furniture for science classrooms. Frey Scientific offers value-added focus in the biology, chemistry,
physics and earth science areas.

Sportime. Sportime is a leading marketer of physical education, athletic and recreational

products. Sportime’s catalog product offering includes products for early childhood through middle
school as well as targeted products for physically challenged children.

Teacher’s Video. Teacher’s Video is a leading marketer and producer of educational videos for

educators targeting teachers, curriculum coordinators and department heads through 16 different
curriculum-oriented catalogs, with a total annual mailing volume in excess of 22 million catalogs.

Brodhead Garrett. Brodhead Garrett is the nation’s oldest marketer of industrial arts products
and technical materials to classrooms. Brodhead Garrett’s product line includes various items such as
drill presses, sand paper, lathes and robotic controlled arms.

Premier Agendas. Premier Agendas is the largest provider of academic agendas in the United

States and Canada. The agendas include proprietary content to promote student success. Premier is also a
leading publisher of school forms, including record books, grade books, teacher planners and other
printed forms under the brand Hammond & Stephens.

Our merchandising managers, many of whom have prior experience in education, continually

review and update the product lines for each business. The merchandising managers convene customer
focus groups and advisory panels to determine whether current offerings are well-received and to
anticipate future demand. The merchandising managers also travel to product fairs and conventions
seeking out new product lines. This annual review process results in a constant reshaping and expansion
of the educational materials we offer.

For further information regarding our traditional and specialty segments, see our “Segment

Information” in notes to consolidated financial statements.

Sales and Marketing

We have implemented an innovative multi-channel sales and marketing strategy that employs a

traditional sales force of over 300 professionals, a specialty sales force of over 200 professionals, over 38
million catalogs mailed annually, a B2T website and a B2B educational portal. We believe we have
developed a substantially different sales and marketing model from that of other supplemental educational
supply companies in the United States. Our strategy is to use two separate sales and marketing
approaches (“top down” and “bottom up”) to reach all the prospective purchasers in the education system.

Traditional Business. Our “top down” marketing approach targets administrative decision-

makers through our traditional sales force, the School Specialty general supply catalog and the
JuneBox.com education portal. This approach accounts for the majority of our traditional business.

Our primary compensation program for sales representatives is based on commissions as a

percentage of gross profit on sales. For new and transitioning sales representatives, we offer salary and
expense reimbursement until the representative is moved to a full commission compensation structure.

Schools typically purchase supplies based on established relationships with relatively few

vendors. We seek to establish and maintain these critical relationships by assigning accounts within a
specific geographic territory to a local area sales representative who is supported by a centrally located
customer service team. The customer service representatives frequently call on existing customers to
ascertain and fulfill their supplemental educational supply needs. The representatives maintain contact
with these customers throughout the order cycle and assist in processing orders.

As part of the integration of Beckley-Cardy, which we acquired in 1998, we restructured our
traditional sales and marketing operations from a decentralized regional system to a more centralized
national structure. We believe that the new structure significantly improves our effectiveness through
better sales management, resulting in higher regional penetration, and significant cost savings through the
reduction of distribution centers.

“Projects by Design” is a service we provide to help in the building or renovation of schools. Our

professionals prepare a detailed room-by-room analysis to simplify supplemental educational supply

planning and fulfillment. Customers have the ability to view prospective classrooms through our
innovative software in order to efficiently manage the project.

Specialty Business. We use the “bottom up” approach to target the classroom level decision-
makers through our specialty sales force and catalogs featuring seven specialty brands along with our
ClassroomDirect.com catalog and website. These catalogs allow teachers to procure supplies that are
specific to their curriculum and classroom needs and may not have been purchased by school
administration.

For each specialty brand, a major catalog containing its full product offering is distributed near

the end of the calendar year for the beginning of the January through July selling season. During the
course of the year we mail additional supplemental catalogs. Schools can also access the Childcraft,
Teacher’s Video and ClassroomDirect.com websites. Further, we believe that by cross marketing our
specialty brands to traditional customers, we can achieve substantial incremental sales.

Internet Operations. Our Internet approach comprises both a B2T website and a B2B portal and

creates a new sales channel for School Specialty. We have invested approximately $11 million within the
last three years to develop what we believe to be the number one education portal and e-commerce
website in the industry. In January 1999, we launched our fully-integrated, e-commerce website
ClassroomDirect.com. The site offers access to approximately 18,000 items with digital pictures of most
items. The site is currently teacher-focused, but we have the option to broaden the format to target the
large parent/student market.

In August 1999, we launched JuneBox.com, a portal structured as an education mall offering our
products. We believe that this site will play an important role within the education industry by providing
education-related content and information, thereby strengthening our brand name recognition.

JuneBox.com is a one-stop shop for all supplemental educational supplies offering School
Specialty’s full product portfolio or custom electronic catalogs as well as teaching tips, lesson plan help,
product reviews and updates on current events affecting the education community.

We also benefit from the Internet with increased quality of customer service and lower operating
costs. By shifting the majority of customer service for e-commerce customers to the Internet and having
orders reviewed and verified on-line, we have been able to reduce the associated costs while providing a
24-hour service. Substantially all of our investments in our Internet operations have been dedicated
towards building an efficient, advanced and flexible Internet platform.

Pricing. Pricing for our general and specialty product offerings varies by product and market

channel. We generally offer a negotiated discount from catalog prices for supplies from our School
Specialty catalog and respond to quote and bid requests. The pricing structure of specialty products
offered through direct marketing is generally not subject to negotiation.

School Specialty has built a broad customer base where no single customer accounted for more

than 2% of sales during fiscal 2000, 2001 or 2002. We believe we sell into every school district in the
United States and reach nearly all of the country’s teachers.

Procurement

Traditional Business. We purchase our general school supplies and furniture and equipment from

over 2,000 vendors. Product selection is evaluated on an annual basis and we typically negotiate an
annual supply contract with each vendor. Our supply contracts with our larger vendors usually provide for
special pricing and/or extended terms and often include volume based incentive and rebate programs. In

fiscal 2000, we introduced a private label, ClassroomSelect, and subsequently expanded product selection
which has allowed for margin expansion. We have exclusive distribution rights on several furniture and
equipment lines.

Specialty Business. Many of our products in the specialty business are proprietary. We either
develop the product or it is an exclusive product developed on our behalf. Typically, we outsource the
manufacturing of proprietary products, except for our Childcraft division, which manufactures wood
furniture for sale by Childcraft and our other businesses. We produce our Teacher’s Video proprietary
videos at our Global Video facility in Tempe, Arizona. Our Premier agendas and forms are designed and
produced at our facilities in Bellingham, Washington and Fremont, Nebraska, as well as through third
party printers. We purchase non-proprietary products in the specialty business in a similar manner as our
traditional business procurement process.

To the extent the traditional and specialty businesses are sourcing product from common vendors,

we typically negotiate one contract to take full advantage of our combined buying power. We maintain
close and stable relationships with our vendors to facilitate a streamlined procurement process. At the
same time, we continually review alternative supply sources in an effort to improve quality, improve
customer satisfaction, and reduce product cost.

Logistics

We have built what we believe is the largest and most sophisticated distribution network among

our direct marketing competitors, with nine fully-automated and seamlessly-integrated distribution
centers that ship directly to the customer. The distribution centers average approximately 190,000 square
feet. We also maintain call centers to support customer service and sales. We believe this network
represents a significant competitive advantage for us, allowing us to reach any school in a fast and
efficient manner. We shipped approximately 70 percent of stocked inventory via UPS in fiscal 2002 and
had a 97 percent on-time delivery rate. The fill-rate of our facilities has generally exceeded 95 percent at
the peak of our shipping season. We have the ability to expand the network through necessary additions
needed to support sales growth. New warehouse capacity can be leased and no large capital investments
are typically required.

In order to maintain the proprietary nature of some of our specialty products, we operate three

small manufacturing facilities. The Lancaster, Pennsylvania facility manufactures products for the
Childcraft brand, while the Bellingham, Washington and Fremont, Nebraska facilities are used for the
production of student agendas and school forms. Our manufactured products account for approximately 5
percent of our sales.

Information Systems

We believe that through the utilization of technology in areas such as purchasing and inventory
management, customer order fulfillment and database management, we are able to turn over inventory
more quickly than our competitors, offer customers more convenient and cost effective ways of ordering
products and more precisely focus our sales and marketing strategies.

We use two principal information systems. In the traditional and certain specialty businesses, we

use a specialized distribution software package used primarily by office products and paper marketers.
This software package, System for Distributors, offers a fully-integrated process from sales order entry
through customer invoicing, and inventory requirements planning through accounts payable. Our system
provides information through daily automatic posting to the general ledger and integrated inventory

control. We have made numerous enhancements to this process that allow greater flexibility in
addressing the seasonal requirements of the industry and meeting specific customer needs.

The remaining specialty divisions use a mail-order and catalog system provided by Ecometry

Corporation. This mail-order and catalog system meets the needs of the direct marketing approach with
extensive list management and tracking of multiple marketing efforts. The system provides complete and
integrated order processing, inventory control, warehouse management and financial applications.

In April 2002 we installed a new order management and warehouse management system in our

Fresno, California distribution center. With this system, designed by Yantra, we expect to achieve a more
simplified order process cycle, improved access to data and enhancement of our inventory control
procedures. Following evaluation of the pilot Fresno installation, we plan to install the Yantra system in
our other distribution centers beginning in October 2002.

Our software and hardware allow for continued incremental growth as well as the opportunity to

integrate new client-server and other technologies into the information systems.

Competition

We believe competition in the market we operate in is fragmented with approximately 3,400

regional suppliers to preK-12 schools. These companies are generally smaller than us in terms of
revenues and serve customers in a limited geographic region. We also compete with alternate channel
competitors such as office product contract stationers and office supply superstores. Their primary
advantages over us are size, location, greater financial resources and buying power. Their primary
disadvantage is that their product mix typically covers less than 20 percent of the school’s needs
(measured by volume).

For the most part, our competitors do not offer special order fulfillment software, which we

believe is increasingly important to adequately service school needs. We believe we compete favorably
with these companies on the basis of service and product offering.

Employees

As of June 1, 2002, we had approximately 2,400 full-time employees. To meet the seasonal
demands of our customers, we employ many seasonal employees during the late spring and summer
months. Historically, we have been able to meet our requirements for seasonal employment. None of our
employees is represented by a labor union. We consider our relations with our employees to be very
good.

Forward-Looking Statements

Statements in this Annual Report which are not historical are “forward-looking” statements

within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking
statements include: (1) statements made under Item 1, Business and Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations, including, without limitation, statements
with respect to internal growth plans, projected revenues, margin improvement, future acquisitions,
capital expenditures and adequacy of capital resources; (2) statements included or incorporated by
reference in our future filings with the Securities and Exchange Commission; and (3) information
contained in written material, releases and oral statements issued by, or on behalf of, School Specialty
including, without limitation, statements with respect to projected revenues, costs, earnings and earnings
per share. Forward-looking statements also include statements regarding the intent, belief or current
expectation of School Specialty or its officers. Forward-looking statements include statements preceded

by, followed by or that include forward-looking terminology such as “may,” “will,” “should,” “believes,”
“expects,” “anticipates,” “estimates,” “continues” or similar expressions.

All forward-looking statements included in this Annual Report are based on information available

to us as of the date hereof. We do not undertake to update any forward-looking statements that may be
made by or on behalf of us, in this Annual Report or otherwise. Our actual results may differ materially
from those contained in the forward-looking statements identified above. Factors which may cause such a
difference to occur include, but are not limited to the factors listed in Exhibit 99.2 to our Form 10-K for
fiscal 2002.

Item 2. Properties

Our corporate headquarters is located in a leased facility at W6316 Design Drive, Greenville,

Wisconsin, a combined office and warehouse facility of approximately 332,000 square feet, which also
services both our traditional and specialty segments. In addition, we lease or own the following principal
facilities:

Locations

Agawam, Massachusetts (1) ................................
Atlanta, Georgia (2)..............................................
Bellingham, Washington (2) ................................
Fremont, Nebraska (2)..........................................
Fresno, California (3) ...........................................
Lancaster, Pennsylvania (2) .................................
Lancaster, Pennsylvania (2) .................................
Lufkin, Texas (1)..................................................
Lyons, New York (1) ...........................................
Mansfield, Ohio (3) ..............................................
New Berlin, Wisconsin (2)...................................
Salina, Kansas (1).................................................
Southaven, Mississippi (3) ...................................
Tempe, Arizona (2) ..............................................
________________

Approximate
Square
Footage

Owned/
Leased

188,000
20,000
48,000
95,000
163,200
73,000
204,000
140,000
179,000
315,000
16,200
123,000
200,000
57,000

Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Owned
Leased
Leased
Owned
Leased
Leased

Lease Expiration

November 30, 2020
January 31, 2006
March 31, 2011
June 30, 2003
November 1, 2009
December 31, 2002
February 28, 2009
—
—
November 30, 2020
September 30, 2007
—
December 31, 2010
February 28, 2005

(1) Location primarily services the traditional segment.
(2) Location primarily services the specialty segment.
(3) Location primarily services both business segments.

The 73,000 square foot Lancaster, Pennsylvania facility is used for manufacturing and the Fremont,
Nebraska and Bellingham, Washington facilities are used for production of agendas and school forms. The
other facilities are distribution centers and/or office space. We believe that our properties, as enhanced for
our ongoing expansion, are adequate to support our operations for the foreseeable future. We regularly
review the utilization and consolidation of our facilities.

Item 3. Legal Proceedings

We are, from time to time, a party to legal proceedings arising in the normal course of business.
We believe that none of these legal proceedings will materially or adversely affect our financial position,
results of operations or cash flows.

Item 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted during the quarter ended April 27, 2002 to a vote of our security

holders.

EXECUTIVE OFFICERS OF THE REGISTRANT

As of June 1, 2002, the following persons served as executive officers of School Specialty:

Name and Age
of Officer

David J. Vander Zanden
Age 47

Mr. Vander Zanden became the President and Chief Operating Officer of
School Specialty in March 1998 and was appointed the Interim Chief
Executive Officer in March 2002, following the unexpected death of Daniel P.
Spalding, former Chairman and Chief Executive Officer. From 1992 to
March 1998, he served as President of Ariens Company, a manufacturer of
outdoor lawn and garden equipment. Mr. Vander Zanden has served as a
director of School Specialty since June 1998.

Mary M. Kabacinski
Age 53

Ms. Kabacinski, a Certified Public Accountant, has served as Executive Vice
President and Chief Financial Officer of School Specialty since August 1999.
From 1989 to 1999, she served as Senior Vice President and Chief Financial
Officer for Marquette Medical Systems, a manufacturer of medical devices.

A. Brent Pulsipher
Age 60

Mr. Pulsipher became Executive Vice President of Corporate Logistics and
Technology of School Specialty in March 2001. From 1998 to 2001, Mr.
Pulsipher was Chief Information Officer for Tropical Sportswear
International, an apparel producer and brand manager. Mr. Pulsipher held the
position of Manager of Consulting Services for Distribution Resources
Company from 1988 to 1998.

Donald J. Noskowiak
Age 44

Mr. Noskowiak has served as Vice President of Finance and Business
Development of School Specialty since August 1999. Mr. Noskowiak has
been with School Specialty since 1992, and served as Chief Financial Officer
from 1997 to August 1999.

The term of office of each executive officer is from one annual meeting of the Board of Directors
until the next annual meeting of the Board of Directors or until a successor for each is selected. There are
no arrangements or understandings between any of our executive officers and any other person (not an
officer or director of School Specialty acting as such) pursuant to which any of our executive officers were
selected as an officer of School Specialty.

PART II

Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters

Market Information

Our common stock is traded under the symbol “SCHS” on the Nasdaq National Market. The table

below sets forth the reported high and low closing sale prices for shares of the common stock, as reported by
the National Association of Securities Dealers, Inc. during the indicated quarters.

Fiscal 2002 quarter ended
July 28, 2001......................................................................................
October 27, 2001................................................................................
January 26, 2002 ................................................................................
April 27, 2002 ....................................................................................

$28.66
31.99
31.30
29.65

$21.95
26.00
21.65
23.19

High

Low

Fiscal 2001 quarter ended
July 29, 2000......................................................................................
October 28, 2000................................................................................
January 27, 2001 ................................................................................
April 27, 2001 ....................................................................................

High Low
$14.50
15.06
15.00
19.69

$19.50
21.31
21.69
23.39

Holders

As of July 19, 2002, there were 2,203 record holders of our common stock.

Historical Dividends

We have not declared or paid any cash dividends on our common stock to date. We currently
intend to retain our future earnings to finance the growth, development and expansion of our business.
Accordingly, we do not expect to pay cash dividends on our common stock in the foreseeable future. In
addition, our ability to pay dividends may be restricted or prohibited from time to time by financial
covenants in our credit agreements and debt instruments. Our current credit facility contains restrictions on,
and in some circumstances may prevent, our payment of dividends.

Equity Compensation Plan Information

The equity compensation plan table required by this item is set forth in our Proxy Statement for the

Annual Meeting of Shareholders to be held on August 27, 2002 under the caption “Equity Compensation
Plan Information,” which information is incorporated herein by reference.

Item 6. Selected Financial Data

SELECTED FINANCIAL DATA
(in thousands, except per share data)(1)

Statement of Operations Data:
Revenues.......................................
Cost of revenues ...........................
Gross profit .................................
Selling, general and
administrative expenses ...............
Restructuring and strategic
restructuring costs......................
Operating income........................
Interest expense (net) ....................
Other expense (income) ...............
Income before provision for
income taxes .............................
Provision for income taxes ...........
Net income(2) .............................

Net income per share:
Basic ...........................................
Diluted ........................................
Weighted average shares
outstanding:
Basic ...........................................
Diluted ........................................

Balance Sheet Data:
Working capital ............................
Total assets....................................
Long-term debt .............................
Total debt ......................................
Shareholders’ equity .....................
__________

Fiscal Year
2002

2000

1999

1998

2001
As Restated(3)
$692,674
440,946
251,728

$767,387
473,407
293,980

$639,271
406,043
233,228

$521,704
341,783
179,921

$310,455
202,870
107,585

236,436

208,153

184,586

144,659

87,846

—
57,544
17,279
3,965

36,300
14,521
$ 21,779

4,500
39,075
16,855
1,214

21,006
9,075
$ 11,931

—
48,642
13,151
1,856

33,635
15,120
$ 18,515

5,274
29,988
12,601
(228)

3,491
16,248
5,373
156

17,615
8,719
$ 8,896

10,719
5,480
$ 5,239

$ 1.22
$ 1.17

$ 0.68
$ 0.67

$ 1.06
$ 1.06

$ 0.61
$ 0.60

$ 0.40
$ 0.39

17,917
18,633

17,495
17,782

17,429
17,480

14,690
14,840

13,284
13,547

April 27,
2002

$ 78,587
673,642
285,592
290,063
271,170

April 28,
2001
As Restated(3)
$ 85,962
523,359
176,183
198,038
239,252

April 29,
2000

April 24,
1999

April 25,
1998

$116,857
454,849
144,789
162,180
224,993

$115,853
437,708
161,691
173,285
202,687

$ 47,791
223,729
63,014
83,302
106,466

(1) Our business has grown significantly since 1998 through acquisitions and internal growth. For
detailed information on acquisitions during fiscal years 2002, 2001 and 2000, see the “Business
Combinations” note in our notes to consolidated financial statements. During fiscal 1999, we made
five acquisitions under the purchase method for an aggregate purchase price of approximately
$127.8 million and during fiscal 1998 we made eight acquisitions under the purchase method for an
aggregate purchase price of approximately $99.2 million.

(2) At the beginning of fiscal 2002, we adopted SFAS No. 142, which resulted in goodwill no longer
being subject to amortization. Goodwill amortization, net of tax, included in net income during

fiscal years 2001, 2000, 1999 and 1998 was $5.0 million, $4.5 million, $3.9 million and $1.7
million, respectively.

(3) Fiscal 2001 financial data has been restated. See “Restatement of Financial Statements” note in our

notes to consolidated financial statements.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(“MD&A”)

You should read the following discussion and analysis in conjunction with our consolidated

financial statements and related notes, included elsewhere in this Annual Report.

Overview

We are the largest direct marketing company for supplemental educational supplies to schools
and teachers for preK-12 in the United States. We offer more than 80,000 items through an innovative
two-pronged marketing approach that targets both school administrators and individual teachers. Our
broad product range enables us to provide our customers with one source for virtually all of their non-
textbook school supplies and furniture needs.

We have grown significantly in recent years primarily through acquisitions but also through

internal growth. For information on our recent acquisitions see the “Business Combinations” note in our
notes to consolidated financial statements. Our revenues for fiscal 2002 were $767.4 million and our
operating income was $57.5 million, which represented compound annual revenue growth of 25.4% and
compounded annual operating income growth, prior to restructuring charges of 30.7%, compared to our
fiscal 1998 results.

Our gross margin has improved in recent years primarily due to acquisitions and increased buying

power. We have acquired many specialty businesses, which tend to have higher gross margins than our
traditional business. In addition, our acquisitions of both specialty and traditional businesses have
increased our buying power, resulting in reduced costs of the products we purchase.

Our operating profit and margins also improved significantly over the last several years. This

improvement reflects our acquisitions of specialty companies, which typically have higher operating
margins than our traditional business. In addition, through the integration of acquired businesses, we
have been able to further improve our operating profit and margins by eliminating redundant expenses,
leveraging overhead costs and improving purchasing power.

In recent years, we have grown through acquisitions. As a result of integrating the acquired
operations, we have recorded restructuring charges over the last several years. These charges have
primarily been to close existing facilities and to consolidate operations that, when combined with
acquired operations, became redundant. To the extent our integrations have resulted in certain exit costs
such as the closure of acquired facilities, the costs were accrued in purchase accounting.

Our business and working capital needs are highly seasonal with peak sales levels occurring from

June through October. During this period, we receive, ship and bill the majority of our orders so that
schools and teachers receive their merchandise by the start of each school year. Our inventory levels
increase in April through June in anticipation of the peak shipping season. The majority of shipments are
made between May and October and the majority of cash receipts are collected from September through
December. As a result, we usually earn more than 100% of our annual net income in the first two
quarters of our fiscal year and operate at a net loss in our third and fourth fiscal quarters.

Our fiscal 2001 financial statements have been restated. See “Restatement of Financial
Statements” note in our notes to consolidated financial statements. The following MD&A gives affect to
the restatement.

Results of Operations

The following table sets forth certain information as a percentage of revenues on a historical basis

concerning our results of operations for the fiscal years 2002, 2001, and 2000.

Revenues ..............................................................
Cost of revenues...................................................
Gross profit .......................................................
Selling, general and administrative expenses.......
Restructuring costs ...............................................
Operating income ..............................................
Interest expense, net .............................................
Other expense.......................................................
Income before provision for income taxes ...........
Provision for income taxes...................................
Net income ..........................................................

2002

100.0%
61.7
38.3
30.8
—
7.5
2.3
0.5
4.7
1.9
2.8%

Fiscal Year

2001

100.0%
63.7
36.3
30.1
0.6
5.6
2.4
0.2
3.0
1.3
1.7%

2000

100.0%
63.5
36.5
28.9
—
7.6
2.1
0.2
5.3
2.4
2.9%

Consolidated Historical Results of Operations

Fiscal 2002 Compared to Fiscal 2001

Revenues

Revenues increased 10.8% from $692.7 million for fiscal 2001 to $767.4 million for fiscal 2002.

Traditional segment revenues increased 15.9% from $415.0 million in fiscal 2001 to $480.9 million in
fiscal 2002. The increase in traditional segment revenues was primarily due to acquisitions. Specialty
segment revenues increased 3.2% from $277.7 million in fiscal 2001 to $286.5 million in fiscal 2002. The
increase in specialty segment revenues was due to internal growth and acquisitions, partially offset by the
exclusion of revenues from the three businesses disposed of since January 2001.

Gross Profit

Gross profit increased 16.8% from $251.7 million, or 36.3% of revenues in fiscal 2001 to $294.0

million, or 38.3% of revenues in fiscal 2002. The increase in gross profit was due to an increase in
revenues and gross margin. The increase in gross margin was primarily due to strong improvement in the
traditional segment from 30.8% of revenues in fiscal 2001 to 33.9% of revenues in fiscal 2002. This
increase in gross margin in the traditional segment was primarily due to strong improvement in the
consumable business, driven by improved purchasing power and modest selling price increases. Specialty
segment gross margin improved to 45.6% of revenues in fiscal 2002 from 44.6% of revenues in fiscal
2001. This improvement was primarily driven by the ClassroomDirect business, which improved gross
margin primarily through an increase in selling price and the Childcraft business, which improved gross
margin primarily through improved operating efficiencies and purchasing power. On a consolidated basis,
gross margin was impacted by an increase in traditional segment revenue mix (driven by the November
2000 acquisition of J.L. Hammett’s K-12 wholesale business) from 59.9% of revenues in fiscal 2001 to

62.7% of revenues in fiscal 2002. The traditional segment historically has lower gross margins than the
specialty segment.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A”) include selling expenses (the most

significant component of which is sales wages and commissions), operations expenses (which includes
customer service, warehouse and warehouse shipments transportation costs), catalog costs, general
administrative overhead (which includes information systems, accounting, legal, and human resources)
and depreciation and amortization expense.

SG&A increased 13.6% from $208.2 million or 30.1% of revenues in fiscal 2001 to $236.4

million or 30.8% of revenues in fiscal 2002. Traditional segment SG&A increased $10.6 million from
$98.6 million or 23.8% of revenues in fiscal 2001 to $109.1 million or 22.7% of revenues in fiscal 2002.
Increase in SG&A was primarily due to an increase in variable costs related to increased revenues and an
increase in fixed operating costs, primarily due to redundancies created with the Hammett acquisition.
Specialty segment SG&A increased $13.0 million from $95.2 million or 34.3% of revenues in fiscal 2001
to $108.2 million or 37.8% of revenues in fiscal 2002. Increase in specialty segment SG&A was primarily
due to the acquisition of Premier Agendas, and costs to consolidate existing operations into acquired
businesses. These traditional and specialty segment increases were partially offset by our early adoption
at the beginning of fiscal 2002 of Statement of Financial Accounting Standards (“SFAS”) No. 142
“Goodwill and Intangible Assets,” which resulted in the discontinuance of amortization of goodwill.
Corporate expenses increased $4.7 million from $14.4 million in fiscal 2001 to $19.1 million in fiscal
2002. This increase was primarily due to an increase in salaries and wages, salary continuation
obligations related to the death of our chief executive officer and depreciation.

The decrease in traditional segment SG&A as a percentage of revenues was primarily due to the
adoption of SFAS No. 142 at the beginning of fiscal 2002. The increase in specialty segment SG&A as a
percentage of revenues was primarily due to 1) operating costs of Premier Agendas, a highly seasonal
business acquired during a seasonally low period, 2) costs associated with closing our distribution center
in Birmingham, Alabama, 3) costs associated with integrating our Hammond & Stephens sales force with
the Premier Agendas sales force and 4) increased catalog costs primarily due to the inclusion of a full
fiscal year of catalog expense for Teacher’s Video, which has higher catalog costs as a percentage of
revenues than our other specialty businesses. These increases were partially offset by a reduction in
amortization expense, due to our adoption of SFAS No. 142 at the beginning of fiscal 2002.

Interest Expense

Net interest expense increased 2.5% from $16.9 million in fiscal 2001 to $17.3 million in fiscal
2002. The increase in interest expense is primarily due to an increase in debt outstanding partially offset
by a reduction in our effective borrowing rate on our credit facility.

Other Expenses

Other expense increased $2.8 million from $1.2 million in fiscal 2001 to $4.0 million in fiscal 2002.

Other expenses in fiscal 2002 primarily consisted of the discount and loss on the accounts receivable
securitization of $2.0 million, $1.7 million to write-off a long-term investment and a $0.3 million realized
loss on the sale of available-for-sale securities. Other expense in fiscal 2001 primarily consisted of the
discount and loss on an accounts receivable securitization (the “receivable securitization”) of $1.4 million.

Provision for Income Taxes

The provision for income taxes for fiscal 2002 increased 60.0% or $5.4 million over fiscal 2001,

reflecting effective tax rates of 40.0% and 43.2% for fiscal years 2002 and 2001, respectively. The change
in the effective tax rate of 40.0% in fiscal 2002 as compared to 43.2% in fiscal 2001 was due primarily to
the impact of our adoption of SFAS No. 142, and its impact on non-deductible goodwill amortization.
The higher effective tax rate, compared to the federal statutory rate of 35%, was primarily due to state and
local income taxes.

Fiscal 2001 (52 weeks) Compared to Fiscal 2000 (53 weeks)

Revenues

Revenues increased 8.4% from $639.3 million for fiscal 2000 to $692.7 million for fiscal 2001.

Traditional segment revenues increased 7.3% from $386.7 million in fiscal 2000 to $415.0 million in fiscal
2001. Specialty segment revenues increased 9.9% from $252.6 million in fiscal 2000 to $277.7 million in
fiscal 2001. Increase in revenues was primarily due to the inclusion of revenues from the eight businesses
acquired since the beginning of fiscal 2000 and internal growth on existing business. These increases were
partially offset by an extra week of shipments in fiscal 2000, as fiscal 2000 was a 53 week fiscal year and
fiscal 2001 had 52 weeks. On a comparable 52 week basis, revenues increased 10.4% from fiscal 2000 to
fiscal 2001.

Gross Profit

Gross profit increased 7.9% from $233.2 million, or 36.5% of revenues, in fiscal 2000 to $251.7

million, or 36.3% of revenues, in fiscal 2001. Traditional segment gross profit increased $7.3 million from
$120.7 million or 31.2% of revenues in fiscal 2000 to $128.0 million or 30.8% of revenues in fiscal 2001.
The increase in traditional segment gross profit was primarily due to an increase in revenues. The change in
traditional segment gross margin was primarily due to slightly lower gross margin on the furniture lines,
partially offset by enhanced consumable business gross margins and an increase in consumable business
product mix, which has higher gross margins than the furniture lines. Specialty segment gross profit
increased $11.2 million from $112.6 million or 44.6% of revenues in fiscal 2000 to $123.8 million or 44.6%
of revenues in fiscal 2001. Increase in specialty segment gross profit was primarily due to an increase in
revenues and an increase in gross margin in the Childcraft division (driven by improved operating
efficiencies and purchasing power) and the acquisition of Global Video in June 2000, which has higher
gross margins than most of our other specialty businesses. These increases were offset by lower gross
margins in the ClassroomDirect division, driven by Internet pricing strategies.

Selling, General and Administrative Expenses

SG&A increased 12.8% from $184.6 million, or 28.9% of revenues, in fiscal 2000 to $208.2
million, or 30.1% of revenues, in fiscal 2001. Traditional segment SG&A increased $11.6 million, or
13.3%, from $87.0 million, or 22.5% of revenues, in fiscal 2000 to $98.6 million, or 23.8% of revenues in
fiscal 2001. The increase in traditional segment SG&A was primarily due to an increase in variable costs
related to increased revenues and the acquisition of certain assets of Hammett. The change in traditional
segment SG&A as a percentage of revenues was primarily due to the acquisition of Hammett during our
seasonally low period, which created redundancies in the traditional segment. We began to integrate
Hammett during the third quarter of fiscal 2001, and further consolidated operations as a result of the
acquisition in the third quarter of fiscal 2002, following our heavy shipping season. Specialty segment
SG&A increased $10.0 million or 11.7% from $85.2 million, or 33.8% of revenues in fiscal 2000 to $95.2

million or 34.3% of revenues in fiscal 2001. The increase in specialty segment SG&A and SG&A as a
percent of revenues was primarily due to an increase in revenues and expenses incurred to develop our
Internet operations and the acquisition of Global Video in June 2000, a business which generally has higher
SG&A expense (due to catalog costs) than our other specialty businesses.

Restructuring Costs

During the fourth quarter of fiscal 2001, we recorded a restructuring charge of $4.5 million, which

includes $2.4 million to close redundant facilities, $1.5 million for severance and termination benefits for
approximately 80 individuals and $0.6 million for other costs. Further details of the restructuring charge are
discussed in the notes to our consolidated financial statements.

Interest Expense

Net interest expense increased $3.7 million from $13.2 million, or 2.1% of revenues, in fiscal

2000, to $16.9 million, or 2.4% of revenues in fiscal 2001. Increase in net interest expense was primarily
attributable to the debt assumed and cash paid for the acquisitions of Global Video and Hammett, which
occurred in June 2000 and November 2000, respectively, and a slight increase in the effective interest
rate. These increases were partially offset by reduced interest expense attributable to debt repaid from the
net proceeds from the sale of property of $6.6 million, the sale of Gresswell of $3.5 million and proceeds
from the receivable securitization of $50.0 million, which we entered into in November 2000.

Other Expenses

Other expenses decreased $0.7 million from $1.9 million in fiscal 2000 to $1.2 million in fiscal

2001. Other expenses in fiscal 2001 primarily consisted of the discount and loss on the receivable
securitization of $1.4 million. Other expenses in fiscal 2000 primarily consisted of a $1.5 million non-
cash impairment charge on a minority equity investment.

Provision for Income Taxes

Provision for income taxes for fiscal 2001 decreased 40.0% or $6.0 million over fiscal 2000,

reflecting income tax rates of 43.2% and 45.0% in fiscal 2001 and fiscal 2000, respectively. The decrease
in the effective tax rate was primarily due to the impact of the difference in book and tax basis related to
the divestitures of SmartStuff and Gresswell. The higher effective tax rate, as compared to the federal
statutory rate of 35.0%, was primarily due to state and local income taxes and non-deductible goodwill
amortization.

Liquidity and Capital Resources

At April 27, 2002, we had working capital of $78.6 million. Our capitalization at April 27, 2002

was $561.2 million and consisted of total debt of $290.1 million and shareholders’ equity of $271.2
million.

We currently have a five year secured $350 million credit facility with Bank of America, N.A.

The credit facility had an initial $100 million term loan maturing quarterly and $250 million of
availability under revolving loans. The credit facility matures on September 30, 2003. The amount
outstanding as of April 27, 2002 under the revolving portion of the credit facility was $118.0 million.

During fiscal 2002, the term loan portion of the credit facility was repaid in full. 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.

On July 30, 2001, we sold an aggregate principal amount of $130 million of six percent
convertible subordinated notes due August 1, 2008. The notes are convertible at any time prior to maturity
into shares of our common stock at a conversion price of $32.29 per share and accrue interest payable
semi-annually. Net proceeds from the sale of these notes was approximately $125.7 million. On August 2,
2001, the purchasers of the notes exercised their over-allotment option in full and purchased an additional
$19.5 million. We used the total net proceeds from the offering of $144.6 million to repay a portion of the
debt outstanding under the credit facility.

Effective January 2, 2001, we entered into an interest rate swap agreement with The Bank of New

York covering $50 million of the outstanding amount under the revolving portion of our credit facility.
The one-year non-cancelable swap agreement fixed the 30-day LIBOR interest rate at 6.07% per annum
on a $50 million notional amount. The swap expired January 2, 2002.

As of April 27, 2002, our effective interest rate on borrowings under our credit facility was
5.26%, which includes amortization of the loan origination fee and costs and the commitment fee on
unborrowed funds. During fiscal 2002, we borrowed under our credit facility primarily for seasonal
working capital, acquisitions, and capital expenditures. During the same period, we made certain changes
to certain financial and other covenants under our credit facility.

In November 2000, we entered into a receivable securitization with a financial institution

whereby we sell on a continuous basis an undivided interest in all of our eligible trade accounts
receivable. Under the receivable securitization, we transfer without recourse all of our accounts receivable
to a wholly-owned subsidiary. This subsidiary, in turn, has sold and, subject to certain conditions, may
from time to time sell an undivided interest in these receivables and is permitted to receive advances of up
to $50 million for the sale of such undivided interest. The facility expired in November 2001 and was
renewed to extend to November 2002 and may be extended further with the financial institution’s
consent. At April 27, 2002, $50 million was advanced under the receivable securitization and
accordingly, that amount of accounts receivable has been removed from our consolidated balance sheet.
The proceeds from the sale were used to reduce borrowings on our credit facility. Costs associated with
the sale of receivables, primarily related to the discount and loss on sale, were $2.0 million during fiscal
2002 and are included in other expenses in our consolidated statement of operations. In May 2002, the
receivable securitization was amended to allow advances up to $100 million.

In November 2000, we entered into two sale-leaseback transactions which are accounted for as

financings. Under the agreements, we recorded $18.5 million of debt, which has an effective interest rate
of 8.97%, excluding amortization of related fees. The leases expire in November 2020.

During fiscal 2002, net cash provided by operating activities was $75.6 million, an 109.9%

increase over fiscal 2001. The increase in cash from operating activities was primarily due to an
improvement in working capital management and an increase in net income. Net cash used in investing
activities was $160.8 million, including $162.2 million for acquisitions and $12.1 million for additions to
property, plant and equipment. We realized $9.6 million in net proceeds from the sale of available-for-
sale securities. Cash from financing activities was $85.7 million. Net proceeds from our convertible debt
offering of $144.6 million were used to reduce borrowing under our credit facility. Borrowing under our
credit facility and cash from operations were used to fund the above investing activities. During fiscal
2002, debt outstanding under our credit facility was reduced by $61.0 million.

During fiscal 2001, net cash provided by operating activities was $36.0 million, a 16.3% increase

over fiscal 2000. Net cash used in investing activities was $118.9 million, including $113.1 million for
acquisitions and $15.2 million for additions to property and equipment. This use of cash was partially
offset by net proceeds provided by the sale of property of $6.6 million and the sale of Gresswell of $3.5
million. Net borrowings combined with cash from operations, cash on hand and proceeds from the
receivables securitization of $50.0 million were used to finance the above investing activities.

Our capital expenditures in fiscal 2003 are expected to be approximately $12 million. The largest

items include computer hardware and software.

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 capital expenditures, and our contractual obligations.

Summary of Contractual Obligations

The following table summarizes our contractual debt and operating lease obligations as of April

27, 2002:

Payments Due by Fiscal Year
(in thousands)

Debt
Operating leases
Total Contractual obligations

2003

2004

$ 4,471 $118,460
8,023
6,178
$12,494 $124,638

2005
$ 477
6,019
$6,496

2006
$ 431
5,180
$5,611

2007
$ 529
4,791
$5,320

Total

Thereafter
$165,695 $290,063
53,194
23,003
$188,698 $343,257

Fluctuations in Quarterly Results of Operations

Our business is subject to seasonal influences. Our historical revenues and profitability have

been dramatically higher in the first two quarters of our fiscal year, primarily due to increased shipments
to customers coinciding with the start of each school year. Quarterly results also may be materially
affected by the timing of acquisitions, the timing and magnitude of costs related to such acquisitions,
variations in our costs for the products sold, the mix of products sold and general economic conditions.
Moreover, the operating margins of companies we acquire may differ substantially from our own, which
could contribute to further fluctuation in quarterly operating results. Therefore, results for any quarter are
not indicative of the results that we may achieve for any subsequent fiscal quarter or for a full fiscal year.

The following table sets forth certain unaudited consolidated quarterly financial data for fiscal
years 2002 and 2001. We derived this quarterly data from unaudited consolidated financial statements.
Certain fiscal 2002 and fiscal 2001 financial data has been restated. See “Restatement of Financial
Statements” note in our notes to consolidated financial statements.

First
As Restated

Revenues ..................................... $260,162
100,294
Gross profit .................................
32,470
Operating income (loss) ..............
16,446
Net income (loss) ........................

Second
As Restated
$269,656
99,834
36,608
19,162

Fiscal 2002
Third
As Restated
$104,005
39,746
(8,203)
(8,625)

Fourth

$133,564
54,106
(3,331)
(5,204)

Total
As Restated
$767,387
293,980
57,544
21,779

Per share amounts:
Basic.........................................
Diluted .....................................

$ 0.93
$ 0.89

$ 1.07
$ 0.88

$ (0.48)
$ (0.48)

$ (0.29)
$ (0.29)

$ 1.22
$ 1.17

First

Second

Revenues ..................................... $217,067
79,069
Gross profit .................................
24,107
Operating income (loss) ..............
11,393
Net income (loss) ........................

$240,539
85,513
27,782
12,902

Fiscal 2001
Third
As Restated
$104,658
38,034
(3,967)
(4,908)

Fourth
As Restated
$130,410
49,112
(8,847)
(7,456)

Total
As Restated
$692,674
251,728
39,075
11,931

Per share amounts:
Basic.........................................
Diluted .....................................

Inflation

$ 0.65
$ 0.65

$ 0.74
$ 0.73

$ (0.28)
$ (0.28)

$ (0.42)
$ (0.42)

$ 0.68
$ 0.67

Inflation has and is expected to have only a minor effect on our results of operations and our

internal and external sources of liquidity.

Critical Accounting Policies

We believe the policies identified below are critical to our business and the understanding of its

results of operations. The impact and any associated risks related to these policies on our business are
discussed throughout MD&A where applicable. Refer to our notes to consolidated financial statements in
Item 8 for detailed discussion on the application of these and other accounting policies. The preparation
of the consolidated financial statements requires management to make estimates and assumptions that
affect: a) the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements; and b) the reported amounts of revenues and expenses
during the reporting period. We evaluate our estimates on an ongoing basis and base them on a
combination of historical experience and various other assumptions that are believed to be reasonable
under the circumstances. Actual results could differ from those estimates. Our critical accounting policies
that require significant judgments and estimates used in the preparation of our consolidated financial
statements are as follows:

Catalog Costs and Related Amortization

We accumulate all direct costs incurred in the development, production and circulation of our

catalogs on our balance sheet until such time as the related catalog is mailed, at which time, they are
subsequently amortized into SG&A over the expected sales realization cycle, typically one year or less.
Our initial estimation of the expected sales realization cycle for a particular catalog is based on, among

other possible considerations, our historical sales experience with identical or similar catalogs and our
assessment of prevailing economic conditions, and various competitive factors. We track our subsequent
sales realization, reassess the marketplace, and compare our findings to our previous estimate and adjust
our amortization going forward, if necessary.

Goodwill and Intangible Assets

At April 27, 2002, goodwill and intangible assets represented approximately 63% of our total
assets. The recoverability of these assets requires considerable judgment and is evaluated on an annual
basis or more frequently if events or circumstances indicate that the assets may be impaired. As it relates
to goodwill and indefinite life intangible assets, we apply the impairment rules in accordance with SFAS
No. 142. As required by SFAS No. 142, the recoverability of these assets is subject to a fair value
assessment which includes several significant judgments regarding financial projections and comparable
market values. As it relates to definite life intangible assets, we apply the impairment rules as required by
SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and Assets to Be Disposed Of”
which also requires significant judgment and assumptions related to the expected future cash flows
attributable to the intangible asset. The impact of modifying any of these assumptions can have a
significant impact on the estimate of fair value and, thus, the recoverability of the asset.

Recent Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 144,

“Accounting for the Impairment or Disposal of Long-Lived Assets,” which addresses financial
accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed
of. SFAS No. 144 is effective for fiscal years beginning after December 31, 2001, with early adoption
permitted. The adoption of SFAS No. 144 is not expected to have a material effect on our financial
statements or financial position.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable,
accrued liabilities and debt. Market risks relating to our operations result primarily from changes in interest
rates. Our borrowings under our credit facility and our discount expense related to our receivable
securitization are primarily dependent upon LIBOR rates. Assuming no change in our financial structure, if
variable interest rates were to average 100 basis points higher during fiscal 2003, pre-tax earnings would
decrease by approximately $2.8 million. This amount was determined by considering a hypothetical 100
basis point increase in interest rates on average variable-rate debt outstanding and the average advanced
under the receivable securitization during fiscal 2002, excluding any impact of the swap agreement. The
estimated fair value of long-term debt approximates its carrying value at April 27, 2002, with the exception
of our convertible debt which at April 27, 2002 had a carrying value of $149.5 million and a fair market
value of $168.6 million.

To manage interest rate risk on the variable rate borrowings under the revolving portion of our

credit facility, we have historically entered into interest rate swap agreements. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital
Resources.” These interest rate swap agreements had the effect of locking in, for a specified period, the
base interest rate we paid on a notional principal amount established in the swaps. As a result, while these
hedging arrangements were structured to reduce our exposure to interest rate increases, it also limits the
benefit we might otherwise have received from any interest rate decreases. The swaps were typically cash
settled monthly, with interest expense adjusted for amounts paid or received. The swap agreements had the
effect of increasing interest expense by approximately $0.9 million in fiscal 2002 and decreasing fiscal 2001
interest expense by approximately $0.5 million. We do not hold or issue derivative financial instruments for
trading purposes.

Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
School Specialty, Inc.:

We have audited the accompanying consolidated balance sheets of School Specialty, Inc., and
subsidiaries as of April 27, 2002 and April 28, 2001 and the related consolidated statements of operations,
shareholders’ equity, and cash flows for the years then ended. Our audits also included the financial
statement schedule for the years ended April 27, 2002 and April 28, 2001 listed in the Index at Item
14(a)(2). These financial statements and financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

In our opinion, such 2002 and 2001 consolidated financial statements present fairly, in all material
respects, the financial position of School Specialty, Inc. and subsidiaries at April 27, 2002 and April 28,
2001, and the results of their operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule for the years ended April 27, 2002 and April 28, 2001, when considered in
relation to the basic consolidated financial statements taken as a whole, present fairly in all material
respects the information set forth therein.

As described in Note 3 to the consolidated financial statements, on April 29, 2001, the Company adopted
Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”. Also, as
described in Note 15 to the consolidated financial statements, the accompanying 2001 financial
statements have been restated.

DELOITTE & TOUCHE LLP

Milwaukee, Wisconsin
July 19, 2002

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders
of School Specialty, Inc.

In our opinion, the consolidated statements of operations, of shareholders’ equity and of cash

flows for the year ended April 29, 2000, present fairly, in all material respects, the results of operations
and cash flows of School Specialty, Inc. and its subsidiaries for the fiscal year ended April 29, 2000, in
conformity with accounting principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) presents
fairly, in all material respects, the information set forth therein for the fiscal year ended April 29, 2000,
when read in conjunction with the related consolidated financial statements. These financial statements
and the financial statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and the financial statement schedule
based on our audit. We conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audit provides a reasonable
basis for our opinion.

PricewaterhouseCoopers LLP

Minneapolis, Minnesota
June 9, 2000, except as to Note 3, which is as of April 29, 2001

FINANCIAL STATEMENTS

SCHOOL SPECIALTY, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)

ASSETS
Current assets:
Cash and cash equivalents..........................................................................................................................
Accounts receivable, less allowance for doubtful accounts of $2,719 and $3,523, respectively ..............
Inventories ..................................................................................................................................................
Deferred catalog costs ................................................................................................................................
Prepaid expenses and other current assets..................................................................................................
Deferred taxes.............................................................................................................................................
Total current assets..............................................................................................................................

Property, plant and equipment, net ................................................................................................................
Goodwill, net..................................................................................................................................................
Intangible assets, net ......................................................................................................................................
Other ...............................................................................................................................................................
Total assets..........................................................................................................................................

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities – long-term debt ...........................................................................................................
Accounts payable .......................................................................................................................................
Accrued compensation ...............................................................................................................................
Deferred revenue ........................................................................................................................................
Accrued restructuring .................................................................................................................................
Other accrued liabilities..............................................................................................................................
Total current liabilities ........................................................................................................................

April 27,
2002

$ 6,123
34,356
98,148
13,590
12,770
7,341
172,328

67,083
390,946
35,457
7,828
$ 673,642

$ 4,471
47,097
16,712
10,681
863
13,917
93,741

Long-term debt...............................................................................................................................................
Deferred taxes ................................................................................................................................................
Total liabilities ....................................................................................................................................

285,592
23,139
402,472

April 28,
2001
As Restated
See Note 15

$ 5,688
40,358
102,192
16,596
18,300
7,873
191,007

60,013
249,781
5,090
17,468
$ 523,359

$ 21,855
57,896
7,989
1,771
2,513
13,021
105,045

176,183
2,879
284,107

Commitments and contingencies (Note 10)

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 18,046,315 and 17,587,008 shares issued and outstanding, respectively....................................
Capital paid-in excess of par value.............................................................................................................
Accumulated other comprehensive income ..............................................................................................
Retained earnings .......................................................................................................................................
Total shareholders’ equity...................................................................................................................
Total liabilities and shareholders’ equity............................................................................................

18
208,053
395
62,704
271,170
$ 673,642

18
198,119
190
40,925
239,252
$ 523,359

See accompanying notes to consolidated financial statements.

SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)

April 27,
2002
(52 weeks)

For the Fiscal Year Ended_________
April 28,
2001
(52 weeks)
As Restated
See Note 15

April 29,
2000
(53 weeks)

Revenues ............................................................................................................................ $ 767,387
473,407
Cost of revenues.................................................................................................................
293,980
Gross profit .............................................................................................................
236,436
Selling, general and administrative expenses ....................................................................
–
Restructuring costs .............................................................................................................
57,544
Operating income....................................................................................................

Other (income) expense:
17,321
Interest expense ..............................................................................................................
(42)
Interest income ...............................................................................................................
3,965
Other ...............................................................................................................................
36,300
Income before provision for income taxes ..................................................................
Provision for income taxes.................................................................................................
14,521
Net income ......................................................................................................................... $ 21,779

692,674
440,946
251,728
208,153
4,500
39,075

16,983
(128)
1,214
21,006
9,075
11,931

$ 639,271
406,043
233,228
184,586
–
48,642

13,342
(191)
1,856
33,635
15,120
18,515

Weighted average shares outstanding:
Basic .................................................................................................................................
Diluted ..............................................................................................................................

17,917
18,633

17,495
17,782

17,429
17,480

Net income per share:
Basic ................................................................................................................................. $
Diluted .............................................................................................................................. $

1.22
1.17

$ 0.68
$ 0.67

$ 1.06
$ 1.06

See accompanying notes to consolidated financial statements.

SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In Thousands)

Capital Paid-
in Excess of
Par Value

Accumulated Other
Comprehensive
Income (Loss)

Retained
Earnings

Total Shareholders’
Equity

Total
Comprehensive
Income (Loss)

Common Stock

Dollars

17,229
151

$ 17
-

$ 192,196
2,225

$ (5)
-

$ 10,479
-

$ 202,687
2,225

55
-

57
(27)

-
-

896
22

1,178
(505)

-
-

896
22

1,178
(505)

-
-

(25)
-

-
18,515

(25)
18,515

17,465

196,012

(30)

28,994

224,993

$ (25)
18,515
$ 18,490

133
-
(11)

1
-
-

2,113
262
(268)

-
-
-

2,114
262
(268)

$ 30

-
-

190
-

-
11,931

190
11,931

190
11,931
$ 12,151

17,587

198,119

190

40,925

239,252

339
-

120

-
-

5,869
1,365

2,700

-
-

395

-
-

5,869
1,365

2,700

395

$ 395

-
-

(190)
-

-
21,779

(190)
21,779

18,046

$ 18

$ 208,053

$ 395

$ 62,704

$ 271,170

(190)
21,779
$ 21,984

Balance at April 24, 1999....................
Issuance of common stock ..............
Issuance of common stock in

conjunction with stock option
exercises .....................................
Tax benefit on option exercises.......
Issuance of common stock in

conjunction with acquisitions .....
Retirement of common stock ..........
Foreign currency translation

adjustment ..................................
Net income......................................
Total comprehensive income ......
Balance at April 29, 2000....................

Issuance of common stock in

conjunction with stock option
exercises .....................................
Tax benefit on option exercises.......
Retirement of common stock ..........
Foreign currency translation

adjustment ..................................

Unrealized gain on available-for-

sale securities, net of tax.............
Net income, as restated ...................
Total comprehensive income ......

Balance at April 28, 2001, As
Restated ..........................................

Issuance of common stock in

conjunction with stock option
exercises .....................................
Tax benefit on option exercises.......

Issuance of common stock in

conjunction with acquisition.......

Foreign currency translation

adjustment ..................................

Reclassification adjustment for
losses on available-for-sale
securities included in net
income, net of tax .......................
Net income......................................
Total comprehensive income ......
Balance at April 27, 2002....................

See accompanying notes to consolidated financial statements.

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

April 27,
2002
(52 weeks)

For the Fiscal Year Ended

April 28,
2001
(52 weeks)
As Restated
See Note 15

April 29,
2000
(53 weeks)

$ 11,931

$ 18,515

Cash flows from operating activities:
Net income .............................................................................................................................. $ 21,779
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization expense...............................................................................
Amortization of debt fees and other ....................................................................................
Deferred taxes......................................................................................................................
Restructuring costs, net of payments...................................................................................
Loss (gain) on disposal of property, equipment and other ..................................................
Loss on sale of available-for-sale securities ........................................................................
Loss on impairment of investment ......................................................................................
Changes in current assets and liabilities (net of assets

11,198
2,410
8,335
(1,650)
1,397
329
1,657

acquired and liabilities assumed in business combinations
accounted for under the purchase method):
Accounts receivable.........................................................................................................
12,472
Inventories........................................................................................................................
5,195
Prepaid expenses and other current assets .......................................................................
7,404
(12,024)
Accounts payable.............................................................................................................
Accrued liabilities ............................................................................................................ 17,111
Net cash provided by operating activities ................................................................ 75,613

Cash flows from investing activities:
Cash paid in acquisitions, net of cash acquired.......................................................................
Additions to property, plant and equipment............................................................................
Proceeds from business dispositions, net of cash disposed.....................................................
Proceeds from disposal of property and equipment................................................................
Proceeds from sale of available-for-sale securities .................................................................
Proceeds from note receivable ................................................................................................
Investment in long-term assets …...........................................................................................
Net cash used in investing activities.........................................................................

(162,248)
(12,110)
1,500
1,335
9,572
1,115
-
(160,836)

14,962
1,078
3,831
2,448
(55)
-
-

10,968
(8,478)
(5,147)
7,471
(2,992)
36,017

(113,062)
(15,200)
3,538
6,632
-
108
(924)
(118,908)

Cash flows from financing activities:
259,800
Proceeds from borrowings ......................................................................................................
(324,112)
Repayment of debt and capital leases......................................................................................
149,500
Proceeds from convertible debt offering.................................................................................
-
Proceeds from sale of accounts receivable..............................................................................
(5,399)
Payment of debt fees ...............................................................................................................
5,869
Proceeds from exercise of stock options .................................................................................
Repurchase of common stock .................................................................................................
-
Proceeds from issuance of common stock .............................................................................. -
85,658
Net cash provided by (used in) financing activities .................................................

222,622
(188,547)
-
50,000
(1,493)
2,114
(268)
-
84,428

Net increase (decrease) in cash and cash equivalents .................................................................
435
Cash and cash equivalents at beginning of period ...................................................................... 5,688
Cash and cash equivalents at end of period ................................................................................ $ 6,123

1,537
4,151
$ 5,688

11,839
671
5,746
(2,687)
596
-
1,500

844
(6,137)
(6,559)
9,943
(3,295)
30,976

(1,292)
(17,351)

-
-
-
118
(8,703)
(27,228)

186,200
(198,192)
-
-
-
896
(505)
2,225
(9,376)

(5,628)
9,779
$ 4,151

Non-cash investing activities:
Common stock received for net assets sold in business disposition ....................................... $ -

$ 9,901

$ -

Supplemental disclosures of cash flow information:
Interest paid ............................................................................................................................. $ 15,493
Income taxes paid.................................................................................................................... $ 2,533

$ 15,976
$ 8,992

$ 13,215
$ 13,255

SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS—(Continued)
(In Thousands)

The Company issued common stock and/or cash in connection with certain business combinations accounted for

under the purchase method in the fiscal years ended April 27, 2002, April 28, 2001, and April 29, 2000. The fair values of the
assets and liabilities of the acquired companies are presented as follows:

Accounts receivable ................................................................................................
Inventories...............................................................................................................
Current deferred tax assets ......................................................................................
Prepaid expenses and other current assets ..............................................................
Property, plant and equipment ................................................................................
Goodwill..................................................................................................................
Intangible assets ......................................................................................................
Other assets .............................................................................................................
Short-term debt and capital lease obligations .........................................................
Accounts payable ....................................................................................................
Accrued liabilities ...................................................................................................
Long-term debt and capital lease obligations..........................................................
Long-term deferred tax liabilities............................................................................
Net assets acquired ..............................................................................................

The acquisitions were funded as follows:
Common stock ........................................................................................................
Cash paid, net of cash acquired (1) .........................................................................
Note and other payable to selling shareholders.......................................................
Total.....................................................................................................................

April 27,
2002
(52 weeks)

$ 6,835
3,819
386
1,086
7,202
135,342
33,877
49
(2,483)
(624)
(5,940)
(342)
(13,147)
$166,060

$ 2,700
159,248
4,112
$166,060

For the Fiscal Year Ended

April 28,
2001
(52 weeks)

$ 27,725
8,680
-
5,143
5,922
75,504
2,750
20
(1,217)
(3,036)
(4,863)
(566)
-
$116,062

$ -
113,062
3,000
$116,062

April 29,
2000
(53 weeks)

$ 2,091
1,434
-
65
178
2,214
-
13
-

(1,881)
(759)
(885)
-
$ 2,470

$ 1,178
1,292
-
$ 2,470

(1) Fiscal 2002 cash paid in acquisitions, net of cash acquired, as reported within cash flows from investing activities, includes the

payment of the fiscal 2001 note payable to selling shareholders.

See accompanying notes to consolidated financial statements.

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION

School Specialty, Inc. (the “Company”), is a Wisconsin corporation. The Company reincorporated from
Delaware to Wisconsin effective August 29, 2000. The Company is primarily a direct marketer of supplemental
education supplies to schools and teachers for pre-kindergarten through twelfth grade.

The accompanying consolidated financial statements and related notes to consolidated financial statements

include the accounts of School Specialty, Inc., its subsidiaries and the companies acquired in business
combinations accounted for under the purchase method from their respective dates of acquisition. All significant
inter-company accounts and transactions have been eliminated.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the

United States requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.

Definition of Fiscal Year

The Company’s fiscal year ends on the last Saturday in April in each year. As used in these consolidated

financial statements and related notes to consolidated financial statements, “fiscal 2002,” “fiscal 2001,” and “fiscal
2000” refer to the Company’s fiscal years ended April 27, 2002 (52 weeks), April 28, 2001 (52 weeks), and April
29, 2000 (53 weeks), respectively.

Cash and Cash Equivalents

The Company considers cash investments with original maturities of three months or less from the date of

purchase to be cash equivalents.

Inventories

Inventories are stated at the lower of cost or market with cost generally determined on a weighted-average

basis and consist primarily of products held for sale.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Additions and improvements are capitalized, whereas,
maintenance and repairs are expensed as incurred. Depreciation of property, plant and equipment is calculated
using the straight-line method over the estimated useful lives of the respective assets. The estimated useful lives
range from twenty-five to forty years for buildings and its components and three to fifteen years for furniture,
fixtures and equipment. Property and equipment leased under capital leases is being amortized over the lesser of its
useful life or its lease term. As required by Statement of Financial Accounting Standards (“SFAS”) No. 121
“Accounting for the Impairment of Long-Lived Assets and Assets to be Disposed of,” the Company reviews
property, plant and equipment for impairment if events or circumstances indicate an asset might be impaired.

Goodwill and Other Intangible Assets

Goodwill represents the excess of cost over the fair value of net assets acquired in business combinations
accounted for under the purchase method. The Company adopted SFAS No. 142 at the beginning of fiscal 2002.

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

As a result of this adoption, goodwill is no longer subject to amortization but rather must be tested for impairment
annually or more frequently if events or circumstances indicate goodwill might be impaired. Prior to fiscal 2002,
goodwill was amortized using the straight-line method over fifteen to forty years. Other amortizable intangible
assets include customer relationships, non-compete agreements and order backlog and are being amortized over
their estimated useful lives ranging from one to fifteen years. Certain other intangible assets are not subject to
amortization. See note on goodwill and other intangible assets.

Investments

The Company held a preferred stock investment in a company which had been accounted for under the
cost method. Under this method, the Company’s investment was stated at cost and was periodically evaluated
for impairment. As a result of these evaluations, the Company has written-off this investment due to the
deteriorating financial condition of the company, reporting impairment changes of $1,657 and $1,500 during
fiscal 2002 and fiscal 2000, respectively, within other expense in the consolidated statements of operations.

The Company had an investment in the common stock of Riverdeep Group plc, which was classified
and accounted for as an available-for-sale security under SFAS No. 115, “Accounting for Certain Investments
in Debt and Equity Securities.” Unrealized holding gains, net of tax, related to this investment were reported as
other comprehensive income, a component of shareholders’ equity. During fiscal 2002, the investment was
sold, resulting in a realized pre-tax loss of $329.

Fair Value of Financial Instruments

The carrying amounts of the Company's financial instruments including cash and cash equivalents,

accounts receivable, accounts payable, and accrued liabilities approximate fair value.

Income Taxes

Income taxes have been computed utilizing the asset and liability approach which requires the recognition

of deferred tax assets and liabilities for the tax consequences of temporary differences by applying enacted
statutory tax rates applicable to future years to differences between the financial statement carrying amounts and
the tax basis of existing assets and liabilities.

Revenue Recognition

Revenue is recognized upon the delivery of products or upon the completion of services provided to

customers.

Cost of Revenues

Rebates received from vendors are recognized as a reduction in cost of revenues.

Deferred Catalog Costs

Deferred catalog costs represent costs which have been paid to produce Company catalogs which will be
used in/benefit future periods. Deferred catalog costs are amortized in amounts proportionate to expected revenues
over the life of the catalog, which is typically one year or less. Amortization expense related to deferred catalog
costs is included in the consolidated statement of operations as a component of selling, general and administrative

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

expenses. Such amortization expense for fiscal years 2002, 2001 and 2000, was $28,658, $22,905, and $16,076,
respectively.

Shipping and Handling Costs

The Company accounts for shipping and handling costs as a cost of revenues for shipments made

directly from vendors to customers. For shipments from the Company’s warehouses, the Company accounts
for shipping and handling costs as a selling, general and administrative expense. The amount of shipping and
handling costs in selling, general and administrative expenses for fiscal years 2002, 2001 and 2000 was
$29,909, $28,561, and $23,410, respectively.

Foreign Currency Translation

The financial statements of foreign subsidiaries have been translated into U.S. dollars in accordance with

SFAS No. 52, “Foreign Currency Translation.” All balance sheet accounts have been translated using the exchange
rates in effect at the balance sheet date. Income statement amounts have been translated using the average
exchange rate for the year. Resulting translation adjustments are included in foreign currency translation
adjustment, a component of other comprehensive income.

New Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets,” which addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed of. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001, with early adoption permitted. The adoption of SFAS No. 144 is not
expected to have a material effect on the Company’s financial statements or financial position.

Reclassifications

Certain amounts previously reported have been reclassified to conform with the current year

presentation.

NOTE 3—GOODWILL AND OTHER INTANGIBLE ASSETS

Effective at the beginning of fiscal 2002, the Company adopted SFAS No. 142, which resulted in
goodwill no longer being subject to amortization, but rather an annual impairment test. The following
information presents what reported net income, basic earnings per share (“basic EPS”) and diluted earnings per
share (“diluted EPS”) would have been had SFAS No. 142 been adopted at the beginning of fiscal 2000:

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

Fiscal
2002

Fiscal
2001

Fiscal
2000

Reported net income............................ $ 21,779
Add back: Goodwill amortization,
-
net of tax .........................................
Adjusted net income ............................ $ 21,779

$ 11,931

$18,515

5,046
$ 16,977

4,498
$23,013

Basic EPS:
Reported basic EPS ........................ $ 1.22
-
Goodwill amortization....................
Adjusted basic EPS.............................. $ 1.22

$ 0.68
0.29
$ 0.97

$ 1.06
0.26
$ 1.32

Diluted EPS:
Reported diluted EPS...................... $ 1.17
-
Goodwill amortization....................
Adjusted diluted EPS........................... $ 1.17

$ 0.67
0.28
$ 0.95

$ 1.06
0.26
$ 1.32

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

April 27, 2002
Amortizable intangible assets:
Customer relationships ..............................
Non-compete agreements ..........................
Order backlog and other ............................
Total amortizable intangible assets ........

Non-amortizable intangible assets:
Perpetual license agreement ......................
Other..........................................................
Total non-amortizable intangible assets .
Total intangible assets .................

April 28, 2001
Amortizable intangible assets:
Non-compete agreements ........................
Other........................................................
Total intangible assets.....................

Gross Value

Accumulated
Amortization

Net Book
Value

$ 19,384
3,221
1,452
24,057

$ (420)
(793)
(464)
(1,677)

$ 18,964
2,428
988
22,380

12,700
377
13,077
37,134

-
-
-
(1,677)

12,700
377
13,077
35,457

Gross Value

Accumulated
Amortization

Net Book
Value

$ 2,851
4,362
7,213

$ (327)
(1,796)
(2,123)

$ 2,524
2,566
5,090

Intangible amortization expense included in selling, general and administrative expenses for fiscal

years 2002, 2001 and 2000 was $1,131, $1,518 and $1,399, respectively.

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

Estimated intangible amortization expense for each of the five succeeding fiscal years is

estimated to be:

2003 ..................................................................... $2,497
2004 ....................................................................... 2,044
2005 ....................................................................... 1,995
2006 ....................................................................... 1,765
2007 ....................................................................... 1,344

The following information presents changes to net goodwill during the period beginning April 30,

2000 through April 27, 2002:

Segment
Traditional..........
Specialty.............
Total ................

Balance at
April 30,
2000
$110,282
72,208
$182,490

Acquired
$46,709
28,795
$75,504

Business

Dispositions Amortization Adjustments
$ -
344
$ 344

$ (3,418)
(2,503)
$ (5,921)

$ -
(2,636)
$ (2,636)

Balance at
April 28,
2001
$153,573
96,208
$249,781

Acquired
$ 747
134,032
$134,779

Adjustments
$ 5,596
790
$ 6,386

Balance at
April 27,
2002
$159,916
231,030
$390,946

During fiscal 2001, the Company sold the SmartStuff division for a pre-tax gain for approximately
$500, which included the disposition of net goodwill of $963, and the Gresswell division, a pre-tax loss of
approximately $700, which included the disposition of net goodwill of $1,673. The adjustments during fiscal
2001 in the Specialty segment primarily represent the accrual of additional purchase price consideration
associated with the Company’s acquisition of Scantron Quality Computers. The adjustments during fiscal 2002
in the Traditional segment represent the reclassification of the net book value of previously recorded intangible
assets to goodwill upon adoption of SFAS No. 142 of $2,381. The balance of the adjustments within the
Traditional segment represent the final allocation of purchase price associated with the acquisition of J.L.
Hammett. The Specialty segment adjustments during fiscal 2002 represent additional cash consideration paid
to the former owners of Global Video of $210 and final purchase accounting adjustments of $170. The balance
of the fiscal 2002 adjustments represent foreign currency translation.

NOTE 4—BUSINESS COMBINATIONS

On December 21, 2001, the Company acquired all of the issued and outstanding shares of capital stock
of Premier Agendas, Inc. and Premier School Agendas Ltd., Agenda Scolaire Premier Ltee (together “Premier
Agendas”). Premier Agendas, headquartered in Bellingham, Washington, is the largest provider of academic
agendas in the United States and Canada. The Company expects the acquisition to create synergies with the
existing student agenda brands Time Tracker and Hammond & Stephens. The aggregate purchase price, net of
cash acquired, of $155,931, includes a $4,012 six-month note payable to the former owners of Premier
Agendas that bears interest at two percent over LIBOR. The balance of the purchase price was funded
primarily through borrowings under the Company’s existing credit facility. The results of this acquisition have
been included in the consolidated financial statements and are part of the Specialty segment results since the
date of acquisition. The Company is in the process of finalizing restructuring related plans as a result of the
acquisition and expects these and other adjustments to occur in fiscal 2003.

The total purchase price was allocated to the tangible and intangible assets and liabilities acquired

based upon their respective fair values as of the closing date of the acquisition. A preliminary allocation of the
purchase price has been made to major categories of assets and liabilities as follows:

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

Current assets ..................................................... $ 11,166
6,684
Property, plant and equipment and other ...........
Identifiable intangible assets ..............................
32,077
Goodwill............................................................. 127,869
(21,865)
Liabilities assumed.............................................
$ 155,931

Details of the acquired identifiable intangible assets as part of the Premier Agendas acquisition are as

follows:

Acquired Intangibles
Amortizable intangibles:
Customer relationships........
Order backlog......................
Non-compete agreements....
Total .................................
Non amortizable intangibles:
Perpetual license agreement
Total acquired intangibles

Allocated
Value

Amortization
Life

$ 18,900
400
77
19,377

12,700
$ 32,077

15 years
1 year
2 years
14.7 years

N/A
N/A

The above acquired intangible valuations are based on a third-party valuation. In addition to the above

intangible assets, the Company preliminarily recorded $127,869 of goodwill related to the Premier Agendas
acquisition, which will not be deductible for income tax purposes.

Also during fiscal 2002, the Company acquired three other businesses, accounted for under the
purchase method of accounting, for a total purchase price, net of cash acquired, of $9,566 including $300 paid
for non-compete agreements. The following transactions were paid for with cash and 120 shares of School
Specialty, Inc. common stock:

• April 2002 – Certain assets of the K-12 wholesale business of Bradburn School Supply, Inc., a
marketer of supplemental educational supplies which will be operated from the Greenville,
Wisconsin facility. Results are included in the Traditional segment since the date of acquisition.
• October 2001 – Premier Science, a start-up science curriculum company which will be operated
from the Mansfield, Ohio facility. Results are included in the Specialty segment since the date of
acquisition.

• May 2001 – Envision, Inc., based in Grand Junction, Colorado, a designer, producer and marketer

of student agenda books. Results are included in the Specialty segment since the date of acquisition.
The purchase price included 120 shares of School Specialty, Inc. common stock.

The acquisitions resulted in goodwill of approximately $6,910, which is fully deductible for tax

purposes. The resulting goodwill from the Bradburn acquisition of $747 is included in the Traditional
segment, and the goodwill from the Premier Science and Envision acquisitions of $6,163 is included in the
Specialty segment.

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

During fiscal 2001, the Company made two acquisitions accounted for under the purchase method for

an aggregate purchase price, net of cash acquired, of $116,625, including $2,750 paid for non-compete
agreements. The above purchase price includes subsequent cash payments related to final purchase price
adjustments of $3,210 and $353, which were made during fiscal 2002. The businesses acquired were:

• November 2000 – Certain assets of the K-12 wholesale business of the J.L. Hammett Company, a

marketer of supplemental educational supplies, with operations in Lyons, New York and
Southaven, Mississippi. Results are included in the Traditional segment since the date of
acquisition.
June 2000 – Global Video, LLC, a designer, producer and marketer of educational videos, based in
Tempe, Arizona. Results are included in the Specialty segment since the date of acquisition.

•

Goodwill resulting from the above two transactions, including the affect of the fiscal 2002

adjustments, which is expected to be fully deductible for tax purposes, was approximately $79,098, of which,
$49,923 has been allocated to the Traditional segment and $29,175 to the Specialty segment.

During fiscal 2000, the Company made two acquisitions accounted for under the purchase method for

an aggregate purchase price, net of cash acquired, of $2,470. The following transactions were paid for with
cash and 57 shares of School Specialty, Inc. common stock:

• May 1999 – Audio Graphic Systems, a marketer of school furnishings and audio/visual equipment
located in Ontario, California. Results are included in the Traditional segment since the date of
acquisition.

• December 1999 – Scantron Quality Computers, Inc., a marketer and developer of educational
software located in St. Claire Shores, Michigan. Results are included in the Specialty segment
since the date of acquisition.

Goodwill resulting from the Audio Graphic Systems acquisition of $1,934, which is included in the

Traditional segment, is not deductible for tax purposes. Goodwill of $624 resulting from the Scantron
acquisition is fully deductible for tax purposes and is included in the Specialty segment.

The following information presents the unaudited pro forma results of operations of the Company for

fiscal 2002 and 2001, and includes the Company’s consolidated results of operations and the results of the
companies acquired during fiscal 2002 and fiscal 2001 as if all such purchase acquisitions had been made at
the beginning of fiscal 2001, 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 goodwill (if the transaction occurred during fiscal
2001) and amortizable intangible assets, adjustments to interest expense, and the inclusion of an income tax
provision on all earnings:

Revenues .........................
Net income ......................

Net income per share:

Fiscal 2002
$851,260
32,503

Fiscal 2001
$864,797
16,572

Basic.............................
Diluted .........................

$ 1.81
$ 1.66

$ 0.94
$ 0.93

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

The 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
2001 or the results that may occur in the future.

NOTE 5—RESTRUCTURING COSTS

During 1999, the Company recorded a restructuring charge of $4,200 to consolidate warehousing,
customer service and sales operations. During fiscal years 2000 and 1999, the Company terminated 43 and
152 employees, respectively, under this plan.

During the fourth quarter of fiscal 2001, the Company recorded a restructuring charge of $4,500 to
close redundant facilities and for related severance costs. The Company terminated 76 employees under this
plan during fiscal 2001. Remaining payments primarily relate to commitments on a leased facility which
expires in April 2005.

Selected information related to the above restructurings is as follows:

Total

$ 2,752
(2,687)
65
4,500
(2,052)
2,513
(1,650)
863

Severance
Facility
Closure and
and
Consolidation Terminations Costs

Other

Balance at April 24, 1999 .......................................
Utilizations ..........................................................
Balance at April 29, 2000 .......................................
Additions .............................................................
Utilizations ..........................................................
Balance at April 28, 2001 .......................................
Utilizations ..........................................................
Balance at April 27, 2002 .......................................

$ 1,101
(1,084)
17
2,391
(714)
1,694
(991)
703

$ 1,285
(1,245)
40
1,544
(784)
800
(640)
160

$ 366
(358)
8
565
(554)
19
(19)
-
$

NOTE 6—PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

April 27,
2002

Land .................................................................................................... $
Projects in progress.............................................................................
Buildings and leasehold improvements..............................................
Furniture, fixtures, and other ..............................................................
Machinery and warehouse equipment................................................

538
6,108
29,263
33,514
21,764
91,187
(24,104)
Less: Accumulated depreciation.........................................................
Net property, plant and equipment .............................................. $ 67,083

April 28,
2001
$

678
4,428
28,460
23,915
18,643
76,124
(16,111)
$ 60,013

Depreciation expense for fiscal years 2002, 2001 and 2000 was $10,067, $7,523, and $5,523, respectively.

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

NOTE 7—DEBT

Long-Term Debt

Long-term debt consists of the following:

April 27,
2002

Credit facility ................................................................................................ $ 118,000
149,500
Convertible debt...................................................................................
18,015
Sale-leaseback obligations...................................................................
4,136
Notes payable.......................................................................................
412
Capital lease obligations ......................................................................
290,063
(4,471)
Total long-term debt .................................................................. $ 285,592

Less: Current maturities.......................................................................

April 28,
2001
$ 179,002
-
18,255
136
645
198,038
(21,855)
$ 176,183

On September 30, 1998, the Company entered into a five year secured $350,000 credit facility (the “credit

facility”) with a syndicate of financial institutions, led by Bank of America, N.A. as Agent, consisting of a
$250,000 revolving loan and a $100,000 term loan. Interest accrues at a rate of, at the Company’s option, either (i)
LIBOR plus an applicable margin of up to 2.25%, or (ii) the lender’s base rate plus an applicable margin of up to
1.00%, plus a fee of up to 0.5% on the unborrowed amount under the revolving loan. The credit facility is secured
by substantially all of the assets of the Company and contains certain financial covenants. The Company was in
compliance with these covenants at April 27, 2002. At April 27, 2002, the balance outstanding under the credit
facility was $118,000 on the revolving loan. The term loan was paid in full during fiscal 2002. The effective
interest rate under the credit facility for fiscal 2002 was 6.44%, which includes amortization of the loan origination
fee and commitment fee on unborrowed funds, and excludes the effect of the interest rate swap agreement
disclosed below.

On July 30, 2001, the Company sold an aggregate principal amount of $130,000 of 6.0% convertible
subordinated notes of the Company due in full August 1, 2008. The notes are convertible at any time prior to
maturity into shares of School Specialty, Inc. common stock at a conversion price of $32.29 per share and accrue
interest payable semi-annually. There are no scheduled principal payments due prior to maturity. Net proceeds
from the sale of these notes was $125,675. On August 2, 2001, the purchasers of the notes exercised their over-
allotment option in full and purchased an additional $19,500 aggregate principal amount of the notes, with net
proceeds of $18,915. The Company used the total net proceeds from the offering of $144,590 to repay a portion of
the debt outstanding under the credit facility.

In November 2000, the Company entered into two sale-leaseback transactions which are accounted for as

financings due to a technical default provision within the leases which could allow for continuing ownership
involvement by the Company in the two properties. Under the agreements, the Company recorded debt of $18,525,
which has an effective interest rate of 8.97%, excluding amortization of loan fees. The leases expire in November
2020.

The Company entered into an interest rate swap agreement on December 13, 2000 (effective date of

January 2, 2001), with The Bank of New York covering $50,000 of the outstanding borrowings under the credit
facility. On April 29, 2001, the Company began accounting for the swap in accordance with SFAS No. 133
“Accounting for Derivative Instruments and Hedging Activities,” which requires derivative instruments, such as
this interest rate swap, to be recorded on the balance sheet as either an asset or a liability measured at fair value.
The swap was designated as a cash flow hedge and was considered highly effective throughout its term. As a result

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

of adopting SFAS No. 133, the Company recognized the fair value of the swap liability of $660 ($396 net of tax)
with the net of tax offset to accumulated other comprehensive income (loss) on the date of adoption. Subsequent
net of tax changes in the swap’s fair value of $163 were recorded as a component of accumulated other
comprehensive loss during fiscal 2002, all of which was reclassified to the fiscal 2002’s consolidated statement of
operations when the hedged item affected earnings. The swap agreement fixed the 30-day LIBOR interest rate at
6.07 percent per annum on the $50,000 notional amount and had a one-year term which expired on January 2,
2002.

On October 28, 1998, the Company entered into an interest rate swap agreement with The Bank of New
York covering $50,000 of the outstanding credit facility. The agreement fixed the 30-day LIBOR interest rate at
4.37% per annum on a $50,000 notional amount and had a three year term that was cancelable by The Bank of
New York on the second anniversary. On October 30, 2000, The Bank of New York cancelled the swap
agreement.

As a result of the above swap agreements, interest expense was increased (decreased) in fiscal years 2002,

2001 and 2000 by $931, $(484) and $(592), respectively.

The carrying value of variable rate long-term debt approximates fair value. The convertible subordinated

notes had a fair value at April 27, 2002 of $168,561, determined using the closing bid price as reported on the
National Association of Securities Dealers’ Portal Market on April 27, 2002.

Maturities of Long-Term Debt

Maturities of long-term debt, including capital lease obligations for our fiscal years, are as follows:

2003 .........................................................................
2004 .........................................................................
2005 .........................................................................
2006 .........................................................................
2007 .........................................................................
Thereafter.................................................................
Total maturities of long-term debt....................

4,471
118,460
477
431
529
165,695
$ 290,063

NOTE 8—SECURITIZATION OF ACCOUNTS RECEIVABLE

The Company and certain of its U.S. subsidiaries entered into an agreement (the “Receivables Facility”) in

November 2000 with a financial institution whereby it sells on a continuous basis an undivided interest in all
eligible trade accounts receivable. Pursuant to the Receivables Facility, the Company formed New School, Inc.
(“NSI”), a wholly-owned, special purpose, bankruptcy-remote subsidiary. As such, the assets of NSI will be
available first and foremost to satisfy the claims of the creditors of NSI. NSI was formed for the sole purpose of
buying and selling receivables generated by the Company and certain subsidiaries of the Company. Under the
Receivables Facility, the Company and certain subsidiaries transfer without recourse all their accounts receivables
to NSI. NSI, in turn, has sold and, subject to certain conditions, may from time to time sell an undivided interest in
these receivables and is permitted to receive advances of up to $50,000 for the sale of such undivided interest. The
Company receives a fee from the financial institution for billing and collection functions, which remain the
responsibility of the Company, that approximates fair value. The agreement initially expired in November 2001. In
November 2001 it was amended to extend the expiration to November 19, 2002. On May 2, 2002, the Receivables
Facility was amended to allow NSI to receive advances up to $100,000 under the Receivables Facility. Our

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

retained interests in the receivables sold are recorded at fair value, which approximates cost, due to the short-term
nature of the receivables sold.

This two-step transaction is accounted for as a sale of receivables under the provision of SFAS No. 140,

“Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.” There was
$50,000 advanced under the Receivables Facility at April 27, 2002 and April 28, 2001, and accordingly, that
amount of accounts receivable has been removed from the consolidated balance sheets. Costs associated with the
sale of receivables, primarily related to the discount and loss on sale, were $1,985 and $1,389 and are included in
other expenses in the consolidated statement of operations for fiscal years 2002 and 2001, respectively.

NOTE 9—INCOME TAXES

The provision for income taxes consists of:

Current income tax expenses:
Federal ................................................................................................ $ 4,485
State .................................................................................................... 1,701
6,186
Deferred income tax expense ............................................................... 8,335
Total provision for income taxes................................................. $ 14,521

$ 3,834
1,410
5,244
3,831
$ 9,075

$ 7,371
2,003
9,374
5,746
$ 15,120

Fiscal
2002

Fiscal
2001

Fiscal
2000

Deferred taxes are comprised of the following:

April 27,
2002

April 28,
2001

Current deferred tax assets (liabilities):
Inventory............................................................................................. $ 2,855
1,374
Allowance for doubtful accounts .......................................................
1,375
Net operating loss carryforward.........................................................
(613)
Accrued liabilities...............................................................................
Accrued restructuring.........................................................................
334
Charitable contribution carryforward................................................. 2,016
Total current deferred tax assets.................................................. 7,341

Long-term deferred tax assets (liabilities):
Net operating loss carryforward ............................................................
1,494
Property and equipment.........................................................................
(3,267)
(21,366)
Intangible assets.....................................................................................
Unrealized loss on investment............................................................... -
Total long-term deferred tax liabilities........................................ (23,139)
Net deferred tax (liabilities) assets .............................................. $ (15,798)

$ 4,028
1,493
1,493
(885)
994
750
7,873

2,284
(1,361)
(4,402)
600
(2,879)
$ 4,994

The Company has federal net operating loss carryforwards of approximately $5,387, on a consolidated

basis, which expire during fiscal years 2011-2013. The carryforwards are also subject to an annual federal
limitation on utilization pursuant to IRS Code Section 382 of approximately $3,900. The Company has state and
foreign net operating losses of approximately $11,682, which will expire during fiscal years 2007-2022.

The Company's effective income tax rate varied from the U.S. federal statutory tax rate as follows:

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

U.S. federal statutory rate...............................................................
State income taxes, net of federal income tax benefit ....................
Non-deductible goodwill and intangible amortization ...................
Impact of divestitures .....................................................................
Other...............................................................................................
Effective income tax rate................................................................

NOTE 10—OPERATING LEASE COMMITMENTS

Fiscal
2002
35.0%
4.5%

-
-
0.5%
40.0%

Fiscal
2001
35.0%
4.5
6.2
(2.5)
-
43.2%

Fiscal
2000
35.0%
4.6
5.4
-
-
45.0%

The Company leases various types of warehouse and office facilities and equipment, under noncancelable

lease agreements which expire at various dates. Future minimum lease payments under noncancelable operating
leases for our fiscal years are as follows:

2003 ................................................................................................................ $
2004 ................................................................................................................
2005 ................................................................................................................
2006 ................................................................................................................
2007 ................................................................................................................
Thereafter .......................................................................................................
Total minimum lease payments ................................................................ $

8,023
6,178
6,019
5,180
4,791
23,003
53,194

Rent expense for fiscal 2002, 2001 and 2000, was $8,398, $6,527, and $5,535, respectively.

NOTE 11—EMPLOYEE BENEFIT PLANS

On June 9, 1998, the Company implemented the School Specialty, Inc. 401(k) Plan (the “401(k) Plan”)

which allows employee contributions in accordance with Section 401(k) of the Internal Revenue Code. The
Company matches a portion of employee contributions and virtually all full-time employees are eligible to
participate in the 401(k) Plan after 90 days of service. In fiscal years 2002, 2001, and 2000, the Company’s
matching contribution expense was $670, $657, and $564, respectively.

NOTE 12—SHAREHOLDERS’ EQUITY

Earnings Per Share (“EPS”)

Basic EPS excludes dilution and is computed by dividing income available to common shareholders by

the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities to issue common stock were exercised. The following information presents
the Company's computations of basic and diluted EPS for the periods presented in the consolidated statements of
operations:

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

Income
Shares
(Numerator) (Denominator) Amount

Per Share

Fiscal 2002:
Basic EPS ........................................................................................ $ 21,779
-
Effect of dilutive employee stock options......................................
Diluted EPS..................................................................................... $ 21,779

17,917
716
18,633

$ 1.22

$ 1.17

Fiscal 2001:
Basic EPS ........................................................................................ $ 11,931
-
Effect of dilutive employee stock options......................................
Diluted EPS..................................................................................... $ 11,931

17,495
287
17,782

$ 0.68

$ 0.67

Fiscal 2000:
Basic EPS ........................................................................................ $ 18,515
-
Effect of dilutive employee stock options......................................
Diluted EPS..................................................................................... $ 18,515

17,429
51
17,480

$ 1.06

The Company had additional employee stock options outstanding of 128, 259, and 948 during fiscal

2002, 2001 and 2000, respectively, that were not included in the computation of diluted EPS because they were
anti-dilutive. Additionally, the impact of the conversion of the convertible debt to common stock has been
excluded from the computation of fiscal 2002 diluted EPS because the impact was anti-dilutive.

Stock Offerings

On April 16, 1999, the Company issued 2,400 shares in conjunction with a secondary public offering

for net proceeds of $40,820. On May 17, 1999, the underwriters of the Company’s secondary offering
exercised their over allotment option for 151 shares of Company stock at $17.25 per share for net proceeds of
$2,225.

Employee Stock Plans

On June 10, 1998, the Company’s Board of Directors approved the School Specialty, Inc. 1998 Stock

Incentive Plan (the “Plan”). The purpose of the Plan is to provide directors, officers, key employees and
consultants with additional incentives by increasing their ownership interests in the Company. The maximum
number of options available for grant under the Plan, is equal to 20% of the Company’s outstanding common
stock. The maximum number of options available for grant in any fiscal year under the Plan is 1,200 shares.

The Company accounts for options issued in accordance with Accounting Principles Board Opinion

No. 25. Accordingly, because the exercise prices 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:

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

Fiscal
2002

Fiscal
2001

Fiscal
2000

Net income:
As reported .................................................................... $ 21,779
Pro forma ....................................................................... 18,923

$ 11,931
9,197

$ 18,515
14,954

EPS:
As reported:
Basic ........................................................................... $
Diluted ........................................................................ $

1.22
1.17

Pro forma:

Basic ........................................................................... $
Diluted ........................................................................ $

1.06
1.02

$
$

0.68
0.67

0.53
0.52

$
$

1.06
1.06

0.86
0.86

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

Fiscal
2002

Fiscal
2001

Fiscal
2000

Expected life of option ....................................................
Risk free interest rate.......................................................
Expected volatility of stock .............................................

7 years
4.85%
58.38%

7 years
5.30%
59.58%

7 years
6.49%
67.14%

The weighted-average fair value of options granted during fiscal years 2002, 2001 and 2000 was

$15.53, $11.98, and $11.45, respectively.

A summary of option transactions follows:

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

Balance at April 24, 1999..................................................
Granted ..................................................................
Exercised ...............................................................
Canceled ................................................................
Balance at April 29, 2000..................................................
Granted ..................................................................
Exercised ...............................................................
Canceled ................................................................
Balance at April 28, 2001..................................................
Granted ..................................................................
Exercised ...............................................................
Canceled ................................................................
Balance at April 27, 2002..................................................

Options Outstanding
Weighted-
Average
Exercise
Price
$ 16.70
16.23
16.21
20.20
16.53
18.58
15.83
16.99
16.70
24.67
17.47
17.97
$ 17.48

Options
2,366
803
(55)
(50)
3,064
243
(133)
(108)
3,066
338
(345)
(55)
3,004

Options Exercisable
Weighted-
Average
Exercise
Options Price

118

$23.39

1,973

$16.20

2,173

$16.47

2,192

$16.44

The following table summarizes information about stock options outstanding at April 27, 2002:

Range of Exercise Prices

$12.00 - $15.00
$15.50 - $15.50
$15.63 - $20.31
$21.78 - $59.84

Options Outstanding
Weighted-
Average
Exercise
Price

Weighted-
Average
Life

Options

Options Exercisable
Weighted-
Average
Exercise
Price

Options

263
1,484
794
463
3,004

7.16
6.12
7.48
8.28
6.90

$14.37
15.50
17.89
24.91
$17.48

135
1,484
461
112
2,192

$14.40
15.50
17.74
26.06
$16.44

Options granted are generally exercisable beginning one year from the date of grant in cumulative
yearly amounts of twenty-five percent of the shares granted and generally expire ten years from the date of
grant. Options granted to directors and non-employee officers of the Company vest over a three year period,
twenty percent after the first year, fifty percent (cumulative) after the second year and one-hundred percent
(cumulative) after the third year.

On June 20, 2000, the Board of Directors approved the JuneBox.com, Inc. 2000 Equity Incentive Plan.

JuneBox.com was a wholly owned subsidiary of School Specialty, Inc., and its stock was not publicly traded.
No options were granted under this Plan during fiscal 2002 and 1,900 options were granted at fair market value
at the date of grant during fiscal 2001. No options were exercised under this Plan. During fiscal 2002,
JuneBox.com, Inc. was merged into School Specialty, Inc. The options outstanding at that time were replaced
with School Specialty, Inc. options under the School Specialty, Inc. 1998 Stock Incentive Plan. The option

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

holders were in the same economic position immediately before and after the replacement of JuneBox.com,
Inc. options with School Specialty, Inc. options. The vesting provisions and option period of the original grants
were not changed.

NOTE 13—SEGMENT INFORMATION

The Company’s business activities are organized around two principal business segments, Traditional

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

Effective with the beginning of fiscal 2002, the Company discontinued separately reporting the
Internet segment, as the management of this business has changed such that this business is operated as a sales
channel within the traditional and specialty segments. Amounts previously reported for the Internet segment
have been reclassified to conform with fiscal 2002’s presentation. The following table presents segment
information:

Revenues:
Traditional .........................................................................
Specialty ............................................................................
Total............................................................................

Operating income and income before taxes:
Traditional .........................................................................
Specialty ............................................................................
Total.........................................................................
Corporate expenses ...........................................................
Restructuring costs ...........................................................
Operating income .......................................................
Interest expense and other ................................................
Income before taxes....................................................

Fiscal
2002

Fiscal
2001

Fiscal
2000

$ 480,922
286,465
$ 767,387

$ 415,001
277,673
$ 692,674

$ 386,715
252,556
$ 639,271

$ 54,075
22,576
76,651
19,107
-
57,544
21,244
$ 36,300

$ 29,373
28,582
57,955
14,380
4,500
39,075
18,069
$ 21,006

$ 33,669
27,338
61,007
12,365
-
48,642
15,007
$ 33,635

Identifiable assets (at fiscal year end):
Traditional .........................................................................
Specialty ............................................................................
Total.........................................................................
Corporate assets (1) ...........................................................
Total............................................................................

$ 249,926
344,045
593,971
79,671
$ 673,642

$ 258,212
171,144
429,356
94,003
$ 523,359

$ 246,006
177,825
423,831
31,018
$ 454,849

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

Depreciation and goodwill and intangible amortization:
Traditional .........................................................................
Specialty ............................................................................
Total............................................................................
Corporate ...........................................................................
Total............................................................................

4,003
3,882
7,885
3,313
$ 11,198

6,689
6,588
13,277
1,685
$ 14,962

6,129
5,080
11,209
630
$ 11,839

Expenditures for property, plant and equipment:
Traditional .........................................................................
Specialty ............................................................................
Total ........................................................................
Corporate ...........................................................................
Total............................................................................

1,847
2,199
4,046
8,064
$ 12,110

4,479
4,646
9,125
6,075
$ 15,200

6,215
7,656
13,871
3,480
$ 17,351

(1) Includes assets of NSI.

NOTE 14—QUARTERLY FINANCIAL DATA (UNAUDITED)

The following presents certain unaudited quarterly financial data, as restated, see “Restatement of

Financial Statements,” for fiscal 2002 and fiscal 2001:

Revenues ................................................
Gross profit.............................................
Operating income (loss) .........................
Net income (loss) ...................................

Per share amounts:
Basic....................................................
Diluted.................................................

Fiscal 2002
Third(1)

Fourth(1)

Total

First

Second
As Restated As Restated As Restated
$ 104,005
$ 269,656
$ 260,162
39,746
99,834
100,294
(8,203)
36,608
32,470
(8,625)
19,162
16,446

$ 133,564
54,106
(3,331)
(5,204)

$ 767,387
293,980
57,544
21,779

$ 0.93
$ 0.89

$ 1.07
$ 0.88

$ (0.48)
$ (0.48)

$ (0.29)
$ (0.29)

$ 1.22
$ 1.17

First

Second

Fiscal 2001
Third(2)

Fourth(2)(3) Total

Revenues.................................................... $ 217,067 $ 240,539
85,513
Gross profit ................................................
27,782
Operating income (loss).............................
12,902
Net income (loss).......................................

79,069
24,107
11,393

As Retated As Restated
$ 104,658
38,034
(3,967)
(4,908)

$ 130,410 $ 692,674
251,728
39,075
11,931

49,112
(8,847)
(7,456)

Per share amounts:
Basic........................................................ $
Diluted .................................................... $

0.65 $
0.65 $

0.74
0.73

$
$

(0.28)
(0.28)

$
$

(0.42) $
(0.42) $

0.68
0.67

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

The summation of quarterly net income per share may not equate to the calculation for the full fiscal year

as quarterly calculations are performed on a discrete basis.

(1) During the third quarter of fiscal 2002, the Company acquired Premier Agendas, a highly seasonal

business during a seasonally low period. This transaction had the affect of reducing fiscal 2002’s third
and fourth quarter’s reported net income and related earnings per share.

(2) During the third quarter of fiscal 2001, the Company acquired certain assets of the K-12 wholesale
business of the J.L. Hammett Company, a highly seasonal business during a seasonally low period.
This transaction had the affect of reducing fiscal 2001’s third and fourth quarter’s reported net income
and related earnings per share.

(3) During the fourth quarter of fiscal 2001, the Company recorded a $4,500 pre-tax restructuring charge .

See “Restructuring Costs” for additional information related to this charge.

NOTE 15—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 during fiscal 2001 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 our fiscal
2001 financial statements:

As Reported

As Restated

At April 28, 2001:
Prepaid expenses and other current assets .......
Property, plant and equipment .........................
Other assets.......................................................
Current maturities – long-term debt.................
Other accrued liabilities....................................
Long-term debt.................................................
Deferred taxes...................................................
Retained earnings .............................................

For the fiscal year ended April 28, 2001:
Selling, general and administrative expenses...
Operating income .............................................
Interest expense ................................................
Income before provision for income taxes.......
Provision for income taxes...............................
Net income .......................................................
Basic EPS .........................................................
Diluted EPS ......................................................

$
$

18,300
60,013
17,468
21,855
13,021
176,183
2,879
40,925

208,153
39,075
16,983
21,006
9,075
11,931
0.68
0.67

$
$

18,457
43,522
16,735
21,615
13,862
158,168
3,018
41,133

208,647
38,581
16,142
21,353
9,214
12,139
0.69
0.68

SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

Fiscal 2002’s unaudited quarterly financial results, and fiscal 2001’s third and fourth quarter unaudited
financial results have also been restated. The following table summarizes the impact of this restatement on the
Company’s previously filed Form 10-Q’s as applicable for these respective unaudited quarterly financial results:

For the Three Months Ended

January 27, 2001
As
Reported

As
Restated

July 28, 2001
As
As
Restated
Reported

October 27, 2001

As
Reported

As
Restated

January 26, 2002
As
As
Restated
Reported

− $

−
$
61,457
7,515
15,078
−
24,250
185,185
48,381

$ 22,782 $ 22,624 $
44,008
15,228
10,356
−
27,028
204,410
57,680

−
Prepaid expenses and other current assets..... $
Property, plant and equipment....................... 44,755
Other assets.................................................... 6,772
Current maturities – long-term debt .............. 14,823
−
Accrued income tax.......................................
Other accrued liabilities................................. 25,037
Long-term debt .............................................. 167,102
Retained earnings .......................................... 48,487
Selling, general and administrative
Expenses .....................................................
42,245
Operating income (loss) ................................ (4,211)
Interest expense ............................................. 4,214
Income (loss) before provision for (benefit
from) income taxes.....................................
(14,374)
(9,790)
Provision for (benefit from) income taxes..... (4,988)
(5,749)
Net I ncome (loss).......................................... (4,802)
(8,625)
Basic EPS ...................................................... $ (0.27) $ (0.28) $ 0.93 $ 0.93 $ 1.08 $ 1.07 $ (0.47) $ (0.48)
Diluted EPS ................................................... $ (0.27) $ (0.28) $ 0.90 $ 0.89 $ 0.89 $ 0.88 $ (0.47) $ (0.48)

−
49,185
11,358
4,412
8,115
21,463
278,221
68,416

−
$
65,042
12,063
4,691
7,776
20,791
296,023
67,908

60,287
15,952
10,602
−
25,991
222,355
57,371

43,315
12,818
23,062
14,050
16,915
154,934
76,944

59,383
13,533
23,335
13,777
16,232
172,808
76,536

(14,208)
(5,683)
(8,525)

48,199
(8,453)
3,769

47,949
(8,203)
4,185

(9,967)
(5,059)
(4,908)

42,001
(3,967)
4,635

27,579
11,032
16,547

27,411
10,965
16,446

68,074
32,220
3,805

67,824
32,470
4,223

32,104
12,843
19,261

63,477
36,357
4,156

31,938
12,776
19,162

63,226
36,608
4,573

The originally reported unaudited year-to-date quarterly basic and diluted EPS for the above periods have
been restated as follows:

Basic EPS
As Reported As Restated As Reported As Restated

Diluted EPS

Nine months ended January 27, 2001 .....
Six months ended October 27, 2001 .......
Nine months ended January 26, 2002 .....

$1.12
$2.01
$1.53

$1.11
$2.00
$1.51

$1.10
$1.78
$1.39

$1.10
$1.77
$1.38

Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure

Information previously reported.

Item 10. Directors and Executive Officers of the Registrant

PART III

(a)

(b)

(c)

Executive Officers. Reference is made to “Executive Officers of the Registrant” in Part I
hereof.

Directors. The information required by this Item is set forth in our Proxy Statement for the
Annual Meeting of Shareholders to be held on August 27, 2002, under the caption
“Election of Directors,” which information is incorporated by reference herein.

Section 16 Compliance. The information required by this Item is set forth in our Proxy
Statement for the Annual Meeting of Shareholders to be held on August 27, 2002, under the
caption “Section 16(a) Beneficial Ownership Reporting Compliance,” which information is
incorporated by reference herein.

Item 11. Executive Compensation

The information required by this Item is set forth in our Proxy Statement for the Annual Meeting of
Shareholders to be held on August 27, 2002, under the captions “Executive Compensation,” “Employment
Contracts and Related Matters,” “Non-Employee Director Compensation,” “Compensation Committee
Report,” “Compensation Committee Interlocks and Insider Participation,” and “Performance Graph,” which
information is incorporated by reference herein.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters

The information required by this Item is set forth in our Proxy Statement for the Annual Meeting of

Shareholders to be held on August 27, 2002, under the captions “Security Ownership of Management and
Certain Beneficial Owners” and “Equity Compensation Plan Information,” which information is
incorporated by reference herein.

Item 13. Certain Relationships and Related Transactions

Not applicable.

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)(1) Financial Statements (See Part II, Item 8).

Consolidated Financial Statements

Reports of Independent Public Accountants

Consolidated Balance Sheets as of April 27, 2002, and April 28, 2001 As Restated

Consolidated Statements of Operations for the fiscal years ended April 27, 2002 (52
weeks), April 28, 2001 (52 weeks) As Restated, and April 29, 2000 (53 weeks)

Consolidated Statements of Shareholders’ Equity for the fiscal years ended April 27, 2002
(52 weeks), April 28, 2001 (52 weeks) As Restated, and April 29, 2000 (53 weeks)

Consolidated Statements of Cash Flows for the fiscal years ended April 27, 2002 (52
weeks), April 28, 2001 (52 weeks) As Restated, and April 29, 2000 (53 weeks)

Notes to Consolidated Financial Statements

(a)(2) Financial Statement Schedule (See Exhibit 99-1).

Schedule for the fiscal years ended April 27, 2002 (52 weeks), April 28, 2001 (52 weeks), and April
29, 2000 (53 weeks): Schedule II – Valuation and Qualifying Accounts.

(a)(3) Exhibits.

See (c) below.

(b)

Reports on Form 8-K.

The Company filed three reports on Form 8-K since the beginning of the fourth quarter of fiscal
2002 as follows:

(1)

(2)

(3)

Form 8-K/A dated December 21, 2001, filed on March 5, 2002, under Items 2 and 7. The
Company filed financial statements and pro forma financial information relating to its
acquisition of all the issued and outstanding shares of capital stock of Premier Agendas,
Inc. and Premier School Agendas, Ltd., Agenda Scolaire Premier Ltee.

Form 8-K dated March 8, 2002, filed on March 11, 2002, under Item 5. The Company
reported the unexpected death of its Chairman and Chief Executive Officer, Daniel P.
Spalding.

Form 8-K dated and filed on June 11, 2002, under Item 4. The Company dismissed Arthur
Andersen LLP as its independent auditors and engaged Deloitte & Touche LLP to act as its
independent auditor.

(c)

Exhibits.

See the Exhibit Index, which is incorporated by reference herein.

(d)

Financial Statements Excluded from Annual Report to Shareholders.

Not applicable.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Appleton, State of Wisconsin, on July 22, 2002.

SCHOOL SPECIALTY, INC.

By: /s/ David J. Vander Zanden
David J. Vander Zanden
President and Chief Operating Officer
(Interim Chief Executive Officer)

Each person whose signature appears below hereby constitutes and appoints David J. Vander Zanden
and Mary M. Kabacinski, and each of them, as his or her true and lawful attorney-in-fact and agent, with full
power of substitution, to sign on his or her behalf individually and in the capacity stated below and to perform
any acts necessary to be done in order to file any and all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto and all other documents in connection therewith and each of the
undersigned does hereby ratify and confirm all that said attorney-in-fact and agent, or his substitutes, shall do
or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by

the following persons in the capacities and on the dates indicated below.

Name

Title

Date

/s/ David J. Vander Zanden
David J. Vander Zanden

President, Chief Operating Officer
and Director (Interim Chief Executive Officer)

July 22, 2002

/s/ Mary M. Kabacinski
Mary M. Kabacinski

Chief Financial Officer
(Principal Financial and Accounting Officer)

July 22, 2002

/s/ Leo C. McKenna
Leo C. McKenna

/s/ Jonathan J. Ledecky
Jonathan J. Ledecky

/s/ Rochelle Lamm
Rochelle Lamm

/s/ Jerome M. Pool
Jerome M. Pool

Interim Chairman of the Board

July 22, 2002

Director

July 22, 2002

SS 10K Cover Wrap 2002 Inside 7/19/02 3:16 PM Page 2

Directors

Officers

Leo C. McKenna
Interim Chairman of the Board
Financial Consultant

David J. Vander Zanden
Interim Chief Executive Officer
President, Chief Operating Officer

Richard H. Nagel
Executive Vice President
Sax Arts & Crafts

David J. Vander Zanden
Interim Chief Executive Officer
President, Chief Operating Officer
School Specialty, Inc.

Jonathan J. Ledecky
Chairman
The Ledecky Foundation

Rochelle Lamm
Chairman, Chief Executive Officer
Precision Marketing Partners, LLC

Jerome M. Pool
Former President
Jantzen, Inc.

Mary M. Kabacinski
Executive Vice President
Chief Financial Officer

A. Brent Pulsipher
Executive Vice President
Corporate Logistics & Technology

Michael J. Killoren
Executive Vice President
Marketing

Donald J. Noskowiak
Vice President Finance/
Business Development

Douglas L. Jehle
Executive Vice President
Traditional Company

John Jeffery
Executive Vice President
Teacher’s Video and ClassroomDirect

Ronald E. Suchodolski
Executive Vice President Childcraft

Garett H.D. Reid
Executive Vice President
Frey Scientific

Peter S. Savitz
Executive Vice President Sportime

David G. Loeppky
Executive Vice President
Premier Agendas

Joseph F. Franzoi IV
Secretary and Corporate Counsel

Investor Information

Corporate Headquarters
School Specialty, Inc.
W6316 Design Drive
Greenville, Wisconsin 54942
Phone: 920-734-5712
920-882-5863
Fax:

Dividend Policy
School Specialty’s present policy is to
retain earnings to finance its growth.
As a result, the company does not
expect to pay cash dividends in the
foreseeable future.

Stock Listing
School Specialty’s common stock is
traded on Nasdaq under the symbol
SCHS.

Shareholder Information
For information about School
Specialty, including copies of annual
reports, forms 10-K and 10-Q and
other available information, please
contact:

Mary M. Kabacinski
Executive Vice President and CFO
Phone: 920-882-5852
920-882-5863
Fax:
Email:
mkabacinski@schoolspecialty.com

Annual Meeting
All shareholders are welcome to
attend School Specialty’s annual
meeting. It will be held at 10:00 a.m.
Central Standard Time on August 27,
2002, at the Radisson Paper Valley
Hotel in Appleton, Wisconsin.

Websites
Investor information can be found
under that title at School Specialty’s
website: www.schoolspecialty.com.
You also are invited to visit
www.junebox.com and
www.classroomdirect.com to see
how School Specialty assists school
business officials, teachers and
consumers who purchase educational
products and materials.

Transfer Agent and Registrar
American Stock Transfer & Trust
Company
40 Wall Street
New York, New York 10005

Independent Auditors
Deloitte & Touche LLP
411 East Wisconsin Avenue
Milwaukee, Wisconsin 53202

Legal Counsel
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, Wisconsin 53202

Franzoi & Franzoi, S.C.
514 Racine Street
Menasha, Wisconsin 54952

Annual Report cover '02 7/19/02 3:17 PM Page 1

School Specialty, Inc.
W6316 Design Drive • Greenville, WI 54942

Phone: 920.734.5712 • Fax: 920.882.5863
www.schoolspecialty.com