SCHOOL SPECIALTY INC, S-1/A, 1999-03-22

SCHOOL SPECIALTY INC
S-1/A, 1999-03-22
PAPER & PAPER PRODUCTS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 22, 1999

REGISTRATION NO. 333-73103

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------

AMENDMENT NO. 1

FORM S-1
Registration Statement Under the Securities Act of 1933
------------------------------------

SCHOOL SPECIALTY, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 5112 39-0971239
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>

------------------------------------

1000 NORTH BLUEMOUND DRIVE, APPLETON, WISCONSIN 54914, (920) 734-2756
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

DANIEL P. SPALDING
CHIEF EXECUTIVE OFFICER
SCHOOL SPECIALTY, INC.
1000 NORTH BLUEMOUND DRIVE
APPLETON, WISCONSIN 54914
(920) 734-2756
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

------------------------------------

Copies to:

<TABLE>
<S> <C>
SCOTT A. MOEHRKE, ESQ. DUNCAN MCCURRACH, ESQ.
GODFREY & KAHN, S.C. SULLIVAN & CROMWELL
780 NORTH WATER STREET 125 BROAD STREET
MILWAUKEE, WISCONSIN 53202 NEW YORK, NY 10004
</TABLE>

------------------------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]

------------------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

EXPLANATORY NOTE

The initial filing of this Registration Statement contained two
Prospectuses, one for an equity offering and one for a concurrent debt offering.
Since the date of the initial filing, School Specialty has determined not to
proceed with the debt offering. Accordingly, the Prospectus for the debt
offering has been removed from the Registration Statement and the debt
securities are no longer registered under this Registration Statement.

<PAGE> 3

The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell nor does it seek an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.

Subject to Completion. Dated March 22, 1999.

3,000,000 Shares
SCHOOL SPECIALTY, INC.
LOGO Common Stock

------------------------------

The Common Stock is quoted on the Nasdaq National Market under the symbol
"SCHS." The last reported sale price for the Common Stock on March 19, 1999 was
$20.6875 per share.

See "Risk Factors" on page 10 to read about certain factors you should
consider before buying shares of the Common Stock.

------------------------------

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED ON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

------------------------------

<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to School Specialty.............. $ $
</TABLE>

The underwriters may, under certain circumstances, purchase up to an
additional 450,000 shares from School Specialty at the initial public offering
price less the underwriting discount.

------------------------------

The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.

GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY

U.S. BANCORP PIPER JAFFRAY

------------------------------
Prospectus dated , 1999.
<PAGE> 4

[PICTURES OF FRONT COVER PAGES OF COMPANY'S VARIOUS CATALOGS]

Childcraft(R) is a registered trademark of Childcraft Education Corp.
School Specialty(R) and Education Access(R) are registered trademarks of School
Specialty. Sportime(R) is a registered trademark of Sportime, LLC. Gresswell is
a common law trademark of School Specialty. All other trademarks, service marks
and trade names referred to in this Prospectus are the property of their
respective owners.

2
<PAGE> 5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to the more
detailed information and financial statements and pro forma financial statements
appearing elsewhere in this Prospectus. Unless the context requires otherwise,
all references to "School Specialty," "we" or "our" refers to School Specialty,
Inc. and its subsidiaries. Our fiscal year ends on the last Saturday in April in
each year. In this Prospectus, we refer to fiscal years by reference to the
calendar year in which they end (e.g., the fiscal year ended April 25, 1998 is
referred to as "fiscal 1998"). Unless otherwise indicated, the information
contained in this Prospectus assumes no exercise of the underwriters'
over-allotment option.

SCHOOL SPECIALTY

OVERVIEW

We are the largest marketer of non-textbook educational supplies and
furniture to schools for pre-kindergarten through twelfth grade. We offer more
than 60,000 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 through both acquisitions and
internal growth. In order to expand our geographic presence and product range,
we have acquired 18 companies since May 1996. In August 1998, we purchased
Beckley-Cardy, our largest traditional and specialty school supply competitor.
After giving pro forma effect to the acquisitions that we made during the
period, our revenues for the twelve months ended January 23, 1999 were $606.5
million and our operating income before non-recurring acquisition and
restructuring costs was $40.2 million, which represented compound annual
increases of 48.9% and 70.7%, respectively, compared to our historical results
for the year ended December 31, 1994.

Our "top down" marketing approach targets school administrators at the
state, regional and local levels using our 250 sales representatives and our
School Specialty and Beckley-Cardy general supply and furniture catalogs. Our
"bottom up" approach seeks to reach individual teachers and curriculum
specialists primarily through the mailing of our ClassroomDirect.com general
supply catalog (previously known as Re-Print) and our seven different specialty
direct catalogs. During 1998, we mailed over 10.2 million catalogs to more than
three million teachers and curriculum specialists. Approximately 100 employees
assist in the sale, marketing and merchandising of our specialty direct
products. We are also exploring various ways in which we can use the Internet to
market and sell our products. As the first stage of our Internet initiative, we
recently opened a fully integrated e-commerce website under the name
"ClassroomDirect.com" which offers over 13,000 items for sale. The second stage
of our Internet initiative, which we expect to launch in May 1999, is an
education portal in the form of an education mall which will offer our products
for sale and also provide a community forum and content aimed at educators.

We sell general school supplies, such as classroom and art supplies,
instructional materials, furniture and equipment. We also sell supplies and
furniture for specialized educational disciplines, including the following:

<TABLE>
<CAPTION>
BRAND PRODUCTS
----- --------
<S> <C>
Childcraft.......... Early childhood
Sax Arts and
Crafts............ Art supplies
Frey Scientific..... Science
Sportime............ Physical education
Education Access.... Educational software
Brodhead Garrett.... Industrial arts
Gresswell........... Library
Hammond & Stephens... School forms
</TABLE>

School Specialty was incorporated as a wholly owned subsidiary by U.S.
Office Products in Delaware in February 1998 to hold its Educational Supplies
and Products
3
<PAGE> 6

Division. On June 9, 1998, U.S. Office Products distributed all of the shares of
School Specialty to its shareholders. At the same time as this distribution,
School Specialty sold 2,375,000 shares of Common Stock in an initial public
offering and a concurrent offering to several of its officers and directors. Our
principal executive offices are located at 1000 North Bluemound Drive, Appleton,
Wisconsin 54914. Our telephone number is (920) 734-2756.

INDUSTRY TRENDS

The National School Supply Equipment Association estimates that annual
sales of non-textbook educational supplies and equipment to the school supply
market are approximately $6.1 billion. Of this amount, over $3.6 billion is sold
through institutional channels and the remaining $2.5 billion is sold through
retail channels. We estimate that there are over 3,400 marketers of non-
textbook school supplies and equipment, the majority of which are family or
employee owned businesses that operate in a single geographic region and have
annual revenues under $20 million. We believe the increasing demand for single
source suppliers, prompt order fulfillment and competitive prices, and the
related need for suppliers to invest in automated inventory and electronic
ordering systems, is accelerating the trend toward consolidation in our
industry. As the largest company in our industry with annual revenues which we
believe are three times greater than the next largest industry competitor, we
are well positioned to capitalize on this consolidation. Even as the industry
leader, our market share of the $6.1 billion non-textbook school supply and
equipment market is less than 10%, creating substantial growth opportunities.

The demand for school supplies is driven primarily by the level of the
student population and, to a lesser extent, expenditures per student. Student
population is largely a function of demographics, while expenditures per student
are also affected by government budgets and the prevailing political and social
attitudes towards education. The U.S. Department of Education estimates that
kindergarten through twelfth grade student enrollment in public and private
schools reached a record level of 52.7 million students in 1998 and projects
that it will continue to grow to 54.5 million by the year 2006. The U.S.
Department of Education also projects that expenditures per student in public
elementary and secondary schools will continue to rise through the year 2006. We
believe that the current political and social environment is favorable for
education spending.

KEY STRENGTHS

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

-- LEADING MARKET POSITION. We believe our annual revenues are three
times greater than those of our next largest industry competitor and
that our large size and brand recognition have resulted in significant
buying power, economies of scale and customer loyalty.

-- BROAD PRODUCT LINE. With over 60,000 items ranging from classroom
supplies and furniture to playground equipment, we provide customers
with one source for virtually all of their non-textbook school supply
and furniture needs.

-- INNOVATIVE TWO-PRONGED MARKETING APPROACH. By marketing our products
both to school administrators and to individual teachers and
curriculum specialists, we believe we market to all of the prospective
purchasers in the school system in an efficient and profitable manner.

-- STABLE INDUSTRY. Because the demand for educational supplies is
primarily driven by demographics and government spending, we believe
that our industry is less exposed to economic cycles than many others.

-- ABILITY TO COMPLETE AND INTEGRATE ACQUISITIONS. We have successfully
completed the acquisition of 23 companies since 1991, including 18
since May 1996. We believe that we can rapidly improve the revenues
and
4
<PAGE> 7

gross and operating margins of the businesses we acquire by
eliminating redundant expenses, leveraging overhead costs, increasing
our purchasing power and cross merchandising their specialty products
to our general supply customers (which we sometimes refer to as our
"traditional" customers).

-- USE OF TECHNOLOGY. We believe that our use of information technology
systems allows us to turn 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 campaigns.

-- EXPERIENCED AND INCENTIVISED MANAGEMENT. Our management team provides
depth and continuity of experience. Management's interests are aligned
with those of our stockholders. Management currently owns
approximately 7.6% of our shares of Common Stock on a fully-diluted
basis and purchased approximately 1.7% of the currently outstanding
shares at the same time as our initial public offering in June 1998.

GROWTH STRATEGY

We use the following strategies to grow and enhance our position as the
leading marketer of non-textbook educational supplies and furniture:

-- INCREASE SALES OF SPECIALTY AND PROPRIETARY PRODUCTS. We believe we
can increase our margins by selling more specialty direct products and
products for which we are the only supplier. We believe that specialty
direct products accounted for approximately 42% of our revenues on a
pro forma basis for the twelve months ended January 23, 1999, compared
to approximately 20% on an historical basis for the year ended
December 31, 1994.

-- EXPAND EXISTING TRADITIONAL BUSINESS. We believe that we can also
increase the revenues of our traditional business by adding sales
representatives in geographic markets in which we are underrepresented
and by cross merchandising our specialty products to our traditional
customers.

-- IMPROVE PROFITABILITY. We improved our operating margin (as measured
by our operating income before non-recurring acquisition and
restructuring costs divided by our revenues) from 3.8% in 1994 on an
historical basis to 6.6% on a pro forma basis for the twelve months
ended January 23, 1999. We believe that we can further improve our
operating margins by eliminating redundant expenses of acquired
businesses, leveraging our overhead costs, increasing our purchasing
power and improving the efficiency of our warehousing and
distribution.

-- PURSUE INTERNET INITIATIVE. Because more schools and teachers are
connecting to the Internet, we intend to aggressively pursue sales
opportunities through this rapidly growing channel. By establishing an
early presence on the Internet, we believe we can gain a significant
competitive advantage and valuable brand recognition. Our goal is to
become the leading marketer of school supplies and furniture over the
Internet. This may also permit us to expand our customer base over
time to include individuals and other non-traditional customers.

5
<PAGE> 8

THE OFFERING

<TABLE>
<S> <C>
Shares offered by School Specialty.... 3,000,000
Shares outstanding after the
offering............................ 17,578,925(1)
Use of proceeds....................... To repay a portion of the indebtedness
outstanding under our Senior Credit
Facility which was incurred in
connection with three recent
acquisitions. After such repayment, we
may reborrow under the Senior Credit
Facility for general corporate
purposes including working capital,
and for acquisitions.
Nasdaq National Market symbol......... SCHS
</TABLE>

- ---------------
(1) Based on the number of shares outstanding as of February 1, 1999. Excludes
2,319,313 shares of Common Stock issuable upon exercise of outstanding
options granted under our 1998 Stock Incentive Plan.

6
<PAGE> 9

SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA

The following tables present certain historical and pro forma financial
data as of and for the periods indicated. This information should be read
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations," our consolidated financial statements and related notes
and our pro forma combined financial statements and related notes, included
elsewhere in this Prospectus.

SUMMARY HISTORICAL FINANCIAL DATA

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
HISTORICAL(1)
-----------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED FOUR
DECEMBER 31, MONTHS FISCAL YEAR ENDED NINE MONTHS ENDED TWELVE MONTHS
------------------- ENDED --------------------- ------------------------- ENDED
APRIL 30, APRIL 26, APRIL 25, JANUARY 24, JANUARY 23, JANUARY 23,
1994(2) 1995(2) 1996(2) 1997(2) 1998(2) 1998(2) 1999 1999(3)
-------- -------- --------- --------- --------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.................. $119,510 $150,482 $28,616 $191,746 $310,455 $247,880 $424,332 $486,907
Cost of revenues.......... 82,951 98,233 18,591 126,862 202,870 164,105 281,436 320,201
-------- -------- ------- -------- -------- -------- -------- --------
Gross profit.............. $ 36,559 $ 52,249 $10,025 $ 64,884 $107,585 $ 83,775 $142,896 $166,706
Selling, general and
administrative
expenses................. 32,080 47,393 11,917 53,177 87,846 63,395 108,005 132,456
Non-recurring acquisition
costs.................... -- -- 1,122 1,792 -- -- -- --
Restructuring costs....... -- 2,532 -- 194 3,491 -- 5,274 8,765
-------- -------- ------- -------- -------- -------- -------- --------
Operating income (loss)... $ 4,479 $ 2,324 $(3,014) $ 9,721 $ 16,248 $ 20,380 $ 29,617 $ 25,485
Interest expense.......... 3,007 5,536 1,461 4,197 5,505 4,100 8,942 10,347
Interest income........... -- -- (6) -- (132) (109) (114) (137)
Other (income) expense.... (86) (18) 67 (196) 156 441 -- (285)
-------- -------- ------- -------- -------- -------- -------- --------
Income (loss) before
provision for (benefit
from) income taxes....... $ 1,558 $ (3,194) $(4,536) $ 5,720 $ 10,719 $ 15,948 $ 20,789 $ 15,560
Provision for (benefit
from) income taxes(4).... 218 173 139 (2,412) 5,480 7,113 10,094 8,461
-------- -------- ------- -------- -------- -------- -------- --------
Net income (loss)......... $ 1,340 $ (3,367) $(4,675) $ 8,132 $ 5,239 $ 8,835 $ 10,695 $ 7,099
======== ======== ======= ======== ======== ======== ======== ========
Net income (loss) per
share:
Basic.................... $ 0.26 $ (0.51) $ (0.54) $ 0.81 $ 0.40 $ 0.69 $ 0.73 $ 0.48
Diluted.................. 0.26 (0.50) (0.53) 0.80 0.39 0.68 0.73 0.48
Weighted average shares
outstanding:
Basic.................... 5,062 6,562 8,611 10,003 13,284 12,751 14,625 14,714
Diluted.................. 5,078 6,669 8,789 10,196 13,547 13,020 14,665 14,744
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------ APRIL 30, APRIL 26, APRIL 25, JANUARY 23,
1994 1995 1996 1997 1998 1999
------- ------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).................. $ 3,512 $(1,052) $(3,663) $14,491 $ 47,791 $ 90,826
Total assets............................... 44,267 54,040 54,573 87,685 223,729 378,513
Long-term debt............................. 11,675 15,294 15,031 33,792 63,014 162,199
Total debt................................. 32,276 39,783 40,918 60,746 83,302 172,513
Stockholders' (deficit) equity............. 1,827 (620) (4,267) 16,329 106,466 159,067
</TABLE>

7
<PAGE> 10

SUMMARY PRO FORMA FINANCIAL DATA

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA COMBINED(6)
-----------------------------------------------------
TWELVE
FISCAL YEAR NINE MONTHS ENDED MONTHS
ENDED ------------------------- ENDED
APRIL 25, JANUARY 24, JANUARY 23, JANUARY 23,
1998(2) 1998(2) 1999 1999(3)
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Revenues............. $597,285 $496,941 $506,180 $606,524
Cost of revenues..... 389,818 327,174 330,786 393,430
-------- -------- -------- --------
Gross profit......... $207,467 $169,767 $175,394 $213,094
Selling, general and
administrative
expenses............ 175,403 135,598 133,046 172,851
Restructuring
costs............... 4,689 1,198 5,401 8,892
-------- -------- -------- --------
Operating income..... $ 27,375 $ 32,971 $ 36,947 $ 31,351
Interest expense..... 17,000 13,500 13,500 17,000
Other expense........ 193 536 420 77
-------- -------- -------- --------
Income before
provision for income
taxes............... $ 10,182 $ 18,935 $ 23,027 $ 14,274
Provision for income
taxes............... 5,906 10,982 11,283 6,207
-------- -------- -------- --------
Net income........... $ 4,276 $ 7,953 $ 11,744 $ 8,067
======== ======== ======== ========
Net income per
share(5):
Basic............... $ 0.27 $ 0.53 $ 0.78 $ 0.52
Diluted............. 0.27 0.52 0.78 0.52
Weighted average
shares
outstanding(5):
Basic............... 15,659 15,126 15,025 15,608
Diluted............. 15,922 15,395 15,065 15,638

<CAPTION>
PRO FORMA AS ADJUSTED(6)
-----------------------------------------------------
TWELVE
FISCAL YEAR NINE MONTHS ENDED MONTHS
ENDED ------------------------- ENDED
APRIL 25, JANUARY 24, JANUARY 23, JANUARY 23,
1998(2) 1998(2) 1999 1999(3)
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Revenues............. $597,285 $496,941 $506,180 $606,524
Cost of revenues..... 389,818 327,174 330,786 393,430
-------- -------- -------- --------
Gross profit......... $207,467 $169,767 $175,394 $213,094
Selling, general and
administrative
expenses............ 175,403 135,598 133,046 172,851
Restructuring
costs............... 4,689 1,198 5,401 8,892
-------- -------- -------- --------
Operating income..... $ 27,375 $ 32,971 $ 36,947 $ 31,351
Interest expense..... 12,038 9,779 9,779 12,038
Other expense........ 193 536 420 77
-------- -------- -------- --------
Income before
provision for income
taxes............... $ 15,144 $ 22,656 $ 26,748 $ 19,236
Provision for income
taxes............... 7,892 12,470 12,771 8,193
-------- -------- -------- --------
Net income........... $ 7,252 $ 10,186 $ 13,977 $ 11,043
======== ======== ======== ========
Net income per
share(5):
Basic............... $ 0.39 $ 0.56 $ 0.78 $ 0.59
Diluted............. 0.38 0.55 0.77 0.59
Weighted average
shares
outstanding(5):
Basic............... 18,659 18,126 18,025 18,608
Diluted............. 18,922 18,395 18,065 18,638
</TABLE>

<TABLE>
<CAPTION>
JANUARY 23, 1999(7)
------------------------
PRO FORMA PRO FORMA
COMBINED AS ADJUSTED
--------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 99,339 $ 99,339
Total assets................................................ 403,920 403,920
Long-term debt.............................................. 185,268 123,248
Total debt.................................................. 195,582 133,562
Stockholders' equity........................................ 159,067 221,087
</TABLE>

8
<PAGE> 11

- ---------------

(1) The historical financial information of School Specialty, Inc., a Wisconsin
corporation, and The Re-Print Corp., both of which were acquired by U.S.
Office Products in business combinations accounted for under the
pooling-of-interests method in May 1996 and July 1996, respectively, have
been combined on a historical cost basis in accordance with generally
accepted accounting principles ("GAAP") to present this financial data as
if the two companies had always been members of the same operating group.
All business acquisitions since July 1996 have been accounted for under the
purchase method. The financial information of the businesses acquired in
business combinations accounted for under the purchase method is included
from the dates of their respective acquisitions.

(2) Certain reclassifications have been made to the historical and pro forma
financial data for the fiscal years ended December 31, 1994 and 1995, the
four months ended April 30, 1996, the fiscal years ended April 26, 1997 and
April 25, 1998 and the nine months ended January 24, 1998 to conform with
the fiscal 1999 presentation. These reclassifications had no effect on net
income or net income per share.

(3) The results for the historical and pro forma twelve months ended January 23,
1999 have been calculated based upon the historical and pro forma results,
respectively, for the fiscal year ended April 25, 1998 less the historical
and pro forma results, respectively, for the nine months ended January 24,
1998 plus the historical and pro forma results, respectively, for the nine
months ended January 23, 1999.

(4) Results for the fiscal year ended April 26, 1997 include a benefit from
income taxes of $2.4 million primarily arising from the reversal of a $5.3
million valuation allowance in the quarter ended April 26, 1997. The
valuation allowance had been established in 1995 to offset the tax benefit
from net operating loss carryforwards included in our deferred tax assets,
because at the time it was not likely that such tax benefit would be
realized. The valuation allowance was reversed subsequent to our being
acquired by U.S. Office Products, because it was deemed "more likely than
not," based on improved results, that such tax benefit would be realized.

(5) For calculation of the pro forma combined and pro forma as adjusted weighted
average shares outstanding, see Note (j) and Note (k), respectively, of
Notes to Pro Forma Combined Financial Statements included herein.

(6) The pro forma combined financial data give effect, as applicable, to all
acquisitions completed through February 9, 1999, the spin-off and the
refinancing of all amounts payable to U.S. Office Products in connection
with the spin-off, the June 1998 initial public offering and concurrent
offering to certain officers and directors, as if all such transactions had
occurred at the beginning of the periods presented. The pro forma as
adjusted financial data also gives effect to the Common Stock offering, as
if such transaction had occurred at the beginning of the periods presented.
The pro forma statement of income data are not necessarily indicative of
the operating results that would have been achieved had these events
actually occurred on such dates and should not be construed as
representative of future operating results.

(7) The pro forma combined balance sheet data give effect to the purchase
acquisition of Sportime, the only acquisition completed subsequent to
January 23, 1999, as if it had occurred on January 23, 1999. This pro forma
balance sheet data is then adjusted, as indicated, to reflect the Common
Stock offering as if it had occurred on January 23, 1999. The pro forma
balance sheet data and the adjustments to that data are not necessarily
indicative of the financial position that would have been achieved had
these events actually occurred on such date and should not be construed as
representative of future financial position.

9
<PAGE> 12

RISK FACTORS

You should carefully consider the following risk factors and the other
information in this Prospectus before deciding to purchase shares of our Common
Stock.

WE HAVE A POTENTIAL TAX LIABILITY FROM SPIN-OFFS

We became a public company on June 9, 1998 when U.S. Office Products
distributed all of our shares and the shares of three other companies to its
shareholders and we sold additional shares of our stock in a public offering.
These distributions (known as the "spin-offs") were intended to be tax-free to
both U.S. Office Products and its shareholders. As part of the spin-offs, we and
the other three companies whose shares were distributed each agreed with U.S.
Office Products that if any of us took any action or failed to act in a way that
materially caused the distributions to be taxable, then U.S. Office Products
could require any of us to pay to it the full amount of the tax losses it
suffered as a result of the distributions. We and the three other spin-off
companies also agreed that if the distributions became taxable for any other
reason, we would each pay to U.S. Office Products a portion of its tax losses
based on the relative aggregate value of each company's common stock immediately
after the distributions. We estimate that our portion of any such tax losses
under this agreement would be approximately 14.4%. We also agreed with the other
three spin-off companies that if one or more of us materially caused the
distributions to be taxable and any of the other companies were required to pay
tax losses under the agreement to U.S. Office Products, then the company or
companies that materially caused the distributions to be taxable would reimburse
the other companies for such payments. As a result of these agreements, we could
be required to pay:

-- all of the tax losses of U.S. Office Products if we cause the
distributions to be taxable,

-- our portion of the tax losses of U.S. Office Products even if neither
we nor any of the other three companies cause the distributions to be
taxable, or

-- all of the tax losses of U.S. Office Products even if we did not cause
the distributions to be taxable and one or more of the other companies
did (while such other companies would be required to reimburse us for
such payment, we cannot be sure that we will receive such
reimbursement).

WE ARE EXPOSED TO RISKS RELATED TO OTHER LIABILITIES OF U.S. OFFICE PRODUCTS

As part of the distributions, we and the other three spin-off companies
each agreed with U.S. Office Products to pay a portion of the securities law and
general liabilities of U.S. Office Products arising prior to the distributions
and, if any of the spin-off companies fails to pay its portion, to pay a portion
of the unpaid amount. These shared liabilities do not include any liability that
relates specifically to a particular spin-off company or to the continuing
businesses of U.S. Office Products after the distributions. The portion of the
shared liabilities payable by each spin-off company is based on the average of
each company's revenues for fiscal 1998 relative to those of U.S. Office
Products and each company's operating income for fiscal 1998 relative to that of
U.S. Office Products. We estimate that our portion of any such liabilities under
this agreement would be approximately 9.8%, but the maximum aggregate amount we
can be required to pay for all shared liabilities is limited by the agreement to
$1.75 million (including as a result of defaults by the other spin-off
companies). U.S. Office Products has been named as a defendant in various class
action lawsuits relating to the distributions that allege, among other things,
violations of the federal securities laws. As a result of these agreements, we
may be required to pay up to $1.75 million to U.S. Office Products for shared
liabilities even though they are unrelated to our business and operations, we
have no control over such liabilities and one or more of the other spin-off
companies may be primarily responsible for such liabilities.

10
<PAGE> 13

WE HAVE A LIMITED INDEPENDENT OPERATING HISTORY

Prior to the spin-off in June 1998, we operated as a wholly owned
subsidiary of U.S. Office Products and many of our general, administrative and
financial functions (including legal, accounting, purchasing, management
information services and borrowings) were handled by U.S. Office Products. Since
the spin-off, we have operated independently of U.S. Office Products and have
been independently responsible for managing and financing all aspects of our
business and operations. Our expenses are likely to be higher than when we were
a subsidiary of U.S. Office Products and we may experience difficulties with
respect to general, administrative and financial functions that we did not
experience as part of U.S. Office Products. Because most of the financial
information included in this Prospectus relates to periods during which we were
a subsidiary of U.S. Office Products, it does not necessarily reflect what our
results of operations and financial condition would have been if we were
independent during those periods and it may not be a good indication of what our
future results of operations and financial condition will be.

WE HAVE EXPERIENCED RAPID GROWTH AND DEPEND UPON ACQUISITIONS FOR FUTURE GROWTH

Our business has grown significantly through acquisitions in recent years.
Since 1991, we have acquired 17 regional marketers of general educational
supplies and six specialty direct school supply companies. All of our specialty
direct acquisitions and 12 of our regional marketer acquisitions have occurred
since June 1996. Future growth in our revenues and earnings depends
substantially on our ability to continue to acquire and successfully integrate
and operate school supply businesses. We cannot guarantee that we will be able
to identify and acquire businesses at all or on reasonable terms. In addition,
we cannot be sure that we will be able to operate the businesses that we acquire
profitably or that our management and financial controls, personnel, computer
systems and other corporate support systems will be adequate to manage the
increased size and scope of our operations as a result of acquisitions. Managing
and integrating acquired businesses may result in substantial costs, delays or
other operating or financial problems that could materially and adversely affect
our financial condition and results of operations. These include:

-- the diversion of management's attention and other resources away from
our existing businesses,

-- significant charges and expenses relating to employee severance,
restructuring and transaction costs and other unexpected events or
liabilities,

-- the inability to retain, hire or train qualified personnel for the
acquired businesses, and

-- the amortization of goodwill and other acquired intangible assets.

We intend to pay for acquisitions in whole or in part using our shares, and
in some cases this may dilute our earnings per share. Our ability and
willingness to use our shares will depend upon their market price and the
willingness of sellers to accept our shares. In addition, our ability to issue
shares may be limited by Section 355(e) of the Internal Revenue Code of 1986.
Under that Section, U.S. Office Products will incur tax liability for the
distribution of our shares if 50% or more, by vote or value, of the capital
stock of either U.S. Office Products or School Specialty is acquired by one or
more persons acting pursuant to a plan or series of related transactions that
includes the spin-off. There is a presumption that any acquisition occurring
within two years after the spin-off is pursuant to a plan that includes the
spin-off. However, the presumption may be overcome by establishing that the
spin-off and such acquisition are not part of a plan or series of related
transactions. As noted above, we will be liable for all the tax liabilities of
U.S. Office Products if our actions cause the spin-off to be taxable and will be
liable for all or a portion of such liabilities even if our actions did not
cause the spin-off to be taxable.

11
<PAGE> 14

WE ARE UNABLE TO USE THE POOLING-OF-INTERESTS METHOD OF ACCOUNTING; WE HAVE A
MATERIAL AMOUNT OF GOODWILL

Under generally accepted accounting principles, we must be independent for
at least two years before we can use the pooling-of-interests method of
accounting for share acquisitions, which would avoid the creation and subsequent
amortization of goodwill. Because we were a wholly owned subsidiary of U.S.
Office Products until the completion of the spin-off on June 9, 1998, we will
not be eligible to use pooling-of-interest accounting until June 9, 2000. We
must use purchase accounting for any acquisitions prior to that date, which may
result in the creation of goodwill.

Approximately $197.3 million, or 48.9%, of our pro forma total assets as of
January 23, 1999 represents intangible assets, the significant majority of which
is goodwill. Goodwill is the amount by which the costs of an acquisition
accounted for using the purchase method exceeds the fair value of the net assets
we acquire. We are required to record goodwill as an intangible asset on our
balance sheet and to amortize it over a period of years. We generally amortize
goodwill for each acquisition on a straight line method over a period of 40
years, which means that in each year during the 40-year period 1/40(th) of the
goodwill is taken off our balance sheet and recorded in our income statement as
a non-cash expense (which reduces our net income). Even though it reduces our
net income for accounting purposes, amortization of goodwill may not be
deductible for tax purposes. In addition, we are required to periodically
evaluate whether we can recover our remaining goodwill from the undiscounted
future cash flows that we expect to receive from the operations of the acquired
companies. If these undiscounted future cash flows are less than the carrying
value of the associated goodwill, the goodwill is impaired and we must reduce
the carrying value of the goodwill to equal the undiscounted future cash flows
and take the amount of the reduction as a charge against our income. Reductions
in our net income caused by the amortization or write down of goodwill could
materially adversely affect our results of operations and financial condition
and the market price of our Common Stock.

OUR BUSINESS DEPENDS ON GROWTH OF STUDENT POPULATION AND SCHOOL EXPENDITURES

Our growth strategy and profitability also depend on growth in the student
population and expenditures per student in public and private elementary and
secondary schools. The level of student enrollment is largely a function of
demographics, while expenditures per student are also affected by government
budgets and the prevailing political and social attitudes towards education. Any
significant and sustained decline in student enrollment and/or expenditures per
student could have a material adverse effect on our business, financial
condition and results of operations.

OUR BUSINESS IS HIGHLY SEASONAL

Our educational supply businesses are highly seasonal. Because most of our
customers want their school supplies delivered before or shortly after the
commencement of the school year in September, we make most of our sales from May
to October. As a result, we usually earn more than 100% of our annual net income
in the first six months of our fiscal year and operate at a loss in our third
fiscal quarter. This seasonality causes our operating results to vary
considerably from quarter to quarter and these fluctuations could adversely
affect the market price of our Common Stock.

WE DEPEND ON KEY SUPPLIERS AND SERVICE PROVIDERS

We depend upon a limited number of suppliers for some of our products,
especially furniture. We also depend upon a limited number of service providers,
including United Parcel Service, for the delivery of our products. If these
suppliers or service providers are unable to provide the products or services
that we require or materially increase their costs (especially during our peak
season of June through September), this could impair our ability to deliver our
products on a timely and profitable basis and could have a material adverse
effect on our
12
<PAGE> 15

business, financial condition and results of operations. We were, for example,
adversely affected by the United Parcel Service strike during August 1997 due to
the perception that we were unable to ship products. As we seek to reduce the
number of our suppliers and to minimize duplicative lines as part of our
business strategy, we are likely to increase our dependence on remaining
vendors.

WE RELY ON KEY PERSONNEL

Our business depends to a large extent on the abilities and continued
efforts of current executive officers and senior management, including Daniel P.
Spalding, our Chief Executive Officer. We are also likely to depend heavily on
the executive officers and senior management of businesses that we acquire in
the future. If any of these people become unable or unwilling to continue in his
or her present role, or if we are unable to attract and retain other qualified
employees, our business could be adversely affected. Although we have employment
contracts with some executive officers, we do not have employment agreements
with most of our executive officers and senior management. We do not have and do
not intend to obtain key man life insurance covering any of our executive
officers or other members of senior management.

OUR BUSINESS IS HIGHLY COMPETITIVE

The market for school supplies is highly competitive and fragmented. We
estimate that over 3,400 companies market educational materials to schools for
pre-kindergarten through twelfth grade as a primary focus of their business. We
also face increasing competition from alternate channel marketers, including
superstores and office product contract stationers, that have not traditionally
focused on marketing school supplies. These competitors are likely to continue
to expand their product lines and interest in school supplies. Some of these
competitors have greater financial resources and buying power than we do. We
believe that the educational supplies market will consolidate over the next
several years, which is likely to increase competition in our markets and in our
search for attractive acquisition candidates.

WE DEPEND ON OUR SYSTEMS; OUR YEAR 2000 ISSUES

We believe that one of our competitive advantages is our information
systems, including our proprietary PC-based customer Order Management System. We
have integrated the operations of almost all of our divisions and subsidiaries
and their information systems are linked to host systems located at our
headquarters in Appleton, Wisconsin and at two other locations. If any of these
links are disrupted or become unavailable, this could materially and adversely
affect our business, results of operations and financial condition.

Our Sax Arts and Crafts, Gresswell, Hammond & Stephens and Sportime
businesses currently use predecessor information systems. With the exception of
Gresswell, we intend to convert the information systems of these acquired
businesses to one of our host systems as soon as practicable. However, none of
these businesses has a backup computer system or backup extra communication
lines. Even though we have taken precautions to protect ourselves from events
that could interrupt the operations of these businesses and intend to do so for
other businesses we acquire in the future, we cannot be sure that a fire, flood
or other natural disaster affecting their systems would not disable the system
or prevent the system from communicating with our other businesses. The
occurrence of any of these events could have a material adverse effect on our
results of operations and financial condition.

company wide plan to identify, evaluate and address Year 2000 issues. Although
we expect that most of our mission critical systems, network elements and
products will be verified for Year 2000 compliance by May 1999, our ability to
meet this target is dependent on a variety of factors. In addition, if our
suppliers, service providers and/or customers fail to resolve their Year 2000
issues in an effective and timely manner, our business could be significantly
and adversely affected. We believe that many of our school customers have not
yet addressed or resolved their Year 2000 issues.

WE DO NOT EXPECT TO PAY DIVIDENDS

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
from time to time by the financial covenants contained in our credit agreements
and debt instruments. Our current Senior Credit Facility contains restrictions
on, and in some circumstances may prevent, our payment of dividends.

WE ARE HIGHLY LEVERAGED

As of January 23, 1999, we had $195.6 million of debt outstanding on a pro
forma basis. If we had issued the Common Stock in this offering and applied the
proceeds from this offering on that date, our outstanding debt would have been
$133.6 million or approximately 38% of our total capitalization. In addition,
our leverage could increase over time. Our Senior Credit Facility permits us to
incur additional debt under certain circumstances and we expect to reborrow
under our Senior Credit Facility for general corporate purposes, including
working capital and for acquisitions.

Our ability to meet our debt service obligations depends on our future
performance. Our future performance is influenced by general economic conditions
and by financial, business and other factors affecting our operations, many of
which are beyond our control. If we are unable to service our debt, we may have
to:

-- delay our acquisition program,

-- sell our equity securities,

-- sell our assets, or

-- restructure and refinance our debt.

We cannot give you any assurance that, if we are unable to service our
debt, we will be able to sell our equity securities, sell assets or restructure
and refinance our debt. Our substantial debt could have important consequences
to you. For example, it could:

-- make it more difficult for us to obtain additional financing in the
future for our acquisitions and operations,

-- require us to dedicate a substantial portion of our cash flows from
operations to the repayment of our debt and the interest associated
with our debt,

-- limit our operating flexibility due to financial and other restrictive
covenants, including restrictions on incurring additional debt,
creating liens on our property and paying dividends,

-- subject us to risks that interest rates and our interest expense will
increase,

-- place us at a competitive disadvantage compared to our competitors
that have less debt, and

-- make us more vulnerable in the event of a downturn in our business.

14
<PAGE> 17

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This Prospectus contains forward-looking statements that involve risks and
uncertainties. The words "anticipate," "believe," "estimate," "intend," "may,"
"will" and "expect" are intended to identify forward-looking statements. There
are important factors that could cause our actual results, performance or
achievement to differ materially from the results suggested by the
forward-looking statements. Factors discussed under the captions "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" are particularly susceptible to risks
and uncertainties. Such forward-looking statements should, therefore, be
considered in light of various important factors, including those set forth in
this Prospectus and other factors set forth from time to time in our reports and
registration statements filed with the Securities and Exchange Commission (the
"SEC"). You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. We disclaim any intent or
obligation to update forward-looking statements.

USE OF PROCEEDS

We expect to receive approximately $62.0 million ($71.4 million if the
underwriters' over-allotment option is exercised in full) of net proceeds from
this offering (based on an assumed initial public offering price for the Common
Stock of $22.00 per share, which was the last reported sale price for the Common
Stock on the Nasdaq National Market on February 24, 1999, less estimated
offering expenses and underwriters' discounts).

We intend to use the net proceeds from this offering to repay a portion of
our outstanding revolving credit borrowings under our five year secured $350
million Senior Credit Facility. The Senior Credit Facility permits up to $250
million in revolving credit loans which mature on September 30, 2003. As of
January 23, 1999, we had approximately $72.5 million outstanding in revolving
credit loans. The Senior Credit Facility also has a $100 million term loan
payable quarterly over five years commencing in January 1999. The Senior Credit
Facility has a floating rate of interest for borrowings thereunder. As of
January 23, 1999, the effective interest rate on borrowings under our Senior
Credit Facility was approximately 8%. Since the beginning of fiscal 1999, we
borrowed under the Senior Credit Facility to fund three acquisitions and for
seasonal working capital and capital expenditures.

In connection with the Common Stock offering, we intend to amend our Senior
Credit Facility to change certain financial and other covenants. See
"Description of Senior Credit Facility." We intend to reborrow amounts under our
Senior Credit Facility for general corporate purposes including working capital,
and for acquisitions.

15
<PAGE> 18

DIVIDEND POLICY

We currently intend to retain our future earnings, if any, 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 Senior Credit Facility contains restrictions on, and in some
circumstances may prevent, our payment of dividends.

PRICE RANGE OF COMMON STOCK

Our Common Stock has traded on the Nasdaq National Market since June 10,
1998 under the symbol "SCHS." There was no market for the Common Stock prior to
that date. The following table sets forth, for the periods indicated, the high
and low sale prices per share of the Common Stock as reported on the Nasdaq
National Market:

<TABLE>
<CAPTION>
FISCAL QUARTER ENDED HIGH LOW
- -------------------- -------- --------
<S> <C> <C>
July 25, 1998............................................... $17.8750 $14.3750
October 24, 1998............................................ $17.0000 $10.6250
January 23, 1999............................................ $25.0625 $13.8750
April 24, 1999 (through March 19, 1999)..................... $25.8750 $18.5625
</TABLE>

On March 19, 1999, the last reported sale price of the Common Stock on the
Nasdaq National Market was $20.6875 per share. As of February 1, 1999, there
were 3,631 record holders of the Common Stock.

16
<PAGE> 19

CAPITALIZATION

The following table sets forth, as of January 23, 1999, our capitalization
(1) on an historical basis, (2) on a pro forma basis to reflect the one
acquisition we made since January 23, 1999 and (3) on a pro forma basis
described in clause (2) above as adjusted to give effect to the sale of the
Common Stock in this offering and the application of the assumed net proceeds
therefrom as described herein.

<TABLE>
<CAPTION>
JANUARY 23, 1999
----------------------------------
PRO FORMA
PRO FORMA AS
HISTORICAL COMBINED ADJUSTED
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt.......................................... $ 10,314 $ 10,314 $ 10,314
Long-term debt........................................... 162,199 185,268 123,248
-------- -------- --------
Total debt............................................. 172,513 195,582 133,562
Stockholders' equity:
Preferred stock, $0.001 par value (1,000,000 shares
authorized; no shares outstanding).................. -- -- --
Common stock, $0.001 par value (150,000,000 shares
authorized; 14,578,925 shares issued and
outstanding, historical and pro forma; 17,578,925
shares issued and outstanding, pro forma as adjusted
for the Common Stock offering)(1)................... 15 15 18
Additional paid-in capital............................. 146,768 146,768 208,785
Accumulated other comprehensive income................. 6 6 6
Retained earnings...................................... 12,278 12,278 12,278
-------- -------- --------
Total stockholders' equity.......................... 159,067 159,067 221,087
-------- -------- --------
Total capitalization................................ $331,580 $354,649 $354,649
======== ======== ========
</TABLE>

- ---------------

(1) Excludes 2,319,313 shares of Common Stock issuable upon exercise of
outstanding options granted under our 1998 Stock Incentive Plan.

17
<PAGE> 20

SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA

The selected historical financial data set forth below for the fiscal year
ended December 31, 1995, the four months ended April 30, 1996 and the fiscal
years ended April 26, 1997 and April 25, 1998 have been derived from our audited
consolidated financial statements included elsewhere in this Prospectus. The
selected historical financial data for the fiscal year ended December 31, 1994
have been derived from our audited consolidated financial statements which are
not included elsewhere in this Prospectus. The selected historical financial
data for the fiscal year ended December 31, 1993 have been derived from
unaudited consolidated financial statements which are not included elsewhere in
this Prospectus. The selected historical financial data for the nine months
ended January 24, 1998 and January 23, 1999 have been derived from our unaudited
consolidated financial statements that appear elsewhere in this Prospectus.
These unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements and, in the opinion of
management, contain all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the results of operations for the
periods presented. Because of the seasonality of our business, our results of
operations for the first nine months of our fiscal year are not representative
of our results of operations for the entire fiscal year.

The selected pro forma data, which have been derived from our unaudited pro
forma combined financial statements included elsewhere in this Prospectus, give
effect, as applicable, to all acquisitions completed through February 9, 1999,
the spin-off and the refinancing of all amounts payable to U.S. Office Products
in connection with the spin-off, the June 1998 initial public offering and
concurrent offering to certain officers and directors and the Common Stock
offering, as if all such transactions had occurred at the beginning of the
periods presented. The unaudited pro forma combined financial data discussed
herein do not purport to represent the results that we would have obtained had
the transactions which are the subject of the pro forma adjustments occurred at
the beginning of the applicable periods, as assumed, or our future results. See
additional disclosure regarding pro forma results in the Financial Statements
section of this Prospectus.

The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," our consolidated financial statements and related notes and our pro
forma combined financial statements and related notes, included elsewhere in
this Prospectus.

18
<PAGE> 21

SELECTED HISTORICAL FINANCIAL DATA

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
HISTORICAL(1)
------------------------------------------------------------------------------------------------
FOUR
MONTHS FISCAL YEAR ENDED NINE MONTHS ENDED
ENDED --------------------- -------------------------
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------- APRIL 30, APRIL 26, APRIL 25, JANUARY 24, JANUARY 23,
1993(2) 1994(2) 1995(2) 1996(2) 1997(2) 1998(2) 1998(2) 1999
-------- --------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues....................... $76,926 $119,510 $150,482 $28,616 $191,746 $310,455 $247,880 $424,332
Cost of revenues............... 53,760 82,951 98,233 18,591 126,862 202,870 164,105 281,436
------- -------- -------- ------- -------- -------- -------- --------
Gross profit................... $23,166 $ 36,559 $ 52,249 $10,025 $ 64,884 $107,585 $ 83,775 $142,896
Selling, general and
administrative expenses...... 20,814 32,080 47,393 11,917 53,177 87,846 63,395 108,005
Non-recurring acquisition
costs........................ -- -- -- 1,122 1,792 -- -- --
Restructuring costs............ -- -- 2,532 -- 194 3,491 -- 5,274
------- -------- -------- ------- -------- -------- -------- --------
Operating income (loss)........ $ 2,352 $ 4,479 $ 2,324 $(3,014) $ 9,721 $ 16,248 $ 20,380 $ 29,617
Interest expense............... 1,845 3,007 5,536 1,461 4,197 5,505 4,100 8,942
Interest income................ -- -- -- (6) -- (132) (109) (114)
Other (income) expense......... 228 (86) (18) 67 (196) 156 441 --
------- -------- -------- ------- -------- -------- -------- --------
Income (loss) before provision
for (benefit from) income
taxes........................ $ 279 $ 1,558 $ (3,194) $(4,536) $ 5,720 $ 10,719 $ 15,948 $ 20,789
Provision for (benefit from)
income taxes(3).............. 199 218 173 139 (2,412) 5,480 7,113 10,094
------- -------- -------- ------- -------- -------- -------- --------
Net income (loss).............. $ 80 $ 1,340 $ (3,367) $(4,675) $ 8,132 $ 5,239 $ 8,835 $ 10,695
======= ======== ======== ======= ======== ======== ======== ========
Net income (loss) per share:
Basic........................ $ 0.02 $ 0.26 $ (0.51) $ (0.54) $ 0.81 $ 0.40 $ 0.69 $ 0.73
Diluted...................... 0.02 0.26 (0.50) (0.53) 0.80 0.39 0.68 0.73
Weighted average shares
outstanding:
Basic........................ 4,918 5,062 6,562 8,611 10,003 13,284 12,751 14,625
Diluted...................... 4,918 5,078 6,669 8,789 10,196 13,547 13,020 14,665
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- APRIL 30, APRIL 26, APRIL 25, JANUARY 23,
1993 1994 1995 1996 1997 1998 1999
------- ------- ------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)..................... $ 1,140 $ 3,512 $(1,052) $(3,663) $14,491 $ 47,791 $ 90,826
Total assets.................................. 23,190 44,267 54,040 54,573 87,685 223,729 378,513
Long-term debt................................ 7,175 11,675 15,294 15,031 33,792 63,014 162,199
Total debt.................................... 16,576 32,276 39,783 40,918 60,746 83,302 172,513
Stockholders' (deficit) equity................ 545 1,827 (620) (4,267) 16,329 106,466 159,067
</TABLE>

19
<PAGE> 22

SELECTED PRO FORMA FINANCIAL DATA

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA COMBINED(5) PRO FORMA AS ADJUSTED(5)
--------------------------------------- ---------------------------------------
FISCAL YEAR NINE MONTHS ENDED FISCAL YEAR NINE MONTHS ENDED
ENDED ------------------------- ENDED -------------------------
APRIL 25, JANUARY 24, JANUARY 23, APRIL 25, JANUARY 24, JANUARY 23,
1998(2) 1998(2) 1999 1998(2) 1998(2) 1999
--------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues...................................... $597,285 $496,941 $506,180 $597,285 $496,941 $506,180
Cost of revenues.............................. 389,818 327,174 330,786 389,818 327,174 330,786
-------- -------- -------- -------- -------- --------
Gross profit.................................. $207,467 $169,767 $175,394 $207,467 $169,767 $175,394
Selling, general and administrative
expenses.................................... 175,403 135,598 133,046 175,403 135,598 133,046
Restructuring costs........................... 4,689 1,198 5,401 4,689 1,198 5,401
-------- -------- -------- -------- -------- --------
Operating income.............................. $ 27,375 $ 32,971 $ 36,947 $ 27,375 $ 32,971 $ 36,947
Interest expense.............................. 17,000 13,500 13,500 12,038 9,779 9,779
Other expense................................. 193 536 420 193 536 420
-------- -------- -------- -------- -------- --------
Income before provision for income taxes...... $ 10,182 $ 18,935 $ 23,027 $ 15,144 $ 22,656 $ 26,748
Provision for income taxes.................... 5,906 10,982 11,283 7,892 12,470 12,771
-------- -------- -------- -------- -------- --------
Net income.................................... $ 4,276 $ 7,953 $ 11,744 $ 7,252 $ 10,186 $ 13,977
======== ======== ======== ======== ======== ========
Net income per share(4):
Basic....................................... $ 0.27 $ 0.53 $ 0.78 $ 0.39 $ 0.56 $ 0.78
Diluted..................................... 0.27 0.52 0.78 0.38 0.55 0.77
Weighted average shares outstanding(4):
Basic....................................... 15,659 15,126 15,025 18,659 18,126 18,025
Diluted..................................... 15,922 15,395 15,065 18,922 18,395 18,065
</TABLE>

<TABLE>
<CAPTION>
JANUARY 23, 1999(6)
---------------------------
PRO FORMA PRO FORMA AS
COMBINED ADJUSTED
--------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 99,339 $ 99,339
Total assets................................................ 403,920 403,920
Long-term debt.............................................. 185,268 123,248
Total debt.................................................. 195,582 133,562
Stockholders' equity........................................ 159,067 221,087
</TABLE>

20
<PAGE> 23

- ---------------

(1) The historical financial information of School Specialty Inc., a Wisconsin
corporation, and the Re-Print Corp., both of which were acquired by U.S.
Office Products in business combinations accounted for under the
pooling-of-interests method in May 1996 and July 1996, respectively, have
been combined on a historical cost basis in accordance with generally
accepted accounting principles ("GAAP") to present this financial data as if
the two companies had always been members of the same operating group. All
business acquisitions since July 1996 have been accounted for under the
purchase method. The financial information of the businesses acquired in
business combinations accounted for under the purchase method is included
from the dates of their respective acquisitions.

(2) Certain reclassifications have been made to the historical and pro forma
financial data for the fiscal years ended December 31, 1993, 1994 and 1995,
the four months ended April 30, 1996, the fiscal years ended April 26, 1997
and April 25, 1998 and the nine months ended January 24, 1998 to conform
with the fiscal 1999 presentation. These reclassifications had no effect on
net income or net income per share.

(3) Results for the fiscal year ended April 26, 1997 include a benefit from
income taxes of $2.4 million primarily arising from the reversal of a $5.3
million valuation allowance in the quarter ended April 26, 1997. The
valuation allowance had been established in 1995 to offset the tax benefit
from net operating loss carryforwards included in our deferred tax assets,
because at the time it was not likely that such tax benefit would be
realized. The valuation allowance was reversed subsequent to our being
acquired by U.S. Office Products, because it was deemed "more likely than
not," based on improved results, that such tax benefit would be realized.

(4) For calculation of the pro forma combined and pro forma as adjusted weighted
average shares outstanding, see Note (j) and Note (k), respectively, of
Notes to Pro Forma Combined Financial Statements included herein.

(5) The pro forma combined financial data give effect, as applicable, to all
acquisitions completed through February 9, 1999, the spin-off and the
refinancing of all amounts payable to U.S. Office Products in connection
with the spin-off, the June 1998 initial public offering and concurrent
offering to certain officers and directors, as if all such transactions had
occurred at the beginning of the periods presented. The pro forma as
adjusted financial data also gives effect to the Common Stock offering, as
if such transaction had occurred at the beginning of the periods presented.
The pro forma statement of income data are not necessarily indicative of the
operating results that would have been achieved had these events actually
occurred on such dates and should not be construed as representative of
future operating results.

(6) The pro forma combined balance sheet data give effect to the purchase
acquisition of Sportime, the only acquisition completed subsequent to
January 23, 1999, as if it had occurred on January 23, 1999. This pro forma
balance sheet data is then adjusted, as indicated, to reflect the Common
Stock offering as if it had occurred on January 23, 1999. The pro forma
balance sheet data and the adjustments to that data are not necessarily
indicative of the financial position that would have been achieved had these
events actually occurred on such date and should not be construed as
representative of future financial position.

21
<PAGE> 24

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

You should read this Management's Discussion and Analysis of Financial
Condition and Results of Operations together with the consolidated financial
statements and related notes and the pro forma combined financial statements and
related notes, included elsewhere in this Prospectus.

OVERVIEW

We have grown significantly in recent years both through acquisitions and
internal growth. In order to expand our geographic presence and product range,
we have acquired 18 companies since May 1996. In August 1998, we purchased
Beckley-Cardy, our largest traditional and specialty school supply competitor.

Revenues have increased from $119.5 million for the fiscal year ended
December 31, 1994 to $310.5 million for the fiscal year ended April 25, 1998 and
$486.9 million for the twelve months ended January 23, 1999. This increase
resulted primarily from 18 acquisitions, 15 of which occurred during fiscal 1997
and fiscal 1998, as well as internally generated growth. After giving pro forma
effect to the acquisitions that we made during the period, our revenues for the
twelve months ended January 23, 1999 were $606.5 million and our operating
income before non-recurring acquisition and restructuring costs was $40.2
million, which represented compound annual increases of 48.9% and 70.7%,
respectively, compared to our historical results for the year ended December 31,
1994. While acquisitions have the effect of increasing overall revenues, there
may be short-term reductions in the revenues of the acquired businesses due to
rationalization of product line and sales force integrations and reductions.

Our gross profit margin has improved in recent years primarily due to
acquisitions. We have acquired many specialty direct businesses, which tend to
have higher gross margins than our traditional supply businesses. In addition,
our acquisitions of both specialty direct and traditional supply businesses have
increased our buying power and we have used this to reduce the cost of the
products we purchase. Acquisitions of traditional supply businesses may have a
negative impact on our gross margin, although over time we should benefit from
increased purchasing power leverage. We believe that we can continue to improve
our gross margins by acquiring specialty businesses and by leveraging increased
purchasing power.

Our operating margins have also improved significantly over the last
several years. This improvement reflects our recent acquisitions of specialty
companies which have higher operating margins than our general supply
businesses. In addition, through the integration of acquired businesses (both
specialty and general supply), we have been able to further improve our
operating margins by eliminating redundant expenses, leveraging overhead costs
and improving purchasing power. While we have already achieved significant
operating margin improvements from the acquisitions we have made to date, we
believe there are still opportunities to eliminate redundant expenses. In
addition, because our business is seasonal, the timing of our acquisitions may
affect the comparability of our operating margins in the short term. In
particular, we have historically made many of our acquisitions during our peak
selling period (the first two quarters of our fiscal year) when operating
margins are at their highest. Because they have been accounted for using the
purchase method of accounting, these acquisitions have caused our operating
margins for the year in which

22
<PAGE> 25

the acquisitions occurred to be higher than they would have been if the results
of the acquired businesses had been included for the full year.

The benefit from income taxes in fiscal 1997 of $2.4 million reflects the
reversal of a $5.3 million deferred tax valuation allowance in the fourth
quarter. An effective income tax rate of 49% is reflected in the pro forma
financial statements for the most recent interim period. Our effective tax rate
is higher than the federal statutory tax rate of 35% due primarily to
non-deductible goodwill amortization and state taxes. Our effective tax rate for
future periods may fluctuate based on the size and structure of acquisitions and
the tax deductible nature of acquired goodwill. See "-- Consolidated Historical
Results of Operations."

Our business and working capital needs are highly seasonal with peak sales
levels occurring from May 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 July in anticipation of the peak selling season. 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 six months of
our fiscal year and operate at a loss in our third fiscal quarter.

Until June 9, 2000, we will be limited to using the purchase method of
accounting for acquisitions. Under the purchase method of accounting, the costs
of an acquisition over the fair value of the net assets acquired is goodwill,
which is recorded as an intangible asset on the balance sheet and amortized over
a period of years. We generally amortize goodwill on a straight-line basis over
a period of 40 years. In addition to the purchase price, the costs of an
acquisition generally include expenses relating to the acquisition of the
acquired company, including investment banking, legal and accounting fees and
severance and facility closing costs.

As part of the process of integrating acquisitions, we also incur costs
relating to the restructuring of various aspects of our operations, such as the
consolidation of warehouse facilities, customer service centers and sales
operations. These costs typically include: costs to exit the facility, such as
rent under remaining lease terms, occupancy, relocation costs and facility
restoration; employee costs, such as severance; and asset impairment costs. If
these costs relate solely to the operations of the acquired company and are
anticipated at the time of the acquisition, they are capitalized as part of the
acquisition costs. If these costs relate to our existing operations, even if
they result from an acquisition, such costs are recorded as restructuring
charges in the year they are incurred and have the effect of reducing net income
for that year. We expect to incur restructuring costs from time to time in the
future as we continue to acquire and integrate companies. Although we believe
that the restructuring charges we have taken to date are adequate, we cannot
predict the magnitude or timing of restructuring charges that we may take in the
future.

School Specialty was incorporated as a wholly owned subsidiary by U.S.
Office Products in Delaware in February 1998 to hold its Educational Supplies
and Products Division. School Specialty, Inc., a Wisconsin corporation ("Old
School") formed in October 1959, was acquired by U.S. Office Products in May
1996. The Re-Print Corp., the predecessor to ClassroomDirect.com, LLC, our
wholly owned subsidiary, has been in operation since 1921 and was acquired by
U.S. Office Products in July 1996. Our consolidated financial statements give
retroactive effect to these two business combinations under the
pooling-of-interests method (Old School and The Re-Print Corp. are referred to
as the "Pooled Companies") and include the results of companies acquired in
business combinations accounted for under the purchase method from their
respective dates of acquisition. Prior to their respective dates of acquisition
by U.S. Office Products, the Pooled Companies reported results on years ending
on December 31. Upon acquisition by U.S. Office Products and effective for
fiscal 1997, the Pooled Companies changed their year-ends from

23
<PAGE> 26

December 31 to conform to U.S. Office Products' fiscal year, which ends on the
last Saturday in April. Childcraft, Sax Arts and Crafts and Gresswell were all
acquired by U.S. Office Products in 1997 and have been in operation since 1946,
1945 and 1938, respectively.

RESULTS OF OPERATIONS

The following table sets forth certain information as a percentage of
revenues on an historical basis concerning our results of operations for the
year ended December 31, 1995, the fiscal years ended April 26, 1997 ("fiscal
1997") and April 25, 1998 ("fiscal 1998") and the nine months ended January 24,
1998 ("Interim 1998") and January 23, 1999 ("Interim 1999"), and on a pro forma
basis for fiscal 1998 and for Interim 1998 and Interim 1999, reflecting all
acquisitions completed through February 9, 1999, the spin-off and the
refinancing of all amounts payable to U.S. Office Products in connection with
the spin-off and the June 1998 initial public offering and concurrent offering
to certain officers and directors as if such transactions had occurred on the
first day of the period presented.

<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------------------
FISCAL YEAR FISCAL YEAR ENDED NINE MONTHS ENDED
ENDED --------------------- -------------------------
DECEMBER 31, APRIL 26, APRIL 25, JANUARY 24, JANUARY 23,
1995 1997 1998 1998 1999
------------ --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........... 65.3 66.2 65.3 66.2 66.3
----- ----- ----- ----- -----
Gross profit............. 34.7 33.8 34.7 33.8 33.7
Selling, general and
administrative
expenses................. 31.5 27.7 28.3 25.6 25.5
Non-recurring acquisition
costs.................... -- 0.9 -- -- --
Restructuring costs........ 1.7 0.1 1.1 -- 1.2
----- ----- ----- ----- -----
Operating income......... 1.5 5.1 5.3 8.2 7.0
Interest expense, net...... 3.6 2.2 1.8 1.6 2.1
Other (income) expense..... -- (0.1) 0.1 0.2 --
----- ----- ----- ----- -----
Income (loss) before
provision for income
taxes.................... (2.1) 3.0 3.4 6.4 4.9
Provision for (benefit
from) income taxes....... 0.1 (1.3) 1.8 2.9 2.4
----- ----- ----- ----- -----
Net income (loss).......... (2.2)% 4.3% 1.6% 3.5% 2.5%
===== ===== ===== ===== =====

<CAPTION>
PRO FORMA COMBINED
----------------------------------------
FISCAL YEAR NINE MONTHS ENDED
ENDED -------------------------
APRIL 25, JANUARY 24, JANUARY 23,
1998 1998 1999
--------- ----------- -----------
<S> <C> <C> <C>
Revenues................... 100.0% 100.0% 100.0%
Cost of revenues........... 65.3 65.8 65.3
----- ----- -----
Gross profit............. 34.7 34.2 34.7
Selling, general and
administrative
expenses................. 29.3 27.3 26.3
Non-recurring acquisition
costs.................... -- -- --
Restructuring costs........ 0.8 0.3 1.1
----- ----- -----
Operating income......... 4.6 6.6 7.3
Interest expense, net...... 2.9 2.7 2.7
Other (income) expense..... -- 0.1 0.1
----- ----- -----
Income (loss) before
provision for income
taxes.................... 1.7 3.8 4.5
Provision for (benefit
from) income taxes....... 1.0 2.2 2.2
----- ----- -----
Net income (loss).......... 0.7% 1.6% 2.3%
===== ===== =====
</TABLE>

CONSOLIDATED HISTORICAL RESULTS OF OPERATIONS

NINE MONTHS ENDED JANUARY 23, 1999 COMPARED TO NINE MONTHS ENDED JANUARY 24,
1998

Revenues increased 71.2%, from $247.9 million for Interim 1998 to $424.3
million for Interim 1999. This increase was due primarily to the inclusion in
Interim 1999 of (1) the revenues of two businesses acquired during Interim 1999
from their respective dates of acquisition and (2) all of the Interim 1999
revenues of eight businesses acquired in Interim 1998 (whose revenues were
included in Interim 1998 only from the date of acquisition). Revenues also
increased due to sales to new accounts, increased sales to existing customers
and higher pricing on certain products in response to increased product costs.

Gross profit increased 70.6%, from $83.8 million in Interim 1998 to $142.9
million in Interim 1999 primarily due to the acquisitions referred to above.
Gross margins (gross profit as a percentage of revenues) were essentially flat
at 33.8% for Interim 1998 and 33.7% for Interim 1999. Gross margins were reduced
by the acquisition of Beckley-Cardy in the second quarter of Interim 1999 (which
had a lower gross margin than our existing businesses) and an increase in lower
margin

24
<PAGE> 27

bid revenues in our traditional businesses. These reductions in gross margins
were almost entirely offset by the positive impact of increased sales of higher
margin specialty products and lower product costs due to higher vendor purchase
rebates, which reflected our increased buying power.

Selling, general and administrative expenses (including depreciation and
amortization) increased 70.4%, from $63.4 million in Interim 1998 to $108.0
million in Interim 1999 due primarily to the acquisitions referred to above. As
a percentage of revenues, these expenses were essentially flat at 25.6% for
Interim 1998 and 25.5% for Interim 1999. The decrease in selling, general and
administrative expenses as a percentage of revenues resulting from cost savings
attributable to the integration of companies acquired during fiscal 1998 and the
consolidation of our warehousing under the restructuring plan discussed below
were almost offset by increases attributable to the acquisition of Beckley-Cardy
in the second quarter of Interim 1999 (which had higher selling, general and
administrative expenses as a percentage of revenues than our existing
businesses) and higher depreciation and amortization expenses due to the
acquisitions referred to above.

Restructuring charges during Interim 1999 included (1) a non-cash
restructuring charge of $1.1 million in the first quarter of Interim 1999,
consisting of compensation expense attributed to the U.S. Office Products stock
option tender offer and the sale of shares of Common Stock to certain officers
and directors, net of underwriting discounts and (2) a $4.2 million
restructuring charge in the second quarter of Interim 1999 relating to our plan
to consolidate our existing warehousing, customer service and sales operations
following the acquisition of Beckley-Cardy. Under this restructuring plan, we
intend to reduce our distribution centers from 13 to eight and our customer
service centers from seven to two during the period from October 1998 through
December 1999. The $4.2 million charge consists of $2.1 million for employee
severance and termination benefits, $1.3 million for lease termination and
facility shut-down costs and $0.8 million for write down of fixed assets and
inventories. On an after-tax basis these restructuring charges reduced net
income for Interim 1999 by $3.2 million.

Interest expense, net of interest income, increased 121%, from $4.0
million, or 1.6% of revenues, for Interim 1998 to $8.8 million, or 2.1% of
revenues, for Interim 1999 primarily due to the increase in debt attributable to
the acquisition of the three businesses since January 24, 1998 offset by the
reduction in debt from applying the net proceeds from our initial public
offering of Common Stock and concurrent offering to certain officers and
directors and the forgiveness of debt from U.S. Office Products in connection
with the spin-off.

Provision for income taxes increased 41.9% from $7.1 million for Interim
1998 to $10.1 million for Interim 1999, reflecting effective income tax rates of
49% for Interim 1999 and 45% for Interim 1998. The higher effective tax rate,
compared to the federal statutory rate of 35%, is primarily due to state income
taxes and nondeductible goodwill amortization.

YEAR ENDED APRIL 25, 1998 COMPARED TO YEAR ENDED APRIL 26, 1997

Consolidated revenues increased 61.9%, from $191.7 million in fiscal 1997
to $310.5 million in fiscal 1998. This increase was primarily due to the
inclusion of revenues from the eight companies acquired in business combinations
accounted for under the purchase method during fiscal 1998 (the "Fiscal 1998
Purchased Companies") from their respective dates of acquisition and revenues
from the six companies acquired during fiscal 1997 in business combinations
accounted for under the purchase method (the "Fiscal 1997 Purchased Companies"
and together with the Fiscal 1998 Purchased Companies, the "Purchased
Companies") for the entire period. Revenues also increased due to sales to new
accounts, increased sales to existing customers and higher pricing on certain
products in response to increased product costs. Product cost is the most
significant element in cost of revenues.
25
<PAGE> 28

Inbound freight, occupancy and delivery charges are also included in cost of
revenues.

Gross profit increased 65.8%, from $64.9 million, or 33.8% of revenues, for
fiscal 1997 to $107.6 million, or 34.7% of revenues, for fiscal 1998. The
increase in gross profit as a percentage of revenues was due primarily to an
increase in revenues from higher margin products, primarily as a result of the
purchase acquisitions of three companies selling higher margin specialty product
lines during fiscal 1998, and as a result of improved purchasing power and
rebate programs negotiated with vendors. These factors were partially offset by
an increase in the cost of revenues as a result of the increased freight costs
caused by the United Parcel Service strike in the summer of 1997 and an increase
in the portion of revenues represented by lower margin bid revenues.

Selling, general and administrative expenses include selling expenses (the
most significant component of which is sales wages and commissions), catalog
costs, occupancy costs, delivery costs, general administrative overhead (which
includes information systems and customer service) and accounting, legal, human
resources and purchasing expenses. Selling, general and administrative expenses
(including depreciation and amortization) increased 65%, from $53.2 million, or
27.7% of revenues, for fiscal 1997 to $87.8 million, or 28.3% of revenues, for
fiscal 1998. The increase in selling, general and administrative expenses as a
percentage of revenues was due primarily to the purchase acquisition of three
specialty companies during fiscal 1998, which typically have higher operating
expenses as a percentage of revenue, partially offset by the efficiencies
generated from the elimination of certain redundant administrative functions,
including purchasing, accounting, finance and information systems, of the Fiscal
1997 Purchased Companies and the consolidation of two warehouses into one
regional facility in the Northeastern U.S. during the third quarter of fiscal
1997. We have established a 24-month integration process for acquisitions in
which a transition team is assigned to (1) sell or discontinue incompatible
business units, (2) reduce the number of stock keeping units, (3) eliminate
redundant administrative functions, (4) integrate the acquired entity's
management information systems and (5) improve buying power. However, the length
of time it takes us to fully implement our strategy for assimilating an acquired
company can vary depending on the nature of the company acquired and the season
in which it is acquired.

We use grants of employee stock options to provide an incentive to
employees by increasing their ownership interests in our shares. This helps to
align their interests with the interests of our stockholders. In connection with
the spin-off from U.S. Office Products in June 1998, various replacement options
were issued at the prior exercise price adjusted for the spin-off in accordance
with Accounting Principles Board ("APB") Opinion No. 25. If we had recorded
compensation expense based upon the fair market value of the stock options on
the dates of grant under the methodology prescribed by Statement of Financial
Accounting Standards ("SFAS") No. 123, our net income for the fiscal year ended
April 25, 1998 would have been reduced by approximately $0.8 million or 15.3%.

In the fourth quarter of fiscal 1998, we recorded approximately $2.5
million of non-recurring costs, primarily consisting of a write-down of deferred
catalog costs, employee severance and asset impairment costs, and $1 million of
the transaction costs allocated to us under the distribution agreement entered
into with U.S. Office Products and the other spin-off companies. See
"Business -- Ongoing Spin-Off Obligations." We incurred non-recurring
acquisition costs of $1.8 million in fiscal 1997, in conjunction with the
acquisition of the Pooled Companies. These non-recurring acquisition costs
included accounting, legal, investment-banking fees, real estate and
environmental assessments and appraisals and various regulatory fees. We are
required by GAAP to expense all acquisition costs (both those paid by us and
those paid by the sellers of the acquired companies) related to business
combinations accounted for under the pooling-of-interests method of accounting.
26
<PAGE> 29

In accordance with GAAP, we will be unable to use the pooling-of-interests
method to account for acquisitions for a period of two years from June 9, 1998.
During this period, we will not reflect any non-recurring acquisition costs in
our results of operations, as all costs incurred of this nature would be related
to acquisitions accounted for under the purchase method and would, therefore, be
capitalized as a portion of the purchase consideration. See "Risk Factors -- We
Are Unable to Use the Pooling-of-Interests Method of Accounting; We Have a
Material Amount of Goodwill."

From the time U.S. Office Products acquired the Pooled Companies, we were
allocated interest based upon our average outstanding payable balance with U.S.
Office Products at U.S. Office Products' weighted average interest rate during
such period. Interest expense, net of interest income, increased 28.0%, from
$4.2 million for fiscal 1997 to $5.4 million for fiscal 1998. The increase was
due primarily to higher amounts payable to U.S. Office Products incurred as a
result of the acquisition of the eight companies acquired in fiscal 1998.

Provision for income taxes increased from a tax benefit of $2.4 million for
fiscal 1997 to a tax expense of $5.5 million for fiscal 1998. The high effective
income tax rate of 51.1% for fiscal 1998, compared to the federal statutory rate
of 35%, was primarily due to state income taxes, non-deductible goodwill
amortization and U.S. Office Products share of distribution costs. In 1995, we
recorded a valuation allowance of $5.3 million on a deferred tax asset resulting
from the net operating loss carryforwards created during 1995. The valuation
allowance had been established by one of the Pooled Companies prior to its
acquisition by U.S. Office Products to offset the tax benefit from such loss
carryforwards, because at the time it was not likely that such tax benefit would
be realized. The benefit from income taxes in fiscal 1997 of $2.4 million arose
primarily from the reversal of the $5.3 million deferred tax asset valuation
allowance in the fourth quarter. The valuation allowance was reversed subsequent
to U.S. Office Products acquiring us, because it was deemed "more likely than
not," based on improved results, that the tax benefit from such operating loss
carryforwards would be realized.

YEAR ENDED APRIL 26, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1995

Consolidated revenues increased 27.4%, from $150.5 million in 1995 to
$191.7 million in fiscal 1997. This increase was primarily due to the inclusion,
for fiscal 1997, of revenues from the Fiscal 1997 Purchased Companies from their
respective dates of acquisition, sales to new accounts, increased sales to
existing customers and higher pricing on certain products in response to
increased product costs.

Gross profit increased 24.2%, from $52.2 million, or 34.7% of revenues, in
1995 to $64.9 million, or 33.8% of revenues, in fiscal 1997. The decrease in
gross profit as a percentage of revenues was due primarily to a shift in revenue
mix, resulting from the acquisition of the Fiscal 1997 Purchased Companies,
which traditionally had lower gross profits as a percentage of revenues. This
decrease was partially offset by improved purchasing and rebate programs
negotiated with vendors and our ability to take advantage of term discounts due
to improved cash flows.

Selling, general and administrative expenses increased 12.2%, from $47.4
million, or 31.5% of revenues, in 1995 to $53.2 million, or 27.7% of revenues,
in fiscal 1997. The decrease in selling, general and administrative expenses
(including depreciation and amortization) as a percentage of revenues was due
primarily to the consolidation of two warehouses into one regional facility in
the Northeastern U.S. during the third quarter of fiscal 1997, the elimination
of certain redundant administrative functions of a company acquired during 1995
in a business combination accounted for under the purchase method (the "1995
Purchased Company") and reduced executive compensation expense at one of the
Pooled Companies after being acquired by U.S. Office Products in July 1996.
27
<PAGE> 30

We use grants of employee stock options to provide an incentive to our
employees by increasing their ownership interests in our shares. This helps to
align their interests with the interests of our stockholders. In connection with
the spin-off from U.S. Office Products in June 1998, various replacement options
were issued at their prior exercise price adjusted for the spin-off in
accordance with APB Opinion No. 25. If we had recorded compensation expense
based upon the fair market value of the stock options on the dates of grant
under the methodology prescribed by SFAS No. 123, our income from continuing
operations for the fiscal year ended April 26, 1997 would have been reduced by
approximately $0.7 million or 9.2%.

We incurred non-recurring acquisition costs of $1.8 million in fiscal 1997,
in conjunction with business combinations accounted for under the
pooling-of-interests method. These non-recurring acquisition costs included
accounting, legal, investment-banking fees, real estate and environmental
assessments and appraisals and various regulatory fees.

We incurred restructuring costs of $2.5 million in 1995 and $194,000 in
fiscal 1997. These costs represent the external costs and liabilities to close
redundant facilities, severance costs related to our employees and other costs
associated with our restructuring plans. We expect to incur similar costs in the
future as we continue to review our operations, with the intention of continuing
to eliminate redundant facilities.

Interest expense, net of interest income, decreased 24.2%, from $5.5
million in 1995 to $4.2 million in fiscal 1997. The decrease was due primarily
to the repayment of substantially all of our debt in conjunction with the
acquisition of the Pooled Companies by U.S. Office Products and lower interest
rates being charged on our short-term and long-term debt with U.S. Office
Products.

Provision for income taxes decreased from a tax expense of $173,000 in 1995
to a tax benefit of $2.4 million in fiscal 1997. We incurred a tax expense in
1995, notwithstanding the fact that we reported a pre-tax loss, because one of
the Pooled Companies' earnings were not offset by the other Pooled Companies'
loss. In 1995, we recorded a full valuation allowance of $5.3 million on the
deferred tax asset resulting from the net operating loss carryforwards created
during 1995. The valuation allowance had been established by one of the Pooled
Companies prior to its acquisition by U.S. Office Products to offset the tax
benefit from such loss carryforwards, because at the time it was not likely that
such tax benefit would be realized. The benefit from income taxes in fiscal 1997
of $2.4 million arose primarily from the reversal of the $5.3 million deferred
tax asset valuation allowance in the fourth quarter. The valuation allowance was
reversed subsequent to U.S. Office Products acquiring us, because it was deemed
"more likely than not," based on improved results, that the tax benefit from
such operating loss carryforwards would be realized.

PRO FORMA COMBINED RESULTS OF OPERATIONS

The unaudited pro forma combined financial data presented below does not
purport to represent the results that we would have obtained had the
transactions which are the subject of the pro forma adjustments occurred on
April 26, 1997, as assumed, and are not necessarily representative of our
results of operations in any future period.

NINE MONTHS ENDED JANUARY 23, 1999 COMPARED TO NINE MONTHS ENDED JANUARY 24,
1998

Pro forma revenues increased 1.9%, from $496.9 million for Interim 1998 to
$506.2 million for Interim 1999. This increase was primarily due to sales to new
accounts, increased sales to existing customers and higher pricing on certain
products in response to increased product costs. These revenue gains were offset
by the impact of our acquisition of Education Access and lower revenues at
Beckley-Cardy in Interim 1999 resulting from our restructuring of the sales
force and reduced bid revenues. Education Access, which we acquired out of a
bankruptcy proceeding in March 1998, had
28
<PAGE> 31

revenues of $4.6 million in Interim 1999 compared to $18.3 million in Interim
1998.

Pro forma gross profit increased 3.3%, from $169.8 million in Interim 1998
to $175.4 million in Interim 1999. Pro forma gross margins increased slightly
from 34.2% for Interim 1998 to 34.7% for Interim 1999. This increase was due
primarily to a shift in revenue mix to higher margin specialty products and our
use of increased buying power to reduce product costs, offset by increased lower
margin bid revenues from our traditional businesses.

Pro forma selling, general and administrative expenses (including
depreciation and amortization) decreased 1.9%, from $135.6 million in Interim
1998 to $133.0 million in Interim 1999. As a percentage of pro forma revenues,
these expenses decreased from 27.3% for Interim 1998 to 26.3% for Interim 1999.
The pro forma decrease in selling, general and administrative expenses as a
percentage of revenues reflects the elimination of certain redundant expenses at
the companies we acquired and integrated in fiscal 1998 and Interim 1999
(including expenses relating to general management, purchasing, accounting,
finance and information systems) and the closing of two warehouses during the
third quarter of Interim 1999.

Restructuring charges during Interim 1999 included (1) a non-cash
restructuring charge of $1.1 million in the first quarter of Interim 1999,
consisting of compensation expense attributed to the U.S. Office Products stock
option tender offer and the sale of shares of Common Stock to some of our
executive management personnel, net of underwriting discounts and (2) a $4.2
million restructuring charge in the second quarter of Interim 1999 relating to
our plan to consolidate our existing warehousing, customer service and sales
operations following the acquisition of Beckley-Cardy. Under this restructuring
plan, we intend to reduce our distribution centers from 13 to eight and our
customer service centers from seven to two during the period from October 1998
through December 1999. The $4.2 million charge consists of $2.1 million for
employee severance and termination benefits, $1.3 million for lease termination
and facility shut-down costs and $0.8 million for write down of fixed assets and
inventories. On an after-tax basis these restructuring charges reduced net
income for Interim 1999 by $3.2 million.

A $1.2 million restructuring charge was recorded in Interim 1998 by
Beckley-Cardy consisting primarily of compensation and professional services
related to a corporate management reorganization.

Provision for income taxes increased 2.7%, from $11 million for Interim
1998 to $11.3 million for Interim 1999, reflecting an effective income tax rate
of 58% for Interim 1998 and 49% for Interim 1999. The high effective income tax
rate, compared to the federal statutory rate of 35%, was primarily due to
non-deductible goodwill amortization and state income taxes.

LIQUIDITY AND CAPITAL RESOURCES

At January 23, 1999, we had working capital of $90.8 million. Our
capitalization at January 23, 1999 was $331.6 million and consisted of debt of
$172.5 million and stockholders' equity of $159.1 million. On a pro forma basis,
at January 23, 1999, we had working capital of $99.3 million and capitalization
of $354.6 million, which consisted of debt of $195.6 million and stockholders'
equity of $159.1 million. After giving effect to the Common Stock offering, at
January 23, 1999, we had working capital of $99.3 million and capitalization of
$354.6 million, which consisted of debt of $133.6 million and stockholders'
equity of $221.1 million.

We currently have a five year secured $350 million revolving Senior Credit
Facility with NationsBank, N.A. The Senior Credit Facility has a $100 million
term loan payable quarterly over five years commencing in January 1999 and
revolving loans which mature on September 30, 2003. The amount outstanding as of
January 23, 1999 under the Senior Credit Facility was approximately $172.5
million, consisting of $72.5 million outstanding under the revolving loan
portion of the facility and $100 million outstanding

29
<PAGE> 32

under the term loan portion of the facility. Borrowings under the Senior Credit
Facility are usually significantly higher during our first and second quarters
to meet the working capital needs of our peak selling season. On October 28,
1998, we entered into an interest rate swap agreement with the Bank of New York
covering $50 million of the outstanding Senior Credit Facility. The agreement
fixes the 30 day LIBOR interest rate at 4.37% per annum (floating LIBOR on
January 23, 1999 was 4.94%) on the $50 million notional amount and has a three
year term that may be canceled by the Bank of New York on the second
anniversary. As of January 23, 1999, the effective interest rate on borrowings
under our Senior Credit Facility was approximately 8%. Since the beginning of
fiscal 1999, we borrowed under the Senior Credit Facility to fund three
acquisitions and for seasonal working capital and capital expenditures. We
intend to use the net proceeds from the Common Stock offering to repay amounts
outstanding under the revolving credit portion of the Senior Credit Facility. We
intend to then reborrow amounts under the Senior Credit Facility for general
corporate purposes including working capital, and for acquisitions, subject to
compliance with financial covenants. In connection with the Common Stock
offering, we intend to change certain financial and other covenants under the
Senior Credit Facility. See "Description of Senior Credit Facility."

On June 9, 1998, we sold 2,125,000 shares of Common Stock in a public
offering for $30,631,875 in net proceeds. In addition, we sold 250,000 shares of
Common Stock in a concurrent offering directly to Daniel P. Spalding, our
Chairman of the Board and Chief Executive Officer, David J. Vander Zanden, our
President and Chief Operating Officer, and Donald Ray Pate, Jr., our Executive
Vice President for ClassroomDirect.com (formerly named Re-Print), at a price of
$14.415 per share for aggregate consideration of $3,603,750. In connection with
the offerings, we incurred approximately $1,500,000 of expenses. The total net
proceeds to us from the offerings were $32,735,625. The net proceeds were used
to reduce indebtedness outstanding under our Senior Credit Facility.

During the nine months ended January 23, 1999, net cash provided by
operating activities was $29.1 million. This net cash provided by operating
activities during the period is indicative of the high seasonal nature of the
business, with sales occurring in the first and second quarter of the fiscal
year and cash receipts in the second and third quarters. Net cash used in
investing activities was $98.8 million, including $95 million for acquisitions
and $3.9 million for additions to property and equipment and other. Net cash
provided by financing activities was $69.7 million. Borrowing under the Senior
Credit Facility included (1) $16.9 million used to fund the cash portion of the
purchase price of the Hammond & Stephens acquisition, (2) $134.7 million used to
fund the Beckley-Cardy acquisition consisting of $78.1 million for the cash
portion of the purchase price and $56.6 million for debt repayment, (3) $83.3
million used to repay the U.S. Office Products debt in connection with the
spin-off and (4) $67.8 million used for short-term funding of seasonal working
capital and the purchase of property and equipment. The $32.7 million net
proceeds from our initial public offering and concurrent offering to certain
officers and directors was used to repay a portion of the $302.7 million
borrowed under the Senior Credit Facility. U.S. Office Products contributed
capital of $8.1 million as required under the distribution agreement entered
into with us in connection with the spin-off.

During the nine months ended January 24, 1998, net cash used in operating
activities was $15.4 million. Net cash used in investing activities was $96.5
million, including $92.1 million for acquisitions and $4.1 million for additions
to property and equipment and other. Net cash provided by financing activities
was $81.1 million, including $89.2 million provided by U.S. Office Products to
fund the cash portion of the purchase price and the repayment of debt associated
with the Fiscal 1998 Purchased Companies and to fund working capital and the
purchase of property and equipment, partially offset by $8 million used to repay
indebtedness.

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<PAGE> 33

During fiscal 1998, net cash provided by operating activities was $3.7
million. Net cash used in investing activities was $99.7 million, including
$95.7 million for acquisitions and $4.1 million for additions to property and
equipment and other. Net cash provided by financing activities was $96 million,
including $95.7 million provided by U.S. Office Products to fund the cash
portion of the purchase price and the repayment of debt assumed with the
acquisition of the Fiscal 1998 Purchased Companies, $81.3 million of which was
considered a contribution of capital by U.S. Office Products, partially offset
by $8.4 million used to repay indebtedness.

During fiscal 1997, net cash provided by operating activities was $918,000.
Net cash used in investing activities was $16.7 million, including $7.7 million
for acquisitions, $7.2 million for additions to property and equipment and $1.8
million to pay non-recurring acquisition costs. Net cash provided by financing
activities was $15.8 million, including $59.9 million provided by U.S. Office
Products to fund the cash portion of the purchase price and the repayment of
debt associated with the Fiscal 1997 Purchased Companies and the payment of debt
of the Pooled Companies, partially offset by $46.9 million used for the net
repayment of indebtedness, primarily at the Fiscal 1997 Purchased Companies.

During 1995, net cash provided by operating activities was $4.8 million.
Net cash used in investing activities was $6.1 million, including $5.4 million
for acquisitions and $881,000 for additions to property and equipment. Net cash
provided by financing activities was $1.2 million, including net proceeds from
the issuance of debt of $2.4 million and $500,000 received from the issuance of
Common Stock, partially offset by payments of indebtedness of $1.5 million.

Our anticipated capital expenditures for the next twelve months is
approximately $10 million. The largest items include software development for
our Internet initiative, computer hardware and software and warehouse equipment.

We are currently considering, and have hired a nationally known commercial
real estate agent to market, a sale and leaseback transaction involving six
distribution facilities in Ohio, Massachusetts, Kansas, Texas, Nevada and
Illinois. We are currently seeking bids on these properties for such a
transaction. We may sell all or any number of these facilities or could
substitute other properties we own in this transaction. We believe that the
current fair market value for these distribution facilities is approximately $26
million with net proceeds to us of approximately $25 million which would be used
to repay outstanding indebtedness under our Senior Credit Facility or for
general corporate purposes, including working capital and for acquisitions. If
we determine to proceed with this transaction, we expect that it would close in
the fourth quarter of fiscal 1999 or the first quarter of fiscal 2000.

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 (May-October) 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
acquired 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 1997 and 1998 and for the nine months ended January
23, 1999 (in thousands). We derived this data from unaudited consolidated
financial statements that, in the opinion of our management, reflect all
adjustments, consisting only of
31
<PAGE> 34

normal recurring accruals, necessary for a fair presentation of such quarterly
information. Revenues and profitability are significantly higher in the months
of May through October, with the most significant portion of revenue and profit
occurring in the months of July through September.

<TABLE>
<CAPTION>
YEAR ENDED APRIL 26, 1997
--------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenues................................. $58,991 $ 71,682 $29,304 $31,769 $191,746
Gross profit............................. 19,858 23,435 9,595 11,996 64,884
Operating income (loss).................. 5,197 6,732 (1,520) (688) 9,721
Net income (loss)........................ 1,981 2,692 (1,067) 4,526(1) 8,132
Per share amounts:
Basic.................................. 0.21 0.28 (0.11) 0.40 0.81
Diluted................................ 0.21 0.27 (0.11) 0.39 0.80
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED APRIL 25, 1998
--------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenues................................. $87,029 $111,460 $49,391 $62,575 $310,455
Gross profit............................. 30,337 37,225 16,213 23,810 107,585
Operating income (loss).................. 11,872 12,155 (3,647) (4,132) 16,248
Net income (loss)........................ 5,804 5,965 (2,934) (3,596) 5,239
Per share amounts:
Basic.................................. 0.49 0.49 (0.20) (0.24) 0.40
Diluted................................ 0.48 0.47 (0.20) (0.24) 0.39
</TABLE>

<TABLE>
<CAPTION>
NINE MONTHS ENDED JANUARY 23, 1999
----------------------------------------------
FIRST SECOND THIRD TOTAL
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenues............................... $126,657 $212,316 $85,359 $424,332
Gross profit........................... 44,042 70,761 28,093 142,896
Operating income (loss)................ 13,326 18,674 (2,383) 29,617
Net income (loss)...................... 6,563 7,430 (3,298) 10,695
Per share amounts:
Basic................................ 0.45 0.51 (0.23) 0.73
Diluted.............................. 0.44 0.51 (0.23) 0.73
</TABLE>

- ---------------

(1) For the year ended April 26, 1997, fourth quarter net income was increased
by $5.3 million due to the reversal of a deferred tax asset valuation
allowance. See Note 3 to "Selected Historical and Pro Forma Financial Data."

INFLATION

We do not believe that inflation has had a material impact on our results
of operations during the fiscal years ended April 25, 1998 and April 26, 1997 or
the year ended December 31, 1995.

NEW ACCOUNTING PRONOUNCEMENTS

Reporting Comprehensive Income. In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130

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<PAGE> 35

is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. We adopted SFAS No. 130 in fiscal 1999.
Implementation of this disclosure standard did not affect our financial position
or results of operations.

Disclosures About Segments. In June 1997, FASB issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997 and will be presented in our Annual Report on
Form 10-K for the year ending April 24, 1999. Financial statement disclosures
for prior periods are required to be restated. Implementation of this disclosure
standard will not affect our financial position or results of operations.

Accounting for the Costs of Computer Software. In March 1998, the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires computer software costs associated with
internal use software to be expensed as incurred until certain capitalization
criteria are met. We will adopt SOP 98-1 during fiscal 1999. Adoption of SOP
98-1 is not expected to have a material impact on our consolidated financial
position or results of operations.

Accounting for Derivative Instruments and Hedging Activities. In June
1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities." This statement, which is required to be adopted for annual
periods beginning after June 15, 1999, establishes standards for recognition and
measurement of derivatives and hedging activities. We will implement this
statement in fiscal 2001 as required. The adoption of SFAS No. 133 is not
expected to have a material effect on our financial position or results of
operations.

YEAR 2000

The Year 2000 issue exists because many computer systems and applications,
including those embedded in equipment and facilities, use two digit rather than
four digit date fields to designate an applicable year. As a result, the systems
and applications may not properly recognize the Year 2000 or process data which
include it, potentially causing data miscalculations or inaccuracies or
operational malfunctions or failures. Because any disruption to our computerized
order processing and inventory systems could materially and adversely affect our
operations, we have established a centrally managed, company wide plan to
identify, evaluate and address Year 2000 issues. Although we expect that most of
our mission critical systems, network elements and products will be verified for
Year 2000 compliance by May 1999, our ability to meet this target is dependent
upon a variety of factors. In addition, if our suppliers, service providers
and/or customers fail to resolve their Year 2000 issues in an effective and
timely manner, our business could be significantly and adversely affected. We
believe that many of our school customers have not yet addressed or resolved
their Year 2000 issues.

We currently estimate that we will incur expenses of approximately $100,000
through 1999 in connection with our anticipated Year 2000 efforts, in addition
to approximately $50,000 in expenses incurred through January 23, 1999 for
matters historically identified as Year 2000-related. The timing of expenses may
vary and is not necessarily indicative of readiness efforts or progress to date.
We also expect to incur certain capital improvement costs (totaling
approximately $300,000) to support this project. Such capital costs are being
incurred sooner than originally planned, but, for the most part, would have been
required in the normal

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<PAGE> 36

course of business. We expect to fund our Year 2000 efforts through operating
cash flows. We will use our Senior Credit Facility for capital improvements
related to the effort.

As part of our Year 2000 initiative, we are evaluating scenarios that may
occur as a result of the century change and are in the process of developing
contingency and business continuity plans tailored for Year 2000-related
occurrences. As noted earlier, we are highly reliant on our computer order
processing and inventory systems to fill orders, bill the customer and collect
payments. A loss of either of these systems would cause long delays in filling
and shipping products, billing the customer and collecting accounts receivable.
The highly seasonal nature of our business does not allow for any delay in
shipping products to customers. Although the seasonal nature of our business
would heighten any problems encountered, the timing of the majority of our
sales, shipping, billing and collection efforts for fiscal 1999 will be complete
prior to the Year 2000. We expect that any unforeseen problems related to Year
2000 issues would be identified within the months of January and February 2000,
which is our slowest period. We have identified that we may experience certain
inconveniences or inefficiencies as a result of a supplier's failure to
remediate its Year 2000 issue. We believe, however, that most of our business
will proceed without any significant interruption.

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<PAGE> 37

BUSINESS

OVERVIEW OF OUR BUSINESS

Our "top down" marketing approach targets school administrators at the
state, regional and local levels using our 250 sales representatives and our
School Specialty and Beckley-Cardy general supply and furniture catalogs. Our
"bottom up" approach seeks to reach individual teachers and curriculum
specialists primarily through the mailing of our ClassroomDirect.com general
supply catalog (previously known as Re-Print) and our seven different specialty
direct catalogs. During 1998, we mailed over 10.2 million catalogs to more than
three million teachers and curriculum specialists. Approximately 100 employees
assist in the sale, marketing and merchandising of our specialty direct
products. We are also exploring various ways in which we can use the Internet to
market and sell our products. As the first stage of our Internet initiative, we
recently opened a fully integrated e-commerce site under the name
"ClassroomDirect.com" which offers over 13,000 items for sale. The second stage
of our Internet initiative, which we expect to launch in May 1999, is an
education portal in the form of an education mall which will offer our products
for sale and also provide a community forum and content aimed at educators.

As of February 1, 1999, we had 1,853 full-time employees in the United
States and the United Kingdom, providing service to all 50 states and the United
Kingdom. Our principal offices are located at 1000 North Bluemound Drive,
Appleton, Wisconsin 54914, and our telephone number is (920) 734-2756. Our world
wide general website address is www.schoolspecialty.com. Information contained
in any of our websites is not deemed to be a part of this Prospectus.

INDUSTRY OVERVIEW

The school supply market consists of the sale of non-textbook school
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 estimates that
annual sales of non-textbook educational supplies and equipment to the school
supply market are approximately $6.1 billion. Of this amount, over $3.6 billion
is sold through institutional channels and the remaining $2.5 billion is sold
through retail channels.

According to the U.S. Department of Education, there are 15,996 school
districts, 108,577 public and private elementary and secondary schools and 3.1
million teachers in the United States. School supply procurement decisions are
made at the school district level by administrators and curriculum specialists,
at the school level by principals and at the classroom level by teachers. Some
school supplies are purchased directly from manufacturers while others are
purchased through marketing firms such as us. We estimate that there are over
3,400 marketers

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<PAGE> 38

of non-textbook school supplies and equipment, the majority of which are family
or employee owned businesses that operate in a single geographic region and have
annual revenues under $20 million. Besides us, only one other company has a
measurable presence in the market. Even so, we believe we have annual revenues
that are three times greater than this industry competitor. We believe that the
increasing demand for single source suppliers, prompt order fulfillment and
competitive prices, and the related need for suppliers to invest in automated
inventory and electronic ordering systems, is accelerating the trend toward
consolidation in our industry.

The demand for school supplies is driven primarily by the level of the
student population and, to a lesser extent, expenditures per student. Student
population is a function of demographics, while expenditures per student are
also affected by government budgets and the prevailing political and social
attitudes towards education. According to U.S. Department of Education
estimates, student enrollment in kindergarten through twelfth grade public and
private schools began growing in 1986, reaching a record level of 52.7 million
students in 1998. Current projections by the U.S. Department of Education
indicate that student enrollment will continue to grow to 54.5 million by the
year 2006. The U.S. Department of Education also projects that expenditures per
student in public elementary and secondary schools will continue to rise through
the year 2006. Expenditures of $272.4 billion in 1997 are projected to increase
to $340.7 billion by the year 2001. These projected increases in expenditures
include a projected increase in total per student spending from $5,961 per
student in 1997 to $7,179 by the year 2001. We believe that the current
political and social environment is favorable for education spending.

OUR RECENT ACQUISITIONS

-- BECKLEY-CARDY. In August 1998, we acquired The National School Supply
Company ("National School Supply"), including its subsidiary Beckley-Cardy, Inc.
("Beckley-Cardy"). Prior to our acquisition of Beckley-Cardy, it was the second
largest general education supply marketer in the industry. We paid $78.1 million
in cash and refinanced $56.6 million of its debt with borrowings under our
Senior Credit Facility. National School Supply had revenues for the fiscal year
ended March 31, 1998 of $176 million.

-- SPORTIME. In February 1999, we acquired Sportime, LLC ("Sportime")
from ProTeam.com (formerly known as Genesis Direct, Inc.). Sportime is a leading
specialty company focusing on physical education, athletic and recreational
products. Sportime offers several targeted catalogs from its early childhood
offerings to a catalog focused on physically challenged children. We paid $23
million in cash for Sportime, which we financed through borrowings under our
Senior Credit Facility. Sportime had revenues for 1998 of $32.6 million.

-- HAMMOND & STEPHENS. In June 1998, we acquired the business of Hammond
& Stephens, Co. ("Hammond & Stephens"), a leading publisher of school forms,
such as grade books, record books, teacher planners, student assignment books,
school year calendars, awards and similar materials. We paid $16.9 million in
cash for Hammond & Stephens, which we financed through borrowings under our
Senior Credit Facility. Hammond & Stephens had revenues for the fiscal year
ended October 31, 1997 of $9.1 million.

OUR INTERNET INITIATIVE

Because more schools and teachers are connecting to the Internet, we intend
to aggressively pursue sales opportunities through this rapidly growing channel.
By establishing an early presence on the Internet, we believe we can gain a
significant competitive advantage and valuable brand recognition. Our goal is to
become the leading marketer of school supplies and furniture over the Internet.
This may also permit us to expand our customer base over time to include
individuals and other non-traditional customers.

In January 1999, we launched the first phase of our Internet initiative
with the
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<PAGE> 39

opening of our fully integrated e-commerce website ClassroomDirect.com. The site
offers access to over 13,000 stock keeping units with digital pictures of most
items. Although currently teacher focused, the site could be adapted to a more
consumer based format. The increasing demand by school administrators and
teachers for more information in making supply decisions, the lack of a wide
variety of educational products in stores and the growing importance of
convenience make the Internet a viable, low cost channel for the marketing of
education supplies.

The second phase of our Internet initiative, which we expect to launch in
May 1999, is to offer an education portal on the Internet. This portal will be
structured as an education mall offering our products for sale and also provide
a community forum and content aimed at educators. We believe that by providing
education related content and information, this portal will place us at the
education community's decision point for supply and content which will
strengthen our brands. We intend to enter into strategic alliances with a number
of content providers to help develop and maintain the new website and portal
with the goal to become the Internet headquarters for teachers, product
specialists and others with an interest in education. Prospective content
providers could include media, search engine and Internet service providers and
other Internet related companies. Prospective content could include product
reviews, teaching tips, education standards and related teaching products,
public policy, current events and chat rooms.

In connection with our Internet initiative, we have also signed a
non-binding letter of intent to acquire SmartStuff Development Corporation
("SmartStuff"), the developer of FoolProof(R) software, a program with an
installed customer base of 1.5 million. FoolProof(R) is a desktop software
security program which limits access by children to selected programs and
applications on desktop computers. SmartStuff is expected to introduce Internet
browser security and filtering software products for the education market. We
intend to market our brands and Internet services to SmartStuff's existing and
future customer base by including links to our website and portal and other
promotional materials in SmartStuff product upgrades and new products. Under our
letter of intent, we would pay no more than $8.3 million for SmartStuff, some or
all of which may be in the form of Common Stock. SmartStuff's revenues for 1998
were approximately $4.2 million. Although our letter of intent only extended
until March 1, 1999, we continue to work towards a definitive agreement with
SmartStuff. We would expect to close a transaction in March 1999.

OUR STRENGTHS

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

-- LEADING MARKET POSITION. We have developed our leading market
position over our 40 year history by emphasizing high quality products, superior
order fulfillment and exceptional customer service. We believe that our annual
revenues are three times greater than those of our next largest industry
competitor and that our large size and brand recognition have resulted in
significant buying power, economies of scale and customer loyalty.

-- BROAD PRODUCT LINE. Our strategy is to provide a full range of high
quality products to meet the complete supply needs of schools for
pre-kindergarten through twelfth grade. With over 60,000 stock keeping units
ranging from classroom supplies and furniture to playground equipment, we
provide customers with one source for virtually all of their non-textbook school
supply and furniture needs. Our specialty brands enrich our general product
offering and create opportunities to cross merchandise our specialty products to

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<PAGE> 40

our traditional customers. Specialty brands include the following:

<TABLE>
<CAPTION>
BRAND PRODUCTS
----- --------
<S> <C>
Childcraft............. Early childhood
Sax Arts and Crafts.... Art supplies
Frey Scientific........ Science
Sportime............... Physical education
Education Access....... Educational software
Brodhead Garrett....... Industrial arts
Gresswell.............. Library
Hammond & Stephens..... School forms
</TABLE>

-- INNOVATIVE TWO-PRONGED MARKETING APPROACH. School supply procurement
decisions are made at the district and school levels by administrators, and at
the classroom level by curriculum specialists and teachers. We market to both of
these groups, addressing administrative decision makers with a "top down"
approach through our 250 person sales force and the School Specialty and
Beckley-Cardy general supply and furniture catalogs, and targeting teachers and
curriculum specialists with a "bottom up" approach primarily through the mailing
of over 10.2 million ClassroomDirect.com general supply catalogs and our seven
different specialty direct catalogs each year. We utilize our customer database
across our family of catalogs to maximize their effectiveness and increase our
marketing reach. We believe our new ClassroomDirect.com Internet site offers
additional marketing opportunities.

-- STABLE INDUSTRY. Because the market for educational supplies is
driven primarily by demographics and government spending, we believe that our
industry is less exposed to economic cycles than many others.

-- ABILITY TO COMPLETE AND INTEGRATE ACQUISITIONS. We have successfully
completed the acquisition of 23 companies since 1991, including 18 since May
1996. We have established a 24-month integration process in which a transition
team is assigned to:

-- sell or discontinue incompatible business units,

-- reduce the number of stock keeping units,

-- eliminate redundant expenses,

-- integrate the acquired entity's management information systems, and

-- exploit buying power.

To date, our integration efforts have focused on acquired general products
companies and certain administrative functions at our specialty divisions. We
believe that through these processes, we can rapidly improve the revenues and
gross and operating margins of the businesses we acquire.

-- USE OF TECHNOLOGY. We believe that our use of information technology
systems allows us to turn 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 campaigns.

-- EXPERIENCED AND INCENTIVISED MANAGEMENT. Our management team provides
depth and continuity of experience. Management's interests are aligned with
those of our shareholders. Management currently owns approximately 7.6% of our
shares of Common Stock on a fully-diluted basis and purchased approximately 1.7%
of the currently outstanding shares at the same time as our initial public
offering in June 1998.

OUR GROWTH STRATEGY

We use the following strategies to grow and enhance our position as the
leading marketer of non-textbook educational supplies and furniture:

-- AGGRESSIVELY PURSUE ACQUISITIONS. We believe that there are many
attractive acquisition opportunities in our highly fragmented industry. As a
public company, we have greater access to capital for acquisitions than many of
our competitors. We will continue to pursue opportunities that enhance our
geographic presence or which complement our specialty direct product offerings.
We believe that we can improve the revenues and gross and operating margins of
the businesses we acquire through our efficient integration process. Although we
are the largest marketer in the industry, our share

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<PAGE> 41

of the $6.1 billion non-textbook school supply and furniture market is less than
10%, creating substantial growth opportunities.

-- INCREASE SALES OF SPECIALTY AND PROPRIETARY PRODUCTS. We believe we
can increase our margins by selling more specialty direct products and products
for which we are the only supplier. We believe that specialty direct products
accounted for approximately 42% of our revenues on a pro forma basis for the
twelve months ended January 23, 1999, compared to approximately 20% on an
historical basis for the year ended December 31, 1994.

-- EXPAND EXISTING TRADITIONAL BUSINESS. We believe that we can also
increase the revenues of our traditional business by adding sales
representatives in geographic markets in which we are underrepresented and by
cross merchandising our specialty products to our traditional customers.

-- IMPROVE PROFITABILITY. We improved our operating margin (as measured
by our operating income before non-recurring acquisition and restructuring costs
divided by our revenues) from 3.8% in 1994 on an historical basis to 6.6% on a
pro forma basis for the twelve months ended January 23, 1999. We believe that we
can further improve our operating margins by eliminating redundant expenses of
acquired businesses, leveraging our overhead costs, increasing our purchasing
power and improving the efficiency of our warehousing and distribution.

-- PURSUE INTERNET INITIATIVE. Because more schools and teachers are
connecting to the Internet, we intend to aggressively pursue sales opportunities
through this rapidly growing channel. By establishing an early presence on the
Internet, we believe we can gain a significant competitive advantage and
valuable brand recognition. Our goal is to become the leading marketer of school
supplies and furniture over the Internet. This may also permit us to expand our
customer base over time to include individuals and other non-traditional
customers.

We believe this strategy can be effective both as an offensive tool,
enhancing revenue at a low incremental cost, and as a defensive one, by
preventing other existing and prospective Internet competitors from establishing
themselves in this market. The establishment of early brand recognition will
facilitate the establishment of our educational portal as the key education
related website.

OUR PRODUCT LINES

We market two broad categories of products: general school supplies and
specialty products geared towards specific educational disciplines. Our general
school supply products are offered to school administrators by our sales force
through our School Specialty and Beckley-Cardy catalogs and to teachers and
curriculum specialists through direct mailings of our ClassroomDirect.com
catalog. Our specialty products are offered to teachers and curriculum
specialists through direct mailings of our seven specialty catalogs. Our
specialty products enrich our general supply product offering and create
opportunities to cross merchandise our specialty school supplies to our
traditional customers. With over 60,000 stock keeping units ranging from
classroom supplies and furniture to playground equipment, we provide customers
with one source for virtually all of their non-textbook school supply and
furniture needs.

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

-- SCHOOL SPECIALTY/BECKLEY-CARDY. Through the School Specialty and
Beckley-Cardy catalogs, which are targeted to administrative decision makers, we
offer a comprehensive selection of classroom supplies, instructional materials,
educational games, art supplies, school forms (such as reports, planners and
academic calendars), physical education equipment, audio-visual equipment,
school furniture and indoor and outdoor equipment. Over the next year, we expect
to integrate these two general catalogs. 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.

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<PAGE> 42

-- CLASSROOMDIRECT.COM. ClassroomDirect.com offers its customers
substantially the same products as those offered through the School Specialty
catalog but focuses on reaching teachers and curriculum specialists directly
through its mail-order catalogs and new fully integrated Internet e-commerce
website. The new Internet e-commerce site targets the traditional catalog market
and other consumers interested in educational products, such as home school
families, churches and parents.

Our specialty brands 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.

-- 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 17 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
catalogs from early childhood through middle school as well as targeted products
for physically challenged children.

-- EDUCATION ACCESS. Education Access is a reseller of technology
solutions for kindergarten through twelfth grade. This product line includes
curriculum software, productivity software, peripherals, networking products and
other related products and is offered through the ClassroomDirect.com catalog.

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

-- GRESSWELL. Gresswell markets library-related products in the U.K.,
including furniture, and media display and storage. Gresswell's dedicated sales
and design team helps customers plan, design and install library projects using
computer assisted design equipment.

-- HAMMOND & STEPHENS. Hammond & Stephens is a leading publisher of
school forms, including student assignment books, record books, grade books,
teacher planners and other printed forms for kindergarten through twelfth grade.

Our merchandising managers, many of whom have prior experience in
education, continually review and update the product lines for each operating
division. 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 an organic reshaping and expansion of the educational materials we
offer.

OUR SALES AND MARKETING

OUR TWO-PRONGED APPROACH. We believe we have developed a substantially
different sales and marketing model from that of traditional school supply and
school furnishings distribution companies in the United States. Our strategy is
to use two separate marketing approaches to reach all the prospective purchasers
in the school system. Our 250 sales representatives focus on "top down" selling
to districts, school purchasing authorities and schools using School Specialty
and Beckley-Cardy general supply and furniture catalogs. In addition,
40
<PAGE> 43

approximately 100 employees assist in the sale, marketing and merchandising of
our specialty direct products. We also target teachers and curriculum
specialists with a "bottom up" approach using our over 10.2 million specialty
direct catalogs which are mailed each year and our new "ClassroomDirect.com"
Internet e-commerce site.

TRADITIONAL SUPPLY BUSINESS. As part of the integration of Beckley-Cardy
into our School Specialty traditional supply business, we restructured our
traditional sales and marketing operations from a decentralized regional system
to a more centralized national structure. Our national marketing model has 250
sales representatives operating within 15 regions supported by regional managers
and two regional customer service and sales support call centers. The
reorganization reallocated sales territories, selectively reduced the combined
sales and management force and reduced the number of regional customer
service/sales support locations from 12 to two. We believe our new national
structure significantly improves our effectiveness through better sales
management, resulting in higher regional penetration, and achieves significant
cost savings through the reduction in number of distribution centers.

We have a broad customer base and no single customer accounted for more
than 2% of sales during fiscal 1998 or the nine months ended January 23, 1999.
Schools typically purchase school supplies and furniture based on an established
relationship with relatively few suppliers. We establish and maintain our
relationship with our traditional customers by assigning accounts within a
specific geographic territory to a local area sales representative who is
supported by a centrally located customer service team. Our customer service
representatives call on existing traditional customers frequently to ascertain
and fulfill their school supply needs. The representatives maintain contact with
these customers throughout the order cycle and assist in processing orders.

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.

SPECIALTY DIRECT BUSINESS. We use direct mail catalogs to reach our
broader customer base. We distribute seven major specialty direct catalogs, one
for each of our Childcraft, Sax Arts and Crafts, Frey Scientific, Sportime,
Brodhead Garrett, Gresswell and Hammond & Stephens lines. The catalog
distribution calendar is generally the same across all product lines. For each
product line, a major catalog containing all product offerings is distributed
toward the end of the calendar year so that it is available for school buyers at
the beginning of the year. During the year, various catalog supplements are
distributed to coincide with the peak school buying season in June through
September and following the return of students to school in the fall.

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<PAGE> 44

The approximate number of catalogs distributed for our brands for calendar
1998 and projected catalog distribution for calendar 1999 is set out below. The
figures set forth below include all books of over 32 pages distributed (or, with
respect to 1999, expected to be distributed) during the calendar year.

<TABLE>
<CAPTION>
1998 1999
---------- ----------
(PROJECTED)
<S> <C> <C>
School Specialty......... 450,000 600,000
Beckley-Cardy(1)......... 400,000 280,000
ClassroomDirect.com
(formerly named
Re-Print).............. 2,700,000 3,200,000
Childcraft............... 1,900,000 2,400,000
Sax Arts and Crafts...... 1,548,500 1,680,000
Frey Scientific.......... 168,000 168,000
Sportime................. 2,773,500 2,045,500
Brodhead Garrett......... 82,000 82,000
Gresswell................ 130,000 480,000
Hammond & Stephens....... 80,000 80,000
---------- ----------
Total.................. 10,232,000 11,015,500
========== ==========
</TABLE>

- ---------------

(1) Excludes figures for Beckley-Cardy's early childhood and art catalogs, which
are included in the Childcraft and Sax Arts and Crafts' figures,
respectively.

PRICING. Pricing for our general and specialty direct product offerings
varies by product and channel of distribution. We generally offer a negotiated
discount from catalog prices for supplies from our School Specialty and
Beckley-Cardy catalogs and respond to quote and bid requests for furniture and
equipment. In addition, local sales representatives work with our corporate
sales force and school supply buyers to achieve an acceptable pricing structure
based upon the mix of products being purchased. The pricing structure of
specialty direct products offered through direct marketing is generally not
subject to negotiation.

DISTRIBUTION

We distribute products through our distribution centers and place customer
orders directly with our suppliers. Furniture is generally shipped directly from
the manufacturer to the customer.

We have adopted a plan to rationalize our distribution systems following
the Beckley-Cardy acquisition. Under this plan, we will close five of our 13
regional distribution centers and centrally manage the remaining eight. We have
currently closed two regional distribution centers and expect to close the
remaining three by December 31, 1999. We believe this restructuring will improve
our distribution efficiency and generate significant cost savings.

OUR PURCHASING AND INVENTORY MANAGEMENT

We manage our inventory by continually reviewing daily inventory levels
compared to a running 90-day inventory for the previous year, adjusted for
incoming orders. We constantly refine the focus of inventory products through
our automated inventory management system to pursue the optimum level of scope
and depth of product offered. Inventory forecasts are made daily for all stock
keeping units by assessing anticipated demand by adjusting historical demand
levels to account for current order activity and available stock as well as the
expected lead time from the supplier. The forecast allows inventory purchases to
respond quickly to high seasonal demand while keeping off-season inventory to a
minimum. The information systems for all of our distribution centers are
connected to allow transfer of inventory between facilities to fill regional
demand. In addition, all orders can be redirected to the distribution center
which is the primary stocking location for a product. Our inventory management
results in inventory turnover that management believes is higher than average
industry turnover rates and reduces the level of discontinued, excess and
obsolete inventory compared to businesses that we have acquired.

We believe our large size enhances our purchasing power with suppliers
resulting in lower product costs than most of our competitors. Further, we
believe that this purchasing power leverage will increase with additional
acquisitions which, in turn, should improve our operating margins.

We believe that the primary determinants of customer satisfaction in the
educational

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<PAGE> 45

supply industry are the completeness and accuracy of shipments received and the
timeliness of delivery. We continue to invest in sophisticated computer systems
to automate the order taking, inventory allocation and management, and order
shipment processes. As a result, we have been able to provide superior order
fulfillment to our customers. In addition, we have developed our Order
Management System, which allows schools to customize their orders and enter them
electronically and provides historical usage reports to schools useful for their
budgeting process. While this system currently only accounts for approximately
6% of our traditional supply sales, we believe it will become more significant
as schools upgrade their technology and use of computers. During the academic
year, we seek to fill orders within 24 hours of receipt of the order at a 95%
fill rate and a 99.5% order accuracy rate. During the summer months, we shift to
a production environment and schedule shipments to coincide with the start of
the school year. During the summer months, our objectives are to meet a 100%
fill rate at a 99.5% order accuracy rate. Our average order fill rate for June,
July and August 1998 exceeded 97%. We define "fill rate" as the percentage of
line items in a customer's order that are initially shipped to the customer in
response to the order by the requested ship date.

During the peak shipping season between June 1 and September 30, each of
our distribution centers contracts with local common carriers to deliver our
product to schools and school warehouses. ClassroomDirect.com and Sax Arts &
Craft rely on carriers such as Roadway Package Service, United Parcel Service
and the U.S. Postal Service for distribution to customers.

OUR INFORMATION SYSTEMS

We believe that through the utilization of technology in areas such as (1)
purchasing and inventory management, (2) customer order fulfillment and (3)
database management, we are able to turn inventory more quickly than
competitors, offer customers more convenient and cost effective ways of ordering
products and more precisely focus our sales and marketing campaigns.

We use two principal information systems, one for our general and another
for our specialty product distribution. In general school supply distribution,
we use a specialized distribution software package used primarily by office
products and paper marketers. This software package is referred to as the
Software for Distributors System (the "SFD system"). This software 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 specialty divisions, including newly acquired companies, use either the
SFD system or a mail order and catalog system provided by Smith-Gardner &
Associates. The Mail-Order and Catalog System ("MACS") meets the unique 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.

Although we have two principal information systems, both the SFD system and
MACS integrate general ledger, purchasing and inventory management functions.
The 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. For information on Year 2000 compliance of our information
systems, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000."

INTERNET CONNECTION WITH OUR SYSTEMS

Our existing ClassroomDirect.com Internet site is fully integrated with
MACS and our
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<PAGE> 46

education portal is currently being designed to be fully integrated with both of
our systems (i.e., the SFD system and MACS). We intend to install Ironworks
Powered Server ("IPS") on our web servers. IPS provides a secured front-end so
the customer can place an order using a JAVA-enabled web browser. IPS
communicates with the host machine (i.e., the SFD system or MACS) by means of
remote procedure calls ("RPC"). The firewall between the web server and the host
computers will be configured so that only IPS is permitted to use the RPC to the
host gateway.

All of the websites will be navigable through dynamically generated HTML
pages, generated either by using the current/extended functionality of IPS or by
accessing product information from a relational database generated and
synchronized with our information systems in real time. The product images and
their descriptions will be maintained in files residing on the web server,
synchronized with data in a Centrus system, which is a central repository for
all products and data related to those products.

At the check-out stage, new customers will fill out their personal
information, billing, shipping and credit card information, and existing
customers will enter their user password and/or account number verified through
synchronization with our information systems.

OUR COMPETITION

We operate in a highly competitive environment. Our principal competitors
are other national and regional marketers of school supplies. We also face
increasing competition from non-traditional alternate channel competitors, such
as office products contract stationers and superstores. Among traditional school
supply marketers, we believe that there is only one other company with a
measurable presence in the market. Even so, we believe that we have annual
revenues that are three times greater than this competitor and that we compete
favorably with this company on the basis of service and price.

The market is highly competitive on a regional basis, but we believe our
heaviest competition is coming from alternate channel competitors such as office
product contract stationers and superstores. Their primary advantages over us
are size, location, greater financial resources and buying power. Their primary
disadvantage is that their product mix covers only 15% to 20% of the school's
needs (measured by volume). In addition, 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.

OUR EMPLOYEES

As of February 1, 1999, we had 1,853 full-time employees, 448 of whom were
employed primarily in management and administration, 1,043 in regional warehouse
and distribution operations and 362 in marketing, sales, order processing and
customer service. To meet the seasonal demands of our customers, we employ many
seasonal employees during the late spring and summer seasons. Historically, we
have been able to meet our requirements for seasonal employment. As of February
1, 1999, approximately 28 of our employees were members of the Teamsters Labor
Union at our Sax Arts and Crafts' New Berlin, Wisconsin facility. We consider
our relations with our employees to be very good.

OUR FACILITIES

Our corporate headquarters are located at 1000 North Bluemound Drive,
Appleton, Wisconsin, a combined office and warehouse facility of approximately
120,000 square feet. Our lease on the Appleton headquarters expires on December
31, 2001, although we are currently negotiating with the owners of the facility
(consisting of the father and uncle of our Chief Executive Officer, Daniel P.
Spalding, and one other unrelated party) to purchase the property sometime prior
to the end of March 1999. See "Certain Transactions" for more information. We
lease

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<PAGE> 47

or own the following additional principal distribution facilities:

<TABLE>
<CAPTION>
APPROXIMATE
SQUARE OWNED/
LOCATIONS FOOTAGE LEASED LEASE EXPIRATION
- --------- ----------- ------ ------------------
<S> <C> <C> <C>
Agawam, Massachusetts......................... 163,300 Owned* --
Atlanta, Georgia.............................. 76,913 Leased January 6, 2002
Birmingham, Alabama........................... 180,365 Leased November 30, 2006
Bowling Green, Kentucky....................... 42,000 Leased June 30, 2001
Carson City, Nevada........................... 80,000 Owned* --
Fremont, Nebraska............................. 95,000 Leased June 30, 2003
Fresno, California............................ 18,480 Leased December 31, 2001
Hoddesdon, England............................ 47,500 Leased September 24, 2006
Lancaster, Pennsylvania....................... 72,947 Leased December 31, 2002
Lancaster, Pennsylvania....................... 165,750 Leased February 28, 2009
Lufkin, Texas................................. 140,000 Owned* --
Mansfield, Ohio............................... 323,000 Owned* --
New Berlin, Wisconsin......................... 97,500 Leased March 31, 2002
Oklahoma City, Oklahoma....................... 37,340 Leased July 16, 2001
Portland, Oregon.............................. 30,456 Leased May 31, 2001
Salina, Kansas................................ 123,000 Owned* --
Union City, California........................ 14,494 Leased April 7, 2000
</TABLE>

- ---------------

* We are currently considering a sale and leaseback transaction involving
certain of our owned distribution centers and other properties. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

The Lancaster, Pennsylvania facility is used for manufacturing and the
Fremont, Nebraska facility is used for production of school forms. In addition,
we have 15 sales offices throughout the United States.

We believe that our properties are adequate to support our operations for
the foreseeable future. We regularly review the consolidation of our facilities.

OUR LEGAL PROCEEDINGS

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

OUR ONGOING SPIN-OFF OBLIGATIONS

In connection with the spin-off from U.S. Office Products in June 1998, we
entered into a series of agreements with U.S. Office Products and the other
spin-off companies, including a distribution agreement (the "Distribution
Agreement"), a tax allocation agreement (the "Tax Allocation Agreement"), a tax
indemnification agreement (the "Tax Indemnification Agreement") and an employee
benefits agreement (the "Employee Benefits Agreement"). These agreements have
resulted in certain contractual obligations for us.

Under the Distribution Agreement, each spin-off company, including us, will
be liable for any liabilities related to its business, its liabilities under the
Employee Benefits Agreement, Tax Allocation Agreement and the Tax
Indemnification Agreement (each discussed below), federal securities laws
liabilities relating generally to U.S. Office Products prior to the
distributions and certain other shared liabilities. We estimate that our portion
of any shared liabilities under the Distribution Agreement would be

45
<PAGE> 48

approximately 9.8%. The aggregate of such liabilities for which we may be liable
is a maximum of $1.75 million.

We are aware of certain lawsuits filed against U.S. Office Products that
could fall within these contractual obligations. See "Risk Factors--We Are
Exposed to Risks Related to Other Liabilities of U.S. Office Products."

The Tax Allocation Agreement provides that each spin-off company will
jointly and severally indemnify U.S. Office Products for any losses associated
with taxes related to the distributions if any of the spin-off companies take an
action or fail to take an action that results in the spin-off being taxable (an
"Adverse Tax Act"). If any of the spin-off distributions are taxable and none of
U.S. Office Products or any of the spin-off companies was responsible, U.S.
Office Products and each of the spin-off companies will be liable for its pro
rata portion of the distribution taxes based on the value of each company's
common stock after the distributions. The Tax Indemnification Agreement provides
that the spin-off company that is responsible for the Adverse Tax Act will
indemnify the other spin-off companies for any liability to U.S. Office Products
under the Tax Allocation Agreement. As a result of these tax agreements, we
could become liable for certain amounts of the distribution taxes should there
be a finding that any or all of the distributions are taxable. We estimate that
our portion of any such taxes would be approximately 14.4%.

The Employee Benefits Agreement provides that the spin-off companies will
retain or assume liability for employment-related claims and severance for
persons employed or previously employed by the respective spin-off companies and
their subsidiaries at the time of the distributions, while U.S. Office Products
and its post-distribution subsidiaries will retain or assume responsibility for
their current and previous employees.

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<PAGE> 49

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Our Board of Directors consists of five members. The Board is divided into
three classes, with members of each class serving a three year term. The terms
of Class I, II and III directors expire at the annual meetings of stockholders
in 1999, 2000 and 2001. The following table sets forth certain information about
our directors and executive officers as of February 1, 1999:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Daniel P. Spalding............. 44 Chairman of the Board and Chief Executive Officer (Class
III)
David J. Vander Zanden......... 44 President, Chief Operating Officer and Director (Class II)
Donald J. Noskowiak............ 41 Executive Vice President and Chief Financial Officer
Douglas Moskonas............... 53 Executive Vice President for School Specialty Divisions
Melvin D. Hilbrown............. 50 Executive Vice President for Gresswell
Richard H. Nagel............... 58 Executive Vice President for Sax Arts and Crafts
Donald Ray Pate, Jr............ 35 Executive Vice President for ClassroomDirect.com
Ronald E. Suchodolski.......... 52 Executive Vice President for Childcraft
Jonathan J. Ledecky............ 41 Director (Class I)
Leo C. McKenna................. 65 Director (Class III)
Rochelle Lamm Wallach.......... 50 Director (Class II)
</TABLE>

DANIEL P. SPALDING became Chairman of the Board and Chief Executive Officer
of School Specialty in February 1998. From 1996 to February 1998, Mr. Spalding
served as President of the Educational Supplies and Products Division of U.S.
Office Products. From 1988 to 1996, he served as President, Chief Executive
Officer and a director of Old School. Prior to 1988, Mr. Spalding was an officer
of JanSport, a manufacturer of sports apparel and backpacking equipment. Mr.
Spalding was a co-founder of JanSport and served as President and Chief
Executive Officer from 1977 to 1984. Mr. Spalding has been a director of the
National School Supply and Equipment Association since 1992 and completed his
term as the association's Chairman in November 1997.

DAVID J. VANDER ZANDEN became the President and Chief Operating Officer of
School Specialty in March 1998. 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 completion of
the spin-off from U.S. Office Products in June 1998.

DONALD J. NOSKOWIAK has served as Chief Financial Officer of School
Specialty since 1997. In February 1998, Mr. Noskowiak became an Executive Vice
President of School Specialty. He was Vice President, Treasurer and Principal
Financial Officer of Old School from 1994 until 1997. From 1992 to 1994, he was
the Corporate Controller of Old School.

DOUGLAS MOSKONAS has served as Executive Vice President of School Specialty
for School Specialty Divisions since completion of the spin-off from U.S. Office
Products in June 1998. Mr. Moskonas joined Old School in 1993 as Vice President
of Sales for the Valley Division. He served as General Manager for the Valley
Division from 1994 to 1996 and was appointed President of School Specialty
Divisions in 1997. Prior to joining School Specialty, Mr. Moskonas served as
Vice President of Sales for Emmons-Napp Office Products from 1979 to 1993.

MELVIN D. HILBROWN has served as Executive Vice President of School
Specialty for Gresswell since completion of the spin-off from U.S. Office
Products in June 1998. Mr. Hilbrown joined School Specialty as Managing Director
of Gresswell with School Specialty's acquisition of Don Gresswell, Ltd.

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<PAGE> 50

in 1997. He had been Managing Director of
Gresswell since 1989.

RICHARD H. NAGEL has served as Executive Vice President of School Specialty
for Sax Arts and Crafts since completion of the spin-off from U.S. Office
Products in June 1998. Mr. Nagel joined School Specialty with the acquisition of
Sax Arts and Crafts in 1997. Mr. Nagel had been with Sax Arts and Crafts since
1975 when he was hired as Assistant General Manager. He was named Vice
President/General Manager of Sax Arts and Crafts in 1984 and President of Sax
Arts and Crafts in 1990.

DONALD RAY PATE, JR. has served as Executive Vice President of School
Specialty for ClassroomDirect.com since completion of the spin-off from U.S.
Office Products in June 1998. Mr. Pate joined School Specialty with the
acquisition of Re-Print in 1996, having served as President of Re-Print since he
acquired it in 1988.

RONALD E. SUCHODOLSKI has served as Executive Vice President of School
Specialty for Childcraft since completion of the spin-off from U.S. Office
Products in June 1998. Mr. Suchodolski joined School Specialty with the
acquisition of Childcraft in 1997. Mr. Suchodolski was Vice President of
Childcraft in 1995 and 1996 and was Director of Childcraft's School Division
from 1984 to 1989. From 1989 to 1993, Mr. Suchodolski was President of the
Judy/Instructo Division of Paramount, and from 1993 to 1995, Mr. Suchodolski
served as Senior Vice President of Sales and Marketing for Paramount
Publishing's Supplementary Materials Division.

JONATHAN J. LEDECKY has served as a director and an employee of School
Specialty since June 1998. He founded Building One Services Corporation
(formerly Consolidation Capital Corporation) in February 1997 and serves as its
Chairman and Chief Executive Officer. Mr. Ledecky founded U.S. Office Products
in October 1994, served as its Chairman of the Board until June 1998 and served
as its Chief Executive Officer until November 1997. Mr. Ledecky also serves as a
director of Aztec Technology Partners, Inc., Navigant International, Workflow
Management, USA Floral Products, UniCapital Corporation and MicroStrategy
Corporation. Mr. Ledecky served from 1989 to 1991 as the President of The Legacy
Fund, Inc., and from 1991 to September 1994 as President and Chief Executive
Officer of Legacy Dealer Capital Fund, Inc., a wholly-owned subsidiary of
Steelcase Inc. Prior to his tenure at The Legacy Fund, Inc., Mr. Ledecky was a
partner at Adler and Company and a Senior Vice President at Allied Capital
Corporation, an investment management company.

LEO C. MCKENNA has served as a director of School Specialty since
completion of the spin-off from U.S. Office Products in June 1998. Mr. McKenna
is a self-employed financial consultant working with personal asset management,
corporate planning, acquisitions, merger studies and negotiations. Mr. McKenna
is currently a director of Life Insurance Company of Boston and New York
(Subsidiary of Boston Mutual Life). He is founder and a director of Ledyard
National Bank, where he also serves on the Investment Advisory Board and the
Trust Committee. He is a director and member of the John Brown Cook Foundation
and an overseer and Chairman of the Finance Committee for the Catholic Student
Center at Dartmouth College.

ROCHELLE LAMM WALLACH has served as a director of School Specialty since
completion of the spin-off from U.S. Office Products in June 1998. Ms. Wallach
is Chairman and Chief Executive Officer of Precision Marketing Partners, LLC and
The Academy of Financial Services Studies, LLC. Ms. Wallach was associated with
Strong Advisory Services, a division of Strong Capital Management, Inc., as its
President from 1995 to March 1998. Prior to that time, she was President and the
chief operating officer of AAL Capital Management, a mutual fund manager.

COMMITTEES OF THE BOARD

The Audit Committee of the Board of Directors is charged with reviewing our
annual audit and meeting with our independent accountants to review our internal
controls and financial management practices. The following persons comprise
48
<PAGE> 51

the Audit Committee: Mr. McKenna and Ms. Wallach.

The Compensation Committee of the Board of Directors is charged with
determining the compensation of our executive officers and administering our
1998 Stock Incentive Plan. The following persons comprise the Compensation
Committee: Mr. McKenna and Ms. Wallach.

EXECUTIVE COMPENSATION

The following table sets forth information with respect to the compensation
paid by us for services rendered during the years ended April 26, 1997 and April
25, 1998 to the Chief Executive Officer and to each of our four other most
highly compensated officers (the "Named Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)(1) COMPENSATION($)
- --------------------------- ---- --------- -------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Daniel P. Spalding................. 1997 $178,846 -- -- --
Chairman of the Board and CEO 1998 212,104 $34,200 135,484 --
Ronald E. Suchodolski(2)........... 1997 $141,535 $30,000 -- --
Executive Vice President, 1998 157,646 62,633 18,065 --
Childcraft
Richard H. Nagel(2)(3)............. 1997 $118,000 $29,500 -- $32,000
Executive Vice President, Sax
Arts 1998 130,660 29,500 18,065 --
and Crafts
Donald Ray Pate, Jr.(2)............ 1997 $220,901 -- -- --
Executive Vice President, 1998 117,000 -- -- --
ClassroomDirect.com
Douglas Moskonas................... 1997 $ 97,266 $44,500 13,548 --
Executive Vice President, School 1998 139,525 -- 18,065 --
Specialty Division
</TABLE>

- ---------------

(1) No options to purchase School Specialty Common Stock were granted to the
Named Officers during the years shown. Rather, the number of shares set
forth in the table represents the number of shares of Common Stock
underlying options that the Named Officer would have been granted if all
U.S. Office Products options granted during the year were replaced with
School Specialty options.

(2) Mr. Suchodolski, Mr. Nagel and Mr. Pate joined School Specialty in May 1997,
July 1997 and July 1996, respectively. The compensation information included
in this table reflects the compensation received when employed by
predecessor companies.

(3) Other compensation refers to Mr. Nagel's automobile allowance and stay-bonus
compensation received from his prior employer.

49
<PAGE> 52

OPTIONS GRANTED IN FISCAL 1999

The following table sets forth certain information regarding options to
acquire Common Stock granted to certain executive officers during fiscal 1999.

OPTIONS GRANTED IN FISCAL 1999

<TABLE>
<CAPTION>
% OF
NUMBER OF SECURITIES UNDERLYING TOTAL OPTIONS
OPTIONS GRANTED IN FISCAL 1999(#) GRANTED TO
------------------------------------------------- EMPLOYEES IN
NAME REPLACEMENT OPTIONS(1) NEW OPTIONS(2) TOTAL FISCAL 1999
- ---- ---------------------- -------------- ------- -------------
<S> <C> <C> <C> <C>
Daniel P. Spalding................. 104,001 228,519 332,520 14.5%
Ronald E. Suchodolski.............. 18,065 45,703 63,768 2.8%
Richard H. Nagel................... 13,867 45,703 59,570 2.6%
Donald Ray Pate, Jr. .............. -- 45,703 45,703 2.0%
Douglas Moskonas................... 24,267 45,703 69,970 3.1%
David J. Vander Zanden............. -- 228,519 228,519 10.0%
</TABLE>

- ---------------

(1) The options granted are non-qualified stock options which replace options
that were previously granted by U.S. Office Products. The options were
granted by School Specialty on June 10, 1998, have various exercise
schedules based on the original date of grant by U.S. Office Products and
expire ten years from the original date of grant by U.S. Office Products.
The options are exercisable at the market price on the original date of
grant by U.S. Office Products, as adjusted by a fraction, the numerator of
which is the initial public offering price of School Specialty Common Stock
on June 10, 1998 and the denominator of which is the trading price of U.S.
Office Products' common stock prior to the spin-off.

(2) The options granted are both qualified and non-qualified stock options,
which were granted on June 10, 1998, are exercisable in full on June 10,
1999 at the market price on the date of grant (which was $15.50 per share)
and expire on June 10, 2008. The options become fully exercisable upon a
change in control, as defined in the 1998 Stock Incentive Plan.

50
<PAGE> 53

OPTIONS GRANTED IN FISCAL 1998

The following table sets forth certain information regarding options to
acquire Common Stock granted to the Named Officers during the year ended April
25, 1998. No options to purchase School Specialty Common Stock were granted to
Named Officers during the year. Rather, the number of shares and exercise prices
set forth below represent the number of shares of Common Stock underlying
options (and the exercise price of options) that the Named Officer would have
been granted if all U.S. Office Products options granted during the year were
replaced with School Specialty options.

OPTIONS GRANTED IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE
----------------------------------------------------------- AT ASSUMED ANNUAL
NUMBER OF % OF RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED (#)(1) FISCAL YEAR (2) ($/SH)(1) DATE 5% ($) 10% ($)
---- --------------- --------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Daniel P. Spalding........ 135,484 52.7% $16.80 4/28/07 $1,431,447 $3,626,567
Ronald E. Suchodolski..... 18,065 7.0% 19.93 12/12/07 226,424 573,804
Richard H. Nagel.......... 18,065 7.0% 19.93 12/12/07 226,424 573,804
Donald Ray Pate, Jr....... -- -- -- -- -- --
Douglas Moskonas.......... 18,065 7.0% 19.93 12/12/07 226,424 573,804
</TABLE>

- ---------------
(1) The options granted are non-qualified stock options, which are exercisable
at the market price on the date of grant, beginning one year from the date
of grant in cumulative yearly amounts of 25% of the shares and expire ten
years from the date of grant. The options become fully exercisable upon a
change in control, as defined in the 1998 Stock Incentive Plan.

(2) Total options granted refers to options to acquire U.S. Office Products
common stock given to all employees of the Educational Supplies and Products
Division of U.S. Office Products during fiscal 1998.

(3) The dollar amounts under these columns are the results of calculations at
assumed annual rates of stock appreciation of 5% and 10%. These assumed
rates of growth were selected by the SEC for illustration purposes only.
They are not intended to forecast possible future appreciation, if any, of
stock prices. No gain to the optionees is possible without an increase in
stock prices, which will benefit all stockholders.

51
<PAGE> 54

OPTION EXERCISES IN FISCAL 1998 AND FISCAL YEAR-END OPTION VALUES

The following table sets forth certain information regarding unexercised
options held by the Named Officers at April 25, 1998. No options to purchase
School Specialty Common Stock had been granted as of April 25, 1998. Rather, the
number of shares set forth below represents the number of shares of Common Stock
underlying options that the Named Officer would have held at the end of the year
if all U.S. Office Products options held on that date (prior to the U.S. Office
Products tender offer (which occurred immediately prior to the spin-off), which
allowed holders of U.S. Office Products options to tender a portion of their
options to U.S. Office Products for cash) were replaced with School Specialty
options.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT FY-END (#) AT FISCAL YEAR END ($) (1)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Daniel P. Spalding........ -- $ -- -- 135,484 $ -- N/A
Ronald E. Suchodolski..... -- -- -- 18,065 -- N/A
Richard H. Nagel.......... -- -- -- 18,065 -- N/A
Donald Ray Pate, Jr....... -- -- -- -- -- N/A
Douglas Moskonas.......... -- -- -- 31,613 -- N/A
</TABLE>

- ---------------

(1) At the end of fiscal 1998, School Specialty Common Stock was not traded.
Therefore, it is not possible to determine the value of unexercised
in-the-money options as of that date.

1998 STOCK INCENTIVE PLAN

The purpose of the Amended and Restated 1998 Stock Incentive Plan (the
"Plan") is to promote our long-term growth and profitability. The Plan does this
by providing employees, officers and non-employee directors with incentives to
improve stockholder value and contribute to our growth and financial success,
and by enabling us to attract, retain and reward highly motivated and qualified
employees, officers and non-employee directors. The maximum percentage of shares
of Common Stock that may be issued with respect to awards granted under the Plan
is 20% of the outstanding shares of Common Stock determined immediately after
the grant of the award. The maximum number of shares that may be issued with
respect to awards granted under the Plan to an individual in a calendar year may
not exceed 1.2 million shares. The Plan is administered by the Compensation
Committee of the Board of Directors. All employees of School Specialty and its
subsidiaries, as well as non-employee directors and officers of School
Specialty, are eligible to receive awards under the Plan. The Plan authorizes
the Compensation Committee to make awards of stock options, restricted stock and
other stock-based awards. The Compensation Committee determines the prices
(which may not be less than the fair market value on the date of award), vesting
schedules, expiration dates and other material conditions under which such
awards may be exercised.

As of June 10, 1998, Mr. Ledecky received options to purchase 914,079
shares of Common Stock under the Plan. The options were intended to compensate
Mr. Ledecky for his services to us as an employee. The options have a per share
exercise price equal to $15.50. Based on an exercise price of $15.50 and an
assumed trading volatility index of the Common Stock of 35%, the estimated value
of the options at the date of grant was approximately $2.6 million, net of taxes
at an assumed 40%

52
<PAGE> 55

rate. Mr. Ledecky's options are fully vested when granted but will not be
exercisable until June 10, 1999. Mr. Ledecky's options will be exercisable
immediately if Mr. Ledecky dies before the options expire or if and to the
extent that we accelerate the exercise schedule of substantially all management
options. All unexercised portions of options will expire ten years after the
date of grant or, if applicable, as of the date Mr. Ledecky violates the
non-competition agreement he entered into with us. See "-- Director Compensation
and Other Arrangements."

As of June 10, 1998, Daniel P. Spalding and David J. Vander Zanden each
received options to purchase 228,519 shares of Common Stock under the Plan.
Messrs. Spalding and Vander Zanden's options have the same terms as Mr.
Ledecky's options, including an exercise price equal to $15.50. Based on an
exercise price of $15.50 and an assumed trading volatility index of the Common
Stock of 35%, the estimated value of the options to each of Mr. Spalding and Mr.
Vander Zanden at the date of grant was approximately $0.7 million, net of taxes
at an assumed 40% rate.

In addition to the foregoing, certain of our executive officers received
options to purchase an aggregate of 274,218 shares of Common Stock on June 10,
1998, also at an exercise price of $15.50.

DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS

We granted non-management directors options to purchase 15,000 shares of
Common Stock upon their initial election as members of the Board of Directors.
We intend to grant options to acquire 5,000 shares of Common Stock for each
additional year of service. Non-management directors are paid an annual retainer
of $20,000 plus $1,000 for each additional special meeting attended and are
reimbursed for all out-of-pocket expenses related to their service as directors.

We entered into an employment agreement with Mr. Ledecky effective as of
June 10, 1998 that implemented certain portions of an agreement that Mr. Ledecky
had previously entered into with U.S. Office Products (the "Ledecky Services
Agreement"). Under the employment agreement, Mr. Ledecky reports to the Board of
Directors and senior management of School Specialty. In such capacity, Mr.
Ledecky provides high-level acquisition negotiation services and strategic
business advice. We can require Mr. Ledecky's performance of such services,
consistent with his other contractual obligations to Building One Services
Corporation, U.S. Office Products and the other spin-off companies. As an
employee, Mr. Ledecky is subject to our generally applicable personnel policies
and is eligible for such benefit plans in accordance with their terms. We pay
Mr. Ledecky an annual salary of $48,000 for up to two years. We may terminate
Mr. Ledecky's employment for "cause," where cause consists of (1) his conviction
of, or guilty or nolo contendere plea to, a felony demonstrably and materially
injurious to us or (2) his violation of the non-competition provision as it
relates to us.

The Ledecky Services Agreement provides for non-competition and
non-solicitation restrictions that continue until the later of June 10, 2000 or
one year after Mr. Ledecky leaves our employ. These provisions generally
restrict Mr. Ledecky from, among other things, investing in or working for or on
behalf of any business selling any products or services in direct competition
with U.S. Office Products or the spin-off companies within 100 miles of any
location where U.S. Office Products or a spin-off company, as applicable,
regularly maintains an office with employees. (For this purpose, "products or
services" are those that U.S. Office Products or a spin-off company offered on
or before January 13, 1998.) Notwithstanding this prohibition, Mr. Ledecky may
serve in a policy making role (but not engage in direct personal competition)
with respect to the following businesses: (1) any electrical contracting
business that derives more than 50% of its revenues from electrical contracting
and maintenance services, without regard to whether the business competes with
certain activities of Aztec Technology Partners, Inc.

53
<PAGE> 56

(one of the spin-off companies) or any of its subsidiaries (collectively,
"Aztec"); (2) any business whose revenue from certain activities that compete
with Aztec is less than $15 million per year; (3) any business engaged in
computer monitoring for facilities management; (4) businesses selling, supplying
or distributing janitorial or sanitary products or services; (5) businesses
managing or servicing office equipment (other than computers); (6) businesses
providing Internet services; (7) UniCapital Corporation's current businesses
(which include equipment leasing); or (8) U.S. Marketing Services'
shelf-stocking and merchandising and point-of-purchase display creation
business. The Ledecky Services Agreement prohibits Mr. Ledecky from trying to
hire away our managerial employees or from calling upon our customers to solicit
or sell products or services in direct competition with us. Mr. Ledecky also may
not hire away for Building One Services Corporation any person then or in the
preceding one year employed by us.

EMPLOYMENT CONTRACTS AND RELATED MATTERS

We have entered into employment agreements with Daniel P. Spalding, Donald
Ray Pate, Jr., and Richard H. Nagel, each of whom is a Named Officer, and David
J. Vander Zanden, an executive officer.

Daniel P. Spalding, Chief Executive Officer of School Specialty, entered
into an employment contract with Old School on April 29, 1996 (School Specialty
is the successor to this agreement). The contract has an initial term of four
years but, unless terminated, is automatically extended at the end of each of
the last three years of the initial term for another year. Mr. Spalding receives
a base salary of at least $180,000 and participates in an incentive bonus plan
which provides for an annual bonus up to 100% of base salary upon the attainment
of profit and revenue objectives. Following the termination of his employment
for any reason, Mr. Spalding has agreed not to compete with us for a period
equal to the longer of two years or, in the case of early termination, the years
remaining on his contract. If Mr. Spalding is terminated without cause, as
defined in the contract, he is entitled to his entire base salary for the years
remaining on the contract. In addition, Mr. Spalding may terminate his contract
for good cause (e.g., a material, adverse change in his position or
responsibilities or any material breach on our part) or within five days of a
change in control of School Specialty. The contract defines a change of control
to mean: (1) the acquisition of beneficial ownership of 50% or more of our
voting securities by any person other than U.S. Office Products; (2) a loss of
majority status by the combination of members of U.S. Office Products' Board of
Directors at the time of its initial public offering and any board members
installed by a two-thirds vote of the then-present initial directors or any
directors subsequently installed by them; (3) any reorganization of U.S. Office
Products, unless 75% of the beneficial ownership of U.S. Office Products voting
securities remains in the same hands; or (4) U.S. Office Products or more than
49% of its assets are liquidated.

Donald Ray Pate, Jr., President of ClassroomDirect.com, entered into an
employment contract with the Re-Print Corporation (now known as
ClassroomDirect.com) on July 26, 1996. The contract runs for four years but
provides for two automatic one-year extensions unless ClassroomDirect.com gives
60 days written notice of its intent not to renew. Mr. Pate receives an annual
base salary of at least $125,000 (although he voluntarily reduced his base
salary in 1998). Following the termination of his employment for any reason, Mr.
Pate has agreed not to compete with ClassroomDirect.com for the longer of two
years or until the end of the contractual term. If Mr. Pate is terminated
without cause, he is entitled to receive his base salary for three months or
until the end of the initial contractual term, whichever period is greater. Mr.
Pate was granted options on June 10, 1998 to purchase 45,703 shares of Common
Stock with the same terms as Mr. Ledecky's options, including an exercise price
of $15.50. See "--1998 Stock Incentive Plan."

Richard H. Nagel, President of Sax Arts and Crafts, entered into a
four-year
54
<PAGE> 57

employment contract with Sax Arts and Crafts on June 27, 1997. Mr. Nagel
receives an annual base salary of at least $125,000, and he participates in an
incentive bonus plan based upon the attainment of profit and revenue objectives.
Mr. Nagel also entered into a covenant not to compete agreement with Sax Arts
and Crafts on June 27, 1997 for which he received consideration of $31,250 from
Sax Arts and Crafts. Pursuant to this agreement, following the termination of
his employment for any reason, Mr. Nagel has agreed not to compete with Sax Arts
and Crafts for one year. If Mr. Nagel is terminated without cause, he is
entitled to receive his base salary for one year or until the end of the
contractual term, whichever period is lesser. Mr. Nagel was granted options on
June 10, 1998 to purchase 45,703 shares of Common Stock with the same terms as
Mr. Ledecky's options, including an exercise price of $15.50. See "--1998 Stock
Incentive Plan."

David J. Vander Zanden became President and Chief Operating Officer of
School Specialty in March 1998. We entered into an employment contract with Mr.
Vander Zanden on July 15, 1998. The contract has an initial term of two years,
with automatic two-year extensions unless either party gives 90 days written
notice of such party's intent not to renew. The employment contract provides for
a base salary of $225,000 and participation in an incentive bonus plan based
upon the attainment of profit and revenue objectives. The employment contract
also contains a covenant not to compete upon termination of the agreement, and
provides Mr. Vander Zanden the right to terminate the agreement upon a change of
control in School Specialty, as defined in the agreement. Mr. Vander Zanden was
granted options on June 10, 1998 to purchase 228,519 shares of Common Stock with
the same terms as Mr. Ledecky's options, including an exercise price of $15.50.
See "--1998 Stock Incentive Plan."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No member of the Compensation Committee has ever been an officer of our
company or any of our subsidiaries and none of our executive officers has served
on the compensation committee or the board of directors of any company of which
any of our directors is an executive officer.

55
<PAGE> 58

CERTAIN TRANSACTIONS

On April 29, 1996, U.S. Office Products acquired Old School in a business
combination accounted for under the pooling-of-interests method in which 576,923
shares (as adjusted for a one-for-four reverse stock split) of U.S. Office
Products common stock were issued as consideration. Current officers of School
Specialty who received shares of U.S. Office Products common stock in the
transaction include Daniel P. Spalding (77,441 shares (as adjusted), and an
additional 7,504 shares (as adjusted) through an IRA for his benefit), Michael
J. Killoren, a non-executive officer of School Speciality, (6,754 shares (as
adjusted)) and Donald J. Noskowiak (6,754 shares (as adjusted)). In addition,
John S. Spalding (Daniel P. Spalding's father) received 162 shares (as adjusted)
and an additional 15,008 shares (as adjusted) through an IRA for his benefit,
the Patricia M. Spalding Revocable Trust received 17,731 shares (as adjusted)
(Patricia M. Spalding is Daniel P. Spalding's mother), Joanne Lee Killoren
(Michael J. Killoren's aunt) received 5,076 shares (as adjusted), Donald
Killoren (Michael J. Killoren's father) received 15,194 shares (as adjusted) and
Leo C. McKenna received 69,501 shares (as adjusted). The other parties to the
foregoing transactions had no relationship to School Specialty or U.S. Office
Products at the time such transactions were entered into, and accordingly, we
believe that these transactions were as favorable as could be negotiated with
third parties.

U.S. Office Products acquired ClassroomDirect.com (formerly Re-Print) on
July 26, 1996 in a business combination accounted for under the
pooling-of-interests method in which it issued 487,500 shares (as adjusted) of
U.S. Office Products common stock as consideration. In that transaction, Donald
Ray Pate, Jr. received 269,007 shares (as adjusted) of U.S. Office Products
common stock for his interest in ClassroomDirect.com. Other shareholders related
to Mr. Pate who received shares of U.S. Office Products common stock in the
merger were Celita Pate Carmichael (7,560 shares (as adjusted)), Phillip S. Pate
(21,338 shares (as adjusted)), Richard K. Pate (18,480 shares (as adjusted)) and
Mary K. Pate (29,126 shares (as adjusted)). The other parties to the foregoing
transactions had no relationship to School Specialty or U.S. Office Products at
the time such transactions were entered into, and accordingly, we believe that
these transactions were as favorable as could be negotiated with third parties.

On March 20, 1998, School Specialty acquired substantially all of the
assets of the catalog division of Education Access, Inc., a debtor in possession
under Chapter 11 of the United States Bankruptcy Code. In this transaction, the
secured creditors of Education Access received all of the consideration paid by
School Specialty. Lillian R. Kellogg, a former executive officer of School
Specialty, owned approximately 40% of the capital stock of Education Access.
This transaction was the subject of arm's length negotiation between School
Specialty and the secured creditors of Education Access, Inc.

Our main office and warehouse facility, a 120,000 square foot building
located in Appleton, Wisconsin, is leased from Bluemound Corporation. John S.
Spalding, a former member of the Board of Directors of Old School and the father
of Daniel P. Spalding, holds a one-third stake in Bluemound. Donald Killoren,
father of Michael J. Killoren, a non-executive officer of School Specialty, also
holds a one-third stake in Bluemound. The lease provides for annual payments of
$196,000 through December 31, 2001. We believe that this transaction was as
favorable as could be negotiated with third parties. We are currently
negotiating a transaction to acquire this facility from Bluemound. It is
expected that this transaction would be effected at fair market value as
determined by an independent appraisal, net of any indebtedness assumed. We
believe the net value of any such transaction would be approximately $2 million.

For a discussion of transactions between School Specialty and Mr. Ledecky,
see "Management--Director Compensation and Other Arrangements."

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<PAGE> 59

PRINCIPAL STOCKHOLDERS

The following table sets forth, as of February 1, 1999 (unless otherwise
indicated), the number and percentage of Common Stock beneficially owned by the
following persons and as adjusted to give effect to the Common Stock offering:
(1) all persons known by us to own beneficially more than 5% of the Common
Stock, (2) each director and Named Officer and (3) all directors and executive
officers as a group. All persons listed below have sole voting and investment
power with respect to their shares, unless otherwise indicated. Except as
otherwise indicated, the business address of each of the following is 1000 North
Bluemound Drive, Appleton, Wisconsin 54914.

<TABLE>
<CAPTION>
PRIOR TO THE OFFERING AFTER THE OFFERING
--------------------------- ---------------------------
PERCENT OF PERCENT OF
NUMBER OF OUTSTANDING NUMBER OF OUTSTANDING
NAME AND ADDRESS SHARES OWNED SHARES(5) SHARES OWNED SHARES(6)
- ---------------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Daniel P. Spalding(1)................ 149,607 1% 149,607 *
Ronald E. Suchodolski(1)............. 4,530 * 4,530 *
Richard H. Nagel(1).................. 358 * 358 *
Donald Ray Pate, Jr.(2).............. 162,944 1.1% 162,944 *
Douglas Moskonas(1).................. 5,243 * 5,243 *
David J. Vander Zanden............... 50,000 * 50,000 *
Jonathan J. Ledecky.................. -- -- -- --
Leo C. McKenna....................... 6,239 * 6,239 *
Rochelle Lamm Wallach................ 1,950 * 1,950 *
All executive officers and directors
as a group (11 persons)(1)......... 386,561 2.7% 386,561 2.2%

Dresdner RCM Global Investors LLC(3)
Dresdner RCM Global Investors US
Holdings LLC
Dresdner Bank AG
Four Embarcadero Center
San Francisco, California 94111.... 1,084,900 7.4% 1,084,900 6.2%

AXA Conseil Vie Assurance Mutuelle(4)
AXA Assurances I.A.R.D. Mutuelle and
AXA Assurances Vie Mutuelle
AXA Courtage Assurance Mutuelle
AXA
The Equitable Companies Incorporated
1290 Avenues of the Americas
New York, New York 10104........... 768,601 5.3% 768,601 4.4%
</TABLE>

- ---------------
* Less than 1%.

(1) Share amounts include options currently exercisable, or exercisable within
60 days after February 1, 1999, in the amount of 2,389 for Mr. Spalding,
4,516 for Mr. Suchodolski, 318 for Mr. Nagel, 3,943 for Mr. Moskonas and
13,612 for all executive officers and directors as a group.

(2) Mr. Pate has entered into hedging arrangements that place a ceiling and a
floor on the price of certain of his shares of Common Stock.

(3) Dresdner RCM Global Investors LLC ("Dresdner RCM"), Dresdner RCM Global
Investors US Holdings LLC ("Dresdner RCM Global") and Dresdner Bank AG
("Dresdner Bank")

57
<PAGE> 60

have jointly filed a Schedule 13G with the SEC reporting that they had, as
of December 31, 1998, sole voting power over 928,900 shares of Common Stock
(including 904,900 shares beneficially owned by Dresdner RCM and Dresdner
RCM Global) and sole dispositive power over 1,084,900 (including 1,060,900
shares beneficially owned by Dresdner RCM and Dresdner RCM Global).
Dresdner Bank's principal business office is located at Jurgen-Ponto-Platz
1, 60301 Frankfurt, Germany. The principal business address of both
Dresdner RCM and Dresdner RCM Global is as indicated in the table.

(4) AXA Conseil Vie Assurance Mutuelle ("AXA Conseil"), AXA Assurances I.A.R.D.
Mutuelle ("AXA Assurances"), AXA Assurances Vie Mutuelle ("AXA Assurances
Vie"), AXA Courtage Assurance Mutuelle ("AXA Courtage"), AXA ("AXA") and
The Equitable Companies Incorporated ("Equitable") have jointly filed a
Schedule 13G with the SEC reporting that they had, as of December 31, 1998,
sole voting power over 625,000 shares of Common Stock, shared voting power
over 139,600 shares of Common Stock and sole dispositive power over 768,601
shares of Common Stock. AXA Conseil's principal business office is located
at 100-101 Terrasse Boieldieu, 92042 Paris, La Defense, France; AXA
Assurances' principal business office, which is the same as AXA Assurances
Vie's principal business office, is located at 21 Rue de Chateaudun, 75009
Paris, France; AXA Courtage's principal business office is located at 25
Rue Louis le Grand, 75002 Paris, France; AXA's principal business office is
located at 9 Place Vendome, 75001 Paris, France; and Equitable's principal
business address is as indicated in the table.

(5) Based on 14,578,925 shares of Common Stock outstanding as of February 1,
1999.

(6) Based on 17,578,925 shares of Common Stock outstanding after the offering.

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<PAGE> 61

DESCRIPTION OF SENIOR CREDIT FACILITY

OVERVIEW

Our Senior Credit Facility is among School Specialty, our subsidiaries,
NationsBank, N.A., as administrative agent, Bank One, Wisconsin and U.S. Bank
National Association, as documentation agents, and other lending institutions
(the "Lenders") named in the Senior Credit Facility. The Senior Credit Facility
generally provides for a revolving loan facility of up to $250 million and a
term loan in the amount of $100 million, subject to certain covenants and
restrictions. In connection with the Common Stock offering, we are negotiating
certain changes to the Senior Credit Facility.

Our subsidiaries have jointly and severally guaranteed our obligations
under the Senior Credit Facility.

SECURITY

Our indebtedness under the Senior Credit Facility is secured by (1) the
pledge of most of the capital stock in all of our subsidiaries and (2) liens on
substantially all of our other assets (other than real estate). The Senior
Credit Facility contemplates that if the proposed sale leaseback transaction
involving our properties does not occur by September 1999, we must provide
mortgages on these properties as additional security to the Lenders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- Our Facilities."

INTEREST

Indebtedness under the Senior Credit Facility bears interest at a floating
rate based (at our option) on (1) the base rate for base rate loans, plus a
margin percentage or (2) LIBOR, plus a margin percentage. The margin percentage
varies after the third quarter of fiscal 1999 from 0% to .75% for base rate
loans and 1% to 2% for LIBOR loans based on our consolidated leverage ratio. Our
consolidated leverage ratio is calculated as of the last day of each fiscal
quarter and is the ratio of our funded debt to our operating income before
interest, income taxes, depreciation, amortization and non-recurring acquisition
and restructuring costs.

On October 28, 1998, we entered into an interest rate swap agreement with
the Bank of New York covering $50 million of the outstanding Senior Credit
Facility. The agreement fixes the 30 day LIBOR interest rate at 4.37% per annum
on the $50 million notional amount and has a three year term that may be
canceled by the Bank of New York on the second anniversary.

MATURITY

The revolving Senior Credit Facility matures on September 30, 2003. The
term loan amortizes quarterly beginning in January 1999 and requires payments of
$10 million in the first year, $15 million in each of the second and third
years, and $30 million in each of the fourth and fifth years. Prepayments may be
made in whole or in part without penalty, subject to certain minimums. Amounts
prepaid may be reborrowed under the revolving facility but not the term
facility.

CONDITIONS TO EXTENSIONS OF CREDIT

The obligation of the Lenders to make subsequent loans is subject to the
satisfaction of certain customary conditions including, but not limited to, the
absence of a default or event of default under the Senior Credit Facility, all
representations and warranties under the Senior Credit Facility and the other
related loan documents being true and correct in all material respects and that
there has been no material adverse change in our properties or business.

COVENANTS

The Senior Credit Facility requires us to meet certain financial tests,
including meeting a minimum net worth test and leverage ratio and fixed charge
coverage ratio tests. The Senior Credit Facility also contains covenants which,
among other things, limit the incurrence of additional indebtedness, the nature
of our business, investments, leases of assets, creation and ownership of

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<PAGE> 62

subsidiaries, dividends, transactions with affiliates, mergers, consolidations
and acquisitions and dispositions of assets, liens and encumbrances and other
matters customarily restricted in credit agreements of this type. The Senior
Credit Facility also contains additional covenants that require us to maintain
our properties, together with insurance thereon, to provide certain information
to Nationsbank and the Lenders, including financial statements, notices and
reports, to permit inspections of our books and records and to comply with
applicable laws.

EVENTS OF DEFAULT

The Senior Credit Facility contains customary events of default, including
payment defaults, breach of representations, warranties and covenants (subject
to certain cure periods), cross-defaults to certain other indebtedness in excess
of $5 million, certain events of bankruptcy and insolvency, judgment defaults in
excess of $1 million and the failure of any of the loan documents to be in full
force and effect.

AMENDMENT

As noted above, in connection with the Common Stock offering, we are
negotiating certain changes to the Senior Credit Facility. These changes include
certain changes to the financial and other covenants.

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<PAGE> 63

DESCRIPTION OF OUR CAPITAL STOCK

GENERAL

Our authorized capital stock consists of 150,000,000 shares of Common
Stock, par value $.001 per share, and 1,000,000 shares of Preferred Stock, par
value $.001 per share. As of February 1, 1999, there were 14,578,925 shares of
Common Stock outstanding and no shares of Preferred Stock outstanding. All of
our currently outstanding shares of Common Stock are validly issued, fully paid
and non-assessable, and upon completion of the Common Stock offering, all of our
outstanding shares of Common Stock will be validly issued, fully paid and
non-assessable.

The following summary of our capital stock is qualified in its entirety by
reference to our Restated Certificate of Incorporation (the "Certificate of
Incorporation") and Amended and Restated Bylaws (the "Bylaws"), which are
incorporated by reference as exhibits to the registration statement of which
this Prospectus is a part.

COMMON STOCK

The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors.

Subject to the rights of any then outstanding shares of Preferred Stock,
the holders of Common Stock are entitled to such dividends as may be declared in
the discretion of the Board of Directors out of funds legally available
therefor. See "Dividend Policy." Holders of Common Stock are entitled to share
ratably in our net assets upon liquidation after payment or provision for all
liabilities and any preferential liquidation rights of any Preferred Stock then
outstanding. Holders of Common Stock have no preemptive rights to purchase
shares of our stock. Shares of Common Stock are not subject to any redemption
provisions and are not convertible into any other securities of School
Specialty.

PREFERRED STOCK

The Board of Directors has the authority from time to time to issue
Preferred Stock as shares of one or more classes or series. Subject to the
provisions of our Certificate of Incorporation and limitations prescribed by
law, the Board of Directors is expressly authorized to adopt resolutions to
issue the shares, to fix the number of shares and to change the number of shares
constituting any series and to provide for or change the voting powers,
designations, preferences and relative, participating, optional or other special
rights, qualifications, limitations or restrictions thereof, including dividend
rights (including whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), redemption prices, conversion
rights and liquidation preferences of the shares constituting any class or
series of the Preferred Stock, in each case without any further action or vote
by the stockholders. We have no current plans to issue any shares of Preferred
Stock of any class or series.

One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of School Specialty by means of a tender offer, proxy contest,
merger or otherwise, and thereby to protect the continuity of our management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock may rank prior to Common
Stock as to dividend rights, liquidation preference or both, may have full or
limited voting rights and may be convertible into shares of Common Stock.
Accordingly, the issuance of shares of Preferred Stock may discourage bids for
Common Stock or may otherwise adversely affect the market price of Common Stock.

STATUTORY BUSINESS COMBINATION PROVISION

We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Section 203 provides, with certain exceptions, that a Delaware

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<PAGE> 64

corporation may not engage in any of a broad range of business combinations with
a person or an affiliate, or associate of such person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (1) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the board of directors of the corporation before the person becomes an
interested stockholder; (2) the interested stockholder acquired 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes such person an interested stockholder (excluding shares owned by persons
who are both officers and directors of the corporation, and shares held by
certain employee stock ownership plans); or (3) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined as any person who is: (1) the owner of 15%
or more of the outstanding voting stock of the corporation; or (2) an affiliate
or associate of the corporation if such affiliate or associate was the owner of
15% or more of the outstanding voting stock of the corporation at any time
within the three-year period immediately prior to the date on which it is sought
to be determined whether such person is an interested stockholder.

A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws, by action of
its stockholders, to exempt itself from coverage, provided that such bylaws or
certificate of incorporation amendment shall not become effective until 12
months after the date it is adopted. We have not adopted such an amendment to
our Certificate of Incorporation or Bylaws. Under our Certificate of
Incorporation, the affirmative vote of a majority of the directors is required
to approve an interested stockholder transaction except for certain statutory
business combinations governed by Section 203, which require the affirmative
vote of 66 2/3% of the directors to approve such transactions.

PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS AFFECTING CHANGE OF
CONTROL

The Board of Directors has adopted certain amendments to the Certificate of
Incorporation or Bylaws that may provide the Board of Directors with more
negotiating leverage by delaying or making more difficult unsolicited
acquisitions or changes of control of School Specialty. We believe that such
provisions will enable us to develop our business in a manner that will foster
our long-term growth without disruption caused by the threat of a takeover not
deemed by the Board of Directors to be in our best interests and the best
interests of our stockholders. Such provisions could have the effect of
discouraging third parties from making proposals involving an unsolicited
acquisition or change of control, although such proposals, if made, might be
considered desirable by a majority of our stockholders. Such provisions may also
have the effect of making it more difficult for third parties to cause the
replacement of our management without concurrence of the Board of Directors.
These provisions include: (1) the availability of capital stock for issuance
from time to time at the discretion of the Board of Directors (see "-- Preferred
Stock" above); (2) the classification of the Board of Directors into three
classes, each of which serves for a term of three years; (3) prohibition on
stockholders acting by written consent in lieu of a meeting; (4) limitation on
stockholders calling a special meeting of stockholders; (5) requirements for
advance notice for raising business or making nominations at stockholders'
meetings; and (6) the requirement of a supermajority vote to amend the Bylaws.

CLASSIFIED BOARD. Our Certificate of Incorporation includes provisions
dividing the Board of Directors' membership into three classes, each of which
serves until the third succeeding annual meeting with one class being elected at
each annual meeting of

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stockholders. Under Delaware law, each class will be as nearly equal in number
as possible. As a result, at least two annual meetings of stockholders may be
required for our stockholders to change a majority of the members of the Board
of Directors. We believe that a classified board of directors will assure
continuity and stability of our management and policies, without diminishing
accountability to stockholders. A classified Board of Directors will ensure that
a majority of directors at any given time will have experience in our business
and competitive affairs.

NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS. The
Certificate of Incorporation and Bylaws provide that stockholder action can be
taken only at an annual or special meeting and cannot be taken by written
consent in lieu of a meeting. The Certificate of Incorporation and Bylaws also
provide that special meetings of the stockholders can be called only by the
Chairman of the Board, the Chief Executive Officer, a vote of the majority of
the entire board or by holders of at least 33 1/3% of the outstanding shares of
our stock entitled to vote generally for the election of directors.

ADVANCE NOTICE FOR RAISING BUSINESS OR MAKING NOMINATIONS AT MEETINGS. The
Bylaws establish an advance notice procedure for stockholder proposals to be
brought before an annual meeting of stockholders and for nominations by
stockholders of candidates for election as directors at an annual or special
meeting at which directors are to be elected. Only such business may be
conducted at an annual meeting of stockholders as has been brought before the
meeting by, or at the direction of, the Board of Directors, or by a stockholder
who has given to the Secretary of School Specialty timely written notice, in
proper form, of the stockholder's intention to bring that business before the
meeting. The chairman of such meeting has the authority to make the
determination of whether business has been properly brought before such meeting.
Only persons who are nominated by, or at the direction of, the Board, or who are
nominated by a stockholder who has given timely written notice, in proper form,
to the Secretary prior to a meeting at which directors are to be elected will be
eligible for election as directors. These provisions are intended to establish
orderly procedures for the conduct of our business and to allow the Board of
Directors adequate time to evaluate and respond to stockholder initiatives. They
may have the effect of impeding the ability of a stockholder to present
proposals or make nominations in a change of control context if the requisite
notice provisions cannot be satisfied.

AMENDMENT OF BYLAWS. The Certificate of Incorporation requires a vote of
at least 66 2/3% of the outstanding Common Stock for the stockholders to amend
the Bylaws. This super-majority requirement could make it more difficult for
stockholders to compel the Board of Directors to act by amending the Bylaws to
require actions not presently permitted by the Bylaws.

LIMITATION ON DIRECTORS' LIABILITIES

Pursuant to our Certificate of Incorporation and under Delaware law,
directors are not liable to us or our stockholders for monetary damages for
breach of fiduciary duty, except for liability in connection with a breach of
duty of loyalty, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for dividend payments or
stock repurchases illegal under Delaware law or any transaction in which a
director has derived an improper personal benefit.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer and Trust Company.

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EXPERTS

The consolidated financial statements of School Specialty as of April 26,
1997 and April 25, 1998, for the four months ended April 30, 1996 and for the
years ended April 26, 1997 and April 25, 1998, included in this Prospectus, have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.

The consolidated financial statements of School Specialty for the year
ended December 31, 1995, included in this Prospectus, except as they relate to
The Re-Print Corporation for the year ended December 31, 1995, have been so
included in reliance on the February 2, 1996 report of Ernst & Young LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting. Insofar as the consolidated financial statements for
the year ended December 31, 1995 relate to The Re-Print Corporation, such
financial statements have been audited by BDO Seidman, LLP, independent
accountants, whose report dated February 8, 1996 thereon appears herein.

The consolidated financial statements of American Academic Suppliers
Holding Corporation and Subsidiary as of December 31, 1995 and December 31, 1996
and for the years then ended, included in this Prospectus, have been so included
in reliance on the February 24, 1997 report of Altschuler, Melvoin and Glasser
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting. We have agreed to indemnify and advance costs and
expenses for Altschuler, Melvoin and Glasser LLP for legal costs and expenses
incurred in connection with a successful defense relating to any litigation
arising from this offering (i.e., a defense in which Altschuler, Melvoin and
Glasser LLP is neither decreed to have been culpable nor pays any part of the
plaintiff's damages as a result of judgment or settlement (except as agreed by
Altschuler, Melvoin and Glasser LLP)). This indemnification will be void if
Altschuler, Melvoin and Glasser LLP is found liable of professional malpractice.

The consolidated financial statements of Sax Arts and Crafts, Inc. as of
December 16, 1995 and December 25, 1996, and for the three years in the period
ended December 25, 1996, included in this Prospectus, have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.

Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of the National School Supply Company as of March 31, 1998
and March 31, 1997, and for each of the three years in the period ended March
31, 1998, included in this Prospectus and registration statement, as set forth
in their report, which is included elsewhere in this Prospectus and registration
statement. The consolidated financial statements of The National School Supply
Company are included in reliance on their report, given on their authority as
experts in accounting and auditing.

The financial statements of Hammond & Stephens Company as of and for the
year ended October 31, 1997, included in the Prospectus, have been so included
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.

VALIDITY OF SHARES

The validity of the shares of Common Stock offered hereby will be passed
upon on behalf of School Specialty by Godfrey & Kahn, S.C., Milwaukee,
Wisconsin, and on behalf of the Underwriters by Sullivan & Cromwell, New York,
New York.

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ADDITIONAL INFORMATION

We have filed with the SEC a registration statement on Form S-1 (including
exhibits, schedules and amendments thereto) pursuant to the Securities Act with
respect to the Common Stock offering. This Prospectus, while forming a part of
the registration statement, does not contain all of the information set forth in
the registration statement. Reference is made to the registration statement and
the exhibits thereto for further information. Statements contained in this
Prospectus concerning the provisions of documents filed as exhibits to the
registration statement are necessarily summaries of such documents, and each
such statement is qualified in its entirety by reference to the copy of the
applicable document filed with the SEC.

The registration statement and the exhibits thereto are available for
inspection and copying at the public reference facilities maintained by the SEC
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as the
regional offices of the SEC at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such information can also be obtained
at prescribed rates by writing to the SEC's Public Reference Section at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for information relating to the operation of the Public Reference
Section. Such information may also be accessed electronically by means of the
SEC's website on the Internet at http://www.sec.gov.

We are subject to the reporting requirements of the Securities Exchange Act
of 1934, as amended, and, in accordance therewith, file annual and quarterly
reports, proxy statements and other information with the SEC. Such periodic
reports, proxy statements and other information can be inspected and copied at
the SEC's public reference facilities referred to above. Copies of such material
can be obtained by mail at prescribed rates by writing to the SEC's Public
Reference Section at the address referred to above or by calling the SEC at the
toll-free telephone number noted above. In addition, reports, proxy statements
and other information concerning School Specialty may be inspected at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street,
NW, Washington, D.C. 20006.

We furnish to our stockholders annual reports containing audited
consolidated financial statements examined by our independent public accountants
and quarterly reports containing unaudited consolidated financial statements for
each of the first three fiscal quarters of each fiscal year.

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SCHOOL SPECIALTY, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
SCHOOL SPECIALTY, INC.
Historical Financial Statements
Report of PricewaterhouseCoopers LLP, Independent
Accountants........................................... F-3
Report of Ernst & Young LLP, Independent Auditors...... F-4
Report of BDO Seidman, LLP, Independent Auditors....... F-5
Consolidated Balance Sheet as of April 26, 1997, April
25, 1998 and January 23, 1999 (unaudited)............. F-6
Consolidated Statement of Operations for the year ended
December 31, 1995, the four months ended April 30,
1996 and the fiscal years ended April 26, 1997 and
April 25, 1998, and for the nine months ended January
24, 1998 (unaudited) and January 23, 1999
(unaudited)........................................... F-7
Consolidated Statement of Stockholders' (Deficit)
Equity for the year ended December 31, 1995, the four
months ended April 30, 1996 and the fiscal years ended
April 26, 1997 and April 25, 1998, and for the nine
months ended January 23, 1999 (unaudited)............. F-8
Consolidated Statement of Cash Flows for the year ended
December 31, 1995, the four months ended April 30,
1996 and the fiscal years ended April 26, 1997 and
April 25, 1998, and for the nine months ended January
24, 1998 (unaudited) and January 23, 1999
(unaudited)........................................... F-9
Notes to Consolidated Financial Statements............. F-11

Pro Forma Combined Financial Statements (Unaudited)
Introduction to Pro Forma Financial Information........ F-31
Pro Forma Combined Balance Sheet as of January 23,
1999.................................................. F-33
Pro Forma Combined Statement of Income for the nine
months ended January 23, 1999......................... F-34
Pro Forma Combined Statement of Income for the nine
months ended January 24, 1998......................... F-35
Pro Forma Combined Statement of Income for the fiscal
year ended April 25, 1998............................. F-36
Notes to Pro Forma Combined Financial Statements....... F-37

AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION AND
SUBSIDIARY
Report of Altschuler, Melvoin and Glasser LLP, Independent
Accountants............................................ F-39
Consolidated Balance Sheet as of December 31, 1995,
December 31, 1996 and September 30, 1997 (unaudited)... F-40
Consolidated Statement of Operations for the years ended
December 31, 1995 and December 31, 1996, and for the
nine months ended September 30, 1996 (unaudited) and
September 30, 1997 (unaudited)......................... F-41
Consolidated Statement of Changes in Shareholders' Equity
for the years ended December 31, 1995 and December 31,
1996, and for the nine months ended September 30, 1997
(unaudited)............................................ F-42
Consolidated Statement of Cash Flows for the years ended
December 31, 1995 and December 31, 1996, and for the
nine months ended September 30, 1996 (unaudited) and
September 30, 1997 (unaudited)......................... F-43
Notes to Consolidated Financial Statements................ F-44
</TABLE>

F-1
<PAGE> 69

<TABLE>
<CAPTION>
Page
----
<S> <C>
SAX ARTS AND CRAFTS, INC.
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................ F-49
Balance Sheets as of December 16, 1995, December 25, 1996
and June 29, 1997 (unaudited).......................... F-50
Statements of Operations for the years ended December 17,
1994, December 16, 1995 and December 25, 1996, and for
the six months ended June 30, 1996 (unaudited) and June
29, 1997 (unaudited)................................... F-51
Statements of Shareholders' Equity for the years ended
December 17, 1994, December 16, 1995 and December 25,
1996, and for the six months ended
June 29, 1997 (unaudited).............................. F-52
Statements of Cash Flows for the years ended December 17,
1994, December 16, 1995 and December 25, 1996, and for
the six months ended June 30, 1996 (unaudited) and June
29, 1997 (unaudited)................................... F-53
Notes to Financial Statements............................. F-54

NATIONAL SCHOOL SUPPLY COMPANY
Report of Ernst & Young LLP, Independent Auditors......... F-60
Consolidated Balance Sheets as of March 31, 1997, March
31, 1998 and June 30, 1998 (unaudited)................. F-61
Consolidated Statement of Operations for the years ended
March 31, 1996,
March 31, 1997 and March 31, 1998, and for the three
months ended June 30, 1997 (unaudited) and June 30,
1998 (unaudited)....................................... F-62
Consolidated Statement of Stockholders' Equity for the
years ended March 31, 1996, March 31, 1997 and March
31, 1998, and for the three months ended June 30, 1998
(unaudited)............................................ F-63
Consolidated Statement of Cash Flows for the years ended
March 31, 1996,
March 31, 1997 and March 31, 1998, and for the three
months ended June 30, 1997 (unaudited) and June 30,
1998 (unaudited)....................................... F-64
Notes to Consolidated Financial Statements................ F-65

HAMMOND & STEPHENS COMPANY
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................ F-75
Balance Sheet as of October 31, 1997 and April 30, 1998
(unaudited)............................................ F-76
Statement of Income for the year ended October 31, 1997,
and for the six months ended April 30, 1997 (unaudited)
and April 30, 1998 (unaudited)......................... F-77
Statement of Stockholders' Equity for the year ended
October 31, 1997 and for the six months ended April 30,
1998 (unaudited)....................................... F-78
Statement of Cash Flows for the year ended October 31,
1997 and for the six months ended April 30, 1997
(unaudited) and April 30, 1998 (unaudited)............. F-79
Notes to Financial Statements............................. F-80
</TABLE>

F-2
<PAGE> 70

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
of School Specialty, Inc.

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of School
Specialty, Inc. (the "Company") and its subsidiaries at April 25, 1998 and April
26, 1997, and the results of their operations and their cash flows for the four
months ended April 30, 1996 and the fiscal years ended April 26, 1997 and April
25, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards 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 audits provide a reasonable basis for the opinion expressed
above.

PRICEWATERHOUSECOOPERS LLP

Minneapolis, Minnesota
June 24, 1998

F-3
<PAGE> 71

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors
School Specialty, Inc.

We have audited the accompanying consolidated statement of operations and
cash flows of School Specialty, Inc. (the "Company") for the year ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Re-Print Corporation, a wholly owned subsidiary, which statements reflect total
revenues of $30,798,000 for the year ended December 31, 1995. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for Re-Print Corporation, is
based solely on the report of the other auditors.

We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.

In our opinion, based on our audit and report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the results of the Company's operations and its cash flows for the year December
31, 1995, in conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Milwaukee, Wisconsin
February 2, 1996

F-4
<PAGE> 72

REPORT OF INDEPENDENT AUDITORS

Board of Directors
The Re-Print Corporation
Birmingham, Alabama

We have audited the accompanying balance sheet of The Re-Print Corporation
as of December 31, 1995, and the related statements of income, stockholders'
equity, and cash flows for the year ended December 31, 1995 (not presented
separately herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Re-Print Corporation at
December 31, 1995, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.

BDO Seidman, LLP

Atlanta, Georgia
February 8, 1996

F-5
<PAGE> 73

SCHOOL SPECIALTY, INC.

CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
APRIL 26, APRIL 25, JANUARY 23,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ -- $ -- $ --
Accounts receivable, less allowance for doubtful accounts
of $471, $716 and $1,778, respectively................ 17,232 38,719 84,843
Inventories.............................................. 24,461 49,307 46,799
Prepaid expenses and other current assets................ 10,331 13,503 16,219
-------- -------- --------
Total current assets............................. 52,024 101,529 147,861
Property and equipment, net................................ 14,478 22,553 39,781
Intangible assets, net..................................... 20,824 99,613 183,693
Other assets............................................... 359 34 7,178
-------- -------- --------
Total assets..................................... $ 87,685 $223,729 $378,513
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.......................................... $ 262 $ 11 $ 10,314
Short-term payable to U.S. Office Products............... 26,692 20,277 --
Accounts payable......................................... 9,091 23,788 15,485
Accrued compensation..................................... 860 4,458 11,945
Accrued income taxes..................................... -- -- 5,596
Accrued restructuring.................................... 151 472 3,638
Other accrued liabilities................................ 477 4,732 10,057
-------- -------- --------
Total current liabilities........................ 37,533 53,738 57,035
Long-term debt............................................. 566 315 162,199
Long-term payable to U.S. Office Products.................. 33,226 62,699 --
Other...................................................... 31 511 212
-------- -------- --------
Total liabilities................................ 71,356 117,263 219,446
Commitments and contingencies
Stockholders' 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 14,578,925 shares issued and
outstanding (unaudited)............................... -- -- 15
Capital paid in excess of par value...................... -- -- 146,768
Divisional equity........................................ 19,985 104,883 --
Accumulated other comprehensive income................... -- -- 6
Retained earnings (deficit).............................. (3,656) 1,583 12,278
-------- -------- --------
Total stockholders' equity....................... 16,329 106,466 159,067
-------- -------- --------
Total liabilities and stockholders' equity....... $ 87,685 $223,729 $378,513
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.
F-6
<PAGE> 74

SCHOOL SPECIALTY, INC.

CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
FOUR
MONTHS FISCAL YEAR ENDED NINE MONTHS ENDED
YEAR ENDED ENDED ---------------------- --------------------------
DECEMBER 31, APRIL 30, APRIL 26, APRIL 25, JANUARY 24, JANUARY 23,
1995 1996 1997 1998 1998 1999
------------ --------- --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues................. $150,482 $28,616 $191,746 $310,455 $247,880 $424,332
Cost of revenues......... 98,233 18,591 126,862 202,870 164,105 281,436
-------- ------- -------- -------- -------- --------
Gross profit........... 52,249 10,025 64,884 107,585 83,775 142,896
Selling, general and
administrative
expenses............... 47,393 11,917 53,177 87,846 63,395 108,005
Restructuring costs...... 2,532 -- 194 2,491 -- 4,200
Strategic restructuring
costs.................. -- -- -- 1,000 -- 1,074
Non-recurring acquisition
costs.................. -- 1,122 1,792 -- -- --
-------- ------- -------- -------- -------- --------
Operating income
(loss).............. 2,324 (3,014) 9,721 16,248 20,380 29,617
Other (income) expense:
Interest expense....... 5,536 1,461 4,197 5,505 4,100 8,942
Interest income........ -- (6) -- (132) (109) (114)
Other.................... (18) 67 (196) 156 441 --
-------- ------- -------- -------- -------- --------
Income (loss) before
provision for (benefit
from) income taxes..... (3,194) (4,536) 5,720 10,719 15,948 20,789
Provision for (benefit
from) income taxes..... 173 139 (2,412) 5,480 7,113 10,094
-------- ------- -------- -------- -------- --------
Net income (loss)........ $ (3,367) $(4,675) $ 8,132 $ 5,239 $ 8,835 $ 10,695
======== ======= ======== ======== ======== ========
Weighted average shares
outstanding:
Basic.................. 6,562 8,611 10,003 13,284 12,751 14,625
Diluted................ 6,669 8,789 10,196 13,547 13,020 14,665
Net income (loss) per
share:
Basic.................. $ (0.51) $ (0.54) $ 0.81 $ 0.40 $ 0.69 $ 0.73
Diluted................ $ (0.50) $ (0.53) $ 0.80 $ 0.39 $ 0.68 $ 0.73
</TABLE>

See accompanying notes to consolidated financial statements.
F-7
<PAGE> 75

SCHOOL SPECIALTY, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
CAPITAL ACCUMULATED
COMMON STOCK PAID IN OTHER RETAINED STOCKHOLDER'S TOTAL
---------------- EXCESS OF DIVISIONAL COMPREHENSIVE (DEFICIT) (DEFICIT) COMPREHENSIVE
SHARES DOLLARS PAR VALUE EQUITY INCOME EARNINGS EQUITY INCOME (LOSS)
------ ------- --------- ---------- ------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994.................... -- -- -- $ 5,327 -- $(3,500) $ 1,827
Transactions of Pooled
Companies:
Issuance of
warrants............ -- -- -- 672 -- -- 672
Issuance of Pooled
Company common stock
for cash............ -- -- -- 500 -- -- 500
Repurchase of treasury
stock............... -- -- -- (92) -- -- (92)
Cash dividends
declared and paid... -- -- -- -- -- (160) (160)
Net loss................ -- -- -- -- -- (3,367) (3,367) (3,367)
------ ---- -------- -------- ---- ------- -------- -------
Total
comprehensive
income.......... (3,367)
Balance at December 31,
1995.................... -- -- -- 6,407 -- (7,027) (620)
Transactions of Pooled
Companies:
Exercise of
warrants............ -- -- -- 1,080 -- -- 1,080
Cash dividends
declared and paid... -- -- -- -- -- (52) (52)
Net loss................ -- -- -- -- -- (4,675) (4,675) (4,675)
------ ---- -------- -------- ---- ------- -------- -------
Total
comprehensive
income.......... (4,675)
Balance at April 30,
1996.................... -- -- -- 7,487 -- (11,754) (4,267)
Transactions of Pooled
Companies:
Exercise of warrants
and stock options... -- -- -- 1,979 -- -- 1,979
Retirement of treasury
stock............... -- -- -- 34 -- (34) --
Issuances of U.S. Office
Products Company
common stock in
conjunction with
acquisitions.......... -- -- -- 10,485 -- -- 10,485
Net income.............. -- -- -- -- -- 8,132 8,132 8,132
------ ---- -------- -------- ---- ------- -------- -------
Total
comprehensive
income.......... 8,132
Balance at April 26,
1997.................... -- -- -- 19,985 -- (3,656) 16,329
Issuances of U.S. Office
Products Company
common stock in
conjunction with
acquisitions.......... -- -- -- 3,566 -- -- 3,566
Capital contribution by
U.S. Office
Products.............. -- -- -- 81,332 -- -- 81,332
Net income.............. -- -- -- -- -- 5,239 5,239 5,239
------ ---- -------- -------- ---- ------- -------- -------
Total
comprehensive
income.......... 5,239
Balance at April 25,
1998.................... -- -- -- 104,883 -- 1,583 106,466
Unaudited data:
Shares distributed in
spin off from U.S.
Office Products....... 12,204 12 104,867 (104,883) 4 -- --
Shares issued in June
1998.................. 2,375 3 32,732 -- -- -- 32,735
Capital contribution by
U.S. Office
Products.............. -- -- 8,095 -- -- -- 8,095
Compensation expense
from office stock
purchase.............. -- -- 1,074 -- -- -- 1,074
Cumulative translation
adjustment............ -- -- -- -- 2 -- 2 $ 2
Net Income.............. -- -- -- -- -- 10,695 10,695 10,695
------ ---- -------- -------- ---- ------- -------- -------
Total
comprehensive
income.......... $10,697
=======
Balance at January 23,
1999 (unaudited)........ 14,579 $ 15 $146,768 $ -- $ 6 $12,278 $159,067
====== ==== ======== ======== ==== ======= ========
</TABLE>

See accompanying notes to consolidated financial statements.
F-8
<PAGE> 76

SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
FOUR MONTHS FISCAL YEAR ENDED NINE MONTHS ENDED
YEAR ENDED ENDED --------------------- -------------------------
DECEMBER 31, APRIL 30, APRIL 26, APRIL 25, JANUARY 24, JANUARY 23,
1995 1996 1997 1998 1998 1999
------------ ----------- --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................... $(3,367) $(4,675) $ 8,132 $ 5,239 $ 8,835 $ 10,695
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization
expense.............................. 2,927 674 2,106 4,561 3,382 6,607
Non-recurring acquisition costs........ -- 1,122 1,792 -- -- --
Restructuring costs.................... 2,532 -- 194 2,491 -- 5,274
Amortization of loan fees.............. 420
Other.................................. 277 118 115 78 43 --
Change in current assets and
liabilities (net of assets acquired
and liabilities assumed in business
combinations accounted for under the
purchase method):
Accounts receivable................ 2,666 3,727 1,277 (3,586) (6,450) (1,971)
Inventory.......................... (2,523) (4,376) 2,737 (6,666) 9,590 27,208
Prepaid expenses and other current
assets........................... (338) (443) (2,361) (717) 3,844 1,722
Accounts payable................... 2,642 3,459 (6,969) 5,256 (6,593) (31,924)
Accrued liabilities................ 12 (784) (6,105) (2,932) 2,741 11,069
------- ------- -------- -------- -------- ---------
Net cash provided by (used in)
operating activities......... 4,828 (1,178) 918 3,724 15,392 29,100
------- ------- -------- -------- -------- ---------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash
received................................. (5,389) -- (7,734) (95,670) (92,076) (95,030)
Additions to property and equipment, net of
disposals................................ (881) (120) (7,216) (3,558) (4,095) (3,978)
Other...................................... 178 414 (514) (366) 171
Payments of non-recurring acquisition
costs.................................... -- (1,122) (1,792) -- -- --
------- ------- -------- -------- -------- ---------
Net cash used in investing
activities................... (6,092) (828) (16,742) (99,742) (96,537) (98,837)
------- ------- -------- -------- -------- ---------
Cash flows from financing activities:
Payments of long-term debt................. (1,488) (194) (16,962) (6,270) (6,200) (187,857)
Proceeds from (payments of) short-term
debt, net................................ 655 1,263 (29,908) (2,102) (1,841) (20,277)
Advances from (repayments to) U.S. Office
Products Company......................... -- -- 59,919 23,058 19,424 (62,699)
Capital contribution by U.S. Office
Products................................. -- -- -- 81,332 69,762 8,095
Proceeds from issuance of common stock..... 500 1,080 1,979 -- -- 32,735
Proceeds from issuance of long-term debt... 1,715 -- 750 -- -- 302,700
Capitalized loan fees...................... -- -- -- -- -- (2,960)
Payments of dividends at Pooled Companies.. (134) (138) -- -- -- --
Purchase of treasury stock at Pooled
Company.................................. (92) -- -- -- -- --
------- ------- -------- -------- -------- ---------
Net cash provided by financing
activities................... 1,156 2,011 15,778 96,018 81,145 69,737
------- ------- -------- -------- -------- ---------
Net increase (decrease) in cash and cash
equivalents.............................. (108) 5 (46) -- -- --
Cash and cash equivalents at beginning of
period................................... 149 41 46 -- -- --
------- ------- -------- -------- -------- ---------
Cash and cash equivalents at end of
period................................... $ 41 $ 46 $ -- $ -- $ -- $ --
======= ======= ======== ======== ======== =========
Supplemental disclosures of cash flow
information:
Interest paid.............................. $ 5,564 $ 1,461 $ 456 $ 35 $ 27 $ 7,153
Income taxes paid (refunded)............... $ 9 $ (3) $ (132) $ 1,148 $ -- $ 3,429
</TABLE>

See accompanying notes to consolidated financial statements.
F-9
<PAGE> 77

SCHOOL SPECIALTY, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)

The Company issued common stock and cash in connection with certain
business combinations accounted for under the purchase method in the year ended
December 31, 1995, the fiscal years ended April 26, 1997 and April 25, 1998 and
the nine months ended January 24, 1998 and January 23, 1999. The fair values of
the assets and liabilities of the acquired companies at the dates of the
acquisitions are presented as follows:

<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEAR ENDED FISCAL YEAR ENDED ENDED
------------ ---------------------- --------------------------
DECEMBER 31, APRIL 26, APRIL 25, JANUARY 24, JANUARY 23,
1995 1997 1998 1998 1999
------------ --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Accounts receivable.................. $1,589 $ 5,381 $17,900 $17,848 $ 44,153
Inventories.......................... 1,823 6,922 18,180 18,075 24,701
Prepaid expenses and other current
assets............................. 502 2,371 2,431 2,431 3,251
Property and equipment............... 4,536 1,155 6,379 6,667 17,312
Intangible assets.................... 3,268 14,248 80,359 74,741 85,312
Other assets......................... 156 29 346 210 7,223
Short-term debt...................... (191) (4,283) (1,850) (1,850) --
Accounts payable..................... (274) (4,012) (9,400) (9,410) (23,621)
Accrued liabilities.................. (225) (1,846) (9,089) (7,050) (6,303)
Long-term debt....................... (5,795) (1,746) (6,020) (6,020) (56,998)
------ ------- ------- ------- --------
Net assets acquired................ $5,389 $18,219 $99,236 $95,642 $ 95,030
====== ======= ======= ======= ========
The acquisitions were funded as
follows:
U.S. Office Products common stock.... $ -- $10,485 $ 3,566 $ 3,566 $ --
Cash paid, net of cash acquired...... 5,389 7,734 95,670 92,076 95,030
------ ------- ------- ------- --------
Total................................ $5,389 $18,219 $99,236 $95,642 $ 95,030
====== ======= ======= ======= ========
</TABLE>

See accompanying notes to consolidated financial statements.
F-10
<PAGE> 78

SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 1 -- BACKGROUND

School Specialty, Inc. (the "Company") is a Delaware corporation which was
a wholly owned subsidiary of U.S. Office Products Company ("U.S. Office
Products") at April 25, 1998. On June 9, 1998, U.S. Office Products spun-off its
Educational Supplies and Products Division (the "Education Division") as an
independent publicly owned company. This transaction was effected through the
distribution of shares of the Company to U.S. Office Products' shareholders (the
"Distribution"). Prior to the Distribution, U.S. Office Products contributed its
equity interests in certain wholly owned subsidiaries associated with the
Education Division to the Company. U.S. Office Products and the Company entered
into a number of agreements to facilitate the Distribution and the transition of
the Company to an independent business enterprise. Additionally, concurrently
with the Distribution, the Company sold 2.125 million shares in an initial
public offering (the "IPO") and 250,000 shares in a private placement to certain
of its officers and directors.

The Education Division was created by U.S. Office Products in May 1996 in
connection with the acquisition of School Specialty, Inc., a Wisconsin
corporation ("Old School"). This business combination and the acquisition in
July 1996 of The Re-Print Corp. ("Re-Print") (now known as ClassroomDirect.com,
LLC) were accounted for under the pooling-of-interests method (Old School and
Re-Print are herein referred to as the "Pooled Companies"). As a result of these
business combinations being accounted for under the pooling-of-interests method,
the results of the Company prior to the completion of such business combinations
represent the combined results of the Pooled Companies operating as separate
autonomous entities.

NOTE 2 -- BASIS OF PRESENTATION

The consolidated financial statements through April 1998, reflect the
assets, liabilities, divisional equity, revenues and expenses that were directly
related to the Company as it was operated within U.S. Office Products. In cases
involving assets and liabilities not specifically identifiable to any particular
business of U.S. Office Products, only those assets and liabilities expected to
be transferred to the Company prior to the Distribution were included in the
Company's separate consolidated balance sheet. The Company's statement of income
includes all of the related costs of doing business, including an allocation of
certain general corporate expenses of U.S. Office Products which were not
directly related to these businesses including certain corporate executives'
salaries, accounting and legal fees, departmental costs for accounting, finance,
legal, purchasing, marketing and human resources as well as other general
overhead costs. These allocations were based on a variety of factors, dependent
upon the nature of the costs being allocated, including revenues, number and
size of acquisitions and number of employees. Management believes these
allocations were made on a reasonable basis.

U.S. Office Products uses a centralized approach to cash management and the
financing of its operations. As a result, minimal amounts of cash and cash
equivalents and an agreed upon amount of debt was allocated to the Company at
the time of the Distribution. The consolidated statement of operations does not
include an allocation of interest expense on all debt allocated to the Company
up to the date of the Distribution on June 9, 1998. See Note 9 for further
discussion of interest expense.

F-11
<PAGE> 79
SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

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

As used in these consolidated financial statements and related notes to
consolidated financial statements, "fiscal 1998" and "fiscal 1997" refer to the
Company's fiscal year ended April 25, 1998 and April 26, 1997, respectively.

CHANGE IN FISCAL YEAR

Prior to their respective dates of acquisition by U.S. Office Products, the
Pooled Companies reported results on years ending on December 31. Upon
acquisition by U.S. Office Products and effective for fiscal 1997, the Pooled
Companies changed their year-ends from December 31 to conform to U.S. Office
Products' fiscal year, which ends on the last Saturday in April. A four-month
fiscal transition period from January 1, 1996 through April 30, 1996 has been
presented for the Company to conform its fiscal year-end.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
accounts are eliminated in consolidation.

CASH AND CASH EQUIVALENTS

The Company considers temporary cash investments with original maturities
of three months or less from the date of purchase to be cash equivalents.

CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
Receivables arising from sales to customers are not collateralized and, as a
result, management continually monitors the financial condition of its customers
to reduce the risk of loss.

INVENTORIES

Inventories are stated at the lower of cost or market with cost determined
on a first-in, first-out (FIFO) basis and consist primarily of products held for
sale.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. Additions and improvements are
capitalized. Maintenance and repairs are expensed as incurred. Depreciation of
property and equipment is calculated using the straight-line method over the
estimated useful lives of the respective assets.
F-12
<PAGE> 80
SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The estimated useful lives range from 25 to 40 years for buildings and its
components and three to 15 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 terms.

INTANGIBLE ASSETS

Intangible assets consist primarily of goodwill, which represents the
excess of cost over the fair value of assets acquired in business combinations
accounted for under the purchase method and non-compete agreements.
Substantially all goodwill is amortized on a straight line basis over an
estimated useful life of 40 years. Management periodically evaluates the
recoverability of goodwill, which would be adjusted for a permanent decline in
value, if any, by comparing anticipated undiscounted future cash flows from
operations to net book value. Other intangible assets are being amortized over
their estimated useful lives ranging from one to four years.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of the Company's financial instruments including cash
and cash equivalents, accounts receivable and accounts payable approximate fair
value.

INCOME TAXES

As a division of U.S. Office Products, the Company did not file separate
federal income tax returns but rather was included in the federal income tax
returns filed by U.S. Office Products and its subsidiaries from the respective
dates that the entities within the Company were acquired by U.S. Office
Products. For purposes of the consolidated financial statements, the Company's
allocated share of U.S. Office Products' income tax provision was based on the
"separate return" method. Certain companies acquired in pooling-of-interests
transactions elected to be taxed as Subchapter S corporations, and accordingly,
no federal income taxes were recorded by those companies for periods prior to
their acquisition by U.S. Office Products. Subsequent to the Distribution, the
Company does file separate federal income tax returns.

REVENUE RECOGNITION

Revenue is recognized upon the delivery of products or upon the completion
of services provided to customers as no additional obligations to the customers
exist. Returns of the Company's product are considered immaterial.

COST OF REVENUES

Vendor rebates are recorded as a reduction in the cost of inventory and
recognized as a reduction in cost of revenues when such inventory is sold.
Delivery and occupancy costs are included in cost of revenues.

ADVERTISING COSTS

The Company expenses advertising costs when the advertisement occurs.
Advertising costs are included in the consolidated statement of operations as a
component of selling, general and administrative expenses.

F-13
<PAGE> 81
SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED CATALOG COSTS

Deferred catalog costs are amortized in amounts proportionate to revenues
over the life of the catalog, which is typically one to two years. Amortization
expense related to deferred catalog costs is included in the consolidated
statement of operations as a component of selling, general and administrative
expenses. Such amortization expense for the year ended December 31, 1995, the
four months ended April 30, 1996, the fiscal years ended April 26, 1997 and
April 25, 1998 and the nine months ended January 24, 1998 and January 23, 1999
was $4,395, $832, $3,621, $6,934, $5,430 (unaudited) and $9,847 (unaudited),
respectively.

INTERNALLY DEVELOPED SOFTWARE

Internal costs related to internally developed software, such as internal
salaries and supplies, are expensed as incurred as a component of selling,
general and administrative expenses. External costs related to internally
developed software, such as fees for outside programmers and consultants, are
capitalized and expensed over the expected useful life of the software, normally
three to five years.

NON-RECURRING ACQUISITION COSTS

Non-recurring acquisition costs represent acquisition costs incurred by the
Company in business combinations accounted for under the pooling-of-interests
method. These costs include accounting, legal and investment banking fees, real
estate and environmental assessments and appraisals, and various regulatory
fees. Generally accepted accounting principles require the Company to expense
all acquisition costs (both those paid by the Company and those paid by the
sellers of the acquired companies) related to business combinations accounted
for under the pooling-of-interests method.

RESTRUCTURING COSTS

The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance and relocation costs related to the
Company's employees in accordance with EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in Restructuring)."

STRATEGIC RESTRUCTURING COSTS

Strategic restructuring costs represent the Company's portion of the costs
incurred by U.S. Office Products as a result of the U.S. Office Products'
comprehensive restructuring.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements. SFAS No. 130
requires that all items required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
is effective for
F-14
<PAGE> 82
SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company adopted SFAS No. 130 in fiscal 1999. Implementation of this
disclosure standard did not affect the Company's financial position or results
of operations.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual and interim financial
statements. Operating segments are determined consistent with the way management
organizes and evaluates financial information internally for making decisions
and assessing performance. It also requires related disclosures about products,
geographic areas and major customers. SFAS 131 is effective for fiscal years
beginning after December 15, 1997. The Company intends to adopt SFAS No. 131 in
fiscal 1999. Implementation of this disclosure standard will not affect the
Company's financial position or results of operations.

In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
requires computer software costs associated with internal use software to be
expensed as incurred until certain capitalization criteria are met. The Company
will adopt SOP 98-1 during fiscal 1999. Adoption of this Statement is not
expected to have a material impact on the Company's consolidated financial
position or results of operations.

In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement, which is required to be
adopted for annual periods beginning after June 15, 1999, establishes standards
for recognition and measurement of derivatives and hedging activities. The
Company will implement this statement in fiscal 2001 as required. The adoption
of SFAS No. 133 is not expected to have a material effect on the Company's
financial position or results of operations.

UNAUDITED INTERIM FINANCIAL DATA

In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of January 23, 1999 and the results
of operations and of cash flows for the nine months ended January 24, 1998 and
January 23, 1999, as presented in the accompanying unaudited consolidated
financial data.

DISTRIBUTION RATIO

On May 14, 1998, the U.S. Office Products Board of Directors approved the
distribution ratio for the Company in connection with the Distribution. At the
date of Distribution, the Company issued approximately 12.2 million shares of
its common stock to U.S. Office Products, which then distributed such shares to
its shareholders in the ratio of one share of Company common stock for every
nine shares of U.S. Office Products common stock held by each shareholder. The
share data reflected in the accompanying financial statements represents the
historical share data for U.S. Office Products for the period or as of the date
indicated up to the date of the Distribution on June 9, 1998, retroactively
adjusted to give effect to the one for nine distribution ratio.

F-15
<PAGE> 83
SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 4 -- BUSINESS COMBINATIONS

POOLING-OF-INTERESTS METHOD

In fiscal 1997, the Company issued 4,257,693 shares of U.S. Office Products
common stock to acquire the Pooled Companies. The Pooled Companies and the
number of shares issued are as follows:

<TABLE>
<CAPTION>
NUMBER OF
COMPANY NAME SHARES ISSUED
------------ -------------
<S> <C>
School Specialty, Inc....................................... 2,307,693
Re-Print.................................................... 1,950,000
---------
Total shares issued.................................... 4,257,693
=========
</TABLE>

The Company's consolidated financial statements give retroactive effect to
the acquisitions of the Pooled Companies for all periods presented. Prior to
being acquired by U.S. Office Products, the Pooled Companies reported on years
ending on December 31. Upon completion of the acquisitions of the Pooled
Companies, their year-ends were changed to U.S. Office Products' year-end of the
last Saturday in April.

The following presents the separate results, in each of the periods
presented, of the Company (excluding the results of Pooled Companies prior to
the dates on which they were acquired), and the Pooled Companies up to the dates
on which they were acquired:

<TABLE>
<CAPTION>
SCHOOL POOLED
SPECIALTY COMPANIES COMBINED
--------- --------- --------
<S> <C> <C> <C>
For the year ended December 31, 1995
Revenues................................................. $ -- $150,482 $150,482
Net loss................................................. $ -- $ (3,367) $ (3,367)
For the four months ended April 30, 1996
Revenues................................................. $ -- $ 28,616 $ 28,616
Net loss................................................. $ -- $ (4,675) $ (4,675)
For the year ended April 26, 1997
Revenues................................................. $181,420 $ 10,326 $191,746
Net income............................................... $ 7,791 $ 341 $ 8,132
</TABLE>

PURCHASE METHOD

In 1995, one of the Pooled Companies made one acquisition accounted for
under the purchase method for an aggregate cash purchase price of $5,389. The
total assets related to the acquisition were $11,874, including goodwill of
$3,268. The results of the acquisition have been included in the Company's
results from its date of acquisition.

In fiscal 1997, the Company made six acquisitions accounted for under the
purchase method for an aggregate purchase price of $18,219, consisting of $7,734
of cash and U.S. Office Products common stock with a market value of $10,485.
The total assets related to these six acquisitions were $30,106, including
goodwill of $14,248. The results of these acquisitions have been included in the
Company's results from their respective dates of acquisition.

In fiscal 1998, the Company made eight acquisitions accounted for under the
purchase method for an aggregate purchase price of $99,236, consisting of
$95,670 of cash and U.S. Office Products common stock with a market value of
$3,566. The total assets related to these

F-16
<PAGE> 84
SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 4 -- BUSINESS COMBINATIONS (CONTINUED)

eight acquisitions were $125,595, including goodwill of $80,359. The results of
these acquisitions have been included in the Company's results from their
respective dates of acquisition.

The following presents the unaudited pro forma results of operations of the
Company for the fiscal years ended April 26, 1997 and April 25, 1998 and
includes the Company's consolidated financial statements, which give retroactive
effect to the acquisitions of the Pooled Companies for all periods presented,
and the results of the companies acquired in purchase acquisitions as if all
such purchase acquisitions had been made at the beginning of fiscal 1997. The
results presented below include certain pro forma adjustments to reflect the
amortization of intangible assets, adjustments in executive compensation of $124
and $573 for the fiscal years ended April 26, 1997 and April 25, 1998,
respectively, and the inclusion of a federal income tax provision on all
earnings:

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED
----------------------
APRIL 26, APRIL 25,
1997 1998
--------- ---------
<S> <C> <C>
Revenues................................................ $350,760 $381,242
Net income.............................................. 11,714 7,538
Net income per share:
Basic................................................. $1.17 $0.57
Diluted............................................... 1.15 0.56
</TABLE>

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 1997 or the
results which may occur in the future.

NOTE 5 -- RESTRUCTURING COSTS

The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance and relocation costs related to the
Company's employees. The following table sets forth the Company's accrued
restructuring costs for the fiscal years ended April 30, 1996, April 26, 1997
and April 25, 1998, and the nine months ended January 23, 1999:

<TABLE>
<CAPTION>
FACILITY SEVERANCE OTHER ASSET
CLOSURE AND AND WRITE-DOWNS
CONSOLIDATION TERMINATIONS AND COSTS TOTAL
------------- ------------ ----------- -----
<S> <C> <C> <C> <C>
Balance at April 30 1996..................... $ 641 $ 469 $ 1,422 $ 2,532
Additions.................................. -- -- 194 194
Utilizations............................... (641) (469) (1,465) (2,575)
------ ------ ------- -------
Balance at April 26, 1997.................... -- -- 151 151
Additions.................................. 728 214 1,549 2,491
Utilizations............................... (728) -- (1,442) (2,170)
------ ------ ------- -------
Balance at April 25, 1998.................... -- 214 258 472
Additions (unaudited)...................... 1,300 2,100 800 4,200
Utilizations (unaudited)................... -- (931) (103) (1,034)
------ ------ ------- -------
Balance at January 23, 1999 (unaudited)...... $1,300 $1,383 $ 955 $ 3,638
====== ====== ======= =======
</TABLE>

F-17
<PAGE> 85
SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 6 -- PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following:

<TABLE>
<CAPTION>
APRIL 26, APRIL 25,
1997 1998
--------- ---------
<S> <C> <C>
Deferred catalog costs.................................... $ 5,740 $ 7,206
Deferred income taxes..................................... 2,055 1,886
Notes Receivable.......................................... 1,643 1,558
Other..................................................... 893 2,853
------- -------
Total prepaid expenses and other current assets...... $10,331 $13,503
======= =======
</TABLE>

Deferred catalog costs represent costs which have been paid to produce
Company catalogs which will be used in future periods. These deferred catalog
costs will be expensed in the periods the catalogs are used.

NOTE 7 -- PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
APRIL 26, APRIL 25, JANUARY 23,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land........................................... $ 729 $ 1,144 $ 1,921
Buildings...................................... 6,488 10,064 22,659
Furniture and fixtures......................... 6,502 6,725 11,358
Warehouse equipment............................ 3,163 7,052 9,984
Leasehold improvements......................... 2,185 3,341 4,409
------- ------- --------
19,067 28,326 50,331
Less: Accumulated depreciation................. (4,589) (5,773) (10,550)
------- ------- --------
Net property and equipment..................... $14,478 $22,553 $ 39,781
======= ======= ========
</TABLE>

Depreciation expense (which includes capital lease amortization) for the
year ended December 31, 1995, the four months ended April 30, 1996, the fiscal
years ended April 26, 1997 and April 25, 1998 and the nine months ended January
24, 1998 and January 23, 1999 was $1,645, $470, $1,540, $2,499, $1,971
(unaudited) and $2,880 (unaudited), respectively.

NOTE 8 -- INTANGIBLE ASSETS

Intangible assets consist of the following:

<TABLE>
<CAPTION>
APRIL 26, APRIL 25, JANUARY 23,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill.................................... $ 22,128 $102,487 $186,723
Other....................................... 2,020 2,487 5,287
-------- -------- --------
24,148 104,974 192,010
Less: Accumulated amortization.............. (3,324) (5,361) (8,317)
-------- -------- --------
Net intangible assets..................... $ 20,824 $ 99,613 $183,693
======== ======== ========
</TABLE>

F-18
<PAGE> 86
SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 8 -- INTANGIBLE ASSETS (CONTINUED)

Amortization expense for the year ended December 31, 1995, the four months
ended April 30, 1996, the fiscal years ended April 26, 1997 and April 25, 1998
and the nine months ended January 24, 1998 and January 23, 1999 was $1,098,
$204, $566, $2,061, $1,411 (unaudited) and $3,184 (unaudited), respectively.

NOTE 9 -- CREDIT FACILITIES

SHORT-TERM DEBT

Short-term debt consists of the following:

<TABLE>
<CAPTION>
APRIL 26, APRIL 25, JANUARY 23,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current maturities of long-term debt............ $232 $ 11 $10,000
Other........................................... 30 -- 314
---- ---- -------
Total short-term debt......................... $262 $ 11 $10,314
==== ==== =======
</TABLE>

LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
APRIL 26, APRIL 25, JANUARY 23,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Bank debt....................................... $ -- $ -- $172,000
Capital lease obligations....................... 315 16 199
Other........................................... 483 310 --
----- ----- --------
798 326 172,199
Less: Current maturities of long-term debt...... (232) (11) (10,000)
----- ----- --------
Total long-term debt.......................... $ 566 $ 315 $162,199
===== ===== ========
</TABLE>

MATURITIES OF LONG-TERM DEBT

Maturities on long-term debt as of April 25, 1998, including capital lease
obligations, are as follows:

<TABLE>
<S> <C>
1999........................................................ $ 11
2000........................................................ 181
2001........................................................ 92
2002........................................................ 36
2003........................................................ 6
Thereafter.................................................. --
----
Total maturities of long-term debt........................ $326
====
</TABLE>

PAYABLE TO U.S. OFFICE PRODUCTS

The short-term payable to U.S. Office Products was incurred by the Company
primarily as a result of U.S. Office Products repaying short-term debt
outstanding of the businesses acquired by U.S. Office Products at or soon after
the respective dates of acquisition and through the

F-19
<PAGE> 87
SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 9 -- CREDIT FACILITIES (CONTINUED)
centralized cash management system, which involved daily advances or sweeps of
cash to keep the cash balance at or near zero on a daily basis.

The long-term payable to U.S. Office Products primarily represents payments
made by U.S. Office Products on behalf of the Company and a reasonable
allocation by U.S. Office Products of certain general corporate expenses. An
analysis of the activity in this account is as follows:

<TABLE>
<S> <C>
Balance at April 30, 1996................................... $ --
Payments of long-term debt of acquired companies.......... 21,379
Funding of acquisitions and payment of acquisition
costs.................................................. 8,203
Allocated corporate expenses.............................. 2,221
Normal operating costs paid by U.S. Office Products....... 1,423
-------
Balance at April 26, 1997................................... 33,226
Payments of long-term debt of acquired companies.......... 822
Funding of acquisitions and payment of acquisition
costs.................................................. 20,706
Allocated corporate expenses.............................. 7,145
Normal operating costs paid by U.S. Office Products....... 800
-------
Balance at April 25, 1998................................... $62,699
=======
</TABLE>

The average outstanding long-term payable to U.S. Office Products during
the fiscal years ended April 26, 1997 and April 25, 1998 was $27,269 and
$52,207, respectively.

Interest has been allocated to the Company based upon the Company's average
outstanding payable (short-term and long-term) balance with U.S. Office Products
at U.S. Office Products' weighted average interest rate during such period. The
Company's financial statements include allocations of interest expense from U.S.
Office Products totaling $3,839 and $5,414 during the fiscal years ended April
26, 1997 and April 25, 1998, respectively.

The Distribution Agreement allocated a specified amount of U.S. Office
Products' debt outstanding under its credit facilities to each spin-off company
and required each spin-off company, on or prior to the Distribution, to obtain
credit facilities, to borrow funds under such facilities and to use the proceeds
of such borrowings to pay off the U.S. Office Products' debt so allocated plus
any additional debt incurred by U.S. Office Products after January 12, 1998 in
connection with the acquisition of an entity that has become or will become a
subsidiary of such spin-off company. Under the Distribution Agreement, $80,000
of U.S. Office Products' debt has been allocated to the Company, and since
January 12, 1998, U.S. Office Products has incurred an additional $3,300 of debt
in connection with one additional acquisition completed by the Company. Prior to
the Distribution, the Company entered into the credit facility and at the time
of the Distribution borrowed $83,300 under the facility to pay off debt of U.S.
Office Products.

F-20
<PAGE> 88
SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 10 -- INCOME TAXES

The provision for income taxes consists of:

<TABLE>
<CAPTION>
FOR THE FOR THE FISCAL YEAR
FOR THE FOUR MONTHS ENDED
YEAR ENDED ENDED ----------------------
DECEMBER 31, APRIL 30, APRIL 26, APRIL 25,
1995 1996 1997 1998
------------ ----------- --------- ---------
<S> <C> <C> <C> <C>
Income taxes currently payable:
Federal....................................... $(66) $ -- $ 71 $3,646
State......................................... -- -- 99 907
---- ---- ------- ------
(66) -- 170 4,553
---- ---- ------- ------
Deferred income tax expense (benefit)........... 239 139 (2,582) 927
---- ---- ------- ------
Total provision for (benefit from) income
taxes................................. $173 $139 $(2,412) $5,480
==== ==== ======= ======
</TABLE>

Deferred taxes are comprised of the following:

<TABLE>
<CAPTION>
APRIL 26, APRIL 25,
1997 1998
--------- ---------
<S> <C> <C>
Current deferred tax assets:
Inventory................................................. $ 265 $ 743
Allowance for doubtful accounts........................... 193 164
Net operating loss carryforward........................... 3,069 851
Accrued liabilities....................................... 421 128
Prepaid catalog advertising/restructuring................. (1,893) --
------- ------
Total current deferred tax assets.................... 2,055 1,886
------- ------
Long-term deferred tax assets (liabilities):
Property and equipment...................................... (289) (591)
Intangible assets........................................... 258 80
------- ------
Total long-term deferred tax liabilities............. (31) (511)
------- ------
Net deferred tax assets.............................. $ 2,024 $1,375
======= ======
</TABLE>

At April 30, 1996, the valuation allowance of $5.3 million had been
recorded, related to deferred tax assets of a Pooled Company, including net
operating loss carryforwards. Based upon the improved profitability of this
Pooled Company during fiscal 1997, the valuation allowance was reversed in
fiscal 1997, resulting in a benefit from income taxes.

F-21
<PAGE> 89
SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 10 -- INCOME TAXES (CONTINUED)
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:

<TABLE>
<CAPTION>
FOR THE FOR THE FISCAL YEAR
FOR THE FOUR MONTHS ENDED
YEAR ENDED ENDED ---------------------
DECEMBER 31, APRIL 30, APRIL 26, APRIL 25,
1995 1996 1997 1998
------------ ----------- --------- ---------
<S> <C> <C> <C> <C>
U.S. federal statutory rate..................... 34.0% 35.0% 35.0% 34.0%
State income taxes, net of federal income tax
benefit for fiscal 1997....................... -- -- 1.0 6.6
Net benefit for current year net operating
loss.......................................... (34.0) (32.8) -- --
Reversal of valuation allowance................. -- -- (84.8) --
Nondeductible goodwill.......................... -- (2.2) 1.6 6.0
Nondeductible acquisition costs................. -- -- 5.0 3.3
Tax on separate company income not offset
against other company's loss.................. (5.4) (3.0) -- --
Other........................................... -- -- -- 1.2
----- ----- ----- ----
Effective income tax rate....................... (5.4)% (3.0)% (42.2)% 51.1%
===== ===== ===== ====
</TABLE>

At April 25, 1998, the Company has available for tax purposes net operating
loss carryforwards of approximately $2,500. These carryforwards expire in the
years ending 2002-2011. The net operating loss carryforwards are subject to
certain limitations pursuant to IRS Code Section 382.

NOTE 11 -- LEASE COMMITMENTS

The Company leases various types of retail, warehouse and office facilities
and equipment, furniture and fixtures under noncancelable lease agreements which
expire at various dates. Future minimum lease payments under noncancelable
capital and operating leases are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1999........................................................ $12 $1,556
2000........................................................ 6 1,183
2001........................................................ -- 1,027
2002........................................................ -- 659
2003........................................................ -- 323
Thereafter.................................................. -- --
--- ------
Total minimum lease payments................................ 18 $4,748
--- ------
Less: Amounts representing interest......................... (2)
---
Present value of net minimum lease payments................. $16
===
</TABLE>

Rent expense for the year ended December 31, 1995, the four months ended
April 30, 1996 and the fiscal years ended April 26, 1997 and April 25, 1998 was
$1,947, $600, $1,817 and $3,389, respectively.

F-22
<PAGE> 90
SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 12 -- COMMITMENTS AND CONTINGENCIES

LITIGATION

The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.

POSTEMPLOYMENT BENEFITS

The Company has entered into employment agreements with several employees
that would result in payments to these employees upon a change of control or
certain other events. No amounts have been accrued at April 25, 1998 or April
26, 1997 related to these agreements, as no change of control has occurred.

AGREEMENTS WITH USOP

Under the Distribution Agreement, the Company was required, on or prior to
the Distribution, to obtain a credit facility, to borrow funds under such
facility and to use the proceeds of such borrowings to pay off $83.3 million of
U.S. Office Products' debt. See additional discussion in Note 9.

At the date of the Distribution, School Specialty, U.S. Office Products and
the other spin-off companies entered into the Distribution Agreement, the Tax
Allocation Agreement and the Employee Benefits Agreement and the spin-off
companies entered into the Tax Indemnification Agreement. These agreements
provide, among other things, for U.S. Office Products and the Company to
indemnify each other from tax and other liabilities relating to their respective
businesses prior to and following the Distribution. Certain of the obligations
of the Company and the other spin-off companies to indemnify U.S. Office
Products are joint and several. Therefore, if one of the other spin-off
companies fails to satisfy its indemnification obligations to U.S. Office
Products when such a loss occurs, the Company may be required to reimburse U.S.
Office Products for all or a portion of the losses that otherwise would have
been allocated to other spin-off companies. In addition, the agreements allocate
liabilities, including general corporate and securities liabilities of U.S.
Office Products not specifically related to the school supplies business,
between U.S. Office Products and the Company and the other spin-off companies.
The terms of the agreements that will govern the relationship between the
Company and U.S. Office Products were established by U.S. Office Products in
consultation with the Company's management prior to the Distribution while the
Company was a wholly owned subsidiary of U.S. Office Products.

NOTE 13 -- EMPLOYEE BENEFIT PLANS

Effective September 1, 1996, the Company implemented the U.S. Office
Products 401(k) Retirement 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 all full-time
employees are eligible to participate in the 401(k) Plan after one year of
service.

Certain subsidiaries of the Company have, or had prior to implementation of
the 401(k) Plan, qualified defined contribution benefit plans, which allow for
voluntary pre-tax contributions by the employees. The subsidiaries paid all
general and administrative expenses of the plans and in some cases made matching
contributions on behalf of the employees. For the year ended
F-23
<PAGE> 91
SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 13 -- EMPLOYEE BENEFIT PLANS (CONTINUED)
December 31, 1995 and the four months ended April 30, 1996, the subsidiaries
incurred expenses totaling $105 and $6, respectively, related to these plans.

NOTE 14 -- STOCKHOLDERS' EQUITY

EARNINGS PER SHARE

In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS
No. 128 establishes standards for computing and presenting earnings per share
("EPS"). SFAS No. 128 requires the dual presentation of basic and diluted EPS on
the face of the consolidated statement of income. 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 or other
contracts to issue common stock were exercised or converted into common stock.
The Company has adopted SFAS No. 128 during fiscal 1998 and has restated all
prior period EPS data. The following

F-24
<PAGE> 92
SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 14 -- STOCKHOLDERS' EQUITY (CONTINUED)

information presents the Company's computations of basic and diluted EPS for the
periods presented in the consolidated statement of operations.

<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Year ended December 31, 1995:
Basic EPS............................................. $(3,367) 6,562,210 $(0.51)
======
Effect of dilutive employee stock options............. 107,199
------- ----------
Diluted EPS........................................... $(3,367) 6,669,409 $(0.50)
======= ========== ======
Four months ended April 30, 1996:
Basic EPS............................................. $(4,675) 8,611,240 $(0.54)
======
Effect of dilutive employee stock options............. 177,702
------- ----------
Diluted EPS........................................... $(4,675) 8,788,942 $(0.53)
======= ========== ======
Fiscal 1997:
Basic EPS............................................. $ 8,132 10,002,875 $ 0.81
======
Effect of dilutive employee stock options............. 192,766
------- ----------
Diluted EPS........................................... $ 8,132 10,195,641 $ 0.80
======= ========== ======
Fiscal 1998:
Basic EPS............................................. $ 5,239 13,284,003 $ 0.40
======
Effect of dilutive employee stock options............. 263,461
------- ----------
Diluted EPS........................................... $ 5,239 13,547,464 $ 0.39
======= ========== ======
Nine months ended January 24, 1998 (unaudited):
Basic EPS............................................. $ 8,835 12,750,931 $ 0.69
======
Effect of dilutive employee stock options............. 269,571
------- ----------
Diluted EPS........................................... $ 8,835 13,020,502 $ 0.68
======= ========== ======
Nine months ended January 23, 1999 (unaudited):
Basic EPS............................................. $10,695 14,624,672 $ 0.73
======
Effect of dilutive employee stock options............. 40,379
------- ----------
Diluted EPS........................................... $10,695 14,665,051 $ 0.73
======= ========== ======
</TABLE>

CAPITAL CONTRIBUTION BY U.S. OFFICE PRODUCTS

During the fiscal year ended April 25, 1998 and the nine month period ended
January 23, 1999, U.S. Office Products contributed $81,332 and $8,095
(unaudited), respectively, of capital to the Company. The contribution reflects
the forgiveness of intercompany debt by U.S. Office Products, as it was agreed
that the Company would be allocated only $80,000 of debt plus the amount of any
additional debt incurred after January 12, 1998 in connection with the
acquisition of entities that would become subsidiaries of the Company.

F-25
<PAGE> 93
SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 14 -- STOCKHOLDERS' EQUITY (CONTINUED)

EMPLOYEE STOCK PLANS

At the time of the IPO, the Company replaced certain options outstanding
under the U.S. Office Products 1994 Long-Term Compensation Plan, which
represented options to purchase shares of common stock of U.S. Office Products
held by employees, with options to purchase shares of common stock of the
Company. In order to keep the option holders in the same economic position
immediately before and after the Distribution, the number of U.S. Office
Products options held by Company personnel was multiplied by 0.903 and the
exercise price of those options was divided by 0.903 for purposes of the
replacement options. The vesting provisions and option period of the original
grants were not changed. All option data reflected below has been retroactively
restated to reflect the effects of the Distribution. The Company accounts for
options issued in accordance with APB Opinion No. 25. Accordingly, because the
exercise prices of the options have equaled the market price on the date of
grant, no compensation expense has been recognized for the options granted. Had
compensation cost for the Company's stock options been recognized based upon the
fair value of the stock options on the grant date under the methodology
prescribed by SFAS 123, the Company's net income and net income per share would
have been impacted as indicated in the following table.

<TABLE>
<CAPTION>
FOR THE FISCAL
YEAR ENDED
----------------------
APRIL 26, APRIL 25,
1997 1998
--------- ---------
<S> <C> <C>
Net income:
As reported............................................... $8,132 $5,239
Pro Forma................................................. 7,383 4,436
Net income per share:
As reported:
Basic.................................................. 0.81 0.40
Diluted................................................ 0.80 0.39
Pro Forma:
Basic.................................................. 0.74 0.33
Diluted................................................ 0.72 0.33
</TABLE>

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 option pricing model with the following
weighted average assumptions:

<TABLE>
<CAPTION>
FOR THE FISCAL
YEAR ENDED
----------------------
APRIL 26, APRIL 25,
1997 1998
--------- ---------
<S> <C> <C>
Expected life of option.................................... 7 years 7 years
Risk free interest rate.................................... 6.66% 6.35%
Expected volatility of stock............................... 44.00% 44.10%
</TABLE>

The weighted-average fair value of options granted was $15.31 and $9.75 for
fiscal 1997 and 1998, respectively.

F-26
<PAGE> 94
SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 14 -- STOCKHOLDERS' EQUITY (CONTINUED)

A summary of option transactions follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------- --------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Balance at April 30, 1996...........................
Granted........................................... 225,445 $27.03
Exercised......................................... -- --
Canceled.......................................... (14,565) 28.37
-------- ------
Balance at April 26, 1997........................... (210,880) 26.93
Granted........................................... 257,020 18.01
Exercised......................................... -- --
Canceled.......................................... (25,606) 25.45
-------- ------
Balance at April 25, 1998........................... 442,294 $21.83 46,319 $27.14
======== ====== ====== ======
</TABLE>

The following table summarizes information about stock options outstanding
at April 25, 1998:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- --------------------
WEIGHTED- WEIGHTED-
WEIGHTED- AVERAGE AVERAGE
AVERAGE EXERCISE EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE
------------------------ ------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
$16.80-$21.77.............................. 257,020 9.23 $18.01 -- --
$24.36-$29.43.............................. 185,274 8.17 27.14 46,319 $27.14
------- ---- ------ ------ ------
$16.80-$29.43.............................. 442,294 8.79 $21.83 46,319 $27.14
======= ==== ====== ====== ======
</TABLE>

Non-qualified options granted to employees are generally exercisable
beginning one year from the date of grant in cumulative yearly amounts of 25% of
the shares under option and generally expire ten years from the date of grant.

Under a services agreement entered into with Jonathan J. Ledecky, the Board
of Directors of U.S. Office Products agreed that Jonathan J. Ledecky would
receive a stock option for School Specialty Common Stock from the Company as of
the date of the Distribution. The U.S. Office Products Board intended the option
to be compensation for Mr. Ledecky's services as a director of the Company, and
certain services as an employee of the Company. The option covers 7.5% of the
outstanding Company common stock determined as of the date of the Distribution,
with no anti-dilution provisions in the event of issuance of additional shares
of common stock (other than with respect to stock splits or reverse stock
splits). Immediately following the date of the Distribution, Mr. Ledecky
received options for 914,079 shares of School Specialty common stock. The
options have a per share exercise price of $15.50, equal to the IPO price.

As of June 10, 1998, immediately following the effective date of the
registration statements filed in connection with the IPO and the Distribution,
the Company's Board of Directors granted 731,256 options to purchase shares of
the Company's common stock, immediately following the Distribution and prior to
the IPO, to certain executive officers (excluding Mr. Ledecky). The options
granted were granted under the 1998 Stock Incentive Plan (the "Plan") and have a
per share exercise price of $15.50, equal to the IPO price.

F-27
<PAGE> 95
SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 14 -- STOCKHOLDERS' EQUITY (CONTINUED)

Total options available for grant under the Plan are equal to 20.0% of the
outstanding shares of the Company's common stock immediately following the grant
of the award.

NOTE 15 -- QUARTERLY FINANCIAL DATA (UNAUDITED)

The following presents certain unaudited quarterly financial data for the
fiscal years ended April 26, 1997 and April 25, 1998 and the nine months ended
January 23, 1999:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 26, 1997
-----------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Revenues................................. $58,991 $71,682 $29,304 $31,769 $191,746
Gross profit............................. 19,858 23,435 9,595 11,996 64,884
Operating income (loss).................. 5,197 6,732 (1,520) (688) 9,721
Net income (loss)........................ 1,981 2,692 (1,067) 4,526 8,132
Per share amounts:
Basic.................................. 0.21 0.28 (0.11) 0.40 0.81
Diluted................................ 0.21 0.27 (0.11) 0.39 0.80
</TABLE>

<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 25, 1998
-----------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Revenues................................. $87,029 $111,460 $49,391 $62,575 $310,455
Gross profit............................. 30,337 37,225 16,213 23,810 107,585
Operating income (loss).................. 11,872 12,155 (3,647) (4,132) 16,248
Net income (loss)........................ 5,804 5,965 (2,934) (3,596) 5,239
Per share amounts:
Basic.................................. 0.49 0.49 (0.20) (0.24) 0.40
Diluted................................ 0.48 0.47 (0.20) (0.24) 0.39
</TABLE>

<TABLE>
<CAPTION>
NINE MONTHS ENDED JANUARY 23, 1999
-------------------------------------------
FIRST SECOND THIRD TOTAL
----- ------ ----- -----
<S> <C> <C> <C> <C>
Revenues.......................................... $126,657 $212,316 $85,359 $424,332
Gross profit...................................... 44,042 70,761 28,093 142,896
Operating income (loss)........................... 13,326 18,674 (2,383) 29,617
Net income (loss)................................. 6,563 7,430 (3,298) 10,695
Per share amounts:
Basic........................................... 0.45 0.51 (0.23) 0.73
Diluted......................................... 0.44 0.51 (0.23) 0.73
</TABLE>

F-28
<PAGE> 96
SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 16 -- SUBSEQUENT EVENTS (UNAUDITED)

SENIOR CREDIT FACILITY

On September 30, 1998, the Company entered into a five year secured
$350,000 credit facility consisting of a $250,000 revolving loan and $100,000
term loan. Interest on borrowings under the senior credit facility accrued
through the third quarter of fiscal 1999 at a rate of, at the Company's option,
either (i) LIBOR plus 2.375% or (ii) the lender's base rate plus a margin of
.75%, plus an unused fee of .475 on the unborrowed amount under the revolving
credit facility. Thereafter, interest will accrue at a rate of (i) LIBOR plus a
range of 1.000% to 2.000%, or (ii) the lender's base rate plus a range of .000%
to .750%, plus an unused fee ranging from .275 to .475 on the unborrowed amount
under the revolving credit facility (depending on the Company's leverage ratio
of funded debt to earnings before interest, income taxes, depreciation and
amortization). Indebtedness is secured by substantially all of the assets of the
Company. The credit facility is subject to terms and conditions typical of
facilities of such size and includes certain financial covenants. The Company
borrowed under the credit facility to repay the U.S. Office Products' debt
outstanding on June 10, 1998 in accordance with the terms of the U.S. Office
Products strategic restructuring plan, to fund the two companies acquired in the
first three quarters of fiscal 1999 and for seasonal working capital and capital
expenditures. The balance of the credit facility will be available for working
capital, capital expenditures and acquisitions, subject to compliance with
financial covenants. The amount outstanding as of January 23, 1999 under the
credit facility was approximately $172,000.

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 fixes the 30 day LIBOR interest rate at 4.37% per annum
on the $50,000 notional amount and has a three year term that may be canceled by
the Bank of New York on the second anniversary. The floating LIBOR interest rate
at January 23, 1999 was 4.94%.

The term loan will amortize quarterly over five years under the following
amortization schedule with the first principal payment due January 30, 1999:

PURCHASE BUSINESS COMBINATIONS

In the nine months ended January 23, 1999, the Company made two
acquisitions which were accounted for under the purchase method of accounting
for an aggregate cash purchase price of approximately $95,000, resulting in
goodwill of approximately $85,000 which will be amortized over 40 years. The
results of these acquisitions have been included in the Company's results from
their respective dates of acquisition.

On February 9, 1999 the Company purchased Sportime, LLC, the physical
education, athletic and recreation products business of Genesis Direct Inc. for
approximately $23 million in cash, resulting in goodwill of approximately
$13,587 which will be amortized over 40 years.

F-29
<PAGE> 97
SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 16 -- SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)

The following presents the unaudited pro forma results of operations of the
Company for the fiscal year ended April 25, 1998, and the nine month periods
ended January 23, 1999 and January 24, 1998, and includes the Company's
consolidated financial statements, which give retroactive effect to the
acquisitions as if all fiscal year 1998 and fiscal year 1999 purchase
acquisitions had been made at the beginning of fiscal 1998. The results
presented below include certain pro forma adjustments to reflect the
amortization of intangible assets, adjustments to interest expense, adjustments
to depreciation, and the inclusion of a federal income tax provision on all
earnings for the periods ended April 25, 1998, January 23, 1999 and January 24,
1998, respectively:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------
FISCAL YEAR ENDED JANUARY 24, JANUARY 23,
APRIL 25, 1998 1998 1999
----------------- ----------- -----------
<S> <C> <C> <C>
Revenues...................................... $597,285 $496,941 $506,180
Net income.................................... 4,276 7,953 11,744
Net income per share
Basic......................................... $ 0.27 $ 0.53 $ 0.78
Diluted....................................... $ 0.27 $ 0.52 $ 0.78
</TABLE>

NON-RECURRING CHARGES AND RESTRUCTURING COSTS

The Company incurred non-recurring charges in the quarters ended July 25,
1998 and October 24, 1998. The first quarter non-cash strategic restructuring
plan cost of $1,074 consisted of compensation expense attributed to the U.S.
Office Products stock option tender offer and the sale of shares of stock to
certain executive management personnel of the Company, net of underwriting
discounts. The second quarter restructuring costs of $4,200 is related to the
consolidation of the Company's existing warehousing, customer service and sales
operations resulting from the acquisition of National School Supply Company. The
$4,200 charge included $2,100 for employee severance and termination benefits,
$1,300 for lease termination and facility shut-down costs and $800 for write
down of fixed assets and inventories.

F-30
<PAGE> 98

SCHOOL SPECIALTY, INC.

PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)

The unaudited pro forma financial statements give effect to, where
applicable, all acquisitions completed through February 9, 1999, the spin-off
and the refinancing of all amounts payable to U.S. Office Products in connection
with the spin-off and the June 1998 initial public offering and concurrent
offering to certain directors and officers. The pro forma Common Stock offering
adjustments further adjust such pro forma financial statements to give effect to
such offering.

The pro forma combined balance sheet gives effect to the acquisition
completed on February 9, 1999.

The pro forma combined statement of income for the fiscal year ended April
25, 1998 gives effect to (i) the spin-off and the refinancing of all amounts
payable to U.S. Office Products in connection with the spin-off; (ii) the June
1998 initial public offering and concurrent offering to certain directors and
officers; (iii) the acquisitions of Sax Arts and Crafts, American Academic and
six other individually insignificant companies in business combinations
accounted for under the purchase method completed during the fiscal year ended
April 25, 1998 (the "Fiscal 1998 Purchase Acquisitions"); and (iv) the
acquisitions of Hammond & Stephens, National School Supply and Sportime in
business combinations accounted for under the purchase method completed during
the fiscal year ending April 24, 1999 (the "Fiscal 1999 Purchase Acquisitions"),
as if all such transactions had occurred on April 27, 1997. The pro forma
combined statement of income for the year ended April 25, 1998 includes (i) our
audited financial information for the year ended April 25, 1998; (ii) the
unaudited financial information of the Fiscal 1998 Purchase Acquisitions for the
period from April 27, 1997 through their respective dates of acquisitions; and
(iii) the unaudited financial information of the Fiscal 1999 Purchase
Acquisitions for the period from April 27, 1997 through April 25, 1998.

The pro forma combined statement of income for the nine months ended
January 23, 1999 gives effect to (i) the spin-off and the refinancing of all
amounts payable to U.S. Office Products in connection with the spin-off; (ii)
the June 1998 initial public offering and concurrent offering to certain
directors and officers; and (iii) the Fiscal 1999 Purchase Acquisitions, as if
all such transactions had occurred on April 26, 1998. The pro forma combined
statement of income for the nine months ended January 23, 1999 includes our
unaudited financial information for the nine months ended January 23, 1999 and
the unaudited financial information of the Fiscal 1999 Purchase Acquisitions for
the period from April 26, 1998 through the earlier of their respective dates of
acquisition or January 23, 1999.

The pro forma combined statement of income for the nine months ended
January 24, 1998 gives effect to (i) the spin-off and the refinancing of all
amounts payable to U.S. Office Products in connection with the spin-off; (ii)
the June 1998 initial public offering and concurrent offering to certain
directors and officers; (iii) the Fiscal 1998 Purchase Acquisitions; and (iv)
the Fiscal 1999 Purchase Acquisitions, as if all such transactions had occurred
on April 27, 1997. The pro forma combined statement of income for the nine
months ended January 24, 1998 includes (i) our unaudited financial information
for the nine months ended January 24, 1998; (ii) the unaudited financial
information of the Fiscal 1998 Purchase Acquisitions for the period from April
27, 1997 through the earlier of their respective dates of acquisition or January
24, 1998; and (iii) the unaudited financial information of the Fiscal 1999
Purchase Acquisitions for the period from April 27, 1997 through January 24,
1998.

Our historical financial statements reflect an allocated portion of general
and administrative costs and interest expense incurred by U.S. Office Products.
The allocated costs include expenses such as: certain corporate executives'
salaries, accounting and legal fees, departmental costs for accounting, finance,
legal, purchasing, marketing and human resources, as well as other general
overhead costs. These corporate overheads have been allocated to us
F-31
<PAGE> 99

using one of several factors, dependent on the nature of the costs being
allocated, including, revenues, number and size of acquisitions and number of
employees. Interest expense incurred by U.S. Office Products has been allocated
to us based upon our average outstanding intercompany balances with U.S. Office
Products at U.S. Office Products' weighted average interest rate during such
period.

The pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma combined financial data presented herein does not purport to
represent what our financial position or results of operations would have been
had the transactions which are the subject of pro forma adjustments occurred on
those dates, as assumed, and are not necessarily representative of our financial
position or results of operations in any future period. The pro forma combined
financial statements should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this Prospectus.

F-32
<PAGE> 100

SCHOOL SPECIALTY, INC.

PRO FORMA COMBINED BALANCE SHEET
JANUARY 23, 1999

(IN THOUSANDS)

(UNAUDITED)

<TABLE>
<CAPTION>
PRO FORMA
POST COMMON
JANUARY 23, 1999 STOCK
SCHOOL PURCHASE PRO FORMA PRO FORMA OFFERING PRO FORMA
SPECIALTY, INC. ACQUISITION ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
--------------- ---------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash & cash equivalents....... $ -- $ -- $ -- $ -- $ 62,020(b) $ --
(62,020)(b)
Accounts receivable, net...... 84,843 3,432 -- 88,275 -- 88,275
Inventories................... 46,799 4,371 -- 51,170 -- 51,170
Prepaid and other current
assets.................... 16,219 2,820 -- 19,039 -- 19,039
-------- ------- -------- -------- -------- --------
Total current assets...... 147,861 10,623 -- 158,484 -- 158,484
Property and equipment, net... 39,781 1,185 -- 40,966 -- 40,966
Intangible assets, net........ 183,693 14,689 (1,102)(a) 197,280 -- 197,280
Other assets.................. 7,178 12 -- 7,190 -- 7,190
-------- ------- -------- -------- -------- --------
Total assets.............. $378,513 $26,509 $ (1,102) $403,920 $ -- $403,920
======== ======= ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current portion of long-term
debt...................... $ 10,314 $ -- $ -- $ 10,314 $ -- $ 10,314
Accounts payable............ 15,485 1,063 -- 16,548 -- 16,548
Accrued compensation........ 11,945 303 -- 12,248 -- 12,248
Accrued income taxes........ 5,596 6 -- 5,602 -- 5,602
Accrued restructuring....... 3,638 -- -- 3,638 -- 3,638
Other accrued liabilities... 10,057 738 -- 10,795 -- 10,795
-------- ------- -------- -------- -------- --------
Total current
liabilities............. 57,035 2,110 -- 59,145 -- 59,145
Long-term debt................ 162,199 69 23,000(a) 185,268 (62,020)(b) 123,248
Other......................... 212 228 -- 440 -- 440
-------- ------- -------- -------- -------- --------
Total liabilities......... 219,446 2,407 23,000 244,853 (62,020) 182,833
Stockholders' equity:
Common stock................ 15 -- -- 15 3(b) 18
Capital paid in excess of
par value................. 146,768 -- -- 146,768 62,017(b) 208,785
Accumulated other
comprehensive income...... 6 -- -- 6 -- 6
Retained earnings........... 12,278 -- -- 12,278 -- 12,278
Equity of purchased
company................... -- 24,102 (24,102)(a) -- -- --
-------- ------- -------- -------- -------- --------
Total stockholders'
equity.................. 159,067 24,102 (24,102) 159,067 62,020 221,087
-------- ------- -------- -------- -------- --------
Total liabilities and
stockholders' equity.... $378,513 $26,509 $ (1,102) $403,920 $ -- $403,920
======== ======= ======== ======== ======== ========
</TABLE>

F-33
<PAGE> 101

SCHOOL SPECIALTY, INC.

PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 23, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
PRO FORMA
NATIONAL COMMON STOCK
SCHOOL SCHOOL HAMMOND & PRO FORMA PRO FORMA OFFERING
SPECIALTY, INC. SUPPLY STEPHENS SPORTIME ADJUSTMENTS COMBINED ADJUSTMENTS
--------------- -------- --------- -------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues........................... $424,332 $53,690 $2,380 $25,778 $ -- $506,180 $ --
Cost of revenues................... 281,436 36,122 1,181 12,047 -- 330,786 --
-------- ------- ------ ------- ------- -------- -------
Gross profit................... 142,896 17,568 1,199 13,731 -- 175,394 --
Selling, general and administrative
expenses......................... 108,005 12,948 476 11,625 24(e) 133,046 --
(32)(f)
Restructuring costs................ 5,274 127 -- -- -- 5,401 --
-------- ------- ------ ------- ------- -------- -------
Operating income................. 29,617 4,493 723 2,106 8 36,947 --
Other (income) expense:
Interest expense................. 8,942 1,265 -- 3 3,290(g) 13,500 (3,721)(i)
Interest income.................. (114) -- -- -- 114(g) -- --
Other............................ 235 (15) 200 -- 420 --
-------- ------- ------ ------- ------- -------- -------
Income before provision for income
taxes............................ 20,789 2,993 738 1,903 (3,396) 23,027 3,721
Provision for income taxes......... 10,094 4 -- -- 1,185(h) 11,283 1,488
-------- ------- ------ ------- ------- -------- -------
Net income......................... $ 10,695 $ 2,989 $ 738 $ 1,903 $(4,581) $ 11,744 $ 2,233
======== ======= ====== ======= ======= ======== =======
Weighted average shares:
Basic............................ 14,625 15,025(j)
Diluted.......................... 14,665 15,065(j)
Net income per share:
Basic............................ $ 0.73 $ 0.78
Diluted.......................... $ 0.73 $ 0.78

PRO FORMA
AS ADJUSTED
-----------
<S> <C>
Revenues........................... $506,180
Cost of revenues................... 330,786
--------
Gross profit................... 175,394
Selling, general and administrative
expenses......................... 133,046
Restructuring costs................ 5,401
--------
Operating income................. 36,947
Other (income) expense:
Interest expense................. 9,779
Interest income.................. --
Other............................ 420
--------
Income before provision for income
taxes............................ 26,748
Provision for income taxes......... 12,771
--------
Net income......................... $ 13,977
========
Weighted average shares:
Basic............................ 18,025(k)
Diluted.......................... 18,065(k)
Net income per share:
Basic............................ $ 0.78
Diluted.......................... $ 0.77
</TABLE>

F-34
<PAGE> 102

SCHOOL SPECIALTY, INC.

PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 24, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

SAX NATIONAL
SCHOOL ARTS AND AMERICAN SCHOOL HAMMOND &
SPECIALTY, INC.(C) CRAFTS(C) ACADEMIC(C) SUPPLY STEPHENS SPORTIME
------------------ --------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues....................................... $247,880 $5,421 $36,423 $146,526 $7,782 $23,966
Cost of revenues............................... 164,105 3,196 24,382 100,819 3,764 11,043
-------- ------ ------- -------- ------ -------
Gross profit.................................. 83,775 2,225 12,041 45,707 4,018 12,923
Selling, general and administrative expenses... 63,395 1,722 8,789 40,024 2,019 10,533
Restructuring costs............................ -- -- -- 1,198 -- --
-------- ------ ------- -------- ------ -------
Operating income.............................. 20,380 503 3,252 4,485 1,999 2,390
Other (income) expense:
Interest expense.............................. 4,100 18 441 3,927 -- --
Interest income............................... (109) (3) -- -- (109) --
Other......................................... 441 -- 24 -- -- 13
-------- ------ ------- -------- ------ -------
Income before provision for income taxes....... 15,948 488 2,787 558 2,108 2,377
Provision for income taxes..................... 7,113 189 892 15 -- --
-------- ------ ------- -------- ------ -------
Net income..................................... $ 8,835 $ 299 $ 1,895 $ 543 $2,108 $ 2,377
======== ====== ======= ======== ====== =======
Weighted average shares:
Basic......................................... 12,751
Diluted....................................... 13,020
Net income per share:
Basic......................................... $ 0.69
Diluted....................................... $ 0.68

<CAPTION>
INDIVIDUALLY PRO FORMA
INSIGNIFICANT COMMON
FISCAL 1998 STOCK
PURCHASE PRO FORMA PRO FORMA OFFERING PRO FORMA
ACQUISITIONS(C) ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
--------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues....................................... $28,943 $ -- $496,941 $ -- $496,941
Cost of revenues............................... 19,865 -- 327,174 -- 327,174
------- ------- -------- ------- --------
Gross profit.................................. 9,078 -- 169,767 -- 169,767
Selling, general and administrative expenses... 7,873 224(e) 135,598 -- 135,598
1,019(f)
Restructuring costs............................ -- -- 1,198 -- 1,198
------- ------- -------- ------- --------
Operating income.............................. 1,205 (1,243) 32,971 -- 32,971
Other (income) expense:
Interest expense.............................. 38 4,976(g) 13,500 (3,721)(i) 9,779
Interest income............................... (4) 225(g) -- -- --
Other......................................... 58 -- 536 -- 536
------- ------- -------- ------- --------
Income before provision for income taxes....... 1,113 (6,444) 18,935 3,721 22,656
Provision for income taxes..................... 140 2,633(h) 10,982 1,488 12,470
------- ------- -------- ------- --------
Net income..................................... $ 973 $(9,077) $ 7,953 $ 2,233 $ 10,186
======= ======= ======== ======= ========
Weighted average shares:
Basic......................................... 15,126(j) 18,126(k)
Diluted....................................... 15,395(j) 18,395(k)
Net income per share:
Basic......................................... $ 0.53 $ 0.56
Diluted....................................... $ 0.52 $ 0.55
</TABLE>

F-35
<PAGE> 103

SCHOOL SPECIALTY, INC.

PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED APRIL 25, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

SAX NATIONAL
SCHOOL ARTS AND AMERICAN SCHOOL HAMMOND &
SPECIALTY, INC.(C) CRAFTS(C) ACADEMIC(C) SUPPLY(D) STEPHENS SPORTIME
------------------ --------- ----------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................................... $310,455 $5,421 $36,423 $176,034 $9,028 $30,981
Cost of revenues............................ 202,870 3,196 24,382 120,652 4,386 14,467
-------- ------ ------- -------- ------ -------
Gross profit............................... 107,585 2,225 12,041 55,382 4,642 16,514
Selling, general and administrative
expenses................................... 87,846 1,722 8,789 50,832 2,555 14,367
Restructuring costs......................... 3,491 -- -- 1,198 -- --
-------- ------ ------- -------- ------ -------
Operating income........................... 16,248 503 3,252 3,352 2,087 2,147
Other (income) expense:
Interest expense........................... 5,505 18 441 5,036 -- --
Interest income............................ (132) (3) -- -- (154) --
Other...................................... 156 -- 24 -- -- (45)
-------- ------ ------- -------- ------ -------
Income before provision for income taxes.... 10,719 488 2,787 (1,684) 2,241 2,192
Provision for income
taxes...................................... 5,480 189 892 -- -- --
-------- ------ ------- -------- ------ -------
Net income.................................. $ 5,239 $ 299 $ 1,895 $ (1,684) $2,241 $ 2,192
======== ====== ======= ======== ====== =======
Weighted average shares:
Basic...................................... 13,284
Diluted.................................... 13,547
Net income per share:
Basic...................................... $ 0.40
Diluted.................................... $ 0.39

<CAPTION>
INDIVIDUALLY PRO FORMA
INSIGNIFICANT COMMON
FISCAL 1998 STOCK
PURCHASE PRO FORMA PRO FORMA OFFERING PRO FORMA
ACQUISITIONS(C) ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
--------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues.................................... $28,943 $ -- $ 597,285 $ -- $597,285
Cost of revenues............................ 19,865 -- 389,818 -- 389,818
------- ------- --------- ------- --------
Gross profit............................... 9,078 -- 207,467 -- 207,467
Selling, general and administrative
expenses................................... 7,873 295(e) 175,403 -- 175,403
1,124(f)
Restructuring costs......................... -- -- 4,689 -- 4,689
------- ------- --------- ------- --------
Operating income........................... 1,205 (1,419) 27,375 -- 27,375
Other (income) expense:
Interest expense........................... 38 5,962(g) 17,000 (4,962)(i) 12,038
Interest income............................ (4) 293(g) -- -- --
Other...................................... 58 -- 193 -- 193
------- ------- --------- ------- --------
Income before provision for income taxes.... 1,113 (7,674) 10,182 4,962 15,144
Provision for income
taxes...................................... 140 (795)(h) 5,906 1,986 7,892
------- ------- --------- ------- --------
Net income.................................. $ 973 $(6,879) $ 4,276 $ 2,976 $ 7,252
======= ======= ========= ======= ========
Weighted average shares:
Basic...................................... 15,659(j) 18,659(k)
Diluted.................................... 15,922(j) 18,922(k)
Net income per share:
Basic...................................... $ 0.27 $ 0.39
Diluted.................................... $ 0.27 $ 0.38
</TABLE>

F-36
<PAGE> 104

SCHOOL SPECIALTY, INC.

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)

UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS

(a) Adjustment to reflect purchase price adjustments associated with the
acquisition of Sportime. The portion of the consideration assigned to
goodwill ($13,587) in the transaction accounted for under the purchase
method represents the excess of the cost over the fair market value of the
net assets acquired. We amortize goodwill over a period of 40 years. The
recoverability of the unamortized goodwill will be assessed on an ongoing
basis by comparing anticipated undiscounted future cash flows from
operations to net book value.

(b) Adjustment to reflect $62,020 of net proceeds from the sale of 3,000 shares
of Common Stock as part of the Common Stock offering (net of expenses and
underwriting discount) and the utilization of the proceeds to repay $62,020
of long-term debt.

UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS

(c) Certain reclassifications have been made to our historical results and the
results of the Fiscal 1998 Purchase Acquisitions for the period prior to
their respective dates of acquisition for the nine months ended January 24,
1998 and the fiscal year ended April 25, 1998 to conform with the fiscal
1999 presentation. These reclassifications had no effect on net income or
net income per share.

(d) The results are for the fiscal year ended March 31, 1998.

(e) Adjustment to reflect additional corporate overhead expenses to be incurred
as a stand-alone, publicly traded, entity, rather than as a division of
U.S. Office Products.

(f) Adjustment to reflect the increase (decrease) in amortization expense
relating to goodwill recorded in purchase accounting related to the Fiscal
1998 and Fiscal 1999 Purchase Acquisitions for the periods prior to the
respective dates of acquisition. We have recorded goodwill amortization in
the historical financial statements from the respective dates of
acquisition forward. The goodwill is being amortized over an estimated life
of 40 years.

(g) Adjustment to reflect an increase in interest expense. Interest expense is
being calculated on the average pro forma debt outstanding during the
applicable periods at a weighted average interest rate of approximately
8.0%. The adjustment also reflects a reduction in interest income to zero
as we generally expect to use available cash to repay debt. Pro forma
interest expense will fluctuate approximately $272 on an annual basis for
each 0.125% change in interest rates.

(h) Adjustment to calculate the provision for income taxes on the pro forma
combined results at an effective income tax rate of approximately 49% for
the nine months ended January 23, 1999 and 58% for the nine months ended
January 24, 1998 and the fiscal year ended April 25, 1998. The difference
between the effective tax rates and the statutory tax rate of 35% relates
primarily to state income taxes and nondeductible goodwill.

(i) Adjustment to reflect a decrease in interest expense as a result of the
utilization of the net proceeds from the Common Stock offering to repay
$62,020 of long-term debt at an annual interest rate of 8%.

(j) The weighted average shares outstanding used to calculate pro forma
combined earnings per share is calculated based upon our weighted average
shares, adjusted to reflect the

F-37
<PAGE> 105
SCHOOL SPECIALTY, INC.

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)

UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS(CONTINUED)

shares sold in the June 1998 initial public offering and the concurrent
offering to certain officers and directors, as if these offerings had occurred
on April 27, 1997.

(k) The weighted average shares outstanding used to calculate pro forma as
adjusted earnings per share is calculated based upon the pro forma weighted
average shares described in note (j), adjusted to reflect the 3,000 shares
to be sold in the Common Stock offering, as if the Common Stock offering
had occurred on April 27, 1997.

F-38
<PAGE> 106

INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
American Academic Suppliers Holding Corporation

We have audited the accompanying consolidated balance sheets of AMERICAN
ACADEMIC SUPPLIERS HOLDING CORPORATION AND SUBSIDIARY as of December 31, 1995
and 1996, and the related consolidated statements of operations, changes in
shareholders' equity and of cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of American
Academic Suppliers Holding Corporation and Subsidiary as of December 31, 1995
and 1996, and the consolidated results of their operations and their cash flows
for the years then ended, in conformity with generally accepted accounting
principles.

ALTSCHULER, MELVOIN AND GLASSER LLP

Chicago, Illinois
February 24,1997

F-39
<PAGE> 107

AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
---- ---- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash............................................. $ 7,228 $ 21,507 $ 9,841
Trade accounts receivable (net of allowance for
doubtful accounts of $25,000)................. 4,525,451 3,656,546 13,476,228
Inventories (Note 1)............................. 1,805,731 1,599,140 2,398,435
Other current assets and prepaid expenses........ 127,673.... 173,549 269,234
----------- ----------- -----------
6,466,083 5,450,742 16,153,738
----------- ----------- -----------
Property, Plant and Equipment (less accumulated
depreciation -- Notes 1 and 2)................... 3,081,784 2,949,000 2,845,858
----------- ----------- -----------
Other Assets:
Excess of cost over the fair value of net assets
acquired (less accumulated amortization of
$320,322, $433,022, $509,311, respectively --
Note 1........................................ 4,187,938 4,075,238 4,030,878
Deferred financing costs (less accumulated
amortization of $21,729, $42,729, and $50,965
respectively -- Note 1)....................... 40,544 19,544
Deposits......................................... 37,581 64,211
----------- ----------- -----------
4,266,063 4,158,993 4,030,878
----------- ----------- -----------
$13,813,930 $12,558,735 $23,030,474
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................. $ 1,476,312 $ 1,636,969 $ 4,281,450
Current portion of long-term debt (Note 4)....... 168,673 3,135 10,772,516
Other current liabilities and accrued expenses
(Notes 3 and 9)............................... 1,968,780 736,374 2,391,544
----------- ----------- -----------
3,613,765 2,376,478 17,445,510
----------- ----------- -----------
Long-term Liabilities:
Long-term debt (Note 4).......................... 7,712,187 6,407,152
----------- ----------- -----------
Shareholders' Equity:
Common stock, (10,000 shares of $.01 par value
authorized 1,209, 1,232 and 1,232 shares
issued and outstanding at December 31, 1995,
1996, and September 30, 1997, respectively --
Note 8)....................................... 12 12 12
Additional paid-in capital....................... 5,528,073 5,648,073 5,648,073
Retained earnings (Accumulated deficit).......... (1,463,356) (296,229) 1,513,630
----------- ----------- -----------
4,064,729 5,351,856 7,161,715
Excess of Purchase Price over Predecessor Basis
(Note 1)......................................... (1,576,751) (1,576,751) (1,576,751)
----------- ----------- -----------
2,487,978 3,775,105 5,584,964
----------- ----------- -----------
$13,813,930 $12,558,735 $23,030,474
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of this statement.
F-40
<PAGE> 108

AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY

CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------------------
1995 1996 1996 1997
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Net Sales............................ $38,596,316 $39,290,879 $32,578,366 $38,497,843
Cost of Goods Sold................... 27,050,924 26,667,961 21,985,703 25,916,417
----------- ----------- ----------- -----------
Gross Profit......................... 11,545,392 12,622,918 10,592,663 12,581,426
Selling, General and Administrative
Expenses........................... 9,522,851 9,995,206 7,229,895 8,932,382
----------- ----------- ----------- -----------
Income from Operations............... 2,022,541 2,627,712 3,362,768 3,649,044
----------- ----------- ----------- -----------
Other Expense:
Interest........................... 1,002,199 856,223 660,753 543,089
Guarantee fees (Note 4)............ 305,384 148,996 148,996 0
Executive severance (Note 9)....... 168,750 0 0 0
Amortization of intangibles (Note
1).............................. 133,700 133,700 100,275 120,516
Management fee (Note 8)............ 112,000 182,000 121,500 198,000
Other.............................. 104,574 128,908 81,115 126,523
----------- ----------- ----------- -----------
1,826,607 1,449,827 1,112,639 988,128
----------- ----------- ----------- -----------
Income before Income Taxes........... 195,934 1,177,885 2,250,129 2,660,916
Income Tax Provision -- Current...... 26,000 10,758 8,069 851,057
----------- ----------- ----------- -----------
Net Income........................... $ 169,934 $ 1,167,127 $ 2,242,060 $ 1,809,859
=========== =========== =========== ===========
</TABLE>

The accompanying notes are an integral part of this statement.
F-41
<PAGE> 109

AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995 AND 1996
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)

<TABLE>
<CAPTION>
EXCESS OF
RETAINED PURCHASE
SHARES ADDITIONAL EARNINGS PRICE OVER TOTAL
ISSUED AND PAID-IN (ACCUMULATED PREDECESSOR SHAREHOLDERS'
OUTSTANDING PAR VALUE CAPITAL DEFICIT) BASIS EQUITY
----------- --------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1994................. 1,209 $12 $5,528,073 $(1,633,290) $(1,576,751) $2,318,044
Net Income, Year Ended
December 31, 1995.... 169,934 169,934
----- --- ---------- ----------- ----------- ----------
Balances, December 31,
1995................. 1,209 12 5,528,073 (1,463,356) (1,576,751) 2,487,978
Issuance of Common
Stock (Note 8)....... 23 120,000 120,000
Net Income, Year Ended
December 31, 1996.... 1,167,127 1,167,127
----- --- ---------- ----------- ----------- ----------
Balances, December 31,
1996................. 1,232 12 5,648,073 (296,229) (1,576,751) 3,775,105
Unaudited data:
Net Income, Nine Months
Ended September 30,
1997................. 1,809,859 1,809,859
----- --- ---------- ----------- ----------- ----------
Balances September 30,
1997 (unaudited)..... 1,232 $12 $5,648,073 $ 1,513,630 $(1,576,751) $5,584,964
===== === ========== =========== =========== ==========
</TABLE>

See accompanying notes to pro forma combined financial statements.
F-42
<PAGE> 110

AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------------------
1995 1996 1996 1997
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income.................................. $ 169,934 $ 1,167,127 $ 2,242,060 $ 1,809,859
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............. 404,222 381,791 281,842 292,031
Change in assets and liabilities:
Accounts receivable (net)............... 643,826 868,905 (6,575,016) (9,819,682)
Inventories............................. 172,680 206,591 (523,208) (799,296)
Other assets............................ (56,950) (72,506) (95,646) (89,177)
Accounts payable........................ (140,915) 160,657 2,010,499 2,643,464
Other liabilities and accrued
expenses............................. 968,782 (1,232,406) (1,530,288) 1,652,036
----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities.................................. 2,161,579 1,480,159 (4,189,757) (4,310,765)
----------- ----------- ----------- -----------
Cash Flows Used in Investing Activities:
Purchases of property and equipment......... (197,298) (115,307) (108,329) (67,282)
----------- ----------- ----------- -----------
Cash Flows from Financing Activities:
Repayment of revolving line of credit
(net)..................................... (1,929,681) (1,305,935) 4,227,957 5,766,671
Repayment of term loans and mortgage........ (96,046) (107,306) (81,277) (1,400,290)
Principal payment on capital lease
obligation................................ (1,305) (3,496)
Repayment of promissory note payable to
shareholder............................... (53,836)
Proceeds from sale of common stock.......... 120,000 120,000
----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities................................ (2,027,032) (1,350,573) 4,266,680 4,366,381
----------- ----------- ----------- -----------
Net Increase (Decrease) in Cash............... (62,751) 14,279 (31,406) (11,666)
Cash, Beginning of Year....................... 69,979 7,228 7,228 21,507
----------- ----------- ----------- -----------
Cash, End of Year............................. $ 7,228 $ 21,507 $ (24,178) $ 9,841
=========== =========== =========== ===========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the year for:
Interest.................................. $ 977,000 $ 864,134 $ 660,753 $ 543,089
=========== =========== =========== ===========
Income taxes.............................. $ 4,900 $ 11,046 $ $ 85,000
=========== =========== =========== ===========
Supplemental Schedule of Noncash Operating,
Investing and Financing Activities:
Acquisition of equipment financed through
capital lease obligation.................... $ 8,953 $ $ $
=========== =========== =========== ===========
Conversion of portion of accrued guaranteed
fees to a note payable (Note 4)............. $ 53,836 $ $ $
=========== =========== =========== ===========
</TABLE>

The accompanying notes are an integral part of this statement.
F-43
<PAGE> 111

AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES

American Academic Suppliers Holding Corporation ("AASHC") and its wholly
owned subsidiary, American Academic Suppliers, Inc. ("AASI") (collectively
referred to as the "Company"), is a direct distributor of school supplies,
supplementary educational materials, furniture, and equipment to educational
institutions, school systems and administrative offices located throughout the
United States. Operations are conducted from owned and leased premises located
in Cary, Illinois and from leased premises located in Mt. Laurel, New Jersey
(Note 7).

On February 28, 1993, AASHC acquired all of the outstanding common stock of
AASI for $8,000,000. The acquisition was accounted for using the purchase method
of accounting. Since the former shareholders of AASI acquired an equity interest
in AASHC, the purchase price allocation has been adjusted by $1,576,751 to
reflect the excess of the purchase price over the predecessor basis in the net
assets acquired which, under generally accepted accounting principles, may not
be recognized as an asset. Such excess of purchase price over predecessor basis
was recorded as a reduction of the excess of cost over the fair value of net
assets acquired and as a decrease in shareholders' equity as of the date of
acquisition.

The Company primarily sells its products to separate schools or school
systems. As such, the majority of trade accounts receivable relate primarily to
these customers. Management believes that the recorded allowance for doubtful
accounts is adequate to cover potential losses associated with these customers.

In the opinion of management, the Company has made all adjustments
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of September 30, 1997 and the
results of its operations and its cash flows for the nine months ended September
30, 1996 and 1997, as presented in the accompanying unaudited interim financial
statements.

In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.

A summary of significant accounting policies is as follows:

Principles of Consolidation -- The consolidated financial statements
include the accounts of AASHC and its wholly owned subsidiary, AASI. All
intercompany accounts and balances have been eliminated in the
consolidation.

Inventories -- Inventories are valued at the lower of cost or market, with
cost determined under the first-in, first-out ("FIFO") basis.

Depreciation and Amortization -- Depreciation of property, plant and
equipment is computed under both accelerated and straight-line methods
for financial reporting purposes, based on the estimated useful lives of
the assets. For income tax reporting purposes, provisions for
depreciation are computed principally under accelerated methods, as
permitted by the Internal Revenue Code.

The excess of cost over fair value of net assets acquired is being
amortized under the straight-line method over a period of 40 years.

F-44
<PAGE> 112
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 -- NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Costs incurred in connection with obtaining long-term financing are
amortized, on a straight-line basis, over the term of the financing
commitment.

Income Taxes -- The Company accounts for income taxes under the
provisions of Financial Accounting Standard No. 109. Under this standard,
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized.

NOTE 2 -- PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, at December 31, 1995 and 1996, stated at
acquisition cost, consisted of the following:

<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Land................................................ $ 415,000 $ 415,000
Buildings........................................... 2,333,828 2,335,258
Warehouse equipment................................. 603,590 638,976
Office furniture and equipment...................... 249,060 255,613
Computer equipment.................................. 173,285 245,223
---------- ----------
Total owned assets............................. 3,774,763 3,890,070
Equipment capitalized under lease obligation........ 8,953 8,953
---------- ----------
3,783,716 3,899,023
Less accumulated depreciation....................... (701,932) (950,023)
---------- ----------
$3,081,784 $2,949,000
========== ==========
</TABLE>

Depreciation of property, plant, and equipment, for the years ended
December 31, 1995 and 1996, amounted to approximately $270,500 and $248,000,
respectively.

NOTE 3 -- OTHER CURRENT LIABILITIES AND ACCRUED EXPENSES

Other current liabilities and accrued expenses, at December 31, 1995 and
1996, consisted of the following:

<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Compensation and commissions.......................... $1,037,714 $390,037
Guarantor's fee (Note 4).............................. 305,383 0
Severance pay (Note 9)................................ 170,442 0
Real estate taxes..................................... 77,253 80,385
Interest.............................................. 67,971 60,060
Other................................................. 310,017 205,892
---------- --------
$1,968,780 $736,374
========== ========
</TABLE>

F-45
<PAGE> 113
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4 -- LONG-TERM DEBT

Long-term debt, at December 31, 1995 and 1996, consisted of the following:

<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Borrowings from Harris Trust and Savings Bank ("Harris")
pursuant to a Credit Agreement ("Agreement") (see below):
Revolving credit loan borrowings.......................... $5,787,922 $4,481,987
Term loan borrowings...................................... 521,422 467,231
Mortgage note payable to Harris Bank Barrington, N.A.
(secured by real estate occupied by the Company; payable
in monthly installments, inclusive of interest at prime
plus 1 1/2%, of $16,600; final maturity on December 16,
1999. Fully paid subsequent to year-end).................. 1,510,032 1,456,917
Promissory note payable to Pfingsten Executive Fund, L.P.
(bearing interest at 10% per annum; paid in full during
1996)..................................................... 53,836
Capitalized lease obligation (payable in monthly
installments of $291, inclusive of interest at 10%; final
maturity June 7, 1998).................................... 7,648 4,152
---------- ----------
7,880,860 6,410,287
Less current portion........................................ 168,673 3,135
---------- ----------
Long-term portion, due in 1998.............................. $7,712,187 $6,407,152
========== ==========
</TABLE>

At December 31, 1996, the Harris Agreement provided maximum aggregate
borrowings of $12,077,500. Interest on outstanding borrowings was payable
monthly, at the prime rate (8.25% at December 31, 1996) plus 1%. The Company had
availability under the Agreement of $1,100,000 at December 31, 1996. Pfingsten
Executive Fund, L.P. (the Company's majority shareholder) had guaranteed
$1,500,000 of the borrowings (reduced from $3,000,000 effective December 31,
1995) under the Agreement. Guarantee fees are charged to the Company at 10% per
annum, which amounted to $305,384 and $148,996 for the years ended December 31,
1995 and 1996. The guarantees were released by Harris on October 31, 1996.

On February 4, 1997, the Agreement with Harris was amended ("Amended
Agreement") to provide maximum aggregate borrowings of $16,800,000 from June 1
through October 31, and $11,800,000 at all other times. Revolving credit loan
borrowings, under the Amended Agreement which expires March 31, 1998, are
limited to a computed "Borrowing Base" amount and bear interest at the Company's
option at the prime rate or LIBOR plus 1.75%. The Amended Agreement requires the
Company to pay .25% per annum on the average daily unused portion of the
Revolving Credit Commitment and to pay a prepayment penalty in certain
situations.

The Amended Agreement contains covenants restricting certain corporate
acts, such as restricting dividend and management fee payments, and requiring
the maintenance of net worth levels and a financial ratio.

Borrowings under the agreement with Harris are secured by all of the
Company's assets.

On February 4, 1997, the Company repaid the mortgage note and term loan
from borrowings under the revolving credit loan.

Borrowings under the revolving credit, term loan and mortgage note at
December 31, 1996 have been reported as long-term liabilities at December 31,
1996 as a result of the Amended Agreement and repayment of the mortgage note and
term loan.

F-46
<PAGE> 114
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5 -- INCOME TAXES

AASHC and its wholly owned subsidiary file a consolidated federal income
tax return.

The primary differences between the statutory and effective tax rates for
1995 and 1996 relate to the use of net operating loss carryforwards not
previously recognized.

Gross deferred income tax assets consist primarily of (a) net operating
loss carryforwards, (b) accrued expenses not paid within two and one-half months
after the end of the Company's year which are deductible for tax reporting
purposes when paid, and (c) uniform capitalization rules (for additional
inventory costs) reflected for tax reporting purposes only. The gross deferred
income tax liability consists of the variation in the book and tax bases of
property, plant and equipment.

At December 31, 1995 and 1996, the Company's net deferred income tax asset
and related valuation allowance consisted of:

<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Gross deferred tax asset.............................. $828,000 $262,000
Less valuation allowance.............................. 517,000 84,000
-------- --------
Deferred tax asset, net of valuation allowance........ 311,000 178,000
Less deferred tax liability........................... 311,000 178,000
-------- --------
$ -- $ --
======== ========
</TABLE>

The valuation allowance decreased by $112,799 and $433,000 during 1995 and
1996, respectively.

At December 31, 1996, the Company has available, as a carryforward to
future years, a federal net operating loss carryforward of approximately
$560,000, expiring in 2008 and 2009.

NOTE 6 -- EMPLOYEE BENEFIT PLAN

The Company is a participant in a Pfingsten Partners, L.P. master employee
benefit plan. The plan, established under the provisions of Section 401(k) of
the Internal Revenue Code provides, among other things, for the Company to make
discretionary contributions. Such employer contributions to the plan, for the
years ended December 31, 1995 and 1996, amounted to $43,427 and $24,534,
respectively.

Certain professionals of Pfingsten Partners, L.P. (Note 8) serve as the
trustees of the plan.

NOTE 7 -- LEASES

The Company leases an office building and a warehouse under various
operating agreements which expire in 1998. The office building lease is
renewable at the Company's option for 36 additional months with an escalated
monthly payment. Rent expense incurred under these leases, for the years ended
December 31, 1995 and 1996, totalled approximately $253,000 and $251,000,
respectively.

F-47
<PAGE> 115
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7 -- LEASES (CONTINUED)
Future minimum lease payments under the aforementioned operating leases, at
December 31, 1996, are as follows:

NOTE 8 -- SHAREHOLDERS' EQUITY AND RELATED-PARTY TRANSACTIONS

During the year ended December 31, 1996, the Company issued 23 shares of
common stock to certain officers for $120,000 in cash.

For the years ended December 31, 1995 and 1996, the Company incurred
$112,000 and 182,000, respectively, in fees pursuant to a management agreement
with Pfingsten Partners, L.P., which entity is an affiliate of the Company's
majority shareholder, Pfingsten Executive Fund, L.P.

During the years ended December 31, 1995 and 1996, approximately $15,300
and $6,900, respectively, in consulting services were paid by Pfingsten
Partners, L.P., on behalf of the Company, and charged to the Company.
Additionally, at December 31, 1995, $12,000 was owed to a shareholder of the
Company for services rendered during 1995.

See Notes 3 and 4 for additional related-party transactions.

NOTE 9 -- SEVERANCE AGREEMENTS

During December 1995, the Company terminated its employment agreement with
its president and recognized a $168,750 charge to operations to cover the cost
associated with this termination. The related amount owed pertaining to the
aforementioned charge, as well as a 1993 termination, at December 31, 1995, was
$170,442. There were no outstanding amounts at December 31, 1996.

NOTE 10 -- SUBSEQUENT EVENT (UNAUDITED)

Effective December 15, 1997, the Company and its stockholders entered into
a definitive agreement with U.S. Office Products Company ("U.S. Office
Products") pursuant to which U.S. Office Products acquired all outstanding
shares of the Company's common stock in exchange for cash.

F-48
<PAGE> 116

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
of Sax Arts and Crafts, Inc.

In our opinion, the accompanying balance sheets and related statements of
operations, of shareholder's equity and of cash flows present fairly, in all
material respects, the financial position of Sax Arts and Crafts, Inc. at
December 16, 1995 and December 25, 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 25, 1996
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards 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 accounts 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 audits provide a reasonable basis for the opinion expressed
above.

PRICEWATERHOUSECOOPERS LLP

Minneapolis, Minnesota
February 3, 1998

F-49
<PAGE> 117

SAX ARTS AND CRAFTS, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 16, DECEMBER 25, JUNE 29,
1995 1996 1997
------------ ------------ --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................. $ 102,900 $ 114,492 $ 109,544
Accounts receivable -- trade, less allowance for
doubtful accounts of $31,860,$49,860 and
$37,448, respectively......................... 4,656,651 4,383,464 4,114,798
Inventories...................................... 5,591,557 5,441,664 7,145,216
Prepaid expenses and other current assets........ 856,943 429,741 747,466
----------- ----------- -----------
Total current assets.......................... 11,208,051 10,369,361 12,117,024
Net property, plant and equipment.................. 1,034,648 820,827 658,356
Other assets....................................... 42,477 26,506 26,506
----------- ----------- -----------
Total assets.................................. $12,285,176 $11,216,694 $12,801,886
=========== =========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable -- trade........................ $ 4,210,593 $ 1,947,833 $ 3,403,006
Affiliate payable, net........................... 3,212,473 1,806,645 3,130,496
Accrued income taxes............................. 1,802,399 1,814,139 401,063
Other accrued expenses........................... 684,089 806,241 856,057
----------- ----------- -----------
Total current liabilities..................... 9,909,554 6,374,858 7,790,622
Deferred income taxes.............................. 42,256 16,202 16,202
Other liabilities.................................. 69,195 69,197 92,000
----------- ----------- -----------
Total liabilities............................. 10,021,005 6,460,257 7,898,824
Shareholder's equity:
Common stock, $1.00 par value, 1,000 shares
authorized, issued and outstanding............... 1,000 1,000 1,000
Capital surplus -- additional paid-in capital.... 1,507,597 1,507,597 1,507,597
Retained earnings................................ 755,574 3,247,840 3,394,465
----------- ----------- -----------
Total shareholder's equity.................... 2,264,171 4,756,437 4,903,062
----------- ----------- -----------
Total liabilities and shareholder's equity.... $12,285,176 $11,216,694 $12,801,886
=========== =========== ===========
</TABLE>

See accompanying notes to financial statements.
F-50
<PAGE> 118

SAX ARTS AND CRAFTS, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
------------------------------------------ -------------------------
DECEMBER 17, DECEMBER 16, DECEMBER 25, JUNE 30, JUNE 29,
1994 1995 1996 1996 1997
------------ ------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................. $29,169,879 $33,239,883 $34,350,947 $11,125,967 $13,009,456
Cost of sales............. 16,369,453 19,029,918 20,078,806 6,562,838 8,286,522
----------- ----------- ----------- ----------- -----------
Gross profit............ 12,800,426 14,209,965 14,272,141 4,563,129 4,722,934
Selling, administrative
and other expenses... 8,401,463 9,169,667 9,734,256 4,379,178 4,427,608
----------- ----------- ----------- ----------- -----------
Operating earnings... 4,398,963 5,040,298 4,537,885 183,951 295,326
Other income (expense),
net..................... (510,508) (545,302) (476,886) (222,759) (52,971)
----------- ----------- ----------- ----------- -----------
Earnings before income
taxes................... 3,888,455 4,494,996 4,060,999 (38,808) 242,355
Income taxes.............. 1,502,315 1,738,191 1,568,733 (14,351) 95,730
----------- ----------- ----------- ----------- -----------
Net earnings (loss)....... $ 2,386,140 $ 2,756,805 $ 2,492,266 $ (24,457) $ 146,625
=========== =========== =========== =========== ===========
</TABLE>

See accompanying notes to financial statements.
F-51
<PAGE> 119

SAX ARTS AND CRAFTS, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED SHAREHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 18, 1993................. 1,000 $1,000 $1,507,597 $ 512,629 $ 2,021,226
Dividends................................ (2,400,000) (2,400,000)
Net income............................... 2,386,140 2,386,140
----- ------ ---------- ----------- -----------
Balance, December 17, 1994................. 1,000 1,000 1,507,597 498,769 2,007,366
Dividends................................ (2,500,000) (2,500,000)
Net income............................... 2,756,805 2,756,805
----- ------ ---------- ----------- -----------
Balance, December 16, 1995................. 1,000 1,000 1,507,597 755,574 2,264,171
Net income............................... 2,492,266 2,492,266
----- ------ ---------- ----------- -----------
Balance, December 25, 1996................. 1,000 1,000 1,507,597 3,247,840 4,756,437
Net income (unaudited)................... 146,625 146,625
----- ------ ---------- ----------- -----------
Balance, June 29, 1997 (unaudited)......... 1,000 $1,000 $1,507,597 $ 3,394,465 $ 4,903,062
===== ====== ========== =========== ===========
</TABLE>

See accompanying notes to financial statements.
F-52
<PAGE> 120

SAX ARTS AND CRAFTS, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
-------------------------------------------- --------------------------
DECEMBER 17, DECEMBER 16, DECEMBER 25, JUNE 30, JUNE 29,
1994 1995 1996 1996 1997
------------ ------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net earnings (loss)............. $ 2,386,140 $ 2,756,805 $ 2,492,266 $ (24,457) $ 146,625
Adjustments to reconcile net
earnings (loss) to cash
provided by operating
activities:
Depreciation and
amortization................ 327,489 340,556 371,516 178,529 153,891
Deferred income taxes......... 599 (30,302) (26,054) -- --
Gain on disposal of fixed
assets...................... (5,350) (21,505) (6,578) (6,205) (23,234)
Impact on cash flow from
changes in working capital:
Accounts receivable......... (185,934) (734,239) 273,187 1,403,353 268,666
Inventory................... (659,936) 144 149,893 (2,287,194) (1,703,552)
Other current assets........ (632,521) (56,442) 427,202 (109,614) (317,726)
Accounts payable............ 155,519 2,590,011 (2,262,760) (2,172,326) 1,455,174
Affiliates payable.......... 942,481 (2,521,286) (1,405,828) 2,927,060 1,323,851
Accrued expenses............ (212,673) 656,493 133,894 27,125 (1,340,457)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used
in) operating
activities.............. 2,115,814 2,980,235 146,738 (63,729) (36,762)
----------- ----------- ----------- ----------- -----------
Cash flows from investing
activities:
Purchased property, plant and
equipment..................... (196,752) (473,305) (157,695) (9,789) (27,006)
Proceeds from sales of assets... 5,350 21,505 6,578 11,450 58,820
Increase in other assets........ -- -- 15,971 15,971 --
----------- ----------- ----------- ----------- -----------
Net cash provided by (used
in) investing
activities.............. (191,402) (451,800) (135,146) 17,632 31,814
----------- ----------- ----------- ----------- -----------
Cash flows from financing
activities:
Dividend payment................ (2,400,000) (2,500,000) -- -- --
----------- ----------- -----------
Net cash used in financing
activities.............. (2,400,000) (2,500,000) -- -- --
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash... (475,588) 28,435 11,592 (46,097) (4,948)
Cash at beginning of period....... 550,053 74,465 102,900 102,900 114,492
----------- ----------- ----------- ----------- -----------
Cash at end of period............. $ 74,465 $ 102,900 $ 114,492 $ 56,803 $ 109,544
=========== =========== =========== =========== ===========
Supplemental disclosures of cash
flow information:
Cash paid for interest.......... $ 91,585 $ 390 $ -- $ -- $ 23
Cash paid for taxes............. $ 1,540,000 $ 1,480,000 $ 1,780,000 $ 141,000 $ 95,000
</TABLE>

See accompanying notes to financial statements.
F-53
<PAGE> 121

SAX ARTS AND CRAFTS, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 1 -- ORGANIZATION AND OPERATIONS

Sax Arts and Crafts, Inc. (the "Company") is a national mail order
distributor of art and craft supplies to schools and educational institutions.
Sax Arts and Crafts, Inc. is a wholly-owned subsidiary of Day-Timers, Inc. (the
"Parent"). The Parent is owned by ACCO World Corporation ("ACCO"), which is a
wholly-owned subsidiary of Fortune Brands International ("Fortune Brands"). On
June 30, 1997, the Company and its shareholder entered into a definitive
agreement with U.S. Office Products Company ("U.S. Office Products") pursuant to
which the Company was acquired by U.S. Office Products. All outstanding shares
of the Company were exchanged for cash.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

FISCAL YEAR

The Company's fiscal year ends on the third Saturday in December. Fiscal
year 1994 ended on December 17, 1994 and fiscal year 1995 ended on December 16,
1995. In 1996, the Company's fiscal year end was changed to December 25, 1996 in
order to comply with the closing date of the Parent. As a result, fiscal 1996
has 53 weeks.

UNAUDITED INTERIM FINANCIAL STATEMENTS

In the opinion of management, the Company has made all adjustments
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of June 29, 1997 and the results of
its operations and its cash flows for the six months ended June 30, 1996 and
June 29, 1997, as presented in the accompanying unaudited interim financial
statements.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

REVENUE RECOGNITION

The Company recognizes revenue upon shipment of the product as obligations
subsequent to delivery are not significant.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of accounts receivable. The
Company provides products to a wide range of customers who primarily operate in
the education sector. The Company does not believe it is exposed to any undue
concentration of credit risk based on the strong credit history of the Company's
customer base.

INCOME TAXES

The Company is part of a consolidated tax group with its Parent. For
purposes of these financial statements, income taxes have been provided as if
the Company filed a separate tax

F-54
<PAGE> 122
SAX ARTS AND CRAFTS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
return. Income taxes are calculated in accordance with the liability method of
accounting for income taxes as provided by Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Deferred taxes are provided on
temporary differences between book and tax basis of assets and liabilities which
will have a future impact on taxable income.

NOTE 3 -- INVENTORIES

Inventories are recorded at cost (not in excess of market value) as
determined by the weighted average cost method. Inventories are comprised as
follows:

<TABLE>
<CAPTION>
DECEMBER 16, DECEMBER 25,
1995 1996
------------ ------------
<S> <C> <C>
Finished goods..................................... $5,647,290 $5,493,859
Less -- Reserves................................... 55,733 52,195
---------- ----------
Total inventory............................... $5,591,557 $5,441,664
========== ==========
</TABLE>

NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT

The major classes are:

<TABLE>
<CAPTION>
DECEMBER 16, DECEMBER 25,
1995 1996
------------ ------------
<S> <C> <C>
Buildings and improvements........................ $ 129,302 $ 120,045
Automobiles....................................... 251,382 245,403
Machinery and equipment........................... 1,463,156 1,482,480
Computer hardware and software.................... 806,755 982,415
Construction in progress.......................... 157,534 58,544
----------- -----------
Total cost................................... 2,808,129 2,888,887
Less -- Accumulated depreciation.................. (1,773,481) (2,068,060)
----------- -----------
Net property, plant and equipment................. $ 1,034,648 $ 820,827
=========== ===========
</TABLE>

Depreciation is generally computed on a straight-line method over the
estimated useful lives of the assets including assets acquired by capital
leases. Accelerated depreciation is used for income tax purposes where
permitted. Depreciation expense recorded for the years ended December 17, 1994,
December 16, 1995 and December 25, 1996 was $327,489, $340,556 and $371,516,
respectively.

F-55
<PAGE> 123
SAX ARTS AND CRAFTS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 5 -- INCOME TAXES

The income tax provision consists of the following components:

<TABLE>
<CAPTION>
DECEMBER 17, DECEMBER 16, DECEMBER 25,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current portion:
Federal............................................ $1,292,616 $1,522,247 $1,372,728
State.............................................. 209,100 246,246 222,059
---------- ---------- ----------
1,501,716 1,768,493 1,594,787
---------- ---------- ----------
Deferred portion:
Federal............................................ 516 (26,083) (22,426)
State.............................................. 83 (4,219) (3,628)
---------- ---------- ----------
599 (30,302) (26,054)
---------- ---------- ----------
Income tax provision................................. $1,502,315 $1,738,191 $1,568,733
========== ========== ==========
</TABLE>

Deferred tax assets (liabilities) consist of the following:

<TABLE>
<CAPTION>
DECEMBER 16, DECEMBER 25,
1995 1996
------------ ------------
<S> <C> <C>
Accruals.................................................... $ 58,944 $ 64,186
Asset reserves.............................................. 12,585 19,693
Inventories................................................. 17,370 15,610
Pension..................................................... 41,828 39,066
--------- ---------
Gross deferred tax assets................................. 130,727 138,555
Depreciation................................................ (172,983) (154,757)
--------- ---------
Gross deferred tax liabilities............................ (172,983) (154,757)
--------- ---------
Net deferred tax liability................................ $ (42,256) $ (16,202)
========= =========
</TABLE>

The effective rate for income taxes differs from the statutory rate as
follows:

<TABLE>
<CAPTION>
DECEMBER 17, DECEMBER 16, DECEMBER 25,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
U.S. federal statutory tax rate...................... 34.0% 34.0% 34.0%
Non-deductible expenses.............................. 0.1 0.2 0.1
State income taxes, net of federal benefit........... 5.5 5.5 5.5
Other................................................ (1.0) (1.0) (1.0)
---- ---- ----
38.6% 38.7% 38.6%
==== ==== ====
</TABLE>

F-56
<PAGE> 124
SAX ARTS AND CRAFTS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 6 -- RELATED PARTY TRANSACTIONS

The affiliates payable component on the balance sheet represents the net
balance payable to the Parent and its affiliates. Interest is charged to the
Company on the outstanding balance. An analysis of the activity in this account
is as follows:

<TABLE>
<CAPTION>
DECEMBER 17, DECEMBER 16, DECEMBER 25,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period..................... $(4,791,279) $(5,733,759) $(3,212,473)
Cost allocations and direct charges from Parent.... (59,981) (24,414) (73,569)
Interest charged by Parent......................... (421,370) (602,674) (528,324)
Intercompany sales................................. -- 273,106 471,794
Cash transfers..................................... (461,129) 2,875,268 1,535,927
----------- ----------- -----------
Balance at end of period........................... $(5,733,759) $(3,212,473) $(1,806,645)
=========== =========== ===========
</TABLE>

The Company has the following affiliated receivables and payables:

<TABLE>
<CAPTION>
DECEMBER 16, DECEMBER 25,
1995 1996
------------ ------------
<S> <C> <C>
Receivable from:
Day-Timers Canada......................................... $ 11,054 $ 186,581
Fortune Brands............................................ -- 648,932
----------- -----------
Total................................................ $ 11,054 $ 835,513
=========== ===========
Payable to:
ACCO...................................................... $(2,089,941) $(2,618,265)
Parent.................................................... (21,202) (23,893)
Fortune Brands............................................ (1,112,384) --
----------- -----------
Total................................................ $(3,223,527) $(2,642,158)
=========== ===========
</TABLE>

Services provided to the Company by the Parent and its affiliates include
expenses incurred and paid by the Parent on the Company's behalf and charges for
accounting and payroll functions provided by the Parent. The primary components
of cost allocations and direct charges from the Parent and affiliates are as
follows:

<TABLE>
<CAPTION>
DECEMBER 17, DECEMBER 16, DECEMBER 25,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Payroll and accounting function...................... $38,950
Employee benefits.................................... $34,922
Insurance............................................ 21,009 $21,202 29,222
Bank charges......................................... 4,050 3,212 5,397
------- ------- -------
$59,981 $24,414 $73,569
======= ======= =======
</TABLE>

F-57
<PAGE> 125
SAX ARTS AND CRAFTS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 7 -- LEASE COMMITMENTS

<TABLE>
<CAPTION>
DECEMBER 25,
FISCAL YEAR 1996
----------- ------------
<S> <C>
1997........................................................ $ 506,847
1998........................................................ 417,091
1999........................................................ 334,447
2000........................................................ 319,545
2001 and thereafter......................................... 399,431
----------
Total minimum lease payments........................... $1,977,361
==========
</TABLE>

Rental expense for all operating leases charged against earnings amounted
to $553,198, $546,603 and $559,830 for the years ended December 17, 1994,
December 16, 1995 and December 25, 1996, respectively.

NOTE 8 -- RETIREMENT PLAN

Nonunion employees of the Company participate in a noncontributory defined
benefit plan established by the Parent. Benefits for the plan are based
primarily on years of service and employees' average monthly earnings. The
Parent's funding policy is consistent with the funding requirements of federal
law and regulations. Plan assets consist principally of listed equity
securities. Participants are fully vested in the plan after completing five
years of service.

As of the most recent actuarial valuation, the total pension costs for the
Parent for the year ended December 25, 1996 consisted of the following:

<TABLE>
<CAPTION>
TOTAL
PARENT'S
PLAN
--------
<S> <C>
Service cost -- benefits earned during the period........... $1,479,787
Interest cost on projected benefit obligation............... 1,640,620
Expected return on plan assets.............................. (1,783,635)
Amortization of unrecognized prior service cost............. (6,752)
All other cost components................................... 40,302
----------
Net pension costs........................................... $1,370,322
==========
</TABLE>

The net pension costs of the plan for the years ended December 17, 1994,
December 16, 1995 and December 25, 1996 allocated to the Company by the Parent
were $86,000, $94,000 and $108,000, respectively.

F-58
<PAGE> 126
SAX ARTS AND CRAFTS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 8 -- RETIREMENT PLAN (CONTINUED)
As of the most recent actuarial valuation, the funded status of the plan
for the Parent as of December 25, 1996 is as follows:

<TABLE>
<CAPTION>
TOTAL
PARENT'S
PLAN
--------
<S> <C>
Actuarial present value of benefit obligations:
Vested benefits........................................... $17,629,613
Non-vested benefit........................................ 1,458,142
-----------
Accumulated benefit obligation.............................. 19,087,755
Effect of projected future compensation increases........... 5,300,546
-----------
Projected benefit obligation................................ 24,388,301
Plan assets at fair value................................... 22,052,322
-----------
Projected benefit obligation in excess of plan assets....... (2,335,979)
Unrecognized prior service cost............................. (32,672)
Unrecognized net gain....................................... (60,338)
-----------
Accrued pension costs....................................... $(2,428,989)
===========
</TABLE>

The accrued pension costs at December 16, 1995 and December 31, 1996
attributed to the Company were $183,000 and $177,000, respectively.

Upon being acquired by U.S. Office Products, the plan was terminated for
the Company's plan participants and the net assets will be distributed for their
benefit.

NOTE 9 -- OTHER POSTRETIREMENT PLAN

The Parent provides health care and life insurance benefits for eligible
retired employees and their eligible dependents. The cost of these benefits was
determined by application of actuarial assumptions and healthcare trend rates.
Based on the actuarial valuations performed for the years ended December 17,
1994, December 16, 1995 and December 25, 1996, the total net periodic
postretirement costs (benefit) allocated by the Parent to the Company were
$10,000, $2,000 and $(1,000), respectively.

The accrued other postretirement costs as of the years ended December 16,
1995 and December 25, 1996 attributed to the Company were $141,000 and $129,000,
respectively.

Upon being acquired by U.S. Office Products, the plan was terminated for
the Company's plan participants and the net assets will be distributed for their
benefit.

F-59
<PAGE> 127

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
The National School Supply Company

We have audited the accompanying consolidated balance sheets of The
National School Supply Company and Subsidiaries as of March 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended March 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The National School Supply Company and Subsidiaries as of March 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended March 31, 1998, in conformity with generally
accepted accounting principles.

ERNST & YOUNG LLP

/s/ Ernst & Young LLP

Cleveland, Ohio
June 11, 1998, except for Note C,
as to which the date is June 17, 1998

F-60
<PAGE> 128

THE NATIONAL SCHOOL SUPPLY COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)

<TABLE>
<CAPTION>
MARCH 31,
-------------------- JUNE 30,
1998 1997 1998
---- ---- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 1,235 $ 5,207 $ 1,517
Accounts receivable, less allowance of $1,352 at June 30,
1998 and $1,386 and $1,410 at March 31, 1998 and 1997,
respectively.......................................... 21,965 18,846 26,205
Inventories.............................................. 22,745 14,362 30,532
Prepaid catalog costs.................................... 5,286 4,486 4,577
Prepaid and other........................................ 864 149 592
-------- -------- --------
Total current assets....................................... 52,095 43,050 63,423
Property, plant and equipment -- Notes A, B, C and G:
Land and improvements.................................... 1,316 1,295 1,335
Building and improvements................................ 14,452 14,303 14,469
Machinery, equipment and furniture....................... 12,059 11,301 12,419
-------- -------- --------
27,827 26,899 28,223
Less accumulated depreciation and amortization............. 9,283 7,097 9,865
-------- -------- --------
Total property, plant and equipment........................ 18,544 19,802 18,358
Intangible assets, net -- Notes B and C.................... 13,266 14,799 12,886
Other long-term assets..................................... 221 221 221
-------- -------- --------
Total assets............................................... $ 84,126 $ 77,872 $ 94,888
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 15,787 $ 8,318 $ 20,578
Accrued expenses -- Note A............................... 6,263 7,059 5,889
Current portion of long-term obligations -- Notes C and
G..................................................... 3,084 4,036 3,085
-------- -------- --------
Total current liabilities 25,134 19,413 29,552
Long-term obligations -- Notes C and G
Long-term debt:
Due to bank and others................................... 22,360 20,193 29,464
Due to affiliated companies.............................. 20,225 19,929 20,295
-------- -------- --------
42,585 40,122 49,759
Other.................................................... 1,165 1,411 1,110
-------- -------- --------
Total long-term obligations................................ 43,750 41,533 50,869
Stockholders' equity -- Notes D and E: Common Stock, $0.01
par value per share:
Class A:
Authorized shares -- 4,175,000
Issued and outstanding shares -- 3,230,300............ 32 32 32
Class B:
Authorized shares -- 1,548,000
Issued and outstanding shares -- 1,500,042............ 15 15 15
Class C:
Authorized shares -- 550,000
Issued and outstanding shares -- 427,487.............. 4 4 4
Capital in excess of par value........................... 45,690 45,690 45,690
Accumulated deficit...................................... (30,499) (28,815) (31,274)
-------- -------- --------
Total stockholders' equity................................. 15,242 16,926 14,467
-------- -------- --------
Total liabilities and stockholders' equity................. $ 84,126 $ 77,872 $ 94,888
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.
F-61
<PAGE> 129

THE NATIONAL SCHOOL SUPPLY COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------ -------------------
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................... $176,034 $174,637 $164,994 $38,772 $34,896
Cost of goods sold...................... 115,134 111,054 106,293 24,914 22,569
-------- -------- -------- ------- -------
Gross profit............................ 60,900 63,583 58,701 13,858 12,327
Selling, general and administrative
expenses.............................. 52,398 50,879 54,419 12,393 12,226
Depreciation............................ 2,419 2,735 2,889 582 621
Amortization............................ 1,533 1,525 3,194 380 379
Restructuring costs -- Note A........... 1,198 1,381 4,343 76 62
Goodwill write-down..................... 1,864
-------- -------- -------- ------- -------
Operating income (loss)................. 3,352 7,063 (8,008) 427 (961)
Interest expense, net................... 5,036 7,375 8,685 1,202 1,097
-------- -------- -------- ------- -------
Loss before income taxes and
extraordinary gain.................... (1,684) (312) (16,693) (775) (2,058)
Provision for income taxes -- Note F.... -- -- -- -- --
-------- -------- -------- ------- -------
Loss before extraordinary gain.......... (1,684) (312) (16,693) (775) (2,058)
Extraordinary gain from debt
restructuring, net of income taxes --
Note C................................ -- 564 -- -- --
-------- -------- -------- ------- -------
Net (loss) income....................... (1,684) 252 (16,693) (775) (2,058)
======== ======== ======== ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.
F-62
<PAGE> 130

THE NATIONAL SCHOOL SUPPLY COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN TOTAL
--------------------------- EXCESS OF ACCUMULATED STOCKHOLDERS'
CLASS A CLASS B CLASS C PAR VALUE DEFICIT EQUITY
------- ------- ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1995......... $ 1 $15 $4 $15,271 $(12,374) $ 2,917
Net loss......................... -- -- -- -- (16,693) (16,693)
--- --- -- ------- -------- --------
Balance at March 31, 1996........ 1 15 4 15,271 (29,067) (13,776)
Net income....................... 252 252
Stock issued -- Note A........... 31 -- -- 30,419 -- 30,450
--- --- -- ------- -------- --------
Balance at March 31, 1997........ 32 15 4 45,690 (28,815) 16,926
Net loss......................... -- -- -- -- (1,684) (1,684)
--- --- -- ------- -------- --------
Balance at March 31, 1998........ 32 15 4 45,690 (30,499) 15,242
Net loss (unaudited)............. -- -- -- -- (775) (775)
--- --- -- ------- -------- --------
Balance at June 30, 1998
(unaudited).................... $32 $15 $4 $45,690 $(31,274) $ 14,467
=== === == ======= ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.
F-63
<PAGE> 131

THE NATIONAL SCHOOL SUPPLY COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------- -------------------
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows for operating activities
Net (loss) income................................ $(1,684) $ 252 $(16,693) $ (775) $ (2,058)
Adjustments to reconcile net (loss) income to net
cash (used) provided by operating activities:
Extraordinary gain............................. -- (564) -- -- --
Depreciation and amortization................ 3,952 4,260 6,083 962 1,000
Compensation expense from issuance of
stock...................................... -- 450 -- -- --
Loss on sale of property, plant and
equipment.................................. -- -- 600 -- --
Write-down of assets held for sale........... -- -- 1,012 -- --
Goodwill write-down.......................... -- -- 1,864 -- --
Provision for losses on accounts
receivable................................. -- -- 2,806 -- --
Other........................................ 295 635 545 70 80
Change in operating assets and liabilities:
Accounts receivable........................ (3,119) 7,131 (5,258) (4,240) (4,456)
Inventories................................ (8,383) 7,313 4,309 (7,787) (13,084)
Prepaid and other current assets........... (1,515) 349 (488) 981 (901)
Accounts payable........................... 7,469 (8,697) (3,290) 4,791 13,354
Accrued expenses........................... (796) (610) 878 (374) (1,754)
Other non-current assets and liabilities... (246) (794) (287) -- --
------- -------- -------- ------- --------
Net cash (used) provided by operating
activities..................................... (4,027) 9,725 (7,919) (6,372) (7,819)
Cash flows used in investing activities
Additions to property, plant and equipment,
net............................................ (1,168) (1,551) (4,890) (396) (510)
Proceeds from sale of property and equipment..... 7 1,353 1,842 -- --
Net cash used in investing activities............ (1,161) (198) (3,048) (396) (510)
Cash flows provided (used) by financing
activities.....................................
Net borrowings (payments) on revolving credit.... 5,191 (7,000) 7,000 7,372 4,173
Proceeds from issuance of long-term debt......... -- 937 4,489
Payments on long-term debt....................... (3,966) (28,400) -- (250) (251)
Prepayment penalties on long-term debt........... -- (983) -- -- --
Net payments on capital leases................... (9) (570) (663) (72) (15)
Proceeds from issuance of stock.................. -- 30,000 -- -- --
------- -------- -------- ------- --------
Net cash provided (used) by financing
activities..................................... 1,216 (6,016) 10,826 7,050 3,907
------- -------- -------- ------- --------
Net (decrease) increase in cash and cash
equivalents.................................... (3,972) 3,511 (141) 282 (4,422)
Cash and cash equivalents at beginning of year... 5,207 1,696 1,837 1,235 5,207
------- -------- -------- ------- --------
Cash and cash equivalents at end of year......... $ 1,235 $ 5,207 $ 1,696 $ 1,517 $ 785
======= ======== ======== ======= ========
Supplemental disclosure of cash flow information
Interest paid.................................... $ 5,026 $ 8,481 $ 7,183 $ 1,173 $ 955
======= ======== ======== ======= ========
Properties acquired under capital leases......... $ 377
========
</TABLE>

See accompanying notes to consolidated financial statements.
F-64
<PAGE> 132

THE NATIONAL SCHOOL SUPPLY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)

NOTE A -- ORGANIZATION AND NATURE OF THE BUSINESS

The National School Supply Company and its subsidiaries ("the Company") are
engaged in the distribution of educational supplies and equipment, teaching
aids, school furniture and instructional materials for science, art and
technology education. The Company sells primarily to elementary, secondary and
vocational schools and early learning centers throughout the United States. The
products are marketed through catalogs which carry the names of Beckley-Cardy,
Frey Scientific, Pyramid Art Supply and Brodhead-Garrett.

The Company's business is seasonal in nature, corresponding to the
purchasing cycle of school systems. Because of seasonality, a substantial part
of annual revenues and operating income is realized in the second quarter of the
fiscal year.

Effective November 5, 1992, certain limited partnerships affiliated with
Butler Capital Corporation (Butler) formed Beckley-Cardy, Inc. (Beckley) to
acquire a subsidiary of Advanstar Communications, Inc., a company which had
recently emerged from Chapter 11 bankruptcy. The acquisition was accounted for
as a purchase and, accordingly, the purchase price of $49,000,000 was allocated
to the underlying assets and liabilities based on their estimated fair values as
of the acquisition date. The excess of the purchase price over the estimated
fair value of the net assets acquired ($21,430,000) was classified as intangible
assets.

Effective September 14, 1993, the Company (which was 60% owned by Butler at
that date), Butler, Beckley and certain individual stockholders of the Company
entered into an Agreement of Merger and Plan of Reorganization whereby Beckley
became a wholly-owned subsidiary of the Company. Because of Butler's common
ownership interests in the Company and Beckley, the merger was accounted for as
if it were a pooling-of-interests.

Effective at the close of business on March 31, 1995, one of the Company's
subsidiaries, FSC Educational, Inc., was merged into another subsidiary,
Beckley.

Effective October 31, 1996, the Company issued 1,327,588 shares of Class A
Common Stock to Butler Capital Corporation, an existing investor, (at a price of
$9.50 per share), 1,777,676 shares to Fenway Partners, Inc., a new investor (at
a price of $9.50 per share) and another 100,000 shares to an executive of the
Company (at a price of $5.00 per share) as part of his executive employment
agreement. Net proceeds from the stock issuance were used to pay down
outstanding long-term debt.

Restructuring costs related to various organizational changes have been
charged to expense as follows (in thousands):

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Direct compensation................................. $ 924 $ 225 $2,181
Professional services............................... 198 485 255
Facilities closing expense.......................... -- -- 1,636
Stock compensation expense.......................... -- 450 --
Other............................................... 76 221 271
------ ------ ------
$1,198 $1,381 $4,343
====== ====== ======
</TABLE>

In a prior year, the Company consolidated certain warehouse facilities. In
1996, the Company recorded a provision of $1,012,000 to adjust the carrying
value of these assets based on

F-65
<PAGE> 133
THE NATIONAL SCHOOL SUPPLY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)

NOTE A -- ORGANIZATION AND NATURE OF THE BUSINESS (CONTINUED)
expected losses on the impending sales. During 1997, the assets were sold and
the Company recognized proceeds approximately equal to the net carrying value as
of March 31, 1996.

NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements as of June 30,
1998 and for the three months ended June 30, 1998 and 1997 have been prepared in
accordance with generally accepted accounting principles for interim financial
information and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month
period ended June 30, 1998 are not necessarily indicative of the results that
may be expected for the year ending March 31, 1999.

CASH AND CASH EQUIVALENTS

The Company considers highly liquid investments with a maturity of three
months or less to be cash equivalents, which are stated at cost.

INVENTORY

The Company values its inventory at the lower of cost or market on a
first-in, first-out (FIFO) basis. Substantially all inventory is finished
products purchased for resale.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is stated at cost. Provisions for
depreciation and amortization are computed by the straight-line method over the
following estimated useful lives:

<TABLE>
<S> <C>
Building and improvements................................... 15-30 years
Machinery, equipment and furniture.......................... 3-10 years
</TABLE>

FAIR VALUE OF FINANCIAL INSTRUMENTS

At March 31, 1998 and 1997, the carrying value of the Company's financial
instruments, which include cash and cash equivalents, accounts receivable and
accounts payable, approximate their fair value. The estimated fair value of the
Company's long-term debt was $47,961,000 at March 31, 1998 and $47,665,000 at
March 31, 1997 as compared with the carrying value of $45,669,000 and
$44,158,000 included in the balance sheet at year-end 1998 and 1997,
respectively.

F-66
<PAGE> 134
THE NATIONAL SCHOOL SUPPLY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)

NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION

Revenue from the sale of the Company's products is recognized upon shipment
to the customer.

ADVERTISING EXPENSE

Advertising costs are expensed as incurred except for catalog costs, which
are deferred and expensed as revenue from the respective catalog is realized.
Advertising expenditures including catalog costs for the years ended March 31,
1998, 1997 and 1996 were $7,101,00, $4,824,000 and $4,927,000, respectively.
Deferred catalog costs as of March 31, 1998 and 1997 were $5,286,000 and
$4,486,000, respectively.

CONCENTRATION OF CREDIT RISK

Credit is extended based on an evaluation of the customer's financial
condition and generally collateral is not required. Credit terms are consistent
with the industry and losses from credit sales are provided for in the financial
statements.

USE OF ESTIMATES

The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

RECLASSIFICATION

Certain amounts have been reclassified in 1996 and 1997 to conform with the
1998 presentation.

INTANGIBLE ASSETS

Intangible assets consist of the following at March 31 (in thousands):

<TABLE>
<CAPTION>
ACCUMULATED
COST AMORTIZATION NET
------------------ ---------------- ------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Customer lists...................... $14,300 $14,300 $5,150 $4,197 $ 9,150 $10,103
Goodwill............................ 5,673 5,673 2,044 1,665 3,629 4,008
Debt issuance costs................. 1,781 1,781 1,294 1,093 487 688
------- ------- ------ ------ ------- -------
$21,754 $21,754 $8,488 $6,955 $13,266 $14,799
======= ======= ====== ====== ======= =======
</TABLE>

Intangible assets are amortized on a straight-line basis over periods
ranging generally from 5 to 15 years.

The ongoing value and remaining useful lives of intangible assets are
subject to periodic evaluation and the Company currently expects the carrying
amounts to be fully recoverable. When the events or circumstances indicate that
intangible assets might be impaired, an

F-67
<PAGE> 135
THE NATIONAL SCHOOL SUPPLY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)

NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
undiscounted cash flow methodology would be used to determine whether an
impairment loss would be recognized.

As a result of a periodic evaluation during the year ended March 31, 1996,
the Company wrote-off net intangible assets of $1,864,000 which consisted
primarily of goodwill associated with a specific business unit. Other fully
amortized intangible assets were also written off in 1997 and 1996 as a result
of the merger with Beckley.

NOTE C -- FINANCING ARRANGEMENTS

Long-term debt consisted of the following at March 31 (in thousands):

<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revolving credit, due in fiscal year 2000................... $ 5,192 $ --
Supplemental term loan with an interest rate of 8.25%
payable quarterly, principal payments due annually in
fiscal years 1998 through 2002............................ 10,200 12,200
Subordinated debt with an interest rate of 11.25% payable
quarterly, entire principal due in fiscal year 2000....... 6,458 6,458
Subordinated debt (net of original issue discount of $462
and $757 at March 31, 1998 and 1997, respectively) with an
effective interest rate of 15.4% payable quarterly, entire
principal due in fiscal year 2000......................... 5,961 5,666
Subordinated debt with an effective interest rate of 9.0%
payable quarterly, entire principal due in fiscal year
2003...................................................... 7,804 7,804
Construction term loans with interest ranging from 8.25% to
8.31% payable quarterly, principal payments due quarterly
in fiscal years 1997 through 2002......................... 9,371 11,154
Capital lease obligations................................... 311 320
Other notes payable......................................... 372 556
------- -------
45,669 44,158
Less current portion 3,084 4,036
------- -------
$42,585 $40,122
======= =======
</TABLE>

In September 1994, the Company and its subsidiaries entered into a combined
Revolving Credit, Term Loan and Guaranty Agreement (the "Credit Agreement") with
a bank. Maximum borrowings under the Revolving Credit facility and Term Loan are
$30,000,000 ($10,000,000 during the period February 15 through April 1 each year
and $33,000,000 from June 17, 1998 through October 31, 1998) and $15,000,000,
respectively. The agreement also provides for the bank to issue Letters of
Credit in amounts which will not exceed $10,000,000 in the aggregate. The face
amount of the Letters of Credit issued shall reduce the amount of funds
available under the Revolving Credit facility. As of March 31, 1998, Letters of
Credit of $500,000 were outstanding. The Revolving Credit facility expires on
June 30, 1999.

Advances under the Credit Agreement bear interest at a CD Rate, a
Eurodollar Rate or a Reference Rate plus an applicable margin as specified in
the Credit Agreement. A fee of 3/8% per annum is applied to the unused portion
of the Revolving Credit facility.

F-68
<PAGE> 136
THE NATIONAL SCHOOL SUPPLY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)

NOTE C -- FINANCING ARRANGEMENTS (CONTINUED)
The Credit Agreement is secured by accounts receivable, inventory, certain
property, plant and equipment and general intangible assets. As of March 31,
1996, funds under the Term Loan Agreement had been advanced for construction of
a new facility. Upon completion of the new facility, in fiscal 1997, the funds
advanced under the Term Loan Agreement were converted to a five year term loan
under a fifteen year amortization schedule, with the final payment due on June
30, 2001. The Term Loan Agreement also provides for restrictions on payments of
subordinated debt and accelerated principal payments on the Term Loan based upon
a calculation of "excess cash flows" on an annual basis.

On October 29, 1996, an amendment was made to the Credit Agreement which
included revisions to certain financial covenants and certain provisions for a
restructuring of a portion of the Company's debt. The debt restructuring
included a Supplemental Term Loan under the Credit Agreement of $12,200,000.
Substantially all of the proceeds from the sale of stock (see Note A) and the
Supplemental Term Loan were used to repay the entire amount outstanding under a
former senior notes agreement, repay approximately $24,325,000 (net of
$1,200,000 of unamortized original issue discount) of the amounts outstanding
under the subordinated debt instruments, and to pay related accrued interest,
prepayment penalties and refinancing costs. The Company recorded an
extraordinary gain of $564,000 from the debt restructuring due to the write-off
of deferred interest less prepayment penalties. No income tax expense was
recorded for the extraordinary gain due to the use of available net operating
loss carryforwards.

As a result of the Company's recapitalization in October 1996, subordinated
debt instruments are now payable to Butler (60.76%) and Fenway (39.24%). The
percentages are based on the investor's pro rata equity ownership. All
subordinated debt is fully subordinated to the Credit Agreement. Amortization of
the original issue discount is provided over the period the subordinated debt is
outstanding using the effective interest rate method. Such amortization was
approximately $295,000, $635,000 and $545,000 for the years ended March 31,
1998, 1997 and 1996, respectively. Interest is also provided using the effective
interest rate method for the interest-free period on certain subordinated debt.

At the Bank's request, the Company must prepay all or any portion of the
Supplemental Term Loan if the Company arranges for refinancing. Additionally,
the Company may be required to prepay certain portions of the Credit Agreement
in an amount equal to the Excess Cash Flow (as defined) on an annual basis. Any
prepayments under the Excess Cash Flow provision would apply first to the Term
Loan, then to the Supplemental Term Loan and would not affect scheduled
maturities. No amounts are required to be prepaid under the Excess Cash Flow
provision for fiscal year 1998. $1,000,000 was required to be paid for fiscal
year 1997.

All long-term debt agreements contain certain restrictive covenants and
provisions which, among other matters, place limitations on indebtedness,
dividends and certain other payments, changes in control, certain investments
and capital expenditures. Other covenants require the maintenance of minimum
working capital and net worth levels and interest coverage and debt service
coverage ratios.

As of March 31, 1998, the Company was in violation of a financial covenant
under the Credit Agreement as the result of planned acceleration of inventory
receipts to improve service levels. Effective June 17, 1998, an amendment was
made to the Credit Agreement which included a waiver by the bank of the covenant
violation that occurred and revisions to certain financial

F-69
<PAGE> 137
THE NATIONAL SCHOOL SUPPLY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)

NOTE C -- FINANCING ARRANGEMENTS (CONTINUED)
covenants through March 31, 1999, including the leverage, interest coverage,
debt service coverage, net worth and current ratios.

Aggregate principal payments due on long-term debt are as follows (in
thousands):

<TABLE>
<CAPTION>
Years ending March 31:
----------------------
<S> <C>
1999........................................................ $ 3,084
2000........................................................ 20,669
2001........................................................ 3,880
2002........................................................ 10,231
2003........................................................ 7,805
-------
$45,669
=======
</TABLE>

Scheduled principal payments under the subordinated debt agreements were
deferred in fiscal year 1996 according to the Credit Agreement. Payments were
made concurrent with the debt and equity restructuring in October 1996.
Subordinated debt principal payments are permitted out of excess cash flow,
provided certain covenant calculations are met.

Other long-term liabilities represent interest at March 31, 1998 and 1997.

NOTE D -- STOCKHOLDERS' EQUITY

The Company has three classes of common stock authorized. Class A and B
stock have equal voting rights of one vote per share outstanding. Each holder of
Class C stock is entitled to a number of votes equal to a conversion factor for
each Class C share outstanding. Class C shares may be converted into the number
of Class A shares as is equal to the conversion factor in effect at the time of
such conversion.

NOTE E -- STOCK OPTIONS AND WARRANTS

The Company maintains two stock option plans. The 1987 Stock Plan has three
remaining participants who hold fully vested options to purchase shares of the
Company's Class A or Class C Common Stock at an exercise price of $1.73 per
share. There are no remaining grants under the 1987 Stock Plan.

The 1997 Performance Accelerated Stock Option Plan (the 1997 Plan) succeeds
a previous plan which originated in 1993. All options issued under the 1993 Plan
have been cancelled. The 1997 Plan granted 721,792 options in 1997 to employees
to purchase shares of the Company's Class A Common Stock. The options vest over
time, with vesting accelerated if certain financial objectives are met. All
options under the 1997 Plan are exercisable at $9.50 per share, which was the
market price at the time of the grant. Generally, options under the 1997 Plan
expire ten years from the date of grant.

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APBO No. 25), and related
interpretations in accounting for its employee stock options, because as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123) requires the use of highly subjective assumptions
in option valuation models. Under APBO No. 25, because the exercise

F-70
<PAGE> 138
THE NATIONAL SCHOOL SUPPLY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)

NOTE E -- STOCK OPTIONS AND WARRANTS (CONTINUED)
price of the Company's employee stock options is not less than the fair market
price of the shares at the date of the grant and the number of options is known,
no compensation expense is recognized in the financial statements.

Pro forma information regarding net income determined as if the Company had
accounted for the 1997 Performance Accelerated Stock Option Plan under the fair
value method of SFAS No. 123 is required to be disclosed for the year ended
March 31, 1997 as options were granted in that year. The fair value for these
options was estimated at the date of the grant using the Minimum Value Model
which is typically used for non-public companies. The following input
assumptions were used in determining the fair value.

<TABLE>
<CAPTION>
1997
----
<S> <C>
Risk-free interest rate..................................... 5.0%
Expected life of option..................................... 10 years
Expected dividend yield..................................... 0.0%
</TABLE>

Because the Company's employee stock options have several unique
characteristics, and because changes in the subjective input assumptions can
materially affect the fair value estimate, it is management's opinion that the
existing model does not necessarily provide a reliable single measure of the
fair value of its employees stock options.

The amounts below represent the pro forma information calculated through
the use of the Minimum Value Model.

<TABLE>
<CAPTION>
1997
----
<S> <C>
Reported net income......................................... $ 252,000
Pro forma net loss.......................................... (115,000)
</TABLE>

The weighted average fair value of the Company's stock options used to
compute the pro forma net loss disclosure is $3.38.

Due to the required phase-in provisions, the effects of applying SFAS No.
123 to arrive at the above pro forma amounts are not representative of the
expected effects on pro forma net income in future years.

A summary of the Company's stock option activity and related information
for the years ended March 31 is shown in the following table.

<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONED EXERCISE OPTIONED EXERCISE OPTIONED EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning of year..... 743,542 $9.43 130,496 $17.91 190,196 $18.58
Granted........................... -- -- 721,792 9.50 30,800 20.04
Exercised......................... -- -- -- -- -- --
Cancelled......................... 310,958 9.50 108,746 20.04 90,500 20.04
------- ----- ------- ------ ------- ------
Outstanding end of year........... 432,584 $9.11 743,542 $ 9.43 130,496 $17.91
======= ======= =======
Exercisable end of year........... 223,787 $8.75 265,178 $ 8.86 55,623 $12.88
</TABLE>

F-71
<PAGE> 139
THE NATIONAL SCHOOL SUPPLY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)

NOTE E -- STOCK OPTIONS AND WARRANTS (CONTINUED)
At March 31, 1998 and 1997, the weighted average remaining contractual life
of the Company's stock options was 7.62 years and 9.74 years, respectively.

As of March 31, 1998 and 1997, there were 36,261 shares available for
future grants.

In addition, effective October 29, 1996, the Company amended and restated
its warrant agreement with BCC Industrial Services (BCC), an affiliate of
Butler. The new agreement entitles BCC to purchase, at any time, 22,819 duly
authorized, validly issued, fully paid and nonassessable shares of the Company's
Class A Common Stock at a purchase price of $9.50 per share.

NOTE F -- INCOME TAXES

The Company uses the liability method in measuring the provision for income
taxes and recognizing deferred tax assets and liabilities in the balance sheet.
The liability method requires that deferred income taxes reflect the tax
consequences of currently enacted rates for differences between the tax and
financial reporting bases of assets and liabilities.

There was no income tax expense or benefit recorded in 1998, 1997 or 1996.
The Company has available net operating loss carryforwards of approximately $24
million. These carryforwards, if not utilized, expire in varying amounts from
2009 to 2013.

The significant components of deferred tax assets and liabilities were as
follows (in thousands):

<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 31, 1997
------------------------- -------------------------
DEFERRED DEFERRED
DEFERRED TAX DEFERRED TAX
TAX ASSETS LIABILITIES TAX ASSETS LIABILITIES
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net operating loss carryforwards.................. $ 8,276 $ -- $ 6,846 $ --
Inventory......................................... 635 -- 705 --
Catalog costs..................................... -- 1,719 -- 1,363
Accrued liabilities and other..................... 3,763 2,361 2,055 16
------- ------ ------- ------
12,674 4,080 9,606 1,379
Valuation allowance............................... (8,594) -- (8,227) --
------- ------ ------- ------
$ 4,080 $4,080 $ 1,379 $1,379
======= ====== ======= ======
</TABLE>

The provision for income taxes differs from the amounts computed by
applying the federal statutory rate as follows:

<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income tax expense (credit) at federal statutory rate....... (34.0)% (34.0)% (34.0)%
Non-deductible intangible amortization...................... 9.3 49.3 2.5
Other, net.................................................. 2.1 (43.8) 0.6
Valuation allowance......................................... 22.6 28.5 30.9
----- ----- -----
0.0 0.0 0.0
===== ===== =====
</TABLE>

F-72
<PAGE> 140
THE NATIONAL SCHOOL SUPPLY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)

NOTE G -- LEASES

The Company leases equipment under agreements accounted for as capital
leases. The cost of equipment recorded under capital leases was $457,035 and
$377,000 as of March 31, 1998 and 1997, respectively.

The Company has operating leases for certain machinery and computer
equipment. Rent expense for all operating leases amounted to approximately
$412,000 in 1998, $329,000 in 1997 and $476,000 in 1996.

At March 31, 1998, future minimum lease payments under non-cancellable
operating and capital leases are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Years ending March 31:
1999...................................................... $127 $ 550
2000...................................................... 127 499
2001...................................................... 108 189
2002...................................................... 9 17
2003...................................................... -- --
---- ------
Total minimum lease payments................................ $371 $1,255
======
Less amount representing interest........................... 60
----
Present value of total obligation under capital leases...... 311
Less current portion........................................ 98
----
Long-term obligation under capital leases................... $213
====
</TABLE>

NOTE H -- BENEFIT PLANS

The Company sponsors defined contribution employee savings plans covering
substantially all of its salaried and hourly employees. During fiscal 1997, the
Company merged these plans into one plan covering all eligible employees. Under
the plan, the Company contributes a matching amount based upon the employees'
deferred salary contribution. Company contributions were approximately $403,000,
$414,000 and $405,000 for the years ended March 31, 1998, 1997 and 1996,
respectively.

NOTE I -- CONTINGENCIES

The Company is subject to legal proceedings and claims arising in the
ordinary course of its business. Management evaluates each claim and provides
for any potential loss when the claim is probable and estimable. In the opinion
of management, the ultimate liability with respect to these actions will not
materially affect the financial position, results of operations and cash flows
of the Company.

NOTE J -- YEAR 2000 (UNAUDITED)

In fiscal 1998, the Company completed an upgrade of its J.D. Edwards (JDE)
software which, through testing and implementation, has addressed the Year 2000
date conversion issue. Additionally, the Company uses software from large
national vendors with a broad base of active

F-73
<PAGE> 141
THE NATIONAL SCHOOL SUPPLY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)

NOTE J -- YEAR 2000 (UNAUDITED)(CONTINUED)
users in all other software applications, therefore, the Year 2000 date
conversion was accomplished through the JDE and other software upgrades at no
significant cost to the Company. However, there can be no assurance that the
systems of other companies on which the Company's systems rely also will be
timely converted or that any such failure to convert by another company would
not have an adverse effect on the Company's systems.

NOTE K -- SUBSEQUENT EVENT (UNAUDITED)

Effective August 14, 1998, the Company and its stockholders entered into an
Agreement and Plan of Merger with School Specialty, Inc. to sell all of its
outstanding common stock for total consideration of approximately $138 million.

F-74
<PAGE> 142

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and
Board of Directors of
Hammond & Stephens Company

In our opinion, the accompanying balance sheet and the related statements
of income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Hammond & Stephens Company at
October 31, 1997, and the results of its operations and its cash flows for the
year in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards 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 the opinion expressed
above.

PRICEWATERHOUSECOOPERS LLP

Minneapolis, Minnesota
September 3, 1998

F-75
<PAGE> 143

HAMMOND & STEPHENS COMPANY

BALANCE SHEET

<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
1997 1998
----------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $2,930,710 $ 226,749
Accounts receivable....................................... 732,334 720,778
Inventories............................................... 2,025,849 3,467,382
Employees' advances....................................... 12,319 1,049
Prepaid expenses.......................................... 36,255 47,555
Income tax deposit........................................ 151,032 151,032
---------- ----------
Total current assets................................... 5,888,499 4,614,545
---------- ----------
Property and equipment:
Fixtures and equipment.................................... 2,071,181 2,077,916
Transportation equipment.................................. 28,364 28,364
Leasehold improvements.................................... 62,337 62,337
---------- ----------
2,161,882 2,168,617
Less: Accumulated depreciation............................ 1,470,219 1,557,838
---------- ----------
Total property and equipment........................... 691,663 610,779
---------- ----------
Investments and other assets:
Cash value of life insurance.............................. 423,882 456,382
---------- ----------
Total assets........................................... $7,004,044 $5,681,706
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 238,247 $ 295,939
Accrued sales commissions................................. 578,880 30,689
Other accrued expenses.................................... 198,657 112,309
---------- ----------
Total current liabilities............................ 1,015,784 438,937
---------- ----------
Stockholders' equity:
Common stock; authorized 1,500 shares, $100 par value;
issued and outstanding 1,500 shares.................... 150,000 150,000
Retained earnings......................................... 6,966,073 6,220,582
---------- ----------
7,116,073 6,370,582
Less: Treasury stock, 1,050 shares at cost................ 1,127,813 1,127,813
---------- ----------
Total stockholders' equity............................. 5,988,260 5,242,769
---------- ----------
Total liabilities and stockholders' equity............. $7,004,044 $5,681,706
========== ==========
</TABLE>

The accompanying notes are an integral part of the financial statements.
F-76
<PAGE> 144

HAMMOND & STEPHENS COMPANY

STATEMENT OF INCOME

<TABLE>
<CAPTION>
FOR THE FOR THE SIX MONTHS ENDED
YEAR ENDED ------------------------
OCTOBER 31, APRIL 30, APRIL 30,
1997 1997 1998
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Net sales............................................. $9,082,852 $1,800,254 $1,744,600
Cost of goods sold.................................... 4,372,852 867,461 842,341
---------- ---------- ----------
Gross profit..................................... 4,710,000 932,793 902,259
Selling, general and administrative expenses.......... 2,466,670 846,996 925,104
---------- ---------- ----------
Operating income (loss).......................... 2,243,330 85,797 (22,845)
Other income:
Interest income..................................... 70,838 45,823 61,091
Other............................................... 56,456 28,438 26,263
---------- ---------- ----------
Net income....................................... $2,370,624 $ 160,058 $ 64,509
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of the financial statements.
F-77
<PAGE> 145

HAMMOND & STEPHENS COMPANY

STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON TOTAL
CAPITAL RETAINED STOCK HELD STOCKHOLDERS'
STOCK EARNINGS IN TREASURY EQUITY
------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at October 31, 1996............. $150,000 $ 6,575,449 $(1,127,183) $ 5,598,266
Net income.............................. 2,370,624 2,370,624
Cash dividends paid on common stock,
$4,400 per share...................... (1,980,000) (1,980,000)
-------- ----------- ----------- -----------
Balance at October 31, 1997............. 150,000 6,966,073 (1,127,183) 5,988,890
Net income (unaudited).................. 64,509 64,509
Cash dividends paid on common stock,
$1,800 per share (unaudited).......... (810,000) (810,000)
-------- ----------- ----------- -----------
Balance at April 30, 1998 (unaudited)... $150,000 $ 6,220,582 $(1,127,183) $ 5,243,399
======== =========== =========== ===========
</TABLE>

The accompanying notes are an integral part of the financial statements.
F-78
<PAGE> 146

HAMMOND & STEPHENS COMPANY

STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE FOR THE SIX MONTHS ENDED
YEAR ENDED --------------------------
OCTOBER 31, APRIL 30, APRIL 30,
1997 1997 1998
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 2,370,624 $ 160,058 $ 64,509
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation.................................. 192,676 89,384 87,619
Cash surrender value of officers' life
insurance................................... (24,186) 2,424 524
Gain on sale of assets........................ (4,000)
Changes in assets and liabilities:
Accounts receivable........................... (83,559) (115,124) 22,827
Inventories................................... (39,299) (1,561,561) (1,441,533)
Employees' advances........................... (8,605)
Prepaid expenses.............................. (2,701) (7,146) (11,300)
Income tax deposit............................ (16,570)
Accounts payable.............................. (9,930) (47,279) 60,058
Accrued expenses.............................. (19,386) (647,068) (636,905)
----------- ----------- -----------
Net cash provided by (used in) operating
activities............................. 2,355,064 (2,126,312) (1,854,201)
Cash flows from investing activities:
Purchases of property and equipment.............. (153,496) (15,507) (6,736)
Purchase of officers' life insurance............. (40,731) (33,024) (33,024)
Proceeds from sale of assets..................... 4,000
----------- ----------- -----------
Net cash used in investing activities.... (190,227) (48,531) (39,760)
Cash flows from financing activities:
Dividends paid................................... (1,980,000) (810,000)
----------- ----------- -----------
Net cash used in financing activities.... 1,980,000 810,000
Net increase (decrease) in cash and cash
equivalents...................................... 184,837 (2,174,843) (2,703,961)
Cash and cash equivalents at beginning of period... 2,745,873 2,745,873 2,930,710
----------- ----------- -----------
Cash and cash equivalents at end of period......... $ 2,930,710 $ 571,030 $ 226,749
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of the financial statements.
F-79
<PAGE> 147

HAMMOND & STEPHENS COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

The Company is primarily engaged in the printing and sales of educational
materials to schools nationwide.

REVENUE RECOGNITION

The Company recognizes revenue from product sales at the time of billing,
which is completed within one day of shipment. All goods shipped on the last day
of the year are billed on the last day of the year and have been properly
included in current year revenues.

CASH AND CASH EQUIVALENTS

For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.

ACCOUNTS RECEIVABLE

Doubtful accounts are written off as deemed uncollectible. It is
management's opinion that all accounts represented on the balance sheet at
October 31, 1997 are collectible.

INVENTORY VALUATION

Inventory is valued at the lower of cost, using the first-in, first-out
method, or market.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Expenditures for maintenance
and repairs are charged to expense as incurred. Major expenditures for
improvements are capitalized. The Company computes depreciation on its property
and equipment using the straight-line method.

Rates used for depreciation are based on the following estimated useful
lives: fixtures and equipment -- 3 to 20 years; transportation equipment -- 5
years; and leasehold improvements -- 10 to 31 years.

Upon sale or retirement of property and equipment, the related costs and
accumulated depreciation are removed from the accounts and any gain or loss is
included in the determination of income.

ADVERTISING EXPENSE

Advertising costs are expensed as incurred except for catalog costs, which
are deferred and expensed as distributed. Advertising expense including catalog
costs for the year ended October 31, 1997 was $219,486. Deferred catalog costs
as of October 31, 1997 were $12,674.

INCOME TAXES

The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code by unanimous consent of its stockholders. Under those
provisions, the Company does not pay Federal corporate income taxes on its
taxable income. Instead, the stockholders are liable for individual income taxes
on their respective shares of the Company's taxable income.

F-80
<PAGE> 148
HAMMOND & STEPHENS COMPANY

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

UNAUDITED INTERIM FINANCIAL DATA

In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of April 30, 1998 and the results
of operations and of cash flows for the six months ended April 30, 1997 and
April 30, 1998, as presented in the accompanying unaudited financial data.

NOTE 2 -- CONCENTRATION OF CREDIT RISK

The Company maintains cash balances at one financial institution located in
Fremont, Nebraska. The accounts are secured by the Federal Deposit Insurance
Corporation up to $100,000. Uninsured balances aggregate $2,936,020 at October
31, 1997.

NOTE 3 -- INVENTORIES

Inventories consist of the following components:

<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
1997 1998
----------- ---------
<S> <C> <C>
Raw material........................................ $ 311,483 $ 693,476
Work in process..................................... 669,697 1,144,236
Finished goods...................................... 1,044,669 1,629,670
---------- ----------
$2,025,849 $3,467,382
========== ==========
</TABLE>

NOTE 4 -- PROPERTY AND EQUIPMENT

For the year ending October 31, 1997, depreciation expense was $192,676.

NOTE 5 -- BUILDING LEASE

The Company's operations are conducted in facilities leased form the
Company's president. The lease was for a two-year term, through December 31,
1997 and provided for monthly rental payments of $9,900 through October 31, 1997
and $14,700 for November and December 1997, with the Company paying all
maintenance and executory costs. The Company has determined the building to be
an operating lease and it is recorded as such in the financial statements. The
future minimum rental payments excluding maintenance and executory costs
required under this lease are as follows:

<TABLE>
<S> <C>
Year ended October 31, 1998................................. $29,400
=======
</TABLE>

Building lease expense for the year ending October 31, 1997 was $118,800.

F-81
<PAGE> 149
HAMMOND & STEPHENS COMPANY

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 5 -- BUILDING LEASE (CONTINUED)
The building lease was renewed for a two year term on January 1, 1998 for a
fixed monthly rental payment of $14,700.

NOTE 6 -- EMPLOYEE BENEFIT PLAN

The Company maintains a profit sharing plan which includes provisions from
the Internal Revenue Code, Section 401-(K). The plan covers substantially all
the employees. Profit sharing expense for the year ended October 31, 1997 was
$42,290.

NOTE 7 -- SUBSEQUENT EVENTS

On June 30, 1998, the Company was acquired by School Specialty, Inc. a
supplier of non-textbook education products to schools and educators. Total
consideration for the acquisition was approximately $16.5 million, payable in a
cash transaction structured as an asset purchase for certain assets and
liabilities of the Company. The acquisition has been accounted for under the
purchase method of accounting.

F-82
<PAGE> 150

UNDERWRITING

School Specialty and the underwriters for the offering (the "Underwriters")
named below have entered into an underwriting agreement with respect to the
shares of Common Stock being offered. Subject to certain conditions, each
Underwriter has severally agreed to purchase the number of shares indicated in
the following table. Goldman, Sachs & Co., Salomon Smith Barney Inc. and U.S.
Bancorp Piper Jaffray Inc. are the representatives of the Underwriters (the
"Representatives").

<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co.........................................
Salomon Smith Barney Inc....................................
U.S. Bancorp Piper Jaffray Inc..............................
---------
Total..................................................... 3,000,000
=========
</TABLE>

------------------------------

If the Underwriters sell more than the total number set forth in the table
above, the Underwriters have an option to buy up to an additional 450,000 shares
from us to cover such sales. They may exercise that option for 30 days. If any
shares are purchased pursuant to this option, the Underwriters will severally
purchase shares in approximately the same proportion as set forth in the table
above.

The following table shows the per share and total underwriting discounts
and commissions to be paid to the Underwriters by us. Such amounts are shown
assuming both no exercise and full exercise of the Underwriters' option to
purchase additional shares.

Paid by School Specialty
------------------------------

<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............. $ $
Total................. $ $
</TABLE>

------------------------------

Shares sold by the Underwriters to the initial public will initially be
offered at the initial public offering price set forth on the cover of this
Prospectus. Any shares sold by the Underwriters to securities dealers may be
sold at a discount of up to $ per share from the initial public
offering price. Any such securities dealers may resell any shares purchased from
the Underwriters to certain other brokers or dealers at a discount of up to
$ per share from the initial public offering price. If all the shares
are not sold at the initial public offering price, the Representatives may
change the offering price and the other selling terms.

School Specialty has agreed, along with certain of its directors and
executive officers, not to dispose of or hedge any of their Common Stock or
securities convertible into or exchangeable for shares of Common Stock during
the period from the date of this Prospectus continuing through the date 90 days
after the date of this Prospectus, except with the prior written consent of the
Representatives. This agreement does not apply to any existing employee benefit
plans, including the 1998 Stock Incentive Plan, or shares of Common Stock used
as consideration for acquisitions (up to an aggregate of shares if
holders of shares deliver a lock-up letter to the Representatives).

In connection with the offering, the Underwriters may purchase and sell
shares of Common Stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the Underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the Common Stock while
the offering is in progress.

U-1
<PAGE> 151

The Underwriters also may impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the underwriting
discount received by it because the Representatives have repurchased shares sold
by or for the account of such Underwriter in stabilizing or short covering
transactions.

These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the Common Stock. As a result, the price of the
Common Stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
Underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.

School Specialty has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act").

School Specialty estimates that its share of the total expenses of the
Common Stock offering, excluding underwriting discounts and commissions, will be
approximately $350,000.

U-2
<PAGE> 152

[PICTURES OF HOME PAGE FOR COMPANY'S VARIOUS WEBSITES]

<PAGE> 153

- ---------------------------------------------------------
- ---------------------------------------------------------

No dealer, salesperson or other person is authorized to give you any
information or to represent anything not contained in this Prospectus. You must
not rely on any unauthorized information or representations. This Prospectus is
an offer to sell or to buy only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The information
contained in this Prospectus is current only as of its date.

------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................... 3
Risk Factors............................. 10
Disclosure Regarding Forward-Looking
Statements............................. 15
Use of Proceeds.......................... 15
Dividend Policy.......................... 16
Price Range of Common Stock.............. 16
Capitalization........................... 17
Selected Historical and Pro Forma
Financial Data......................... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 22
Business................................. 35
Management............................... 47
Certain Transactions..................... 56
Principal Stockholders................... 57
Description of Senior Credit Facility.... 59
Description of Our Capital Stock......... 61
Experts.................................. 64
Validity of Shares....................... 64
Additional Information................... 65
Index to Financial Statements............ F-1
Underwriting............................. U-1
</TABLE>

- ---------------------------------------------------------
- ---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------

3,000,000 Shares

SCHOOL SPECIALTY, INC.

Common Stock

------------------
LOGO
------------------

GOLDMAN, SACHS & CO.

SALOMON SMITH BARNEY

U.S. BANCORP PIPER JAFFRAY

Representatives of the Underwriters
---------------------------------------------------------
---------------------------------------------------------
<PAGE> 154

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following is an itemized statement of the estimated amounts of all
expenses payable by School Specialty in connection with the issuance and
distribution of the Common Stock being registered hereunder, other than
underwriting discounts and commissions. All of such expenses (except the SEC
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee) are estimated.

<TABLE>
<S> <C>
SEC registration fee........................................ $ 21,160.14
NASD filing fee............................................. 17,112.00
Nasdaq National Market listing fee.......................... 17,500.00
Accounting fees and expenses................................ 50,000.00
Legal fees and expenses..................................... *
Printing and engraving expenses............................. 100,000.00
Transfer Agent and Registrar fees........................... 4,000.00
Blue sky fees and expenses.................................. 15,000.00
Miscellaneous............................................... *
-----------
Total.................................................. $350,000.00
===========
</TABLE>

- ---------------

* To be completed by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Article Eight of School Specialty's Certificate of Incorporation provides
that School Specialty shall indemnify its directors and officers to the fullest
extent permitted by the General Corporation Law of the State of Delaware.

Section 145 of the General Corporation Law of the State of Delaware permits
a corporation, under specified circumstances, to indemnify its directors,
officers, employees or agents against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties by reason of the fact that they were or are directors, officers,
employees or agents of the corporation, if such directors, officers, employees
or agents acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action (i.e., one by or in the right of the
corporation), indemnification may be made only for expenses actually and
reasonably incurred by directors, officers, employees or agents in connection
with the defense or settlement of an action or suit, and only with respect to a
matter as to which they shall have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent that
the court in which the action or suit was brought shall determine upon
application that the defendant directors, officers, employees or agents are
fairly and reasonably entitled to indemnity for such expenses despite such
adjudication of liability.

Article Seven of School Specialty's Certificate of Incorporation states
that directors of School Specialty will not be liable to School Specialty or its
stockholders for monetary damages for any breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to School Specialty or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the General

II-1
<PAGE> 155

Corporation Law of the State of Delaware, which makes directors liable for
unlawful dividends or unlawful stock repurchases or redemptions or (iv) for any
transaction from which the director derived an improper personal benefit.

Article IV of School Specialty's Bylaws provides that School Specialty
shall indemnify its officers and directors (and those serving at the request of
School Specialty as an officer or director of another corporation, partnership,
joint venture, trust or other enterprise), and may indemnify its employees and
agents (and those serving at the request of School Specialty as an employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise), against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred, if such officer,
director, employee or agent acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of School Specialty, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. In a derivative action, indemnification shall
be limited to expenses (including attorneys' fees) actually and reasonably
incurred by such officer, director, employee or agent in the defense or
settlement of such action or suit, and no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to School Specialty unless and only to the extent that the
Delaware Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Delaware Court of
Chancery or such other court shall deem proper.

Unless the Board of Directors of School Specialty otherwise determines in a
specific case, expenses incurred by an officer or director in defending a civil
or criminal action, suit or proceeding shall be paid by School Specialty in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of the officer or director to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by School Specialty.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

The following information is furnished as to securities of School Specialty
sold within the past three years that were not registered under the Securities
Act:

Concurrent with its initial public offering in June 1998, School Specialty
sold 250,000 shares of Common Stock to Daniel P. Spalding, the Chairman of the
Board and its Chief Executive Officer, David J. Vander Zanden, its President and
Chief Operating Officer, and Donald Ray Pate, Jr., its Executive Vice President
for ClassroomDirect.com (formerly named Re-Print). These shares were sold at a
price of $14.415 per share for aggregate consideration of $3,603,750. The sale
of these shares was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended.

ITEM 16. EXHIBITS AND FINANCIAL SCHEDULES

(A) EXHIBITS

See "Index to Exhibits."

(B) FINANCIAL STATEMENT SCHEDULES

See "Index to Exhibits."

II-2
<PAGE> 156

ITEM 17. UNDERTAKINGS

(a) The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

II-3
<PAGE> 157

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended,
School Specialty, Inc. has duly caused this Pre-Effective Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Appleton, State of Wisconsin, on March 15, 1999.

SCHOOL SPECIALTY, INC.

/s/ DONALD J. NOSKOWIAK

By:
--------------------------------------

Donald J. Noskowiak,

Chief Financial Officer

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Pre-Effective Amendment No. 1 to the Registration Statement has been signed
by the following persons in the capacities and on the dates indicated below.

<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
* Chief Executive Officer (Principal March 15, 1999
- --------------------------------------------- Executive Officer) and Director
Daniel P. Spalding

/s/ DONALD J. NOSKOWIAK Chief Financial Officer (Principal March 15, 1999
- --------------------------------------------- Financial and Accounting Officer)
Donald J. Noskowiak

* President, Chief Operating Officer March 15, 1999
- --------------------------------------------- and Director
David J. Vander Zanden

* Director March 15, 1999
- ---------------------------------------------
Jonathan J. Ledecky

* Director March 15, 1999
- ---------------------------------------------
Rochelle Lamm Wallach

* Director March 15, 1999
- ---------------------------------------------
Leo C. McKenna

*By/s/ DONALD J. NOSKOWIAK March 15, 1999
----------------------------------------
Donald J. Noskowiak
</TABLE>

(as attorney-in-fact pursuant to authority granted by power of attorney included
on this signature page in initial filing of this Registration Statement)

II-4
<PAGE> 158

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------- --------------------
<C> <S>
1.1 Form of Underwriting Agreement for Common Stock Offering(7)
3.1 Restated Certificate of Incorporation(1)
3.2 Amended and Restated Bylaws(1)
5.1 Opinion of Godfrey & Kahn, S.C. relating to validity of
Common Stock*
10.1 Distribution Agreement among U.S. Office Products Company,
Workflow Management, Inc., Aztec Consulting, Inc., Navigant
International, Inc. and School Specialty, Inc.(2)
10.2 Tax Allocation Agreement among U.S. Office Products Company,
Workflow Management, Inc., Aztec Technology Partners, Inc.,
Navigant International, Inc. and School Specialty, Inc.(1)
10.3 Tax Indemnification Agreement among Workflow Management,
Inc., Aztec Technology Partners, Inc., Navigant
International, Inc. and School Specialty, Inc.(2)
10.4 Employee Benefits Agreement among Workflow Management, Inc.,
Aztec Technology Partners, Inc., Navigant International,
Inc. and School Specialty, Inc.(2)
10.5 Employment Agreement dated April 29, 1996, between Daniel P.
Spalding and School Specialty, Inc.(3)
10.6 Employment Agreement dated July 26, 1996, between Donald Ray
Pate, Jr. and The Re-Print Corp.(3)
10.7.a Employment Agreement dated June 27, 1997, between Richard H.
Nagel and Sax Arts and Crafts, Inc.(3)
10.7.b Covenant Not to Compete Agreement dated June 27, 1997,
between Richard H. Nagel and Sax Arts and Crafts, Inc.(7)
10.8 Employment Agreement between David Vander Zanden and School
Specialty, Inc.(4)
10.9 Employment Agreement between School Specialty, Inc. and
Jonathan J. Ledecky(4)
10.10 Amended Services Agreement dated as of June 8, 1998 between
U.S. Office Products and Jonathan J. Ledecky(5)
10.11 Amended and Restated 1998 Stock Incentive Plan(6)
10.12 Amended and Restated Credit Agreement dated as of September
30, 1998 among School Specialty, Inc., certain subsidiaries
and affiliates of School Specialty, Inc., the lenders named
therein, Nationsbank, N.A., Bank One, Wisconsin and U.S.
Bank National Association(6)
21.1 Subsidiaries of School Specialty, Inc.
23.1 Consent of Godfrey & Kahn, S.C. (included in Exhibit No.
5.1)*
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Ernst & Young, LLP
23.4 Consent of BDO Seidman, LLP
23.5 Consent of Altschuler, Melvoin and Glasser LLP
23.6 Consent of PricewaterhouseCoopers LLP
23.7 Consent of Ernst & Young LLP
</TABLE>

<PAGE> 159

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------- --------------------
<C> <S>
23.8 Consent of PricewaterhouseCoopers LLP
24.1 Powers of Attorney(8)
27.1 Financial Data Schedule(7)
99.1 Schedule II -- Valuation and Qualifying Accounts(7)
</TABLE>

- ---------------

* To be filed by amendment.

(1) Incorporated by reference to School Specialty's Pre-Effective Amendment No.
3 to the Registration Statement on Form S-1 filed with the SEC on June 4,
1998; Registration No. 333-47509.

(2) Incorporated by reference to School Specialty's Pre-Effective Amendment No.
2 to the Registration Statement on Form S-1 filed with the SEC on May 18,
1998; Registration No. 333-47509.

(3) Incorporated by reference to School Specialty's Pre-Effective Amendment No.
1 to the Registration Statement on Form S-1 filed with the SEC on May 6,
1998; Registration No. 333-46537.

(4) Incorporated by reference to School Specialty's Annual Report on Form 10-K
filed with the SEC on July 24, 1998.

(5) Incorporated by reference to School Specialty's Pre-Effective Amendment No.
4 to the Registration Statement on Form S-1 filed with the SEC on June 9,
1998; Registration No. 333-47509.

(6) Incorporated by reference to the School Specialty's Form 10-Q for the period
ended January 23, 1999, as filed with the SEC on March 1, 1999.

(7) Incorporated by reference to School Specialty's initial filing of the
Registration Statement on Form S-1 filed with the SEC on March 1, 1999;
Registration No. 333-73103.

(8) Incorporated by reference to the signature page for School Specialty, Inc.
filed as part of the initial filing of this Registration Statement on Form
S-1; Registration No. 333-73103.

<PAGE> 1

EXHIBIT 21.1

SUBSIDIARIES OF THE REGISTRANT

STATE OR OTHER JURISDICTION
OF INCORPORATION OR
ORGANIZATION
NAME

1. ClassroomDirect.com,LLC Delaware
2. Sax Arts and Crafts, Inc. Delaware
3. Childcraft Education Corp. New York
4. Bird-in-Hand Woodworks, Inc. New Jersey
5. Don Gresswell, Ltd. United Kingdom
6. Sportime Acquisition, Inc. Delaware
7. Sportime, LLC Delaware
8. SSI Acquisition Subsidiary, Inc. Delaware
9. SSI Acquisition Corp. Delaware

<PAGE> 1

EXHIBIT 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Prospectus constituting part of
this Registration Statement on Form S-1 of our report dated June 24, 1998,
relating to the financial statements of School Specialty, Inc., as of April 26,
1997 and April 25, 1998 and for the four months ended April 30, 1996 and for the
fiscal years ended April 26, 1997 and April 25, 1998, which appears in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.

/s/ PRICEWATERHOUSECOOPERS LLP

PRICEWATERHOUSECOOPERS LLP

Minneapolis, Minnesota

March 15, 1999

<PAGE> 1
EXHIBIT 23.3

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 2, 1996, with respect to the financial
statements of School Specialty Inc. for the year ended December 31, 1995
included in the Registration Statement on Pre-Effective Amendment No. 1 to Form
S-1 (No. 333-73103) and related Prospectus of School Specialty, Inc. (formerly
known as School Specialty, Inc. and Re-Print Corporation) for the registration
of 3,450,000 shares of its common stock.

Milwaukee, Wisconsin /s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP

March 15, 1999

<PAGE> 1

EXHIBIT 23.4

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Prospectus constituting part of
this Amendment No. 1 to the Registration Statement on Form S-1 of our report
dated February 8, 1996, relating to the financial statements of The Re-Print
Corporation, which is contained in that Prospectus.

We also consent to the references to us under the heading "Experts" in
that Prospectus.

/s/ BDO SEIDMAN

BDO SEIDMAN, LLP

Atlanta, Georgia

March 15, 1999

<PAGE> 1

EXHIBIT 23.5

INDEPENDENT AUDITORS' CONSENT

We hereby consent to the use in this Prospectus constituting part of
this Registration Statement on Form S-1 of our report dated February 24, 1997,
relating to the consolidated financial statements of American Academic Suppliers
Holding Corporation and Subsidiary, which appears in such Prospectus. We also
consent to the references to us under the heading "Experts".

/s/ ALTSCHULER, MELVOIN AND GLASSER LLP

ALTSCHULER, MELVOIN AND GLASSER LLP

Chicago, Illinois

March 15, 1999

<PAGE> 1

EXHIBIT 23.6

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Prospectus constituting part of
this Registration Statement on Form S-1 of our report dated February 3, 1998,
relating to the financial statements of Sax Arts and Crafts, Inc., as of
December 16, 1995 and December 25, 1996 and for each of the three years in the
period ended December 25, 1996, which appears in such Prospectus. We also
consent to the reference to us under the heading "Experts" in such Prospectus.

/s/ PRICEWATERHOUSECOOPERS LLP

PRICEWATERHOUSECOOPERS LLP

Minneapolis, Minnesota

March 15, 1999

<PAGE> 1

EXHIBIT 23.7

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and
to the use of our report dated June 11, 1998 (except for Note C, as to which the
date is June 17, 1998), with respect to the consolidated financial statements of
The National School Supply Company and Subsidiaries included in Amendment No. 1
to the Registration Statement on Form S-1 (No. 333-73103) and related Prospectus
of School Specialty, Inc. for the registration of 3,450,000 shares of its common
stock.

Cleveland, Ohio /s/ ERNST & YOUNG LLP
March 15, 1999 ----------------------
ERNST & YOUNG LLP

<PAGE> 1

EXHIBIT 23.8

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Prospectus constituting part of
this Registration Statement on Form S-1 of our report dated September 3, 1998,
relating to the financial statements of Hammond & Stephens Company, as of
October 31, 1997 and for the fiscal year then ended which appears in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.

/s/ PRICEWATERHOUSECOOPERS LLP

PRICEWATERHOUSECOOPERS LLP

Minneapolis, Minnesota

March 15, 1999