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School Specialty Inc – ‘424B1’ on 6/10/98

As of: Wednesday, 6/10/98 · Accession #: 1047469-98-23520 · File #: 333-47509

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 6/10/98  School Specialty Inc              424B1                  1:381K                                   Merrill Corp/New/FA

Prospectus — Rule 424(b)(1)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424B1       Prospectus                                           115    675K

Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Ability to Integrate Acquisitions Additional Information Business Capitalization Certain Transactions Company Growth Strategy Company Strengths Competition Consolidated Historical Results of Operations Cost of revenues Debt Deferred catalog costs Dependence on Systems Description of School Specialty Capital Stock Dilution Director Compensation and Other Arrangements Distribution Distribution Agreement Dividend Policy Donald Ray Pate, Jr Employee Benefits Agreement Executive Compensation Experts Goldman, Sachs & Co Industry Overview Inventories Liabilities Long-term debt Management Management's Discussion and Analysis of Financial Condition and Results of Operations Material Amount of Goodwill Nationsbanc Montgomery Securities Llc Non-recurring acquisition costs Notes to Consolidated Financial Statements Notes to Financial Statements Notes to Pro Forma Combined Financial Statements Offering, The Other (income) expense Piper Jaffray Inc Possible Limitations on Issuances of Common Stock Potential Liability for Taxes Related to the Distributions Preferred Stock Principal Stockholders Property and equipment Pursue Acquisitions Aggressively Replacement of Outstanding U.S. Office Products' Options Reporting Comprehensive Income Re-Print Restructuring costs Risk Factors Risks Related to Inability to Use Pooling-of-Interests Method to Account for Future Acquisitions Sax Arts & Crafts School Specialty School Specialty, Inc Selected Financial Data Short-term debt Spin-Off from U.S. Office Products, The Stockholder's (deficit) equity Summary Tax Allocation Agreement and Tax Indemnification Agreement The Offering The Spin-Off from U.S. Office Products Total (Unaudited) Underwriting Use of proceeds Validity of Shares 1998 Stock Incentive Plan
1	1st Page - Filing Submission
"	Nationsbanc Montgomery Securities Llc
"	Piper Jaffray Inc
3	Summary
"	School Specialty, Inc
4	Ability to Integrate Acquisitions
"	Pursue Acquisitions Aggressively
5	The Offering
"	The Spin-Off from U.S. Office Products
8	Risk Factors
"	Potential Liability for Taxes Related to the Distributions
10	Possible Limitations on Issuances of Common Stock
11	Risks Related to Inability to Use Pooling-of-Interests Method to Account for Future Acquisitions
"	Dependence on Systems
13	Competition
"	Material Amount of Goodwill
14	Dilution
"	Distribution Agreement
15	Debt
"	Liabilities
16	Tax Allocation Agreement and Tax Indemnification Agreement
"	Employee Benefits Agreement
19	Use of proceeds
"	Dividend Policy
21	Capitalization
22	Selected Financial Data
25	Management's Discussion and Analysis of Financial Condition and Results of Operations
27	Consolidated Historical Results of Operations
33	Reporting Comprehensive Income
34	Industry Overview
35	Business
"	Company Strengths
36	Company Growth Strategy
"	School Specialty
37	Re-Print
"	Sax Arts & Crafts
42	Management
43	Donald Ray Pate, Jr
44	Executive Compensation
46	Replacement of Outstanding U.S. Office Products' Options
47	1998 Stock Incentive Plan
48	Director Compensation and Other Arrangements
51	Certain Transactions
52	Principal Stockholders
53	Description of School Specialty Capital Stock
"	Preferred Stock
57	Experts
"	Validity of Shares
"	Additional Information
63	(Unaudited)
"	Stockholder's (deficit) equity
64	Other (income) expense
65	Total
68	Notes to Consolidated Financial Statements
69	Inventories
"	Property and equipment
70	Cost of revenues
"	Deferred catalog costs
71	Non-recurring acquisition costs
"	Restructuring costs
76	Short-term debt
"	Long-term debt
80	Distribution
90	Notes to Pro Forma Combined Financial Statements
107	Notes to Financial Statements
113	Underwriting
115	Goldman, Sachs & Co

424B1 1st Page of 115 TOC ↑Top Previous Next ↓Bottom Just 1st
2,125,000 SHARES

Filed pursuant to
Rule 424(b)(1)

[Download Table]

[LOGO] SCHOOL SPECIALTY, INC.

COMMON STOCK

(PAR VALUE $.001 PER SHARE)

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

In addition to the 2,125,000 shares being offered, School Specialty is
selling 250,000 shares directly 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
Re-Print. The Underwriters will not participate in, or receive any discount or
commission on, the sale of the Common Stock to these officers.

All of the shares of Common Stock offered hereby are being sold by the
Company. Prior to this offering, there has been no public market for the Common
Stock of the Company. For factors considered in determining the initial public
offering price, see "Underwriting".

SEE "RISK FACTORS" ON PAGE 8 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.

School Specialty Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "SCHS".

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------

[Enlarge/Download Table]

INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
------------------ ------------------ ------------------

Per Share................................................ $15.50 $1.085 $14.415
Total(3)................................................. $32,937,500 $2,305,625 $30,631,875

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

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.

(2) Before deducting estimated expenses of $1,500,000 payable by the Company.
Proceeds to the Company does not include proceeds of $3,603,750 to be
received from the direct sale by School Specialty of 250,000 shares to
Messrs. Spalding, Vander Zanden and Pate at $14.415 per share, the initial
public offering price less the underwriting discount.

(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 318,750 shares at the initial public offering price per
share, less the underwriting discount, solely to cover over-allotments. If
such option is exercised in full, the total initial public offering price,
underwriting discount and proceeds to Company will be $37,878,125,
$2,651,469, and $35,226,656, respectively. See "Underwriting".
------------------------

The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery in New York, New York, on or about
June 15, 1998, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.

NATIONSBANC MONTGOMERY SECURITIES LLC

SALOMON SMITH BARNEY

PIPER JAFFRAY INC.
------------------------

The date of this Prospectus is June 9, 1998.

424B1 2nd Page of 115 TOC 1st Previous Next ↓Bottom Just 2nd
[PICTURES]

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

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER- ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".

424B1 3rd Page of 115 TOC 1st Previous Next ↓Bottom Just 3rd
SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS. PROSPECTIVE INVESTORS SHOULD READ THE PROSPECTUS IN ITS ENTIRETY.
UNLESS THE CONTEXT REQUIRES OTHERWISE, REFERENCES TO THE COMPANY INCLUDE ITS
SUBSIDIARIES. UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS
PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.

THE COMPANY

School Specialty, Inc. (the "Company" or "School Specialty") believes that
it is the largest U.S. distributor focusing on non-textbook educational supplies
and furniture for grades pre-kindergarten through 12 ("pre-K-12"). The Company
provides a comprehensive offering of high quality educational supplies and
furniture to school districts, school administrators and teachers through the
broad distribution of its catalogs. School Specialty distributes general school
supplies, including classroom and art supplies, instruction materials, furniture
and equipment. The Company also distributes supplies and furniture for certain
educational disciplines, including early childhood education under the
Childcraft name, art supplies under the Sax Arts & Crafts name and
library-related products under the Gresswell name. In order to broaden its
geographic presence and product offering, the Company has acquired 15 companies
since May 1996. For the twelve months ended January 24, 1998, the Company's
revenues aggregated $279.6 million and operating income aggregated $19.7
million, which represented compound annual increases of 32% and 62%,
respectively, over revenues and operating income for the year ended December 31,
1994. For the twelve months ended January 24, 1998, the Company's pro forma
revenues (giving effect to all acquisitions made since the beginning of such
period) aggregated $377.2 million and pro forma operating income aggregated
$23.7 million, which represented compound annual increases of 45% and 71%,
respectively, over revenues and operating income for the year ended December 31,
1994.

With over 32,000 stock keeping units ("SKUs"), School Specialty offers
customers one source for virtually all of their non-textbook school supply and
furniture needs. School Specialty markets its products through an innovative
two-pronged approach, targeting both administrators and teachers to cover the
full spectrum of decision makers. The Company's "top down" approach, utilizing
its 290 sales representatives and its School Specialty general supply and
furniture catalog (the "School Specialty Catalog"), focuses on procurement
officials at the state, regional and local levels, while its "bottom up"
approach focuses on curriculum specialists and teachers. Sales to curriculum
specialists and over 2.1 million teachers are made primarily through the 6.3
million general supply catalogs of The Re-Print Corp. ("Re-Print") and specialty
catalogs that are mailed each year.

The Company believes that annual sales of non-textbook educational supplies
and equipment to the school supply market aggregate approximately $6.1 billion,
with over $3.6 billion sold to institutions and $2.5 billion sold to consumers.
The Company also believes there are over 3,400 distributors of school supplies,
the majority of which are family- or employee-owned companies with revenues
under $20 million that operate in a single region. The Company believes the
demand for timely order fulfillment at competitive prices, combined with the
need to invest in automated inventory and electronic ordering systems, is
accelerating the trend toward consolidation in the industry. School Specialty
also believes that it is well positioned to capitalize on this consolidation as
the largest distributor in its industry with annual revenues which it believes
exceed those of its next two largest competitors combined. Although the Company
is the largest distributor in the industry, its share of the $6.1 billion school
supply market is less than 6%, giving the Company substantial growth
opportunities.

424B1 4th Page of 115 TOC 1st Previous Next ↓Bottom Just 4th
The volume of school supplies is directly influenced by the size of the
student population. Kindergarten through 12th grade ("K-12") student enrollment
reached an all-time peak in 1996 with 51.5 million students and the U.S.
Department of Education projects that student enrollment will continue to grow
to 54.3 million by the year 2006. As a result of these trends, the U.S.
Department of Education projects that expenditures in public elementary and
secondary schools will continue to rise through the year 2007. These rising
expenditures include a projected increase in total per pupil spending in current
dollars from $5,961 per pupil in 1997 to $7,179 by the year 2001. The Company
believes that as the largest U.S. distributor of non-textbook educational
supplies it will be a major beneficiary of this growth in expenditures.

KEY STRENGTHS

School Specialty attributes its strong competitive position to the following
key strengths:

LEADING MARKET POSITION. The Company has developed its leading market
position over its 38 year history by emphasizing high quality products, superior
order fulfillment, exceptional customer service and brand name recognition. The
Company believes its annual revenues exceed those of its next two largest
competitors combined and that its large size and brand recognition have resulted
in significant buying power, economies of scale and customer loyalty.

BROAD PRODUCT LINE. School Specialty's strategy is to provide a full range
of high quality products to meet the complete supply needs of pre-K-12 schools
and as a result currently offers over 32,000 SKUs ranging from classroom
supplies to playground equipment. School Specialty offers customers one source
for virtually all of their school supply needs.

INNOVATIVE TWO-PRONGED DISTRIBUTION. The Company targets administrative
decision makers with a "top down" approach through its 290 person sales force
and School Specialty Catalog, and teachers and curriculum specialists with a
"bottom up" approach primarily through the 6.3 million Re-Print general supply
and specialty catalogs mailed each year.

ABILITY TO INTEGRATE ACQUISITIONS. School Specialty has successfully
completed the acquisition of 20 companies since 1991, 15 of which have been
acquired since May 1996. The Company believes that it can generate significant
economies of scale and rapidly improve the margins of acquired entities, as well
as increase sales, by channeling acquired entities products through its broad
distribution network. See "Business--Company Strengths".

USE OF TECHNOLOGY. The Company believes that through the utilization of
technology in areas such as (i) purchasing and inventory management, (ii)
customer order fulfillment, and (iii) database management, School Specialty is
able to turn inventory more quickly than competitors, offer customers more
convenient and cost effective product ordering methods and conduct more
precisely targeted sales and marketing campaigns.

EXPERIENCED MANAGEMENT. School Specialty's management team provides depth
and continuity of experience. Management's interests are aligned with those of
its stockholders as management's incentive-based compensation is tied to School
Specialty's operating profitability.

GROWTH STRATEGY

School Specialty's objective is to further enhance its position as the
leading distributor of non-textbook educational supplies through the continued
implementation of the following strategies:

424B1 5th Page of 115 TOC 1st Previous Next ↓Bottom Just 5th
the Company has a limited presence, and (ii) specialty companies focusing on
disciplines such as physical education, science, technology and music.

IMPROVE PROFITABILITY. School Specialty improved its operating margin from
3.7% in 1994 to 7.0% for the twelve months ended January 24, 1998. School
Specialty believes that there are substantial opportunities to further improve
margins by (i) increasing the efficiency of recent acquisitions, (ii) expanding
purchasing power and (iii) improving warehousing and distribution.

PENETRATE NEW MARKETS AND EXPAND CUSTOMER BASE IN EXISTING MARKETS. School
Specialty believes that it can increase revenues by adding sales representatives
in geographic markets in which the Company does not have a significant presence.
In addition, the Company believes that it can further increase revenues by cross
merchandising its specialty product lines to its general supplies customers.

RECENT DEVELOPMENTS

On March 20, 1998, the Company acquired the catalog division of Education
Access, a catalog reseller of technology solutions for the K-12 education
market. This new product line will offer curriculum software, productivity
software, peripherals, networking products and other related products through
catalogs mailed twice a year.

THE OFFERING

[Enlarge/Download Table]

Common Stock Offered by the Company.......... 2,125,000 Shares
Nasdaq National Market symbol................ SCHS
Use of proceeds.............................. To repay a portion of indebtedness to be
incurred to refinance amounts payable to U.S.
Office Products Company. After such
repayment, approximately $200 million will be
available under the Company's credit facility
(subject to compliance with financial
covenants), which may be used for general
corporate purposes, including working
capital, and for acquisitions.

THE SPIN-OFF FROM U.S. OFFICE PRODUCTS

Concurrently with this Offering, 12,187,723 shares of School Specialty
Common Stock are being distributed to the stockholders of U.S. Office Products
as of June 9, 1998 (the "School Specialty Distribution" or the "Distribution").
The School Specialty Distribution is part of a comprehensive restructuring plan
adopted by the U.S. Office Products Board of Directors (the "Strategic
Restructuring Plan") in which U.S. Office Products is spinning off all of the
shares of School Specialty and three other companies that will conduct U.S.
Office Products' current print management, technology solutions and corporate
travel services businesses. (These spin-offs are collectively referred to as the
"Distributions", and School Specialty and the three other such companies are
collectively referred to as the "Spin-Off Companies".) The effective time of the
Distribution was 11:59 p.m. on June 9, 1998 (the "Distribution Date"). See "The
Spin-Off from U.S. Office Products".

424B1 6th Page of 115 TOC 1st Previous Next ↓Bottom Just 6th
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

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HISTORICAL(1)
-------------------------------------------------------
FISCAL
YEAR
FOUR MONTHS ENDED NINE MONTHS
FISCAL YEAR ENDED ENDED -------- ENDED
DECEMBER 31, ----------- APRIL -----------
------------------ APRIL 30, 26, JANUARY 25,
1994 1995 1996 1997 1997
-------- -------- ----------- -------- -----------

STATEMENT OF INCOME
DATA:
Revenues.............. $119,510 $150,482 $28,616 $191,746 $159,977
Cost of revenues...... 87,750 105,757 20,201 136,577 114,380
-------- -------- ----------- -------- -----------
Gross profit.......... 31,760 44,725 8,415 55,169 45,597
Selling, general and
administrative
expenses............ 27,281 39,869 10,307 43,462 33,396
Non-recurring
acquisition costs... 1,122 1,792 1,792
Restructuring costs... 2,532 194
-------- -------- ----------- -------- -----------
Operating income
(loss).............. 4,479 2,324 (3,014) 9,721 10,409
Interest expense...... 3,007 5,536 1,461 4,197 3,358
Interest income....... (6) (101)
Other (income)
expense............. (86) (18) 67 (196) (204)
-------- -------- ----------- -------- -----------
Income (loss) before
provision for
(benefit from)
income taxes........ 1,558 (3,194) (4,536) 5,720 7,356
Provision for (benefit
from) income
taxes(4)............ 218 173 139 (2,412) 3,750
-------- -------- ----------- -------- -----------
Net income (loss)..... $ 1,340 $ (3,367) $(4,675) $ 8,132 $ 3,606
-------- -------- ----------- -------- -----------
-------- -------- ----------- -------- -----------
Net income (loss) per
share(5):
Basic............. $ 0.26 $ (0.51) $ (0.54) $ 0.81 $ 0.38
Diluted........... $ 0.26 $ (0.50) $ (0.53) $ 0.80 $ 0.37

Weighted average
shares
outstanding(5):
Basic............. 5,062 6,562 8,611 10,003 9,553
Diluted........... 5,078 6,669 8,789 10,196 9,758

PRO FORMA(2)
---------------------------------------------------------
TWELVE TWELVE
MONTHS MONTHS
ENDED FISCAL YEAR NINE MONTHS ENDED ENDED
----------- ENDED APRIL 26, ------------------------- -----------
JANUARY 24, JANUARY 24, --------------- JANUARY 25, JANUARY 24, JANUARY 24,
1998 1998(3) 1997 1997 1998 1998(3)
----------- ----------- --------------- ----------- ----------- -----------

STATEMENT OF INCOME
DATA:
Revenues.............. $247,880 $279,649 $350,760 $292,244 $318,667 $377,183
Cost of revenues...... 176,501 198,698 244,396 203,705 227,485 268,176
----------- ----------- --------------- ----------- ----------- -----------
Gross profit.......... 71,379 80,951 106,364 88,539 91,182 109,007
Selling, general and
administrative
expenses............ 50,999 61,065 85,430 66,926 66,623 85,127
Non-recurring
acquisition costs... 1,792 1,792
Restructuring costs... 194 194 194
----------- ----------- --------------- ----------- ----------- -----------
Operating income
(loss).............. 20,380 19,692 18,948 19,821 24,559 23,686
Interest expense...... 4,100 4,939 7,300 5,535 5,535 7,300
Interest income....... (109) (8)
Other (income)
expense............. 441 449 (158) (174) 522 538
----------- ----------- --------------- ----------- ----------- -----------
Income (loss) before
provision for
(benefit from)
income taxes........ 15,948 14,312 11,806 14,460 18,502 15,848
Provision for (benefit
from) income
taxes(4)............ 7,113 951 92 6,651 8,511 1,952
----------- ----------- --------------- ----------- ----------- -----------
Net income (loss)..... $ 8,835 $ 13,361 $ 11,714 $ 7,809 $ 9,991 $ 13,896
----------- ----------- --------------- ----------- ----------- -----------
----------- ----------- --------------- ----------- ----------- -----------
Net income (loss) per
share(5):
Basic............. $ 0.69 $ 1.08 $ 0.96 $ 0.64 $ 0.82 $ 1.14
Diluted........... $ 0.68 $ 1.06 $ 0.96 $ 0.64 $ 0.82 $ 1.14
Weighted average
shares
outstanding(5):
Basic............. 12,751 12,401 12,188 12,188 12,188 12,188
Diluted........... 13,020 12,642 12,188 12,188 12,188 12,188
[Enlarge/Download Table]

DECEMBER 31,
----------------------
1994 1995
---------- ----------

BALANCE SHEET DATA:
Working capital (deficit).............................................................................. $ 3,512 $ (1,052)
Total assets........................................................................................... 44,267 54,040
Long-term debt, less current portion................................................................... 11,675 15,294
Long-term payable to U.S. Office Products..............................................................
Stockholder's (deficit) equity......................................................................... 1,827 (620)

APRIL 30, APRIL 26,
1996 1997
---------- ----------

BALANCE SHEET DATA:
Working capital (deficit).............................................................................. $ (3,663) $ 14,460
Total assets........................................................................................... 54,573 87,685
Long-term debt, less current portion................................................................... 15,031 566
Long-term payable to U.S. Office Products.............................................................. 33,226
Stockholder's (deficit) equity......................................................................... (4,267) 16,329

JANUARY 24, 1998

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

PRO

ACTUAL FORMA(6)

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

BALANCE SHEET DATA:
Working capital (deficit).............................................................................. $ 43,613 $ 60,586

Total assets........................................................................................... 201,207 204,457

Long-term debt, less current portion................................................................... 385 82,978

Long-term payable to U.S. Office Products.............................................................. 62,470
Stockholder's (deficit) equity......................................................................... 98,492 98,492

424B1 7th Page of 115 TOC 1st Previous Next ↓Bottom Just 7th
------------------------

(1) The historical financial information of the businesses that were acquired in
business combinations accounted for under the pooling-of-interests method
(the "Pooled Companies") have been combined on a historical cost basis in
accordance with generally accepted accounting principles ("GAAP") to present
this financial data as if the Pooled Companies had always been members of
the same operating group. The financial information of the businesses
acquired in the business combinations accounted for under the purchase
method is included from the dates of their respective acquisitions.

(2) The pro forma financial data give effect to the refinancing of all amounts
payable to U.S. Office Products and the purchase acquisitions completed by
the Company since May 1, 1996 as if all such transactions had occurred on
May 1, 1996. The pro forma statement of income data are not necessarily
indicative of the operating results that would have been achieved had these
events actually then occurred and should not be construed as representative
of future operating results.

(3) The results for the historical and pro forma 12 months ended January 24,
1998 have been calculated based upon the historical and pro forma results
for the fiscal year ended April 26, 1997 less the historical and pro forma
results for the nine months ended January 25, 1997 plus the historical and
pro forma results for the nine months ended January 24, 1998, respectively.

(4) Results for the fiscal year ended April 26, 1997 and the 12 months ended
January 24, 1998 (historical and pro forma) 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 fiscal 1995 to offset the tax benefit from
net operating loss carryforwards included in the Company's 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 the Company's
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 weighted average shares outstanding for the
fiscal year ended April 26, 1997 and for the nine months ended January 24,
1998 and January 25, 1997, see Note 2(k) of Notes to Pro Forma Combined
Financial Statements included herein. The pro forma weighted average shares
outstanding (basic and diluted), as further adjusted to give effect to the
sales of shares to Messrs. Spalding, Vander Zanden and Pate and in the
Offering, would have been 14.6 million shares for all periods for which pro
forma data are given, and the pro forma net income per share, as so adjusted
further and to give effect to the use of the proceeds from such sales to
reduce debt, would have been:

[Enlarge/Download Table]

NINE MONTHS
ENDED
-------------
FISCAL YEAR ENDED JANUARY 25,
APRIL 26, 1997 1997
------------------- -------------

Pro forma net income per share, as adjusted:
Basic................................................................................ $ 0.91 $ 0.62
Diluted.............................................................................. $ 0.91 $ 0.62

TWELVE MONTHS ENDED

JANUARY 24, JANUARY 24,

1998 1998

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

Pro forma net income per share, as adjusted:
Basic................................................................................ $ 0.77 $ 1.06

Diluted.............................................................................. $ 0.77 $ 1.06

(6) The pro forma balance sheet data give effect to (i) the refinancing of all
amounts payable to U.S. Office Products, (ii) the purchase acquisition of
Education Access, the only acquisition completed by the Company subsequent
to January 24, 1998, and (iii) the Distribution as if such transactions had
occurred on January 24, 1998. The pro forma balance sheet data are not
necessarily indicative of the financial position that would have been
achieved had these events actually then occurred and should not be construed
as representative of future financial position.

424B1 8th Page of 115 TOC 1st Previous Next ↓Bottom Just 8th
RISK FACTORS

THE FOLLOWING FACTORS SHOULD BE CONSIDERED IN ADDITION TO OTHER INFORMATION
INCLUDED IN THIS PROSPECTUS.

POTENTIAL VOLATILITY OF STOCK PRICE; RISKS ASSOCIATED WITH SHARES ELIGIBLE FOR
IMMEDIATE SALE

As a result of the School Specialty Distribution, stockholders of U.S.
Office Products are acquiring 12,187,723 shares of School Specialty Common Stock
that will be freely tradeable at the time of this Offering without restrictions
or further registration under the Securities Act of 1933, as amended (the
"Securities Act"), except that any shares held by "affiliates" of School
Specialty within the meaning of the Securities Act will be subject to the resale
limitations of Rule 144 promulgated under the Securities Act ("Rule 144").
Because the School Specialty Distribution is being made to existing shareholders
of U.S. Office Products, who have not made an affirmative decision to invest in
School Specialty Common Stock, there can be no assurance that some or all of
these shareholders will not sell the shares of School Specialty Common Stock
into the market shortly after the School Specialty Distribution. In addition,
U.S. Office Products is included in certain broad-based indices tracked by a
number of investment companies and other institutional investors, and such
investors can be expected to sell the shares of School Specialty Common Stock
they receive in the School Specialty Distribution shortly thereafter.

In addition, upon completion of this Offering and the School Specialty
Distribution, School Specialty will have outstanding (i) 2,125,000 shares of
School Specialty Common Stock issued in this Offering and (ii) 250,000 shares of
School Specialty Common Stock issued to Messrs. Spalding, Vander Zanden and
Pate. Following this Offering and the School Specialty Distribution, in view of
the large number of shares freely-tradeable and available for immediate sale,
the market for School Specialty's Common Stock could be highly volatile and
could adversely affect the trading price of School Specialty Common Stock. See
"Management--Director Compensation and Other Arrangements". Certain officers and
directors of School Specialty who will hold an aggregate of 266,374 shares of
School Specialty Common Stock after the Distribution have agreed not to sell or
otherwise dispose of any School Specialty Common Stock without the prior written
consent of the Underwriters for a period of 180 days from the date of this
Prospectus (the "Lock-Up Agreements"). The Company intends to register the
shares of School Specialty Common Stock reserved for issuance pursuant to its
stock option plan as soon as practicable after the closing of this Offering.

POTENTIAL LIABILITY FOR TAXES RELATED TO THE DISTRIBUTIONS

In connection with the Distributions, U.S. Office Products is entering into
a tax allocation agreement with School Specialty and the other Spin-Off
Companies (the "Tax Allocation Agreement") which provides that the Spin-Off
Companies will jointly and severally indemnify U.S. Office Products for any
losses associated with taxes related to the Distributions ("Distribution Taxes")
if an action or omission (an "Adverse Tax Act") of any of the Spin-Off Companies
materially contributes to a final determination that any or all of the
Distributions are taxable. School Specialty is also entering into a tax
indemnification agreement with the other Spin-Off Companies (the "Tax
Indemnification Agreement") under which the Spin-Off Company that is responsible
for the Adverse Tax Act will indemnify the other Spin-Off Companies for any
liability to indemnify U.S. Office Products under the Tax Allocation Agreement.
As a consequence, School Specialty will be liable for any Distribution Taxes
resulting from any Adverse Tax Act by School Specialty and liable (subject to
indemnification by the other Spin-Off Companies) for any Distribution Taxes
resulting from an Adverse Tax Act by the other Spin-Off Companies. If there is a
final determination that any or all of the Distributions are taxable and it is
determined that there has not been an Adverse Tax Act by either U.S. Office
Products or any of the Spin-Off Companies, 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.
As a result, School Specialty could become liable for a pro rata portion of
Distribution Taxes with respect not only to the School

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Specialty Distribution, but also any of the other Distributions. See "The
Spin-Off from U.S. Office Products--Tax Allocation Agreement and Tax
Indemnification Agreement" and "The Spin-Off from U.S. Office Products--U.S.
Federal Income Tax Consequences of the Distributons" for a detailed discussion
of the Tax Allocation Agreement and the Tax Indemnification Agreement and the
U.S. Federal Income Tax consequences of the Distributions.

RISKS RELATED TO ALLOCATION OF CERTAIN LIABILITIES

Under the Distribution Agreement, School Specialty will be liable for (i)
any liabilities arising out of or in connection with the business conducted by
it or its subsidiaries, (ii) its liabilities under the Employee Benefits
Agreement, Tax Allocation Agreement and related agreements described under "The
Spin-Off From U.S. Office Products", (iii) the U.S. Office Products debt that
has been allocated to the Company (see "The Spin-Off From U.S. Office
Products--Distribution Agreement--Debt"), (iv) liabilities under the securities
laws relating to this Prospectus and portions of the Information
Statement/Prospectus distributed to stockholders of U.S. Office Products in
connection with the School Specialty Distribution, as well as other securities
law liabilities related to the School Specialty business that arise from
information supplied to U.S. Office Products (or that should have been supplied,
but was not) by School Specialty, (v) U.S. Office Products' liabilities for
earn-outs from acquisitions in respect of School Specialty and its subsidiaries,
(vi) School Specialty's costs and expenses related to the Offering and its bank
financing, and (vii) $1.0 million of the transaction costs (including legal,
accounting, investment banking and financial advisory) and other fees incurred
by U.S. Office Products in connection with its Strategic Restructuring Plan.
Each of the other Spin-Off Companies will be similarly obligated to U.S. Office
Products. School Specialty and the other Spin-Off Companies have also agreed to
bear a pro rata portion of U.S. Office Products' liabilities under the
securities laws (other than claims relating solely to a specific Spin-Off
Company or relating specifically to the continuing businesses of U.S. Office
Products) and U.S. Office Products' general corporate liabilities (other than
debt, except for that specifically allocated to the Spin-Off Companies) incurred
prior to the Distributions (i.e., liabilities not related to the conduct of a
particular distributed or retained subsidiary's business) (the "Shared
Liabilities"). If one of the Spin-Off Companies defaults on an obligation owed
to U.S. Office Products, the non-defaulting Spin-Off Companies will be obligated
on a pro rata basis to pay such obligation ("Default Liability"). As a result of
the Shared Liabilities and Default Liability, School Specialty could be
obligated to U.S. Office Products in respect of obligations and liabilities not
related to its business or operations and over which neither it nor its
management has or has had any control or responsibility. The aggregate of the
Shared Liabilities and Default Liability for which any Spin-Off Company may be
liable is, however, limited to $1.75 million. The Company's pro rata share of
Shared Liabilities and Default Liability is described below under "The Spin-Off
from U.S. Office Products--The Distribution Agreement--Liabilities." Also see
"--Potential Liability for Taxes Related to the Distributions".

RISKS RELATED TO INTEGRATION OF OPERATIONS AND ACQUISITIONS

An important element of School Specialty's business strategy for its
distribution divisions is to integrate its acquisitions into its existing
operations. There can be no assurance that School Specialty will be able to
integrate future acquisitions in a timely manner without substantial costs,
delays, or other problems. Once integrated, acquisitions may not achieve sales,
profitability, and asset productivity commensurate with School Specialty's
existing divisions. In addition to integration risks for distribution divisions,
acquisitions of both distribution divisions and specialty brand companies
involve a number of special risks, including adverse short-term effects on
School Specialty's reported operating results (including those adverse
short-term effects caused by severance payments to employees of acquired
companies, restructuring charges associated with the acquisitions and other
expenses associated with a change of control, as well as non-recurring
acquisition costs including accounting and legal fees, investment banking fees,
recognition of transaction-related obligations, and various other acquisition-
related costs), the diversion of management's time and attention, the dependence
on retaining, hiring,

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and training key personnel, the amortization of acquired intangible assets, and
risks associated with unanticipated problems or liabilities, some or all of
which could have a material adverse effect on School Specialty's operations and
financial condition. Furthermore, although School Specialty conducts due
diligence and generally requires representations, warranties, and
indemnifications from the former owners of acquired companies, there can be no
assurance that such owners will have accurately represented the financial and
operating conditions of their companies. If an acquired company's financial or
operating results were misrepresented, the acquisition could have a material
adverse effect on the results of operations and financial condition of School
Specialty. See "Business--Company Growth Strategy--Pursue Acquisitions
Aggressively".

DEPENDENCE UPON ACQUISITIONS FOR FUTURE GROWTH

One of School Specialty's strategies is to increase its revenues and the
markets it serves through the acquisition of additional school supply
distribution businesses. There can be no assurance that suitable candidates for
acquisitions can be identified or, if suitable candidates are identified, that
acquisitions can be completed on acceptable terms, if at all. There can be no
assurance that future acquisitions will prove profitable at the time of their
acquisition or will achieve sales and profitability that justify the investment
therein. The failure to complete acquisitions and continue its expansion could
have a material adverse effect on School Specialty's financial condition. In
addition, prior to the School Specialty Distribution, School Specialty's
acquisitions were completed with substantial business, legal, and accounting
assistance from U.S. Office Products, and some of the acquisitions were paid for
with U.S. Office Products Common Stock. The pace of School Specialty's
acquisition program may be adversely affected by the absence of U.S. Office
Products' support for the acquisitions. Also, School Specialty intends to use
School Specialty Common Stock to pay for a portion of the consideration for its
acquisitions, and therefore, if the owners of potential acquisition candidates
are not willing to receive, or School Specialty is not able to issue, shares of
School Specialty Common Stock in exchange for their business, School Specialty's
acquisition program could be adversely affected. Furthermore, the Company's
ability to pay for acquisitions with stock may be materially limited in the
two-year period following the School Specialty Distribution. See "--Possible
Limitations on Issuances of Common Stock".

POSSIBLE LIMITATIONS ON ISSUANCES OF COMMON STOCK

Section 355(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), which was added in 1997, generally provides that a company that
distributes shares of a subsidiary in a spin-off that is otherwise tax-free will
incur U.S. federal income tax liability if 50% or more, by vote or value, of the
capital stock of either the company making the distribution or the spun-off
subsidiary is acquired by one or more persons acting pursuant to a plan or
series of related transactions that includes the spin-off. Stock acquired by
certain related persons is aggregated in determining whether the 50% test is
met. There is a presumption that any acquisition occurring two years before or
after the spin-off is pursuant to a plan that includes the spin-off. However,
the presumption may be rebutted by establishing that the spin-off and such
acquisition are not part of a plan or series of related transactions. As a
result of the provisions of Section 355(e), there can be no assurance that
issuances of stock by School Specialty, including issuances in connection with
an acquisition of another business by School Specialty, will not create a tax
liability for U.S. Office Products. This limitation could adversely affect the
pace of School Specialty's acquisitions and its ability to issue Common Stock
for other purposes, including equity offerings.

School Specialty is entering into the Tax Allocation Agreement and the Tax
Indemnification Agreement pursuant to which School Specialty will be liable to
U.S. Office Products and the other Spin-Off Companies if its actions or
omissions materially contribute to a final determination that the School
Specialty Distribution is taxable. See "--Potential Liability for Taxes Related
to the Distributions" and "The Spin-Off From U.S. Office Products--Tax
Allocation Agreement and Tax Indemnification Agreement."

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RISKS RELATED TO INABILITY TO USE POOLING-OF-INTERESTS METHOD TO ACCOUNT FOR
FUTURE ACQUISITIONS

Generally accepted accounting principles require that an entity be
autonomous for a period of two years before it is eligible to complete business
combinations under the pooling-of-interests method. As a result of School
Specialty being a wholly-owned subsidiary of U.S. Office Products prior to the
Distribution, School Specialty will be unable to satisfy this criterion for a
period of two years following the Distribution. Therefore, School Specialty will
be precluded from completing business combinations under the
pooling-of-interests method for a period of two years and any business
combinations completed by School Specialty during such period will be accounted
for under the purchase method resulting in the recording of goodwill. See
"--Material Amount of Goodwill".

SEASONALITY: FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

School Specialty's business is subject to seasonal influences, with sales
and profitability substantially higher from May to October due to increased
school orders during these months. As a result of this seasonality,
historically, School Specialty has earned more than 100% of its annual net
income in the first six months of its fiscal year and has historically operated
at a loss in its third fiscal quarter. Also, quarterly results may be materially
affected by the timing of acquisitions and the timing and magnitude of
acquisition assimilation costs. Therefore, operating results for any quarter are
not necessarily indicative of the results that may be achieved for any
subsequent fiscal quarter or full fiscal year. Fluctuations caused by variations
in quarterly results may adversely affect the market price of the School
Specialty Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business".

RELIANCE ON KEY PERSONNEL

School Specialty's operations depend on the continued efforts of Daniel P.
Spalding, its Chief Executive Officer, its other executive officers, and the
senior management of certain of its subsidiaries. Furthermore, School
Specialty's operations will likely depend on the senior management of certain of
the companies that may be acquired in the future. If any of these people become
unable to continue in his or her present role, or if School Specialty is unable
to attract and retain other skilled employees, its business could be adversely
affected. School Specialty does have employment contracts with some Named
Officers, as defined herein, but most of the Companies' executive officers and
senior management do not have employment contracts with School Specialty. See
"Management--Director Compensation and Other Arrangements". School Specialty
does not have and does not intend to obtain key man life insurance covering any
of its executive officers or other members of senior management of its
subsidiaries. In addition, Jonathan J. Ledecky will serve as a director and an
employee of School Specialty and is expected to provide services to School
Specialty after the School Specialty Distribution pursuant to an agreement
entered into between Mr. Ledecky and U.S Office Products which provides that the
Company and the other Spin-Off Companies will succeed to certain rights of, and
obligations under, such agreement following the Distribution and an expected
employment agreement with School Specialty. See "Management--Director
Compensation and Other Arrangements". Mr. Ledecky will also serve as a director
of each of the other Spin-Off Companies, and is the director or an officer of
other public companies. Mr. Ledecky may be unable to devote substantial time to
the activities of School Specialty.

DEPENDENCE ON SYSTEMS

School Specialty believes that one of the competitive advantages of its
distribution divisions is its information systems, including its proprietary
PC-based customer Order Management System ("OMS"). School Specialty's operations
in each of its integrated divisions under School Specialty are generally

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dependent on these systems, which are run on a host system located at School
Specialty's headquarters in Appleton, Wisconsin. Each division of School
Specialty is linked to School Specialty's host system and disruption or
unavailability of these links could have a material adverse effect on School
Specialty's business and results of operations.

None of School Specialty's subsidiaries has a redundant computer system or a
redundant dedicated communication line. School Specialty has taken precautions
to protect itself from events that could interrupt its operations.
Notwithstanding these precautions, there can be no assurance that a fire, flood
or other natural disaster affecting School Specialty's system or its
communication lines would not disable the system or prevent the system from
communicating with School Specialty's divisions or the specialty brand
subsidiaries. The occurrence of any of these events would have a material
adverse effect on School Specialty's operations and financial condition.

School Specialty does not expect that it will incur any material costs and
expenses to meet information standards for Year 2000 compliance; however, there
is no assurance that School Specialty's customers or vendors meet information
standards for Year 2000 compliance, and their failure to meet such standards
could adversely affect School Specialty's revenues and product costs.

RISK OF RAPID GROWTH; ABSENCE OF HISTORY AS A STAND-ALONE COMPANY

Since 1991, School Specialty and U.S. Office Products have significantly
expanded the scope of School Specialty's operations by acquiring sixteen
regional distributors of educational supplies in different regions of the United
States and four specialty brand school supply companies. All of School
Specialty's specialty brand acquisitions and eleven of its regional distribution
acquisitions have occurred since June 1996. There can be no assurance that
School Specialty's management and financial controls, personnel, computer
systems, and other corporate support systems will be adequate to manage the
increased size and scope of School Specialty's operations as a result of School
Specialty's recently completed acquisitions.

Prior to the School Specialty Distribution, certain general and
administrative functions relating to School Specialty's business (including
legal, accounting, purchasing and management information services) were handled
by U.S. Office Products. School Specialty's future performance will depend on
its ability to function as a stand-alone entity, to finance and manage its
expanding operations and to adapt its information systems to changes in its
business. As a result, School Specialty's expenses are likely to be higher than
when it was a part of U.S. Office Products, and School Specialty may experience
disruptions of general and administrative functions that it would not have
encountered as a part of U.S. Office Products. Furthermore, the financial
information included herein may not necessarily reflect what the results of
operations and financial condition would have been had School Specialty been a
separate, stand-alone entity during the periods presented or be indicative of
future results of operations and financial condition of School Specialty.

DEPENDENCE ON KEY SUPPLIERS AND SERVICE PROVIDERS

School Specialty is dependent on (i) a limited number of suppliers for
certain of its product lines, particularly its franchise furniture lines, and
(ii) a limited number of service providers, such as delivery service from United
Parcel Service. Any interruption of supply from current vendors or any material
increased costs, particularly in the peak season of June through September,
could cause significant delays in the shipment of such products and could have a
material adverse effect on School Specialty's business, financial condition, and
results of operations. Increases in freight costs charged to School Specialty or
inability to ship products, whether real or perceived, could have a material
adverse effect on School Specialty's business, financial condition, and results
of operations. In addition, as part of its business strategy, School Specialty
strives to reduce its number of suppliers and minimize duplicative lines, which
may have the effect of increasing its dependence on remaining vendors. The
United Parcel

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Service strike during August 1997 had an adverse effect on School Specialty due
to the perceived inability of School Specialty to ship products.

COMPETITION

The market for school supplies is highly competitive and fragmented. School
Specialty estimates that over 3,400 companies distribute educational materials
to pre-K-12 schools as a primary focus of their business. In addition, School
Specialty competes with alternate channel distributors such as office product
contract stationers and superstores, which may continue to broaden their product
lines in school supplies. Some of these competitors have greater financial
resources and buying power than School Specialty. School Specialty believes that
the educational supplies market will consolidate over the next several years,
which may make School Specialty's general and specialty supply businesses more
competitive. In addition, there may be increasing competition for acquisition
candidates and there can be no assurance that acquisitions will continue to be
available to School Specialty on favorable terms, if at all. See
"Business--Competition".

MATERIAL AMOUNT OF GOODWILL

Approximately $97.5 million, or 47.7%, of School Specialty's pro forma total
assets as of January 24, 1998 represents intangible assets, the significant
majority of which is goodwill. Goodwill represents the excess of cost over the
fair market value of net assets acquired in business combinations accounted for
under the purchase method. School Specialty generally amortizes goodwill on a
straight line method over a period of 40 years with the amount amortized in a
particular period constituting a non-cash expense that reduces School
Specialty's net income. Amortization of goodwill resulting from certain past
acquisitions, and additional goodwill recorded in certain acquisitions may not
be deductible for tax purposes. In addition, School Specialty will be required
to periodically evaluate the recoverability of goodwill by reviewing the
anticipated undiscounted future cash flows from the operations of the acquired
companies and comparing such cash flows to the carrying value of the associated
goodwill. If goodwill becomes impaired, School Specialty would be required to
write down the carrying value of the goodwill and incur a related charge to its
income. A reduction in net income resulting from the amortization or write down
of goodwill could have a material and adverse impact upon the market price of
School Specialty Common Stock.

NO PRIOR PUBLIC TRADING MARKET

Prior to the School Specialty Distribution, there has been no public market
for School Specialty Common Stock, and there can be no assurance that an active
trading market will develop or, if one does develop, that it will continue. The
price of School Specialty Common Stock is being determined in the marketplace
and may be influenced by many factors, including (i) the depth and liquidity of
the market for School Specialty Common Stock, (ii) developments affecting School
Specialty's businesses generally, (iii) investor perception of the school
supplies industry generally, and (iv) general economic and market conditions.
See "Underwriting" for a discussion of factors considered in determining the
initial public offering price.

NO DIVIDENDS

School Specialty does not expect to pay cash dividends on School Specialty
Common Stock in the foreseeable future. In addition, School Specialty's ability
to pay dividends may be restricted from time to time by financial covenants in
its credit agreements. See "Dividend Policy".

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DILUTION

Purchasers of Common Stock in this Offering will sustain a substantial and
immediate dilution of $13.18 per share (determined by subtracting its adjustable
pro forma book value per share as of January 24, 1998, adjusted to give effect
to the Offering, from the assumed initial public offering price). In addition,
the exercise of stock options could have a further dilutive effect. See
"Dilution".

THE SPIN-OFF FROM U.S. OFFICE PRODUCTS

Prior to this Offering, School Specialty has been a wholly-owned subsidiary
of U.S. Office Products. At the time of this Offering, School Specialty holds
all of the business and assets of, and is responsible for substantially all of
the liabilities associated with, U.S. Office Products' Educational Supplies and
Products Division. Concurrently with this Offering, the 12,187,723 shares of
School Specialty Common Stock are being distributed to the stockholders of U.S.
Office Products of record as of 5:00 p.m. E.D.T. on June 9, 1998. U.S. Office
Products is spinning off School Specialty as part of the Strategic Restructuring
Plan in which U.S. Office Products is spinning off the shares of the four
companies that will conduct U.S. Office Products' current print management,
technology solutions, educational supplies and corporate travel services
businesses.

In connection with the School Specialty Distribution, School Specialty is
entering into a series of agreements with U.S. Office Products and the other
Spin-Off Companies to provide mechanisms for an orderly transition and to define
certain relationships among School Specialty, U.S. Office Products and the other
Spin-Off Companies after the School Specialty Distribution. These agreements
are: a distribution agreement (the "Distribution Agreement") among School
Specialty, U.S. Office Products and the other Spin-Off Companies; a tax
allocation agreement (the "Tax Allocation Agreement") among School Specialty,
U.S. Office Products and the other Spin-Off Companies; an employee benefits
agreement (the "Employee Benefits Agreement") among School Specialty, U.S.
Office Products and the other Spin-Off Companies; and a tax indemnification
agreement (the "Tax Indemnification Agreement") among School Specialty and the
Other Spin-Off Companies. The terms of the Distribution Agreement, the Tax
Allocation Agreement, the Tax Indemnification Agreement and the Employee
Benefits Agreement described herein have been determined while School Specialty
is a wholly-owned subsidiary of U.S. Office Products. In addition, the agreement
between U.S. Office Products and an affiliate ("CD&R") of an investment fund
managed by Clayton, Dubilier & Rice, Inc. relating to CD&R's investment in U.S.
Office Products (the "Investment Agreement") specifies certain terms of these
agreements and provides that they are subject to CD&R's reasonable approval.
Therefore, these agreements are not the result of arm's-length negotiations
between independent parties.

DISTRIBUTION AGREEMENT

TRANSFER OF SUBSIDIARIES AND ASSETS. The Distribution Agreement will
provide for the transfer from U.S. Office Products to School Specialty of
substantially all of the equity interests in the U.S. Office Products
subsidiaries that are engaged in the business of School Specialty as well as the
transfer, in certain instances, of other assets related to the business of
School Specialty. It also will provide that the recovery on any claims under
applicable acquisition agreements that U.S. Office Products may have against the
persons who sold businesses to U.S. Office Products that will become part of
School Specialty in connection with the Distributions (the "School Specialty
Acquisition Indemnity Claims") will be shared between U.S. Office Products and
School Specialty. In addition, to the extent that the School Specialty
Acquisition Indemnity Claims are currently secured by the pledge of stock of
U.S. Office Products, the pledged shares will be used, subject to the final
resolution of the claim, to reimburse U.S. Office Products and School Specialty
for their respective damages and expenses, in accordance with an agreed upon
allocation of recovery rights, which will be determined prior to the School
Specialty Distribution.

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DEBT. The Distribution Agreement allocates a specified amount of U.S.
Office Products' debt outstanding under its credit facilities to each Spin-Off
Company and requires 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 (the date of the Investment Agreement) 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 million of U.S. Office
Products' debt has been allocated to School Specialty, and since January 12,
1998, U.S. Office Products has incurred an additional $3.3 million of debt in
connection with School Specialty's acquisition of Education Access. Prior to the
Distribution, School Specialty is entering into the credit facility described
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Financial Resources" and is borrowing $83.3 million
under the facility to pay off debt of U.S. Office Products.

School Specialty's historical balance sheets reflect payables to U.S. Office
Products, which arose primarily as a result of U.S. Office Products' funding of
the cash portions of acquisitions, paying the acquisition costs and repaying
outstanding debt of acquired companies, as well as an allocation of U.S. Office
Products' corporate expenses. The amount of such payables to U.S. Office
Products at January 24, 1998 in excess of the $80 million of U.S. Office
Products' debt allocated to School Specialty under the Distribution Agreement
was forgiven by U.S. Office Products. Accordingly, School Specialty's historical
balance sheet as of January 24, 1998 includes aggregate payables to U.S. Office
Products of $80 million and a capital contribution by U.S. Office Products equal
to such excess. School Specialty's pro forma balance sheet as of January 24,
1998 reflects the $3.3 million of debt incurred by U.S. Office Products in
School Specialty's acquisition of Education Access as an additional payable to
U.S. Office Products and the refinancing of the payable to U.S. Office Products
with the proceeds of the $83.3 million borrowing under the new credit facility.

LIABILITIES. Under the Distribution Agreement, School Specialty will be
liable for (i) any liabilities arising out of or in connection with the business
conducted by it or its subsidiaries, (ii) its liabilities under the Employee
Benefits Agreement, Tax Allocation Agreement and related agreements described
below, (iii) the U.S. Office Products debt that has been allocated to the
Company as described above, (iv) liabilities under the securities laws relating
to this Prospectus and portions of the Information Statement/Prospectus
distributed to stockholders of U.S. Office Products in connection with the
School Specialty Distribution, as well as other securities law liabilities
related to the School Specialty business that arise from information supplied to
U.S. Office Products (or that should have been supplied, but was not) by School
Specialty, (v) U.S. Office Products' liabilities for earn-outs from acquisitions
in respect of School Specialty and its subsidiaries, (vi) School Specialty's
costs and expenses related to the Offering and its new credit facility, and
(vii) $1.0 million of the transaction costs (including legal, accounting,
investment banking and financial advisory) and other fees incurred by U.S.
Office Products in connection with its Strategic Restructuring Plan. Each of the
other Spin-Off Companies will be similarly obligated to U.S. Office Products.
School Specialty and the other Spin-Off Companies have also agreed to bear a pro
rata portion of U.S. Office Products' liabilities under the securities laws
(other than claims relating solely to a specific Spin-Off Company or relating
specifically to the continuing businesses of U.S. Office Products) and U.S.
Office Products' general corporate liabilities (other than debt, except for that
specifically allocated to the Spin-Off Companies) incurred prior to the
Distributions (i.e., liabilities not related to the conduct of a particular
distributed or retained subsidiary's business) (the "Shared Liabilities"). If
one of the Spin-Off Companies defaults on an obligation owed to U.S. Office
Products, the non-defaulting Spin-Off Companies will be obligated on a pro rata
basis to pay such obligation ("Default Liability"). The aggregate of the Shared
Liabilities and Default Liability for which any Spin-Off Company may be liable
is, however, limited to $1.75 million.

The Spin-Off Companies' pro rata share of Shared Liabilities will be, based
upon the fiscal year ended April 25, 1998, the average of (a) their revenues
relative to those of U.S. Office Products and

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(b) their operating income relative to that of U.S. Office Products; the
residual will be U.S. Office Products' pro rata share. Based upon financial data
for the nine-month period ended January 24, 1998, the Company's pro rata share
of Shared Liabilities would have been 11.9%, the other Spin-Off Companies' pro
rata share would have aggregated 22.5%, and U.S. Office Products' pro rata share
would have been 65.6%. As to any Default Liability, each non-defaulting Spin-Off
Company's pro rata share will be increased to include a portion of the
defaulting Spin-Off Company's pro rata share.

The Distribution Agreement will provide that each party will indemnify and
hold all of the other parties harmless from any and all liabilities for which
the former assumed liability under the Distribution Agreement. All indemnity
payments will be subject to adjustment upward or downward to take account of tax
costs or tax benefits as well as insurance proceeds. If there are any claims
made under U.S. Office Products' existing insurance policies, the amount of any
deductible or retention will be allocated by U.S. Office Products among the
claimants in a fair and reasonable manner.

OTHER PROVISIONS. The Distribution Agreement will have other customary
provisions including provisions relating to mutual release, access to
information, witness services, confidentiality and alternative dispute
resolution.

TAX ALLOCATION AGREEMENT AND TAX INDEMNIFICATION AGREEMENT

The Tax Allocation Agreement provides that each Spin-Off Company will be
responsible for its respective share of U.S. Office Products' consolidated tax
liability for the years that each such corporation was included in U.S. Office
Products' consolidated U.S. federal income tax return. The Tax Allocation
Agreement also provides for sharing, where appropriate, of state, local and
foreign taxes attributable to periods prior to the Distributions.

The Tax Allocation Agreement further provides that the Spin-Off Companies
will jointly and severally indemnify U.S. Office Products for any Distribution
Taxes assessed against U.S. Office Products if an Adverse Tax Act of any of the
Spin-Off Companies materially contributes to a final determination that any or
all of the Distributions are taxable. School Specialty is also entering into the
Tax Indemnification Agreement with the other Spin-Off Companies under which 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 consequence, School Specialty will be liable for any
Distribution Taxes resulting from any Adverse Tax Act by School Specialty and
liable (subject to indemnification by the other Spin-Off Companies) for any
Distribution Taxes resulting from an Adverse Tax Act by the other Spin-Off
Companies. If there is a final determination that any or all of the
Distributions are taxable and it is determined that there has not been an
Adverse Tax Act by either U.S. Office Products or any of the Spin-Off Companies,
each of U.S. Office Products and the Spin-Off Companies will be liable for its
pro rata portion of such Distribution Taxes based on the value of each company's
common stock after the Distributions. As a result, School Specialty could become
liable for a pro rata portion of Distribution Taxes with respect not only to the
School Specialty Distribution but also any of the other Distributions. The
liabilities of School Specialty under the Tax Allocation Agreement and the Tax
Indemnification Agreement are not subject to any limits.

EMPLOYEE BENEFITS AGREEMENT

In connection with the School Specialty Distribution, U.S. Office Products
is entering into the Employee Benefits Agreement with School Specialty and the
other Spin-Off Companies to provide for an orderly transition of benefits
coverage between U.S. Office Products and the Spin-off Companies. Pursuant to
this agreement, the respective Spin-Off Companies will retain or assume
liability for employment-related claims and severance for persons currently or
previously employed by the respective Spin-Off Companies and their subsidiaries,
while U.S. Office Products and its post-Distribution subsidiaries will retain or
assume responsibility for their current and previous employees. The Employee
Benefits

424B1 17th Page of 115 TOC 1st Previous Next ↓Bottom Just 17th
Agreement reflects U.S. Office Products' expectation that each of the Spin-Off
Companies will establish 401(k) plans for their respective employees effective
as of, or shortly after, the Distribution Date and that U.S. Office Products
will transfer 401(k) accounts to those plans as soon as practicable. The
agreement also provides for spinning off portions of the U.S. Office Products'
cafeteria plan that relate to employees of the Spin-Off Companies (and their
subsidiaries) and having those spun-off plans assume responsibilities for claims
submitted on or after the Distribution.

U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTIONS

Pursuant to the Tax Allocation Agreement and Tax Indemnification Agreement,
see "--Tax Allocation Agreement and Tax Indemnification Agreement," School
Specialty could be liable for Distribution Taxes if any or all of the
Distributions fail to qualify as tax-free spin-offs under Section 355 of the
Code or are taxable under Section 355(e) of the Code.

THE TAX OPINION. Wilmer, Cutler & Pickering has delivered an opinion (the
"Tax Opinion") stating that for U.S. federal income tax purposes the
Distributions will qualify as tax-free spin-offs under Section 355 of the Code
and will not be taxable under Section 355(e) of the Code. The Tax Opinion is
based on the accuracy as of the time of the Distributions of factual
representations made by U.S. Office Products, the Spin-Off Companies and CDR-PC
Acquisition, L.L.C., and certain other information, data, documentation and
other materials that Wilmer, Cutler & Pickering has deemed necessary.

The Tax Opinion represents Wilmer, Cutler & Pickering's best judgment of how
a court would rule. However, the Tax Opinion is not binding upon either the IRS
or any court. A ruling has not been, and will not be, sought from the IRS with
respect to the U.S. federal income tax consequences of the Distributions.

Assuming the Distributions qualify as tax-free spin-offs under Section 355
and are not taxable under Section 355(e), no gain or loss will be recognized by
U.S. Office Products as a result of the Distributions.

CONSEQUENCES OF FAILURE TO QUALIFY AS A TAX-FREE DISTRIBUTION. As noted
above, the Tax Opinion is not binding on the IRS or the courts. Prospective
investors should be aware that the requirements of Section 355 pertaining to
business purpose, active trade or business, and absence of a device for
distribution of earnings and profits, as well as the requirements of Section
355(e) pertaining to a plan or series of related transactions to acquire 50% or
more by vote or value of a company, are highly dependent on factual
interpretations, are to a significant extent subjective in nature, and have a
relative absence of authority addressing their application to the particular
facts presented by the Distributions. Accordingly, the IRS and/or a court could
reach a conclusion that differs from the conclusions in the Tax Opinion.

BUSINESS PURPOSE. In order for a Distribution to qualify as a tax-free
spin-off under Section 355, it must be motivated, in whole or substantial part,
by one or more corporate business purposes. U.S. Office Products has represented
that the Distributions were motivated, in whole or substantial part, to allow
U.S. Office Products and the Spin-Off Companies to adopt strategies and pursue
objectives that are more appropriate to their respective industries and stages
of growth; to allow the Spin-Off Companies to pursue independent acquisition
programs with a more focused use of resources and, where stock is used as
consideration, to allow the Spin-Off Companies to provide stock of a public
company that is in the same industry as the business being acquired; to allow
U.S. Office Products and the Spin-Off Companies to offer their respective
employees more focused compensation packages; and to make possible the Equity
Investment which the Board of Directors of U.S. Office Products concluded would
contribute to U.S. Office Products' development, based on the skills and
experience of CD&R, Inc. Based on these representations and certain other
information, data, documentation and other materials, Wilmer, Cutler & Pickering
has delivered the Tax Opinion stating that each Distribution satisfies the
business purpose requirement of Section 355. However, although similar
rationales have been accepted

424B1 18th Page of 115 TOC 1st Previous Next ↓Bottom Just 18th
by the IRS in other circumstances as sufficient to meet the business purpose
requirement of Section 355, there can be no assurance that the IRS will not
assert that the business purpose requirement is not satisfied.

ACTIVE TRADE OR BUSINESS. In order for the distribution of the stock of a
Spin-Off Company (other than Navigant International, Inc. ("Navigant"), the
Spin-Off Company acquiring U.S. Office Products' travel business) to qualify as
a tax-free spin-off under Section 355, both the Spin-Off Company and U.S. Office
Products must be engaged in an active trade or business that has been actively
conducted for the five-year period preceding the Distributions, taking into
account only businesses that have been acquired in transactions in which no gain
or loss was recognized. In order for the distribution of the stock of Navigant
to qualify as a tax-free spin-off under Section 355, substantially all of the
assets of Navigant must consist of the stock of Professional Travel Corporation
("Professional Travel"), and Professional Travel and U.S. Office Products must
meet the requirements described in the preceding sentence. Whether current and
historical business activity constitutes an active trade or business, and
whether any gain or loss should have been recognized in an acquisition
structured and reported as a nontaxable transaction, turn in some instances on
the application of subjective legal standards and on factual determinations,
such as intentions of the parties involved. Based on the representations of U.S.
Office Products and the Spin-Off Companies, Wilmer, Cutler & Pickering has
delivered the Tax Opinion stating that each Distribution satisfies the active
trade or business requirement. However, because of the inherently subjective
nature of important elements of the active trade or business requirement, and
because the IRS may challenge the representations upon which Wilmer, Cutler &
Pickering relies, there can be no assurance that the IRS will not assert that
the active trade or business requirement is not satisfied.

ABSENCE OF A DEVICE FOR DISTRIBUTION OF EARNINGS AND PROFITS. A
Distribution will not qualify as a tax-free spin-off under Section 355 if the
Distribution was used principally as a device for the distribution of the
earnings and profits of U.S. Office Products or the Spin-Off Company. Treasury
regulations provide that this test is applied based on all the facts and
circumstances, including the presence or absence of factors described in the
Treasury Regulations as "device factors" and "nondevice factors." Application of
this test is uncertain in part because of its subjective nature. Based on the
representations of U.S. Office Products and the Spin-Off Companies, Wilmer,
Cutler & Pickering has delivered the Tax Opinion stating that none of the
Distributions is a transaction used principally as a device for the distribution
of earnings and profits of either U.S. Office Products or any of the Spin-Off
Companies. However, because of the inherently subjective nature of the device
test (including the subjectivity involved in assigning weight to various
factors), and because the IRS may challenge the representations upon which
Wilmer, Cutler & Pickering relies, there can be no assurance that the IRS will
not assert that any or all of the Distributions are transactions used
principally as a device for the distribution of earnings and profits.

EFFECT OF POST-DISTRIBUTION TRANSACTIONS. Section 355(e), which was added
in 1997, generally provides that a company that distributes shares of a
subsidiary in a spin-off that is otherwise tax-free will incur U.S. federal
income tax liability if 50% or more, by vote or value, of the capital stock of
either the company making the distribution or the subsidiary is acquired by one
or more persons acting pursuant to a plan or a series of related transactions
that includes the spin-off. Stock acquired by certain related persons is
aggregated in determining whether this 50% test is met. There is a presumption
that any acquisition of 50% or more, by vote or value, of the capital stock of
the company or the subsidiary occurring two years before or after the spin-off
is pursuant to a plan that includes the spin-off. However, the presumption may
be rebutted by establishing that the spin-off and the acquisition are not part
of a plan or a series of related transactions. Based on the representations of
U.S. Office Products, the Spin-Off Companies and CDR-PC, L.L.C., and the
assumption that no Distribution is part of a plan that is outside the knowledge
of U.S. Office Products and the Spin-Off Companies pursuant to which one or more
persons will acquire directly or indirectly 50% or more by vote or value of the
capital stock of U.S. Office Products or of any Spin-Off Company, Wilmer, Cutler
& Pickering has delivered the Tax Opinion

424B1 19th Page of 115 TOC 1st Previous Next ↓Bottom Just 19th
stating that the Distributions will not be taxable under Section 355(e).
However, there can be no assurance that the IRS will not assert that any or all
of the Distributions are taxable under Section 355(e).

If a Distribution fails to qualify as a tax-free spin-off or is taxable
under Section 355(e), U.S. Office Products will recognize gain equal to the
difference between the fair market value of the common stock of the Spin-Off
Company and U.S. Office Products' adjusted tax basis in the common stock of the
Spin-Off Company (on the Distribution Date). If U.S. Office Products were to
recognize gain on one or more Distributions, such gain would likely be
substantial.

USE OF PROCEEDS

The net proceeds to School Specialty from the sale of the 2,125,000 shares
of Common Stock offered pursuant to the Offering and the 250,000 shares offered
to Messrs. Spalding, Vander Zanden and Pate are approximately $32,735,625
($37,330,406 if the Underwriters' over-allotment option is exercised in full),
after deducting the underwriting discount and offering expenses payable by the
Company.

School Specialty intends to use the net proceeds from the Offering and the
sale of 250,000 shares of Common Stock to Messrs. Spalding, Vander Zanden and
Pate to repay a portion of the $83.3 million to be borrowed under a $250 million
credit facility to refinance all amounts payable to U.S. Office Products. After
such repayment, approximately $200 million will be available under the credit
facility (subject to compliance with financial covenants), which may be used for
general corporate purposes, including working capital, and for acquisitions.

DIVIDEND POLICY

School Specialty does not anticipate declaring and paying cash dividends on
School Specialty Common Stock in the foreseeable future. School Specialty's
ability to pay dividends may be restricted from time to time by financial
covenants in its credit agreements.

424B1 20th Page of 115 TOC 1st Previous Next ↓Bottom Just 20th
DILUTION

The pro forma net tangible book value of School Specialty at January 24,
1998 was $1.0 million, or $.09 per share of Common Stock. Pro forma net tangible
book value per share is determined by dividing the pro forma net tangible book
value (total pro forma tangible assets less total pro forma liabilities) of
School Specialty by the pro forma number of shares of Common Stock outstanding.
Without taking into account any changes in the pro forma net tangible book value
of School Specialty, other than to give effect to the sale of the shares of
Common Stock to Messrs. Spalding, Vander Zanden and Pate and those offered
hereby (after deducting the underwriting discount and offering expenses to be
paid by the Company) and the receipt of the net proceeds therefrom, the adjusted
pro forma net tangible book value of School Specialty at January 24, 1998 would
have been $33.8 million or $2.32 per share of Common Stock. This represents an
immediate dilution in net tangible book value of $13.18 per share to new
investors purchasing shares in this Offering. The following table illustrates
this per share dilution.

[Enlarge/Download Table]

Initial public offering price per share.................................... $ 15.50

Pro forma net tangible book value per share at January 24, 1998.......... $ .09
Increase per share attributable to new investors(1)...................... 2.23
---------
Pro forma net tangible book value after the offering....................... 2.32
---------
Dilution per share to new investors(2)(3).................................. $ 13.18
---------
---------

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

(1) After deduction of the underwriting discount and offering expenses to be
paid by the Company and assuming no exercise of the Underwriters'
over-allotment option.

(2) Determined by subtracting the adjusted pro forma net tangible book value per
share after the offering from the amount of cash paid by a new investor for
one share of Common Stock.

(3) The foregoing information does not give effect to the issuance of shares of
Common Stock pursuant to stock options granted or to be granted. See
"Management--Executive Compensation" and "-- Replacement of Outstanding U.S.
Office Products' Options".

424B1 21st Page of 115 TOC 1st Previous Next ↓Bottom Just 21st
CAPITALIZATION

The following table sets forth the capitalization of School Specialty at
January 24, 1998 (i) on a historical basis, (ii) on a pro forma basis to reflect
the refinancing of all amounts payable to U.S. Office Products, the purchase
acquisition completed subsequent to January 24, 1998 and the Distribution and
(iii) on such pro forma basis as adjusted to give effect to this Offering, the
direct sale by the Company of 250,000 shares of Common Stock to Messrs.
Spalding, Vander Zanden and Pate and the application of the net proceeds
therefrom to the payment of debt (assuming no exercise of the Underwriter's
overallotment option, after deducting the estimated offering expenses). This
table should be read in conjunction with the "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the historical
consolidated financial statements and the pro forma combined financial
statements of School Specialty, and the related notes to each thereof, included
elsewhere in this Prospectus.

[Enlarge/Download Table]

JANUARY 24, 1998
----------------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
----------- ----------- --------------
(IN THOUSANDS)

Short-term debt......................................................... $ 272 $ 272 $ 272
Short-term payable to U.S. Office Products.............................. 16,873
----------- ----------- --------------
Total short-term debt............................................. $ 17,145 $ 272 $ 272
----------- ----------- --------------
----------- ----------- --------------

Long-term debt.......................................................... $ 385 $ 82,978 $ 50,242
Long-term payable to U.S. Office Products............................... 62,470

Stockholder's equity:
Preferred stock (1,000,000 shares authorized; no shares
outstanding)........................................................
Common stock, $0.001 par value (150,000,000 shares authorized;
12,187,723 shares outstanding pro forma; 14,562,723 shares
outstanding pro forma, as adjusted)(1).............................. 12 15
Additional paid-in capital............................................ 93,301 126,034
Divisional equity..................................................... 93,313
Retained earnings..................................................... 5,179 5,179 5,179
----------- ----------- --------------
Total stockholder's equity........................................ 98,492 98,492 131,228
----------- ----------- --------------
Total capitalization.............................................. $ 161,347 $ 181,470 $ 181,470
----------- ----------- --------------
----------- ----------- --------------

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

(1) Outstanding shares do not include shares authorized for issuance upon
exercise of stock options granted or to be granted. See
"Management--Replacement of Outstanding U.S. Office Products' Options" and
"--1998 Stock Incentive Plan". The approximately 12.2 million shares of
Common Stock outstanding on a pro forma basis was calculated by dividing the
approximately 109.7 million shares of U.S. Office Products common stock
expected to be outstanding on the Distribution Date by nine, which is the
Distribution Ratio. The approximately 14.6 million shares of Common Stock
outstanding on a pro forma basis, as adjusted, was calculated by adding to
the approximately 12.2 million shares (a) the 2,125,000 shares offered
hereby and (b) the 250,000 shares to be sold to Messrs. Spalding, Vander
Zanden and Pate.

424B1 22nd Page of 115 TOC 1st Previous Next ↓Bottom Just 22nd
SELECTED FINANCIAL DATA

The Selected Financial Data provided herein should be read in conjunction
with the historical financial statements, including the notes thereto, the pro
forma financial information, including the notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations", all
of which appear elsewhere in this Prospectus.

The historical Selected Financial Data for the years ended December 31, 1994
and 1995, the four months ended April 30, 1996 and the fiscal year ended April
26, 1997 (except pro forma amounts) have been derived from School Specialty's
consolidated financial statements that have been audited and are included
elsewhere in the Prospectus. The historical Selected Financial Data for the
years ended December 31, 1992 and 1993 have been derived from unaudited
consolidated financial statements which are not included elsewhere in this
Prospectus. The Selected Financial Data for the nine months ended January 25,
1997 and January 24, 1998 (except pro forma amounts) have been derived from
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.

The pro forma income statement data, which have been derived from School
Specialty's unaudited pro forma financial statements included elsewhere in this
Prospectus, give effect, as applicable, to the refinancing of all amounts
payable to U.S. Office Products and the acquisitions completed by the Company
since May 1, 1996 as if all such transactions had been consummated by May 1,
1996. The unaudited pro forma combined financial data discussed herein do not
purport to represent the results that the Company 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 the future results of the
Company. See additional disclosure regarding pro forma results in the Financial
Statements section.

424B1 23rd Page of 115 TOC 1st Previous Next ↓Bottom Just 23rd
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

[Enlarge/Download Table]

HISTORICAL(1)
---------------------------------------------------------------------
FOUR MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------ APRIL 30, FISCAL YEAR ENDED
1992 1993 1994 1995 1996 APRIL 26, 1997(2)
------- ------- -------- -------- ----------- -----------------

STATEMENT OF INCOME DATA:
Revenues.............................. $65,042 $76,926 $119,510 $150,482 $28,616 $ 191,746
Cost of revenues...................... 48,111 56,280 87,750 105,757 20,201 136,577
------- ------- -------- -------- ----------- -----------------
Gross profit.......................... 16,931 20,646 31,760 44,725 8,415 55,169
Selling, general and administrative
expenses............................ 17,729 18,294 27,281 39,869 10,307 43,462
Non-recurring acquisition costs....... 1,048 1,122 1,792
Restructuring costs................... 2,532 194
------- ------- -------- -------- ----------- -----------------
Operating income (loss)............... (1,846) 2,352 4,479 2,324 (3,014) 9,721
Interest expense...................... 1,660 1,845 3,007 5,536 1,461 4,197
Interest income....................... (6)
Other (income) expense................ 99 228 (86) (18) 67 )(196
------- ------- -------- -------- ----------- -----------------
Income (loss) before provision for
(benefit from) income taxes......... (3,605) 279 1,558 (3,194) (4,536) 5,720
Provision for (benefit from) income
taxes(3)............................ 216 199 218 173 139 (2,412)
------- ------- -------- -------- ----------- -----------------
Net income (loss)..................... $(3,821) $ 80 $ 1,340 $ (3,367) $(4,675) $ 8,132
------- ------- -------- -------- ----------- -----------------
------- ------- -------- -------- ----------- -----------------
Net income (loss) per share(4):.......
Basic............................. $ (0.78) $ 0.02 $ 0.26 $ (0.51) $ (0.54) $ 0.81
Diluted........................... $ (0.78) $ 0.02 $ 0.26 $ (0.50) $ (0.53) $ 0.80

Weighted average shares
outstanding(4):.....................
Basic............................. 4,918 4,918 5,062 6,562 8,611 10,003
Diluted........................... 4,918 4,918 5,078 6,669 8,789 10,196

PRO FORMA (2)
------------------------------------
NINE MONTHS ENDED NINE MONTHS
----------------------------------- ENDED
JANUARY 25, JANUARY 24, FISCAL YEAR ENDED ----------------
1997(2) 1998(2) APRIL 26, 1997 JANUARY 25, 1997
---------------- ---------------- ----------------- ----------------

STATEMENT OF INCOME DATA:
Revenues.............................. $159,977 $247,880 $ 350,760 $292,244
Cost of revenues...................... 114,380 176,501 244,396 203,705
---------------- ---------------- ----------------- ----------------
Gross profit.......................... 45,597 71,379 106,364 88,539
Selling, general and administrative
expenses............................ 33,396 50,999 85,430 66,926
Non-recurring acquisition costs....... 1,792 1,792 1,792
Restructuring costs................... 194
---------------- ---------------- ----------------- ----------------
Operating income (loss)............... 10,409 20,380 18,948 19,821
Interest expense...................... 3,358 4,100 7,300 5,535
Interest income....................... (101) (109)
Other (income) expense................ (204) 441 )(158 (174)
---------------- ---------------- ----------------- ----------------
Income (loss) before provision for
(benefit from) income taxes......... 7,356 15,948 11,806 14,460
Provision for (benefit from) income
taxes(3)............................ 3,750 7,113 92 6,651
---------------- ---------------- ----------------- ----------------
Net income (loss)..................... $ 3,606 $ 8,835 $ 11,714 $ 7,809
---------------- ---------------- ----------------- ----------------
---------------- ---------------- ----------------- ----------------
Net income (loss) per share(4):.......
Basic............................. $ 0.38 $ 0.69 $ 0.96 $ 0.64
Diluted........................... $ 0.37 $ 0.68 $ 0.96 $ 0.64
Weighted average shares
outstanding(4):.....................
Basic............................. 9,553 12,751 12,188 12,188
Diluted........................... 9,758 13,020 12,188 12,188

JANUARY 24, 1998
----------------
STATEMENT OF INCOME DATA:
Revenues.............................. $318,667
Cost of revenues...................... 227,485
----------------
Gross profit.......................... 91,182
Selling, general and administrative
expenses............................ 66,623
Non-recurring acquisition costs.......
Restructuring costs...................
----------------
Operating income (loss)............... 24,559
Interest expense...................... 5,535
Interest income.......................
Other (income) expense................ 522
----------------
Income (loss) before provision for
(benefit from) income taxes......... 18,502
Provision for (benefit from) income
taxes(3)............................ 8,511
----------------
Net income (loss)..................... $ 9,991
----------------
----------------
Net income (loss) per share(4):.......
Basic............................. $ 0.82
Diluted........................... $ 0.82
Weighted average shares
outstanding(4):.....................
Basic............................. 12,188
Diluted........................... 12,188
[Enlarge/Download Table]

DECEMBER
31,
----------
1992
----------

BALANCE SHEET DATA:
Working capital (deficit)..................................................................................... $ (51)
Total assets.................................................................................................. 21,905
Long-term debt, less current portion.......................................................................... 8,205
Long-term payable to U.S. Office Products.....................................................................
Stockholder's (deficit) equity................................................................................ (365)

1993
----------

BALANCE SHEET DATA:
Working capital (deficit)..................................................................................... $ 1,140
Total assets.................................................................................................. 23,190
Long-term debt, less current portion.......................................................................... 7,175
Long-term payable to U.S. Office Products.....................................................................
Stockholder's (deficit) equity................................................................................ 545

1994
----------
BALANCE SHEET DATA:
Working capital (deficit)..................................................................................... $ 3,512
Total assets.................................................................................................. 44,267
Long-term debt, less current portion.......................................................................... 11,675
Long-term payable to U.S. Office Products.....................................................................
Stockholder's (deficit) equity................................................................................ 1,827

1995
----------
BALANCE SHEET DATA:
Working capital (deficit)..................................................................................... $ (1,052)
Total assets.................................................................................................. 54,040
Long-term debt, less current portion.......................................................................... 15,294
Long-term payable to U.S. Office Products.....................................................................
Stockholder's (deficit) equity................................................................................ (620)

APRIL 30,
1996
-----------
BALANCE SHEET DATA:
Working capital (deficit)..................................................................................... $ (3,663)
Total assets.................................................................................................. 54,573
Long-term debt, less current portion.......................................................................... 15,031
Long-term payable to U.S. Office Products.....................................................................
Stockholder's (deficit) equity................................................................................ (4,267)

APRIL 26,
1997
-----------
BALANCE SHEET DATA:
Working capital (deficit)..................................................................................... $ 14,460
Total assets.................................................................................................. 87,685
Long-term debt, less current portion.......................................................................... 566
Long-term payable to U.S. Office Products..................................................................... 33,226
Stockholder's (deficit) equity................................................................................ 16,329

JANUARY 24,
1998
-----------

ACTUAL
-----------
BALANCE SHEET DATA:
Working capital (deficit)..................................................................................... $ 43,613
Total assets.................................................................................................. 201,207
Long-term debt, less current portion.......................................................................... 385
Long-term payable to U.S. Office Products..................................................................... 62,470
Stockholder's (deficit) equity................................................................................ 98,492

PRO

FORMA (5)

-----------

BALANCE SHEET DATA:
Working capital (deficit)..................................................................................... $ 60,586

Total assets.................................................................................................. 204,457

Long-term debt, less current portion.......................................................................... 82,978

Long-term payable to U.S. Office Products.....................................................................
Stockholder's (deficit) equity................................................................................ 98,492

424B1 24th Page of 115 TOC 1st Previous Next ↓Bottom Just 24th
------------------------

(1) The historical financial information of the Pooled Companies have been
combined on a historical cost basis in accordance with GAAP to present this
financial data as if the Pooled Companies had always been members of the
same operating group. The financial information of the Purchased Companies
is included from the dates of their respective acquisitions.

(2) The pro forma financial data give effect to the refinancing of all amounts
payable to U.S. Office Products and the purchase acquisitions completed by
School Specialty since May 1, 1996 as if all such transactions had occurred
on May 1, 1996. The pro forma statement of income data are not necessarily
indicative of the operating results that would have been achieved had these
events actually then occurred and should not be construed as representative
of future operating results.

(3) Results for the fiscal year ended April 26, 1997 and the 12 months ended
January 24, 1998 (historical and pro forma) include 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 fiscal 1995 to offset the tax benefit from
net operating loss carryforwards included in the Company's 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 the Company's
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 weighted average shares outstanding for the
fiscal year ended April 26, 1997 and for the nine months ended January 24,
1998 and January 25, 1997, see Note 2(k) of Notes to Pro Forma Combined
Financial Statements included herein. The pro forma weighted average shares
outstanding (basic and diluted), as further adjusted to give effect to the
sales of shares to Messrs. Spalding, Vander Zanden and Pate and in the
Offering, would have been 14.6 million shares for all periods for which pro
forma data are given, and the pro forma net income per share, as so adjusted
further and to give effect to the use of the proceeds from such sales to
reduce debt, would have been:

[Enlarge/Download Table]

NINE MONTHS ENDED
FISCAL YEAR ENDED -----------------
APRIL 26, 1997 JANUARY 25, 1997
------------------- -----------------

Pro forma net income per share, as adjusted:
Basic.............................................................................. $ 0.91 $ 0.62
Diluted............................................................................ $ 0.91 $ 0.62

JANUARY 24, 1998
-----------------

Pro forma net income per share, as adjusted:
Basic.............................................................................. $ 0.77
Diluted............................................................................ $ 0.77

(5) The pro forma balance sheet data give effect to (i) the refinancing of all
amounts payable to U.S. Office Products, (ii) the purchase acquisition of
Education Access, the only acquisition completed by School Specialty
subsequent to January 24, 1998, and (iii) the Distribution as if such
transactions had occurred on January 24, 1998. The pro forma balance sheet
data are not necessarily indicative of the financial position that would
have been achieved had these events actually then occurred and should not be
construed as representative of future financial position.

424B1 25th Page of 115 TOC 1st Previous Next ↓Bottom Just 25th
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

School Specialty is the largest U.S. distributor focusing on non-textbook
educational supplies and furniture for grades pre-K-12. The Company provides a
comprehensive offering of high quality educational supplies and furniture to
school districts, school administrators and teachers through the broad
distribution of its catalogs. Specialty brands, which target specific curriculum
disciplines, include Childcraft, which sells to the early childhood market; Sax
Arts & Crafts, which distributes a broad line of art supplies and materials; and
Gresswell, which distributes library-related products in the United Kingdom.

Revenues have increased from $65.0 million in the fiscal year ended December
31, 1992 to $279.6 million for the twelve months ended January 24, 1998. This
increase resulted primarily from 15 acquisitions, 13 of which occurred during
fiscal 1997 and the first nine months of fiscal 1998, as well as internally
generated growth.

School Specialty's gross profit margins have improved by achieving increased
buying power and by acquiring specialty companies which usually have higher
gross margins than the Company's general products divisions. The Company expects
gross profit margins to be further enhanced by acquiring additional specialty
companies and continuing to improve its purchasing power.

School Specialty's operating margin has improved significantly over the last
several years. This improvement reflects the Company's acquisition of specialty
companies which have higher operating margins than the Company's general
products divisions. In addition, operating margins have increased as the Company
has reduced selling, general and administrative expenses of acquired companies
by eliminating redundant administrative functions. Currently, nine of the ten
general school supply companies acquired since May 1996 have been integrated.
However, the Company believes that the full benefit of the integrations has not
yet been realized as there continue to be opportunities for the Company to
eliminate redundant costs.

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. The Company believes the effective income tax rate of 46%, which is
reflected in the pro forma financial statements for the most recent interim
period, is more representative of future effective income tax rates. See
"--Consolidated Historical Results of Operations".

School Specialty's business and working capital needs are highly seasonal
with peak sales levels occurring from May through October. During this period,
the Company receives, ships and bills the majority of its orders so that schools
and teachers receive their merchandise by the start of each school year. School
Specialty's 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.

In the past, the Company has recorded restructuring costs associated with
consolidation of warehouse facilities. 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. The Company expects to incur such costs in the
future as it continues to integrate acquired companies. Based on the additional
time and resources expected to be involved in the development, review and
approval of any such restructuring plans, the Company cannot presently predict
the timing or overall magnitude of such a charge.

The Company anticipates recording in the fourth quarter of fiscal 1998 $2.0
to $2.5 million of one-time non-recurring costs, primarily consisting of a
write-down of deferred catalog costs and employee severance and asset impairment
costs, and $1.0 million of the transaction costs allocated to the

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Company under the Distribution Agreement. In the first quarter of fiscal 1999,
the Company will record a compensation charge of approximately $263,000,
representing the difference between the amount which Messrs. Spalding, Vander
Zanden and Pate will pay for the 250,000 shares of Common Stock to be purchased
directly from the Company and the amount which they would have paid for such
shares if they had purchased such shares from the Underwriters.

School Speciality is a Delaware corporation formed in February 1998 to hold
the Educational Supplies and Products Division of U.S. Office Products, which
acquired School Specialty, Inc., a Wisconsin corporation ("Old School"), in May
1996 and Re-Print in July 1996. The Company's consolidated financial statements
give retroactive effect to these two business combinations under the pooling-of-
interests method (Old School and Re-Print 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 the fiscal year ended
April 26, 1997 ("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.

The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes thereto and pro forma
financial statements and related notes thereto appearing elsewhere in this
Prospectus.

RESULTS OF OPERATIONS

The following table sets forth various items as a percentage of revenues on
a historical basis for the years ended December 31, 1994 and 1995, fiscal 1997
and for the nine months ended January 25, 1997 and January 24, 1998, and on a
pro forma basis for fiscal 1997 and for the nine months ended January 25, 1997
and January 24, 1998, reflecting the refinancing of the amounts payable to U.S.
Office

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Products and the results of the companies acquired since May 1, 1996 in business
combinations accounted for under the purchase method as if such transactions had
occurred on May 1, 1996.

[Enlarge/Download Table]

PRO FORMA
HISTORICAL ----------------------------
-----------------------------------------------------------------------------
FISCAL YEAR FISCAL YEAR NINE MONTHS
FOR THE YEAR ENDED ENDED NINE MONTHS ENDED ENDED ENDED
-------------------------------- ------------- ---------------------------- ------------- -------------
DECEMBER 31, DECEMBER 31, APRIL 26, JANUARY 25, JANUARY 24, APRIL 26, JANUARY 25,
1994 1995 1997 1997 1998 1997 1997
--------------- --------------- ------------- ------------- ------------- ------------- -------------

Revenues......... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of
revenues....... 73.4 70.3 71.2 71.5 71.2 69.7 69.7
------- ------- ------------- ------------- ------------- ------------- -------------
Gross profit... 26.6 29.7 28.8 28.5 28.8 30.3 30.3
Selling, general
and
administrative
expenses....... 22.9 26.5 22.7 20.9 20.6 24.4 22.9
Non-recurring
acquisition
costs.......... 0.9 1.1 0.5 0.6
Restructuring
costs.......... 1.7 0.1
------- ------- ------------- ------------- ------------- ------------- -------------
Operating
income....... 3.7 1.5 5.1 6.5 8.2 5.4 6.8
Interest expense,
net............ 2.5 3.6 2.1 2.2 1.6 2.1 1.9
Other (income)
expense........ (0.1) (0.1) (0.1) 0.2 (0.1)
------- ------- ------------- ------------- ------------- ------------- -------------
Income (Loss)
before
provision for
income taxes... 1.3 (2.1) 3.0 4.5 6.4 3.3 5.0
Provision for
(benefit from)
income taxes... 0.2 0.1 (1.3) 2.3 2.9 0.0 2.3
------- ------- ------------- ------------- ------------- ------------- -------------
Net income
(Loss)......... 1.1% (2.2)% 4.3% 2.2% 3.5% 3.3% 2.7%
------- ------- ------------- ------------- ------------- ------------- -------------
------- ------- ------------- ------------- ------------- ------------- -------------

JANUARY 24,
1998
-------------

Revenues......... 100.0%
Cost of
revenues....... 71.4
-------------
Gross profit... 28.6
Selling, general
and
administrative
expenses....... 20.9
Non-recurring
acquisition
costs..........
Restructuring
costs..........
-------------
Operating
income....... 7.7
Interest expense,
net............ 1.7
Other (income)
expense........ 0.2
-------------
Income (Loss)
before
provision for
income taxes... 5.8
Provision for
(benefit from)
income taxes... 2.7
-------------
Net income
(Loss)......... 3.1%
-------------
-------------

CONSOLIDATED HISTORICAL RESULTS OF OPERATIONS

NINE MONTHS ENDED JANUARY 24, 1998 COMPARED TO NINE MONTHS ENDED JANUARY 25,
1997

Consolidated revenues increased 54.9%, from $160.0 million for the nine
months ended January 25, 1997, to $247.9 million for the nine months ended
January 24, 1998. This increase was primarily due to the inclusion of revenues
from the seven companies acquired in business combinations accounted for under
the purchase method during the nine months ended January 24, 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") for the entire nine month 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. Inbound freight, occupancy and
delivery charges are also included in cost of revenues.

Gross profit increased 56.5%, from $45.6 million, or 28.5% of revenues, for
the nine months ended January 25, 1997 to $71.4 million, or 28.8% of revenues,
for the nine months ended January 24, 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 the nine months
ended January 24, 1998, and as a result of improved purchasing power and rebate
programs negotiated with vendors. These factors were

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partly offset by an increase in the cost of revenues as a result of the
increased freight costs caused by the UPS 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, general administrative overhead (which includes information systems and
customer service), and accounting, legal, human resources and purchasing
expenses. Selling, general and administrative expenses increased 52.7%, from
$33.4 million, or 20.9% of revenues, for the nine months ended January 25, 1997
to $51.0 million, or 20.6% of revenues, for the nine months ended January 24,
1998. The decrease in selling, general and administrative expenses as a
percentage of revenues was due primarily to 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. School Specialty
has established a 24-month integration process in which a transition team is
assigned to (i) sell or discontinue incompatible business units, (ii) reduce the
number of SKUs, (iii) eliminate redundant administrative functions, (iv)
integrate the acquired entity's MIS system, and (v) improve buying power.
However, the length of time it takes the Company to fully implement its strategy
for assimilating an acquired company can vary depending on the nature of the
company acquired and the season in which it is acquired.

The Company incurred non-recurring acquisition costs of $1.8 million for the
nine months ended January 25, 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. Generally accepted accounting principles
("GAAP") 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 of
accounting. In accordance with GAAP, the Company will be unable to utilize the
pooling-of-interests method to account for acquisitions for a period of two
years following the completion of the Strategic Restructuring Plan. During this
period, the Company will not reflect any non-recurring acquisition costs in its
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--Risks
Related to Inability to Use Pooling-of-Interests Method to Account for Future
Acquisitions".

Since U.S. Office Products' acquisition of the Pooled Companies, interest
has been allocated to the Company based upon the Company's 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 22.5%, from $3.3 million for the nine months ended January 25,
1997 to $4.0 million for the nine months ended January 24, 1998. The increase
was due primarily to higher amounts payable to U.S. Office Products incurred as
a result of the acquisition of the seven companies acquired in fiscal 1998.

Provision for income taxes increased from $3.8 million for the nine months
ended January 25, 1997 to $7.1 million for the nine months ended January 24,
1998, reflecting effective income tax rates of 51.0% and 44.6%, respectively.
The high effective income tax rates for the nine months ended January 25, 1997
and January 24, 1998, compared to the federal statutory rate of 35.0%, was
primarily due to state income taxes and non-deductible goodwill amortization.

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

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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 23.4%, from $44.7 million, or 29.7% of revenues, in
1995 to $55.2 million, or 28.8% 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 the Company's ability to take advantage of term
discounts due to improved cash flows.

Selling, general and administrative expenses increased 9.0%, from $39.9
million, or 26.5% of revenues, in 1995 to $43.5 million, or 22.7% of revenues,
in fiscal 1997. The decrease in selling, general and administrative expenses as
a percentage of revenues was due primarily to the consolidation of two
warehouses into one regional facility in the Northeastern U.S. during 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.

The Company has historically utilized grants of employee stock options as a
method of incentivizing employees by increasing their ownership interests in the
Company, which also has the effect of more closely aligning their interests with
the interests of stockholders of the Company. As a result, if the Company 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 123, the
Company's income from continuing operations for the fiscal year ended April 26,
1997 would have been reduced by approximately $0.7 million or 7.7%.

The Company 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.

The Company incurred restructuring costs of $2.5 million and $194,000 during
1995 and fiscal 1997, respectively. These costs represent the external costs and
liabilities to close redundant Company facilities, severance costs related to
the Company's employees and other costs associated with the Company's
restructuring plans. The Company expects to incur similar costs in the future as
the Company continues to review its operations, with the intention of continuing
to eliminate redundant facilities. See "Business-- Cost Reduction and Other
Efficiencies".

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 the Company's debt in conjunction with the
acquisition of the Pooled Companies by U.S. Office Products and lower interest
rates being charged on the Company's 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. The Company incurred a tax
expense in 1995, notwithstanding the fact that it reported a pre-tax loss,
because one of the Pooled Companies' earnings were not offset by the other
Pooled Companies' loss. In 1995, the Company 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 the Company's being acquired by
U.S. Office

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Products, because it was deemed "more likely than not", based on improved
results, that the tax benefit from such operating loss carryforwards would be
realized. The Company believes that the effective income tax rate of 46%
reflected in the pro forma interim financial statements is more representative
of future effective income tax rates.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

Consolidated revenues increased 25.9%, from $119.5 million in 1994, to
$150.5 million in 1995. This increase was primarily due to the inclusion in 1995
of the 1995 Purchased Company from its date of acquisition and revenues from one
company acquired in a business combination accounted for under the purchase
method of accounting during 1994 (the "1994 Purchased Company") for the entire
year.

Gross profit increased 40.8%, from $31.8 million, or 26.6% of revenues, in
1994 to $44.7 million, or 29.7% of revenues, in 1995. The increase in gross
profit as a percentage of revenues was due primarily to a shift in revenue mix,
primarily attributed to the acquisition of the 1995 Purchased Company, which had
a higher gross profit as a percentage of revenues and a reduction in lower
margin bid revenues.

Selling, general and administrative expenses increased 46.1%, from $27.3
million, or 22.8% of revenues, in 1994 to $39.9 million, or 26.5% of revenues,
in 1995. The increase in selling, general and administrative expenses as a
percentage of revenues was due primarily to the 1994 and 1995 Purchased
Companies, which operated with higher levels of selling, general and
administrative expenses as a percentage of revenues.

Interest expense, net of interest income, increased 84.1%, from $3.0 million
in 1994 to $5.5 million in 1995. The increase was due primarily to additional
borrowings to finance the acquisition of the 1995 Purchased Company, a full year
of interest expense on debt incurred to finance the acquisition of the 1994
Purchased Company and higher average borrowings on the Company's revolving
credit facility resulting from financing the operations of the 1994 and 1995
Purchased Companies.

Provision for income taxes decreased from $218,000 in 1994 to $173,000 in
1995. The Company incurred a tax expense in 1995, notwithstanding the fact that
it reported a pre-tax loss, because one of the Pooled Companies' earnings were
not offset by the other Pooled Companies' loss. The low effective income tax
rate of 14.0% in 1994 is due to the Company's utilization of a net operating
loss carryforward the benefit of which had not been reflected as income in prior
years.

CONSOLIDATED PRO FORMA RESULTS OF OPERATIONS

The unaudited pro forma combined financial data does not purport to
represent the results that the Company would have obtained had the transactions
which are the subject of pro forma adjustments occurred May 1, 1996, as assumed,
and are not necessarily representative of the Company's results of operations in
any future period.

NINE MONTHS ENDED JANUARY 25, 1997 COMPARED TO NINE MONTHS ENDED JANUARY 24,
1998

Pro forma revenues increased 9.0%, from $292.2 million for the nine months
ended January 25, 1997, to $318.7 million for the nine months ended January 24,
1998. 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.

Gross profit increased 3.0%, from $88.5 million, or 30.3% of revenues, for
the nine months ended January 25, 1997 to $91.2 million, or 28.6% of revenues,
for the nine months ended January 24, 1998. The decrease in gross profit as a
percentage of revenues was primarily due to higher freight costs as a result of
the UPS strike in the summer of 1997 and an increase in the portion of revenues
represented by lower margin bid revenues and the discontinuation of higher
margin retail operations at some of the Fiscal 1997 Purchased Companies.

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Selling, general and administrative expenses were $65.0 million, or 22.2% of
revenues, for the nine months ended January 25, 1997 and $64.7 million, or 20.3%
of revenues, for the nine months ended January 24, 1998. The decrease in
selling, general and administrative expenses as a percentage of revenues
reflects 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. The Company has a 24-month integration strategy to consolidate operations
of purchased businesses; however, the length of time it takes for the Company to
fully implement its strategy for assimilating an acquired company can vary
depending on the nature of the company acquired and the season in which it is
acquired. See "Business--Company Strengths--Ability to Integrate Acquisitions."
The decrease in selling, general and administrative expense as a percentage of
revenues was partly offset by the inclusion of the pro forma results of
Education Access, which the Company acquired out of a bankruptcy proceeding in
March 1998.

Provision for income taxes increased 28.0% from $6.7 million for the nine
months ended January 25, 1997 to $8.5 million for the nine months ended January
24, 1998, reflecting an effective income tax rate of 46.0% in both periods. The
high effective income tax rate, compared to the federal statutory rate of 35.0%,
was primarily due to state income taxes and non-deductible goodwill
amortization.

LIQUIDITY AND CAPITAL RESOURCES

Subsequent to the acquisition by U.S. Office Products of the Pooled
Companies and prior to the Distribution, U.S. Office Products funded the cash
portions of School Specialty's acqusitions, paid the acquisition costs, repaid
outstanding debt of acquired companies, allocated a portion of U.S. Office
Products' corporate expenses to School Specialty and made daily advances or
sweeps of cash to keep School Specialty's cash balance at or near zero on a
daily basis. The net amount of such transactions was recorded as a payable from
School Specialty to U.S. Office Products.

At January 24, 1998, the Company had working capital of $43.6 million. The
Company's capitalization, defined as the sum of long-term debt, long-term
payable to U.S. Office Products and stockholders' equity, at January 24, 1998
was $161.3 million. On a pro forma basis at January 24, 1998, the Company had
working capital of $60.6 million and capitalization of $181.5 million.

During the nine months ended January 24, 1998, net cash provided by
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. 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 assumed
with the acquisition of the fiscal 1998 Purchased Companies, $69.8 million of
which was considered a contribution of capital by U.S. Office Products,
partially offset by $8.0 million used to repay indebtedness.

During the nine months ended January 25, 1997, net cash provided by
operating activities was $4.2 million. Net cash used in investing activities was
$14.7 million, including $7.6 million for acquisitions, $5.3 million for
additions to property and equipment and $1.7 million to pay non-recurring
acquisition costs. Net cash provided by financing activities was $11.2 million,
including $55.0 million provided by U.S. Office Products to fund the cash
portion of the purchase price and the repayment of debt associated with 1997
Purchased Companies acquired during the nine months ended January 25, 1997,
partially offset by $46.9 million used for the repayment of indebtedness,
primarily at the 1997 Purchased Companies acquired during the nine months ended
January 25, 1997.

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

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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 $6.0 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.

During 1994, net cash used in operating activities was $268,000. Net cash
used in investing activities was $2.9 million, including $2.1 million for
acquisitions and $630,000 for additions to property and equipment. Net cash
provided by financing activities was $3.2 million, consisting of proceeds from
the issuance of debt of $5.1 million, partially offset by payments of
indebtedness of $2.0 million.

The Company's anticipated capital expenditures budget for the next twelve
months is approximately $3.0 million. The largest items include operational and
financial reporting software, computer hardware and warehouse equipment.

Under the Distribution Agreement, the Company is 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, as described under "The Spin-Off from U.S. Office
Products--Distribution Agreement--Debt". The Company has received a committment
letter for a secured $250.0 million revolving credit facility from NationsBank,
N.A. as administrative agent. NationsBanc Montgomery Securities LLC, one of the
Underwriters and an affiliate of NationsBank, N.A., is the Arranger and
Syndication Agent. The credit facility will terminate five years from the
Distribution Date. Interest on borrowings under the credit facility will accrue
interest at a rate of, at the Company's option, either LIBOR plus 1.00% or the
lender's base rate, plus a margin of 0% to .25% for up to the first 6 months
under the agreement. Thereafter, interest will accrue at a rate of (i) LIBOR
plus a range of .625% to 1.625% or (ii) the lender's base rate plus a range of
.125% to .250% (depending on the Company's leverage ratio of funded debt to
EBITDA). Indebtedness will be secured by substantially all of the assets of the
Company. The credit facility will be subject to terms and conditions typical of
facilities of such size and will include certain financial covenants. The
Company will borrow under the credit facility to repay the U.S. Office Products'
debt which it is obligated under the Distribution Agreement to repay. The
balance of the credit facility (subject to compliance with financial covenants),
will be available for working capital, capital expenditures and acquisitions.

School Specialty intends to use the net proceeds from the Offering and the
sale of 250,000 shares of Common Stock to Messrs. Spalding, Vander Zanden and
Pate to repay a portion of the $83.3 million to be borrowed under a $250 million
credit facility to refinance all amounts payable to U.S. Office Products. After
such repayment, approximately $200 million will be available under the credit
facility (subject to compliance with the financial covenants), which may be used
for general corporate purposes, including working capital, and for acquisitions.

FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS

The Company's business is subject to seasonal influences. The Company's
historical revenues and profitability have been dramatically higher in the first
two quarters of its 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 the prices paid by the Company for the products it sells, the mix
of products sold and general economic conditions. Moreover, the operating
margins of companies acquired by the Company may differ substantially from those
of the Company,

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which could contribute to the further fluctuation in its quarterly operating
results. Therefore, results for any quarter are not indicative of the results
that the Company 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 the year ended December 31, 1995, fiscal 1997 and the first
three quarters of fiscal 1998 (in thousands). The information has been derived
from unaudited consolidated financial statements that in the opinion of
management reflect all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of such quarterly information. This
quarterly information is not comparative because of the high degree of
seasonability in School Specialty's business. 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. On a fiscal year basis (years ending in April), this six-
month (May through October) period falls in the first two quarters of the fiscal
year. On a calendar year basis, the most profitable three months (July through
September) fall in the third quarter.

[Enlarge/Download Table]

YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------

FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ---------
Revenues.................................. $ 18,760 $ 36,702 $ 69,192 $ 25,828 $ 150,482
Gross profit.............................. 4,960 11,130 20,795 7,840 44,725
Operating income (loss)................... (3,014) 1,196 8,934 (4,792) 2,324
Net income (loss)......................... (3,711) (252) 4,309 (3,713) (3,367)

YEAR ENDED APRIL 26, 1997
-----------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ---------

Revenues.................................. $ 58,991 $ 71,682 $ 29,304 $ 31,769 $ 191,746
Gross profit.............................. 18,110 19,823 7,664 9,572 55,169
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

[Enlarge/Download Table]

NINE MONTHS ENDED JANUARY 24, 1998
------------------------------------------

FIRST SECOND THIRD TOTAL
--------- --------- --------- ---------
Revenues........................................... $ 87,029 $ 111,460 $ 49,391 $ 247,880
Gross profit....................................... 26,090 33,619 11,670 71,379
Operating income (loss)............................ 11,872 12,155 (3,647) 20,380
Net income (loss).................................. 5,804 5,965 (2,934) 8,835

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

(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 Financial Data".

INFLATION

The Company does not believe that inflation has had a material impact on its
results of operations during the years ended December 31, 1994 and 1995 or the
fiscal year ended April 26, 1997.

NEW ACCOUNTING PRONOUNCEMENT

REPORTING COMPREHENSIVE INCOME. In June 1997, 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 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The Company intends to
adopt SFAS No. 130 in fiscal 1999.

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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 Company believes that sales of educational supplies and
equipment (which is defined as educational products sold by dealers for use by
educational institutions or as a supplement to learning outside of the
classroom) to the school supply market is approximately $6.1 billion, with over
$3.6 billion sold to institutions and $2.5 billion sold to consumers.

According to the U.S. Department of Education, in all 50 states, there are
15,996 school districts, 108,577 public and private elementary and secondary
schools, and 3.1 million teachers. 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 distributors. The Company believes that there are over 3,400
distributors of school supplies. The majority of these distributors are family-
or employee-owned companies with revenues under $20 million that operate in a
single region. In addition to School Specialty, only two other companies have a
measurable presence in the market, with annual revenues in excess of $130
million. School Specialty believes the demand for timely order fulfillment at
competitive prices, combined with the need to invest in automated inventory
management systems and electronic ordering systems, is accelerating the trend
toward consolidation in the industry.

The volume of school supplies is directly influenced by the size of the
student population. According to the U.S. Department of Education, student
enrollment in grades K-12 began growing in 1986, reaching an all-time peak in
1996 with 51.5 million students (1997 data not yet available). Current
projections by the U.S. Department of Education indicate that student enrollment
will continue to grow to 54.3 million by the year 2006. As a result of these
trends, the U.S. Department of Education projects that expenditures in public
elementary and secondary schools will rise through the year 2007. In current
dollars, 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 pupil spending in current dollars from
$5,961 per pupil in 1997 to $7,179 by the year 2001.

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BUSINESS

School Specialty is a Delaware corporation formed in February 1998 to hold
the Educational Supplies and Products Division of U.S. Office Products. School
Specialty, Inc., a Wisconsin corporation ("Old School") formed in October 1959,
was acquired by U.S. Office Products in May 1996. U.S. Office Products'
Educational Supplies and Products Division also includes Re-Print, which it
acquired in July 1996, and which has been in operation since 1921. The specialty
product lines, Childcraft, Sax Arts & Crafts and Gresswell, were all acquired by
U.S. Office Products in 1997, and have been in operation since 1946, 1945, and
1938, respectively. School Specialty has 1,322 employees in the United States
and the United Kingdom, providing service to all 50 states and the United
Kingdom. School Specialty's principal offices are located at 1000 North
Bluemound Drive, Appleton, Wisconsin 54914, and its telephone number is (920)
734-2756. School Specialty's world wide website is located at
http:\\www.schoolspecialty.com. Information contained in this website is not
deemed to be a part of this Prospectus.

COMPANY STRENGTHS

School Specialty attributes its strong competitive position to the following
key strengths:

LEADING MARKET POSITION. The Company has developed its leading market
position over its 38 year history by emphasizing high quality products, superior
order fulfillment and exceptional customer service. School Specialty has
developed a group of strong brand names including School Specialty, Re-Print,
Childcraft, Sax Arts & Crafts and Gresswell. The Company believes its annual
revenues exceed those of its next two largest competitors combined and that its
large size and brand recognition have resulted in significant buying power,
economies of scale and customer loyalty.

BROAD PRODUCT LINE. School Specialty's strategy is to provide a full range
of high quality products to meet the complete supply needs of pre-K-12 schools
and, as a result, currently offers over 32,000 SKUs ranging from classroom
supplies to playground equipment. The Company's specialty brands enrich its
general product offering and create opportunities to cross merchandise its
specialty school supplies to the customers of its general lines. Specialty
brands include Childcraft, which sells materials, classroom furniture and
equipment such as library shelving, cubbies, easels, desks and play vehicles to
the early childhood market; Sax Arts & Crafts, which distributes art supplies
such as paint, brushes, paper, ceramics, leather and wood crafts; and Gresswell,
which distributes library-related products including supplies, furniture and
media display and storage in the United Kingdom. School Specialty offers
customers one source for virtually all of their school supply and furniture
needs.

INNOVATIVE TWO-PRONGED DISTRIBUTION. School supply procurement decisions
are made at the district and school levels by administrators and principals, and
at the classroom level by curriculum specialists and teachers. The Company
targets both of these groups, addressing administrative decision makers with a
"top down" approach through its 290 person sales force and School Specialty
Catalog, and targeting teachers and curriculum specialists with a "bottom up"
approach primarily through the 6.3 million Re-Print general supply catalogs, and
Childcraft, Sax Arts & Crafts and Gresswell specialty catalogs mailed each year.
School Specialty utilizes its customer database across its family of catalogs to
maximize their effectiveness and increase the Company's marketing reach.

ABILITY TO INTEGRATE ACQUISITIONS. School Specialty has successfully
completed the acquisition of 20 companies since 1991, 15 of which have been
acquired since May 1996. School Specialty has established a 24-month integration
process in which a transition team is assigned to (i) sell or discontinue
incompatible business units, (ii) reduce the number of SKUs, (iii) eliminate
redundant administrative functions, (iv) integrate the acquired entity's MIS
system, and (v) improve buying power. To date, the Company's integration efforts
have focused on acquired general products companies. The Company intends to
consolidate certain administrative functions at its specialty divisions. The
Company believes that through these processes it can generate significant
economies of scale and rapidly improve the

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margins of acquired entities, as well as increase sales by channeling acquired
entities' products through its broad distribution network.

EXPERIENCED MANAGEMENT. School Specialty's management team provides depth
and continuity of experience. Management's interests are aligned with those of
its shareholders as management's incentive-based compensation is tied to School
Specialty's operating profitability.

COMPANY GROWTH STRATEGY

School Specialty's objective is to further enhance its position as the
leading distributor of non-textbook educational supplies through the continued
implementation of the following strategies:

PURSUE ACQUISITIONS AGGRESSIVELY. The Company believes that there are
extensive acquisition opportunities among the over 3,400 school distributors in
the U.S. The Company intends to pursue two types of acquisitions: (i) general
school supply and furniture companies in geographic markets in which the Company
has a limited presence, and (ii) specialty companies focusing on disciplines
such as physical education, science, technology and music. School Specialty
believes it can improve the margins of acquired entities through its efficient
integration process to achieve economies of scale. Although the Company is the
largest distributor in the industry, its share of the $6.1 billion school supply
market is less than 6%, giving the Company substantial growth opportunities.

In furtherance of its acquisition strategy, School Specialty routinely
reviews and conducts investigations of potential acquisitions of school supply
businesses. When School Specialty believes a favorable opportunity exists, it
enters into discussion with the owners of such businesses regarding the
possibility of an acquisition by School Specialty. As of the date of this
Prospectus, School Specialty is currently engaged in discussions on a number of
possible acquisitions; however, the Company does not have any agreements for
pending acquisitions and no acquisitions are probable.

PENETRATE NEW MARKETS AND EXPAND CUSTOMER BASE IN EXISTING MARKETS. School
Specialty believes that it can increase sales by adding sales representatives in
geographic markets in which the Company does not have a significant presence. In
addition, the Company believes that it can further increase sales by cross
merchandising its specialty supplies to its general supplies customers. Lastly,
the Company intends to increase international sales in English-speaking
countries.

PRODUCT LINES

SCHOOL SPECIALTY. The School Specialty Catalog offers 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 and is targeted to administrative decision makers.
School Specialty believes it is the largest school furniture resale source in
the United States. School Specialty has been granted exclusive franchises for
certain furniture lines in specific territories and School Specialty enjoys
significant purchasing power in open furniture lines.

The Company's specialty brands offer product lines for specific educational
disciplines.

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RE-PRINT. Re-Print offers its customers substantially the same products as
the School Specialty Catalog but focuses on reaching teachers and curriculum
specialists directly through its mail-order catalogs.

CHILDCRAFT. Childcraft distributes early childhood education products and
materials. Childcraft also distributes 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 & CRAFTS. Sax Arts & Crafts is a leading distributor of art
supplies and art instruction materials, including paints, brushes, paper,
ceramics, art metals and glass, leather and wood crafts. Sax Arts & Crafts
offers customers a toll free "Art Savvy Hotline" staffed with 15 professional
artists to respond to customer questions.

GRESSWELL. Gresswell distributes 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.

EDUCATION ACCESS. Education Access is a catalog reseller of technology
solutions for the K-12 education market. This new product line will offer
curriculum software, productivity software, peripherals, networking products,
and other related products. Education Access publishes a 110-page catalog twice
a year and mails interim Technology Flash Updates to the K-12 market in the
United States.

School Specialty employs merchandising managers who continually review and
update the product lines for each operating division. The merchandising managers
convene customer focus groups and advisory panels to ascertain 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 being offered by School Specialty.

OPERATIONS

SALES AND MARKETING

School Specialty believes it has developed a substantially different sales
and marketing model from that of traditional school supply and school
furnishings distribution companies in the United States. School Specialty's
strategy is to use its position of owning two distribution platforms with which
it can approach the school market. School Specialty's 290 sales representatives
focus on "top down" selling (through districts, school purchasing authorities
and schools), while School Specialty's Re-Print Division uses the "bottom up"
approach through its direct mail catalog selling directly to teachers. To
further strengthen its position in the market, School Specialty also owns
premier specialty education brands (Childcraft, Sax Arts & Crafts, and
Gresswell) that have the potential to enrich the general product offering
through cross-merchandising.

School Specialty has a broad customer base and no single customer accounted
for more than 2% of sales during fiscal 1997. Schools typically purchase school
supplies and furniture based on an established relationship with relatively few
suppliers. School Specialty establishes and maintains its relationship with its
customers by assigning accounts within a specific geographic territory to a
local area sales representative. Additionally, each account is assigned its
designated inside customer service representative.

School Specialty's customer service representatives call on existing
customers frequently to ascertain and fulfill their school supply needs. The
representatives maintain contact with customers throughout the order cycle and
assist in processing orders.

School Specialty's primary compensation program for sales representatives is
based on commissions as a percentage of gross profit on sales. For new and
transitioning sales representatives, School

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Specialty offers salary and expense reimbursement until the representative is
moved to a full commission compensation structure.

School Specialty utilizes direct mail catalogs to reach its broader customer
base. School Specialty distributes five major catalogs, one for each of its
School Specialty general supply, Re-Print, Childcraft, Gresswell, and Sax Arts &
Crafts lines. The catalog distribution calendar is generally the same across all
product lines. 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.

The approximate number of catalogs distributed for School Specialty,
Re-Print, Childcraft, Gresswell and Sax Arts & Crafts for each of the past three
calendar years and projected catalog distribution for 1998 is set out below. The
figures set forth below include all books of over 32 pages sent out (or, with
respect to 1998, expected to be sent out) during the calendar year but do not
include catalogs that were distributed by discontinued operations.

[Enlarge/Download Table]

1995 1996 1997 1998
--------- --------- --------- ---------

School Specialty Catalog............................ 115,000 296,750 450,750 600,000
Re-Print............................................ 998,000 1,175,000 2,275,000 3,400,000
Childcraft.......................................... 1,583,000 1,308,000 1,360,000 1,728,000
Gresswell........................................... 100,000 180,000(1) 130,000 150,000
Sax Arts & Crafts................................... 750,000 823,000 1,043,500 1,064,000
--------- --------- --------- ---------
Total........................................... 3,546,000 3,782,750 5,259,250 6,942,000
--------- --------- --------- ---------
--------- --------- --------- ---------

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

(1) Includes an extra catalog published against a competitive launch.

Pricing for School Specialty's general and specialty product offerings
varies by product and channel of distribution. The Company generally offers a
negotiated discount from catalog prices for supplies and responds to quote and
bid requests for furniture and equipment. In addition, local sales
representatives work with the Company's corporate sales force and school supply
buyers to achieve an acceptable pricing structure based upon the mix of products
being procured.

School Specialty distributes products through its distribution centers as
well as placing customer orders directly with School Specialty's suppliers.
Furniture is generally shipped directly from the manufacturer to the user,
bypassing School Specialty's distribution centers.

PURCHASING AND INVENTORY MANAGEMENT

School Specialty manages its inventory by continually reviewing daily
inventory levels compared to a running 90-day inventory for the previous year,
adjusted for incoming orders. School Specialty constantly refines the focus of
inventory products through its automated inventory management system to pursue
the optimum level of scope and depth of product offered. Every item in each of
the various distribution regions is forecasted on a daily basis to account for
the anticipated demand curve, 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 the high seasonal demand while keeping
off-season inventory to a minimum. The information systems for all of School
Specialty's distribution centers are interconnected 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. School Specialty's inventory management results in
inventory turnover that management believes is higher than industry turnover
rates and reduces the level of discontinued, excess and obsolete inventory
compared to businesses acquired by School Specialty.

School Specialty believes its large size enhances its purchasing power with
suppliers and results in lower product costs than most of the Company's
competitors. Further, School Specialty believes it can

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leverage this purchasing power to acquired companies in the future to improve
the operating margins for both general supply and specialty businesses. The
Company also believes its purchasing power for general supplies should result in
improved margins for its specialty businesses.

Market surveys by Krebs and Company have shown that the primary determinants
of customer satisfaction in the educational supply industry are the completeness
and accuracy of shipments received and the timeliness of delivery. School
Specialty continues to invest in sophisticated computer systems to automate the
order taking, inventory allocation and management, and order shipment processes.
As a result, School Specialty has been able to provide superior order
fulfillment to its customers. In addition, School Specialty has developed OMS,
which allows schools to customize their orders and enter them electronically
with School Specialty and provides historical usage reports to schools useful
for their budgeting process. During the academic year, School Specialty seeks to
fill orders within twenty-four hours of receipt of the order at a 95.0% fill
rate and a 99.5% order accuracy rate. During the summer months, School Specialty
shifts to a production environment and schedules shipments to coincide with the
start of the school year. During the summer months, School Specialty's
objectives are to meet a 100% fill rate at a 99.5% order accuracy rate. In the
aggregate, School Specialty's order fill rate for June, July and August 1997
exceeded 97.0%. The Company defines "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
School Specialty's distribution centers contracts with local common carriers to
deliver its product to schools and school warehouses. Re-Print 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.

INFORMATION SYSTEMS

The Company believes that through the utilization of technology in areas
such as (i) purchasing and inventory management, (ii) customer order fulfillment
and (iii) database management, School Specialty is able to turn inventory more
quickly than competitors, offer customers more convenient and cost effective
product ordering methods and conduct more precisely targeted sales and marketing
campaigns. School Specialty uses two principal information systems, one for its
general distribution and another for its specialty market distribution. In
general school supply distribution, School Specialty utilizes a specialized
distribution software package used primarily by office products and paper
distributors. The software offers a fully integrated process from sales order
entry through customer invoicing, and inventory requirements planning through
accounts payable. School Specialty's system provides information through daily
automatic posting to the general ledger and integrated inventory control. School
Specialty has made numerous enhancements to this process that allow greater
flexibility in addressing seasonal requirements of the industry and meeting
specific customer needs.

The specialty divisions are moving towards a common mail order 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 School Specialty has two principal information systems, these
systems 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. Currently, all acquired School Specialty general
distribution companies (except one acquired in December 1997) are on the same
computer system. The specialty businesses and Re-Print operate on different
systems but intend to implement the common MACS system. School Specialty intends
to continue to use two principal information systems in its business.

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YEAR 2000 COMPLIANCE

School Specialty's current information systems as well as those being
considered for acquisition by School Specialty's mail order and specialty
distribution divisions, currently meet information standards for Year 2000
compliance. School Specialty does not expect that it will incur any material
costs and expenses related to bringing its information systems to Year 2000
compliance. See "Risk Factors-- Dependence on Systems".

COMPETITION

School Specialty operates in a highly competitive environment. The Company's
principal competitors are other national and regional school supply distribution
companies. School Specialty is also faced with increasing competition from
non-traditional alternate channel competitors, such as office products contract
stationers and superstores. Among traditional school supply distributors, School
Specialty believes that there are only two other companies with sales in excess
of $130 million: Beckley-Cardy and the J.L. Hammett Co. School Specialty
believes that it competes favorably with these companies on the basis of service
and price.

The market is highly competitive on a regional basis, but School Specialty
believes its heaviest competition is coming from alternate channel competitors
such as office product contract stationers and superstores. Their primary
advantages over School Specialty 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, the
Company's competitors do not offer special order fulfillment software, which
School Specialty believes is increasingly important to adequately service school
needs. School Specialty believes it competes favorably with these companies on
the basis of service and product offering.

EMPLOYEES

As of December 31, 1997, School Specialty had 1,322 full-time employees, 266
of whom were employed primarily in management and administration, 430 in
regional warehouse and distribution operations, and 626 in marketing, sales,
order processing, and customer service. To meet the seasonal demands of its
customers, School Specialty employs many seasonal employees during the late
spring and summer seasons. Historically, School Specialty has been able to meet
its requirements for seasonal employment. As of January 12, 1998, approximately
27 of School Specialty's employees were members of the Teamsters Labor Union at
Sax Arts & Crafts' New Berlin, Wisconsin facility. School Specialty considers
its relations with its employees to be very good.

FACILITIES

School Specialty's corporate headquarters are located at 1000 North
Bluemound Drive, Appleton, Wisconsin, a combined office and warehouse facility
of approximately 120,000 square feet. School

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Specialty's lease on the Appleton headquarters expires on December 31, 2001.
School Specialty leases or owns the following distribution facilities.

[Enlarge/Download Table]

APPROXIMATE
SQUARE OWNED/ LEASE
LOCATIONS FOOTAGE LEASED EXPIRATION
----------------------------------------------- ------------- ----------- ------------------

Agawam, Massachusetts.......................... 163,300 Owned --
Bethlehem, Pennsylvania........................ 25,600 Leased February 28, 1999
Birmingham, Alabama............................ 180,365 Leased November 20, 2006
Bowling Green, Kentucky........................ 42,000 Leased June 30, 2001
Cary, Illinois................................. 75,767 Owned --
Enfield, London, England....................... 8,000 Owned --
Fresno, California............................. 18,480 Leased December 31, 2001
Hoddesdon, London, England..................... 10,000 Leased September 1999
Hoddesdon, London, England..................... 10,000 Leased September 2015
Lancaster, Pennsylvania........................ 75,434 Leased December 31, 2002
Lancaster, Pennsylvania........................ 165,750 Leased February 28, 1999
Mt. Laurel, New Jersey......................... 48,000 Leased May 31, 2001
New Berlin, Wisconsin.......................... 97,500 Leased March 31, 2002
Oklahoma City, Oklahoma........................ 37,340 Leased July 16, 2001
Pollocksville, North Carolina.................. 84,071 Owned --
Portland, Oregon............................... 30,456 Leased May 31, 2001
Salina, Kansas................................. 123,000 Owned --

The Lancaster, Pennsylvania facility is used for manufacturing and the
Salina, Kansas facility is used for production of school forms. In addition,
School Specialty has ten sales offices throughout the United States.

School Specialty believes that its properties are adequate to support its
operations for the foreseeable future. School Specialty reviews on a regular
basis the consolidation of its facilities.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

It is anticipated that the directors and executive officers of School
Specialty at the closing of the Offering will be as follows:

[Enlarge/Download Table]

NAME AGE POSITION
------------------------------------------ --- ------------------------------------------

Daniel P. Spalding........................ 43 Chairman of the Board and Chief Executive
Officer
David J. Vander Zanden.................... 43 President, Chief Operating Officer, and
Director
Donald J. Noskowiak....................... 40 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.......................... 57 Executive Vice President for Sax Arts &
Crafts
Donald Ray Pate, Jr....................... 35 Executive Vice President for Re-Print
Ronald E. Suchodolski..................... 52 Executive Vice President for Childcraft
Michael J. Killoren....................... 41 Vice President for School Specialty
Divisions
Lillian R. Kellogg........................ 45 President for Education Access Division
Jonathan J. Ledecky....................... 40 Director
Leo C. McKenna (1)........................ 64 Director
Rochelle Lamm Wallach (1)................. 50 Director

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

(1) Member of Audit and Compensation Committees

DANIEL P. SPALDING became Chairman of the Board and Chief Executive Officer
of School Specialty in February 1998. Mr. Spalding has served as President of
the Educational Supplies and Products Division of U.S. Office Products since
1996. Prior to that time, he served as President, Chief Executive Officer, and a
director of Old School since 1988. 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. Mr. Spalding is Michael J.
Killoren's cousin.

DAVID J. VANDER ZANDEN became the Chief Operating Officer of School
Specialty in March 1998. Prior to that time, he served as President of Ariens
Company since 1992, a manufacturer of outdoor lawn and garden equipment.

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 since 1994. From 1992 through 1994 he was the
Corporate Controller of Old School.

DOUGLAS MOSKONAS joined Old School in 1993 as Vice President of Sales for
the Valley Division. Since that time he has served as General Manager for the
Valley Division from 1994 through 1996 and was appointed President of School
Specialty Distribution in 1997. Prior to joining School Specialty, Mr. Moskonas
served as Vice President of Sales for Emmons-Napp Office Products from 1979
through 1993. As of the School Specialty Distribution, Mr. Moskonas is expected
to be elected an Executive Vice President of School Specialty for School
Specialty Divisions.

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MELVIN D. HILBROWN joined School Specialty as Managing Director of Gresswell
with School Specialty's acquisition of Don Gresswell, Ltd. in 1997. He has been
Managing Director of Gresswell since 1989. As of the School Specialty
Distribution, Mr. Hilbrown is expected to be elected an Executive Vice President
of School Specialty for Greswell.

RICHARD H. NAGEL joined School Specialty with the acquisition of Sax Arts &
Crafts in 1997 and serves as President of Sax Arts & Crafts. Mr. Nagel has been
with Sax Arts & Crafts since 1975 when he was hired as Assistant General
Manager. He was named President of Sax Arts & Crafts in 1990. As of the School
Specialty Distribution, Mr. Nagel is expected to be elected an Executive Vice
President of School Specialty for Sax Arts & Crafts.

DONALD RAY PATE, JR. joined School Specialty with the acquisition of
Re-Print in 1996 and serves as President of Re-Print. Mr. Pate has served as
President of Re-Print since he acquired it in 1988. As of the School Specialty
Distribution, Mr. Pate is expected to be elected an Executive Vice President of
School Specialty for Re-Print.

RONALD E. SUCHODOLSKI joined School Specialty with the acquisition of
Childcraft in 1997 and serves as President of Childcraft. Mr. Suchodolski has
been President of Childcraft since 1995 and was Director of Childcraft's School
Division from 1984 through 1989. From 1989 to 1993, Mr. Suchodolski was
President of the Judy/Instructo Division of Paramount, and from 1993 through
1995 Mr. Suchodolski served as Senior Vice President of Sales and Marketing for
Paramount Publishing's Supplementary Materials Division. As of the School
Specialty Distribution, Mr. Suchodolski is expected to be elected an Executive
Vice President of School Specialty for Childcraft.

MICHAEL J. KILLOREN has served as Chief Operating Officer of School
Specialty Distribution since 1997. From 1992 to 1997, he was Vice
President/Operations of School Specialty. Mr. Killoren is Daniel P. Spalding's
cousin. As of the School Specialty Distribution, Mr. Killoren is expected to be
elected an Vice President of School Specialty for School Speciality Divisions.

LILLIAN R. KELLOGG joined the Company with the acquisition of Education
Access in March 1998 and serves as President of the Company's Education Access
Division. Ms. Kellogg previously served as Executive Vice President of Education
Access, Inc. from March 1997 to March 1998 and as President of Computer Plus,
Inc. from March 1984 to March 1997. On January 19, 1998, Education Access, Inc.
filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy
Code. The Company acquired substantially all of the assets of its catalog
division on March 20, 1998.

JONATHAN J. LEDECKY will serve as a director and an employee of School
Specialty and each of the other Spin-off Companies. He founded 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 and
will serve as its Chairman of the Board until the Distribution Date and served
as its Chief Executive Officer until November 5, 1997. Mr. Ledecky has also
served as the Non-Executive Chairman of the Board of USA Floral Products, Inc.
since April 1997 and as a director of UniCapital Corporation since October 1997.
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 is a self-employed financial consultant working with personal
asset management, corporate planning, acquisitions, merger studies, and
negotiations. Mr. McKenna is currently a Member of the Board 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 Audit
Committee. He is also a director of Rosenthal, A.G. USA. He is a director and
member of the John Brown Cook Foundation

424B1 44th Page of 115 TOC 1st Previous Next ↓Bottom Just 44th
and an overseer and Chairman of the Finance Committee for the Catholic Student
Center at Dartmouth College.

ROCHELLE LAMM WALLACH was associated with Strong Advisory Services, a
division of Strong Capital Management, as its President from 1995 to March 1998.
Prior to that time, she was Chief Operating Officer of AAL Capital Management, a
mutual fund manager which she founded in 1986.

The Company intends to name two additional independent directors after the
completion of the Offering.

COMMITTEES OF THE BOARD

The School Specialty Board created an Audit Committee prior to the
Distribution Date. The Audit Committee is charged with reviewing School
Specialty's annual audit and meeting with School Specialty's independent
accountants to review School Specialty's internal controls and financial
management practices.

The School Specialty Board created a Compensation Committee prior to the
Distribution Date. The Compensation Committee is charged with determining the
compensation of executive officers of School Specialty and administering any
stock option plan School Specialty may adopt.

EXECUTIVE COMPENSATION

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

SUMMARY COMPENSATION TABLE

[Enlarge/Download Table]

ANNUAL COMPENSATION
LONG TERM
-------------------- COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#)(1) COMPENSATION
-------------------------------- --------- --------- --------- --------------- ---------------

Daniel P. Spalding.............. 1997 $ 178,846
Chairman of the Board, CEO 1998 212,104 $ 34,200 150,000 --
and Director
Ronald E. Suchodolski(2)........ 1997 $ 141,535 $ 30,000 -- --
President, Childcraft 1998 157,646 62,633 20,000 $ 92,000
Richard H. Nagel(2)(3).......... 1997 $ 118,000 $ 29,500 -- $ 32,000
President, Sax Arts & Crafts 1998 130,660 29,500 20,000 --
Donald Ray Pate, Jr.(2)......... 1997 $ 220,901 -- -- --
President, Re-Print 1998 117,000 -- --
Douglas Moskonas................ 1997 $ 97,266 $ 44,500 15,000 --
President, School Specialty 1998 139,525 -- 20,000 --
Division

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

(1) The number of U.S. Office Products Options will be adjusted as described
under "--Replacement of Outstanding U.S. Office Products' 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.

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

OPTIONS GRANTED IN FISCAL YEAR 1998

The following table sets forth certain information regarding options to
acquire U.S. Office Products common stock granted to the Named Officers during
the year ended April 25, 1998. All options were granted by U.S. Office Products
as options to acquire U.S. Office Products Common Stock and are being replaced
with options to acquire School Specialty Common Stock in connection with the
School Specialty Distribution. See "--Replacement of Outstanding U.S. Office
Products' Options". Upon consummation of the School Speciality Distribution, the
number of School Specialty options granted to officers, directors and employees
of the Company in respect of U.S. Office Products' common stock and their
exercise price will be determined according to the formula set by U.S. Office
Products.

OPTIONS GRANTED IN FISCAL YEAR ENDED APRIL 25, 1998

[Enlarge/Download Table]

POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF STOCK
TOTAL OPTIONS PRICE APPRECIATION FOR
GRANTED TO OPTION TERM(4)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ----------------------
NAME GRANTED(1)(2) FISCAL YEAR(3) PRICE(2) DATE 5% 10%
--------------------------------- ------------- ----------------- ----------- ----------- ---------- ----------

Daniel P. Spalding............... 150,000 52.7% $ 15.17 4/28/07 $1,431,049 $3,626,561
Ronald E. Suchodolski............ 20,000 7.0% 18.00 12/12/07 226,400 573,600
Richard H. Nagel................. 20,000 7.0% 18.00 12/12/07 226,400 573,600
Donald Ray Pate, Jr.............. -- -- -- -- -- --
Douglas Moskonas................. 20,000 7.0% 18.00 12/12/07 226,400 573,600

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

(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 Incentive Plan.

(2) The option exercise price and number of options will be adjusted as
described under "--Replacement of Outstanding U.S. Office Products'
Options".

(3) 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.

(4) 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.

AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED APRIL 25, 1998 AND FICAL
YEAR-END 1998 OPTION VALUES

The following table sets forth certain information regarding unexercised
options held by the Named Officers at April 25, 1998. All options were granted
by U.S. Office Products as options to acquire U.S. Office Products common stock
and are being replaced with options to acquire shares of School Specialty Common
Stock in connection with the Distribution. See "--Replacement of Outstanding
U.S. Office Products' Options". Upon consummation of the School Speciality
Distribution, the number of stock options granted to officers, directors and
employees of the Company in respect of U.S. Office Products' options and their
exercise price will be determined according to the formula set by U.S. Office
Products.

424B1 46th Page of 115 TOC 1st Previous Next ↓Bottom Just 46th
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED 1998
AND FISCAL YEAR ENDED 1998 OPTION VALUES

[Enlarge/Download Table]

VALUE OF
UNEXERCISED
IN-THE-
MONEY (3)
NUMBER UNEXERCISED OPTIONS AT
OPTIONS FISCAL
HELD AT APRIL 25, 1998(#)(1) YEAR
SHARES END($)(1)(3)(4)
ACQUIRED ON VALUE -------------------------------- ---------------
NAME EXERCISE(#)(1) REALIZED($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE
------------------------------ ----------------- ----------------- --------------- --------------- ---------------

Daniel P. Spalding............ -- $ -- -- 150,000 $ --
Ronald E. Suchodolski......... -- -- -- 20,000 --
Richard H. Nagel.............. -- -- -- 20,000 --
Donald Ray Pate, Jr........... -- -- -- -- --
Douglas Moskonas.............. -- -- -- 35,000 --

NAME UNEXERCISABLE
------------------------------ ---------------

Daniel P. Spalding............ $ 63,938
Ronald E. Suchodolski......... --
Richard H. Nagel.............. --
Donald Ray Pate, Jr........... --
Douglas Moskonas.............. --

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

(1) The option exercise price and number of options will be adjusted as
described under "Replacement of Outstanding U.S. Office Products' Options".

(2) The value of exercised options represents the difference between the
exercise price of such options and the closing market price of U.S. Office
Products' common stock on the date of exercise.

(3) Options are "in-the-money" if the closing market price of U.S. Office
Products Common Stock exceeds the exercise price of the options.

(4) The value of unexercised options represents the difference between the
exercise price of such options and $16.875, the closing market price of U.S.
Office Products' common stock at April 24, 1998.

REPLACEMENT OF OUTSTANDING U.S. OFFICE PRODUCTS' OPTIONS

All or substantially all vested and unvested options ("U.S. Office Products
Options") to acquire the U.S. Office Products' common stock that are held by
School Specialty employees on the Distribution Date are being replaced with
options ("School Specialty Options") to acquire shares of Company Common Stock.
As of the Distribution Date, 375,895 U.S. Office Products Options were held by
employees of School Specialty (assuming all option holders tendered all of the
shares underlying their options in the Tender Offer). The exercise price and
number of School Specialty Options that will be outstanding after the
Distributions will depend on the trading prices of U.S. Office Products' common
stock around the time of the Distributions and the public offering price of the
School Specialty Common Stock in the Offering. For those reasons, the number of
School Specialty Options into which the U.S. Office Products Options will
convert is not yet determinable. The following formulas will be used to adjust
the number and exercise price of U.S. Office Products Options. The formulas will
adjust solely for the School Specialty Distribution and not for other events
such as the repurchase of 37,037,037 shares (including shares that may be issued
on exercise of vested and unvested U.S. Office Products Options) in a tender
offer (the "Tender Offer") that is part of the Strategic Restructuring Plan. The
formulas will not affect when the options vest or when employees can exercise
the options.

The exercise price of U.S. Office Products Options will be adjusted by
applying the following formulas:

Exercise Price (New) = Exercise Price (Old) X Initial Public Offering Price
of Common Stock in this
Offering_______________________
Trading Price of U.S. Office
Products' Common Stock
Pre-School Speciality
Distribution

The number of U.S. Office Products Options will be adjusted by applying the
following formula:

Option Shares (New)=Option Shares (Old) X Trading Price of U.S. Office
Products' Common Stock Pre-School Speciality Distribution
Initial Public Offering Price of Common Stock in
this Offering

For all optionees, the "Trading Price of U.S. Office Products Common Stock
Pre-School Speciality Distribution" will be the average closing price of U.S.
Office Products' common stock for the lesser of (a) ten business days preceding
the Distributions, or (b) the number of business days falling between the

424B1 47th Page of 115 TOC 1st Previous Next ↓Bottom Just 47th
expiration of the Tender Offer and the completion of the Distributions. The
foregoing formula adjustments are intended to preserve for the holder of U.S.
Office Products Options the intrinsic value per option, measured as the
difference between the market value of one share of U.S. Office Products Common
Stock at the time of the School Specialty Distribution and the exercise price of
such options. The intrinsic value of the adjusted options will be no greater
than the intrinsic value of the options immediately before the Distributions,
and the ratio of exercise price to market price will be not less than the ratio
immediately before the Distributions.

1998 STOCK INCENTIVE PLAN

The Company has adopted the 1998 Stock Incentive Plan (the "Plan"). The
purpose of the Plan is to promote the long-term growth and profitability of the
Company by providing employees with incentives to improve stockholder value and
contribute to the growth and financial success of the Company, and by enabling
the Company to attract, retain and reward highly motivated and qualified
employees. The maximum percentage of shares of Company Common Stock that may be
issued with respect to awards granted under the Plan is 20% of the outstanding
Common Stock of the Company 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 will be administered by the Compensation Committee of the Board
of Directors. All employees of the Company and its subsidiaries, as well as
non-employee directors of the Company, 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 will determine 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.

Mr. Ledecky is receiving a stock option for Company Common Stock from School
Specialty, pursuant to the Plan, as of June 10, 1998. The option is intended to
compensate Mr. Ledecky for his services to School Specialty as an employee. The
option covers 7.5% of the outstanding Company Common Stock determined as of the
Distribution Date, without regard to the Offering. The option will have a per
share exercise price equal to the initial public offering price of the Company
Common Stock. The estimated value of this option depends upon its exercise
price. Based on the initial public offering price of $15.50 and an assumed
trading volatility index of the School Specialty Common Stock of 35.0%, the
estimated value of the option is approximately $2.6 million, net of taxes at an
assumed 40% rate. Mr. Ledecky's option is fully vested when granted but will not
be exercisable until the 12-month anniversary of the Distribution Date. Mr.
Ledecky's option from the Company will be exercisable immediately if Mr. Ledecky
dies before the options expire or, if and to the extent that, School Specialty
accelerates the exercise schedule of substantially all management options. All
unexercised portions of the option will expire ten years after its date of grant
or, if applicable, as of the date Mr. Ledecky violates his non-competition
agreement with School Specialty.

As of June 10, 1998 Daniel P. Spalding will receive an option (the "Spalding
Option") pursuant to the Plan for 1.9% of the outstanding Common Stock as of the
Distribution Date. The Spalding Option is anticipated to have the same terms as
Mr. Ledecky's option, including an exercise price equal to the initial public
offering price of the Common Stock. The estimated value of this option depends
upon the initial public offering price of the School Specialty Common Stock.
Based on the initial public offering price of $15.50 and an assumed trading
volatility index of the School Specialty Common Stock of 35.0%, the estimated
value of the option is approximately $0.7 million, net of taxes at an assumed
40% rate. In addition, management recommended option grants to certain executive
officers of the Company for approximately 5.6% of the Common Stock concurrent
with the School Specialty Distribution, also at an exercise price equal to the
initial public offering price.

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DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS

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

Jonathan J. Ledecky entered into a services agreement with U.S. Office
Products on January 13, 1998, which agreement has been amended and restated as
of June 8, 1998 (the "Ledecky Services Agreement"), effective on the
Distribution Date and contingent on the consummation of the Distributions. The
Ledecky Services Agreement will expire on September 30, 1998 if none of the
Distributions has occurred by that date. If the Ledecky Services Agreement
becomes effective, it will replace his November 4, 1997 employment agreement
with U.S. Office Products. The principal terms of this agreement, as amended,
are summarized herein.

The Ledecky Services Agreement governs Mr. Ledecky's continuing obligations
to U.S. Office Products. Under the Ledecky Services Agreement, Mr. Ledecky will
report to the U.S. Office Products' Board and will provide high-level
acquisition negotiation services and strategic business advice. Under the
agreement, Mr. Ledecky will remain an employee of U.S. Office Products, at an
annual salary of $48,000 through June 30, 2001. As a continuing employee of U.S.
Office Products, Mr. Ledecky will also retain his existing U.S. Office Products'
options despite his reduction in services to U.S. Office Products. U.S. Office
Products can terminate Mr. Ledecky's employment only for "cause" where cause
consists of (i) his conviction of or guilty or nolo contendere plea to a felony
demonstrably and materially injurious to U.S. Office Products, or (ii) his
violation of the noncompetition provision as it relates to U.S. Office Products.
If Mr. Ledecky resigns or is terminated, he will cease to vest in his U.S.
Office Products stock options and will have 90 days to exercise any vested
options.

The Company is entering into an employment agreement with Mr. Ledecky
effective as of June 10, 1998 that implements its assigned portion of the
Ledecky Services Agreement. Under the employment agreement, Mr. Ledecky will
report to the Board of Directors and senior management of the Company. In such
capacity, Mr. Ledecky will provide high-level acquisition negotiation services
and strategic business advice. The Company can require Mr. Ledecky's performance
of such services, consistent with his other contractual obligations to
Consolidation Capital Corporation, U.S. Office Products and the other Spin-Off
Companies. As an employee, Mr. Ledecky will also be subject to the generally
applicable personnel policies of the Company and will be eligible for such
benefit plans in accordance with their terms. The Company will pay Mr. Ledecky
an annual salary of $48,000 for up to two years. The Company may terminate Mr.
Ledecky's employment with "cause" (as defined as in the Ledecky Services
Agreement).

The Ledecky Services Agreement provides for non-competition and
non-solicitation restrictions that continue until the end of a specified
restricted period, which, for School Specialty, means the later of June 10, 2000
or one year after Mr. Ledecky leaves School Specialty's 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 (collectively,
the "U.S. Office Products Companies"), within 100 miles of any location where
the relevant U.S. Office Products Company regularly maintains an office with
employees. (For this purpose, "products or services" are those that U.S. Office
Products offered on 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: (i) certain businesses
acquired by Consolidation Capital Corporation that are potentially competitive
with Aztec Technology Partners, Inc. if those businesses (A) relate to computer
installation and servicing, (B) information technology, or (C)
telecommunications, and if, when acquired, the businesses met certain revenue
limits and had their

424B1 49th Page of 115 TOC 1st Previous Next ↓Bottom Just 49th
principal place of business in the same metropolitan area as that of the
acquiring electrical contracting and services business; (ii) businesses selling,
supplying, or distributing janitorial or sanitary products or services; (iii)
businesses managing or servicing equipment (other than computers); (iv)
businesses providing internet services; (v) UniCapital Corporation's current
businesses (which include equipment leasing); or (vi) 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 managerial employees of the U.S. Office Products Companies or from
calling upon customers of the U.S. Office Products Companies to solicit or sell
products or services in direct competition with the U.S. Office Products
Companies. Mr. Ledecky also may not hire away for Consolidation Capital
Corporation any person then or in the preceding one year employed by the U.S.
Office Products Companies. U.S. Office Products will assign to the Company the
ability to enforce the non-competition provisions described above as to its own
business, which will then constitute part of Mr. Ledecky's employment agreement
with the Company.

EMPLOYMENT CONTRACTS AND RELATED MATTERS

School Specialty has entered into employment agreements with the following
three of its Named Officers that will continue after the School Specialty
Distribution: Daniel P. Spalding (Chairman and Chief Executive Officer), Donald
Ray Pate, Jr. (Executive Vice President and President of Re-Print), and Richard
H. Nagel (Executive Vice President and President of Sax Arts & Crafts). After
the School Specialty Distribution, the Company intends to enter into an
employment agreement with David J. Vander Zanden, who became President and Chief
Operating Officer of the Company in March 1998.

Daniel P. Spalding, Chief Executive Officer of School Specialty, entered
into an employment contract with Old School on April 29, 1996. 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 School Specialty 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 the
part of School Specialty) or within five days of a change in control of School
Specialty. The contract defines a change of control to mean: (i) the acquisition
of beneficial ownership of 50% or more of voting securities of School Specialty
by any person other than U.S. Office Products; (ii) a loss of majority status by
the combination of members of U.S. Office Products' Board 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; (iii) 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 (iv) U.S. Office Products or more than 49% of its assets are
liquidated. Following the completion of the Offering, the Company expects to
enter into an amendment to Mr. Spalding's employment agreement in respect of the
change of control provisions to reflect the Company's public status.

Donald Ray Pate, Jr., serves as President of Re-Print and entered into an
employment contract with Re-Print on July 26, 1996 to serve as its President.
The contract runs for four years but provides for two automatic one-year
extensions unless Re-Print gives 60 days written notice of its intent not to
renew. Mr. Pate's annual base salary is $125,000, and he participates in an
executive compensation program developed by U.S. Office Products. Following the
termination of his employment for any reason, Mr. Pate has agreed not to compete
with Re-Print for the longer of two years or until the end of the contractual

424B1 50th Page of 115 TOC 1st Previous Next ↓Bottom Just 50th
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.

Richard H. Nagel, President of Sax Arts & Crafts, entered into a four-year
employment contract with Sax Arts & Crafts on June 27, 1997 to serve as its
President. Mr. Nagel's annual base salary is at least $125,000, and he
participates in School Specialty's management bonus program. Following the
termination of his employment for any reason, Mr. Nagel has agreed not to
compete with Sax Arts & 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.

David J. Vander Zanden became President and Chief Operating Officer in March
1998. After the School Specialty Distribution, School Specialty expects to enter
into an employment contract with Mr. Vander Zanden with an initial term of two
years, with automatic two-year extensions unless School Specialty or Mr. Vander
Zanden gives 90 days written notice of either party's intent not to renew.
School Specialty expects that Mr. Vander Zanden's employment contract will
provide for a base salary of $225,000 and participation in an incentive bonus
plan based upon the attainment of profit and revenue objectives. School
Specialty also expects that Mr. Vander Zanden's employment contract will contain
a covenant not to compete upon termination of the agreement, and provide Mr.
Vander Zanden the right to terminate the agreement upon a change of control in
School Specialty, with change of control to be defined in the agreement. School
Specialty also expects to grant options to Mr. Vander Zanden on or shortly after
the Distribution.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The School Specialty Board will create a Compensation Committee, prior to
the Offering. The Compensation Committee will be charged with determining the
compensation of all executive officers. Until the Compensation Committee of the
School Specialty Board is created, decisions regarding compensation of the
executive officers will be made by the School Specialty Board. No member of the
School Specialty Board has ever been an officer of School Specialty or any of
its subsidiaries, except that Mr. Spalding is the Chief Executive Officer of
School Specialty and Mr. Vander Zanden is the President and Chief Operating
Officer of School Specialty. In addition, Mr. Ledecky was the Chief Executive
Officer of U.S. Office Products until November 5, 1997 and will be the Chairman
of U.S. Office Products until the Distribution Date.

424B1 51st Page of 115 TOC 1st Previous Next ↓Bottom Just 51st
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
2,307,693 shares 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
(309,766 shares, and an additional 30,018 through an IRA for his benefit),
Michael J. Killoren (27,018 shares), and Donald J. Noskowiak (27,018 shares). In
addition, John S. Spalding (Daniel P. Spalding's father) received 661 shares and
an additional 60,034 through an IRA for his benefit, the Patricia M. Spalding
Revocable Trust received 70,923 shares, Joanne Lee Killoren received 60,304
shares, Donald Killoren (Michael J. Killoren's father) received 60,778 shares
and Leo C. McKenna received 278,005 shares. The other parties to the foregoing
transactions had no relationship to the Company or U.S. Office Products Company
at the time such transactions were entered into, and accordingly, the Company
believes that these transactions were as favorable as could be negotiated with
third parties.

U.S. Office Products acquired Re-Print on July 26, 1996 in a business
combination accounted for under the pooling-of-interests method in which it
issued 1,950,000 shares of U.S. Office Products Common Stock as consideration.
In that transaction, Donald Ray Pate, Jr., President of Re-Print, received
1,076,028 shares of U.S. Office Products Common Stock for his interest in
Re-Print. Other shareholders related to Mr. Pate who received shares of U.S.
Office Products Common Stock in the merger were Celita Pate Carmichael (30,240
shares), Phillip S. Pate (85,351 shares), Richard K. Pate (73,921 shares), and
Mary K. Pate (116,505 shares). The other parties to the foregoing transactions
had no relationship to the Company or U.S. Office Products Company at the time
such transactions were entered into, and accordingly, the Company believes 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, President of School Specialty's Education
Access Division, owns 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.

School Specialty's 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 Old School and the father of
Daniel P. Spalding, Chairman of the Board and Chief Executive Officer of School
Specialty, holds a one-third stake in Bluemound. Donald Killoren, father of
Michael J. Killoren, an 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. The Company believes that this transaction was as favorable
as could be negotiated with third parties.

For a discussion of matters related to the spin-off of the Company from U.S.
Office Products, see "The Spin-Off From U.S. Office Products".

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

424B1 52nd Page of 115 TOC 1st Previous Next ↓Bottom Just 52nd
PRINCIPAL STOCKHOLDERS

The following table sets forth the number and percentage of School Specialty
Common Stock beneficially owned by the following persons, after giving effect to
the School Specialty Distribution, the Offering and the sale of 250,000 shares
of School Specialty Common Stock to Messrs. Spalding, Vander Zanden and Pate,
based on their beneficial ownership of U.S. Office Products common stock on May
15, 1998 (assuming that each person (other than Mr. Pate) tendered his pro rata
share of the 37,037,037 shares of U.S. Office Products common stock tendered for
as part of its Strategic Restructuring Plan and that the Underwriters'
overallotment option is not exercised): (i) all persons known by School
Specialty to own beneficially more than 5% of U.S. Office Products common stock,
(ii) each director and each Named Officer who is a stockholder, and (iii) 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.

[Enlarge/Download Table]

PRIOR TO THE OFFERING AFTER THE OFFERING
---------------------------- ----------------------------
NUMBER OF PERCENT OF NUMBER OF PERCENT OF
SHARES OUTSTANDING SHARES OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED SHARES OWNED SHARES
-------------------------------------------------------- ----------- --------------- ----------- ---------------

Daniel P. Spalding...................................... 13,885(1) * 147,218 1.0%
Ronald Suchodolski......................................
Jonathan J. Ledecky..................................... 207,100(2) 1.9% 207,100 1.4
Richard H. Nagel........................................
Donald Ray Pate, Jr..................................... 91,777(3) * 158,444 1.1
Douglas Moskonas........................................
Leo C. McKenna.......................................... 1,116 * 1,116 *
David J. Vander Zanden..................................
Rochelle Lamm Wallach...................................
All current executive officers and directors as a group
(13 persons).......................................... 315,251 2.9 565,251 3.9

5% STOCKHOLDERS
FMR Corp.(4)............................................ 1,343,676 11.0 1,463,676 10.0
82 Devonshire Street
Boston, MA 02109
Massachusetts Financial Services Company(4)............. 704,760 5.8 764,760 5.3
500 Boylston Street
Boston, MA 02116

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

* Less than 1%.

(1) Does not include shares underlying U.S. Office Products Options which are
exercisable within 60 days following the School Specialty Distribution. The
number of such shares will be adjusted as described under
"Management--Replacement of U.S. Office Products' Options".

(2) Does not include shares underlying Mr. Ledecky's options described under
"Management--1998 Stock Incentive Plan", none of which are exercisable
within the next twelve months.

(3) Mr. Pate has entered into hedging arrangements that place a ceiling and a
floor on the price of certain of his shares of U.S. Office Products common
stock.

(4) Based upon a Schedule 13G for U.S. Office Products filed with the Securities
and Exchange Commission.

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DESCRIPTION OF SCHOOL SPECIALTY CAPITAL STOCK

GENERAL

Set forth below is a summary of the terms of School Specialty's Capital
Stock. At the time of the School Specialty Distribution, the Company's
authorized capital stock will consist of 150,000,000 shares of School Specialty
Common Stock, par value $.001 per share, and 1,000,000 shares of preferred
stock, par value $.001 per share (the "Preferred Stock"). At the time of the
School Specialty Distribution, the Company is expected to have outstanding
approximately 12,187,723 shares of School Specialty Common Stock and no shares
of Preferred Stock.

COMMON STOCK

The holders of School Specialty 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 School Specialty 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". The holders of School Specialty
Common Stock are entitled to share ratably in the net assets of School Specialty
upon liquidation after payment or provision for all liabilities and any
preferential liquidation rights of any Preferred Stock then outstanding. The
holders of School Specialty Common Stock have no preemptive rights to purchase
shares of stock of School Specialty. Shares of School Specialty Common Stock are
not subject to any redemption provisions and are not convertible into any other
securities of School Specialty. All of the shares of School Specialty Common
Stock to be distributed pursuant to the Distribution will be fully paid and
nonassessable.

PREFERRED STOCK

The Preferred Stock may be issued from time to time by the School Specialty
Board of Directors as shares of one or more classes or series. Subject to the
provisions of School Specialty's Certificate of Incorporation and limitations
prescribed by law, the School Specialty 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. School Specialty has 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
School Specialty 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 School
Specialty's management. The issuance of shares of the Preferred Stock pursuant
to the School Specialty Board of Directors' authority described above may
adversely affect the rights of the holders of School Specialty Common Stock. For
example, Preferred Stock issued by School Specialty may rank prior to School
Specialty Common Stock as to dividend rights, liquidation preference or both,
may have full or limited voting rights and may be convertible into shares of
School Specialty Common Stock. Accordingly, the issuance of shares of Preferred
Stock may discourage bids for School Specialty Common Stock or may otherwise
adversely affect the market price of School Specialty Common Stock.

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STATUTORY BUSINESS COMBINATION PROVISION

School Specialty is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware 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: (i) 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; (ii) 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 (iii) 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: (i) the owner of 15% or more of the outstanding
voting stock of the corporation; or (ii) 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. School Specialty has not adopted such an
amendment to its Certificate of Incorporation or Bylaws. Under the Company's
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 SCHOOL SPECIALTY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AFFECTING CHANGE OF CONTROL

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

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CLASSIFIED BOARD

School Specialty's Certificate of Incorporation includes provisions dividing
the School Specialty Board's membership into three classes, each of which serves
until the third succeeding annual meeting with one class being elected at each
annual meeting of 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 School Specialty's stockholders to change a
majority of the members of the School Specialty Board. School Specialty believes
that a classified board of directors will assure continuity and stability of
School Specialty's management and policies, without diminishing accountability
to stockholders. School Specialty's classified Board will ensure that a majority
of directors at any given time will have experience in the business and
competitive affairs of School Specialty.

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 stockholder 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
School Specialty 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 School Specialty Board, 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 School Specialty
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 of School
Specialty. These provisions are intended to establish orderly procedures for the
conduct of School Specialty's 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 School Specialty Common Stock for the stockholders to amend the
Bylaws. This super-majority requirement could make it more difficult for
stockholders to compel Board action by the School Specialty Board by amending
the Bylaws to require actions not presently permitted by the Bylaws.

RIGHTS PLAN

After the Offering, School Specialty intends to consider adoption of a
shareholder rights plan or "poison pill." As with the Certificate of
Incorporation and Bylaw provisions discussed above, if such a plan is adopted,
it could render more difficult or discourage an attempt to obtain control of
School Specialty. However, such a plan might also provide the School Specialty
Board with more negotiating

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leverage by delaying or making more difficult unsolicited acquisitions or
changes of control of School Specialty.

LIMITATION ON DIRECTORS' LIABILITIES

Pursuant to School Specialty's Certificate of Incorporation and under
Delaware law, directors of School Specialty are not liable to School Specialty
or its 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 School Specialty Common Stock will
be American Stock Transfer & Trust Company.

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EXPERTS

The consolidated financial statements of School Specialty as of April 30,
1996 and April 26, 1997, for the four months ended April 30, 1996, and for the
year ended April 30, 1997, included in this Prospectus, have been so included in
reliance on the January 13, 1998 (except for Note 1 and the last paragraph of
Note 3, which are as of May 14, 1998) report of Price Waterhouse 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 years
ended December 31, 1995 and December 31, 1994 included in this Prospectus,
except as they relate to The Re-Print Corporation for the years ended December
31, 1995 and December 31, 1994, have been audited by Ernst & Young, independent
accountants, and insofar as they relate to The Re-Print Corporation for such
periods, by BDO Seidman, LLP, independent accountants, whose report dated
February 8, 1996 thereon appears herein. Such consolidated financial statements
have been so included in reliance on the reports of such independent accountants
given on the authority of such firms as experts in auditing and accounting.

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.

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 February 3, 1998 report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.

VALIDITY OF SHARES

The validity of shares of School Specialty Common Stock offered hereby will
be passed upon on behalf of School Specialty and U.S. Office Products by Wilmer,
Cutler & Pickering, Washington, D.C. and on behalf of the Underwriters by
Sullivan & Cromwell, Washington, D.C.

ADDITIONAL INFORMATION

School Specialty has filed with the SEC a Registration Statement on Form S-1
(including exhibits, schedules, and amendments thereto, the "School Specialty
Form S-1") pursuant to the Securities Act of 1933, as amended (the "Securities
Act"), with respect to School Specialty Common Stock. This Prospectus, while
forming a part of the School Specialty Form S-1, does not contain all of the
information set forth in the School Specialty Form S-1. Reference is hereby made
to the School Specialty Form S-1 for further information with respect to School
Specialty. Statements contained herein concerning the provisions of documents
filed as exhibits to the School Specialty Form S-1 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 School Specialty Form S-1 is 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 be obtained by mail from the Public Reference
Branch of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates or on the Internet at http://www.sec.gov.

Following the School Specialty Distribution, School Specialty will be
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and, in accordance therewith, will file
reports, proxy statements and other information with the SEC that will be

424B1 58th Page of 115 TOC 1st Previous Next ↓Bottom Just 58th
available for inspection and copying 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 Public Reference Branch of the SEC at the address
referred to above.

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

Holders of School Specialty Common Stock having inquiries related to their
investment in School Specialty should contact Daniel P. Spalding, Chief
Executive Officer, at 1000 North Bluemound Drive, P.O. Box 1579, Appleton,
Wisconsin 54914, telephone (920) 734-2756.

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

Childcraft Education Corp.-Registered Trademark- is a trademark of
Childcraft Education Corp. School Specialty-Registered Trademark- and Education
Access-Registered Trademark- are trademarks of School Specialty. Gresswell is a
common law trademark of School Specialty.

424B1 59th Page of 115 TOC 1st Previous Next ↓Bottom Just 59th
SCHOOL SPECIALTY, INC.
INDEX TO FINANCIAL STATEMENTS

[Enlarge/Download Table]

PAGE
-----

SCHOOL SPECIALTY, INC.
Historical Financial Statements....................................................
Report of Price Waterhouse LLP, Independent Accountants.......................... F-2
Report of Ernst & Young LLP, Independent Auditors................................ F-3
Report of BDO Seidman, LLP, Independent Auditors................................. F-4
Consolidated Balance Sheet as of April 30, 1996, April 26, 1997 and January 24,
1998 (unaudited)................................................................ F-5
Consolidated Statement of Operations for the years ended December 31, 1994 and
1995, the four months ended April 30, 1996, the fiscal year ended April 26, 1997
and the nine months ended January 25, 1997 (unaudited) and January 24, 1998
(unaudited)..................................................................... F-6
Consolidated Statement of Stockholder's (Deficit) Equity for the years ended
December 31, 1994 and 1995, the four months ended April 30, 1996, the fiscal
year ended April 26, 1997 and the nine months ended January 24, 1998
(unaudited)..................................................................... F-7
Consolidated Statement of Cash Flows for the years ended December 31, 1994 and
1995, the four months ended April 30, 1996, the fiscal year ended April 26, 1997
and the nine months ended January 25, 1997 (unaudited) and January 24, 1998
(unaudited)..................................................................... F-8
Notes to Consolidated Financial Statements....................................... F-10
Pro Forma Financial Statements.....................................................
Introduction to Pro Forma Financial Information.................................. F-26
Pro Forma Combined Balance Sheet as of January 24, 1998 (unaudited).............. F-28
Pro Forma Combined Statement of Income for the nine months ended January 24, 1998
(unaudited)..................................................................... F-29
Pro Forma Combined Statement of Income for the nine months ended January 25, 1997
(unaudited)..................................................................... F-30
Pro Forma Combined Statement of Income for the fiscal year ended April 26, 1997
(unaudited)..................................................................... F-31
Notes to Pro Forma Combined Financial Statements................................. F-32

AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION AND SUBSIDIARY
Report of Altschuler, Melvoin and Glasser LLP, Independent Accountants............. F-34
Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997
(unaudited)...................................................................... F-35
Consolidated Statement of Operations for the years ended December 31, 1995 and 1996
and the nine months ended September 30, 1996 (unaudited) and 1997 (unaudited).... F-36
Consolidated Statement of Changes in Shareholders' Equity for the years ended
December 31, 1995 and 1996 and the nine months ended September 30, 1997
(unaudited)...................................................................... F-37
Consolidated Statement of Cash Flows for the years ended December 31, 1995 and 1996
and the nine months ended September 30, 1996 (unaudited) and 1997 (unaudited).... F-38
Notes to the Consolidated Financial Statements..................................... F-39

SAX ARTS & CRAFTS, INC.
Report of Price Waterhouse LLP, Independent Accountants............................ F-44
Balance Sheets as of December 16, 1995, and December 25, 1996 and June 29, 1997
(unaudited)...................................................................... F-45
Statements of Operations for the years ended December 17, 1994, December 16, 1995
and December 25, 1996 and the six months ended June 30, 1996 (unaudited) and June
29, 1997 (unaudited)............................................................. F-46
Statements of Shareholders' Equity for the years ended December 17, 1994, December
16, 1995 and December 25, 1996 and the six months ended June 29, 1997
(unaudited)...................................................................... F-47
Statements of Cash Flows for the years ended December 17, 1994, December 16, 1995
and December 25, 1996 and the six months ended June 30, 1996 (unaudited) and June
29, 1997 (unaudited)............................................................. F-48
Notes to Financial Statements...................................................... F-49

F-1

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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 stockholder's 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 30, 1996 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 year ended April 26, 1997, 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.

PRICE WATERHOUSE LLP

Minneapolis, Minnesota
January 13, 1998, except for Note 1 and the last
paragraph of Note 3, which are as of May 14, 1998

F-2

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REPORT OF INDEPENDENT AUDITORS

BOARD OF DIRECTORS
SCHOOL SPECIALTY, INC.

We have audited the accompanying consolidated statements of operations,
consolidated statement of stockholder's (deficit) equity and cash flows of
School Specialty, Inc. (the Company) for the years ended December 31, 1995 and
1994. 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 and $24,140,000 for the years ended December 31, 1995
and 1994, respectively. 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 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, based on our audits 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 years
December 31, 1995 and 1994, in conformity with generally accepted accounting
principles.

ERNST & YOUNG LLP
Milwaukee, Wisconsin
February 2, 1996

F-3

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REPORT OF INDEPENDENT AUDITORS

Board of Directors
The Re-Print Corporation
Birmingham, Alabama

We have audited the accompanying balance sheets of The Re-Print Corporation
as of December 31, 1995 and 1994, and the related statements of income,
stockholders' equity, and cash flows for the years then ended (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 audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial position of The Re-Print Corporation at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.

BDO Seidman, LLP

Atlanta, Georgia
February 8, 1996

F-4

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SCHOOL SPECIALTY, INC.

CONSOLIDATED BALANCE SHEET

(IN THOUSANDS)

[Enlarge/Download Table]

APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
----------- ----------- ------------

(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 46 $ $
Accounts receivable, less allowance for doubtful
accounts of $202, $471 and $724, respectively........ 13,129 17,232 41,530
Inventories............................................ 20,276 24,461 32,946
Prepaid expenses and other current assets.............. 5,556 10,331 8,997
----------- ----------- ------------
Total current assets............................... 39,007 52,024 83,473

Property and equipment, net.............................. 7,647 14,478 20,489
Intangible assets, net................................... 7,142 20,824 94,651
Other assets............................................. 777 359 2,594
----------- ----------- ------------
Total assets....................................... $ 54,573 $ 87,685 $ 201,207
----------- ----------- ------------
----------- ----------- ------------

LIABILITIES AND STOCKHOLDER'S (DEFICIT) EQUITY
Current liabilities:
Short-term debt........................................ $ 25,887 $ 262 $ 272
Short-term payable to U.S. Office Products............. 26,692 16,873
Accounts payable....................................... 11,933 9,091 11,951
Accrued compensation................................... 785 860 5,502
Other accrued liabilities.............................. 4,065 659 5,262
----------- ----------- ------------
Total current liabilities.......................... 42,670 37,564 39,860

Long-term debt........................................... 15,031 566 385
Long-term payable to U.S. Office Products................ 33,226 62,470
Deferred income taxes.................................... 1,139
----------- ----------- ------------
Total liabilities.................................. 58,840 71,356 102,715
----------- ----------- ------------
Commitments and contingencies

Stockholder's (deficit) equity:
Divisional equity...................................... 7,487 19,985 93,313
Retained (deficit) earnings............................ (11,754) (3,656) 5,179
----------- ----------- ------------
Total stockholder's (deficit) equity............... (4,267) 16,329 98,492
----------- ----------- ------------
Total liabilities and stockholder's (deficit)
equity............................................. $ 54,573 $ 87,685 $ 201,207
----------- ----------- ------------
----------- ----------- ------------

See accompanying notes to consolidated financial statements.

F-5

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SCHOOL SPECIALTY, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(IN THOUSANDS)

[Enlarge/Download Table]

FOR THE FOR THE FOUR FOR THE FISCAL FOR THE NINE
YEAR ENDED MONTHS ENDED YEAR ENDED MONTHS ENDED
------------------------------ -------------- -------------- --------------------------
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26, JANUARY 25, JANUARY 24,
1994 1995 1996 1997 1997 1998
-------------- -------------- -------------- -------------- ------------ ------------

(UNAUDITED)
Revenues...................... $ 119,510 $ 150,482 $ 28,616 $ 191,746 $ 159,977 $ 247,880
Cost of revenues.............. 87,750 105,757 20,201 136,577 114,380 176,501
-------------- -------------- -------------- -------------- ------------ ------------
Gross profit............ 31,760 44,725 8,415 55,169 45,597 71,379

Selling, general and
administrative expenses..... 27,281 39,869 10,307 43,462 33,396 50,999
Non-recurring acquisition
costs....................... 1,122 1,792 1,792
Restructuring costs........... 2,532 194
-------------- -------------- -------------- -------------- ------------ ------------
Operating income
(loss)................ 4,479 2,324 (3,014) 9,721 10,409 20,380

Other (income) expense:
Interest expense.......... 3,007 5,536 1,461 4,197 3,358 4,100
Interest income........... (6) (101) (109)
Other..................... (86) (18) 67 (196) (204) 441
-------------- -------------- -------------- -------------- ------------ ------------
Income (loss) before provision
for (benefit from) income
taxes....................... 1,558 (3,194) (4,536) 5,720 7,356 15,948
Provision for (benefit from)
income taxes................ 218 173 139 (2,412) 3,750 7,113
-------------- -------------- -------------- -------------- ------------ ------------
Net income (loss)............. $ 1,340 $ (3,367) $ (4,675) $ 8,132 $ 3,606 $ 8,835
-------------- -------------- -------------- -------------- ------------ ------------
-------------- -------------- -------------- -------------- ------------ ------------
Weighted average shares
outstanding:
Basic....................... 5,062 6,562 8,611 10,003 9,553 12,751
Diluted..................... 5,078 6,669 8,789 10,196 9,758 13,020
Net income (loss) per share:
Basic....................... $ 0.26 $ (0.51) $ (0.54) $ 0.81 $ 0.38 $ 0.69
Diluted..................... $ 0.26 $ (0.50) $ (0.53) $ 0.80 $ 0.37 $ 0.68

See accompanying notes to consolidated financial statements.

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SCHOOL SPECIALTY, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDER'S (DEFICIT) EQUITY

(IN THOUSANDS)

[Enlarge/Download Table]

TOTAL
RETAINED STOCKHOLDER'S
DIVISIONAL (DEFICIT) (DEFICIT)
EQUITY EARNINGS EQUITY
----------- ----------- ---------------

Balance at December 31, 1993.......................... $ 5,247 $ (4,780) $ 467
Issuance of Pooled Company common stock for cash.... 80 80
Cash dividends declared at Pooled Companies......... (60) (60)
Net income.......................................... 1,340 1,340
----------- ----------- ---------------

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)
----------- ----------- ---------------

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)
----------- ----------- ---------------

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

Balance at April 26, 1997............................. 19,985 (3,656) 16,329
Unaudited data:
Issuances of U.S. Office Products Company common
stock in conjunction with acquisitions............ 3,566 3,566
Capital contribution by U.S. Office Products........ 69,762 69,762
Net income.......................................... 8,835 8,835
----------- ----------- ---------------
Balance at January 24, 1998 (unaudited)............... $ 93,313 $ 5,179 $ 98,492
----------- ----------- ---------------
----------- ----------- ---------------

See accompanying notes to consolidated financial statements.

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SCHOOL SPECIALTY, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(IN THOUSANDS)

[Enlarge/Download Table]

FOR THE FOUR
MONTHS FOR THE FISCAL FOR THE NINE
FOR THE YEAR ENDED ENDED YEAR ENDED MONTHS ENDED
-------------------------------- ------------- -------------- ------------
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26, JANUARY 25,
1994 1995 1996 1997 1997
--------------- --------------- ------------- -------------- ------------

(UNAUDITED)
Cash flows from operating activities:
Net income (loss)......................... $ 1,340 $ (3,367) $ (4,675) $ 8,132 $ 3,606
Adjustment to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization
expense............................. 1,719 2,927 674 2,106 1,570
Non-recurring acquisition costs....... 1,122 1,792 1,792
Other................................. 231 277 118 115 73
Changes in current assets and
liabilities (net of assets acquired
and liabilities assumed in business
combinations accounted for under the
purchase method):
Accounts receivable............... (2,226) 2,666 3,727 1,277 (629)
Inventory......................... 4,365 (2,523) (4,376) 2,737 9,816
Prepaid expenses and other current
assets.......................... (989) (338) (443) (2,361) (1,509)
Accounts payable.................. (4,367) 2,642 3,459 (6,969) (12,376)
Accrued liabilities............... (341) 2,544 (784) (5,911) 1,866
------- ------- ------------- -------------- ------------
Net cash provided by (used in)
operating activities........ (268) 4,828 (1,178) 918 4,209
------- ------- ------------- -------------- ------------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash
received................................ (2,106) (5,389) (7,734) (7,609)
Payments of non-recurring acquisition
costs................................... (1,122) (1,792) (1,725)
Additions to property and equipment....... (630) (881) (120) (7,216) (5,317)
Other..................................... (120) 178 414
------- ------- ------------- -------------- ------------
Net cash used in investing
activities.................. (2,856) (6,092) (828) (16,742) (14,651)
------- ------- ------------- -------------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock.... 80 500 1,080 1,979 1,979
Proceeds from issuance of long-term
debt.................................... 1,850 1,715 750 1,160
Payments of long-term debt................ (2,023) (1,488) (194) (16,962) (17,164)
Proceeds from (payments of) short-term
debt, net............................... 3,295 655 1,263 (29,908) (29,775)
Advances from U.S. Office Products
Company................................. 59,919 55,029
Capital contribution by U.S. Office
Products................................
Payments of dividends at Pooled
Companies............................... (134) (138)
Purchase of treasury stock at Pooled
Company................................. (92)
------- ------- ------------- -------------- ------------
Net cash provided by financing
activities.................. 3,202 1,156 2,011 15,778 11,229
------- ------- ------------- -------------- ------------
Net increase (decrease) in cash and cash
equivalents............................... 78 (108) 5 (46) 787
Cash and cash equivalents at beginning of
period.................................... 71 149 41 46 46
------- ------- ------------- -------------- ------------
Cash and cash equivalents at end of
period.................................... $ 149 $ 41 $ 46 $ $ 833
------- ------- ------------- -------------- ------------
------- ------- ------------- -------------- ------------
Supplemental disclosures of cash flow
information:
Interest paid......................... $ 2,850 $ 5,564 $ 1,461 $ 456 $ 630
Income taxes paid (refunded).......... $ 236 $ 9 $ (3) $ (132) $ (139)

JANUARY 24,
1998
------------

Cash flows from operating activities:
Net income (loss)......................... $ 8,835
Adjustment to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization
expense............................. 3,382
Non-recurring acquisition costs.......
Other................................. 43
Changes in current assets and
liabilities (net of assets acquired
and liabilities assumed in business
combinations accounted for under the
purchase method):
Accounts receivable............... (6,450)
Inventory......................... 9,590
Prepaid expenses and other current
assets.......................... 3,844
Accounts payable.................. (6,593)
Accrued liabilities............... 2,741
------------
Net cash provided by (used in)
operating activities........ 15,392
------------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash
received................................ (92,076)
Payments of non-recurring acquisition
costs...................................
Additions to property and equipment....... (4,095)
Other..................................... (366)
------------
Net cash used in investing
activities.................. (96,537)
------------
Cash flows from financing activities:
Proceeds from issuance of common stock....
Proceeds from issuance of long-term
debt....................................
Payments of long-term debt................ (6,200)
Proceeds from (payments of) short-term
debt, net............................... (1,841)
Advances from U.S. Office Products
Company................................. 19,424
Capital contribution by U.S. Office
Products................................ 69,762
Payments of dividends at Pooled
Companies...............................
Purchase of treasury stock at Pooled
Company.................................
------------
Net cash provided by financing
activities.................. 81,145
------------
Net increase (decrease) in cash and cash
equivalents...............................
Cash and cash equivalents at beginning of
period....................................
------------
Cash and cash equivalents at end of
period.................................... $
------------
------------
Supplemental disclosures of cash flow
information:
Interest paid......................... $ 27
Income taxes paid (refunded).......... $

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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 years ended December
31, 1994 and 1995, the fiscal year ended April 26, 1997, and the nine months
ended January 25, 1997 and January 24, 1998. The fair values of the assets and
liabilities of the acquired companies at the dates of the acquisitions are
presented as follows:

[Enlarge/Download Table]

FOR THE NINE
FOR THE YEAR ENDED FOR THE FOUR FOR THE FISCAL MONTHS ENDED
-------------------------------- MONTHS ENDED YEAR ENDED ------------
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26, JANUARY 25,
1994 1995 1996 1997 1997
--------------- --------------- ------------- -------------- ------------

(UNAUDITED)
Accounts receivable......................... $ 8,112 $ 1,589 $ $ 5,381 $ 5,381
Inventories................................. 9,743 1,823 6,922 6,922
Prepaid expenses and other current assets... 823 502 2,371 2,371
Property and equipment...................... 2,211 4,536 1,155 1,155
Intangible assets........................... 3,268 14,248 13,994
Other assets................................ 1,488 156 29 29
Short-term debt............................. (6,785) (191) (4,283) (4,283)
Accounts payable............................ (6,447) (274) (4,012) (4,012)
Accrued liabilities......................... (1,661) (225) (1,846) (1,717)
Long-term debt.............................. (5,378) (5,795) (1,746) (1,746)
------- ------- ------------- -------------- ------------
Net assets acquired........... $ 2,106 $ 5,389 $ $ 18,219 $ 18,094
------- ------- ------------- -------------- ------------
------- ------- ------------- -------------- ------------
The acquisitions were funded as follows:
U.S. Office Products common stock........... $ $ $ $ 10,485 $ 10,485
Cash paid, net of cash acquired............. 2,106 5,389 7,734 7,609
------- ------- ------------- -------------- ------------
Total......................... $ 2,106 $ 5,389 $ $ 18,219 $ 18,094
------- ------- ------------- -------------- ------------
------- ------- ------------- -------------- ------------

JANUARY 24,
1998
------------

Accounts receivable......................... $ 17,848
Inventories................................. 18,075
Prepaid expenses and other current assets... 2,431
Property and equipment...................... 6,667
Intangible assets........................... 74,741
Other assets................................ 210
Short-term debt............................. (1,850)
Accounts payable............................ (9,410)
Accrued liabilities......................... (7,050)
Long-term debt.............................. (6,020)
------------
Net assets acquired........... $ 95,642
------------
------------
The acquisitions were funded as follows:
U.S. Office Products common stock........... $ 3,566
Cash paid, net of cash acquired............. 92,076
------------
Total......................... $ 95,642
------------
------------

See accompanying notes to consolidated financial statements.

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SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS)

NOTE 1--BACKGROUND

School Specialty, Inc. (the "Company") is a Delaware corporation which is a
wholly-owned subsidiary of U.S. Office Products Company ("U.S. Office
Products"). On January 13, 1998, U.S. Office Products announced its intention to
spin-off its Educational Supplies and Products Division (the "Education
Division") as an independent publicly owned company. This transaction is
expected to be effected through the distribution of shares of the Company to
U.S. Office Products' shareholders effective on or about June 9, 1998 (the
"Distribution"). Prior to the Distribution, U.S. Office Products plans to
contribute its equity interests in certain wholly-owned subsidiaries associated
with the Education Division to the Company. U.S. Office Products and the Company
will enter 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 anticipates selling 2.1 million
shares (2.4 million shares if the over-allotment is sold) in an initial public
offering ("IPO").

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") 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 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, 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 will be allocated to the Company
at the time of the Distribution. The consolidated statement of income does not
include an allocation of interest expense on all debt allocated to the Company.
See Note 9 for further discussion of interest expense.

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SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS)

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.

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 the fiscal year ended
April 26, 1997 ("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. The estimated useful lives
range from 25 to 40 years for buildings and its components and 3 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.

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SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS)

NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 does not file separate
federal income tax returns but rather is 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.

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 recognized on an accrual basis in the period earned and
are recorded as a reduction to cost of revenues. 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 income as a
component of selling, general and administrative expenses.

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

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SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS)

NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
included in the consolidated statement of income as a component of selling,
general and administrative expenses. Such amortization expense for the year
ended December 31, 1994 and 1995, the four months ended April 30, 1996, the
fiscal year ended April 26, 1997 and the nine months ended January 24, 1998 was
$3,755, $4,395, $832, $3,621 and $4,646 (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)."

NET INCOME PER SHARE

Net income per share is calculated in accordance with the Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share," which
establishes standards for computing and presenting earnings per share ("EPS").
SFAS No. 128 requires dual presentation of basic and diluted EPS on the face of
the income statement. Basic EPS excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of 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 difference between the
weighted-average number of common shares used for the calculation of basic EPS
and the weighted average number of shares of common shares used for the diluted
EPS is comprised of the dilutive effect of outstanding common stock options.
However, a portion of the Company's employee stock options outstanding during
the periods presented were not included in the computation of diluted EPS as
they were anti-dilutive.

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SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS)

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

In June 1997, the 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
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company intends to adopt SFAS No. 130 in
fiscal 1999.

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 24, 1998 and the results
of operations and of cash flows for the nine months ended January 25, 1997 and
January 24, 1998, 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 will issue approximately 12.2 million shares
of its common stock to U.S. Office Products, which will then distribute 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, retroactively adjusted to give effect to the one for nine
distribution ratio.

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:

[Enlarge/Download Table]

NUMBER OF
COMPANY NAME SHARES ISSUED
------------------------------------------------------------------------------ --------------

School Specialty, Inc......................................................... 2,307,693
Re-Print...................................................................... 1,950,000
--------------
Total shares issued....................................................... 4,257,693
--------------
--------------

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

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SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS)

NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
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:

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SCHOOL POOLED
SPECIALTY COMPANIES COMBINED
----------- ----------- -----------

For the year ended December 31, 1994
Revenues................................................................ $ $ 119,510 $ 119,510
Net income.............................................................. $ $ 1,340 $ 1,340
For the year ended December 31, 1995
Revenues................................................................ $ $ 150,482 $ 150,482
Net income (loss)....................................................... $ $ (3,367) $ (3,367)
For the four months ended April 30, 1996
Revenues................................................................ $ $ 28,616 $ 28,616
Net income (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
For the nine months ended January 25, 1997 (unaudited):
Revenues................................................................ $ 149,651 $ 10,326 $ 159,977
Net income.............................................................. $ 3,265 $ 341 $ 3,606
For the nine months ended January 24, 1998 (unaudited):
Revenues................................................................ $ 247,880 $ $ 247,880
Net income.............................................................. $ 8,835 $ $ 8,835

PURCHASE METHOD

In 1994, one of the Pooled Companies made one acquisition accounted for
under the purchase method for an aggregate cash purchase price of $2,106. The
total assets related to the acquisition were $22,377. The results of the
acquisition have been included in the Company's results from its date of
acquisition.

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.

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SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS)

NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
The following presents the unaudited pro forma results of operations of the
Company for the year ended December 31, 1995 and the fiscal year ended April 26,
1997 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
through April 27, 1997 as if all such purchase acquisitions had been made at the
beginning of 1995. The results presented below include certain pro forma
adjustments to reflect the amortization of intangible assets, adjustments in
executive compensation of $1,200 and $124 for the year ended December 31, 1995
and the fiscal year ended April 26, 1997, respectively, and the inclusion of a
federal income tax provision on all earnings:

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FOR THE FISCAL YEAR ENDED
---------------------------

DECEMBER 31, APRIL 26,
1995 1997
-------------- -----------
Revenues............................................................................. $ 206,329 $ 206,566
Net income (loss).................................................................... (1,199) 2,939

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 1995 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:

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FACILITY SEVERANCE OTHER ASSET
CLOSURE AND AND WRITE-DOWNS
CONSOLIDATION TERMINATIONS AND COSTS TOTAL
--------------- ------------- ------------- ---------

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
Utilizations........................................... (151) (151)
------ ------ ------------- ---------
Balance at January 24, 1998 (unaudited).................. $ $ $ $
------ ------ ------------- ---------
------ ------ ------------- ---------

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SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS)

NOTE 6--PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following:

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APRIL 30, APRIL 26,
1996 1997
----------- ---------

Deferred catalog costs...................................................................... $ 4,387 $ 5,740
Deferred income taxes....................................................................... 1,184
Other....................................................................................... 1,169 3,407
----------- ---------
Total prepaid expenses and other current assets........................................... $ 5,556 $ 10,331
----------- ---------
----------- ---------

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:

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APRIL 30, APRIL 26,
1996 1997
--------- ---------

Land....................................................................................... $ 58 $ 729
Buildings.................................................................................. 2,042 6,488
Furniture and fixtures..................................................................... 882 6,502
Warehouse Equipment........................................................................ 8,767 3,163
Leasehold improvements..................................................................... 631 2,185
--------- ---------
12,380 19,067
Less: Accumulated depreciation............................................................. (4,733) (4,589)
--------- ---------
Net property and equipment................................................................. $ 7,647 $ 14,478
--------- ---------
--------- ---------

Depreciation expense for the years ended December 31, 1994 and 1995, the
four months ended April 30, 1996 and the fiscal year ended April 26, 1997 was
$888, $1,645, $470 and $1,540, respectively.

NOTE 8--INTANGIBLE ASSETS

Intangible assets consist of the following:

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APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
--------- --------- ------------

(UNAUDITED)
Goodwill.................................................................... $ 8,312 $ 22,128 $ 96,770
Other....................................................................... 1,647 2,020 2,487
--------- --------- ------------
9,959 24,148 99,257
Less: Accumulated amortization.............................................. (2,817) (3,324) (4,606)
--------- --------- ------------
Net intangible assets................................................. $ 7,142 $ 20,824 $ 94,651
--------- --------- ------------
--------- --------- ------------

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SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS)

NOTE 8--INTANGIBLE ASSETS (CONTINUED)
Amortization expense for the years ended December 31, 1994 and 1995, the
four months ended April 30, 1996, the fiscal year ended April 26, 1997 and the
nine months ended January 24, 1998 was $757, $1,098, $204, $566 and $1,411
(unaudited), respectively.

NOTE 9--CREDIT FACILITIES

SHORT-TERM DEBT

Short-term debt consists of the following:

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APRIL 30, APRIL 26,
1996 1997
--------- ---------

Credit facilities with banks, average interest rates ranging from 10% to 10.75% at April
30, 1996................................................................................. $ 21,898 $
Subordinated debt, interest at 8% at April 30, 1996........................................ 1,000
Other...................................................................................... 441 30
Current maturities of long-term debt....................................................... 2,548 232
--------- ---------
Total short-term debt...................................................................... $ 25,887 $ 262
--------- ---------
--------- ---------

LONG-TERM DEBT

Long-term debt consists of the following:

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APRIL 30, APRIL 26,
1996 1997
--------- ---------

Subordinated notes, at 12.5% at April 30, 1996............................................. $ 13,325 $
Note payable to former shareholder, interest at 10% at April 30, 1996...................... 2,717
Other...................................................................................... 953 483
Capital lease obligations.................................................................. 584 315
--------- ---------
17,579 798
Less: Current maturities of long-term debt................................................. (2,548) (232)
--------- ---------
Total long-term debt................................................................... $ 15,031 $ 566
--------- ---------
--------- ---------

The agreement related to the subordinated notes provided for the bank and
its agents to receive 12,551 and 14,941 detachable warrants for Pooled Company
common stock in June 1994 and January 1995, respectively. The warrants were
valued at $45 per share with such amount deducted from the face value of the
subordinated notes. In conjunction with the acquisition of the Pooled Company by
U.S. Office Products, the outstanding subordinated debt balance was paid in full
and all of the outstanding warrants were exercised and subsequently converted to
U.S. Office Products common stock.

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SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS)

NOTE 9--CREDIT FACILITIES (CONTINUED)
MATURITIES OF LONG-TERM DEBT

Maturities on long-term debt, including capital lease obligations, are as
follows:

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1998.............................................................................. $ 232
1999.............................................................................. 216
2000.............................................................................. 204
2001.............................................................................. 41
2002.............................................................................. 36
Thereafter........................................................................ 68
---------
Total maturities of long-term debt.............................................. $ 797
---------
---------

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 centralized cash management
system, which involves 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:

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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

Unaudited data:
Payments of long-term debt of acquired companies................................. 822
Funding of acquisitions and payment of acquisition costs......................... 24,646
Allocated corporate expenses..................................................... 3,089
Normal operating costs paid by U.S. Office Products.............................. 687
---------
Balance at January 24, 1998 (unaudited).......................................... $ 62,470
---------
---------

The average outstanding long-term payable to U.S. Office Products during the
fiscal year ended April 26, 1997 and the nine months ended January 24, 1998 was
$27,269 and $47,767 (unaudited), 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

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SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS)

NOTE 9--CREDIT FACILITIES (CONTINUED)
interest expense from U.S. Office Products totaling $3,879 and $4,057
(unaudited) during the year ended April 26, 1997 and the nine months ended
Janaury 24, 1998, respectively.

NOTE 10--INCOME TAXES

The provision for income taxes consists of:

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FOR THE YEAR ENDED FOR THE FOUR FOR THE FISCAL
------------------------------ MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26,
1994 1995 1996 1997
-------------- -------------- -------------- --------------

Income taxes currently payable:
Federal........................................ $ (165) $ (66) $ $ 71
State.......................................... 149 99
------- ------- ------- -------
(16) (66) 170
------- ------- ------- -------
Deferred income tax expense (benefit)............ 234 239 139 (2,582)
------- ------- ------- -------
Total provision for (benefit from) income
taxes...................................... $ 218 $ 173 $ 139 $ (2,412)
------- ------- ------- -------
------- ------- ------- -------

Deferred taxes are comprised of the following:

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APRIL 30, APRIL 26,
1996 1997
--------- ---------

Current deferred tax assets:
Inventory................................................................................. $ (349) $ 265
Allowance for doubtful accounts........................................................... 106 193
Net operating loss carryforward........................................................... 3,820 3,069
Accrued liabilities....................................................................... 332 421
Prepaid catalog advertising/restructuring................................................. (205) (1,893)
--------- ---------
Total current deferred tax assets....................................................... 3,704 2,055
--------- ---------
Long-term deferred tax assets (liabilities):
Property and equipment.................................................................... (126) (289)
Intangible assets......................................................................... 622 258
--------- ---------
Total long-term deferred tax assets (liabilities)....................................... 496 (31)
--------- ---------
Subtotal................................................................................ 4,200 2,024
--------- ---------
Valuation allowance....................................................................... (5,339)
--------- ---------
Net deferred tax asset (liability)...................................................... $ (1,139) $ 2,024
--------- ---------
--------- ---------

At April 30, 1996, the valuation allowance 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, resulting in a benefit
from income taxes.

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SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS)

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

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FOR THE YEAR ENDED FOR THE FOUR FOR THE FISCAL
-------------------------------- MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26,
1994 1995 1996 1997
--------------- --------------- ----------------- ---------------

U.S. federal statutory rate...................... 34.0% 34.0% 35.0% 35.0%
State income taxes, net of federal income tax
benefit for fiscal 1997........................ 9.6 1.0
Net operating loss utilized...................... (33.0)
Net benefit for current year net operating
loss........................................... (34.0) (32.8)
Reversal of valuation allowance.................. (84.8)
Nondeductible goodwill........................... (2.2) 1.6
Nondeductible acquisition costs.................. 5.0
Tax on separate company income not offset against
other company's loss........................... (5.4) (3.0)
Other............................................ 3.4
----- ----- ----- -----
Effective income tax rate........................ 14.0% (5.4)% (3.0 )% (42.2 )%
----- ----- ----- -----
----- ----- ----- -----

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:

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CAPITAL OPERATING
LEASES LEASES
----------- -----------

1998........................................................................................ $ 232 $ 871
1999........................................................................................ 118 806
2000........................................................................................ 6 599
2001........................................................................................ 517
2002........................................................................................ 496
Thereafter.................................................................................. 1,057
----- -----------
Total minimum lease payments................................................................ 356 $ 4,346
----- -----------
-----------
Less: Amounts representing interest (42)
-----
Present value of net minimum lease payments................................................. $ 314
-----
-----

Rent expense for the years ended December 31, 1994 and 1995, the four months
ended April 30, 1996 and the fiscal year ended April 26, 1997 was $1,486,
$1,947, $600 and $1,817, respectively.

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SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS)

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 30, 1996 or April
26, 1997 related to these agreements, as no change of control has occurred.

DISTRIBUTION

On or before the date of the Distribution, School Specialty, U.S. Office
Products and the other Spin-Off Companies will enter into the Distribution
Agreement, the Tax Allocation Agreement, and the Employee Benefits Agreement and
the Spin-Off Companies will enter into the Tax Indemnification Agreement and may
enter into other agreements, including agreements relating to referral of
customers to one another. These agreements are expected to provide, among other
things, for U.S. Office Products and School Specialty 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 School Specialty
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,
School Specialty 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 will 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 School Specialty and U.S.
Office Products will be established by U.S. Office Products in consultation with
School Specialty's management prior to the Distribution while School Specialty
is 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

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SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS)

NOTE 13--EMPLOYEE BENEFIT PLANS (CONTINUED)
cases made matching contributions on behalf of the employees. For the years
ended December 31, 1994 and 1995 and the four months ended April 30, 1996, the
subsidiaries incurred expenses totaling $175, $105 and $6, respectively, related
to these plans.

NOTE 14--STOCKHOLDER'S EQUITY

CAPITAL CONTRIBUTION BY U.S. OFFICE PRODUCTS

During the nine months ended January 24, 1998, U.S. Office Products
contributed $69,762 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 will become subsidiaries of School Specialty.

EMPLOYEE STOCK PLANS

Prior to the Distribution, certain employees of the Company participated in
the U.S. Office Products 1994 Long-Term Compensation Plan covering employees of
U.S. Office Products. The Company expects to adopt an employee stock option plan
at approximately the time of the Distribution. The Company expects to replace
the 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. U.S.
Office Products granted 249,600 options to Company employees under the Plan
during fiscal 1997; and the Company accounted for these options 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 was
recognized for the options granted. Had compensation expense been recognized
based upon the fair value of the stock options on the grant date under the
methodology prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and basic net income per share for the
year ended April 26, 1997 would have been reduced by $749 and $0.01,
respectively.

Under a services agreement entered into with Jonathan J. Ledecky, the Board
of Directors of U.S. Office Products has agreed that Jonathan J. Ledecky will
receive a stock option for School Specialty Common Stock from School Specialty
as of the date of the Distribution. The U.S. Office Products Board intends 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 will
cover 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). The option will have a per share exercise price equal to
the IPO price.

Immediately following the effective date of the registration statements
filed in connection with the IPO and the Distribution, the Company's Board of
Directors is expected to grant options covering 7.5% of the outstanding shares
of the Company's common stock, immediately following the Distribution and prior
to the IPO, to certain executive management personnel (excluding the 7.5%
granted to Mr. Ledecky). The options granted will be granted under the 1998
Stock Incentive Plan (the "Plan") and will have a per share exercise price equal
to the IPO price, with other terms to be determined by the Company's Board of
Directors. Total options available for grant under the Plan will be 20.0% of the

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SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS)

NOTE 14--STOCKHOLDER'S EQUITY (CONTINUED)
outstanding shares of the Company's common stock immediately following the
Distribution and the IPO, including the options to be granted to Mr. Ledecky on
that date.

The Company will be required to disclose in the footnotes to the financial
statements the impact of the compensation expense associated with these options
on a pro forma basis in accordance with FAS 123.

NOTE 15--QUARTERLY FINANCIAL DATA (UNAUDITED)

The following presents certain unaudited quarterly financial data for the
year ended December 31, 1995 and the fiscal year ended April 26, 1997:

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YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------------

FIRST SECOND THIRD FOURTH TOTAL
--------- ----------- --------- --------- -----------
Revenues............................................ $ 18,760 $ 36,702 $ 69,192 $ 25,828 $ 150,482
Gross profit........................................ 4,960 11,130 20,795 7,840 44,725
Operating income (loss)............................. (3,014) 1,196 8,934 (4,792) 2,324
Net income (loss)................................... (3,711) (252) 4,309 (3,713) (3,367)

YEAR ENDED APRIL 26, 1997
---------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------- ----------- --------- --------- -----------

Revenues............................................ $ 58,991 $ 71,682 $ 29,304 $ 31,769 $ 191,746
Gross profit........................................ 18,110 19,823 7,664 9,572 55,169
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

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NINE MONTHS ENDED JANUARY 24, 1998
----------------------------------------------

FIRST SECOND THIRD TOTAL
--------- ----------- --------- -----------
Revenues........................................................ $ 87,029 $ 111,460 $ 49,391 $ 247,880
Gross profit.................................................... 26,090 33,619 11,670 71,379
Operating income (loss)......................................... 11,872 12,155 (3,647) 20,380
Net income (loss)............................................... 5,804 5,965 (2,934) 8,835

NOTE 16--SUBSEQUENT EVENTS (UNAUDITED)

DISTRIBUTION AND ACQUISITIONS PRO FORMA

On January 13, 1998, U.S. Office Products announced its intention to
complete the Distribution described in Note 1. In addition, subsequent to April
26, 1997, the Company has completed eight business combinations accounted for
under the purchase method for an aggregate purchase price of $98,892, consisting
of $95,326 of cash and U.S. Office Products Common Stock with a market value of
$3,566. The total assets related to these eight acquisitions were $123,222,
including goodwill of $77,541. The results of operations for the nine months
ended January 24, 1998 include the results of the acquired companies from their
respective dates of acquisition.

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SCHOOL SPECIALTY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS)

NOTE 16--SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
The following presents the unaudited pro forma results of operations of the
Company for fiscal 1997 as if the acquisitions described above and the six
acquisitions accounted for under the purchase method completed in fiscal 1997
(see Note 4) had been consummated as of the beginning of fiscal 1997. The
results presented below include certain pro forma adjustments to reflect the
amortization of intangible assets and adjustments in executive compensation of
$124 for the fiscal year ended April 26, 1997 and the nine months ended January
25, 1997:

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NINE MONTHS ENDED
FISCAL YEAR ENDED ------------------------------------
APRIL 26, 1997 JANUARY 25, 1997 JANUARY 24, 1998
------------------ ----------------- -----------------

Revenues................................................ $ 350,760 $ 292,244 $ 318,667
Net income.............................................. 11,714 7,809 9,991

The Distribution Agreement allocates a specified amount of U.S. Office
Products' debt outstanding under its credit facilities to each Spin-Off Company
and requires 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 (the
date of the Investment Agreement) 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 School Specialty, and since January 12, 1998, U.S. Office Products
has incurred an additional $3,300 of debt in connection with School Specialty's
acquisition of Education Access. Prior to the Distribution, School Specialty
will enter into the credit facility and will borrow $83,300 under the facility
to pay off debt of U.S. Office Products.

PROPOSED CREDIT FACILITY

The Company has received a committment letter for a secured $250,000
revolving credit facility from NationsBank, N.A. as administrative agent.
NationsBanc Montgomery Securities LLC, one of the Underwriters and an affiliate
of NationsBank, N.A., is the Arranger and Syndication Agent. The credit facility
will terminate five years from the Distribution Date. Interest on borrowings
under the credit facility will accrue interest at a rate of, at the Company's
option, either LIBOR plus 1.00% or the lender's base rate, plus a margin of 0%
to .25% for up to the first 6 months under the agreement. Thereafter, interest
will accrue at a rate of (i) LIBOR plus a range of .625% to 1.625%, or (ii) the
lender's base rate plus a range of .125% to .250% (depending on the Company's
leverage ratio of funded debt to EBITDA). Indebtedness will be secured by
substantially all of the assets of the Company. The credit facility will be
subject to terms and conditions typical of facilities of such size and will
include certain financial covenants. The Company will borrow under the credit
facility to repay the U.S. Office Products' debt which it is obligated under the
Distribution Agreement to repay. The balance of the credit facility will be
available for working capital, capital expenditures and acquisitions, subject to
compliance with financial covenants.

F-25

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SCHOOL SPECIALTY, INC.

PRO FORMA COMBINED FINANCIAL STATEMENTS

(UNAUDITED)

The unaudited pro forma financial statements give effect to the refinancing
of all amounts payable to U.S. Office Products, and acquisitions completed
through May 1, 1998 and the Distribution. The pro forma offering adjustments
further adjust such pro forma financial statements to give effect to the
Offering and the sale of 250,000 shares of Common Stock to Messrs. Spalding,
Vander Zanden and Pate and the use of the proceeds therefrom to repay a portion
of the debt incurred to refinance the amounts payable to U.S. Office Products.

The pro forma combined balance sheet gives effect to (i) the refinancing of
all amounts payable to U.S. Office Products, (ii) the acquisition completed
after January 24, 1998, and (iii) the Distribution, as if such transactions had
occurred as of the Company's most recent balance sheet date, January 24, 1998.

The pro forma combined statement of income for the fiscal year ended April
26, 1997 gives effect to (i) the refinancing of all amounts payable to U.S.
Office Products; (ii) the acquisitions of six individually insignificant
companies in business combinations accounted for under the purchase method
completed during the fiscal year ended April 26, 1997 (the "Fiscal 1997 Purchase
Acquisitions"); and (iii) the acquisitions of Childcraft Education Corp., Sax
Arts & Crafts, Inc. ("Sax Arts & Crafts"), American Academic and four other
individually insignificant companies in business combinations accounted for
under the purchase method completed during the fiscal year ending April 25, 1998
(the "Fiscal 1998 Purchase Acquisitions"), as if all such transactions had
occurred on May 1, 1996. The pro forma combined statement of income for the year
ended April 26, 1997 includes (i) the audited financial information of the
Company for the year ended April 26, 1997; (ii) the unaudited financial
information of the Fiscal 1997 Purchase Acquisitions for the period from May 1,
1996 through their respective dates of acquisition; and (iii) the unaudited
financial information of the Fiscal 1998 Purchase Acquisitions for the period
from May 1, 1996 through April 26, 1997.

The pro forma combined statement of income for the nine months ended January
24, 1998 gives effect to the refinancing of all amounts payable to U.S. Office
Products and the Fiscal 1998 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 the unaudited financial
information of the Company for the nine months ended January 24, 1998 and 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.

The pro forma combined statement of income for the nine months ended January
25, 1997 gives effect to (i) the refinancing of all amounts payable to U.S.
Office Products; (ii) the Fiscal 1997 Purchase Acquisitions; and (iii) the
Fiscal 1998 Purchase Acquisitions, as if all such transactions had occurred on
May 1, 1996. The pro forma combined statement of income for the nine months
ended January 25, 1997 includes (i) the unaudited financial information of the
Company for the nine months ended January 25, 1997; (ii) the unaudited financial
information of the Fiscal 1997 Purchase Acquisitions for the period from May 1,
1996 through the earlier of their respective dates of acquisition or January 25,
1997; and (iii) the unaudited financial information of the Fiscal 1998 Purchase
Acquisitions for the period from May 1, 1996 through January 25, 1997.

The historical financial statements of the Company give retroactive effect
to the results of School Specialty, Inc., a Wisconsin corporation, and The
Re-Print Corporation, which were acquired by the Education Division during the
fiscal year ended April 26, 1997 in business combinations accounted for under
the pooling-of-interests method of accounting.

F-26

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SCHOOL SPECIALTY, INC.

PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

The historical financial statements of the Company also 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 the Company 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 has been allocated to the
Company based upon the Company's average outstanding intercompany balance with
U.S. Office Products at U.S. Office Products' weighted average interest rate
during such period.

In the first quarter of fiscal 1999, the Company will record a compensation
charge of approximately $263,000, representing the difference between the amount
which Messrs. Spalding, Vander Zanden and Pate will pay for the 250,000 shares
of Common Stock to be purchased directly from the Company and the amount which
they would have paid for such shares if the purchase price per share had been
the initial public offering price of the shares offered in the Offering. Because
this charge is non-recurring, it has not been reflected in the pro forma
statements of income.

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 the Company's 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
the Company's 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.

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SCHOOL SPECIALTY, INC.

PRO FORMA COMBINED BALANCE SHEET

JANUARY 24, 1998

(IN THOUSANDS)
(UNAUDITED)

[Enlarge/Download Table]

POST
SCHOOL JANUARY 24, 1998 PRO FORMA
SPECIALTY, PURCHASE PRO FORMA OFFERING PRO FORMA
INC. ACQUISTION ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
-------------- ----------------- ------------- --------- ------------ -----------

ASSETS
Current assets:
Cash and cash equivalents..... $ $ $ $ $ 32,736(d) $
(32,736)(d)
Accounts receivable, net...... 41,530 41,530 41,530
Inventory..................... 32,946 100 33,046 33,046
Prepaid and other current
assets...................... 8,997 8,997 8,997
-------------- -------- ------------- --------- ------------ -----------
Total current assets...... 83,473 100 83,573 83,573

Property and equipment, net..... 20,489 350 20,839 20,839
Intangible assets, net.......... 94,651 2,800(a) 97,451 97,451
Other assets.................... 2,594 2,594 2,594
-------------- -------- ------------- --------- ------------ -----------
Total assets.............. $ 201,207 $ 450 $ 2,800 $ 204,457 $ $ 204,457
-------------- -------- ------------- --------- ------------ -----------
-------------- -------- ------------- --------- ------------ -----------

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short term debt............... $ 272 $ $ $ 272 $ $ 272
Short-term Payable to U.S.
Office Products............. 16,873 (16,873)(b)
Accounts payable.............. 11,951 11,951 11,951
Accrued compensation.......... 5,502 5,502 5,502
Other accrued liabilities..... 5,262 5,262 5,262
-------------- -------- ------------- --------- ------------ -----------
Total current
liabilities............. 39,860 (16,873) 22,987 22,987

Long-term debt.................. 385 82,593(b) 82,978 (32,736)(d) 50,242
Long-term Payable to U.S. Office
Products...................... 62,470 3,250(a)
(65,720)(b)
-------------- -------- ------------- --------- ------------ -----------
Total liabilities......... 102,715 3,250 105,965 (32,736) 73,229

Stockholder's equity:
Common Stock.................. 12(c) 12 3(d) 15
Additional paid-in capital.... 93,301(c) 93,301 32,733(d) 126,034
Divisional equity............. 93,313 (93,313)(c)
Retained earnings............. 5,179 5,179 5,179
Equity in Purchased Company... 450 (450)(a)
-------------- -------- ------------- --------- ------------ -----------
Total stockholder's
equity.................. 98,492 450 (450) 98,492 32,736 131,228
-------------- -------- ------------- --------- ------------ -----------
Total liabilities and
stockholder's equity.... $ 201,207 $ 450 $ 2,800 $ 204,457 $ $ 204,457
-------------- -------- ------------- --------- ------------ -----------
-------------- -------- ------------- --------- ------------ -----------

See accompanying notes to pro forma combined financial statements.

F-28

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SCHOOL SPECIALTY, INC.

PRO FORMA COMBINED STATEMENT OF INCOME

FOR THE NINE MONTHS ENDED JANUARY 24, 1998

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

[Enlarge/Download Table]

INDIVIDUALLY
INSIGNIFICANT
SCHOOL SAX FISCAL 1998 PRO FORMA
SPECIALTY, ARTS & AMERICAN PURCHASE PRO FORMA OFFERING
INC. CRAFTS ACADEMIC ACQUISITIONS ADJUSTMENTS SUBTOTAL ADJUSTMENTS
-------------- --------- ----------- ------------ ------------- ---------- -------------

Revenues..................... $ 247,880 $ 5,421 $ 36,423 $ 28,943 $ $ 318,667 $
Cost of revenues............. 176,501 3,467 26,203 21,314 227,485
-------------- --------- ----------- ------------ ------------- ---------- -------------
Gross profit............. 71,379 1,954 10,220 7,629 91,182

Selling, general and
administrative expenses.... 49,588 1,451 6,968 6,425 224(f) 64,656
Amortization expense......... 1,411 556(g) 1,967
-------------- --------- ----------- ------------ ------------- ---------- -------------
Operating income......... 20,380 503 3,252 1,204 (780) 24,559

Other (income) expense:
Interest expense........... 4,100 18 441 38 938(h) 5,535 (1,964)(j)
Interest income............ (109) (3) (4) 116(h)
Other...................... 441 24 57 522
-------------- --------- ----------- ------------ ------------- ---------- -------------
Income before provision for
income taxes............... 15,948 488 2,787 1,113 (1,834) 18,502 1,964
Provision for income taxes... 7,113 189 892 141 176(i) 8,511 786
-------------- --------- ----------- ------------ ------------- ---------- -------------
Net (loss) income............ $ 8,835 $ 299 $ 1,895 $ 972 $ (2,010) $ 9,991 $ 1,178
-------------- --------- ----------- ------------ ------------- ---------- -------------
-------------- --------- ----------- ------------ ------------- ---------- -------------
Weighted average shares:
Basic...................... 12,751 12,188(k)
Diluted.................... 13,020 12,188(k)
Net income per share:
Basic...................... $ 0.69 $ 0.82
Diluted.................... $ 0.68 $ 0.82

PRO FORMA
COMBINED
-----------

Revenues..................... $ 318,667
Cost of revenues............. 227,485
-----------
Gross profit............. 91,182
Selling, general and
administrative expenses.... 64,656
Amortization expense......... 1,967
-----------
Operating income......... 24,559
Other (income) expense:
Interest expense........... 3,571
Interest income............
Other...................... 522
-----------
Income before provision for
income taxes............... 20,466
Provision for income taxes... 9,297
-----------
Net (loss) income............ $ 11,169
-----------
-----------
Weighted average shares:
Basic...................... 14,563(l)
Diluted.................... 14,563(l)
Net income per share:
Basic...................... $ 0.77
Diluted.................... $ 0.77

See accompanying notes to pro forma combined financial statements.

F-29

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SCHOOL SPECIALTY, INC.

PRO FORMA COMBINED STATEMENT OF INCOME

FOR THE NINE MONTHS ENDED JANUARY 25, 1997

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

[Enlarge/Download Table]

INDIVIDUALLY INDIVIDUALLY
INSIGNIFICANT INSIGNIFICANT
SCHOOL SAX FISCAL 1998 FISCAL 1997
SPECIALTY, ARTS & AMERICAN PURCHASE PURCHASE PRO FORMA
INC. CRAFTS ACADEMIC ACQUISITIONS ACQUISITIONS ADJUSTMENTS SUBTOTAL
-------------- --------- ----------- ------------- ------------- ------------- ---------

Revenues.............. $ 159,977 $ 28,717 $ 34,024 $ 54,706 $ 14,820 $ $ 292,244
Cost of revenues...... 114,380 16,663 24,784 36,510 11,368 203,705
-------------- --------- ----------- ------------- ------------- ------------- ---------
Gross profit.......... 45,597 12,054 9,240 18,196 3,452 88,539
Selling, general and
administrative
expenses............ 33,000 7,504 6,702 13,773 3,312 (124)(e) 64,997
830(f)
Amortization expense.. 396 1,533(g) 1,929
Non-recurring
acquisition costs... 1,792 1,792
-------------- --------- ----------- ------------- ------------- ------------- ---------
Operating income...... 10,409 4,550 2,538 4,423 140 (2,239) 19,821
Other (income)
expense:
Interest expense...... 3,358 400 641 206 176 754(h) 5,535
Interest income....... (101) (37) 138(h)
Other................. (204) (27) 67 (10) (174)
-------------- --------- ----------- ------------- ------------- ------------- ---------
Income before
provision for income
taxes............... 7,356 4,177 1,897 4,187 (26) (3,131) 14,460
Provision for income
taxes............... 3,750 1,620 395 111 775(i) 6,651
-------------- --------- ----------- ------------- ------------- ------------- ---------
Net (loss) income..... $ 3,606 $ 2,557 $ 1,897 $ 3,792 $ (137) $ (3,906) $ 7,809
-------------- --------- ----------- ------------- ------------- ------------- ---------
-------------- --------- ----------- ------------- ------------- ------------- ---------
Weighted average
shares:
Basic............. 9,553 12,188(k)
Diluted........... 9,758 12,188(k)
Net income per share:
Basic............. $ 0.38 $ 0.64
Diluted........... $ 0.37 $ 0.64

PRO FORMA
OFFERING PRO FORMA
ADJUSTMENTS COMBINED
------------- -----------

Revenues.............. $ $ 292,244
Cost of revenues...... 203,705
------------- -----------
Gross profit.......... 88,539
Selling, general and
administrative
expenses............ 64,997

Amortization expense.. 1,929
Non-recurring
acquisition costs... 1,792
------------- -----------
Operating income...... 19,821
Other (income)
expense:
Interest expense...... (1,964)(j) 3,571
Interest income.......
Other................. (174)
------------- -----------
Income before
provision for income
taxes............... 1,964 16,424
Provision for income
taxes............... 786 7,437
------------- -----------
Net (loss) income..... $ 1,178 $ 8,987
------------- -----------
------------- -----------
Weighted average
shares:
Basic............. 14,563(l)
Diluted........... 14,563(l)
Net income per share:
Basic............. $ 0.62
Diluted........... $ 0.62

See accompanying notes to pro forma combined financial statements.

F-30

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SCHOOL SPECIALTY, INC.

PRO FORMA COMBINED STATEMENT OF INCOME

FOR THE FISCAL YEAR ENDED APRIL 26, 1997

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

[Enlarge/Download Table]

INDIVIDUALLY INDIVIDUALLY
INSIGNIFICANT INSIGNIFICANT
SAX FISCAL 1998 FISCAL 1997
SCHOOL ARTS & AMERICAN PURCHASE PURCHASE PRO FORMA
SPECIALTY, INC. CRAFTS ACADEMIC ACQUISITIONS ACQUISITIONS ADJUSTMENTS SUBTOTAL
--------------- --------- ----------- -------------- -------------- -------------- -----------

Revenues............. $ 191,746 $ 34,542 $ 40,563 $ 69,089 $ 14,820 $ $ 350,760
Cost of revenues..... 136,577 20,067 29,608 46,776 11,368 244,396
--------------- --------- ----------- -------------- -------------- -------------- -----------
Gross profit..... 55,169 14,475 10,955 22,313 3,452 106,364

Selling, general and
administrative
expenses........... 42,896 9,698 8,102 18,056 3,312 (124)(e) 82,956
1,016(f)
Amortization
expense............ 566 1,908(g) 2,474
Non-recurring
acquisition costs.. 1,792 1,792
Restructuring costs.. 194 194
--------------- --------- ----------- -------------- -------------- -------------- -----------
Operating
income......... 9,721 4,777 2,853 4,257 140 (2,800) 18,948

Other (income)
expense:
Interest expense... 4,197 474 850 234 176 1,369(h) 7,300
Interest income.... (45) 45(h)
Other.............. (196) (33) 81 (10) (158)
--------------- --------- ----------- -------------- -------------- -------------- -----------
Income (loss) before
provision for
income taxes....... 5,720 4,336 2,003 3,987 (26) (4,214) 11,806
Provision for income
taxes.............. (2,412) 1,664 34 618 111 77(i) 92
--------------- --------- ----------- -------------- -------------- -------------- -----------
Net (loss) income.... $ 8,132 $ 2,672 $ 1,969 $ 3,369 $ (137) $ (4,291) $ 11,714
--------------- --------- ----------- -------------- -------------- -------------- -----------
--------------- --------- ----------- -------------- -------------- -------------- -----------
Weighted average
shares outstanding:
Basic............ 10,003 12,188(k)
Diluted.......... 10,196 12,188(k)
Net income per share:
Basic............ $ 0.81 $ 0.96
Diluted.......... $ 0.80 $ 0.96

PRO
FORMA PRO
OFFERING FORMA
ADJUSTMENTS COMBINED
-------------- -----------

Revenues............. $ $ 350,760
Cost of revenues..... 244,396
-------------- -----------
Gross profit..... 106,364
Selling, general and
administrative
expenses........... 82,956

Amortization
expense............ 2,474
Non-recurring
acquisition costs.. 1,792
Restructuring costs.. 194
-------------- -----------
Operating
income......... 18,948
Other (income)
expense:
Interest expense... (2,619)(j) 4,681
Interest income....
Other.............. (158)
-------------- -----------
Income (loss) before
provision for
income taxes....... 2,619 14,425
Provision for income
taxes.............. 1,048 1,140
-------------- -----------
Net (loss) income.... $ 1,571 $ 13,285
-------------- -----------
-------------- -----------
Weighted average
shares outstanding:
Basic............ 14,563(l)
Diluted.......... 14,563(l)
Net income per share:
Basic............ $ 0.91
Diluted.......... $ 0.91

See accompanying notes for pro forma combined financial statements.

F-31

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SCHOOL SPECIALTY, INC.

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS

(UNAUDITED)

(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)

1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS

(a) Adjustment to reflect purchase price adjustments associated with acquisition
of Education Access for $3,250 of cash provided by U.S. Office Products. The
portion of the consideration assigned to goodwill ($2,800) 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. The Company
amortizes 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 the refinancing of the payable to U.S. Office Products
with the proceeds received from expected borrowings under the revolving
credit facility with a third party.

(c) Adjustment to reflect the reclassification of divisional equity to common
stock and additional paid in capital as a result of the Distribution. The
Distribution will result in the issuance of 12,188 shares of common stock.

(d) Adjustment to reflect $32,736 of net proceeds from the sale of 2,375 shares
of Common Stock as part of the Offering (net of expenses and underwriting
discount) and the utilization of the proceeds to repay long-term debt.

2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS

(e) Adjustment to reflect reductions in executive compensation as a result of
the elimination of certain executive positions and the renegotiations of
executive compensation agreements resulting from certain acquisitions. The
Company believes that these reductions are expected to remain in place for
the foreseeable future and are not reasonably likely to affect the operating
performance of the Company.

(f) 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.

(g) Adjustment to reflect the increase in amortization expense relating to
goodwill recorded in purchase accounting related to the Fiscal 1997 and
Fiscal 1998 Purchase Acquisitions for the periods prior to the respective
dates of acquisition. The Company has 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.

(h) Adjustment to reflect the 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
the Company generally expects to use available cash to repay debt. Pro forma
interest expense will fluctuate $65 on an annual basis for each 0.125%
change in interest rates.

(i) Adjustment to calculate the provision for income taxes on the combined pro
forma results. The difference between the effective tax rate of 46% and the
statutory tax rate of 35% for the nine months ended January 25, 1997 and
January 24, 1998 relates primarily to state income taxes and non-deductible
goodwill. The difference between the effective pro forma tax rate and the
statutory tax

F-32

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SCHOOL SPECIALTY, INC.

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)

2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS (CONTINUED)
rate for the fiscal year ended April 26, 1997 relates primarily to state
taxes and nondeductible goodwill, offset by the reversal of a $5,300
deferred tax valuation allowance.

(j) Adjustment to reflect a decrease in interest expense as a result of the
utilization of the net proceeds from the Offering and sale of shares to
Messrs. Spalding, Vander Zanden and Pate of $32,736 to repay long-term debt
at an annual interest rate of 8%.

(k) The approximately 12,188 weighted average shares outstanding used to
calculate pro forma earnings per share is calculated based upon
approximately 109,690 shares of U.S. Office Products common stock
outstanding on the date of the School Specialty Distribution divided by
nine, which is the Distribution Ratio.

(l) The approximately 14,563 weighted average shares outstanding used to
calculate pro forma as adjusted earnings per share is based upon the
approximately 12,188 shares of common stock to be issued as a result of the
School Specialty Distribution plus 2,125 shares to be sold in the Offering
and 250 shares to be sold to Messrs. Spalding, Vander Zanden and Pate.

F-33

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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.

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-34

424B1 93rd Page of 115 TOC 1st Previous Next ↓Bottom Just 93rd
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION

AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

[Enlarge/Download Table]

DECEMBER 31, SEPTEMBER 30,
------------------------ --------------
1995 1996 1997
----------- ----------- --------------
(UNAUDITED)

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 0
Deposits....................................... 37,581 64,211 0
----------- ----------- --------------
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 0
----------- ----------- --------------
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
----------- ----------- --------------
----------- ----------- --------------

The accompanying notes are an integral part of this statement.

F-35

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AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS

[Enlarge/Download Table]

YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
SEPTEMBER 30,
------------------------ ------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
(UNAUDITED)

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

The accompanying notes are an integral part of this statement.

F-36

424B1 95th Page of 115 TOC 1st Previous Next ↓Bottom Just 95th
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)

[Enlarge/Download Table]

EXCESS OF
RETAINED PURCHASE
SHARES ADDITIONAL EARNINGS PRICE OVER TOTAL
ISSUED AND PAID-IN (ACCUMULATED PREDECESSOR SHAREHOLDERS'
OUTSTANDING PAR VALUE CAPITAL DEFICIT) BASIS EQUITY
--------------- ------------- ---------- -------------- ------------- --------------

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

See accompanying notes to pro forma combined financial statements.

F-37

424B1 96th Page of 115 TOC 1st Previous Next ↓Bottom Just 96th
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS

[Enlarge/Download Table]

YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
SEPTEMBER 30,
------------------------ ------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
(UNAUDITED)

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...................... 0 (53,836)
Proceeds from sale of common stock.... 0 120,000 120,000
----------- ----------- ----------- -----------
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 $ 0 $ 85,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Supplemental Schedule of Noncash
Operating, Investing and Financing
Activities: Acquisition of equipment
financed through capital lease
obligation............................ $ 8,953 $ 0 $ 0 $ 0
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Conversion of portion of accrued
guaranteed fees to a note payable
(Note 4).............................. $ 53,836 $ 0 $ 0 $ 0
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------

The accompanying notes are an integral part of this statement.

F-38

424B1 97th Page of 115 TOC 1st Previous Next ↓Bottom Just 97th
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-39

424B1 98th Page of 115 TOC 1st Previous Next ↓Bottom Just 98th
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:

[Download Table]

1995 1996
---------- ----------

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

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:

[Download Table]

1995 1996
---------- ---------

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

F-40

424B1 99th Page of 115 TOC 1st Previous Next ↓Bottom Just 99th
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:

[Enlarge/Download Table]

1995 1996
---------- ----------

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 0
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
---------- ----------
---------- ----------

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.

F-41

424B1 100th Page of 115 TOC 1st Previous Next ↓Bottom Just 100th
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION

AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--LONG-TERM DEBT: (CONTINUED)
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.

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:

[Download Table]

1995 1996
--------- ---------

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
--------- ---------
$ 0 $ 0
--------- ---------
--------- ---------

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-42

424B1 101st Page of 115 TOC 1st Previous Next ↓Bottom Just 101st
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:

[Download Table]

1997............................................................. $ 258,000
1998............................................................. 73,000
---------
$ 331,000
---------
---------

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-43

424B1 102nd Page of 115 TOC 1st Previous Next ↓Bottom Just 102nd
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.

PRICE WATERHOUSE LLP
Minneapolis, Minnesota

February 3, 1998

F-44

424B1 103rd Page of 115 TOC 1st Previous Next ↓Bottom Just 103rd
SAX ARTS AND CRAFTS, INC.

BALANCE SHEETS

[Enlarge/Download Table]

DECEMBER 16, DECEMBER 25, JUNE 29,
1995 1996 1997
-------------- -------------- ------------

(UNAUDITED)

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

See accompanying notes to financial statements.

F-45

424B1 104th Page of 115 TOC 1st Previous Next ↓Bottom Just 104th
SAX ARTS AND CRAFTS, INC.

STATEMENTS OF OPERATIONS

[Enlarge/Download Table]

YEAR ENDED SIX MONTHS ENDED
---------------------------------------------- ------------------------

DECEMBER 17, DECEMBER 16, DECEMBER 25, JUNE 30, JUNE 29,
1994 1995 1996 1996 1997
-------------- -------------- -------------- ----------- -----------

(UNAUDITED)

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

See accompanying notes to financial statements.

F-46

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SAX ARTS AND CRAFTS, INC.

STATEMENTS OF SHAREHOLDER'S EQUITY

[Enlarge/Download Table]

COMMON STOCK ADDITIONAL TOTAL
---------------------- PAID-IN RETAINED SHAREHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ----------- ---------- ----------- ---------------

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

See accompanying notes to financial statements.

F-47

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SAX ARTS AND CRAFTS, INC.
STATEMENTS OF CASH FLOWS

[Enlarge/Download Table]

YEAR ENDED SIX MONTHS ENDED
---------------------------------------------- ------------------------

DECEMBER 17, DECEMBER 16, DECEMBER 25, JUNE 30, JUNE 29,
1994 1995 1996 1996 1997
-------------- -------------- -------------- ----------- -----------

(UNAUDITED)

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

See accompanying notes to financial statements.

F-48

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SAX ARTS AND CRAFTS, INC.

NOTES TO FINANCIAL STATEMENTS

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.

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.

F-49

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SAX ARTS AND CRAFTS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.

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:

[Enlarge/Download Table]

DECEMBER 16, DECEMBER 25,
1995 1996
-------------- --------------

Finished goods.............................................. $ 5,647,290 $ 5,493,859
Less--Reserves.............................................. 55,733 52,195
-------------- --------------
Total inventory......................................... $ 5,591,557 $ 5,441,664
-------------- --------------
-------------- --------------

4. PROPERTY, PLANT AND EQUIPMENT

The major classes are:

[Enlarge/Download Table]

DECEMBER 16, DECEMBER 25,
1995 1996
-------------- --------------

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

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-50

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SAX ARTS AND CRAFTS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. INCOME TAXES

The income tax provision consists of the following components:

[Enlarge/Download Table]

DECEMBER 17, DECEMBER 16, DECEMBER 25,
1994 1995 1996
-------------- -------------- --------------

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

Deferred tax assets (liabilities) consist of the following:

[Enlarge/Download Table]

DECEMBER 16, DECEMBER 25,
1995 1996
-------------- --------------

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)
-------------- --------------
-------------- --------------

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

[Enlarge/Download Table]

DECEMBER 17, DECEMBER 16, DECEMBER 25,
1994 1995 1996
----------------- ----------------- -----------------

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%
--- --- ---
--- --- ---

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SAX ARTS AND CRAFTS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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:

[Enlarge/Download Table]

DECEMBER 17, DECEMBER 16, DECEMBER 25,
1994 1995 1996
-------------- -------------- --------------

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)
-------------- -------------- --------------
-------------- -------------- --------------

The Company has the following affiliated receivables and payables:

[Enlarge/Download Table]

DECEMBER 16, DECEMBER 25,
1995 1996
-------------- --------------

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)
-------------- --------------
-------------- --------------

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:

[Enlarge/Download Table]

DECEMBER 17, DECEMBER 16, DECEMBER 25,
1994 1995 1996
-------------- --------------- ---------------

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

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SAX ARTS AND CRAFTS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. LEASE COMMITMENTS

[Download Table]

DECEMBER 25,
FISCAL YEAR 1996
--------------------------------------------------------- --------------

1997..................................................... $ 506,847
1998..................................................... 417,091
1999..................................................... 334,447
2000..................................................... 319,545
2001 and thereafter...................................... 399,431
--------------
Total minimum lease payments........................... $ 1,977,361
--------------
--------------

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.

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:

[Download Table]

TOTAL
PARENT'S
PLAN
----------

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

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-53

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SAX ARTS AND CRAFTS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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:

[Download Table]

TOTAL
PARENT'S
PLAN
-----------

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)
-----------
-----------

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.

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-54

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UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each of
such Underwriters has severally agreed to purchase from the Company the
respective number of shares of Common Stock set forth opposite its name below:

[Enlarge/Download Table]

NUMBER OF
SHARES OF
COMMON
UNDERWRITERS STOCK
------------------------------------------------------------------------------------------- -----------

Goldman, Sachs & Co........................................................................ 531,250
NationsBanc Montgomery Securities LLC...................................................... 531,250
Smith Barney Inc........................................................................... 531,250
Piper Jaffray Inc.......................................................................... 531,250
-----------
Total.................................................................................. 2,125,000
-----------
-----------

Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.

The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
price less a concession of $0.64 per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $0.10 per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time be
varied by the Underwriters.

The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 318,750
additional shares of Common Stock solely to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 2,125,000 shares of Common
Stock offered.

The Company and certain of its directors and executive officers who will
hold an aggregate of 266,374 shares of Common Stock have agreed that, during the
period beginning from the date of this Prospectus and continuing to and
including the date 180 days after the date of this Prospectus, it will not
offer, sell, contract to sell or otherwise dispose of any securities of the
Company (other than (i) pursuant to acquisitions where the Company uses shares
of Common Stock as all or a portion of the consideration for the acquisitions up
to an aggregate of 1.5 million Shares, if holders of 1.4 million of such Shares
execute and deliver a lock-up letter to the Underwriters, and (ii) pursuant to
employee stock option plans existing, or on the conversion or exchange of
convertible or exchangeable securities outstanding, on the date of this
Prospectus) which are substantially similar to the shares of Common Stock of
which are convertible into or exchangeable for securities which are
substantially similar to the shares of Common Stock without the prior written
consent of the Underwriters, except for the shares of Common Stock offered in
connection with the offering.

More than 10% of the net proceeds of the Offering are expected to be paid to
NationsBank, N.A., an affiliate of NationsBanc Montgomery Securities LLC, one of
the Underwriters. Accordingly, this Offering is being conducted pursuant to the
requirements of Rules 2710(c)(8) and 2720(c)(3) of the Conduct Rules of the
National Association of Securities Dealers, Inc., which provide that the initial
public offering price can be no higher than that recommended by a "qualified
independent underwriter" meeting certain standards. In accordance with this
requirement, Goldman, Sachs & Co. has served in such role and has recommended a
price in compliance with the requirements of Rule 2720(c)(3). Goldman, Sachs &
Co. will receive compensation from the Company in the amount of $10,000 for
serving in such role. In

U-1

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connection with the Offering, Goldman, Sachs & Co. in its role as qualified
independent underwriter has performed due diligence investigations and reviewed
and participated in the preparation of this Prospectus and the Registration
Statement of which this Prospectus forms a part.

In connection with the offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover short positions created by
the Underwriters in connection with the offering. Stabilizing transactions
consist of certain bids or purchases for the purpose of preventing or retarding
a decline in the market price of the Common Stock; and short positions created
by the Underwriters involve the sale by the Underwriters of a greater number of
shares of Common Stock than they are required to purchase from the Company in
the Offering. The Underwriters also may impose a penalty bid, whereby selling
concessions allowed to broker-dealers in respect of the securities sold in the
Offering may be reclaimed by the Underwriters if such securities are repurchased
by the Underwriters in stabilizing or covering transactions. These activities
may stabilize, maintain or otherwise affect the market price of the Common
Stock, which may be higher than the price that might otherwise prevail in the
open market; and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.

The Underwriters have informed School Specialty that they do not expect
sales to accounts over which the Underwriters exercise discretionary authority
to exceed 5% of the total number of shares of Common Stock offered by them.

Prior to this offering, there has been no public market for the shares. The
initial public offering price was negotiated among the Company and the
Underwriters. Among the factors considered in determining the initial public
offering price of the Common Stock, in addition to prevailing market conditions,
have been the Company's historical performance, estimates of the business
potential and earnings prospects of the Company, an assessment of the Company's
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.

In addition to the 2,125,000 shares of Common Stock offered by the
Underwriters, School Specialty is selling 250,000 shares of Common Stock
directly to Daniel P. Spalding, its Chairman and Chief Executive Officer, David
J. Vander Zanden, its President and Chief Operating Officer, and Donald Ray
Pate, Jr., its Executive Vice President for Re-Print. The Underwriters will not
participate in, or receive any discount or commission on, the sale of such
shares being sold by School Specialty directly.

The Common Stock will be quoted on the Nasdaq National Market under the
symbol "SCHS".

The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.

U-2

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

NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------

TABLE OF CONTENTS

[Download Table]

PAGE
-----

Summary........................................ 3
Risk Factors................................... 8
The Spin-Off From U.S. Office Products......... 14
Use of Proceeds................................ 19
Dividend Policy................................ 19
Dilution....................................... 20
Capitalization................................. 21
Selected Financial Data........................ 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 25
Industry Overview.............................. 34
Business....................................... 35
Management..................................... 42
Certain Transactions........................... 51
Principal Stockholders......................... 52
Description of School Specialty Capital
Stock........................................ 53
Experts........................................ 57
Validity of Shares............................. 57
Additional Information......................... 57
Index to Financial Statements.................. F-1
Underwriting................................... U-1

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

THROUGH AND INCLUDING JULY 4, 1998 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

2,125,000 SHARES

SCHOOL SPECIALTY, INC.

COMMON STOCK

(PAR VALUE $.001 PER SHARE)

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

[LOGO]

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

GOLDMAN, SACHS & CO.

NATIONSBANC MONTGOMERY SECURITIES LLC

SALOMON SMITH BARNEY

PIPER JAFFRAY INC.

--------------------------------------------------------------------------------
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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘424B1’ Filing	Date	First	Last	Other Filings

	11/20/06	41
	12/31/02	41		11-K
	3/31/02	41
	12/31/01	41	51	11-K
	7/16/01	41		8-K
	6/30/01	41	48
	5/31/01	41
	6/10/00	48
	12/16/99	99
	2/28/99	41
	9/30/98	48
	7/4/98	115
	6/15/98	1
Filed on:	6/10/98	47	48
	6/9/98	1	68	S-1/A
	6/8/98	48
	6/7/98	99
	5/15/98	52
	5/14/98	57	72
	5/1/98	84
	4/25/98	15	84	10-K
	4/24/98	46
	3/31/98	99
	3/20/98	5	51
	2/3/98	57	102
	1/24/98	3	90
	1/19/98	43
	1/13/98	48	82
	1/12/98	15	83
	12/31/97	40
	12/15/97	33	101
	11/5/97	43	50
	11/4/97	48
	9/30/97	59	97
	6/30/97	107
	6/29/97	59	107
	6/27/97	50
	4/30/97	57
	4/27/97	74	84
	4/26/97	7	91
	2/24/97	57	92
	2/4/97	99
	1/25/97	7	90
	12/31/96	57	112
	12/25/96	57	112
	10/31/96	99
	9/30/96	59	97
	9/1/96	80
	7/26/96	49	51
	6/30/96	59	107
	5/1/96	7	84
	4/30/96	22	81
	4/29/96	49	51
	2/8/96	57	62
	2/2/96	61
	1/1/96	69
	12/31/95	22	101
	12/16/95	57	112
	12/31/94	3	95
	12/17/94	59	112
	12/31/93	22	65
	12/18/93	105
	2/28/93	97
	12/31/92	22	25
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Filing Submission 0001047469-98-023520 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

School Specialty Inc – ‘424B1’ on 6/10/98

As of: Wednesday, 6/10/98 · Accession #: 1047469-98-23520 · File #: 333-47509

Prospectus — Rule 424(b)(1)Filing Table of Contents

Document Table of Contents

Dates Referenced Herein and Documents Incorporated by Reference

Prospectus — Rule 424(b)(1)
Filing Table of Contents