10-Q

Table of Contents


 


 

UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549

 


 

FORM 10-Q

 


 

 




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


FOR THE QUARTERLY PERIOD ENDED JUNE 29, 2019


OR

 




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


FOR THE TRANSITION PERIOD FROM
                     TO
                    


Commission File Number: 000-24385


 

 


SCHOOL SPECIALTY, INC.


(Exact name of Registrant as specified in its charter)

 


 

 










Delaware   39-0971239

(State or Other Jurisdiction


of Incorporation)

 

(IRS Employer


Identification No.)


W6316 Design Drive


Greenville, Wisconsin 54942


(Address of Principal Executive Offices)


(Zip Code)

(920) 734-5712

(Registrant’s Telephone Number, including Area Code)


 

 


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


 















Title of each class

 

Trading


Symbol(s)

 

Name of each exchange on which registered

None   None   None

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

Indicate by check mark whether the registrant has
submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit such files).    Yes  ☒    No  ☐



Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):

 






































Large accelerated filer      Accelerated filer  
Non-accelerated filer      Emerging growth company  
Smaller reporting company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes  ☐    No  ☒

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

 










Class

  

Outstanding at


August 12, 2019

Common Stock, $0.001 par value    7,025,219

 

 


 

 



Table of Contents


SCHOOL SPECIALTY, INC.


INDEX TO FORM 10-Q


FOR THE QUARTERLY PERIOD ENDED JUNE 29, 2019


 











































































































































































         Page
Number
 
PART I – FINANCIAL INFORMATION   

ITEM 1.

 

CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

  
 

Condensed Consolidated Balance Sheets at June 
29, 2019, December 29, 2018 and June 30, 2018

     2  
 

Condensed Consolidated Statements of Operations for the Three Months and Six
Months Ended June 29, 2019 and June 30, 2018

     3  
 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three
Months and Six Months Ended June 29, 2019 and June 30, 2018

     4  
 

Condensed Consolidated Statements of Stockholders’ Equity for the Three
Months and Six Months Ended June 29, 2019 and for the Six Months Ended June 30, 2018

     5  
 

Condensed Consolidated Statements of Cash Flows for Six Months Ended June 29,
2019 and June 30, 2018

     6  
 

Notes to Condensed Consolidated Financial Statements

     7  

ITEM 2.

 

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

     29  

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     37  

ITEM 4.

 

CONTROLS AND PROCEDURES

     37  
PART II – OTHER INFORMATION   

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.

     38  

ITEM 6.

 

EXHIBITS

     38  

 

 

-Index-


Table of Contents


SCHOOL SPECIALTY, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


(In Thousands, except share and per share amounts)

 































































































































































































































































































































































































































































































































































































































































































































     June 29, 2019     December 29, 2018     June 30, 2018  

ASSETS

      

Current assets:

      

Cash and cash equivalents

   $ 7,236     $ 1,030     $ 8,640  

Accounts receivable, less allowance for doubtful accounts of $1,721, $1,909, and $1,310,
respectively

     87,345       77,888       90,470  

Inventories, net

     122,308       90,061       131,761  

Prepaid expenses and other current assets

     22,535       15,763       21,154  

Refundable income taxes

     138       1,019       2,115  
  

 

 

   

 

 

   

 

 

 

Total current assets

     239,562       185,761       254,140  

Property, plant and equipment, net

     30,761       31,902       32,063  

Operating lease
right-of-use asset

     12,528       —         —    

Goodwill

     4,580       4,580       26,842  

Intangible assets, net

     31,149       33,306       35,184  

Development costs and other

     14,489       14,807       16,191  

Deferred income taxes long-term

     291       320       8,347  
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 333,360     $ 270,676     $ 372,767  
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

      

Current liabilities:

      

Current maturities – long-term debt

   $ 94,971     $ 30,352     $ 64,600  

Current operating lease liability

     5,203       —         —    

Accounts payable

     62,060       41,277       61,894  

Accrued compensation

     7,161       7,302       8,209  

Contract liabilities

     5,414       5,641       5,804  

Accrued royalties

     1,591       2,678       1,998  

Other accrued liabilities

     13,908       11,379       12,265  
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     190,308       98,629       154,770  

Long-term debt – less current maturities

     96,429       103,583       130,437  

Operating lease liability

     7,403       —         —    

Other liabilities

     3,353       1,101       792  
  

 

 

   

 

 

   

 

 

 

Total liabilities

     297,493       203,313       285,999  
  

 

 

   

 

 

   

 

 

 

Commitments and contingencies – Note 15

      

Stockholders’ equity:

      

Preferred stock, $0.001 par value per share, 500,000 shares authorized; none outstanding

     —         —         —    

Common stock, $0.001 par value per share, 50,000,000 shares authorized; 7,025,219; 7,000,000 and
7,000,000 shares issued and outstanding, respectively

     7       7       7  

Capital in excess of par value

     124,183       125,072       124,149  

Treasury stock, at cost 5,145; 0 and 0 shares, respectively

     (34     —         —    

Accumulated other comprehensive loss

     (1,821     (2,079     (1,832

Accumulated deficit

     (86,468     (55,637     (35,556
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     35,867       67,363       86,768  
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 333,360     $ 270,676     $ 372,767  
  

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

2


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PART I – FINANCIAL INFORMATION


 




ITEM 1.

Condensed Consolidated Unaudited Financial Statements

SCHOOL SPECIALTY, INC.


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In Thousands, Except Per Share Amounts)


 





































































































































































































































































































































































































































































































     For the Three Months Ended      For the Six Months Ended  
     June 29, 2019     June 30, 2018      June 29, 2019     June 30, 2018  

Revenues

   $ 160,609     $ 169,272      $ 256,541     $ 268,559  

Cost of revenues

     107,930       110,528        171,060       173,694  
  

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     52,679       58,744        85,481       94,865  

Selling, general and administrative expenses

     50,532       53,808        102,980       110,946  

Impairment Charges

     —         —          283       —    

Facility exit costs and restructuring

     334       171        1,210       482  
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating income (loss)

     1,813       4,765        (18,992     (16,563

Other expense (income):

         

Interest expense

     4,960       3,688        9,586       7,194  

Change in fair value of derivative

     1,082       —          1,082       —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before provision for (benefit from) income taxes

     (4,229     1,077        (29,660     (23,757

Provision for (benefit from) income taxes

     1,627       1,059        1,171       (5,097
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ (5,856   $ 18      $ (30,831   $ (18,660
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted average shares outstanding:

         

Basic EPS

     7,012       7,000        7,007       7,000  

Diluted EPS

     7,012       7,129        7,007       7,000  

Net loss per Share:

         

Basic

   $ (0.84   $ 0.00      $ (4.40   $ (2.67

Diluted

   $ (0.84   $ 0.00      $ (4.40   $ (2.67

See accompanying notes to condensed consolidated financial statements.

 

3


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SCHOOL SPECIALTY, INC.


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)


(In Thousands)

 















































































































































     For the Three Months Ended     For the Six Months Ended  
     June 29, 2019     June 30, 2018     June 29, 2019     June 30, 2018  

Net income (loss)

   $ (5,856   $ 18     $ (30,831   $ (18,660

Other comprehensive income (loss), net of tax:

        

Foreign currency translation adjustments

     125       (171     258       (407
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ (5,731   $ (153   $ (30,573   $ (19,067
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


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SCHOOL SPECIALTY, INC.


CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)


(In Thousands)

 





























































































































































































































































































































































































































































































































































































































































(in thousands)

   Common
Stock
     Capital in Excess
of Par Value
    Treasury Stock,
at Cost
    Retained Earnings
(Accumulated
Deficit)
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Stockholders’
Equity
 

Balance, December 29, 2018

   $ 7      $ 125,072     $ —       $ (55,637   $ (2,079   $ 67,363  

Net loss

     —          —         —         (24,975     —         (24,975

Purchase of treasury stock

     —          —         —         —         —         —    

Share-based compensation

     —          (1,160     —         —         —         (1,160

Foreign currency translation adjustment

     —          —         —         —         133       133  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 30, 2019

   $ 7      $ 123,912     $ —       $ (80,612   $ (1,946   $ 41,361  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     —          —         —         (5,856     —         (5,856

Purchase of treasury stock

     —          —         (34     —         —         (34

Share-based compensation

     —          271       —         —         —         271  

Foreign currency translation adjustment

     —          —         —         —         125       125  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 29, 2019

   $ 7      $ 124,183     $ (34   $ (86,468   $ (1,821     35,867  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 30, 2017

   $ 7      $ 123,083     $ —       $ (14,174   $ (1,425   $ 107,491  

Cumulative effect of change in accounting principle (1)

     —          —         —         (2,722     —         (2,722

Net loss

     —          —         —         (18,660     —         (18,660

Share-based compensation

     —          1,066       —         —         —         1,066  

Foreign currency translation adjustment

     —          —         —         —         (407     (407
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2018

   $ 7      $ 124,149     $ —       $ (35,556   $ (1,832   $ 86,768  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.


 

 




(1)

See Note 3, “Change in Accounting Principle – Revenue from Contracts with Customers,” of the
notes to condensed consolidated financial statements for further discussion.

 

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SCHOOL SPECIALTY, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


(In Thousands)

 
































































































































































































































































































































































































































































































































     For the Six Months Ended  
     June 29, 2019     June 30, 2018  

Cash flows from operating activities:

    

Net loss

   $ (30,831   $ (18,660

Adjustments to reconcile net income to net cash used in operating activities:

    

Depreciation and intangible asset amortization expense

     8,513       9,393  

Amortization of development costs

     2,301       2,687  

Impairment of goodwill and intangibles

     283       —    

Gain on disposal of assets

     —         (20

Amortization of debt fees and other

     823       541  

Change in fair value of derivative

     1,082       —    

Unrealized foreign exchange (gain) loss

     (15     69  

Share-based compensation expense

     (889     1,066  

Deferred taxes

     —         (5,355

Non-cash interest expense.

     1,722       1,170  

Changes in current assets and liabilities:

    

Accounts receivable

     (9,402     (21,261

Inventories

     (32,246     (56,071

Prepaid expenses and other current assets

     (5,890     (6,850

Accounts payable

     21,066       35,118  

Accrued liabilities

     (623     (7,744
  

 

 

   

 

 

 

Net cash used by operating activities

     (44,106     (65,917
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Additions to property, plant and equipment

     (5,497     (5,978

Investment in product development costs

     (2,003     (2,650

Proceeds from sale of assets

     —         100  
  

 

 

   

 

 

 

Net cash used in investing activities

     (7,500     (8,528
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from bank borrowings

     113,595       117,228  

Repayment of debt and capital leases

     (55,046     (65,166

Earnout payment for acquisition

     (501     (625

Payment of debt fees and other

     (131     —    

Purchase of treasury stock

     (34     —    
  

 

 

   

 

 

 

Net cash provided in financing activities

     57,883       51,437  
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (71     (213
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     6,206       (23,221

Cash and cash equivalents, beginning of period

     1,030       31,861  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 7,236     $ 8,640  
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Interest paid

   $ 7,041     $ 5,483  

Income taxes paid, net

   $ 305     $ 1,245  

See accompanying notes to condensed consolidated financial statements.

 

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SCHOOL SPECIALTY, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)


NOTE 1 – BASIS OF PRESENTATION

The accompanying
unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, all adjustments (which are normal and recurring in nature unless otherwise noted) considered necessary for a fair presentation have been included. The balance sheet at December 29,
2018 has been derived from School Specialty, Inc.’s (“School Specialty” or the “Company”) audited financial statements for the period ended December 29, 2018. For further information, refer to the consolidated financial
statements and notes thereto included in the Company’s Form 10-K for the period ended December 29, 2018.


NOTE 2 – GOING CONCERN

The accompanying condensed
consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year after the
date the condensed consolidated financial statements are issued. In accordance with Financial Accounting Standards Board, or the FASB, Accounting Standards Update No. 2014-15, Presentation of Financial
Statements—Going Concern (Subtopic 205-40), our management evaluates whether there are conditions or events, considered in aggregate, that raise substantial doubt about our ability to continue as a going
concern within one year after the date that the financial statements are issued.

As of June 29, 2019, the Company had $7.2 million in cash and
excess availability of $54.2 million on its ABL facility. The Company is in compliance with all debt covenants as of the end of the second quarter of fiscal 2019. However, the Company’s operating results were below plan in the first six
months of 2019 and the terms of the borrowing arrangements provide restrictions on the borrowing capacity, such that the Company may not have the liquidity necessary to retire currently maturing debt obligations and may not be able to remain in
compliance with future period covenants, which could result in a default and in the Company’s inability to continue as a going concern.

Management
believes that the Company’s ability to continue as a going concern is dependent on successfully concluding in the second half of fiscal 2019 a combination of obtaining the additional funding necessary to repay its currently maturing debt
obligations, executing its business plan to improve operating profits, and renegotiating certain terms of its existing debt facilities. Management has taken steps to hire an investment banker to assist in seeking additional capital financing, and
management is also maintaining ongoing discussions with its current lenders. The Board and management believe that these steps, if successful, will result in enhanced liquidity and therefore mitigate the factors which raise doubt about the
Company’s ability to continue as a going concern. While management believes that its actions to improve the Company’s financial performance, its engagement of an investment banker to identify additional funding and its discussions with
existing lenders will enable the Company to retire currently-maturing debt, there can be no assurance that additional debt or other financing will be available to the Company in sufficient amounts and on acceptable terms or at all, that the
Company’s current lenders will agree to modify the terms of its debt facilities on acceptable terms or at all, or that the Company will achieve its forecasted performance at the level necessary to provide adequate liquidity and/or covenant
compliance. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might result from this uncertainty.


NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

In August
2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other-Internal-Use Software. ASU 2018-15 aligns the
requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain
internal-use software. The standard is effective beginning January 1, 2020, with early adoption permitted. We are currently assessing the impact this standard will have on our consolidated financial
statements.

 

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SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 


NOTE 4 – CHANGE IN ACCOUNTING PRINCIPLE – REVENUE FROM CONTRACTS WITH CUSTOMERS


In the first quarter of 2018, the Company adopted ASU No. 2014-09, “Revenue from Contracts with
Customers
. Revenue is recognized upon the satisfaction of performance obligations, which occurs when control of the good or service transfers to the customer. Approximately 98% of the Company’s consolidated revenues are related
to the sale of products. Under our standard contracts or purchase orders received from customers, the only performance obligation is the shipment of products. Revenue for products is recognized and the customer is invoiced when the control of the
product transfers to the customer, which is generally when the product is shipped. The Company determines the time at which transfer and control of products has passed to its customers, and the time at which it is able to invoice the customers,
based on review of contracts, sales agreements and purchase orders. Payment terms are generally established to be 30 days from the shipment date. We generally determine standalone selling prices based on the prices charged to customers for all
material performance obligations.

The Company provides its customers an implicit right of return for full or partial refund. Prior to the adjustment for
ASC 606, the Company reflected the right of return in accounts receivable. Under ASC 606, the Company has reclassified this right of return from accounts receivable into a combination of a refund liability, included within other accrued liabilities
for the gross return or credit, and other current assets for the assumed value of the returned product.

Variable consideration is accounted for as a
price adjustment (sales adjustment). Examples of variable consideration that affect the Company’s reported revenue include implicit rights of return and trade promotions. Implicit rights of return are typically contractually limited,
amounts are estimable based upon historic return levels, and the Company records provisions for anticipated returns at the time revenue is recognized. Trade promotions are offered to cooperatives and end users through various programs,
generally with terms of one year or less. Such promotions typically involve rebates based on annual purchases. Payment of incentives generally take the form of cash and are paid according to the terms of their agreement, typically within a year.
Rebates are accrued as sales occur based on the program rebate rates.

Amounts billed to customers for shipping and handling are included in revenues when
control of the goods and services transfers to the customer. Shipping and handling is arranged with third party carriers in connection with delivering goods to customers. Amounts billed to customers for sales tax are not included in revenues.


The Company typically does not have contracts with significant financing components as payments are generally received within 60 days from the time of
completion of the performance obligations. Cost incurred to obtain contracts are settled within 12 months of contract inception. Our accounting policy under ASC 606 remains consistent with past accounting policy whereby such costs are expensed as
incurred.

In the analysis of the revenue streams, the Company identified three areas for which the timing of revenue recognition did change.


 





  1)

Equipment and furniture revenue associated with projects was previously recognized upon the completion of the
project, or at customer acceptance. Under ASC 606, the Company has determined that is has two performance obligations within the project revenue stream: a) the delivery of equipment or furniture and b) the installation of the equipment or the
furniture. Installation services are not typically complex and can be performed by multiple providers. The furniture is functional without customization or modification. For equipment or furniture associated with projects, the Company
determined that control of the equipment or furniture was transferred to the customer upon delivery of the equipment or furniture to the customer site as the customer is in possession of the product at that time. The revenue attributable to the
performance obligation associated with the delivery of the equipment or furniture is accelerated under the new revenue

 

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SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 




 
recognition standard and recognized upon delivery. The revenue attributable to installation is recognized over time during the installation process based on costs incurred relative to total
expected installation costs. Under the contract terms, the customer is not billed for the equipment, furniture, or installation until the installation is complete. The Company allocates revenues to these two performance obligations using a cost plus
margin approach, whereby gross margins are consistent for each component. These contracts represent the only contracts in which there are remaining performance obligations, which are fulfilled upon completion of the project.

 





  2)

Professional development or training days are provided to customers that order certain of the Company’s
curriculum products, the most prominent of which is the FOSS product line. The Company bills for these training days at the same time the customer is billed for the product based on the stand-alone selling price. After the adoption of ASC 606, the
Company is deferring revenue associated with providing training days and will recognize the cost associated with providing the training when the costs are incurred. These contracts represent the only contracts in which there are remaining
performance obligations, which are fulfilled upon delivery of the professional development days.


 





  3)

Certain customer contracts specifically indicate that the customer obtains control of the product upon
delivery. A review of contracts has identified certain contracts for which the language associated with control of the product is deemed to supersede invoice terms and conditions resulting in transfer of control upon receipt.

The Company also evaluated its catalog costs under the new revenue recognition standard and determined that its catalog costs should be treated as costs
incurred to obtain contracts. Since catalog costs are incurred regardless of whether specific customer contracts or purchase orders are obtained, catalog costs are now expensed as incurred.


At the beginning of the second quarter of fiscal 2019, the Company’s opening contract asset balance was $1,487 and the opening contract liability balance
was $5,166. At the end of the second quarter of fiscal 2019, the Company’s closing contract asset balance was $8,649 and the closing contract liability balance was $5,414. Revenue recognized during the six months ended June 29, 2019 which
was outstanding as of December 29, 2018 was $3,979.

 

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SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 


The below table shows the Company’s disaggregated revenues for the three months and six months ended
June 29, 2019 and June 30, 2018.

 



























































































































































































































































































































































     For the Three Months Ended      For the Six Months Ended  
     June 29, 2019      June 30, 2018      June 29, 2019      June 30, 2018  

Distribution revenues by product line:

           

Supplies

   $ 77,005      $ 80,241      $ 130,701      $ 133,673  

Furniture

     53,583        52,354        76,837        76,305  

Instruction & Intervention

     14,055        14,337        25,135        26,858  

AV Tech

     4,207        4,089        8,172        8,366  

Agendas

     2,019        4,588        2,181        4,834  

Freight Revenue .

     2,231        2,581        3,783        4,387  

Customer Allowances / Discounts

     (2,995      (2,415      (4,881      (4,028
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Distribution Segment

   $ 150,105      $ 155,775      $ 241,928      $ 250,395  

Curriculum revenues by product line:

           

Science

   $ 10,504      $ 13,497      $ 14,613      $ 18,164  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Curriculum Segment

   $ 10,504      $ 13,497      $ 14,613      $ 18,164  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 160,609      $ 169,272      $ 256,541      $ 268,559  
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues from the sale of products comprise the significant portion of revenues in all product categories in the above table.
Except as described above, the product revenues associated with the above disaggregated revenues are recorded when control of goods or services are transferred to the customer. The Furniture category includes installation revenues that are recorded
over time as installation services are incurred. The Instruction & Intervention category includes subscription revenues which are recognized over the subscription period, typically twelve months. All product categories are impacted by
school budget funding.

NOTE 5 – CHANGE IN ACCOUNTING PRINCIPLE – LEASES


In the first quarter of 2019, the Company adopted ASU No. 2016-02,Leases.” ASU No. 2016-02 requires lessees to recognize the assets and liabilities arising from leases on the balance sheet. The new guidance requires that all leases create an asset and a liability for the lessee in
accordance with FASB Concepts Statement No. 6, Elements of Financial Statements.

Lease assets and lease liabilities are recognized at the
commencement of an arrangement where it is determined at inception that a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising
from the lease. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using the Company’s incremental borrowing rate (“IBR”). The rate implicit in each lease
was not readily determinable, thus the Company used its IBR of 10.5%, which was comprised of LIBOR as of December 30, 2018 of 2.5% plus the applicable margin pursuant to the Company’s New Term Loan (as defined below), or 8.0%. Lease assets
also include any upfront lease payments made and exclude lease incentives. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.


The Company leases certain distribution centers, office space, and equipment. At lease inception, the Company determined the lease term by assuming the
exercise of those renewal options that are reasonably assured. Leases with an initial term of 12 months or less are not recorded in the Condensed Consolidated Balance Sheets and the Company recognizes lease expense for these leases on a
straight-line basis over the lease term and includes the lease expense in selling, general and administrative (“SG&A”) expense. As of December 30, 2018, the Company’s leases had remaining contractual terms up to 4 years, some
of which include options to extend the leases for up to 10 years. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. None of the Company’s variable lease payments depend on a rate or an
index; therefore, are expensed as incurred.

 

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SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 


Following this adoption, the Company made the following elections:


 






   

The Company did not elect the hindsight practical expedient for all leases.

 






   

The Company elected the package of practical expedients to not reassess prior conclusions related to contracts
containing leases, lease classification and initial direct costs for all leases.


 






   

In March 2018, the FASB approved an optional transition method that allows companies to use the effective date as
the date of initial application on transition. The Company elected this transition method, and as a result, will not adjust its comparative period financial information or make the newly required lease disclosures for periods before the effective
date.


 






   

The Company elected to make the accounting policy election for short-term leases resulting in lease payments not
being recorded on the Company’s balance sheet.


 






   

The Company elected to not separate lease and non-lease components for
all leases.


Based on the present value of the lease payments for the remaining lease term of the Company’s existing leases, the
Company recognized right-of-use assets of approximately $14,200 and lease liabilities for operating leases consisting of approximately $5,100 in current maturities and
approximately $9,100 in long term maturities on December 30, 2018.

As of June 29, 2019, future maturities of operating lease liabilities were
as follows (in thousands):

 












































































Fiscal 2019 (6 months remaining)

   $ 3,229  

Fiscal 2020

     5,442  

Fiscal 2021

     2,554  

Fiscal 2022

     1,771  

Fiscal 2023

     1,772  

Thereafter

     64  
  

 

 

 

Total lease payments

     14,832  

Present value adjustment

     (2,225
  

 

 

 

Operating lease liabilities

     12,607  
  

 

 

 

As of December 29, 2018, the future minimum lease payments under operating leases for the Company’s fiscal years are
as follows (in thousands):

 


























































Fiscal 2019

   $ 5,449  

Fiscal 2020

     4,744  

Fiscal 2021

     2,275  

Fiscal 2022

     1,606  

Fiscal 2023

     1,577  

Thereafter

     122  
  

 

 

 

Total minimum lease payments

   $ 15,773  
  

 

 

 

As of June 29, 2019, our operating leases had a weighted-average remaining lease term of 36 months and a weighted-average
discount rate of 10.5%. Cash paid for amounts included in the measurement of operating lease liabilities was $1,582 for the three months ended June 29, 2019 and $3,123 for the six months ended June 29, 2019. Operating lease cost and
short-term lease costs included in SG&A for the three months ended June 29, 2019 was approximately $1,900 and $20, respectively. Operating lease cost and short-term lease costs included in SG&A for the six months ended June 29, 2019 was
approximately $3,400 and $50, respectively. The Company had no financing leases as of June 29, 2019.

 

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SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 


NOTE 6 - INCOME TAXES


On December 22, 2017, the Tax Act was signed into law. In accordance with accounting standards, the effects of this legislation were recognized in 2017
upon enactment. The primary impact of the Tax Act on the Company related to the reduction of the Federal corporate income tax rate from 35% to 21% beginning in 2018. At December 30, 2017, our previously recorded deferred tax assets and
liabilities were remeasured to reflect the 21% rate at which these assets and liabilities would be realized in future periods. A provisional amount related to a one-time transitional tax on foreign earnings
and profits, disclosed but not recorded at December 31, 2017 in accordance with SEC staff accounting bulletin No. 118, was finalized during the fourth quarter of 2018 and $725 was recognized in the 2018 provision.


In fiscal 2018, the Company concluded that the realization of substantially all of its net deferred tax assets did not meet the more likely than not
threshold. This conclusion was based primarily on a combination of fiscal 2018 operating performance, cumulative pre-tax net losses over the prior thirty-six months, and
future forecasts of taxable income. Based on the Company’s performance in the first half of fiscal 2019, the Company’s conclusion regarding the more likely than not threshold did not change. The Company has Federal and state net operating
losses totaling $16,696. These net operating losses cannot be carried back, but the Federal net operating loss can be carried forward indefinitely and the majority of the state net operating losses can be carried forward for 20 years. The
Company’s accumulated unremitted earnings from foreign affiliates are expected to be repatriated to the parent entity within the next twelve months. Accordingly, the Company recorded a foreign withholding tax of $835 related to the accumulated
unremitted foreign earnings.

The Company files income tax returns with the U.S., various U.S. states, and foreign jurisdictions. The most significant tax
return the Company files is with the U.S. The Company’s tax returns are no longer subject to examination by the U.S. for fiscal years before 2016. The Company has various state tax audits and appeals in process at any given time. It is not
anticipated that any adjustments resulting from tax examinations or appeals would result in a material change to the Company’s financial position or results of operations.


The balance of the Company’s liability for unrecognized income tax benefits, net of federal tax benefits, at June 29, 2019, December 29, 2018,
and June 30, 2018, was $1,043, $1,101, and $792, respectively, all of which would have an impact on the effective tax rate if recognized. The Company does not expect any material changes in the amount of unrecognized tax benefits within the
next twelve months. The Company classifies accrued interest and penalties related to unrecognized tax benefits as income tax expense in its condensed consolidated statements of operations. The amounts of accrued interest and penalties included in
the liability for uncertain tax positions are not material.

 

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SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 


NOTE 7 - EARNINGS PER SHARE


Earnings Per Share

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


 











































































































































































































































































































































































































































































































































     Income (loss)
(Numerator)
     Weighted
Average
Shares
(Denominator)
     Per Share
Amount
 

Three months ended June 29, 2019:

        

Basic EPS

   $ (5,856      7,012      $ (0.84
        

 

 

 

Effect of dilutive stock options

     —          —       

Effect of dilutive restricted stock units

     —          —       

Effect of dilutive derivatives

     —          —       
  

 

 

    

 

 

    

Diluted EPS

   $ (5,856      7,012      $ (0.84
  

 

 

    

 

 

    

 

 

 

Three months ended June 30, 2018:

        

Basic EPS

   $ 18        7,000      $ 0.00  
        

 

 

 

Effect of dilutive stock options

     —          —       

Effect of dilutive restricted stock units

     —          129     
  

 

 

    

 

 

    

Basic and diluted EPS

   $ 18        7,129      $ 0.00  
  

 

 

    

 

 

    

 

 

 
     Income (loss)
(Numerator)
     Weighted
Average
Shares
(Denominator)
     Per Share
Amount
 

Six months ended June 29, 2019:

        

Basic EPS

   $ (30,831      7,007      $ (4.40
        

 

 

 

Effect of dilutive stock options

     —          —       

Effect of dilutive restricted stock units

     —          —       

Effect of dilutive derivatives

     —          —       
  

 

 

    

 

 

    

Basic and diluted EPS

   $ (30,831      7,007      $ (4.40
  

 

 

    

 

 

    

 

 

 

Six months ended June 30, 2018:

        

Basic EPS

   $ (18,660      7,000      $ (2.67
        

 

 

 

Effect of dilutive stock options

     —          —       

Effect of dilutive restricted stock units

     —          —       
  

 

 

    

 

 

    

Basic and diluted EPS

   $ (18,660      7,000      $ (2.67
  

 

 

    

 

 

    

 

 

 

The Company had weighted average stock options outstanding of 367 and 714 for the three months ended June 29, 2019 and
June 30, 2018, respectively, which were not included in the computation of diluted EPS because they were anti-dilutive. The Company had weighted average stock options outstanding of 419 and 718 for the six months ended June 29, 2019 and
June 30, 2018, respectively, which were not included in the computation of diluted EPS because they were anti-dilutive.

The Company had weighted
average restricted stock units outstanding of 63 and 120 for the three and six month periods ended June 29, 2019, respectively, and were not included in the computation of diluted EPS because they were anti-dilutive. The Company had weighted
average restricted stock units outstanding of 214 and 205 for the three and six month periods ended June 30, 2018, respectively.

 

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SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 


Based on the Company’s current senior leverage ratio as of June 29, 2019, the maximum number of
potential warrants that could be issued to our New Term Loan lender could be 1,265. These warrants were not included in our computation of diluted EPS because they were anti-dilutive. See Note 11 – Debt for additional information regarding the
warrants.

NOTE 8 – SHARE-BASED COMPENSATION EXPENSE


As of June 29, 2019, the Company had one share-based employee compensation plan: the School Specialty, Inc. 2014 Incentive Plan (the “2014
Plan”). The 2014 Plan was adopted by the Board of Directors on April 24, 2014 and approved on September 4, 2014 by the Company’s stockholders. On June 12, 2018, the Company’s stockholders approved an amendment to the
2014 Plan, which increased the number of shares available under the 2014 Plan by an additional 700 shares.

Options


On February 1, 2019, the 249 shares that were previously awarded to our former CEO were effectively cancelled upon his resignation. The Company did not
grant stock option awards during the three and six month periods ended June 29, 2019. On May 29, 2019, 16 shares were effectively cancelled due to an employee’s termination.


A summary of option transactions for the six months ended June 29, 2019 and June 30, 2018 were as follows:


 

















































































































































































































































































































     Options Outstanding      Options Exercisable  
     Options      Weighted-
Average
Exercise Price
     Options      Weighted-
Average
Exercise Price
 

Balance at December 29, 2018

     622      $ 18.57        428      $ 18.57  

Granted

     —             

Exercised

     —             

Canceled

     (265      18.57        
  

 

 

          

Balance at June 29, 2019

     357      $ 18.57        278      $ 18.57  
  

 

 

          
           

Balance at December 30, 2017

     721      $ 18.57        350      $ 18.57  

Granted

     —             

Exercised

     —             

Canceled

     (14      18.57        
  

 

 

          

Balance at June 30, 2018

     707      $ 18.57        433      $ 18.57  
  

 

 

          

The weighted average life remaining of the stock options outstanding as of June 29, 2019 was 6.3 years and as of
June 30, 2018 was 6.9 years.

Restricted Stock Units


On June 18, 2018, the Compensation Committee granted an aggregate of 109 Restricted Stock Units (“RSUs”) under the Company’s 2014 Plan to
members of the Company’s senior management, with an aggregate value of $19.38 per share. 94 of the 109 RSUs that were granted were still outstanding as of the end of fiscal 2018. The RSUs have time-based vesting provisions, with one-third of the RSUs vesting on each March 15 of 2019, 2020 and 2021. The 49 RSUs that were previously awarded to the former CEO were forfeited immediately upon his resignation on February 1, 2019. On
March 15, 2019, 15 of the remaining RSUs vested for which the Company issued 10 shares of common stock to members of senior management and 5 shares were used to satisfy tax withholding requirements for such persons and are reflected as Treasury
Stock on the condensed consolidated balance sheet. As of the end of the second quarter of 2019, 30 RSUs associated with this grant remain outstanding.

 

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SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 


Also, on June 18, 2018, the Compensation Committee granted an aggregate of 15 RSUs under the 2014 Plan
to the non-employee members of the Board of Directors, with an aggregate value of $19.38 per share. The RSUs have time-based vesting provisions and vested on June 18, 2019. The Company issued 15
shares of common stock to each of the non-employee members of the Board of Directors.

On March 15, 2019, the
Compensation Committee granted 3 RSUs under the 2014 Plan to the non-employee director appointed to the Board of Directors on that date, with an aggregate value of $6.25 per share. These RSUs have time-based
vesting conditions, and all of these RSUs vest on March 15, 2020. All of these RSUs remain outstanding as of June 29, 2019.

On June 6,
2019 the Compensation Committee granted an aggregate of 45 RSUs under the 2014 Plan to members of the Company’s senior management, with an aggregate value of $5.55 per share. The RSUs have time-based vesting provisions, with one-third of the RSUs vesting on each March 15 of 2020, 2021 and 2022. All of these RSUs remain outstanding as of June 29, 2019.


Also, on June 6, 2019, the Compensation Committee granted an aggregate of 19 RSUs under the 2014 Plan to the
non-employee members of the Board of Directors, with an aggregate value of $5.55 per share. The RSUs have time-based vesting provisions, with all of the RSUs vesting on June 6, 2020. All of these RSUs
remain outstanding as of June 29, 2019.

On March 23, 2016, the Compensation Committee of the Board of Directors of the Company granted an
aggregate of 196 RSUs under the Company’s 2014 Plan to members of the Company’s senior management. 23 of the 196 RSUs were cancelled in fiscal 2018 in connection with the end of an executive’s employment. The RSUs were
performance-based. A certain percentage of the RSUs were scheduled to vest on the third anniversary of the date of grant, with such percentage based on the 15 day Volume Weighted Average Price (“VWAP”) of the Company’s common stock
prior to the vesting date. The percentage of RSUs that were scheduled to vest was determined as follows:

 






























Vesting %

  

15 Day VWAP

0%    VWAP less than $15.43
20%    VWAP greater than or equal to $15.43, but less than $16.86
40%    VWAP greater than or equal to $16.86, but less than $18.29
60%    VWAP greater than or equal to $18.29, but less than $19.71
80%    VWAP greater than or equal to $19.71, but less than $21.14
100%    VWAP greater than or equal to $21.14

Due to the nature of the vesting conditions of the RSUs, a valuation methodology was needed to incorporate potential equity
value paths for the Company. As such, the fair value of the RSU grants was determined under a Monte Carlo approach with a simulation of the Company’s stock price to a date that was 15 trading days prior to the vesting date. A large
number of trials were run under the Monte Carlo approach to ensure an adequate sampling of different potential scenarios was achieved. Based on this approach, the fair value of the RSUs granted on March 23, 2016 was $11.55 per share. Any RSUs
that vested would have been settled in shares of Company common stock. The 114 RSUs that were previously awarded to the former CEO were forfeited immediately upon his resignation on February 1, 2019. As of March 23, 2019, the VWAP was
determined to be less than $15.43 and as a result, all of the remaining RSUs from the March 23, 2016 grant did not vest and were canceled.

Stock
Appreciation Rights

On May 28, 2014, the Board granted 39 stock appreciation rights (“SARs”) to each of the non-employee members of the Board under the 2014 Plan. On September 28, 2015, the Board granted 39 SARs to each of the two new non-employee members of the Board. On
January 17, 2018, the Board granted 39 SARs to its new non-employee member of the Board. Each SAR has a grant date value of $18.57 and will be settled in cash upon exercise. As such, the SARs are
accounted for as liability awards. As the Company’s stock trading price was less than each SAR’s

 

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SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 



exercise price as of September 29, 2018, expense of $99 recorded for the SARs during the three months ended June 30, 2018 was effectively reversed as of September 29, 2018
based on the trading price of the stock on that date. The SARs vested or will vest as to one-half of the SARs on the second anniversary of the date of grant and vested or will vest as to one-fourth of the SARs on each of the third and fourth anniversaries of the date of grant. In the second quarter of 2018, 39 of the outstanding SARs were exercised by a member of the Board and $31 of expense
was recognized. Total SARs that remain outstanding as of June 29, 2019 are 154.

The following table presents the share-based compensation recognized
for the three and six month periods ended June 29, 2019 and June 30, 2018:

 






























































































































































































































































































     For the Three Months Ended  
     June 29, 2019      June 30, 2018  
     Gross      Net of Tax      Gross      Net of Tax  

Stock Options

   $ 98      $ 96      $ 267      $ 200  

SARs

     —          —          131        98  

RSUs

     173        170        227        170  
  

 

 

       

 

 

    

Total stock-based compensation

   $ 271         $ 625     
  

 

 

       

 

 

    
     For the Six Months Ended  
     June 29, 2019      June 30, 2018  
     Gross      Net of Tax      Gross      Net of Tax  

Stock Options

   $ 162      $ 159      $ 651      $ 488  

SARs

     —          —          131        98  

RSUs

     (1,051      (1,030      415        311  
  

 

 

       

 

 

    

Total stock-based compensation

   $ (889       $ 1,197     
  

 

 

       

 

 

    

The stock-based compensation expense is reflected in selling, general and administrative (“SG&A”) expenses in
the accompanying condensed consolidated statements of operations. The Company records actual forfeitures in the period the forfeiture occurs. During the three and six month periods ended June 29, 2019, 16 stock options and zero RSUs were
forfeited and 265 stock options and 166 RSUs were forfeited, respectively, resulting in negative stock-based compensation expense during the six month period. Stock-based compensation expense associated with stock options and RSUs are non-cash expenses which are recorded to additional paid in capital. Stock-based compensation expense associated with SARs must be cash-settled and are recorded to other accrued liabilities until settled.


The total unrecognized share-based compensation expense as of June 29, 2019 and June 30, 2018 was as follows:


 













































     June 29, 2019      June 30, 2018  

Stock Options, net of actual forfeitures.

   $ 685      $ 1,701  

SARs.

     —          55  

RSUs

     888        2,921  

 

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SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 


NOTE 9 – GOODWILL AND OTHER INTANGIBLE ASSETS


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


 



































































































































































































































































































































































































































































































































June 29, 2019

   Gross Value      Accumulated
Amortization
     Net Book
Value
 

Amortizable intangible assets:

        

Customer relationships (10-13 years)

   $ 13,294      $ (5,670    $ 7,624  

Publishing rights (20 years)

     4,000        (1,217      2,783  

Trademarks (20 years)

     26,587        (7,555      19,032  

Developed technology (7 years)

     6,600        (5,736      864  

Content (5 years)

     4,400        (4,400      —    

Perpetual license agreements (5 years)

     1,200        (1,200      —    

Favorable leasehold interests (10 years)

     2,160        (1,314      846  
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 58,241      $ (27,092    $ 31,149  
  

 

 

    

 

 

    

 

 

 

December 29, 2018

   Gross Value      Accumulated
Amortization
     Net Book
Value
 

Amortizable intangible assets:

        

Customer relationships (10-13 years)

   $ 13,294      $ (5,136    $ 8,158  

Publishing rights (20 years)

     4,000        (1,117      2,883  

Trademarks (20 years)

     26,587        (6,612      19,975  

Developed technology (7 years)

     6,600        (5,264      1,336  

Content (5 years)

     4,400        (4,400      —    

Perpetual license agreements (5 years)

     1,200        (1,200      —    

Favorable leasehold interests (10 years)

     2,160        (1,206      954  
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 58,241      $ (24,935    $ 33,306  
  

 

 

    

 

 

    

 

 

 

June 30, 2018

   Gross Value      Accumulated
Amortization
     Net Book
Value
 

Amortizable intangible assets:

        

Customer relationships (10-13 years)

   $ 13,294      $ (4,601    $ 8,693  

Publishing rights (20 years)

     4,000        (1,017      2,983  

Trademarks (20 years)

     26,587        (5,948      20,639  

Developed technology (7 years)

     6,600        (4,793      1,807  

Content (5 years)

     4,400        (4,400      —    

Perpetual license agreements (5 years)

     1,200        (1,200      —    

Favorable leasehold interests (10 years)

     2,160        (1,098      1,062  
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 58,241      $ (23,057    $ 35,184  
  

 

 

    

 

 

    

 

 

 

Intangible asset amortization expense was included in selling, general and administrative (“SG&A”) expense.
Intangible asset amortization expense for the three month periods ended June 29, 2019 and June 30, 2018, was $934 and $979, respectively. Intangible asset amortization expense for the six month periods ended June 29, 2019 and
June 30, 2018, was $1,874 and $1,979, respectively. The Company recorded a non-cash impairment charge of $283 for the three and six months ended March 30, 2019 related to the discontinuation of a
licensed product tradename previously recorded in the Distribution segment.

 

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SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 


Intangible asset amortization expense for each of the five succeeding fiscal years is expected to be as
follows:

 








































Fiscal 2019 (6 months remaining)

   $ 1,868  

Fiscal 2020

     3,187  

Fiscal 2021

     2,794  

Fiscal 2022

     2,794  

Fiscal 2023

     2,668  

Fiscal 2024

     2,578  

The table below shows the allocation of the recorded goodwill as of June 29, 2019 and June 30, 2018 for both the
reporting units and reporting segments.

 





























































































































































































     Distribution
Segment
       Curriculum
Segment
       Total  

Goodwill

   $ —          $ 4,580        $ 4,580  
  

 

 

      

 

 

      

 

 

 

Balance at June 29, 2019

   $ —          $ 4,580        $ 4,580  
  

 

 

      

 

 

      

 

 

 

Goodwill

   $ —          $ 4,580        $ 4,580  
  

 

 

      

 

 

      

 

 

 

Balance at December 29, 2018

   $ —          $ 4,580        $ 4,580  
  

 

 

      

 

 

      

 

 

 

Goodwill

   $ 22,262        $ 4,580        $ 26,842  
  

 

 

      

 

 

      

 

 

 

Balance at June 30, 2018

   $ 22,262        $ 4,580        $ 26,842  
  

 

 

      

 

 

      

 

 

 

Due to the Curriculum segment revenues for fiscal 2019 falling below the Company’s expectations, as of the end of the
second quarter, the Company tested the segment’s goodwill for an impairment. Based on the results of this test, the Company concluded that there was no impairment.


NOTE 10 – PROPERTY, PLANT AND EQUIPMENT

Property,
plant and equipment consist of the following:

 

































































































































































     June 29, 2019      December 29, 2018      June 30, 2018  

Projects in progress

   $ 2,972      $ 3,768      $ 2,983  

Buildings and leasehold improvements

     2,908        2,876        2,971  

Furniture, fixtures and other

     72,980        68,285        64,828  

Machinery and warehouse equipment

     15,195        14,903        14,595  
  

 

 

    

 

 

    

 

 

 

Total property, plant and equipment

     94,055        89,832        85,377  

Less: Accumulated depreciation

     (63,294      (57,930      (53,314
  

 

 

    

 

 

    

 

 

 

Net property, plant and equipment

   $ 30,761      $ 31,902      $ 32,063  
  

 

 

    

 

 

    

 

 

 

Depreciation expense for the three and six month periods ended June 29, 2019 and June 30, 2018 was $3,407 and $2,955
and $6,639 and $7,414, respectively.

For the three months ended June 29, 2019, $3,356 of depreciation expense was recorded as SG&A expense and
$51 of depreciation expense was categorized as cost of revenues. For the three months ended June 30, 2018, $2,916 of depreciation expense was recorded as SG&A expense and $39 of depreciation expense was categorized as cost of revenues.


For the six months ended June 29, 2019, $6,536 of depreciation expense was recorded as SG&A expense and $103 of depreciation expense was categorized
as cost of revenues. For the six months ended June 30, 2018, $7,337 of depreciation expense was recorded as SG&A expense and $77 of depreciation expense was categorized as cost of revenues.

 

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SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 


NOTE 11 – DEBT


Long-term debt consisted of the following:

 

































































































































































     June 29, 2019      December 29, 2018      June 30, 2018  

ABL Facility, maturing in 2022

   $ 62,600      $ —        $ 61,500  

New Term Loan, maturing in 2022

     108,228        111,725        112,499  

Unamortized New Term Loan Debt Issuance Costs

     (5,599      (2,799      (2,872

Deferred Cash Payment Obligations, maturing in 2019

     26,171        25,009        23,910  
  

 

 

    

 

 

    

 

 

 

Total debt

     191,400        133,935        195,037  

Less: Current maturities

     (94,971      (30,352      (64,600
  

 

 

    

 

 

    

 

 

 

Total long-term debt

   $ 96,429      $ 103,583      $ 130,437  
  

 

 

    

 

 

    

 

 

 

ABL Facility

On
June 11, 2013, the Company entered into a Loan Agreement (the “ABL Facility”) by and among the Company, Bank of America, N.A., as Agent, SunTrust Bank, as Syndication Agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated
and SunTrust Robinson Humphrey, Inc., as Joint Lead Arrangers and Bookrunners, and the Lenders that are party to the Asset-Based Credit Agreement (the “Asset-Based Lenders”).


Under the ABL Facility, the Asset-Based Lenders agreed to provide a revolving senior secured asset-based credit facility in an aggregate principal amount of
$175,000. On August 7, 2015, the aggregate commitments were permanently reduced, at the election of the Company, by $50,000, from $175,000 to $125,000.


Outstanding amounts under the ABL Facility bear interest at a rate per annum equal to, at the Company’s election: (1) a base rate (equal to the
greatest of (a) the prime lending rate, (b) the federal funds rate plus 0.50%, and (c) the 30-day LIBOR rate plus 1.00% per annum) (the “Base Rate”) plus an
applicable margin (equal to a specified margin based on the interest rate elected by the Company, the fixed charge coverage ratio under the ABL Facility and the applicable point in the life of the ABL Facility (the “Applicable Margin”)),
or (2) a LIBOR rate plus the Applicable Margin (the “LIBOR Rate”). Interest on loans under the ABL Facility bearing interest based upon the Base Rate will be due monthly in arrears, and interest on loans bearing interest based upon
the LIBOR Rate will be due on the last day of each relevant interest period or, if sooner, on the respective dates that fall every three months after the beginning of such interest period.


In November 2014, the Company amended the ABL Facility. The main purpose for the amendment was to provide the Company additional flexibility in its execution
of certain restructuring actions by increasing the cap on the amount that may be added back under the definition of earnings before interest, taxes, depreciation, and amortization (“EBITDA”) for
non-recurring, unusual or extraordinary charges, business optimization expenses or other restructuring charges or reserves and cash expenses relating to earn outs or similar obligations.


In September 2015, the Company amended the ABL Facility. The main purposes for the amendment were to reduce the Applicable Margin for base rate and LIBOR
loans, reduce the unused line fee rate and extend the scheduled maturity date. As amended, the maturity date was extended to September 16, 2020, which would have automatically become March 12, 2019 unless the Company’s term loan
facility had been repaid, refinanced, redeemed, exchanged or amended prior to such date, in the case of any refinancing or amendment, to a date that was at least 90 days after the scheduled maturity date. In addition, the amendment provided for the
withdrawal of Sun Trust Bank as a lender and the assumption of its commitments by the remaining lenders.

 

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SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 


On April 7, 2017, the Company executed the Third Amendment to its ABL Facility (the “Third
Amendment”). The ABL Amendment provided a new lower pricing tier of LIBOR plus 125 basis points, a seasonal increase in the borrowing base of 5.0% of eligible accounts receivable for the months of March through August, and the inclusion of
certain inventory in the borrowing base, which previously had been excluded. Additionally, certain conforming changes were made in connection with the entry into the New Term Loan Agreement (as defined below). The Third Amendment extends the
maturity of the ABL Facility, as amended, to April 7, 2022 (“ABL Termination Date”), provided that the ABL Termination Date will automatically become February 7, 2022 unless the New Term Loan (as defined below) has been repaid,
prepaid, refinanced, redeemed, exchanged, amended or otherwise defeased or discharged prior to such date.

On August 9, 2018, the Company entered
into the Fourth Amendment to the ABL Facility (the “Fourth Amendment”) in order to: (1) update the definition of “Change of Control” set forth in the ABL Facility, and (2) update the definition of “Specified
Unsecured Prepetition Debt” and associated provisions set forth in the ABL Facility. The Fourth Amendment deletes the reference to “35%” in the “Change of Control” definition and inserts “50%” in its place. The
Company amended this provision of the ABL Facility in order to ensure certain shareholders with large positions did not put the Company in violation of the terms within its loan agreements. The ABL Facility also amended and restated the definition
“Specified Unsecured Prepetition Debt” in order to increase the cap on amounts prepaid because the original cap set forth therein was less than the amount due at maturity due to the fiscal 2017 revised interpretation of the interest
calculation methodology pursuant to the bankruptcy Reorganization Plan (as defined in the ABL Facility).

On November 7, 2018, the Company entered
into a Fifth Amendment to the ABL Facility (the “Fifth Amendment”) with its Asset-Based Lenders, effective as of September 29, 2018. The Sixth Amendment was entered into in order to: (1) give effect to ASU No. 2014-09 for the purpose of the computation of any financial covenant retroactive to December 31, 2017 and for all other purposes effective as of the date of the ABL Amendment, and (2) substitute
the LIBOR Screen Rate (as defined in the ABL Amendment) with the LIBOR Successor Rate (as defined in the ABL Amendment) in the event that the LIBOR Screen Rate is not available or published on a current basis, it was announced that LIBOR or LIBOR
Screen Rate will no longer be made available or a new benchmark interest rate has been adopted to replace LIBOR.

On March 13, 2019, and effective as
of December 29, 2018, the Company entered into a Sixth Amendment to the ABL Facility with its Asset-Based Lenders in order to, among other things: (1) amend the cap on add-backs for non-recurring, unusual or extraordinary charges, business optimization expenses and other restructuring charges or reserves and cash expenses relating to earn outs and similar obligations in definition of EBITDA;
(2) amend the calculation of the net senior leverage ratio; (3) limit the aggregate amount of outstanding revolving loans to no more than $10,000 on the last Saturday of fiscal year 2019 and each day during a twenty consecutive day period
that includes the last Saturday of fiscal year 2019 if a junior capital raise event has not occurred, or $0 on the last Saturday of fiscal year 2019 and each day during a thirty-five consecutive day period that includes the last Saturday of fiscal
year 2019 if a junior capital raise event has occurred; (4) expand the definition of permitted indebtedness to include subordinated debt in an aggregate principal amount not to exceed $30,000 the proceeds of which have been used, first, to
repay the deferred cash payment obligations, and second, to the extent the deferred cash payment obligations have been repaid in full, to repay the New Term Loan; and (5) condition the repayment of indebtedness with junior capital proceeds upon
satisfaction of the payment conditions and requiring the deferred cash payment obligations to be repaid in full before junior capital proceeds may be applied to the repayment of other indebtedness.


Pursuant to an Amended and Restated Guarantee and Collateral Agreement dated as of April 7, 2017 (the “ABL Security Agreement”), the Loan
Agreement is secured by a first priority security interest in substantially all assets of the Company and the subsidiary borrowers. Under the New Intercreditor Agreement (as defined below), the ABL Lenders have a first priority security interest in
substantially all working capital assets of the Company and the subsidiary borrowers, and a second priority security interest in all other assets, subordinate only to the first priority security interest of the New Term Loan Lenders (as defined
below) in such other assets.

 

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SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 


The effective interest rate under the ABL Facility for the three months ended June 29, 2019 was 5.9%,
which includes interest on borrowings of $627, amortization of loan origination fees of $118 and commitment fees on unborrowed funds of $66. The effective interest rate under the ABL Facility for the three months ended June 30, 2018 was 5.3%,
which includes interest on borrowings of $455, amortization of loan origination fees of $104 and commitment fees on unborrowed funds of $73.

The
effective interest rate under the ABL Facility for the six months ended June 29, 2019 was 6.6%, which includes interest on borrowings of $929, amortization of loan origination fees of $254 and commitment fees on unborrowed funds of $159. The
effective interest rate under the ABL Facility for the six months ended June 30, 2018 was 6.5%, which includes interest on borrowings of $538, amortization of loan origination fees of $208 and commitment fees on unborrowed funds of $181.

As of June 29, 2019, the outstanding balance on the ABL Facility was $62,600. As of June 30, 2018, the outstanding balance on the ABL Facility
was $61,500. The Company has estimated that the fair value of its ABL Facility (valued under level 3) as of June 29, 2019 approximated the carrying value of $62,600.


The Company may prepay advances under the ABL Facility in whole or in part at any time without penalty or premium. The Company will be required to make
specified prepayments upon the occurrence of certain events, including: (1) the amount outstanding on the ABL Facility exceeding the Borrowing Base (as determined in accordance with the terms of the ABL Facility), and (2) the
Company’s receipt of net cash proceeds of any sale or disposition of assets that are first priority collateral for the ABL Facility.

The Asset-Based
Credit Agreement contains customary events of default and financial, affirmative and negative covenants, including but not limited to a springing financial covenant relating to the Company’s fixed charge coverage ratio and restrictions on
indebtedness, liens, investments, asset dispositions and dividends and other restricted payments.

New Term Loan


On April 7, 2017, the Company entered into a Loan Agreement (the “New Term Loan Agreement”) among the Company, as borrower, certain of its
subsidiaries, as guarantors, the financial parties party thereto, as lenders (the “New Term Loan Lenders”) and TCW Asset Management Company LLC, as the agent.


Under the New Term Loan Agreement, the Term Loan Lenders agreed to make a term loan (the “New Term Loan”) to the Company in aggregate principal
amount of $140,000. The initial draw on the New Term Loan at closing was $110,000. These proceeds, along with proceeds received from a draw on the ABL Facility (as defined below), were used to repay the Term Loan which had a remaining principal
balance including accrued interest of $118,167. The New Term Loan Agreement provided for a delayed draw feature that allowed the Company to draw up to an additional $30,000 through April 7, 2019. The ability to access the delayed draw
commitment was subject to compliance with certain terms and conditions. The proceeds from the delayed draw could be used to fund distributions, permitted acquisitions, and repayments of existing indebtedness. In the third quarter of fiscal 2017,
the Company drew $14,000 under the delayed draw term loan feature in conjunction with the Triumph Learning acquisition. At the Company’s option, the New Term Loan interest rate will be either the prime rate or the LIBOR rate (with a LIBOR
floor of 1.0%), plus an applicable margin based on the Company’s net senior leverage ratio. The Company may specify the interest rate period of one, three or six months for interest on loans under the New Term Loan Agreement bearing interest
based on the LIBOR rate.

The New Term Loan matures on April 7, 2022. The New Term Loan required scheduled quarterly principal payments of 0.625% of
the original principal amount which commenced June 30, 2017 and continued through the quarter ended March 31, 2019. Subsequent to March 31, 2019, the scheduled quarterly principal payments are 1.250% of the original principal amount.
Required scheduled quarterly principal payments on borrowings under the delayed-draw feature begin in the quarter following a draw on this feature. In addition to scheduled quarterly principal repayments, the New Term Loan Agreement requires
prepayments at specified levels upon the Company’s receipt of net proceeds from certain events, including but not limited to certain asset dispositions, extraordinary receipts, and the issuance or sale of any indebtedness or equity interests
(other than permitted issuances or sales).

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 



The New Term Loan Agreement also requires prepayments at specified levels from the Company’s excess cash flow. In the first quarter of fiscal 2019, the Company made a $951 repayment of
principal based on fiscal 2018 excess cash flow. The Company is also permitted to voluntarily prepay the New Term Loan in whole or in part. Voluntary prepayments made before April 7, 2018 were subject to an early prepayment fee of 2.0%, while
any voluntary prepayment made on or after April 7, 2018, but before April 7, 2019, were subject to a 1.0% early prepayment fee. Voluntary prepayments made on or after April 7, 2019 will not be subject to an early payment fee. All
prepayments of the loans will be applied first to that portion of the loans comprised of prime rate loans and then to that portion of loans comprised of LIBOR rate loans. The New Term Loan Agreement contains customary events of default and
financial, affirmative and negative covenants, including but not limited to quarterly financial covenants commencing with the fiscal quarter ending September 30, 2017 relating to the Company’s fixed charge coverage ratio and net senior
leverage ratio, and an annual limitation on capital expenditures and product development investments, collectively.

On August 9, 2018, the Company
entered into the First Amendment (the “First Term Loan Amendment”) of its New Term Loan Agreement dated April 7, 2017 in order to: (1) update the definition of “Change of Control” set forth in the New Term Loan
Agreement, and (2) update the definition of “Specified Unsecured Prepetition Debt” and associated provisions set forth in the New Term Loan Agreement. The First Term Loan Amendment deletes the reference to “35%” in the
“Change of Control” definition and inserts “50%” in its place. The Company amended this provision of the New Term Loan Agreement in order to accommodate certain shareholders of the Company with large positions. The New Term Loan
Agreement also amended and restated the definition “Specified Unsecured Prepetition Debt” in order to increase the cap on amounts prepaid because the original cap set forth therein was less than the amount due at maturity due to the fiscal
2017 revised interpretation of the interest calculation methodology pursuant to the bankruptcy Reorganization Plan (as defined in the New Term Loan Agreement).


On November 7, 2018, the Company entered into a Second Amendment to the New Term Loan Agreement (the “Second Term Loan Amendment”) with its New
Term Loan Lenders, each effective as of September 29, 2018. The Second Term Loan Amendment was entered into in order to (1) reduce its fixed charge coverage ratio for the five fiscal quarters ending December 29, 2018 through
December 28, 2019, (2) reduce the number of days for fiscal 2018 during which the Company may have no revolving loans outstanding from 60 to 14 and adjust the time period of such reduction to be between December 15, 2018 and
January 31, 2019, (3) to give effect to ASU 2014-09 for the purpose of the computation of any financial covenant retroactive to December 31, 2017 and for all other purposes effective as of the date
of the Second Term Loan Amendment, (4) change the delayed draw term loan commitment termination date from April 7, 2019 to the effective date of the Third Term Loan Amendment and (5) provide that the Applicable Margin shall assume a
net senior leverage ratio of greater than 3.75x from the date of the Second Term Loan Amendment until the Company delivers its financial statements for fiscal 2018 and the related compliance certificate.


On March 13, 2019, and effective as of December 29, 2018, the Company entered into the Third Amendment (the “Third Term Loan Amendment”)
of its New Term Loan Agreement in order to, among other things: (1) increase the applicable margin based on the net senior leverage ratio and to further increase the applicable margin by a PIK interest rate which will be subject to adjustment
based on the net senior leverage ratio; (2) provide the Agent with certain board observation rights; (3) limit the aggregate amount of outstanding revolving loans to no more than $10,000 on the last Saturday of fiscal year 2019 and each
day during a twenty consecutive day period that includes the last Saturday of fiscal year 2019 if the Company has not raised $25,000 in junior capital proceeds, the proceeds of which were used in the manner specified in the New Term Loan Amendment,
or $0 on the last Saturday of fiscal year 2019 and each day during a thirty-five consecutive day period that includes the last Saturday of fiscal year 2019 if a junior capital raise event has occurred; (4) reduce the limit on capital
expenditures to $12,500 in the aggregate for the four fiscal quarters ending March 30, 2019, June 29, 2019, and September 28, 2019 and $10,000 in the aggregate for the four fiscal quarters ending December 28, 2019; (5) remove the
obligation to comply with the net senior leverage ratio and fixed charge coverage ratio financial covenants for the fiscal year ended December 29, 2018; (6) amend the calculation of the fixed charge coverage ratio and reduce the fixed charge
coverage ratio for the remainder of the term of the New Term Loan Agreement; (7) amend the calculation of the net senior leverage ratio and increase the net senior leverage ratio for the remainder of the term of the New Term Loan Agreement,
which may be adjusted upon a junior capital raise satisfaction

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 



event; (8) amend the cap on add-backs for non-recurring, unusual or extraordinary charges, business
optimization expenses and other restructuring charges or reserves and cash expenses relating to earn outs and similar obligations in the definition of EBITDA and require the Company to maintain a minimum EBITDA for the remainder of the term of the
New Term Loan Agreement, which may be adjusted upon a junior capital raise satisfaction event; (9) require the Company to maintain specified availability under the ABL Agreement in an amount not less than the greater of $12,500 or 10% of the
commitments (as defined in the ABL Agreement); (10) expand the definition of permitted indebtedness to include subordinated debt used to repay the New Term Loan or the deferred cash payment obligations; and (11) provide for additional
inspection and audit rights to be conducted by an advisory firm to be appointed by the Agent.

In connection with the Third Term Loan Amendment, the
Company separately agreed that, commencing with the Fiscal Month ending September 28, 2019, to the extent the payment in full in cash of the Obligations has not occurred on or prior to any such date, the Company shall deliver to the Agent, in
form and substance reasonably satisfactory to the Agent, on or prior to the date that is 30 days following the last day of each Fiscal Month (but within 60 days after the last month in a fiscal year), warrants to purchase, for a price of $0.001
per share, the Designated Percentage of the outstanding common stock of the Company, with such warrants earned in full and vesting immediately on the date of issuance; provided that the aggregate number of warrants delivered to the Agent shall not
exceed warrants to purchase more than 18% of the outstanding common stock of the Company in the aggregate. “Designated Percentage” means, with respect to each Fiscal Month, (x) if the financial statements delivered pursuant to the New
Term Loan Agreement with respect to such fiscal month demonstrate that the net senior leverage ratio for the twelve consecutive fiscal month period is greater than or equal to 5.00:1.0, 2%, (y) if the financial statements delivered pursuant to the
New Term Loan Agreement with respect to such fiscal month demonstrate that the net senior leverage ratio for the twelve consecutive fiscal month period is greater than or equal to 4.2:1.0 but less than 5.00:1.0, 1% and (z) if the financial
statements delivered pursuant to the New Term Loan Agreement with respect to such fiscal month demonstrate that the net senior leverage ratio for the twelve consecutive fiscal month period is less than 4.20:1.0, 0%. Notwithstanding the foregoing, no
warrants issued shall be exercisable until the date by which the Company is required to deliver the financial statements with respect to the fiscal year ending December 28, 2019.


If, on or prior to the 2019 financial delivery date, (i) the New Term Loan obligations are paid in full in cash, (ii) the junior capital raise
satisfaction event has occurred or (iii) the financial statements delivered pursuant to the New Term Loan Agreement with respect to the Fiscal Year ending December 28, 2019 demonstrate that, after giving effect to the payment of the
deferred cash payment obligations, the net senior leverage ratio for the four consecutive fiscal quarter periods ending on December 28, 2019 is less than or equal to 4.00:1.0 and EBITDA for the four consecutive fiscal quarter periods ending on
December 31, 2019 is at least $42,000, the Company shall have the right to buy back, for a price of $0.001 per warrant, 50% of the amount of any third amendment warrants outstanding prior to such buy back event.


The Company accounted for the obligation to issue the warrants as a derivative that is bifurcated from the New Term Loan. This accounting treatment resulted
in the Company recording a liability in the amount of $1,228 within other liabilities based on a valuation of the derivative completed in the second quarter of fiscal 2019. This liability was offset by issuance costs classified as a debt
discount, also be recorded within long-term debt. The liability is marked to market each quarter the derivative is outstanding. In the second quarter of fiscal 2019, the Company recorded a non-cash charge of $1,082 as a change in fair value and the
derivative was valued at $2,310 as of the end of the second quarter of fiscal 2019. The amortization of the issuance costs associated with the derivative is charged to interest expense on a quarterly basis as
non-cash interest, which amounted to $96 for the three and six months ended June 29, 2019.

Pursuant to a
Guarantee and Collateral Agreement dated as of April 7, 2017 (the “New Term Loan Security Agreement”), the New Term Loan is secured by a first priority security interest in substantially all assets of the Company and the subsidiary
guarantors. Under an intercreditor agreement (the “New Intercreditor Agreement”) between the New Term Loan Lenders and the ABL Lenders, the New Term Loan Lenders have a second priority security interest in substantially all working
capital assets of the Company and the subsidiary guarantors, subordinate only to the first priority security interest of the ABL Lenders in such assets, and a first priority security interest in all other assets.

 

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SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 


The effective interest rate under the New Term Loan for the three months ended June 29, 2019 was 12.9%,
which includes interest on borrowings of $3,175 and amortization of loan origination fees of $387. The effective interest rate under the New Term Loan for the three months ended June 30, 2018 was 8.7%, which includes interest on borrowings of
$2,310 and amortization of loan origination fees of $180.

The effective interest rate under the New Term Loan for the six months ended June 29, 2019
was 12.7%, which includes interest on borrowings of $6,405 and amortization of loan origination fees of $673. The effective interest rate under the New Term Loan for the six months ended June 30, 2018 was 8.6%, which includes interest on
borrowings of $4,740 and amortization of loan origination fees of $358.

As of June 29, 2019, the outstanding balance on the New Term Loan Credit
Agreement was $108,228. Of this amount, $6,200 was reflected as currently maturing, long-term debt in the accompanying condensed consolidated balance sheets. As of June 30, 2018, the outstanding balance on the New Term Loan Credit Agreement was
$112,499. Of this amount, $3,100 was reflected as currently maturing, long-term debt in the accompanying condensed consolidated balance sheets.


Deferred Cash Payment Obligations

In connection with the
previously disclosed 2013 Reorganization Plan, general unsecured creditors are entitled to receive a deferred cash payment obligation of 20% of the allowed claim in full settlement of the allowed unsecured claims. Such payment accrues quarterly paid-in-kind interest of 5% per annum beginning on the Effective Date.

Trade
unsecured creditors had the ability to make a trade election to provide agreed upon customary trade terms. If the election was made, those unsecured trade creditors received a deferred cash payment obligation of 45% of the allowed claim in full
settlement of those claims. As of the Effective Date, the deferred payment obligations under the trade elections began to accrue quarterly paid-in-kind interest of 10%
per annum. All deferred cash payment obligations, along with interest paid-in-kind, are payable in December 2019. As such, these obligations have been classified as
current maturities of long-term debt.

The Company’s reconciliation of general unsecured claims was completed in fiscal 2015. As of June 29,
2019, the Company’s deferred payment obligations were $26,171, of which $3,094 represents a 20% recovery for the general unsecured creditors and $12,095 represents a 45% recovery for those creditors who elected to provide the Company standard
trade terms with the remaining $10,982 related to accrued paid-in-kind interest.


The Company has estimated that the fair value of its Deferred Cash Payment Obligations (valued under Level 3) approximates $26,115 as of June 29,
2019. The Company estimated the fair value for its Deferred Cash Payment Obligations based upon the net present value of future cash flows using the discount rate that is consistent with our New Term Loan.

 

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SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 


NOTE 12 – CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)


Changes in accumulated other comprehensive loss during the six months ended June 29, 2019 and June 30, 2018 were as follows:


 





























































































































     Foreign Currency
Translation
 

Accumulated Other Comprehensive Income (Loss) at December 29, 2018

   $ (2,079

Other comprehensive income (loss) before reclassifications

     133  
  

 

 

 

Accumulated Other Comprehensive Income (Loss) at March 30, 2019

   $ (1,946
  

 

 

 

Other comprehensive income (loss) before reclassifications

     125  
  

 

 

 

Accumulated Other Comprehensive Income (Loss) at June 29, 2019

   $ (1,821
  

 

 

 
     Foreign Currency
Translation
 

Accumulated Other Comprehensive Income (Loss) at December 30, 2017

   $ (1,425

Other comprehensive income (loss) before reclassifications

     (236
  

 

 

 

Accumulated Other Comprehensive Income (Loss) at March 31, 2018

   $ (1,661
  

 

 

 

Other comprehensive income (loss) before reclassifications

     (171
  

 

 

 

Accumulated Other Comprehensive Income (Loss) at June 30, 2018

   $ (1,832
  

 

 

 

NOTE 13 – RESTRUCTURING


In the three and six months ended June 29, 2019 and June 30, 2018, the Company recorded restructuring costs associated with severance related
to staffing reductions. The following is a reconciliation of accrued restructuring costs for these periods and are included in facility exit costs and restructuring in the Condensed Consolidated Statements of Operations.


 



























































































































































































































































































































































































































































     Distribution      Curriculum      Corporate      Total  

Accrued Restructuring Costs at December 29, 2018

   $ —        $ —        $ 1,133      $ 1,133  

Amounts charged to expense

     —          —          876        876  

Payments

     —          —          (1,008      (1,008
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Restructuring Costs at March 30, 2019

   $ —        $ —        $ 1,001      $ 1,001  
  

 

 

    

 

 

    

 

 

    

 

 

 

Amounts charged to expense

     —          —          334        334  

Payments

     —          —          (451      (451
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Restructuring Costs at June 29, 2019

   $ —        $ —        $ 884      $ 884  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Distribution      Curriculum      Corporate      Total  

Accrued Restructuring Costs at December 30, 2017

   $ —        $ —        $ 50      $ 50  

Amounts charged to expense

     —          —          311        311  

Payments

     —          —          (189      (189
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Restructuring Costs at March 31, 2018

   $ —        $ —        $ 172      $ 172  
  

 

 

    

 

 

    

 

 

    

 

 

 

Amounts charged to expense

     —          —          171        171  

Payments

     —          —          (258      (258
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Restructuring Costs at June 30, 2018

   $ —        $ —        $ 85      $ 85  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 


NOTE 14 - SEGMENT INFORMATION


The Company determines its operating segments based on the information utilized by the chief operating decision maker, the Company’s Interim Chief
Executive Officer, to allocate resources and assess performance. Based on this information, the Company has determined that it is organized in two operating segments, Distribution and Curriculum, which also constitute its reportable segments. The
Company operates principally in the United States, with limited operations in Canada.

The Distribution segment offers products primarily to the pre-kindergarten through twelfth grade (“preK-12”) education market that include basic classroom supplies and office products, instructional materials, indoor and
outdoor furniture and equipment, physical education equipment, classroom technology, and planning and organizational products. The Distribution sales team focuses on selling all Distribution segment products, including the reading and science
supplies items.

The Curriculum segment is a publisher of proprietary core curriculum, primarily FOSS and Delta Science Module products, in the science
category within the preK-12 education market. The Curriculum segment has a sales team which is unique from the Distribution sales team and focuses exclusively on the products within this segment. In addition,
these products have specific product development requirements, and customer purchasing decisions are made in a different manner than the products represented in our Distribution segment. The accounting policies of the segments are the same as those
described in the Summary of Significant Accounting Policies as included in the Company’s Report on Form 10-K for the fiscal year ended December 29, 2018.


The Company measures profitability of its operating segments at a gross profit level. Since the majority of SG&A costs are managed centrally and
allocation methodologies of these costs to the operating segments is arbitrary, the Company’s chief operating decision maker does not review segment profitability using operating profit, only gross profit. Accordingly, the segment information
reports gross profit at the segment level.

 

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SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 

























































































































































































































































































































































































































































































































































































































































































































































































     Three Months Ended     Three Months Ended      Six Months Ended     Six Months Ended  
     June 29, 2019     June 30, 2018      June 29, 2019     June 30, 2018  

Revenues:

         

Distribution

   $ 150,105     $ 155,775      $ 241,928     $ 250,395  

Curriculum

     10,504       13,497        14,613       18,164  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 160,609     $ 169,272      $ 256,541     $ 268,559  
  

 

 

   

 

 

    

 

 

   

 

 

 

Gross Profit:

         

Distribution

   $ 46,993     $ 50,803      $ 77,835     $ 84,745  

Curriculum

     5,686       7,941        7,646       10,120  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 52,679     $ 58,744      $ 85,481     $ 94,865  
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating income (loss) and loss before taxes:

         

Operating income (loss)

   $ 1,813     $ 4,765      $ (18,992   $ (16,563

Interest expense

     6,042       3,688        10,668       7,194  
  

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before provision for or benefit from income taxes

   $ (4,229   $ 1,077      $ (29,660   $ (23,757
  

 

 

   

 

 

    

 

 

   

 

 

 
     June 29, 2019     December 29, 2018      June 30, 2018        

Identifiable assets:

         

Distribution

   $ 268,656     $ 227,744      $ 301,838    

Curriculum

     45,843       41,666        54,629    

Corporate assets

     18,861       1,266        16,300    
  

 

 

   

 

 

    

 

 

   

Total.

   $ 333,360     $ 270,676      $ 372,767    
  

 

 

   

 

 

    

 

 

   
     Three Months Ended     Three Months Ended      Six Months Ended     Six Months Ended  
     June 29, 2019     June 30, 2018      June 29, 2019     June 30, 2018  

Depreciation and amortization of intangible assets and development costs:

         

Distribution

   $ 5,260     $ 4,771      $ 9,649     $ 10,743  

Curriculum

     425       547        1,165       1,336  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 5,685     $ 5,318      $ 10,814     $ 12,080  
  

 

 

   

 

 

    

 

 

   

 

 

 

Expenditures for property, plant and equipment, intangible and other assets and development
costs:

         

Distribution

   $ 3,312     $ 3,051      $ 6,324     $ 6,747  

Curriculum

     575       922        1,176       1,881  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 3,887     $ 3,973      $ 7,500     $ 8,628  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 


The following table shows the Company’s revenues by each major product line within its two segments:

 



























































































































































































































































































































































     For the Three Months Ended      For the Six Months Ended  
     June 29, 2019      June 30, 2018      June 29, 2019      June 30, 2018  

Distribution revenues by product line:

           

Supplies

   $ 77,005      $ 80,241      $ 130,701      $ 133,673  

Furniture

     53,583        52,354        76,837        76,305  

Instruction & Intervention

     14,055        14,337        25,135        26,858  

AV Tech

     4,207        4,089        8,172        8,366  

Agendas

     2,019        4,588        2,181        4,834  

Freight Revenue .

     2,231        2,581        3,783        4,387  

Customer Allowances / Discounts

     (2,995      (2,415      (4,881      (4,028
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Distribution Segment

   $ 150,105      $ 155,775      $ 241,928      $ 250,395  

Curriculum revenues by product line:

           

Science

   $ 10,504      $ 13,497      $ 14,613      $ 18,164  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Curriculum Segment

   $ 10,504      $ 13,497      $ 14,613      $ 18,164  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 160,609      $ 169,272      $ 256,541      $ 268,559  
  

 

 

    

 

 

    

 

 

    

 

 

 

The above table is an enhanced disclosure to provide additional details related to our revenues by segment. Prior period
amounts in this note have been reclassified in order to present segment and product line amounts consistent with the Company’s current reporting structure.


NOTE 15 – COMMITMENTS AND CONTINGENCIES

Various
claims and proceedings arising in the normal course of business are pending against the Company. The results of these matters are not expected to have a material effect on the Company’s consolidated financial position, results of operations or
cash flows.

 

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ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operation


Quarterly Overview

School
Specialty is a leading provider of educational products, services and programs serving the PreK-12 education market across the United States and Canada. We offer more than 100,000 items through an innovative two-pronged marketing and sales approach that targets both school administrators and individual teachers. School Specialty designs, develops and delivers a broad assortment of innovative and proprietary products,
programs and services to the education marketplace, including essential classroom supplies, furniture, educational technology, supplemental learning resources (“Instruction & Intervention”), science curriculum solutions, and
evidence-based safety and security training. The Company applies its unmatched team of subject-matter experts and customized planning, development and project management tools to deliver this comprehensive learning environments that support the
social, emotional, mental, and physical development of students – improving both learning outcomes and school district performance. The Company provides educators with innovative and proprietary products and services, from basic school
supplies to 21st century learning environments to Science, English and Language Arts (“ELA”), and Math core and supplemental instructional materials. Through its nationwide distribution
network, School Specialty also provides its customers with access to a broad spectrum of trusted, third-party brands across its business segments. This assortment strategy enables the Company to offer a broad range of products primarily serving the preK-12 education market at the state, district and school levels. The Company is expanding the distribution of its products beyond selling directly to the education market into channels such as partnerships with e-tailers and healthcare facilities.

Our goal is to grow profitably as a leading provider of supplies, learning
environment solutions, services and curriculum for the education market. While we had experienced four consecutive years of overall revenue growth, we expect fiscal 2019 revenues to be down modestly partially due to the Company not pursuing low
margin business. One of our fiscal 2019 objectives is to return to balanced revenue growth. We plan to achieve this goal over the long-term through an organic growth strategy based on leveraging our strong brand names and distribution capabilities
and transforming the Company’s sales and marketing to a team-based selling approach focused on new customer acquisition, customer retention and penetration, and expanding into new markets or product areas. In addition, we will continue to
present our uniquely comprehensive value propositions to schools. We believe this will enable us to drive deeper penetration of the full scope of our product offerings. New revenue streams may include opportunities in areas that could expand
our addressable market, such as distribution to non-education customers, expansion into new product lines, continued growth in our e-tail partnerships, and potentially,
abroad in select international markets. In addition, the Company is committed to continuing to invest in product development in order to expand and improve its product offerings.


While remaining focused on lowering costs through consolidation and process improvement, the Company is equally focused on revenue growth and gross margin
management. The Company believes the following initiatives will contribute to continued revenue growth, while effectively managing gross margin and operating costs:

 






   

Successful execution of a new team sell model and go to market strategy;

 






   

Properly positioning the Company’s unique and comprehensive value proposition;

 






   

Improving the effectiveness of margin management through a renewed emphasis on selling proprietary brands;


 






   

Development of an effective strategy to manage pricing in competitive bidding scenarios;

 






   

Increase product category specific sales and support expertise; and

 






   

Execute on key platform investments to both drive efficiency and improve customer experiences.


Our business and working capital needs are highly seasonal, as schools and teachers look to receive a material portion of the products
they purchase in the weeks leading up to the start of the school year. As such, our peak sales levels occur from June through September. We expect to ship approximately 50% of our revenue and earn more than 100% of our annual net income from June
through September of our fiscal year and operate at a net loss from October through May. In anticipation of the peak shipping season, our inventory levels increase during the months of April through June. Our working capital historically peaks in
August or September mainly due to the higher levels of accounts receivable related to our peak revenue months. Historically, accounts receivable collections are most significant in the months of September through December as over 100% of our annual
operating cash flow is generated in those months.

 

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The Company is in discussions to refinance its currently-maturing deferred vendor obligations which are due
December 2019. Due to uncertainties associated with the Company’s ability to refinance these obligations, management believes that the Company’s ability to continue as a going concern is dependent on successfully concluding in the second
half of fiscal 2019 a combination of obtaining the additional funding necessary to repay its currently maturing debt obligations, executing its business plan to improve operating profits, and renegotiating certain terms of its existing debt
facilities. Management has taken steps to hire an investment banker to assist it in seeking additional capital financing, and management also is maintaining ongoing discussions with its current lenders. The Company’s actions related to pricing,
improvements to the bid/quote processes and the continued management of costs are expected to improve operating profits in the second half of fiscal 2019. The Board and management believe that these steps, if successful, will result in enhanced
liquidity and therefore mitigate the factors which raise doubt about the Company’s ability to continue as a going concern. While management believes that its actions to improve the Company’s financial performance, its engagement of an
investment banker to identify additional funding and its discussions with existing lenders will enable the Company to retire currently-maturing debt, there can be no assurance that additional debt or other financing will be available to the Company
in sufficient amounts and on acceptable terms or at all, that the Company’s current lenders will agree to modify the terms of its debt facilities on acceptable terms or at all, or that the Company will achieve its forecasted performance at the
high end or at all. This section does not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might result from this uncertainty.


Results of Operations

Costs of Revenues and Selling,
General and Administrative Expenses

The following table illustrates the primary costs classified in Cost of Revenues and Selling, General and
Administrative Expenses:

 










Cost of Revenues

 

Selling, General and Administrative Expenses

•  Direct costs of merchandise sold, net of vendor rebates other than vendor
payments for or the reimbursement of specific, incremental and identifiable costs, and net of early payment discounts.

 


•  Amortization of product development costs.


 

•  Freight expenses associated
with moving merchandise from our vendors to fulfillment centers or from our vendors directly to our customers.

 

•  Compensation and benefit costs for all selling (including commissions),
marketing, customer care and fulfillment center operations (which include the pick, pack and shipping functions), and other general administrative functions such as finance, human resources and information technology.


 

•  Occupancy and operating costs
for our fulfillment centers and office operations.

 


•  Freight expenses associated with moving our merchandise from our fulfillment centers to our
customers.

 

•  Catalog
expenses, offset by vendor payments for or reimbursement of specific, incremental and identifiable costs.

 


•  Depreciation and intangible asset amortization expense, other than amortization of product
development costs.


The classification of these expenses varies across the distribution industry. As a result, the Company’s gross margin may
not be comparable to other retailers or distributors.

Three Months Ended June 29, 2019 Compared to Three Months Ended June 30, 2018

Revenues

Revenues of $160.6 million for
the three months ended June 29, 2019 decreased by $8.7 million, or 5.1%, as compared to the three months ended June 30, 2018.

Distribution
segment revenues of $150.1 million for the three months ended June 29, 2019 decreased by 3.6%, or $5.7 million, from the three months ended June 30, 2018. Revenues from the Supplies and Agendas categories are driving this decline
year-over-year. Supplies product line revenues decreased $3.2 million, or 4.0%, in the quarter. The decline in Supplies is largely confined to smaller school districts and non-districts. We believe our
poor operating performance in 2018 had more of an impact on these smaller customers, and these customers are less likely to be contacted directly by the Company’s sales organization. The Company has marketing efforts targeted at this customer
segment to stimulate demand. Agendas revenues were down year-over-year $2.6 million, or 56.0%, in the quarter primarily due to a combination of timing and weakness in Agendas order rates; the Company has experienced challenges associated
with the transition to a new technology platform to support the sale and production of Agenda products. These issues are being addressed, but they have had an effect on sales and operational effectiveness in this area of our business. Revenues for
Furniture were up $1.2 million, or 2.3%. Instruction & Intervention revenues of $14.1 million were down $0.3 million and AV Tech revenues of $4.2 million were up $0.1 million as compared to last year’s second
quarter.

 

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Curriculum segment revenues of $10.5 million for the three months ended June 29, 2019 decreased by
22.2%, or $3.0 million from the three months ended June 30, 2018, reflecting a delayed recovery in the Science curriculum spend and timing shifts with the California adoption. We continue to anticipate modest revenue growth in the
Curriculum segment for the full year 2019 due to the increased opportunities in state adoptions, particularly California. Our overall outlook for California adoption revenues remains consistent with original expectations although we project the
majority of this adoption spend will occur in fiscal 2020 versus fiscal 2019. In addition, our opportunity pipeline in open territories continues to build, and we currently have more large and medium opportunities in our Curriculum pipeline than we
had in fiscal 2018. While the competitive landscape has changed since the last major adoption cycle with an increase in the number of competing products which could affect our adoption revenues, we believe the quality and effectiveness of our FOSS
program is superior which we are highlighting in both our marketing and sales positioning.

Gross Profit


Gross profit for the three months ended June 29, 2019 was $52.7 million, as compared to $58.7 million for the three months ended June 30,
2018. Gross margin for the three months ended June 29, 2019 was 32.7%, as compared to 34.7% for the three months ended June 30, 2018.


Distribution segment gross margin was 31.1% for the three months ended June 29, 2019, as compared to 32.6% for the three months ended June 30, 2018.
Rate variances at a product line level negatively impacted gross margin by 90 basis points in the current year first quarter. Pricing actions taken in fiscal 2018 and early fiscal 2019 have begun to positively impact gross margins over the past
three quarters. We expect the impact to be more pronounced in the second half of fiscal 2019 and result in positive year-over-year variances. Based on gross margin trends associated with booked orders in June, July and the first two weeks of August
2019, the Company’s most significant booking months, we expect the segment gross margin to grow in both the third and fourth quarter. The anticipated growth in segment gross margin in the second half of fiscal 2019 is based on a combination of
newly-effective pricing arrangements and our decision to not pursue certain low margin opportunities which did not result in additional pull-through revenues at higher gross margins. A year-over-year shift in product mix, primarily related to
increased Furniture revenues, negatively impacted gross margin by 30 bps in the second quarter of 2019.

Curriculum segment gross margin was 54.1% for the
three months ended June 29, 2019, as compared to 58.8% for the three months ended June 30, 2018. The gross margin decline primarily is attributable to cost variances associated with lower volumes. We currently anticipate full year
curriculum segment gross margins will be consistent with prior year.

Selling, General and Administrative Expenses


SG&A includes: selling expenses, the most significant of which are wages and commissions; operations expenses, which includes customer service, warehouse
and out-bound freight costs; catalog costs; general administrative overhead, which includes information technology, accounting, legal and human resources; and, depreciation and intangible asset amortization
expense.

SG&A decreased $3.3 million in the second quarter of fiscal 2019, from $53.8 million for the three months ended June 30, 2018
to $50.5 million for the three months ended June 29, 2019. Fixed compensation and benefit costs decreased by $0.9 million in the second quarter of fiscal 2019 due to lower staffing levels. Performance-based incentive compensation was
lower in the quarter year-over-year by $0.8 million. Variable SG&A expenses, consisting primarily of fulfillment center labor, outbound transportation costs and commissions, decreased by $1.1 million in the second quarter of fiscal
2019 versus the second quarter of fiscal 2018 due to lower volume. In the second quarter of fiscal 2019, the Company received $1.3 million as a recovery of previously incurred SG&A costs associated with a claim against a former vendor, which
also contributed to the lower SG&A costs in the current year.

As a percent of revenue, SG&A decreased from 31.8% for the three months ended
June 30, 2018 to 31.5% for the three months ended June 29, 2019.

Facility exit costs and restructuring


For the three month period ended June 29, 2019, the Company recorded $0.3 million of facility exit costs and restructuring charges. For the three
month period ended June 30, 2018, the Company recorded $0.2 million of facility exit costs and restructuring charges. The amounts in both periods were entirely related to severance.

 

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Interest Expense


Interest expense increased by $1.3 million from $3.7 million for the three months ended June 30, 2018 to $5.0 million for the three months
ended June 29, 2019. Cash interest expense increased $0.8 million in the second quarter of the current year due primarily to an increase in our cash interest rate of 170 bps due to a combination of a year-over-year increase in LIBOR and an
increase in our applicable margin related to our increased senior leverage ratio over the past twelve months. In addition, our average borrowings were up approximately $4.0 million in the second quarter of fiscal 2019 as compared to the second
quarter of fiscal 2018. However, our outstanding debt at the end of the second quarter of fiscal 2019 was down as compared to the outstanding debt at the end of the second quarter of fiscal 2018, and we expect average debt balances to be down in the
second half of fiscal 2019 as compared to the second half of fiscal 2018.

Non-cash interest expense increased by
$0.3 million in the second quarter of fiscal 2019 due primarily to incremental paid-in-kind interest related to our New Term Loan.


Change in Fair Value of Derivative

In the second quarter
of fiscal 2019, we recorded a non-cash charge of $1.1 million in order to reflect the current fair value of the potential warrants to be issued to the New Term Loan lenders. We did not have a fair value
adjustment in fiscal 2018.

Provision for Income Taxes


The provision for income taxes was $1.6 million for the three months ended June 29, 2019, as compared to $1.1 million for the three months ended
June 30, 2018 due to the valuation allowance recorded in December 2018.

The effective income tax rate for the three months ended June 29, 2019
and the three months ended June 30, 2018 was -38.5% and 98.3%, respectively. In the second quarter of fiscal 2019, the Company determined that unremitted earnings and profits in foreign subsidiaries would
likely be repatriated to the parent entity over the next twelve months. As such, the Company recorded withholding tax expense of approximately $0.8 million related to the repatriation of those earnings and profits.


Six Months Ended June 29, 2019 Compared to Six Months Ended June 30, 2018


Revenues

Revenue of $256.5 million for the six
months ended June 29, 2019 decreased by $12.0 million, or -4.5%, as compared to the six months ended June 30, 2018.


Distribution segment revenues of $241.9 million for the six months ended June 29, 2019 decreased by -3.4%, or $8.5 million, from the six months ended June 30,
2018. Revenues from the Supplies and Agendas categories are the primary drivers of this decline year-over-year. Supplies product line revenues decreased $3.0 million, or -2.2%, in fiscal 2019. While Supplies revenue has grown year-over-year in
larger school districts, revenues in smaller districts and non-district customers was down year-over-year. We believe our poor operating performance in fiscal 2018 contributed to the revenue decline from these smaller customers and have deployed
multiple sales and marketing initiatives aimed at improving our performance with these customers. Instruction & Intervention revenues of $25.1 million were down year-over-year by $1.7 million, or -6.4%. The main contributor to the softness in
Instruction & Intervention orders is the Triumph Learning product line, particularly declining orders for consumable products (i.e. workbooks) for which the renewal rate has been lower than historical levels. In the fall of fiscal 2019 we are
launching Success Coach, a major publishing initiative for our Company and the evolution of our existing Coach family of products. Agendas revenues were down year-over-year by $2.7 million, or -54.9%, in the first six months year-over-year. The
Company has experienced challenges associated with the transition to a new technology platform to support the sale and production of Agenda products. These issues are being addressed, but they have had an effect on sales and operational
effectiveness in this area of our business. Revenues for Furniture were up $0.5 million and AV Tech revenues were down $0.2 million as compared to fiscal 2018. Performance in our Furniture product category has been relatively consistent across all
segments of our customer base, including the smaller district and non-district customers. We believe our continued strength in the Furniture category provides an important foothold with our customers from which to regain Supplies business which may
have been impacted by our fiscal 2018 operating performance.

 

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Curriculum segment revenues of $14.6 million for the six months ended June 29, 2019 decreased by 19.5%, or
$3.6 million, from the six months ended June 30, 2018. The California adoption was a key driver in our fiscal 2019 growth expectations, as we expected approximately 50% of California school districts to purchase science curriculum in fiscal 2019,
with the balance to purchase in 2020 and 2021. Our current expectation is that approximately 25% of California districts will purchase in fiscal 2019. Despite fewer districts purchasing curriculum in fiscal 2019, we expect to generate considerable
revenues associated with the California adoption in fiscal 2019. With the shift to later purchases, our opportunities in California for 2020 and 2021 have increased versus original expectations. Outside of California, our Curriculum revenues are
down. With more active competition, our win-rates have been below historical levels. We believe our Science curriculum remains an effective and competitive product. We continue to enhance our offering and refine the sales and marketing process to
better respond to competitive pressures. In addition, we have recently begun the process of upgrading our digital content delivery platform, which will add important features and functionality to our Science Curriculum offering and improve its
competitive positioning.

Gross Profit

Gross profit
for the six months ended June 29, 2019 was $85.5 million, as compared to $94.9 million for the six months ended June 30, 2018. Gross margin for the six months ended June 29, 2019 was 33.3%, as compared to 35.3% for the six
months ended June 30, 2018.

Distribution segment gross margin was 32.1% for the six months ended June 29, 2019, as compared to 33.7% for the
six months ended June 30, 2018. Rate variances at a product line level negatively impacted gross margin by 110 basis points. A year-over-year shift in product mix negatively impacted gross margin by 50 basis points in the first quarter of 2019.
Despite the lower gross margin in the first half of 2019, gross margins have shown steady improvement over the first six months of the year. In our two largest product categories, Supplies and Furniture, strategic pricing actions taken over the past
six months, including a decision to not pursue certain low-margin business, are expected to result in higher second half 2019 gross margin versus 2018 gross margin. Booked gross margins for June, July and
early August of fiscal 2019, were up materially year-over-year.

Curriculum segment gross margin was 52.3% for the six months ended June 29, 2019, as
compared to 55.7% for the six months ended June 30, 2018. Higher training revenues in the first half of 2018 versus training revenues in the first half of 2019 contributed approximately 250 basis points of the decline in gross margin. An
increase in product cost, primarily associated with smaller runs of printed material due to lower volumes, also contributed to the gross margin decline. As we expect increased revenues in the second half of 2019 versus the second half of 2018, these
increased costs associated with volume will stabilize. We expect second half gross margin to be more consistent with prior year.

Selling, General and
Administrative Expenses

SG&A decreased $8.0 million in the first six months of fiscal 2019, from $110.9 million for the six months ended
June 30, 2018 to $103.0 million for the six months ended June 29, 2019.

Fixed compensation and benefit costs decreased by
$2.3 million in the first half of fiscal 2019 due to lower staffing levels. Performance-based incentive compensation was lower in the first half of fiscal 2019 versus fiscal 2018 by $1.1 million. Stock-based compensation expense was down
year-over-year by $2.0 million as previously recognized unvested RSU expense for the former CEO was reversed in the first quarter of 2019. Variable SG&A expenses, consisting primarily of fulfillment center labor, outbound transportation
costs and commissions, decreased by $1.1 million in fiscal 2019 versus fiscal 2018 due primarily to lower volume. Depreciation and amortization expense decreased by $0.9 million in the current year related primarily to incremental
depreciation in fiscal 2018 associated with the Company’s new phone system implementation. In the second quarter of fiscal 2019, the Company received $1.3 million as a recovery of previously incurred SG&A costs associated with a claim
against a former vendor, which also contributed to the lower SG&A costs in the current year.

As a percent of revenue, SG&A decreased from 41.3%
for the six months ended June 30, 2018 to 40.1% for the six months ended June 29, 2019.

Impairment Charges


For the six month period ended June 29, 2019, the Company recorded an impairment of $0.3 million related to the discontinuation of the use of a
tradename. The Company did not have an impairment charge in the first half of fiscal 2018.

 

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Facility exit costs and restructuring


For the six month period ended June 29, 2019, the Company recorded $1.2 million of facility exit costs and restructuring charges. For the six month
period ended June 30, 2018, the Company recorded $0.5 million of facility exit costs and restructuring charges. The amounts in both periods were related entirely to severance.


Interest Expense

Interest expense increased by
$2.4 million from $7.2 million for the six months ended June 30, 2018 to $9.6 million for the six months ended June 29, 2019. Cash interest expense increased $1.6 million in the first half of the current year versus the
first half of the prior year due primarily to an increase in our cash interest rate for fiscal 2019 of approximately 180 basis points. Approximately $1.4 million of the increase to our cash borrowing rate in the first half of fiscal 2019 as
compared to the first half of fiscal 2018 was due to a combination of a year-over-year increase in LIBOR of approximately 80 basis points and an increase in our applicable margin of approximately 100 basis due primarily to an increase in
our senior leverage ratio over the past twelve months. In addition, our cash interest rate increased by approximately $0.2 million in the first half of 2019 as our average borrowings were up $5.4 million year-over year.


Non-cash interest expense increased by $0.6 million in the first half of fiscal 2019 due primarily to incremental
paid-in-kind interest related to our New Term Loan.

Change in Value of
Derivative

In the second quarter of fiscal 2019, we recorded a non-cash charge of $1.1 million in order
to reflect the current fair value of the potential warrants to be issued to the New Term Loan lenders. We did not have a fair value adjustment in fiscal 2018.


Provision for (Benefit from) Income Taxes

The provision
for income taxes was $1.2 million for the six months ended June 29, 2019, as compared to a benefit from income taxes of $5.1 million for the six months ended June 30, 2018.


The effective income tax rate for the six months ended June 29, 2019 and the six months ended June 30, 2018 was –3.9% and 21.5%, respectively.
The decrease in the year-over-year effective tax rate for the first six months of 2019 is due to the tax valuation allowance which the Company recorded in the fourth quarter of 2018. The Company determined as the end of the second quarter of fiscal
2019 that the tax valuation allowance was still necessary. As a result, the Company has not provided a tax benefit in the current year for anticipated net operating losses. . In the second quarter of fiscal 2019, the Company determined that
unremitted earnings and profits in foreign subsidiaries would likely be repatriated to the parent entity over the next twelve months. As such, the Company recorded withholding tax expense of approximately $0.8 million related to the
repatriation of these earnings and profits. Based on the Company’s current full year forecast, it anticipates utilizing a net operating loss in fiscal 2019. The Company expects cash taxes to be approximately $1.2 million in fiscal 2019.

Liquidity and Capital Resources

At June 29,
2019, the Company had net working capital of $49.3 million, a decrease of $50.1 million as compared to June 30, 2018. Net working capital in the current year includes both $7.2 million of cash and $95.0 million of current
maturities of long-term debt. The Company estimates that the carrying values of its accounts receivable and accounts payable, as shown in the condensed consolidated balance sheets, approximate fair value. The Company’s capitalization at
June 29, 2019 was $227.3 million and consisted of total debt of $191.4 million and stockholders’ equity of $35.9 million.

Net
cash used by operating activities was $44.1 million and $65.9 million for the six months ended June 29, 2019 and June 30, 2018, respectively. The decrease in cash used by operating activities related primarily to working capital
changes. As of fiscal 2018 year end, the Company’s working capital balances were higher than historical year end working capital balances due to the impact of late order and split order fulfillment in fiscal 2018. This year-over-year decrease
reflects that working capital balances are returning to historical levels. In the first half of fiscal 2019, the Company’s cash used for working capital changes was down $21.8 million versus the first half of fiscal 2018.

 

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Net cash used in investing activities was $7.5 million in the first half of fiscal 2019 as compared to
$8.5 million in the first half of fiscal 2018. The Company expects net cash used in investing activities to decrease by approximately $2.4 million for the full year fiscal 2019 as compared to full year fiscal 2018 due to lower investments
in the Company’s e-commerce platform and product information management systems as these projects are approaching completion. The completion of these projects is expected to result in improvements to the
Company’s platforms and processes and lower both ongoing operating costs and future investments.

Net cash provided by financing activities was
$57.9 million in fiscal 2019 versus $51.4 million in fiscal 2018. In both periods the net cash provided from financing activities represents net draws from the ABL Facility, which combined with beginning of period cash balances, were used
to fund operating and investing cash outflows, as well as Term Loan repayments in fiscal 2019. The Company repaid principal on its Term Loan in the amount of $4.1 million during the first half of fiscal 2019, which consisted of an excess cash
flow payment of $1.0 million and regularly scheduled principal payments of $3.1 million.

The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date the consolidated financial
statements are issued. In accordance with Financial Accounting Standards Board, or the FASB, Accounting Standards Update No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40), our management evaluates whether there are conditions or events, considered in aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that
the financial statements are issued.

As of June 29, 2019, outstanding borrowings on the ABL Facility were $62.6 million, while the excess
availability on that date for the ABL Facility was $54.2 million. In addition to the Company’s excess availability, it had $7.2 million of cash on its balance sheet as of June 29, 2019.


The increase in current maturities in the first half of fiscal 2019 as compared to the first half of fiscal 2018 is due to the deferred cash payment
obligations which are payable in December 2019. The amendments described in Note 11 – Debt to the condensed consolidated financial statements give the Company the flexibility to raise new junior capital to refinance the deferred cash payment
obligations before they mature subject to certain conditions.

The Company is in compliance with all debt covenants as of the end of the second quarter of
fiscal 2019. However, as described in Note – 2 Going Concern to the condensed consolidated financial statements, the Company may not have the liquidity necessary to retire currently maturing debt obligations and may not be able to remain in
compliance with future period covenants, which could result in a default and in the Company’s inability to continue as a going concern.


Fluctuations in Quarterly Results of Operations

Our
business is subject to seasonal influences. Our historical revenues and profitability have been dramatically higher in the periods from June through September, primarily due to increased shipments to customers coinciding with the start of each
school year. Quarterly results also may be materially affected by variations in our costs for labor, the products sold, the mix of products sold and general economic conditions. Therefore, results for any quarter are not indicative of the results
that we may achieve for any subsequent fiscal quarter or for a full fiscal year. In addition, the 2018 quarterly results may not be comparable to similar quarters in past or future years due to the fulfillment center staffing challenges in 2018. The
staffing challenges resulted in orders being fulfilled in the fourth quarter of 2018 versus the third quarter.

Inflation


Inflation, particularly in wage rates, transportation costs, and energy costs has had and is expected to have an effect on our results of operations and our
internal and external sources of liquidity.

 

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Table of Contents


Forward-Looking Statements


Statements in this Quarterly Report on Form 10-Q that are not historical are “forward-looking” statements
within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include: (1) statements made under Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations,
including, without limitation, statements with respect to our internal growth plans, projected revenues and revenue growth, margin improvement, capital expenditures, adequacy of capital resources and ability to comply with financial covenants; and
(2) statements included or incorporated by reference in our future filings with the Securities and Exchange Commission. Forward-looking statements also include statements regarding the intent, beliefs or current expectations of School Specialty
or its officers. Forward-looking statements include statements preceded by, followed by or that include forward-looking terminology such as “may,” “should,” “believes,” “expects,” “anticipates,”
“estimates,” “continues,” “projects” or similar expressions.

All forward-looking statements included in this Quarterly
Report are based on information available to us as of the date hereof. We do not undertake to update any forward-looking statements that may be made by us or on our behalf, in this Quarterly Report on Form
10-Q or otherwise. Our actual results may differ materially from those contained in the forward-looking statements identified above. Factors which may cause such a difference to occur include, but are not
limited to, the risk factors set forth in Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 29, 2018.


Other risks and uncertainties include, but are not limited to, the following: failure to comply with restrictive covenants under our credit facilities and
other debt instruments; material adverse effects on our operating flexibility resulting from our debt levels; our ability to refinance our currently maturing debt; volatile or uncertain economic conditions; inability to timely respond to the needs
of our clients; declining school budgets; cyberattack or improper disclosure or loss of sensitive or confidential company, employee or client data; increasing competition with our Science Curriculum products; and other factors that may be disclosed
from time to time in our SEC filings or otherwise.

 

36


Table of Contents




ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in qualitative and quantitative disclosures about market risk from what was reported on Form
10-K for the fiscal year ended December 29, 2018.

 




ITEM 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on
an evaluation as of the end of the period covered by this quarterly report, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) were effective for the purposes set forth in the definition of the Exchange Act rules.


Changes in Internal Control Over Financial Reporting


There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange
Act) during the fiscal quarter ended June 29, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

37


Table of Contents



PART II – OTHER INFORMATION


 





ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table contains information for shares of common stock acquired from employees in lieu of amounts required to satisfy minimum tax withholding
requirements upon the vesting of the employees’ stock-based compensation during the second quarter of fiscal 2019:

 

























































































































































     Total Number of
Shares Purchased
     Average Price
Paid Per Share
     Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
     Approximate Dollar
Value of Shares
that May Yet
Be Purchased
Under the Plans
or Programs
 

December 30, 2018 – January 26, 2019

     —          —          —          —    

January 27, 2019 – February 23, 2019

     —          —          —          —    

February 24, 2019 – March 30, 2019

     5,145      $ 6.6        —          —    

March 31, 2019 –June 29, 2019

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5,145      $ 6.6        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 





ITEM 6.

Exhibits


 









































Exhibit No.

 

Description

31.1

  Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002, by Chief Executive Officer.

31.2

  Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002, by Chief Financial Officer.

32.1

  Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002, by Chief Executive Officer.

32.2

  Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002, by Chief Financial Officer.

101

  The following materials from School Specialty, Inc.’s. Quarterly Report on Form 10-Q for the quarter ended June 29, 2019 are filed herewith, formatted in XBRL (Extensive Business
Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) the Condensed Consolidated
Statement of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements.

 

38


Table of Contents



SIGNATURES


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

 






























































































      SCHOOL SPECIALTY, INC.
      (Registrant)
 

August 12, 2019

   

/s/ Michael Buenzow

  Date     Michael Buenzow
      Interim Chief Executive Officer
      (Principal Executive Officer)
 

August 12, 2019

   

/s/ Kevin L. Baehler

  Date     Kevin L. Baehler
      Executive Vice President and Chief Financial Officer
      (Principal Financial Officer)

 

 

39

EX-31.1


EXHIBIT 31.1


CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002


I, Michael Buenzow, certify that:

 




1.

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


 




2.

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

 




3.

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

 




4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


 





  a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;


 





  b)

Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;


 





  c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 





  d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and


 




5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 





  a)

All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 





  b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.


 































Date: August 12, 2019    

/s/ Michael Buenzow

    Michael Buenzow
    Interim Chief Executive Officer
    Principal Executive Officer

 


EX-31.2


EXHIBIT 31.2


CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002


I, Kevin L. Baehler, certify that:

 




1.

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


 




2.

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

 




3.

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

 




4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


 





  a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;


 





  b)

Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;


 





  c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 





  d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and


 




5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 





  a)

All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 





  b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.


 































Date: August 12, 2019    

/s/ Kevin L. Baehler

    Kevin L. Baehler
    Executive Vice President and Chief Financial Officer
    Principal Financial Officer

 


EX-32.1


EXHIBIT 32.1


CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO


SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


I, Michael Buenzow, Interim Chief Executive Officer of School Specialty, Inc., certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that to the knowledge of the undersigned:

 





  1.

The Quarterly Report on Form 10-Q for the three months ended
June 29, 2019 (the “Report”) which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and

 





  2.

The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations on School Specialty, Inc.


 































Date: August 12, 2019    

/s/ Michael Buenzow

    Michael Buenzow
    Interim Chief Executive Officer
    Principal Executive Officer

This certification accompanies this Quarterly Report on Form 10-Q pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed as filed by School Specialty, Inc. for purposes of Securities Exchange Act of 1934.

 


EX-32.2


EXHIBIT 32.2


CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO


SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


I, Kevin L. Baehler, Executive Vice President and Chief Financial Officer of School Specialty, Inc., certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to the knowledge of the undersigned:

 





  1.

The Quarterly Report on Form 10-Q for the three months ended
June 29, 2019 (the “Report”) which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and

 





  2.

The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations on School Specialty, Inc.


 































Date: August 12, 2019    

/s/ Kevin L. Baehler

    Kevin L. Baehler
    Executive Vice President and Chief Financial Officer
    Principal Financial Officer

This certification accompanies this Quarterly Report on Form 10-Q pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed as filed by School Specialty, Inc. for purposes of Securities Exchange Act of 1934.