10-Q


 


 

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 SEPTEMBER 28, 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, a 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      Smaller reporting company  
     Emerging growth 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


November 12, 2019

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

 

 


 




SCHOOL SPECIALTY, INC.


INDEX TO FORM 10-Q


FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2019

 























































































































































































PART I – FINANCIAL INFORMATION

  
         Page
Number
 

ITEM 1.

  CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS   
  Condensed Consolidated Balance Sheets at September 28, 2019, December 29, 2018 and September 29, 2018      2  
  Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 28, 2019 and September 29, 2018      3  
 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three
Months and Nine Months Ended September 28, 2019 and September 29, 2018

     4  
 

Condensed Consolidated Statements of Stockholders’ Equity for the Three
Months and Nine Months Ended September 28, 2019 and the Nine Months Ended September 29, 2018

     5  
 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 28,
2019 and September 29, 2018

     6  
  Notes to Condensed Consolidated Financial Statements      7  

ITEM 2.

  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      31  

ITEM 3.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      40  

ITEM 4.

  CONTROLS AND PROCEDURES      40  

PART II – OTHER INFORMATION

  

ITEM 1A.

  RISK FACTORS      41  

ITEM 5.

  OTHER INFORMATION      41  

ITEM 6.

  EXHIBITS      41  

 

 

-Index-




PART I – FINANCIAL INFORMATION



ITEM 1. Condensed Consolidated Unaudited Financial Statements


SCHOOL SPECIALTY, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In Thousands, except share and per share amounts)


 



































































































































































































































































































































































































































































































































































































































































































































     September 28, 2019     December 29, 2018     September 29, 2018  

ASSETS

      

Current assets:

      

Cash and cash equivalents

   $ 5,862     $ 1,030     $ 7,922  

Accounts receivable, less allowance for doubtful accounts of $1,023, $1,909, and $1,004,
respectively

     162,127       77,888       175,111  

Inventories, net

     81,974       90,061       96,024  

Prepaid expenses and other current assets

     18,802       15,763       17,731  

Refundable income taxes

     397       1,019       —    
  

 

 

   

 

 

   

 

 

 

Total current assets

     269,162       185,761       296,788  

Property, plant and equipment, net

     29,497       31,902       31,732  

Operating lease
right-of-use asset

     11,275       —         —    

Goodwill

     —         4,580       26,842  

Intangible assets, net

     30,215       33,306       34,245  

Development costs and other

     13,818       14,807       15,407  

Deferred income taxes long-term

     282       320       2,002  
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 354,249     $ 270,676     $ 407,016  
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

      

Current liabilities:

      

Current maturities – long-term debt

   $ 199,068     $ 30,352     $ 90,450  

Current operating lease liability

     5,039       —         —    

Accounts payable

     49,341       41,277       43,219  

Accrued compensation

     7,156       7,302       5,211  

Contract liabilities

     7,589       5,641       7,232  

Accrued royalties

     1,542       2,678       2,105  

Accrued income tax payable

     —         —         6,001  

Other accrued liabilities

     20,829       11,379       17,884  
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     290,564       98,629       172,102  

Long-term debt – less current maturities

     —         103,583       128,830  

Operating lease liability

     6,337       —         —    

Other liabilities

     3,580       1,101       569  
  

 

 

   

 

 

   

 

 

 

Total liabilities

     300,481       203,313       301,501  
  

 

 

   

 

 

   

 

 

 

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

     124,301       125,072       124,228  

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

     (34     —         —    

Accumulated other comprehensive loss

     (1,902     (2,079     (1,720

Accumulated deficit

     (68,604     (55,637     (17,000
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     53,768       67,363       105,515  
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 354,249     $ 270,676     $ 407,016  
  

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

2



SCHOOL SPECIALTY, INC.


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


(In Thousands, Except Per Share Amounts)

 



















































































































































































































































































































































































































































































     For the Three Months Ended      For the Nine Months Ended  
     September 28, 2019     September 29, 2018      September 28, 2019     September 29, 2018  

Revenues

   $ 278,512     $ 290,280      $ 535,053     $ 558,839  

Cost of revenues

     185,945       192,776        357,005       366,470  
  

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     92,567       97,504        178,048       192,369  

Selling, general and administrative expenses

     64,436       59,607        167,416       170,553  

Impairment Charges

     4,580       —          4,863       —    

Restructuring costs

     1,080       667        2,290       1,149  
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     22,471       37,230        3,479       20,667  

Other expense (income):

         

Interest expense

     5,341       4,157        14,927       11,351  

Change in fair value of warrant derivative

     238       —          1,320       —    
  

 

 

   

 

 

    

 

 

   

 

 

 

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

     16,892       33,073        (12,768     9,316  

Provision for (benefit from) income taxes

     (972     14,517        199       9,420  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 17,864     $ 18,556      $ (12,967   $ (104
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted average shares outstanding:

         

Basic EPS

     7,025       7,000        7,013       7,000  

Diluted EPS

     8,282       7,063        7,013       7,000  

Net income (loss) per Share:

         

Basic

   $ 2.54     $ 2.65      $ (1.85   $ (0.01

Diluted

   $ 2.16     $ 2.63      $ (1.85   $ (0.01

See accompanying notes to condensed consolidated financial statements.

 

3



SCHOOL SPECIALTY, INC.


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


(In Thousands)

 















































































































































     For the Three Months Ended      For the Nine Months Ended  
     September 28, 2019     September 29, 2018      September 28, 2019     September 29, 2018  

Net income (loss)

   $ 17,864     $ 18,556      $ (12,967   $ (104

Other comprehensive income (loss), net of tax:

         

Foreign currency translation adjustments

     (81     112        177       (295
  

 

 

   

 

 

    

 

 

   

 

 

 

Total comprehensive income (loss)

   $ 17,783     $ 18,668      $ (12,790   $ (399
  

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



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  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     —          —         —         17,864       —         17,864  

Purchase of treasury stock

     —          —         —         —         —         —    

Share-based compensation

     —          118       —         —         —         118  

Foreign currency translation adjustment

     —          —         —         —         (81     (81
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 28, 2019

   $ 7      $ 124,301     $ (34   $ (68,604   $ (1,902   $ 53,768  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     —          —         —         (104     —         (104

Share-based compensation

     —          1,145       —         —         —         1,145  

Foreign currency translation adjustment

     —          —         —         —         (295     (295
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 29, 2018

   $ 7      $ 124,228     $ —       $ (17,000   $ (1,720   $ 105,515  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 




(1)

See Note 4, “Change in Accounting Principle – Revenue from Contracts with Customers,” of the
notes to condensed consolidated financial statements for further discussion


See accompanying notes to condensed
consolidated financial statements.

 

5



SCHOOL SPECIALTY, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


(In Thousands)

 




















































































































































































































































































































































































































































































































     For the Nine Months Ended  
     September 28, 2019     September 29, 2018  

Cash flows from operating activities:

    

Net loss

   $ (12,967   $ (104

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

    

Depreciation and intangible asset amortization expense

     13,118       13,607  

Amortization of development costs

     3,472       4,190  

Impairment of goodwill and intangibles

     4,863       —    

Gain on disposal of assets

     —         (20

Amortization of debt fees and other

     1,417       815  

Change in fair value of warrant derivative

     1,320       —    

Unrealized foreign exchange (gain) loss

     1       (18

Share-based compensation expense

     (771     1,145  

Deferred taxes

     —         990  

Non-cash interest expense

     2,677       1,717  

Changes in current assets and liabilities:

    

Accounts receivable

     (84,225     (105,744

Inventories

     8,087       (20,333

Prepaid expenses and other current assets

     (2,417     (1,412

Accounts payable

     8,245       16,614  

Accrued liabilities

     8,441       2,488  
  

 

 

   

 

 

 

Net cash used by operating activities

     (48,739     (86,065
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Additions to property, plant and equipment

     (7,904     (8,921

Investment in product development costs

     (2,623     (3,581

Proceeds from sale of assets

     —         100  
  

 

 

   

 

 

 

Net cash used in investing activities

     (10,527     (12,402
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from bank borrowings

     191,244       201,776  

Repayment of debt and capital leases

     (126,458     (126,190

Earnout payment for acquisition

     (501     (816

Payment of debt fees and other

     (131     —    

Purchase of treasury stock

     (34     —    
  

 

 

   

 

 

 

Net cash provided in financing activities

     64,120       74,770  
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (22     (242
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     4,832       (23,939

Cash and cash equivalents, beginning of period

     1,030       31,861  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 5,862     $ 7,922  
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Interest paid

   $ 10,833     $ 8,819  

Income taxes paid, net

   $ 334     $ 1,493  

See accompanying notes to condensed consolidated financial statements.

 

6



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 September 28, 2019, the Company had $5.9 million in cash and excess availability of $59.2 million on its ABL facility. However, the Company’s
operating results were below plan for the first nine months of 2019 which resulted in non-compliance with certain financial covenants of the Company’s debt facilities in the third quarter of 2019 and all of the Company’s debt has been
classified as current in the condensed consolidated financial statements. See Note 11 – Debt for details regarding the Company’s debt facilities. To address the non-compliance, the Company entered into short-term forbearance agreements
with its senior secured lenders and also reached agreement in principle with its senior lenders, subject to definitive documentation, on terms and conditions for a forbearance related to the third quarter non-compliance and amendments to the terms
of its debt facilities (collectively, the “Term Sheets”). The Term Sheets contemplate, among other things, certain restrictions on the Company’s borrowing capacity, and an acceleration of the current maturity dates. However, the Term
Sheets also contemplate allowing the Company to pursue an extension of the maturity date with the holders of the currently maturing deferred vendor obligations. The Company is having ongoing discussions with certain holders of the deferred vendor
obligations, but no definitive agreement to extend maturity has been finalized as of the date of this report. Uncertainty as to the success of entering into binding amendments with the Company’s senior secured lenders, extensions to the
currently-maturing unsecured vendor debt obligations consistent with the Term Sheets and the Company’s ability to remain in compliance with future period covenants could result in the Company’s senior secured lenders exercising their
rights and remedies with respect to our current non-compliance, resulting in substantial doubt about the Company’s ability to continue as a going concern twelve months from the date the financial statements are issued.


Management believes that the Company’s ability to continue as a going concern is dependent on a combination of negotiating satisfactory terms related to
the extension of the maturity date for a substantial portion of the currently-maturing deferred vendor obligations, obtaining the additional funding necessary to repay these currently-maturing debt obligations, renegotiating certain terms of its
existing debt facilities, and pursuing other strategic alternatives. Management hired an investment banker in August 2019 to assist in both seeking additional capital financing and, as announced in October 2019, to pursue strategic alternatives.
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. Managements ultimate plan is to obtain additional financing or replacement financing or engage in a sale transaction. While management believes that its pursuit of strategic alternatives and
additional funding through its investment banker, its other actions to improve the Company’s financial performance, and its discussions with existing lenders and holders of deferred vendor obligations will enable the Company to either retire or
extend the deferred vendor obligations, 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.


See “Note 17 – Subsequent Event” for details regarding the forbearance agreements and the Term Sheets.


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 and should be applied either retrospectively or prospectively to all implementation costs incurred
after the date of adoption. We are currently assessing the impact this standard will have on our consolidated financial statements.

 

7


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

 

8


SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 




 
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 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 curriculum products of
the Company, 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 third quarter of fiscal 2019, the Company’s opening contract asset balance was $8,649 and the opening contract liability balance
was $5,414. At the end of the third quarter of fiscal 2019, the Company’s closing contract asset balance was $3,324 and the closing contract liability balance was $7,589. Revenue recognized during the three and nine months ended
September 28, 2019 which was deferred, or a contract liability as of December 29, 2018 was $984 and $4,963, respectively.

The below table shows
the Company’s disaggregated revenues for the three months and nine months ended September 28, 2019 and September 29, 2018.

 

9


SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 





















































































































































































































































































































































     For the Three Months Ended      For the Nine Months Ended  
     September 28, 2019      September 29, 2018      September 28, 2019      September 29, 2018  

Distribution revenues by product line:

           

Supplies

   $ 122,303      $ 119,681      $ 253,007      $ 253,354  

Furniture

     97,960        99,646        174,797        175,951  

Instruction & Intervention

     19,955        21,993        45,089        48,851  

AV Tech

     3,962        3,680        12,133        12,046  

Agendas

     19,456        23,872        21,636        28,706  

Freight Revenue

     4,226        4,762        8,010        9,149  

Customer Allowances / Discounts

     (2,472      (2,689      (7,354      (6,717
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Distribution Segment

   $ 265,390      $ 270,945      $ 507,318      $ 521,340  

Curriculum revenues by product line:

           

Science

   $ 13,122      $ 19,335      $ 27,735      $ 37,499  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Curriculum Segment

   $ 13,122      $ 19,335      $ 27,735      $ 37,499  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 278,512      $ 290,280      $ 535,053      $ 558,839  
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

10


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 September 28, 2019, future maturities of operating lease liabilities
were as follows (in thousands):

 












































































Fiscal 2019 (3 months remaining)

   $ 1,619  

Fiscal 2020

     5,460  

Fiscal 2021

     2,572  

Fiscal 2022

     1,789  

Fiscal 2023

     1,789  

Thereafter

     70  
  

 

 

 

Total lease payments

     13,299  

Present value adjustment

     (1,923
  

 

 

 

Operating lease liabilities

     11,376  
  

 

 

 

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 September 28, 2019, our operating leases had a weighted-average remaining lease term of 35 months and a
weighted-average discount rate of 10.5%. Cash paid for amounts included in the measurement of operating lease liabilities was $1,617 for the three months ended September 28, 2019 and $4,740 for the nine months ended September 28, 2019.
Operating lease cost and short-term lease costs included in SG&A for the three months ended September 28, 2019 was approximately $1,936 and $0, respectively. Operating lease cost and short-term lease costs included in SG&A for the nine
months ended September 28, 2019 was approximately $5,334 and $50, respectively. The Company had no financing leases as of September 28, 2019.

 

11


SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 


NOTE 6 – INCOME TAXES


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 nine months 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 is expected to be repatriated to the parent entity before year end. The Company’s foreign affiliate intends to treat the repatriation as a return of capital. Accordingly,
the distribution will not be subject to any Canadian withholding tax.

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 September 28, 2019, December 29,
2018, and September 29, 2018, was $1,043, $1,101, and $569, 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.

 

12


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 September 28, 2019:                     

Basic EPS

   $  17,864        7,025      $  2.54  
        

 

 

 

Effect of dilutive stock options

     —          —       

Effect of dilutive restricted stock units

     —          —       

Effect of dilutive derivatives

     —          1,257     
  

 

 

    

 

 

    

Diluted EPS

   $ 17,864        8,282      $ 2.16  
  

 

 

    

 

 

    

 

 

 

Three months ended September 29, 2018:

        

Basic EPS

   $ 18,556        7,000      $ 2.65  
        

 

 

 

Effect of dilutive stock options

     —          —       

Effect of dilutive restricted stock units

     —          63     
  

 

 

    

 

 

    

Basic and diluted EPS

   $ 18,556        7,063      $ 2.63  
  

 

 

    

 

 

    

 

 

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

Nine months ended September 28, 2019:

        

Basic EPS

   $ (12,967      7,013      $ (1.85
        

 

 

 

Effect of dilutive stock options

     —          —       

Effect of dilutive restricted stock units

     —          —       

Effect of dilutive derivatives

     —          —       
  

 

 

    

 

 

    

Basic and diluted EPS

   $ (12,967      7,013      $ (1.85
  

 

 

    

 

 

    

 

 

 

Nine months ended September 29, 2018:

        

Basic EPS

   $ (104      7,000      $ (0.01
        

 

 

 

Effect of dilutive stock options

     —          —       

Effect of dilutive restricted stock units

     —          —       
  

 

 

    

 

 

    

Basic and diluted EPS

   $ (104      7,000      $ (0.01
  

 

 

    

 

 

    

 

 

 

The Company had weighted average stock options outstanding of 344 and 647 for the three months ended September 28, 2019
and September 29, 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 394 and 690 for the nine months ended
September 28, 2019 and September 29, 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 93 and 111 for the three and nine month periods ended September 28, 2019,
respectively. The Company had weighted average restricted stock units outstanding of 285 and 232 for the three and nine month periods ended September 29, 2018, respectively, which were not included in the computation of diluted EPS because they
were anti-dilutive.

Based on the Company’s current senior leverage ratio as of September 28, 2019, the maximum number of potential warrants
that could be issued to our New Term Loan lender could be 1,257. These warrants were included in the computation of diluted EPS as of the three months ended September 28, 2019. The assumed warrants of 1,257, were not included in the computation
of diluted EPS for the nine months ended September 28, 2019 because they were anti-dilutive. See Note 11 – Debt for additional information regarding the warrants.

 

13


SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 


NOTE 8 – SHARE-BASED COMPENSATION EXPENSE


As of September 28, 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 nine month periods ended September 28, 2019. On May 29, 2019 and September 13, 2019, 16 and 72 shares, respectively, were effectively cancelled upon the resignation of three employees.

A summary of option transactions for the nine months ended September 28, 2019 and September 29, 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

     (337      18.57        
  

 

 

          

Balance at September 28, 2019

     285      $ 18.57        223      $ 18.57  
  

 

 

          
           

Balance at December 30, 2017

     721      $ 18.57        350      $ 18.57  

Granted

     —             

Exercised

     —             

Canceled

     (77      18.57        
  

 

 

          

Balance at September 29, 2018

     644      $ 18.57        405      $ 18.57  
  

 

 

          

The weighted average life remaining of the stock options outstanding as of September 28, 2019 was 6.1 years and as of
September 29, 2018 was 6.6 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. On September 13, 2019, 7 of the remaining outstanding RSUs were canceled. As of the end of the third quarter of 2019, 23 RSUs associated with this grant remain outstanding.

 

14


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 a fair 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 September 28, 2019.

On June 6, 2019
the Compensation Committee granted 45 RSUs under the 2014 Plan to members of the Company’s senior management, with a fair 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. On September 13, 2019, 10 of the remaining outstanding RSUs were canceled, and 35 RSUs associated with this grant remained
outstanding.

Also, on June 6, 2019, the Compensation Committee granted 19 RSUs under the 2014 Plan to the
non-employee members of the Board of Directors, with a fair value of $5.55 per share. The RSUs have time-based vesting provisions, with all of the RSUs vesting on June 6, 2020. On September 24, 2019,
4 of the outstanding RSUs were canceled, and 15 RSUs associated with this grant remained outstanding.

On September 24, 2019, the Compensation
Committee granted 4 RSUs under the 2014 Plan to the non-employee director appointed to the Board of Directors on that date, with a fair value of $2.00 per share. These RSUs have time-based vesting conditions,
and all of the RSUs vest on September 24, 2020. All of these RSUs remain outstanding as of September 28, 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.

 

15


SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 


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 exercise price as of September 29, 2018, expense of $99 recorded for the SARs during the three months ended September 29, 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 September 28, 2019 are 154.

The following table presents the share-based compensation
recognized for the three and nine month periods ended September 28, 2019 and September 29, 2018:

 






























































































































































































































































































     For the Three Months Ended  
     September 28, 2019      September 29, 2018  
     Gross      Net of Tax      Gross      Net of Tax  

Stock Options

   $ 54      $ 54      $  (154    $  (116

SARs

     —          —          (99      (74

RSUs

     64        64        234        176  
  

 

 

       

 

 

    

Total stock-based compensation

   $ 118         $ (19   
  

 

 

       

 

 

    
     For the Nine Months Ended  
     September 28, 2019      September 29, 2018  
     Gross      Net of Tax      Gross      Net of Tax  

Stock Options

   $ 216      $ 216      $ 497      $ 373  

SARs

     —          —          32        24  

RSUs

     (987      (987      649        487  
  

 

 

       

 

 

    

Total stock-based compensation

   $  (771       $  1,178     
  

 

 

       

 

 

    

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 nine month periods ended September 28, 2019, 72 stock options and 24 RSUs were
forfeited and 337 stock options and 187 RSUs were forfeited, respectively. Since the Company recognizes stock-based compensation expense ratably over the vesting period of each award, the forfeitures of unvested awards resulted in negative
stock-based compensation expense during the nine 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 is recorded to other accrued liabilities until settled.

The total
unrecognized share-based compensation expense as of September 28, 2019 and September 29, 2018 was as follows:

 













































     September 28,
2019
     September 29,
2018
 

Stock Options, net of actual forfeitures

   $  463      $  1,323  

SARs

     —          —    

RSUs

     565        2,162  

 

16


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:


 



































































































































































































































































































































































































































































































































September 28, 2019

   Gross Value      Accumulated
Amortization
     Net Book
Value
 

Amortizable intangible assets:

        

Customer relationships (10-13 years)

   $  13,294      $  (5,937    $ 7,357  

Publishing rights (20 years)

     4,000        (1,267      2,733  

Trademarks (20 years)

     26,587        (7,883      18,704  

Developed technology (7 years)

     6,600        (5,971      629  

Content (5 years)

     4,400        (4,400      —    

Perpetual license agreements (5 years)

     1,200        (1,200      —    

Favorable leasehold interests (10 years)

     2,160        (1,368      792  
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 58,241      $  (28,026    $  30,215  
  

 

 

    

 

 

    

 

 

 

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  
  

 

 

    

 

 

    

 

 

 

September 29, 2018

   Gross Value      Accumulated
Amortization
     Net Book
Value
 

Amortizable intangible assets:

        

Customer relationships (10-13 years)

   $ 13,294      $ (4,868    $ 8,426  

Publishing rights (20 years)

     4,000        (1,067      2,933  

Trademarks (20 years)

     26,587        (6,280      20,307  

Developed technology (7 years)

     6,600        (5,029      1,571  

Content (5 years)

     4,400        (4,400      —    

Perpetual license agreements (5 years)

     1,200        (1,200      —    

Favorable leasehold interests (10 years)

     2,160        (1,152      1,008  
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 58,241      $  (23,996    $ 34,245  
  

 

 

    

 

 

    

 

 

 

Intangible asset amortization expense was included in selling, general and administrative (“SG&A”) expense.
Intangible asset amortization expense for the three month periods ended September 28, 2019 and September 29, 2018, was $935 and $939, respectively. Intangible asset amortization expense for the nine month periods ended September 28,
2019 and September 29, 2018, was $2,808 and $2,918, respectively. The Company recorded a non-cash impairment charge of $283 for the three months ended March 30, 2019 related to the discontinuation of
a licensed product tradename previously recorded in the Distribution segment.

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

 

17


SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 








































Fiscal 2019 (3 months remaining)

   $ 934  

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 September 28, 2019 and September 29, 2018 for
both the reporting units and reporting segments.

 





























































































































































































     Distribution
Segment
     Curriculum
Segment
     Total  

Goodwill

   $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

 

Balance at September 28, 2019

   $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

 

Goodwill

   $ —        $ 4,580      $ 4,580  
  

 

 

    

 

 

    

 

 

 

Balance at December 29, 2018

   $ —        $ 4,580      $ 4,580  
  

 

 

    

 

 

    

 

 

 

Goodwill

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

 

 

    

 

 

    

 

 

 

Balance at September 29, 2018

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

 

 

    

 

 

    

 

 

 

Typically, the Company tests its goodwill balance for impairment on an annual basis as of the end of December each year. The
Company concluded that the third quarter 2019 forbearance agreements and terms of the proposed amendments to the Company’s senior secured loans reflected in the Term Sheets, along with the reduction in the trading price of the Company’s
common stock, resulted in a reconsideration event that required the Company to reperform its goodwill impairment test as of the end of the third quarter of fiscal 2019. The Company determined the fair value of the reporting unit by utilizing a
combination of the income approach (weighted 90%) and the market approach (weighted 10%) derived from comparable public companies. In completing the assessment, the fair value of the Science reporting unit indicated an impairment of goodwill of
approximately $4.6 million. Indicators of impairment that were identified during the assessment were delayed recovery in the Science curriculum spend, increased competition and timing shifts into fiscal 2020 with the California adoption.
Assumptions utilized in the impairment analysis are subject to significant management judgment. Changes in estimates or the application of alternative assumptions could have produced significantly different results.


The long-lived assets and definite-lived intangible assets of the reporting unit were tested for impairment before completing the goodwill impairment test in
accordance with the accounting standard. No impairment of the long-lived assets was evident.

NOTE 10 – PROPERTY, PLANT AND EQUIPMENT


Property, plant and equipment consist of the following:

 

































































































































































     September 28, 2019      December 29, 2018      September 29, 2018  

Projects in progress

   $ 2,454      $ 3,768      $ 3,513  

Buildings and leasehold improvements

     2,907        2,876        2,971  

Furniture, fixtures and other

     75,908        68,285        67,015  

Machinery and warehouse equipment

     15,195        14,903        14,894  
  

 

 

    

 

 

    

 

 

 

Total property, plant and equipment

     96,464        89,832        88,393  

Less: Accumulated depreciation

     (66,967      (57,930      (56,661
  

 

 

    

 

 

    

 

 

 

Net property, plant and equipment

   $ 29,497      $ 31,902      $ 31,732  
  

 

 

    

 

 

    

 

 

 

Depreciation expense for the three and nine month periods ended September 28, 2019 and September 29, 2018 was $3,671
and $3,275 and $10,310 and $10,689, respectively.

For the three months ended September 28, 2019, $3,620 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 September 29, 2018, $3,224 of depreciation expense was recorded as SG&A expense and $51 of depreciation expense was categorized
as cost of revenues.

 

18


SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 


For the nine months ended September 28, 2019, $10,155 of depreciation expense was recorded as SG&A
expense and $155 of depreciation expense was categorized as cost of revenues. For the nine months ended September 29, 2018, $10,561 of depreciation expense was recorded as SG&A expense and $128 of depreciation expense was categorized as
cost of revenues.

Typically, the Company tests its long-lived assets for impairment on an annual basis as of the end of December each year if and when a
reconsideration event indicates that the carrying value of the non-current assets may not be recoverable. The Company concluded that the third quarter 2019 forbearance agreements and terms of the proposed debt amendments to the Company’s senior
secured loans reflected in the Term Sheets, along with the reduction in the trading price of the Company’s common stock, resulted in a reconsideration event that required the Company to perform its long-lived asset impairment test as of the end
of the third quarter of fiscal 2019. Based on the Company’s impairment test, it concluded that there was not an impairment. Assumptions utilized in the impairment analysis are subject to significant management judgment. Changes in estimates or
the application of alternative assumptions could have produced significantly different results.

NOTE 11 – DEBT


Long-term debt consisted of the following:

 

































































































































































     September 28, 2019      December 29, 2018      September 29, 2018  

ABL Facility, maturing in 2022

   $ 69,000      $ —        $ 85,800  

New Term Loan, maturing in 2022

     108,417        111,725        111,725  

Unamortized New Term Loan Debt Issuance Costs

     (5,122      (2,799      (2,702

Deferred Cash Payment Obligations, maturing in 2019

     26,773        25,009        24,457  
  

 

 

    

 

 

    

 

 

 
Total debt      199,068        133,935        219,280  

Less: Current maturities

     (199,068      (30,352      (90,450
  

 

 

    

 

 

    

 

 

 
Total long-term debt    $ —        $ 103,583      $ 128,830  
  

 

 

    

 

 

    

 

 

 

As of September 28, 2019, the outstanding balance on the New Term Loan Credit Agreement was $108,417. The Company has
classified the full amount of the outstanding New Term Loan balances as currently maturing, long-term debt in the accompanying condensed consolidated balance sheets due to its non-compliance with certain financial covenants as of the end of the
third quarter of fiscal 2019 and the short-term nature of the forbearance granted by the New Term Loan Lenders and ABL Lenders with respect to this non-compliance. As of September 29, 2018, the outstanding balance on the New Term Loan Credit
Agreement was $111,725. Of this amount, $4,650 was reflected as currently maturing, long-term debt in the accompanying condensed consolidated balance sheets.


For additional details, see “Subsequent Events.”


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 (the “ABL 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.

 

19


SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 


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.

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 extended 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

 

20


SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 



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.

The effective interest rate under the ABL Facility for the three months ended September 28, 2019 was 5.0%, which
includes interest on borrowings of $948, amortization of loan origination fees of $118 and commitment fees on unborrowed funds of $24. The effective interest rate under the ABL Facility for the three months ended September 29, 2018 was 4.8%,
which includes interest on borrowings of $932, amortization of loan origination fees of $104 and commitment fees on unborrowed funds of $28.

The
effective interest rate under the ABL Facility for the nine months ended September 28, 2019 was 5.8%, which includes interest on borrowings of $1,877, amortization of loan origination fees of $371 and commitment fees on unborrowed funds of
$183. The effective interest rate under the ABL Facility for the nine months ended September 29, 2018 was 5.5%, which includes interest on borrowings of $1,470, amortization of loan origination fees of $312 and commitment fees on unborrowed
funds of $209.

As of September 28, 2019, the outstanding balance on the ABL Facility was $69,000. As of September 29, 2018, the outstanding
balance on the ABL Facility was $85,800. The Company has estimated that the fair value of its ABL Facility (valued under level 3) as of September 28, 2019 approximated the carrying value of $69,000.


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.

The Company entered into a forbearance agreement and a
non-binding term sheet relating to an amendment to the ABL Facility subsequent to September 28, 2019. See “Subsequent Events.”

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 (the “New Term Loan Agent”) .

 

21


SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 


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 was to 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
were 1.250% of the original principal amount. Required scheduled quarterly principal payments on borrowings under the delayed-draw feature began in the quarter following the 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). 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 was 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 were 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

 

22


SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 



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 Second 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, September 28, 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 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 were paid in full in cash, (ii) the junior capital raise
satisfaction event had occurred or (iii) the financial statements delivered pursuant to the New Term Loan Agreement with respect to the Fiscal Year ending December 28, 2019 demonstrated that, after giving effect to the payment of the
deferred cash payment obligations, the net senior leverage ratio for the four consecutive fiscal quarter

 

23


SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 



periods ending on December 28, 2019 was less than or equal to 4.00:1.0 and EBITDA for the four consecutive fiscal quarter periods ending on December 31, 2019 was at least $42,000, the
Company would 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. During the second quarter of fiscal 2019, the Company recorded a non-cash charge of $1,320
as a change in fair value, of which $238 was recorded in the third quarter of 2019. The derivative was valued at $2,548 as of the end of the third 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 $98 and $194 for the three and nine months ended September 28, 2019.


The Company has estimated that the fair value of these warrants (valued under Level 3) approximates $2,425 as of September 28, 2019. The Company
estimated the fair value for its warrants based upon the net present value of future cash flows using the discount rate that is consistent with our New Term Loan. The warrants were valued using the Monte Carlo Simulation Model using the
Company’s monthly projections of its senior leverage ratio over the life of the warrants. Changes in the inputs may result in a significantly higher or lower fair value measurement.


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.

The effective interest rate under the New Term Loan for the three months ended
September 28, 2019 was 13.3%, which includes interest on borrowings of $3,161 and amortization of loan origination fees of $488. The effective interest rate under the New Term Loan for the three months ended September 29, 2018 was 8.9%,
which includes interest on borrowings of $2,362 and amortization of loan origination fees of $183.

The effective interest rate under the New Term Loan
for the nine months ended September 28, 2019 was 12.9%, which includes interest on borrowings of $9,566 and amortization of loan origination fees of $1,161. The effective interest rate under the New Term Loan for the nine months ended
September 29, 2018 was 8.7%, which includes interest on borrowings of $7,102 and amortization of loan origination fees of $541.

The Company entered
into a forbearance agreement and a non-binding term sheet relating to an amendment to the New Term Loan subsequent to September 28, 2019. See “Subsequent Events.”


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 on December 12, 2019. As such, these obligations have been
classified as current maturities of long-term debt. As discussed in Note 2 Going concern, the Company’s ability to pay these obligations on the maturity date is limited. Due to the Company’s non-compliance with certain financial
covenants in its ABL and New Term Loan facilities, the Company is having ongoing discussions with certain holders of the deferred cash payment obligations to, among other things, extend the maturity date of these obligations.

 

24


SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 


The Company’s reconciliation of general unsecured claims was completed in fiscal 2015. As of
September 28, 2019, the Company’s deferred payment obligations were $26,773, 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 $11,584 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 $26,674 as of
September 28, 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.


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


Changes in accumulated other comprehensive loss during the nine months ended September 28, 2019 and September 29, 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
  

 

 

 

Other comprehensive income (loss) before reclassifications

     (81
  

 

 

 

Accumulated Other Comprehensive Income (Loss) at September 28, 2019

   $ (1,902
  

 

 

 
     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
  

 

 

 

Other comprehensive income (loss) before reclassifications

     112  
  

 

 

 

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

   $ (1,720
  

 

 

 

NOTE 13 – RESTRUCTURING


In the three and nine months ended September 28, 2019 and September 29, 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.

 

25


SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 















































































































































































































































































































































































































































































































































































































































     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  
  

 

 

    

 

 

    

 

 

    

 

 

 

Amounts charged to expense

     —          —          1,080        1,080  

Payments

     —          —          (1,288      (1,288
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Restructuring Costs at September 28, 2019

   $ —        $ —        $ 676      $ 676  
  

 

 

    

 

 

    

 

 

    

 

 

 
     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  
  

 

 

    

 

 

    

 

 

    

 

 

 

Amounts charged to expense

     —          —          667        667  

Payments

     —          —          (245      (245
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Restructuring Costs at September 29, 2018

   $ —        $ —        $ 507      $ 507  
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

26


SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 


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.

 







































































































































































































































































































































































































































































































































































































































































































































































     Three Months Ended      Three Months Ended      Nine Months Ended      Nine Months Ended  
     September 28, 2019      September 29, 2018      September 28, 2019      September 29, 2018  

Revenues:

           

Distribution

   $  265,390      $  270,945      $  507,318      $  521,340  

Curriculum

     13,122        19,335        27,735        37,499  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 278,512      $ 290,280      $ 535,053      $ 558,839  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross Profit:

           

Distribution

   $ 85,101      $ 86,451      $ 162,936      $ 171,197  

Curriculum

     7,466        11,053        15,112        21,172  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 92,567      $ 97,504      $ 178,048      $ 192,369  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income and income (loss) before taxes: Operating income

   $ 22,471      $ 37,230      $ 3,479      $ 20,667  

Interest expense and Change in fair value of warrant derivative

     5,579        4,157        16,247        11,351  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 16,892      $ 33,073      $ (12,768    $ 9,316  
  

 

 

    

 

 

    

 

 

    

 

 

 
     September 28, 2019      December 29, 2018      September 29, 2018         

Identifiable assets:

           

Distribution

   $ 300,676      $ 227,744      $ 342,781     

Curriculum

     36,837        41,666        54,030     

Corporate assets

     16,736        1,266        10,205     
  

 

 

    

 

 

    

 

 

    

Total

   $ 354,249      $ 270,676      $ 407,016     
  

 

 

    

 

 

    

 

 

    
     Three Months Ended      Three Months Ended      Nine Months Ended      Nine Months Ended  
     September 28, 2019      September 29, 2018      September 28, 2019      September 29, 2018  

Depreciation and amortization of intangible assets and development costs:

           

Distribution

   $ 5,090      $ 4,953      $ 14,739      $ 15,697  

Curriculum

     685        764        1,849        2,100  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,775      $ 5,717      $ 16,589      $ 17,797  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

           

Distribution

   $ 2,607      $ 2,855      $ 8,931      $ 9,602  

Curriculum

     420        1,019        1,596        2,900  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,027      $ 3,874      $ 10,527      $ 12,502  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

27


SCHOOL SPECIALTY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)

 





















































































































































































































































































































































     For the Three Months Ended      For the Nine Months Ended  
     September 28, 2019      September 29, 2018      September 28, 2019      September 29, 2018  

Distribution revenues by product line:

           

Supplies

   $  122,303      $  119,681      $  253,007      $  253,354  

Furniture

     97,960        99,646        174,797        175,951  

Instruction & Intervention

     19,955        21,993        45,089        48,851  

AV Tech

     3,962        3,680        12,133        12,046  

Agendas

     19,456        23,872        21,636        28,706  

Freight Revenue

     4,226        4,762        8,010        9,149  

Customer Allowances / Discounts

     (2,472      (2,689      (7,354      (6,717
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Distribution Segment

   $ 265,390      $ 270,945      $ 507,318      $ 521,340  

Curriculum revenues by product line:

           

Science

   $ 13,122      $ 19,335      $ 27,735      $ 37,499  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Curriculum Segment

   $ 13,122      $ 19,335      $ 27,735      $ 37,499  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 278,512      $ 290,280      $ 535,053      $ 558,839  
  

 

 

    

 

 

    

 

 

    

 

 

 

The above table is an enhanced disclosure to provide additional details related to our revenues by segment.


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.

NOTE 16 – SUBSEQUENT EVENTS

The
Company’s third quarter and year-to-date results have been negatively affected by the Agendas product category. This category of paper-based planners has been experiencing top-line pressures for over ten years as schools have been transitioning
to digital solutions. In addition, the current year results have been further negatively impacted by operational challenges associated with the transition to a different technology platform to manage the process from order inception through
shipment. The category has had a negative impact on 2019 earnings, and the Company has made a decision to exit the custom planner category in the fourth quarter of fiscal 2019.


On October 28, 2019, the “Company” entered into the Fourth Amendment (the “Fourth Amendment”) to the New Term Loan Agreement dated April
7, 2017, in order to extend the required delivery date of the unaudited financial statements of the Company and its subsidiaries with respect to the month ended September 30, 2019 required under the New Term Loan Agreement from within 30 days
after the end of such month to November 4, 2019 or such later date as agreed to in writing by the New Term Loan Agent in its discretion. This date was subsequently extended several times by the New Term Loan Agent, most recently to November 12,
2019.

Also on October 28, 2019, the Company entered into the Seventh Amendment (the “Seventh Amendment”) to the ABL Facility dated
June 11, 2013, in order to extend the required delivery date of the unaudited financial statements of the Company and its subsidiaries with respect to the month ended September 30, 2019 required under the ABL Facility from within 30 days after
the end of such month to November 4, 2019 or such later date as agreed to in writing by the ABL Agent in its discretion. This date was subsequently extended several times by the ABL Agent, most recently to November 12, 2019.

 

28



The Fourth Amendment and the Seventh Amendment each served as a short-term forbearance of the events of
default that would have resulted from the delivery of those financial statements due to the Company’s non-compliance with the net senior leverage ratio and the minimum EBITDA covenants under the New Term Loan Agreement and the ABL Facility as
of September 30, 2019 (the “Existing Events of Default”).

On November 12, 2019, the Company and the New Term Loan Agent reached agreement
in principle with respect to a non-binding Summary of Terms and Conditions for Forbearance Agreement and Fifth Amendment to New Term Loan Agreement with the New Term Loan Lenders and the New Term Loan Agent (the “Term Loan Term Sheet”).
Capitalized terms used below that are not otherwise defined have the meaning set forth in the New Term Loan Agreement. The Term Loan Term Sheet contemplates the Company entering into a Fifth Amendment to the New Term Loan Agreement no later than
November 22, 2019, in order to, among other things: (1) establish a forbearance period during which the Term Loan Lenders would forbear the exercise of any rights or remedies with respect to the Existing Events of Default until a Termination
Event (which would be the earliest of (a) January 31, 2020, (b) March 31, 2020 if a Specified Unsecured Prepetition Debt Satisfaction Event has occurred prior to January 31, 2020 (the earlier of (a) or (b), the “Outside Date”), (c) at the
election of the Term Loan Agent, the occurrence of an event of default, other than the Existing Events of Default, (d) the expiration or termination of the forbearance period described in the ABL Term Sheet below, or (e) the occurrence of any other
customary termination event); (2) the payment of a $6 million closing fee, which may be reduced to not less than $1.25 million under certain circumstances; (3) the addition of approximately $3.5 million in other fees to the principal balance of the
New Term Loan; (4) in replacement of the Third Amendment Warrants, warrants to purchase, for a price of $0.01 per share, 18% of the outstanding common stock of the Company, with such warrants earned in full and vesting immediately on the date of
issuance, but not exercisable until the Outside Date (the “Fourth Amendment Warrants”), provided that if the Obligations are paid in full in cash on or prior to (a) February 29, 2020, the Company shall have the right to buy back 50% of the
Fourth Amendment Warrants, and (b) the Outside Date, the Company shall have the right to buy back 75% of the Fourth Amendment Warrants, in each case for a price of $0.01 per share; (5) amend the definition of Applicable Margin so that it will no
longer depend on the Net Senior Leverage Ratio and will instead be set at 7.00% per annum for all Prime Rate Loans and 8.00% per annum for all LIBOR Rate Loans; (6) amend the definition of PIK Interest Rate so that it will no longer depend on the
Net Senior Leverage Ratio and will instead be set at 2.00% per annum; (7) provide that the New Term Loan and other Obligations shall bear interest at the Default Rate and to increase the Default Rate by 1.00%, which increase will be paid in kind by
adding such amount to the principal balance of the Term Loan; (8) convert LIBOR Rate Loans to Prime Rate Loans as their interest periods expire and eliminate the Company’s ability to request to convert or continue the Term Loan or any portion
thereof as LIBOR Rate Loans; (9) require the delivery on a weekly basis of detailed 13-week budgets (each, a “Budget”); (10) amend the financial covenants, including the elimination of the Fixed Charge Coverage Ratio and the Net Senior
Leverage Ratio during the forbearance period, resetting the Minimum EBITDA to be tested monthly, resetting the minimum Specified Availability to the greater of $12.5 million, replacing the existing clean-down and ABL Facility usage covenant with the
same covenants as reflected in the ABL Term Sheet; (11) limit the use of cash receipts to payment of Budget disbursements and not submit ABL borrowing requests in excess of the amount needed to fund the Budget; (12) require the Company to pursue a
merger, financing transaction, or sale transaction that will cause the Company to repay the Obligations in full prior to the Outside Date, subject to the satisfaction of various milestones and conditions; (13) provide full access rights to the Term
Loan Agent, its counsel and its advisors; (14) extend the maturity date of the Term Loan to November 11, 2020; (15) eliminate a number of the Company’s rights under the New Term Loan Agreement, including but not limited to its right to consent
to assignments, to make Permitted Acquisitions, to reinvest proceeds of Asset Dispositions and Extraordinary Proceeds, and to make Specified Asset Dispositions; and (16) provide for enhanced inspection rights for the New Term Loan Agent.


For purposes of the Term Loan Term Sheet, a “Specified Unsecured Prepetition Debt Satisfaction Event” means, among other things, that a specified
percentage of the Specified Unsecured Prepetition Debt has been amended such that its final maturity is not on or before December 11, 2020, does not provide for any payments before that date except for limited percentages in certain limited
circumstances, it accrues interest, payable solely in kind, at a rate per annum reasonably satisfactory to the New Term Loan Agent and the required New Term Loan Lenders, and can be secured by a third lien on the Term Loan Priority Collateral, that
is subject to an intercreditor agreement, among other things.

 

29



Also on November 12, 2019, the Company entered into a non-binding Summary of Terms and Conditions for
Forbearance Agreement and Eighth Amendment to Loan Agreement with the ABL Lenders and the ABL Agent (the “ABL Term Sheet”). Capitalized terms used below that are not otherwise defined have the meaning set forth in the ABL Agreement. The
ABL Term Sheet contemplates the Company entering into an Eighth Amendment to the ABL Agreement no later than November 22, 2019, in order to, among other things: (1) establish a forbearance period during which the ABL Lenders would forbear the
exercise of any rights or remedies with respect to the Existing Events of Default until a Termination Event (which would be the earliest of (a) January 31, 2020, (b) March 31, 2020 if a Specified Unsecured Prepetition Debt Satisfaction Event has
occurred prior to January 31, 2020 (the earlier of (a) or (b), the “Outside Date”), (c) at the election of the ABL Agent, the occurrence of an event of default, other than the Existing Events of Default, (d) the expiration or
termination of the forbearance period provided by the Term Loan Sheet described above, or (e) the occurrence of any other customary termination event); (2) the payment of a fee equal to 0.50% times the amount of the Commitments in effect as of
the Closing Date under the ABL; (3) amend the definition of Applicable Margin so that it will no longer depend on the Fixed Charge Coverage Ratio and will instead be set at 300 bps for all Base Rate Loans and 400 bps for all LIBOR Loans; (4) require
the delivery on a weekly basis of detailed 13-week budgets (each, a “Budget”); (5) amend the financial covenants, including the elimination of the Fixed Charge Coverage Ratio during the forbearance period, adding a covenant testing
trailing twelve-month EBITDA on a monthly basis, in a manner consistent with the Fifth Amendment, replacing the existing clean-down covenant in Section 10.2.3 of the ABL Agreement with a clean-down covenant requiring the Loans be paid down to
$10,000,000 at fiscal year end December 28, 2019; (6) limit the use of cash receipts to payment of Budget disbursements and not submit ABL borrowing requests in excess of the amount needed to fund the Budget; (7) require the Company to pursue a
merger, sale, or other restructuring transaction that will cause the Company to repay the Term Loan Obligations in full on or prior to the Outside Date, subject to the satisfaction of various milestones and conditions; (8) provide full access
rights to the ABL Agent, its counsel and its advisors; (9) extend the maturity date of the ABL 30 days prior to the extended maturity date of the New Term Loan Agreement described above (expected to be to October 11, 2020); (10) eliminate
a number of the Company’s rights under the ABL Agreement, including but not limited to its right to consent to assignments, to make Permitted Acquisitions, and to make Specified Asset Dispositions; (11) amend the definitions of
Availability Reserve and Borrowing Base to add an availability block equal to $15,000,000; and (12) provide for enhanced inspection rights for the ABL Agent.


The foregoing descriptions of the Term Loan Term Sheet and the ABL Term Sheet are summaries and do not purport to be complete descriptions of the terms
thereof. The closing of the Fifth Amendment and the Eighth Amendment are each subject to a number of conditions that the Company may not be able to satisfy, and do not represent binding commitments on the part of the New Term Loan Lenders or the ABL
Lenders to enter into such amendments on these terms or at all. There is no assurance that the Company will enter into the Fifth Amendment or the Eighth Amendment before November 22, 2019 or at all, or if it does, that the Fifth Amendment and
the Eighth Amendment will contain the terms set forth in the Term Loan Term Sheet and the ABL Term Sheet, respectively. In the event the Company is not able to enter into the Fifth Amendment and the Eighth Amendment in a timely manner and the New
Term Loan Lenders and the ABL Lenders do not otherwise extend their forbearance, such lenders will be entitled to exercise their rights and remedies under the New Term Loan Agreement and the ABL Agreement, respectively, with respect to the Existing
Events of Default.

 

30



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.


The Company’s Supplies and transactional Furniture product areas, which represent approximately 69% of our annual revenues, are
collectively a key measure of the strength of our customer relationships and penetration trends therein. Order rates for these products in the post peak season (September and October) of 2019 were up a combined 6.3% year-over-year, with the order
rate being particularly strong in large districts. In addition, the booked gross margin on incoming orders in this period was up 140 basis points over the comparable period last year. The Company views these trends as an indication that its
initiatives, especially those related to team-sell and margin management are continuing to gain traction.

 

31



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.

The Company’s third quarter and
year-to-date results have been negatively affected by the Agendas product category. This category of paper-based planners has been experiencing top-line pressures for over ten years as schools have been transitioning to digital solutions. In addition, the current year results have been further negatively impacted by operational challenges associated with
the transition to a different technology platform to manage the process from order inception through shipment. The category has had a negative impact on 2019 earnings, and the Company has made a decision to exit the custom planner category in the
fourth quarter of fiscal 2019.

The Company’s actions to improve its operating results through pricing, improvements to the bid/quote processes, and
the continued management of costs have resulted in gross margin improvement in the Supplies and Furniture product categories in the third quarter of 2019, the improvements have been offset by continued pressures in its Agendas and Science product
categories. The Company announced in the fourth quarter of 2019 that the Agendas product category will be discontinued and is actively pursuing a sale of the category. The Science business has been adversely impacted by many districts delaying the
purchase of science curriculum. However, the Company is confident that the Science product category is well-positioned for growth in 2020.

However, as
the Company’s operating results were below plan for the first nine months of 2019 which resulted in non-compliance with certain financial covenants of the Company’s debt facilities in the third quarter of 2019. See Note 11 – Debt
for details regarding the Company’s debt facilities. To address the non-compliance, the Company entered into short-term forbearance agreements with its senior secured lenders and also reached agreement in principle with its senior-secured
lenders, subject to definitive documentation, on terms and conditions for a forbearance related to the third quarter non-compliance and amendments to the terms of its debt facilities (the “Term Sheets”). The Term Sheets contemplate, among
other things, certain restrictions on the Company’s borrowing capacity, such that the Company will not have sufficient liquidity necessary to retire currently-maturing debt obligations on the maturity date. However, the Term Sheets also
contemplate allowing the Company to pursue an extension of the maturity date with the holders of the currently maturing deferred vendor obligations. The Company is having ongoing discussions with certain holders of the deferred vendor obligations to
extend the maturity date. Uncertainty as to the success of negotiating binding amendments with the Company’s senior secured lenders and extensions to the currently-maturing debt obligations consistent with the Term Sheets and the Company’s
ability to remain in compliance with future period covenants could result in the Company’s senior secured lenders exercising their rights and remedies with respect to our current non-compliance, resulting in substantial doubt about the
Company’s ability to continue as a going concern twelve months from the date the financial statements are issued.

Management believes that the
Company’s ability to continue as a going concern is dependent on a combination of negotiating satisfactory terms related to the extension of the maturity date for a substantial portion of the currently-maturing deferred vendor obligations,
obtaining the additional funding necessary to repay its currently maturing debt obligations, renegotiating certain terms of its existing debt facilities, and pursuing other strategic alternatives. Management hired an investment banker in August 2019
to assist in both seeking additional capital financing and, as announced in October 2019, to pursue strategic alternatives. 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. Management’s ultimate plan is to obtain additional or replacement
financing, or to engage in a sale transaction. While management believes that its pursuit of strategic alternatives and additional funding through its investment banker, and its actions to improve the Company’s financial performance, and its
discussions with existing lenders and holders of deferred vendor obligations will enable the Company to either retire or extend the deferred vendor obligations, 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.

See “Liquidity and Capital Resources,” below.

 

32



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 September 28, 2019 Compared to Three Months Ended September 29, 2018


Revenues

Revenues of $278.5 million for the three
months ended September 28, 2019 decreased by $11.8 million, or 4.2%, as compared to the three months ended September 29, 2018.


Distribution segment revenues of $265.4 million for the three months ended September 28, 2019 decreased by 2.1%, or $5.6 million, from the
three months ended September 29, 2018. Revenues from the Agendas, Furniture, and Instruction and Intervention categories contributed to this year-over-year decline. The majority of the decline in the quarter was in the Agendas product category,
which was down $4.4 and ongoing operational challenges associated with the transition to a new technology platform to support the sale and production of Agenda products contributed to an acceleration in the historical revenue decline in the
category. The decline in Furniture was primarily due to our decision to forego pursuing lower margin projects. Instruction & Intervention revenues of $20.0 million were down $2.0 million, or 9.3%. The main contributor to the
softness in Instruction & Intervention orders was 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. Revenues for
Supplies were up $2.6 million, or 2.2% due to strong operational performance in the fulfillment centers which resulted in shorter lead times and materially lower open orders entering the fourth quarter of 2019. AV Tech revenues of
$4.0 million were up $0.3 million as compared to last year’s third quarter.

Curriculum segment revenues of $13.1 million for the
three months ended September 28, 2019 decreased by 32.1%, or $6.2 million from the three months ended September 29, 2018, reflecting a delayed recovery in the Science curriculum spend, increased competition and timing shifts into
fiscal 2020 with the California adoption. 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 September 28, 2019 was $92.6 million, as compared to $97.5 million for the three months ended
September 29, 2018. Gross margin for the three months ended September 28, 2019 was 33.2%, as compared to 33.6% for the three months ended September 29, 2018.


Distribution segment gross margin was 32.1% for the three months ended September 28, 2019, as compared to 31.9% for the three months ended
September 29, 2018. Pricing actions taken in 2018 and early 2019 have begun to positively impact gross margins over the past three quarters. The growth in segment gross margin in the third quarter 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. The gross margin improvement in the quarter for the segment have
been partially offset by lower Agenda gross margin as compared to last year’s third quarter. The operational challenges associated with the transition to a new technology platform for Agendas contributed 120 basis points of gross margin decline
in the quarter.

 

33



Curriculum segment gross margin for the quarter was generally consistent with the prior year’s third
quarter. Curriculum segment gross margin was 56.9% for the three months ended September 28, 2019, as compared to 57.2% for the three months ended September 29, 2018.


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 increased $4.8 million in the third quarter of fiscal 2019, from $59.6 million for the three months ended September 29, 2018 to
$64.4 million for the three months ended September 28, 2019. The increased SG&A in the quarter was related to a combination of incentive compensation adjustments in the prior year’s third quarter, increased costs associated with
the Agenda product category which is in the process of being discontinued and costs associated with the Company’s efforts to address its capital structure.

 






   

Approximately $3.1 million of the SG&A increase in the quarter is related to the Company’s
incentive compensation plans. Commission expense for the quarter was $3.6 million, or 1.3% of revenues, while commission expense in last year’s third quarter was $1.7 million or 0.6% of revenues. The lower commission rate in last
year’s third quarter reflected an adjustment in the Company’s estimate as to the number of sales representatives that would achieve full year targets. Management incentive compensation expense was zero in the third quarter of fiscal 2019
compared to a negative expense of $1.2 million in last year’s third quarter. The prior year’s negative expense reflected the adjustment for previously recorded expense based on the Company’s third quarter 2018 performance.


 






   

SG&A cost directly related to the Company’s Agenda product category increased by $1.8 million in
the quarter related to incremental customer care, expedited shipment expense and costs associated with transitioning to a new technology platform.


 






   

Approximately $0.8 million of advisory, legal and consultant SG&A costs were incurred in the third
quarter of 2019 related to efforts associated with our exploration of strategic alternatives announced on October 9, 2019.


All
other SG&A costs in the third quarter of 2019 were down by approximately $2.0 million as compared to the third quarter of 2018. Variable SG&A expenses, consisting primarily of fulfillment center and outbound transportation costs were
relatively flat in the quarter. Decreases in volume, improved operating efficiencies and the impact of favorable freight rates were offset by higher fulfillment center labor costs. All other fixed compensation and benefit costs decreased by
$1.1 million in the third quarter of fiscal 2019 due to lower staffing levels. The remaining SG&A improvements in the quarter were related to the Company’s ongoing cost control efforts which resulted in cost savings across a number of
categories including travel and use of consultants.

As a percent of revenue, SG&A increased from 20.5% for the three months ended September 29,
2018 to 23.1% for the three months ended September 28, 2019.

Impairment Charges


The Company recorded $4.6 million of goodwill impairment charges in the three months ended September 28, 2019 based on the assessment conducted
during the third quarter of fiscal 2019. The goodwill impairment charge was for the Science reporting unit. See Note 9 – Goodwill and Other Intangible.


Restructuring Costs

For the three month period ended
September 28, 2019, the Company recorded $1.1 million of restructuring charges. For the three month period ended September 29, 2018, the Company recorded $0.7 million of restructuring charges. The amounts in both periods were
entirely related to severance. The increase in third quarter of fiscal 2019 was due primarily to a sales force restructuring as we completed the transition to a team sell-model.

 

34



Interest Expense


Interest expense increased by $1.1 million from $4.2 million for the three months ended September 29, 2018 to $5.3 million for the three
months ended September 28, 2019. Cash interest expense increased $0.5 million in the third quarter of the current year due primarily to an increase in our cash interest rate of 120 basis points 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. The additional interest expense due to the higher interest rates was partially offset by lower average outstanding
debt of approximately $6.0 million at the end of the third quarter of fiscal 2019 as compared to the outstanding debt at the end of the third quarter of fiscal 2018.


Non-cash interest expense increased by $0.7 million in the third quarter of fiscal 2019 due to a combination of
incremental paid-in-kind interest related to our New Term Loan and higher loan fee amortization due to the loan fees associated with the debt amendments executed in the
first quarter of 2019.

Change in Fair Value of Warrant Derivative


In the third quarter of fiscal 2019, we recorded a non-cash charge of $0.2 million in order to reflect the current
fair value of the obligation to issue warrants to the New Term Loan lenders. We did not have a fair value adjustment in fiscal 2018.

Benefit for
Income Taxes

The benefit for income taxes was $1.0 million for the three months ended September 28, 2019, as compared to $14.5 million
for the three months ended September 29, 2018. The change in income taxes was due primarily to the valuation allowance recorded in December 2018.


The effective income tax rate for the three months ended September 28, 2019 and the three months ended September 29, 2018 was -5.8% and 43.9%, respectively.

Nine Months Ended September 28, 2019 Compared to Nine Months Ended
September 29, 2018

Revenues

Revenues of
$535.1 million for the nine months ended September 28, 2019 decreased by $23.8 million, or 4.4%, as compared to the nine months ended September 29, 2018.


Distribution segment revenues of $507.3 million for the nine months ended September 28, 2019 decreased by 2.8%, or $14.0 million, from the nine
months ended September 29, 2018. Revenues from the Agendas and Instruction & Intervention product categories are the primary drivers of the year-over-year decline. Agendas revenues were down by $7.1 million, or 24.6%, in the first
nine 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. Instruction & Intervention revenue was down year-over-year
by $3.8 million, or 7.7%, in the first nine months. The main contributor to the softness in Instruction & Intervention orders was 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 2019 we are launching Success Coach, a major publishing initiative for our Company and the evolution of our existing Coach family of products. We are beginning to
experience building momentum in the Instruction & Intervention category as incoming orders in the fourth quarter-to-date of 2019 are up year-over-year by over
15%. Supplies revenues were down slightly, 0.1%, due to a decline in smaller districts and non-district customers year-over-year. However, Supplies revenue has grown year-over-year in larger school districts
and the Company deployed multiple sales and marketing initiatives aimed at improving our performance with the smaller customers. While we entered the fourth quarter with a lower open order position in Supplies due to strong operating performance in
our fulfillment centers in 2019 as compared to 2018, incoming Supplies orders over the months of September and October are up 4.2% year-over-year. We believe our strong operating performance in the 2019 season, along with the team-sell model gaining
effectiveness, are contributing to the increased order rate. Revenues for Furniture were down $1.2 million and AV Tech revenues were up $0.1 million as compared to fiscal 2018. Although we have not pursued certain lower-margin Furniture
opportunities in 2019, the 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.

 

35



Curriculum segment revenues of $27.7 million for the nine months ended September 28, 2019
decreased by 26.0%, or $9.8 million, from the nine months ended September 29, 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 less than 25% of California districts will purchase 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 nine months ended
September 28, 2019 was $178.0 million, as compared to $192.4 million for the nine months ended September 29, 2018. Gross margin for the nine months ended September 28, 2019 was 33.3%, as compared to 34.4% for the nine months
ended September 29, 2018.

Distribution segment gross margin was 32.1% for the nine months ended September 28, 2019, as compared to 32.8% for
the nine months ended September 29, 2018. A year-over-year shift in product mix negatively impacted gross margin by 50 basis points for the first three quarters of 2019. Rate variances at a product line level, particularly Agendas, negatively
impacted gross margin by 20 basis points. Agenda product gross margin has been negatively impacted by the operational challenges related to the transition to a new technology platform. Overall, Agendas contributed 60 basis points of gross margin
decline to the segment for the first nine months of 2019. The gross margin of the remaining product category in the segment were essentially flat year-over-year. The gross margin trend has improved throughout the year. In our two largest product
categories, Supplies and Furniture, strategic pricing actions taken over the past nine months, including a decision to not pursue certain low-margin business, are resulting in higher second half 2019 gross
margin versus 2018 gross margin. Booked gross margins for June through October of 2019 were up materially year-over-year.

Curriculum segment gross margin
was 54.5% for the nine months ended September 28, 2019, as compared to 56.5% for the nine months ended September 29, 2018. Higher training revenues in 2018 versus training revenues in 2019 and increases in product cost in 2019, primarily
associated with smaller runs of printed material due to lower volumes, contributed to the gross margin decline.

Selling, General and Administrative
Expenses

SG&A decreased $3.2 million in the first nine months of fiscal 2019, from $170.6 million for the nine months ended
September 29, 2018 to $167.4 million for the nine months ended September 28, 2019.

Fixed compensation and benefit costs decreased by
$2.7 million in the current year’s first nine months due to lower staffing levels. Stock-based compensation expense was down year-over-year by $1.9 million as previously recognized unvested RSU expense for the former CEO was reversed
in the first quarter of 2019. Travel expense was down year-over-year by $1.1 million primarily due to a decrease in the number of consultants and sales associates. Depreciation and amortization expense decreased by $0.5 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. Partially offsetting these decreases, commission expense was up $1.9 million year-over-year due to
a change in the earning thresholds within the 2019 commission plans. Variable labor was up in the current year by $1.4 million primarily due to switching to using associates from temp agencies versus using seasonal help. This ensured the
correct staffing levels throughout busy season. Financial advisor fees increased year-over-year by $2.2 million related to the Company’s exploration of strategic alternatives. Transitioning Agendas to a new technology platform resulted in
a one time set-up fee of $1.3 million in the current fiscal year.

 

36



As a percent of revenue, SG&A increased from 30.5% for the nine months ended September 29, 2018 to
31.3% for the nine months ended September 28, 2019.

Impairment Charges


For the nine month period ended September 28, 2019, the Company recorded an impairment of $0.3 million related to the discontinuation of the use of a
tradename and $4.6 million of a goodwill impairment charge based on the assessment conducted during the third quarter of fiscal 2019. The goodwill impairment charge was for the Science reporting unit. See Note 9 – Goodwill and Other
Intangible. The Company did not have an impairment charge in the first nine months of fiscal 2018.

Restructuring Costs


For the nine month period ended September 28, 2019, the Company recorded $2.3 million of restructuring charges. For the nine month period ended
September 29, 2018, the Company recorded $1.1 million of restructuring charges. The amounts in both periods were related entirely to severance. The increase in fiscal 2019 is due to a sales force restructuring and changes at the leadership
level.

Interest Expense

Interest expense increased
by $3.5 million from $11.4 million for the nine months ended September 29, 2018 to $14.9 million for the nine months ended September 28, 2019. Cash interest expense increased $2.0 million in the first nine months of the
current year versus the first nine months of the prior year due primarily to an increase in our cash interest rate for fiscal 2019 of approximately 150 basis points. The increase in the cash interest rate was due primarily to a year-over-year
increase in our applicable margin as a result of an increase in our senior leverage ratio over the past twelve months. In addition, our cash interest increased by approximately $0.1 million in the first nine months of 2019 as our average
borrowings were up $1.6 million year-over year.

Non-cash interest expense increased by $1.5 million in
the first nine months of fiscal 2019 due primarily to incremental paid-in-kind interest related to our New Term Loan.


Change in Value of Warrant Derivative

In fiscal 2019,
the Company recorded a non-cash charge of $1.3 million in order to reflect the change in the current fair value of the obligation to issue warrants 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 $0.2 million for the nine months ended September 28, 2019, as compared to a provision for income taxes of
$9.4 million for the nine months ended September 29, 2018.

The effective income tax rate for the nine months ended September 28, 2019 and
the nine months ended September 29, 2018 was -1.6% and 101.1%, respectively. The decrease in the year-over-year effective tax rate for the first nine months of 2019 is due to the tax valuation allowance which the Company recorded in the fourth
quarter of 2018. The Company determined as of the end of the third 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; however, the majority of any earnings and
profits repatriated would be treated as a return of capital for Canadian purposes and, thus, not subject to a withholding tax based on the U.S./Canada tax treaty. 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 less than $0.5 million in fiscal 2019.

 

37



Liquidity and Capital Resources


At September 28, 2019, the Company had negative working capital of $21.4 million, a decrease of $146.1 million as compared to September 29,
2018. Net working capital in the current year includes both $5.9 million of cash and $199.1 million of current maturities of long-term debt. Current maturities of long-term debt have increased year over year because the Company has
classified the full amount of the outstanding New Term Loan balances outstanding as of September 28, 2019, approximately $108.4 million, as currently maturing long-term debt due to the Company’s non-compliance with certain financial
covenants as of the end of the third quarter of fiscal 2019 and the short-term nature of the forbearance granted by the New Term Loan Lenders and ABL Lenders with respect to this non-compliance. The Company’s capitalization at
September 28, 2019 was $252.9 million and consisted of total debt of $199.1 million and stockholders’ equity of $53.8 million.


Net cash used by operating activities was $48.7 million and $86.1 million for the nine months ended September 28, 2019 and September 29,
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 have returned to historical levels. As a result, over the first nine months of fiscal 2019, the
Company’s cash used for working capital changes was down $37.4 million versus the first nine months of fiscal 2018.

Net cash used in investing
activities was $10.5 million in the first nine months of fiscal 2019 as compared to $12.4 million in the first nine months of fiscal 2018. The Company expects net cash used in investing activities to decrease by approximately
$2.7 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 $64.1 million in fiscal 2019 versus $74.8 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 nine months of fiscal 2019, which consisted of an excess cash flow payment of $0.8 million and regularly scheduled principal payments of
$3.3 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 September 28, 2019, outstanding borrowings on the ABL Facility were $69.0 million, while the excess availability on that date for the ABL
Facility was $52.9 million. In addition to the Company’s excess availability, it had $5.9 million of cash on its balance sheet as of September 28, 2019.


The increase in current maturities in the first nine months of fiscal 2019 as compared to the first nine months of fiscal 2018 is due to the deferred cash
payment obligations which are payable in December 2019 and the forbearance associated with the Company’s term loan as of the end of the third quarter 2019.


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 the Company’s inability to continue as a going concern.


On October 28, 2019, the “Company” entered into the Fourth Amendment (the “Fourth Amendment”) to the New Term Loan Agreement dated April
7, 2017, in order to extend the required delivery date of the unaudited financial statements of the Company and its subsidiaries with respect to the month ended September 28, 2019 required under the New Term Loan Agreement from within 30 days
after the end of such month to November 4, 2019 or such later date as agreed to in writing by the New Term Loan Agent in its discretion. This date was subsequently extended several times by the New Term Loan Agent, most recently to November 12,
2019.

Also on October 28, 2019, the Company entered into the Seventh Amendment (the “Seventh Amendment”) to the ABL Facility Loan Agreement
dated June 11, 2013, in order to extend the required delivery date of the unaudited financial statements of the Company and its subsidiaries with respect to the month ended September 28, 2019 required under the ABL Facility from within 30
days after the end of such month to November 4, 2019 or such later date as agreed to in writing by the ABL Agent in its discretion. This date was subsequently extended several times by the ABL Agent, most recently to November 12, 2019.


The Fourth Amendment and the Seventh Amendment each served as a short-term forbearance of the events of default that would have resulted from the delivery of
those financial statements due to the Company’s non-compliance with the net senior leverage ratio and the minimum EBITDA covenants under the New Term Loan Agreement and the ABL Facility as of September 30, 2019 (the “Existing Events of
Default”).

The Fourth Amendment and the Seventh Amendment are filed as exhibits to this report and are incorporated herein by reference. The
foregoing descriptions of the Fourth Amendment and the Seventh Amendment do not purport to be complete and are qualified in their entirety by the full text of such agreements.


On November 12, 2019, the Company and the New Term Loan Agent reached a non-binding Summary of Terms and Conditions for Forbearance Agreement and Fifth
Amendment to the New Term Loan Agreement with the New Term Loan Lenders and the New Term Loan Agent (the “Term Loan Term Sheet”). Capitalized terms used below that are not otherwise defined have the meaning set forth in the New Term Loan
Agreement. The Term Loan Term Sheet contemplates the Company entering into a Fifth Amendment to the New Term Loan Agreement no later than November 22, 2019, in order to, among other things: (1) establish a forbearance period during which the
Term Loan Lenders would forbear the exercise of any rights or remedies with respect to the Existing Events of Default until a Termination Event (which would be the earliest of (a) January 31, 2020, (b) March 31, 2020 if a Specified Unsecured
Prepetition Debt Satisfaction Event has occurred prior to January 31, 2020 (the earlier of (a) or (b), the “Outside Date”), (c) at the election of the Term Loan Agent, the occurrence of an event of default, other than the Existing Events
of Default, (d) the expiration or termination of the forbearance period described in the ABL Term Sheet described below, or (e) the occurrence of any other customary termination event); (2) the payment of a $6 million closing fee, which may be
reduced to not less than $1.25 million under certain circumstances; (3) the addition of approximately $3.5 million in other fees to the principal balance of the New Term Loan; (4) in replacement of the Third Amendment Warrants, warrants to purchase,
for a price of $0.01 per share, 18% of the outstanding common stock of the Company, with such warrants earned in full and vesting immediately on the date of issuance, but not exercisable until the Outside Date (the “Fourth Amendment
Warrants”), provided that if the Obligations are paid in full in cash on or prior to (a) February 29, 2020, the Company shall have the right to buy back 50% of the Fourth Amendment Warrants, and (b) the Outside Date, the Company shall have the
right to buy back 75% of the Fourth Amendment Warrants, in each case for a price of $0.01 per share; (5) amend the definition of Applicable Margin so that it will no longer depend on the Net Senior Leverage Ratio and will instead be set at 7.00% per
annum for all Prime Rate Loans and 8.00% per annum for all LIBOR Rate Loans; (6) amend the definition of PIK Interest Rate so that it will no longer depend on the Net Senior Leverage Ratio and will instead be set at 2.00% per annum; (7) provide that
the New Term Loan and other Obligations shall bear interest at the Default Rate and to increase the Default Rate by 1.00%, which increase will be paid in kind by adding such amount to the principal balance of the Term Loan; (8) convert LIBOR Rate
Loans to Prime Rate Loans as their interest periods expire and eliminate the Company’s ability to request to convert or continue the Term Loan or any portion thereof as LIBOR Rate Loans; (9) require the delivery on a weekly basis of detailed
13-week budgets (each, a “Budget”); (10) amend the financial covenants, including the elimination of the Fixed Charge Coverage Ratio and the Net Senior Leverage Ratio during the forbearance period, resetting the Minimum EBITDA to be tested
monthly, resetting the minimum Specified Availability to the greater of $12.5 million, replacing the existing clean-down and ABL Facility usage covenant with the same covenants as reflected in the ABL Term Sheet (11) limit the use of cash receipts
to payment of Budget disbursements and not submit ABL borrowing requests in excess of the amount needed to fund the Budget; (12) require the Company to pursue a merger, financing transaction, or sale transaction that will cause the Company to repay
the Obligations in full prior to the Outside Date, subject to the satisfaction of various milestones and conditions; (13) provide full access rights to the Term Loan Agent, its counsel and its advisors; (14) extend the maturity date of the Term Loan
to November 11, 2020; (15) eliminate a number of the Company’s right under the New Term Loan Agreement, including but not limited to its right to consent to assignments, to make Permitted Acquisitions, to reinvest proceeds of Asset Dispositions
and Extraordinary Proceeds, and to make Specified Asset Dispositions; and (16) provide for enhanced inspection rights for the New Term Loan Agent.

For
purposes of the Term Loan Term Sheet, a “Specified Unsecured Prepetition Debt Satisfaction Event” means, among other things, that a specified percentage of the Specified Unsecured Prepetition Debt has been amended such that its final
maturity is not on or before December 11, 2020, does not provide for any payments before that date except for limited percentages in certain limited circumstances, it accrues interest, payable solely in kind, at a rate per annum reasonably
satisfactory to the New Term Loan Agent and the required New Term Loan Lenders, and can be secured by a third lien on the Term Loan Priority Collateral, that is subject to an intercreditor agreement, among other things.


Also on November 12, 2019, the Company entered into a non-binding Summary of Terms and Conditions for Forbearance Agreement and Eighth Amendment to Loan
Agreement with the ABL Lenders and the ABL Agent (the “ABL Term Sheet”). Capitalized terms used below that are not otherwise defined have the meaning set forth in the ABL Agreement. The ABL Term Sheet contemplates the Company entering into
an Eighth Amendment the ABL Agreement no later than November 22, 2019, in order to, among other things: (1) establish a forbearance period during which the ABL Lenders would forbear the exercise of any rights or remedies with respect to the
Existing Events of Default until a Termination Event (which would be the earliest of (a) January 31, 2020, (b) March 31, 2020 if a Specified Unsecured Prepetition Debt Satisfaction Event has occurred prior to January 31, 2020 (the earlier of (a) or
(b), the “Outside Date”), (c) at the election of the ABL Agent, the occurrence of an event of default, other than the Existing Events of Default, (d) the expiration or termination of the forbearance period provided by the Term Loan Sheet
described above, or (e) the occurrence of any other customary termination event); (2) the payment of a fee equal to 0.50% times the amount of the Commitments in effect as of the Closing Date under the ABL; (3) amend the definition of Applicable
Margin so that it will no longer depend on the Fixed Charge Coverage Ratio and will instead be set at 300 bps for all Base Rate Loans and 400 bps for all LIBOR Loans; (4) require the delivery on a weekly basis of detailed 13-week budgets (each, a
“Budget”); (5) amend the financial covenants, including the elimination of the Fixed Charge Coverage Ratio during the forbearance period, adding a covenant testing trailing twelve-month EBITDA on a monthly basis, in a manner consistent
with the Fifth Amendment, replacing the existing clean-down covenant in Section 10.2.3 of the ABL Agreement with a clean-down covenant requiring the Loans be paid down to $10,000,000 at fiscal year end December 28, 2019; (6) limit the use of
cash receipts to payment of Budget disbursements and not submit ABL borrowing requests in excess of the amount needed to fund the Budget; (7) require the Company to pursue a merger, sale, or other restructuring transaction that will cause the
Company to repay the Term Loan Obligations in full on or prior to the Outside Date, subject to the satisfaction of various milestones and conditions; (8) provide full access rights to the ABL Agent, its counsel and its advisors; (9) extend the
maturity date of the ABL to 30 days prior to the extended maturity date of the New Term Loan Agreement described above (expected to be October 11, 2020); (10) eliminate a number of the Company’s rights under the ABL Agreement, including but not
limited to its right to consent to assignments, to make Permitted Acquisitions, and to make Specified Asset Dispositions; (11) amend the definitions of Availability Reserve and Borrowing Base to add an availability block equal to $15,000,000; and
(12) provide for enhanced inspection rights for the ABL Agent.

The foregoing descriptions of the Term Loan Term Sheet and the ABL Term Sheet are
summaries and do not purport to be complete descriptions of the terms thereof. The closing of the Fifth Amendment and the Eighth Amendment are subject to a number of conditions that the Company may not be able to satisfy, and do not represent
binding commitments on the part of the New Term Loan Lenders or the ABL Lenders to enter into such amendments on these terms or at all. There is no assurance that the Company will enter into the Fifth Amendment or the Eighth Amendment before
November 22, 2019 or at all, or if it does, that the Fifth Amendment and the Eighth Amendment will contain the terms set forth in the Term Loan Term Sheet and the ABL Term Sheet, respectively. In the event the Company is not able to enter into
the Fifth Amendment and the Eighth Amendment in a timely manner and the New Term Loan Lenders and the ABL Lenders do not otherwise extend their forbearance, such lenders will be entitled to exercise their rights and remedies under the New Term Loan
Agreement and the ABL Agreement, respectively, with respect to the Existing Events of Default.

 

38



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.


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.

 

39



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 September 28, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

40




PART II – OTHER INFORMATION



ITEM 1A. Risk Factors

The following
risk factors supplement the Risk Factors described in the Company’s 2018 Annual Report on Form 10-K and should be read in conjunction therewith.


We are highly leveraged and, due to our noncompliance with certain financial covenants, we are subject to short-term forbearance agreements with our
term loan lenders and ABL lenders as of the date of this report.

As of September 28, 2019, we had $199.1 million of reported debt, or $204.2
million of gross debt, which excludes debt issuance costs. Due to our noncompliance with certain financial covenants and the short-term nature of the forbearance we have received from our term loan lenders and ABL lenders, as well as the scheduled
maturity of certain of this debt in December 2019, all of this debt has been reflected as currently maturing on our balance sheet as of September 28, 2019. If our efforts to extend the forbearance period in effect as of November 12, 2019 and
modify the terms of our debt obligations, and either borrow additional funds in sufficient amounts or engage in a sale transaction within the required time period and/or upon the terms specified in those modifications, we may not have the liquidity
necessary to retire our debt obligations, which could result in our lenders and other creditors accelerating our debt obligations and our inability to continue as a going concern.


See Item 3, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this report for a more detailed discussion of our
liquidity and how this may affect our ability to continue as a going concern.

As a result of our financial performance in the month ended September
28, 2019, we are obligated to begin issuing warrants to our term loan lenders, which will cause immediate and substantial dilution to our current stockholders.


Under the terms of the third amendment to our term loan agreement, we agreed to issue each month beginning with the month ended September 28, 2019 fully
vested and exercisable warrants to our term loan lenders entitling them to purchase up to 2% of our outstanding common stock for a purchase price of $0.001 per share in the event our monthly financial performance does not meet certain thresholds,
with the total number of warrants issued not to exceed in the aggregate 18% of our outstanding common stock. The issuance of these warrants will cause immediate and substantial dilution to our shareholders and are expected to cause our share price
to decline, and if the conditions for repurchasing them are not satisfied, will substantially reduce the amount our existing common stockholder would receive in any sale transaction. In light of our current financial performance, we anticipate that
all of these warrants will be issued.


ITEM 5. Other Information


On October 28, 2019, the “Company” entered into the Fourth Amendment (the “Fourth Amendment”) to the New Term Loan Agreement dated April 7,
2017, in order to extend the required delivery date of the unaudited financial statements of the Company and its subsidiaries with respect to the month ended September 28, 2019 required under the New Term Loan Agreement from within 30 days after the
end of such month to November 4, 2019 or such later date as agreed to in writing by the New Term Loan Agent in its discretion. This date was subsequently extended several times by the New Term Loan Agent, most recently to November 12, 2019.

Also on October 28, 2019, the Company entered into the Seventh Amendment (the “Seventh Amendment”) to the ABL Facility dated June 11,
2013, as amended (the “ABL Agreement”) among the Company, certain of its subsidiary borrowers, Bank of America, N.A. and Bank of Montreal as lenders (the “ABL Lenders”), and Bank of America, N.A., as agent for the ABL Lenders
(the “ABL Agent”) in order to extend the required delivery date of the unaudited financial statements of the Company and its subsidiaries with respect to the month ended September 28, 2019 required under the ABL Facility from within 30
days after the end of such month to November 4, 2019 or such later date as agreed to in writing by the ABL Agent in its discretion. This date was subsequently extended several times by the ABL Agent, most recently to November 12, 2019.


The Fourth Amendment and the Seventh Amendment each served as a short-term forbearance of the events of default that would have resulted from the delivery of
those financial statements due to the Company’s non-compliance with the net senior leverage ratio and the minimum EBITDA covenants under the New Term Loan Agreement as of September 28, 2019 (the “Existing Events of Default”).


The Fourth Amendment and the Seventh Amendment are filed as exhibits to this report and are incorporated herein by reference. The foregoing descriptions of
the Fourth Amendment and the Seventh Amendment do not purport to be complete and are qualified in their entirety by the full text of such agreements.



ITEM 6. Exhibits

 























































Exhibit No.

  

Description

10.1    Fourth Amendment, dated as of October 28, 2019, to the Loan Agreement, dated as of April 7, 2017, by and among School Specialty, Inc., as borrower, certain of its subsidiaries, as guarantors, the financial parties
thereto, as lenders, and TCW Asset Management Company, LLC, as agent.
10.2    Seventh Amendment, dated as of October 28, 2019, to the Loan Agreement dated as of June 
11, 2013, by and among School Specialty, Inc. and certain of its subsidiaries, as borrowers, Bank of America, N.A. and Bank of Montreal, as lenders, and Bank of America, N.A., as agent for the lenders.
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 September 28, 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.

 

41




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)
  November 12, 2019    

/s/ Michael Buenzow

  Date     Michael Buenzow
      Interim Chief Executive Officer
      (Principal Executive Officer)
  November 12, 2019    

/s/ Kevin L. Baehler

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

 

42

EX-10.1


Exhibit 10.1


FOURTH AMENDMENT TO


LOAN AGREEMENT

THIS
FOURTH AMENDMENT TO LOAN AGREEMENT (this “Amendment”), with an effective date as of October 28, 2019, is made by and among SCHOOL SPECIALTY, INC., a Delaware corporation (“Borrower”), each Guarantor (as
defined in the Loan Agreement) party hereto, the Lenders identified on the signature pages hereof and TCW ASSET MANAGEMENT COMPANY LLC, as agent for the Lenders (“Agent”).


WHEREAS, Borrower, the Guarantors from time to time party thereto, Agent, and the Lenders from time to time party thereto are parties to that
certain Loan Agreement dated as of April 7, 2017 (as amended, restated, supplemented or otherwise modified from time to time, the “Loan Agreement”); and


WHEREAS, Borrower has requested that Agent and the Lenders amend the Loan Agreement as set forth herein, and Agent and the Lenders have agreed
to the foregoing, on the terms and conditions set forth herein.

NOW THEREFORE, in consideration of the premises and mutual agreements
herein contained, the parties hereto agree as follows:

1.    Defined Terms. Unless otherwise defined herein,
capitalized terms used herein and not otherwise defined shall have the meanings ascribed to such terms
in the Loan Agreement.


2.    Amendment to Loan Agreement. Subject to the satisfaction of the conditions set forth in
Section 5 below and in reliance upon the representations and warranties of Borrower and the Guarantors party hereto set forth in Section 6 below, the Loan Agreement is amended to extend of the
required delivery date of the unaudited financial statements of Borrower and its Subsidiaries with respect to the month ended September 30, 2019 required pursuant to clause (c) of Section 10.1.2 of the Loan Agreement from within thirty
(30) days after the end of such month to November 4, 2019 (or such later date as agreed to in writing by Agent in its discretion).


3.    Continuing Effect. Except as expressly set forth in Section 2 of this Amendment, nothing in this
Amendment shall constitute a modification or alteration of the terms, conditions or covenants of the Loan Agreement or any other Loan Document, or a waiver of any other terms or provisions thereof, and the Loan Agreement and the other Loan Documents
shall remain unchanged and shall continue in full force and effect, in each case as amended hereby.


4.    Reaffirmation and Confirmation. Each of Borrower and each Guarantor party hereto hereby ratifies, affirms,
acknowledges and agrees that the Loan Agreement and the other Loan Documents represent the valid, enforceable and collectible obligations of Borrower and the Guarantors, and further acknowledges that there are no existing claims, defenses, personal
or otherwise, or rights of setoff whatsoever with respect to the Loan Agreement or any other Loan Document. Each of Borrower and each Guarantor party hereto hereby agrees that





this Amendment in no way acts as a release or relinquishment of the Liens and rights securing payments of the Obligations. The Liens and rights securing payment of the Obligations are hereby
ratified and confirmed by Borrower and the Guarantors party hereto in all respects.

5.    Conditions to
Effectiveness of Amendment
. This Amendment shall become effective upon the satisfaction of each of the following conditions precedent (such date of satisfaction, the “Fourth Amendment Effective Date”):


(a)    Each party hereto shall have executed and delivered this Amendment to Agent;


(b)    Agent shall have received a certificate in form and substance reasonably satisfactory to Agent, dated the Fourth
Amendment Effective date and executed by a duly authorized officer of Borrower, (i) attaching a true and correct copy of an amendment to the Revolving Loan Agreement conforming to this Amendment and (ii) certifying that such conforming
amendment is effective as of the Fourth Amendment Effective Date;

(c)    All proceedings taken in connection with the
transactions contemplated by this Amendment and all documents, instruments and other legal matters incident thereto shall be reasonably satisfactory to Agent and its legal counsel;


(d)    Agent shall have received payment of all fees payable to Agent and Lenders pursuant to the terms of the Fee Letter,
and all other fees, charges and disbursements of Agent and its counsel required to be paid pursuant to the Loan Agreement in connection with the preparation, execution and delivery of this Amendment and all other instruments or documents provided
for herein or delivered or to be delivered hereunder or in connection herewith that have been invoiced on or before the date hereof; and


(e)    No Default or Event of Default shall have occurred and be continuing.


6.    Representations and Warranties. In order to induce Agent and Lenders to enter into this Amendment, each of
Borrower and each Guarantor party hereto hereby represents and warrants to Agent and Lenders that, after giving effect to this Amendment:


(a)    All representations and warranties contained in the Loan Agreement and the other Loan Documents (other than the
representations and warranties contained in Schedules 2(c), 2(d) and 11 of the Perfection Certificate) are true and correct in all material respects (except that such materiality qualifier shall not be applicable to any representations and
warranties that already are qualified or modified by materiality in the text thereof) on and as of the date of this Amendment, in each case as if made on and as of such date, other than representations and warranties that expressly relate solely to
an earlier date (in which case such representations and warranties were true and correct in all material respects (except that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or
modified by materiality in the text thereof) on and as of such earlier date);

(b)    No Default or Event of Default
has occurred and is continuing; and

 

-2-



(c)    This Amendment and the Loan Agreement, as amended hereby,
constitute legal, valid and binding obligations of Borrower and the Guarantors and are enforceable against Borrower and the Guarantors in accordance with their respective terms, except as enforcement may be limited by equitable principles or by
bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors’ rights generally.


7.    Miscellaneous.


(a)    Expenses. Borrower agrees to pay on demand all expenses of Agent in connection with the preparation,
negotiation, execution, delivery and administration of this Amendment in accordance with the terms of the Loan Agreement.


(b)    Governing Law. This Amendment shall be a contract made under and governed by, and construed in accordance
with the internal laws of the State of New York.

(c)    Counterparts. This Amendment may be executed in any
number of counterparts, and by the parties hereto on the same or separate counterparts, and each such counterpart, when executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the
same Amendment. Delivery of an executed signature page of this Amendment by facsimile transmission or electronic photocopy (i.e. “pdf”) shall be effective as delivery of a manually executed counterpart hereof.


8.    Release. In consideration of the agreements of Agent and Lenders contained herein and for other good and
valuable consideration, the receipt and sufficiency of which is hereby acknowledged, each of Borrower and each Guarantor party hereto, on behalf of itself and its respective successors, assigns, and other legal representatives, hereby absolutely,
unconditionally and irrevocably releases, remises and forever discharges Agent and Lenders, and their successors and assigns, and their present and former shareholders, affiliates, subsidiaries, divisions, predecessors, directors, officers,
attorneys, employees, agents and other representatives (Agent, each Lender and all such other Persons being hereinafter referred to collectively as the “Releasees” and individually as a “Releasee”), of and from all
demands, actions, causes of action, suits, covenants, contracts, controversies, agreements, promises, sums of money, accounts, bills, reckonings, damages and any and all other claims, counterclaims, defenses, rights of
set-off, demands and liabilities whatsoever (individually, a “Claim” and collectively, “Claims”) of every name and nature, known or unknown, suspected or unsuspected, as of
the date of this Amendment, both at law and in equity, which Borrower or any Guarantor, or any of their respective successors, assigns, or other legal representatives may now or hereafter own, hold, have or claim to have against the Releasees or any
of them for, upon, or by reason of any circumstance, action, cause or thing whatsoever which arises at any time on or prior to the day and date of this Amendment, in each case for or on account of, or in relation to, or in any way in connection with
any of the Loan Agreement, or any of the other Loan Documents or transactions thereunder or related thereto.

[Signature pages follow]

 

-3-



IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their
respective officers thereunto duly authorized and delivered as of the date set forth above.

 




















































































BORROWER:
SCHOOL SPECIALTY, INC.
By:   /s/ Kevin L. Baehler
Name:   Kevin L. Baehler
Title:   Executive Vice President, Chief Financial Officer
GUARANTORS:
CLASSROOMDIRECT.COM, LLC, a Delaware limited liability company
By:   /s/ Kevin L. Baehler
Name:   Kevin L. Baehler
Title:   Assistant Secretary
SPORTIME, LLC, a Delaware limited liability company
By:   /s/ Kevin L. Baehler
Name:   Kevin L. Baehler
Title:   Assistant Secretary
DELTA EDUCATION, LLC, a Delaware limited liability company
By:   /s/ Kevin L. Baehler
Name:   Kevin L. Baehler
Title:   Assistant Secretary

 

 


Signature Page to Fourth Amendment to Loan Agreement




































































































PREMIER AGENDAS, LLC, a Delaware limited liability company
By:   /s/ Kevin L. Baehler
Name:   Kevin L. Baehler
Title:   Assistant Secretary
CHILDCRAFT EDUCATION, LLC, a Delaware limited liability company
By:   /s/ Kevin L. Baehler
Name:   Kevin L. Baehler
Title:   Assistant Secretary
BIRD-IN-HAND WOODWORKS, LLC, a Delaware limited liability company
By:   /s/ Kevin L. Baehler
Name:   Kevin L. Baehler
Title:   Assistant Secretary
CALIFONE INTERNATIONAL, LLC, a Delaware limited liability company
By:   /s/ Kevin L. Baehler
Name:   Kevin L. Baehler
Title:   Assistant Secretary
SSI GUARDIAN, LLC, a Delaware limited liability company
By:   /s/ Kevin L. Baehler
Name:   Kevin L. Baehler
Title:   Assistant Secretary

 

 


Signature Page to Fourth Amendment to Loan Agreement



































































































AGENT:
TCW ASSET MANAGEMENT COMPANY LLC, as Agent
By:   /s/ Mark Gertzof
Name:   Mark Gertzof
Title:   Managing Director
LENDERS:
TCW DIRECT LENDING LLC, as a Lender
By: TCW Asset Management Company LLC, its Investment Advisor
By:   /s/ Mark Gertzof
Name:   Mark Gertzof
Title:   Managing Director
TCW DIRECT LENDING STRATEGIC VENTURES LLC, as a Lender
By:   /s/ Mark Gertzof
Name:   Mark Gertzof
Title:   Managing Director
WEST VIRGINIA DIRECT LENDING LLC, as a Lender
By: TCW Asset Management Company LLC, its Investment Advisor
By:   /s/ Mark Gertzof
Name:   Mark Gertzof
Title:   Managing Director

 

 


Signature Page to Fourth Amendment to Loan Agreement

















































TCW BRAZOS FUND LLC, as a Lender
By: TCW Asset Management Company LLC, its Investment Advisor
By:   /s/ Mark Gertzof
Name:   Mark Gertzof
Title:   Managing Director
TCW SKYLINE LENDING, L.P., as a Lender
By: TCW Asset Management Company LLC, its Investment Advisor
By:   /s/ Mark Gertzof
Name:   Mark Gertzof
Title:   Managing Director

 

 

 


 

 

 


Signature Page to Fourth Amendment to Loan Agreement


EX-10.2


Exhibit 10.2


SEVENTH AMENDMENT TO


LOAN AGREEMENT

THIS
SEVENTH AMENDMENT TO LOAN AGREEMENT (this “Amendment”) is entered into as of October 28, 2019, by and among SCHOOL SPECIALTY, INC., a Delaware corporation (“Company”), CLASSROOMDIRECT.COM, LLC, a
Delaware limited liability company (“Classroom”), SPORTIME, LLC, a Delaware limited liability company (“Sportime”), DELTA EDUCATION, LLC, a Delaware limited liability company
(“Delta”), PREMIER AGENDAS, LLC, a Delaware limited liability company (as successor in interest to Premier Agendas, Inc., a Washington corporation, “Premier”), CHILDCRAFT EDUCATION, LLC, a Delaware
limited liability company (as successor in interest to Childcraft Education Corp., a New York corporation, “Childcraft”), BIRD-IN-HAND WOODWORKS,
LLC
, a Delaware limited liability company (as successor in interest to Bird-In-Hand Woodworks, Inc., a New Jersey Corporation, “Bird”), CALIFONE
INTERNATIONAL, LLC
, a Delaware limited liability company (as successor in interest to Califone International, Inc., a Delaware corporation, “Califone”), SSI GUARDIAN, LLC, a Delaware limited liability company
(“SSI”, and together with Classroom, Sportime, Delta, Premier,
Childcraft, Bird and Califone collectively, “Subsidiary Borrowers” and each, individually, a “Subsidiary Borrower”), the Lenders party
hereto, and BANK OF AMERICA, N.A., as agent for the Lenders (in such capacity, “Agent”).

WHEREAS, Company,
Subsidiary Borrowers from time to time party thereto, Agent, and the Lenders from time to time party thereto are parties to that certain Loan Agreement, dated as of June 11, 2013 (as amended, restated, supplemented or otherwise modified from
time to time, the “Loan Agreement”); and

WHEREAS, Company has requested that Agent and the Lenders amend the Loan
Agreement as set forth herein, and Agent and the Lenders party hereto have agreed to the foregoing, on the terms and conditions set forth herein.


NOW THEREFORE, in consideration of the premises and mutual agreements herein contained, the parties hereto agree as follows:


1.    Defined Terms. Unless otherwise defined herein, capitalized terms used herein and not otherwise defined shall
have the meanings ascribed to such terms in the Loan Agreement.

2.    Amendment to Loan Agreement. Subject to
the satisfaction of the conditions set forth in Section 5 below and in reliance upon the representations and warranties of Borrowers and the Guarantors party hereto set forth in Section 6 below, the Loan Agreement is amended to extend the
required delivery date of the unaudited financial statements of the Company and its Subsidiaries with respect to the month ended September 30, 2019 required pursuant to clause (c) of Section 10.1.2 of the Loan Agreement from





within thirty (30) days after the end of such month to November 4, 2019 (or such later date as agreed to in writing by Agent in its discretion).


3.    Continuing Effect. Except as expressly set forth in Section 2 of this Amendment, nothing in this
Amendment shall constitute a modification or alteration of the terms, conditions or covenants of the Loan Agreement or any other Loan Document, or a waiver of any other terms or provisions thereof, and the Loan Agreement and the other Loan Documents
shall remain unchanged and shall continue in full force and effect, in each case as amended hereby.


4.    Reaffirmation and Confirmation. Each of Company, each Subsidiary Borrower and each Guarantor party hereto
hereby ratifies, affirms, acknowledges and agrees that the Loan Agreement and the other Loan Documents represent the valid, enforceable and collectible obligations of Borrowers and the Guarantors, and further acknowledges that there are no existing
claims, defenses, personal or otherwise, or rights of setoff whatsoever with respect to the Loan Agreement or any other Loan Document. Each of Company, each Subsidiary Borrower and each Guarantor party hereto hereby agrees that this Amendment in no
way acts as a release or relinquishment of the Liens and rights securing payments of the Obligations. The Liens and rights securing payment of the Obligations are hereby ratified and confirmed by Borrowers and the Guarantors party hereto in all
respects.

5.    Conditions to Effectiveness of Amendment. This Amendment shall become effective upon the
satisfaction of each of the following conditions precedent (the “Seventh Amendment Effective Date”):


(a)    Each party hereto shall have executed and delivered this Amendment to Agent;


(b)    Agent shall have received a certificate in form and substance reasonably satisfactory to Agent, dated the Seventh
Amendment Effective date and executed by a duly authorized officer of the Company, (x) attaching a true and correct copy of an amendment to or waiver of the Term Loan Agreement conforming to this Amendment and (y) certifying in writing
that such conforming amendment or waiver is effective as of the Seventh Amendment Effective Date;

(c)    All
proceedings taken in connection with the transactions contemplated by this Amendment and all documents, instruments and other legal matters incident thereto shall be reasonably satisfactory to Agent and its legal counsel;


(d)    Agent shall have received payment of all fees payable to Agent and Lenders as of the Seventh Amendment Effective
Date, including pursuant to the Fee Letter, dated as of March 13, 2019, between Company and Agent, and all other fees, charges and disbursements of Agent and its counsel required to be paid pursuant to the Loan Agreement in connection with the
preparation, execution and delivery of the Amendment and all other instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith that have been invoiced on or before the date hereof; and

 

-2-



(e)    No Default or Event of Default shall have occurred and be
continuing.

6.    Representations and Warranties. In order to induce Agent and Lenders to enter into this
Amendment, each Borrower and each Guarantor party hereto hereby represents and warrants to Agent and Lenders that, after giving effect to this Amendment:


(a)    All representations and warranties contained in the Loan Agreement and the other Loan Documents (other than the
representations and warranties contained in Schedules 2(c), 2(d) and 11 of the Perfection Certificate) are true and correct in all material respects (except that such materiality qualifier shall not be applicable to any representations and
warranties that already are qualified or modified by materiality in the text thereof) on and as of the date of this Amendment, in each case as if made on and as of such date, other than representations and warranties that expressly relate solely to
an earlier date (in which case such representations and warranties were true and correct in all material respects (except that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or
modified by materiality in the text thereof) on and as of such earlier date);

(b)    No Default or Event of Default
has occurred and is continuing; and

(c)    This Amendment and the Loan Agreement, as amended hereby, constitute
legal, valid and binding obligations of each Borrower and the Guarantors and are enforceable against each Borrower and the Guarantors in accordance with their respective terms, except as enforcement may be limited by equitable principles or by
bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors’ rights generally.


7.    Miscellaneous.


(a)    Expenses. Borrowers agree to pay on demand all expenses of Agent (including expenses of its legal counsel)
in connection with the preparation, negotiation, execution, delivery and administration of this Amendment in accordance with the terms of the Loan Agreement.


(b)    Governing Law. This Amendment shall be a contract made under and governed by, and construed in accordance
with the internal laws of the State of New York.

(c)    Counterparts. This Amendment may be executed in any
number of counterparts, and by the parties hereto on the same or separate counterparts, and each such counterpart, when executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the
same Amendment. Delivery of an executed signature page of this Amendment by facsimile transmission or electronic photocopy (i.e. “pdf”) shall be effective as delivery of a manually executed counterpart hereof.

 

-3-



8.    Release. In consideration of the agreements of Agent and
Lenders contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, each Borrower and each Guarantor party hereto, on behalf of itself and its respective successors, assigns, and other
legal representatives, hereby absolutely, unconditionally and irrevocably releases, remises and forever discharges Agent and Lenders, and their successors and assigns, and their present and former shareholders, affiliates, subsidiaries, divisions,
predecessors, directors, officers, attorneys, employees, agents and other representatives (Agent, each Lender and all such other Persons being hereinafter referred to collectively as the “Releasees” and individually as a
Releasee”), of and from all demands, actions, causes of action, suits, covenants, contracts, controversies, agreements, promises, sums of money, accounts, bills, reckonings, damages and any and all other claims, counterclaims,
defenses, rights of set-off, demands and liabilities whatsoever (individually, a “Claim” and collectively, “Claims”) of every name and nature, known or unknown, suspected or
unsuspected, as of the date of this Amendment, both at law and in equity, which any Borrower or any Guarantor, or any of their respective successors, assigns, or other legal representatives may now or hereafter own, hold, have or claim to have
against the Releasees or any of them for, upon, or by reason of any circumstance, action, cause or thing whatsoever which arises at any time on or prior to the day and date of this Amendment, in each case for or on account of, or in relation to, or
in any way in connection with any of the Loan Agreement, or any of the other Loan Documents or transactions thereunder or related thereto.


[Signature pages follow]

 

-4-



IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective
officers thereunto duly authorized and delivered as of the day and the year first above written.

 












































































SCHOOL SPECIALTY, INC.,

as a
Borrower and a Guarantor

By:   /s/ Kevin L. Baehler
Name:   Kevin L. Baehler
Title:   EVP, CFO

CLASSROOMDIRECT.COM, LLC,

as
a Borrower and as a Guarantor

By:   /s/ Kevin L. Baehler
Name:   Kevin L. Baehler
Title:   Assistant Secretary

SPORTIME, LLC,

as a Borrower
and as a Guarantor

By:   /s/ Kevin L. Baehler
Name:   Kevin L. Baehler
Title:   Assistant Secretary

DELTA EDUCATION, LLC,

as a
Borrower and as a Guarantor

By:   /s/ Kevin L. Baehler
Name:   Kevin L. Baehler
Title:   Assistant Secretary

 

[Signature page to Seventh
Amendment to ABL]


































































































PREMIER AGENDAS, LLC,

as a
Borrower and as a Guarantor

By:   /s/ Kevin L. Baehler
Name:   Kevin L. Baehler
Title:   Assistant Secretary

CHILDCRAFT EDUCATION, LLC,


as a Borrower and as a Guarantor

By:   /s/ Kevin L. Baehler
Name:   Kevin L. Baehler
Title:   Assistant Secretary

BIRD-IN-HAND WOODWORKS, LLC,


as a Borrower and as a Guarantor

By:   /s/ Kevin L. Baehler
Name:   Kevin L. Baehler
Title:   Assistant Secretary

CALIFONE INTERNATIONAL, LLC


as a Borrower and as a Guarantor

By:   /s/ Kevin L. Baehler
Name:   Kevin L. Baehler
Title:   Assistant Secretary

SSI GUARDIAN, LLC

as a
Borrower and as a Guarantor

By:   /s/ Kevin L. Baehler
Name:   Kevin L. Baehler
Title:   Assistant Secretary

[Signature page to Seventh Amendment to ABL]






















BANK OF AMERICA, N.A.,

as
Agent and as a Lender

By:   /s/ Brad Breidenbach
Name:   Brad Breidenbach
Title:   Senior Vice President

 

 

 


 

 

 


 

[Signature page to Seventh Amendment to ABL]


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: November 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: November 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
September 28, 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: November 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
September 28, 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: November 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.