School Specialty (SCOO) 10-Q 2018 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM10-Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018

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)

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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act. (check one):

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐  (Do not check if a smaller reporting company)	Emerging growth company	☐
Smaller reporting company	☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).     Yes  ☐    No  ☒

The aggregate market value of the Registrant’s common stock held bynon-affiliates as of June 30, 2017 was $77,217,446.

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

Class	Outstanding at August 7, 2018
Common Stock, $0.001 par value		7,000,000

SCHOOL SPECIALTY, INC.

INDEX TO FORM10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018

		Page Number
PART I - FINANCIAL INFORMATION
ITEM 1.	CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
	Condensed Consolidated Balance Sheets at June 30, 2018, December 30, 2017 and July 1, 2017		1
	Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2018 and July 1, 2017		2
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months and Six Months Ended June 30, 2018 and July 1, 2017		3
	Condensed Consolidated Statements of Cash Flows for Six Months Ended June 30, 2018 and July 1, 2017		4
	Notes to Condensed Consolidated Financial Statements		5
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		30
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		37
ITEM 4.	CONTROLS AND PROCEDURES		37
PART II - OTHER INFORMATION
ITEM 6.	EXHIBITS		38

-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)

	June 30, 2018			December 30, 2017			July 1, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	8,640		$	31,861		$	6,900
Accounts receivable, less allowance for doubtful accounts of $1,310, $1,059, and $1,136, respectively		90,470			69,297			87,461
Inventories, net		131,761			77,162			124,906
Deferred catalog costs		—			3,450			6,762
Prepaid expenses and other current assets		21,154			14,121			11,145
Refundable income taxes		2,115			547			1,325
Total current assets		254,140			196,438			238,499
Property, plant and equipment, net		32,063			33,579			32,180
Goodwill		26,842			26,842			21,588
Intangible assets, net		35,184			37,163			33,247
Development costs and other		16,191			16,339			12,600
Deferred income taxes long-term		8,347			2,046			193
Total assets	$	372,767		$	312,407		$	338,307
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities—long-term debt	$	64,600		$	10,989		$	46,882
Accounts payable		61,894			26,591			59,125
Accrued compensation		8,209			11,995			9,173
Contract liabilities		5,804			3,454			2,808
Accrued royalties		1,998			5,699			—
Other accrued liabilities		12,265			15,442			12,547
Total current liabilities		154,770			74,170			130,535
Long-term debt—less current maturities		130,437			130,574			124,849
Other liabilities		792			172			169
Total liabilities		285,999			204,916			255,553
Commitments and contingencies—Note 16
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; 7,000,000 shares outstanding		7			7			7
Capital in excess of par value		124,149			123,083			121,940
Accumulated other comprehensive loss		(1,832	)		(1,425	)		(1,600	)
Accumulated deficit		(35,556	)		(14,174	)		(37,593	)
Total stockholders’ equity		86,768			107,491			82,754
Total liabilities and stockholders’ equity	$	372,767		$	312,407		$	338,307

See accompanying notes to condensed consolidated financial statements.

1

SCHOOL SPECIALTY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In Thousands, Except Per Share Amounts)

	For the Three Months Ended				For the Six Months Ended
	June 30, 2018		July 1, 2017		June 30, 2018			July 1, 2017
Revenues	$	169,272	$	160,177	$	268,559		$	257,288
Cost of revenues		110,528		99,682		173,694			162,269
Gross profit		58,744		60,495		94,865			95,019
Selling, general and administrative expenses		53,808		51,721		110,946			99,189
Facility exit costs and restructuring		171		44		482			217
Operating income (loss)		4,765		8,730		(16,563	)		(4,387	)
Other expense (income):
Interest expense		3,688		4,197		7,194			8,247
Loss on early extinguishment of debt		—		4,298		—			4,298
Income (loss) before provision for (benefit from) income taxes		1,077		235		(23,757	)		(16,932	)
Provision for (benefit from) income taxes		1,059		99		(5,097	)		(292	)
Net income (loss)	$	18	$	136	$	(18,660	)	$	(16,640	)
Weighted average shares outstanding:
Basic EPS		7,000		7,000		7,000			7,000
Diluted EPS		7,129		7,077		7,000			7,000
Net loss per Share:
Basic	$	0.00	$	0.02	$	(2.67	)	$	(2.38	)
Diluted	$	0.00	$	0.02	$	(2.67	)	$	(2.38	)

See accompanying notes to condensed consolidated financial statements.

2

SCHOOL SPECIALTY, INC.

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

(In Thousands)

	For the Three Months Ended					For the Six Months Ended
	June 30, 2018			July 1, 2017		June 30, 2018			July 1, 2017
Net income (loss)	$	18		$	136	$	(18,660	)	$	(16,640	)
Other comprehensive income, net of tax:
Foreign currency translation adjustments		(171	)		139		(407	)		184
Total comprehensive income (loss)	$	(153	)	$	275	$	(19,067	)	$	(16,456	)

See accompanying notes to condensed consolidated financial statements.

3

SCHOOL SPECIALTY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Thousands)

	For the Six Months Ended
	June 30, 2018			July 1, 2017
Cash flows from operating activities:
Net loss	$	(18,660	)	$	(16,640	)
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and intangible asset amortization expense		9,393			6,473
Amortization of development costs		2,687			2,283
(Gain) on disposal of assets		(20	)		—
Amortization of debt fees and other		541			797
Loss on early extinguishment of debt		—			4,298
Unrealized foreign exchange (gain) loss		69			(30	)
Share-based compensation expense		1,066			1,091
Deferred taxes		(5,355	)		(7	)
Non-cash interest expense		1,170			1,921
Changes in current assets and liabilities:
Accounts receivable		(21,261	)		(25,665	)
Inventories		(56,071	)		(51,254	)
Deferred catalog costs		—			(1,526	)
Prepaid expenses and other current assets		(6,850	)		233
Accounts payable		35,118			37,141
Accrued liabilities		(7,744	)		(5,353	)
Net cash used by operating activities		(65,917	)		(46,238	)
Cash flows from investing activities:
Additions to property, plant and equipment		(5,978	)		(8,167	)
Investment in product development costs		(2,650	)		(1,050	)
Proceeds from sale of assets		100			—
Net cash used in investing activities		(8,528	)		(9,217	)
Cash flows from financing activities:
Proceeds from bank borrowings		117,228			220,485
Repayment of debt and capital leases		(65,166	)		(189,267	)
Earnout payment for acquisition		(625	)		—
Payment of debt fees and other		—			(4,009	)
Net cash provided in financing activities		51,437			27,209
Effect of exchange rate changes on cash		(213	)		49
Net decrease in cash and cash equivalents		(23,221	)		(28,197	)
Cash and cash equivalents, beginning of period		31,861			35,097
Cash and cash equivalents, end of period	$	8,640		$	6,900
Supplemental disclosures of cash flow information:
Interest paid	$	5,483		$	5,529
Income taxes paid, net	$	1,245		$	244

See accompanying notes to condensed consolidated financial statements.

4

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 Form10-Q and Rule10-01 of RegulationS-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 30, 2017 has been derived from School Specialty, Inc.’s (“School Specialty” or the “Company”) audited financial statements for the period ended December 30, 2017. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Form10-K for the period ended December 30, 2017.

NOTE 2 – INCREASED AUTHORIZED SHARES AND STOCK-SPLIT

At the Special Meeting of Stockholders of School Specialty, Inc. (the “Company”) held on August 15, 2017, the Company’s stockholders voted on a proposal to approve the proposed amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended, to increase the number of authorized shares of common stock, par value $0.001 per share, of the Company (“Common Stock”) from 2,000 to 50,000 shares (the “Amendment”) for the purpose of, among other things, effecting aseven-for-one stock split of the Common Stock as part of the Amendment. Our condensed consolidated financial statements, related notes, and other financial data contained in this report have been adjusted to give retroactive effect to the increased authorization and stock split for all periods presented.

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” ASU2018-07 simplifies the accounting fornon-employee stock based compensation. Specifically, stock based compensation tonon-employees is now measured on the grant date by estimating the fair value of the equity compensation to be issued. Entities should remeasurenon-employee stock based compensation only for those not settled as of the measurement date through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2018, including interim periods within those annual periods, and early adoption is permitted for interim or annual periods, but no earlier than the entity’s adoption date of Topic 606. The adoption is not expected to have a material impact on the consolidated financial statements.

In February 2018, the FASB issued Accounting Standards Update ASUNo. 2018-02,“Income Statement – Reporting Comprehensive Income: Reclassification of Certain Tax Effect from Accumulated Other Comprehensive Income.”ASU2018-02 permits a company to reclassify the income tax effects of the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”) on items within accumulated other comprehensive income or loss(AOCI-L) to retained earnings. Because most items that are charged toAOCI-L are recorded net of applicable income taxes, the subsequent reclassification of these items fromAOCI-L to the statement of operations will be at different income tax rates due to the Tax Act, thereby leaving a “stranded” tax balance withinAOCI-L. ASU2018-02 will allow a company to transfer these “stranded” amounts fromAOCI-L to retained earnings. ASU2018-02 will be effective for the Company at the beginning of fiscal 2019, with early adoption permitted. The adoption is not expected to have a material impact on the consolidated financial statements.

In May 2017, the FASB issued ASUNo. 2017-09,“Compensation—Stock Compensation: Scope of Modification Accounting.” ASU2017-09 amends the scope of modification accounting for share-based payment arrangements. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods, and early adoption is permitted for interim or annual periods. The adoption did not have a material impact on the consolidated financial statements.

5

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

In February 2016, the FASB issued ASUNo. 2016-02, “Leases.”ASUNo. 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. This guidance will be effective for periods beginning after December 15, 2018. The Company is currently in the process of evaluating the impact of adoption of this ASU on the Company’s consolidated financial statements.

NOTE 4 – CHANGE IN ACCOUNTING PRINCIPLE

In the first quarter of 2018, the Company adopted ASUNo. 2014-09,“Revenue from Contracts with Customers.” ASUNo. 2014-09 provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. The guidance within this standard must be applied using either of the following transition methods: (1) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients; or (2) a modified retrospective approach with the cumulative effect of initially adopting the standard recognized at the date of adoption (which requires additional footnote disclosures). The Company chose to adopt ASC 606 using the modified retrospective approach applied to contracts not completed as of the date of adoption. We recognized the cumulative effect of initially applying the new revenue standard, net of tax, as an increase of $2,722 to the opening balance of accumulated deficit. The comparative financial information has not been restated and continues to be reported under the accounting standards in effect for that period. We do not expect the adoption of the new revenue standard to have a material impact on our net income on an ongoing basis.

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 good to customers. Amounts billed to customers for sales tax are not included in revenues.

6

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

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 two revenue streams for which the timing of revenue recognition would change.

1) 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. For furniture associated with projects, the Company determined that control of the furniture was transferred to the customer upon delivery of the furniture to the customer site as the customer is in possession of the product at that time. The revenue attributable to the performance obligation associated with the delivery of the equipment 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 or 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. The revenue associated with unsatisfied performance obligations for furniture is related to installation. The installation is typically completed and the associated revenue is recognized within approximately 90 days following the delivery of the equipment or furniture. The impact of this change in the second quarter of fiscal 2018 was the acceleration of the recognition of $5,388 of revenue and $1,144 of gross profit. The cumulative impact of this change year to date during fiscal 2018 was the acceleration of the recognition of $5,928 of revenue and $1,179 of gross profit.

2) Professional development or training days are provided to customers that order certain of the Company’s curriculum products, the most prominent of which being 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. Prior to the adoption of ASC 606, the Company accrued the estimated costs associated with providing training days, when the product was shipped. 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. Training typically is completed and revenue is recognized within six to nine months following the shipment of the product. As the value of the training provided in both the three and six month periods ended June 30, 2018 exceeded the value of training days billed in the respective periods, the adoption of ASC 606 resulted in incremental revenue, gross profit and SG&A in each period. The impact of this change in the second quarter of fiscal 2018 was the recognition of $314 of both revenue and gross profit and SG&A of $175. The cumulative impact of this change year to date during fiscal 2018 was the recognition of $497 of both revenue and gross profit and SG&A of $221.

3) Certain customer contracts specifically indicate that the customer obtains control of the product upon delivery. While the Company’s sales orders, invoices and catalog order forms indicate that control of the products has passed to the customer at time of shipment, a review of contracts has identified certain contracts for which the language associated with control of the product is deemed to supercede invoice terms and conditions. In the second quarter of fiscal 2018, this change resulted in the deferral of $1,016 of revenue and $394 of gross profit. The impact of this change as of 2017 year end and the end of the first quarter 2018 was immaterial, due primarily to the Company’s seasonality.

7

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

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. Under the prior guidance, the Company capitalized catalog costs and amortized over the period within which revenues attributable to the catalogs were generated, which was generally one year or less. The impact of this change resulted in lower catalog expense in SG&A by $1,697 in the second quarter of fiscal 2018. This reduction reflects the difference between catalog costs incurred during the period and the catalog amortization expense prior to adopting ASC 606. The cumulative impact of this change year to date during fiscal 2018 was the acceleration of the recognition of catalog costs in SG&A of $2,527.

8

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

The cumulative effect of the changes made to our consolidated condensed balance sheet on December 31, 2017 (the first day of our fiscal 2018) for the adoption of the new revenue standard was as follows:

	Reported as of December 30, 2017			Adjustments Due to ASC 606			As Adjusted December 31, 2017
ASSETS
Accounts receivable (3)	$	69,297		$	458		$	69,755
Inventories, net		77,162			(1,468	)		75,694
Deferred catalog costs		3,450			(3,450	)		—
Prepaid expenses and other current assets (1) (3)		14,121			2,043			16,164
Deferred taxes long-term		2,046			947			2,993
Total Assets		312,407			(1,470	)		310,937
LIABILITIES
Contract liabilities (2) (4)		3,454			2,723			6,177
Other accrued liabilities (2) (3)		15,442			(1,471	)		13,971
Total Liabilities		204,916			1,252			206,168
STOCKHOLDERS’ EQUITY
Accumulated deficit	$	(14,174	)	$	(2,722	)	$	(16,896	)
Total Stockholders’ Equity		107,491			(2,722	)		104,769
Total Liabilities and Stockholders’ Equity	$	312,407		$	(1,470	)	$	310,937

(1) Contract assets of $1,750 are included in Prepaid expenses and other current assets above.    

(2) Customer rebates of $1,689 have been reclassified from Other accrued liabilities to Contract liabilities.    

(3) The reserve for customer returns, refunds and allowances, in the amount of $458, was reclassified as follows: a) The amount associated with refund liabilities, of $755, has been reclassified to Other accrued liabilities; and b) The amount associated with the estimated value of returned product, of $297, has been reclassified to Prepaid expenses and other current assets.

(4) The amounts classified as Deferred revenues in the Company’s December 30, 2017 consolidated balance sheets, have been reclassified to Contract liabilities in accordance with ASC 606.         

9

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

The cumulative effect of the adjustments to our June 30, 2018 condensed consolidated statement of operations and condensed consolidated balance sheet for the adoption of ASC 606 were as follows:

	For the Three Months Ended								For the Six Months Ended
	June 30, 2018								June 30, 2018
	Prior to Adoption of ASC 606			Adjustments Due to ASC 606			As Reported		Prior to Adoption of ASC 606			Adjustments Due to ASC 606			As Reported
Revenues	$	164,586		$	4,686		$	169,272	$	263,151		$	5,408		$	268,559
Cost of revenues		106,906			3,622			110,528		169,567			4,127			173,694
Gross profit		57,680			1,064			58,744		93,584			1,281			94,865
Selling, general and administrative expenses		55,330			(1,522	)		53,808		108,198			2,748			110,946
Operating income (loss)		2,179			2,586			4,765		(15,096	)		(1,467	)		(16,563	)
Income (loss) before benefit from income taxes		(1,509	)		2,586			1,077		(22,290	)		(1,467	)		(23,757	)
Benefit from (payment of) income taxes		412			647			1,059		(4,730	)		(367	)		(5,097	)
Net income (loss)	$	(1,921	)	$	1,939		$	18	$	(17,560	)	$	(1,100	)	$	(18,660	)

	June 30, 2018
	Prior to Adoption of ASC 606			Adjustments Due to ASC 606			As Reported
ASSETS
Accounts receivable (3)	$	90,733		$	(263	)	$	90,470
Inventories, net		137,354			(5,593	)		131,761
Deferred catalog costs		5,977			(5,977	)		—
Prepaid expenses and other current assets (1) (3)		12,907			8,247			21,154
Deferred taxes long-term		7,980			367			8,347
Total Assets		375,986			(3,219	)		372,767
LIABILITIES
Contract liabilities (2)	$	3,687		$	2,117		$	5,804
Other accrued liabilities (2) (3)		12,838			(573	)		12,265
Total Liabilities		284,455			1,544			285,999
STOCKHOLDERS’ EQUITY
Accumulated deficit	$	(30,793	)	$	(4,763	)	$	(35,556	)
Total Stockholders’ Equity		91,531			(4,763	)		86,768
Total Liabilities and Stockholders’ Equity	$	375,986		$	(3,219	)	$	372,767

(1) Contract assets of $7,678 are included in Prepaid expenses and other current assets.         

(2) Customer rebates of $1,578 have been reclassed from Other accrued liabilities to Contract liabilities.         

(3) The reserve for customer returns, refunds and allowances, in the amount of $753, was reclassified as follows: a) The amount associated with refund liabilities, of $1,322, has been reclassified to Other accrued liabilities; and b) The amount associated with the estimated value of returned product, of $569, has been reclassified to Prepaid expenses and other current assets.

The below table shows the Company’s disaggregated revenues for the three months and six months ended June 30, 2018 and July 1, 2017.

10

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

	For the Three Months Ended						For the Six Months Ended
	June 30, 2018			July 1, 2017			June 30, 2018			July 1, 2017
Distribution revenues by product line:
Supplies	$	80,241		$	76,756		$	133,673		$	134,955
Furniture		52,354			42,774			76,305			65,370
Instruction & Intervention		14,337			10,238			26,858			16,420
AV Tech		4,089			4,502			8,366			9,286
Agendas		4,588			6,476			4,834			6,746
Freight Revenue		2,581			2,454			4,387			3,993
Customer Allowances / Discounts		(2,415	)		(1,856	)		(4,028	)		(3,473	)
Total Distribution Segment	$	155,775		$	141,344		$	250,395		$	233,297
Curriculum revenues by product line:
Science	$	13,497		$	18,833		$	18,164		$	23,991
Total Curriculum Segment	$	13,497		$	18,833		$	18,164		$	23,991
Total revenues	$	169,272		$	160,177		$	268,559		$	257,288

Revenues from the sale of products comprise the significant portion of revenues in all product categories in the above table. 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.

The Company had a contract liability balance of $6,177 as of December 31, 2017, after the cumulative effects related to the adoption of ASC 606. During the six months ended June 30, 2018, the Company recognized into revenues $4,684, which had been included in the contract liability balance as of December 31, 2017.

NOTE 5 – BUSINESS COMBINATIONS

On August 18, 2017, the Company completed the acquisition of the assets of Triumph Learning, LLC (“Triumph Learning”) pursuant to the terms of an Asset Purchase Agreement dated August 18, 2017 (the “Purchase Agreement”) by and among School Specialty and Triumph Learning, LLC, a Delaware limited liability company. School Specialty acquired all the assets of Triumph Learning for $20,376 plus the assumption of certain liabilities. At closing, $18,114 of the total purchase price was paid using the Company’s existing debt facilities (see Note 12 – Debt). The Company drew $14,000 from the delayed draw term loan feature of its New Term Loan (as defined in Note 12) and drew $4,114 from its ABL Facility (as defined in Note 12) to fund this portion of the purchase price. In November 2017, the Company paid $912 as a final working capital adjustment, which was funded through the Company’s ABL Facility. The remaining purchase price in excess of the cash paid at closing represents the discounted fair value of the contingent portion of the purchase price. The contingent portion of the purchase price is 4.5% of net Triumph Learning revenues from certain Triumph Learning products over the period August 18, 2017 through December 18, 2018, subject to a maximum consideration of $1.5 million. The contingent portion of the purchase price is scheduled to be paid quarterly over the above-mentioned period, and $343 of this contingent obligation was paid in the first quarter ended March 31, 2018 and $282 was paid in the second quarter ended June 30, 2018. The maximum present value of the contingent portion of the purchase price is $1,350. The Company accounted for this acquisition as a business combination in accordance with ASC 805.

11

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

Triumph Learning is a publisher of state-specific assessment preparation, and supplemental and intervention curriculum products for theK-12 education market. For over 25 years, Triumph Learning’s flagship product, Coach, has been utilized throughout education, providing educational facilities and teachers withhands-on test preparation books for English and Language Arts (ELA), Math, Science and Social Studies, with materials customized to state-specific best practices, along with a comprehensive series of supplemental and intervention resources for Math, ELA and Science. Solutions are delivered through multiple platforms, including both print and digital, as well as through third-party platforms and applications. Triumph Learning’s products are complementary to School Specialty’s current offering and others that it intends to bring to market, as it expands its product offering in the Instruction & Intervention category. There are also significant potential synergies beyond the product offering as the Company anticipates the acquisition will result in a broader and more effective selling organization and an extended customer reach that will enable the Company to deliver a true blended learning solution to its customers.

School Specialty incurred acquisition and integration costs of $1,404 in the first and second quarters of 2018 and $3,203 in the third and fourth quarters of fiscal 2017 related to the Triumph Learning acquisition. These costs included legal, due diligence and integration-related costs and are recorded as SG&A.

The Company engaged a third party to complete a full valuation of the assets, including any identified intangible assets of Triumph Learning. School Specialty’s estimates and assumptions are subject to change during the measurement period (up to one year from the acquisition date), as the Company finalizes the valuations of certain liabilities assumed in connection with the acquisition. The table below summarizes the fair value amounts of the $20,376 of net assets acquired.

Accounts receivable	$	4,409
Inventory		2,307
Prepaids		476
Property, plant & equipment		920
Product Development		4,273
Coach Brand		3,887
Customer Relationships		1,994
Goodwill		5,253
Total assets	$	23,519
Accounts payable	$	2,251
Other accruals		892
Deferred revenue		—
Total liabilities	$	3,143
Cash paid	$	20,376

The unaudited pro forma consolidated results in the following table include the Company’s reported results for each respective period and the historical results of Triumph Learning for those periods. The unaudited condensed combined statements of operations for the three and six month periods ended July 30, 2018 and the unaudited pro forma condensed combined statements of operations for the three months and six months ended July 1, 2017 give effect to the acquisition of Triumph Learning as if it had occurred at the beginning of the periods presented.

Anticipated synergies from the combined operations have not been incorporated into the pro forma results as synergies are preliminary. Net income does reflect the incremental interest expense which would have been incurred if the acquisition had been completed at the beginning of the periods presented.

12

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

CONDENSED COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)

(In Thousands, Except Per Share Amounts)

	For the Three Months Ended					For the Six Months Ended
	June 30, 2018		July 1, 2017			June 30, 2018			July 1, 2017
Revenues	$	169,272	$	165,843		$	268,559		$	270,512
Net income (loss)		18		(858	)		(18,660	)		(17,642	)
Weighted average shares outstanding:
Basic EPS		7,000		7,000			7,000			7,000
Diluted EPS		7,129		7,077			7,000			7,000
Net income per Share:
Basic	$	0.00	$	(0.12	)	$	(2.67	)	$	(2.52	)
Diluted	$	0.00	$	(0.12	)	$	(2.67	)	$	(2.52	)

NOTE 6 – INCOME TAXES

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 2015. 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 Company has net operating loss (“NOL”) carryforwards of approximately $3,400 for federal and approximately $3,400 for state. The federal NOL begins to expire in 2037. In December 2017, the Tax Act was enacted into law, significantly changing income tax law that affects U.S. corporations. Key changes included a corporate tax rate reduction from 35 percent to 21 percent effective January 1, 2018, expensing of certain qualified property, significant changes to the U.S international tax system such as aone-time transition tax on accumulated foreign earnings, and how foreign earnings are subject to U.S. tax. Due to the timing of the Tax Act and additional guidance and interpretations that may be issued in the future, the Company has not completed its analysis of the effects of the Tax Act as it relates to theone-time transition tax on accumulated foreign earnings. The Company has estimated the impact of theone-time transition tax to be between zero and $1,000. For the period ended December 30, 2017, the Company recorded a tax benefit of $704 associated with there-measurement of deferred taxes for the corporate rate reduction and a provisional tax provision of zero for theone-time transition tax. The provisional estimates will be adjusted during the measurement period of twelve months from the initial date of the Tax Act, defined under SAB 118, based upon the Company’s ongoing analysis of its data and tax positions along with new guidance from regulators and interpretations of the law.

The Company has considered the effect of U.S. Internal Revenue Code (“Code”) Section 382 on our ability to utilize existing net operating losses and foreign tax credit carryforwards. Section 382 imposes limits on the amount of tax attributes that can be utilized where there has been an ownership change as defined under the Code. The Company has determined that an ownership change occurred in fiscal 2013 that was subject to Section 382. Due to the application of Section 382, certain federal and state deferred tax attributes, such as foreign tax credits, were subject to future limitation.

13

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

In the fourth quarter of fiscal 2017, the Company decreased its valuation allowance by approximately $1,700. Based on the Company’s trend of positive earnings before tax plus projections of the future earnings before tax we believe it is more likely than not that we will realize the tax benefit associated with $1,700 of net deferred tax assets. As of December 30, 2017, the Company continued to maintain a valuation allowance of $7,263 against its foreign tax credits and capital loss carryovers based on projections that reflect minimal to zero foreign source income and capital gains. The Company previously had concluded that the realization of substantially all its deferred tax assets did not meet the more likely than not threshold and recorded a tax valuation allowance due to the lack of taxable income. As of June 30, 2018, the Company had an immaterial amount of unremitted earnings from foreign investments.

The balance of the Company’s liability for unrecognized income tax benefits, net of federal tax benefits, at June 30, 2018, December 30, 2017, and July 1, 2017, was $792, $172, and $169, 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 consolidated statements of operations. The amounts of accrued interest and penalties included in the liability for uncertain tax positions are not material.

NOTE 7 – STOCKHOLDERS’ EQUITY

Changes in condensed consolidated stockholders’ equity during the six months ended June 30, 2018 and July 1, 2017, were as follows:

(in thousands)	Common Stock		Capital in Excess of Par Value		Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance, December 30, 2017	$	7	$	123,083	$	(14,174	)	$	(1,425	)	$	107,491
Cumulative effect of change in accounting principle (1)		—		—		(2,722	)		—			(2,722	)
Net loss		—		—		(18,660	)		—			(18,660	)
Share-based compensation expense		—		1,066		—			—			1,066
Foreign currency translation adjustment		—		—		—			(407	)		(407	)
Balance, June 30, 2018	$	7	$	124,149	$	(35,556	)	$	(1,832	)	$	86,768
Balance, December 31, 2016	$	7	$	120,849	$	(20,953	)	$	(1,784	)	$	98,119
Net loss		—		—		(16,640	)		—			(16,640	)
Share-based compensation expense		—		1,091		—			—			1,091
Foreign currency translation adjustment		—		—		—			184			184
Balance, July 1, 2017	$	7	$	121,940	$	(37,593	)	$	(1,600	)	$	82,754

(1) – See Note 4, “Change in Accounting Principle,” of the notes to condensed consolidated financial statements for further discussion.

14

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

NOTE 8 – EARNINGS PER SHARE

Earnings Per Share

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

	Income (loss) (Numerator)			Weighted Average Shares (Denominator)		Per Share Amount
Three months ended June 30, 2018:
Basic EPS	$	18			7,000	$	0.00
Effect of dilutive stock options		—			—
Effect of dilutive restricted stock units		—			129
Diluted EPS	$	18			7,129	$	0.00
Three months ended July 1, 2017:
Basic EPS	$	136			7,000	$	0.02
Effect of dilutive stock options		—			—
Effect of dilutive restricted stock units		—			77
Basic and diluted EPS	$	136			7,077	$	0.02
	Income (loss) (Numerator)			Weighted Average Shares (Denominator)		Per Share Amount
Six months ended June 30, 2018:
Basic EPS	$	(18,660	)		7,000	$	(2.67	)
Effect of dilutive stock options		—			—
Effect of dilutive restricted stock units		—			—
Basic and diluted EPS	$	(18,660	)		7,000	$	(2.67	)
Six months ended July 1, 2017:
Basic EPS	$	(16,640	)		7,000	$	(2.38	)
Effect of dilutive stock options		—			—
Effect of dilutive restricted stock units		—			—
Basic and diluted EPS	$	(16,640	)		7,000	$	(2.38	)

The Company had weighted average stock options outstanding of 714 for both the three months ended June 30, 2018 and July 1, 2017, which were not included in the computation of diluted EPS because they were anti-dilutive. The Company had weighted average stock options outstanding of 718 and 623 for the six months ended June 30, 2018 and July 1, 2017, 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 214 and 205 for the three and six months ended June 30, 2018, respectively. The Company had weighted average restricted stock units outstanding of 196 for the three and six month periods ended July 1, 2017.

For the three month period ended June 30, 2018 and July 1, 2017, 85 and 128 of the restricted stock units were not included in the computation of diluted EPS because they were anti-dilutive. For the six month periods ended June 30, 2018 and July 1, 2017, no portion of the restricted stock units were not included in the computation of diluted EPS because they were anti-dilutive due to the net loss.

On August 15, 2017, the Company’s stockholders approved an increase in the number of authorized shares of School Specialty common stock from 2,000 shares to 50,000 shares, for the purpose of, among other things, effecting aseven-for-one stock split of School Specialty’s shares. The stock split became effective on August 23, 2017, and the number of outstanding shares of School Specialty stock increased from 1,000 to 7,000. All previously stated values have been restated to adjust for thisseven-for-one stock split.

15

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

NOTE 9 – SHARE-BASED COMPENSATION EXPENSE

As of June 30, 2018, 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 share available under the 2014 Plan by an additional 700 shares.

Options

The Compensation Committee of the Board of Directors of the Company (“Compensation Committee”) granted 238 stock option awards during the six month period ended July 1, 2017 to members of management including its CEO. The options awarded to the Company’s CEO will vest as toone-fourth of the options on the first four anniversaries of the date of the award. The options that were awarded to the other members of management will vest as toone-half of the options on the second anniversary of the date of the award and as toone-fourth of the options on each of the third and fourth anniversaries of the award date. The Company did not grant stock option awards during the three and six month periods ended June 30, 2018.

The fair-value of the options granted in the three month period ended July 1, 2017 was $10.08 per share. The fair value of the options is estimated on the measurement date using the Black-Scholes single option pricing model. The assumptions included a risk-free rate of 1.92%, expected volatility of 59% and an expected term of 6.3 years.

The fair-value of the options granted in the six month period ended July 1, 2017 was $10.14 per share. The fair value of the options is estimated on the measurement date using the Black-Scholes single option pricing model. The assumptions included a risk-free rate of 2.31%, expected volatility of 59% and an expected term of 6.3 years.

A summary of option transactions for the six months ended June 30, 2018 and July 1, 2017 were as follows:

	Options Outstanding					Options Exercisable
	Options			Weighted- Average Exercise Price		Options		Weighted- Average Exercise Price
Balance at December 30, 2017		721		$	18.57		350	$	18.57
Granted		—
Exercised		—
Canceled		(14	)		18.57
Balance at June 30, 2018		707		$	18.57		433	$	18.57
Balance at December 31, 2016		497		$	18.57		224	$	18.57
Granted		238			18.57
Exercised		—
Canceled		(21	)		18.57
Balance at July 1, 2017		714		$	18.57		315	$	18.57

The weighted average life remaining of the stock options outstanding as of June 30, 2018 was 6.9 years and as of July 1, 2017 was 7.9 years.

16

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

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. The RSUs have time-based vesting provisions, withone-third of the RSUs vesting on each March 15 of 2019, 2020 and 2021. In addition, the Compensation Committee granted an aggregate of 15 RSUs under the 2014 Plan to each of thenon-employee members of the Board of Directors. The RSUs have time-based vesting provisions, with all of the RSUs vesting on June 18, 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. The RSUs are performance-based. A certain percentage of the RSUs will 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 will vest shall be 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 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 is 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 vest will be settled in shares of Company common stock

Stock Appreciation Rights

On May 28, 2014, the Board granted 39 stock appreciation rights (“SARs”) to each of thenon-employee members of the Board under the 2014 Plan. On September 28, 2015, the Board granted 39 SARs to each of the two newnon-employee members of the Board. On January 17, 2018, the Board granted 39 SARs to its newnon-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 exceeded each SAR’s exercise price as of June 30, 2018, expense of $99 was recorded for the SARs during the three months ended June 30, 2018. The SARs vested as toone-half of the SARs on the second anniversary of the date of grant and vested as toone-fourth of the SARs on each of the third and fourth anniversaries of the date of grant. 39 of the outstanding SARs were exercised by a member of the Board and $31 of expense was recognized. Total SARs that remain outstanding as of June 30, 2018 are 154.

17

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

The following table presents the share-based compensation expense recognized for the three and six month periods ended June 30, 2018 and July 1, 2017:

	For the Three Months Ended
	June 30, 2018				July 1, 2017
	Gross		Net of Tax		Gross		Net of Tax
Stock Options	$	267	$	200	$	322	$	196
SARs		131		98		—		—
RSUs		227		170		189		115
Total stock-based compensation expense	$	625			$	511
	For the Six Months Ended
	June 30, 2018				July 1, 2017
	Gross		Net of Tax		Gross		Net of Tax
Stock Options	$	651	$	488	$	704	$	430
SARs		131		98		—		—
RSUs		415		311		387		236
Total stock-based compensation expense	$	1,197			$	1,091

The stock-based compensation expense is reflected in selling, general and administrative (“SG&A”) expenses in the accompanying consolidated statements of operations. The Company records actual forfeitures in the period the forfeiture occurs. Stock-based compensation expense associated with stock options and RSUs arenon-cash expenses which are recorded to additional paid in capital. Stock-based compensation expense associated with SARs must be cash-settled and are recorded to other accrued liabilities until settled.

The total unrecognized share-based compensation expense as of June 30, 2018 and July 1, 2017 was as follows:

	June 30, 2018		July 1, 2017
Stock Options, net of actual forfeitures	$	1,701	$	3,335
SARs		55		—
RSUs		2,921		1,378

18

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

NOTE 10 – GOODWILL AND OTHER INTANGIBLE ASSETS

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

June 30, 2018	Gross Value		Accumulated Amortization			Net Book Value
Amortizable intangible assets:
Customer relationships(10-13 years)	$	13,294	$	(4,601	)	$	8,693
Publishing rights (20 years)		4,000		(1,017	)		2,983
Trademarks (20 years)		26,587		(5,948	)		20,639
Developed technology (7 years)		6,600		(4,793	)		1,807
Content (5 years)		4,400		(4,400	)		—
Perpetual license agreements (5 years)		1,200		(1,200	)		—
Favorable leasehold interests (10 years)		2,160		(1,098	)		1,062
Total intangible assets	$	58,241	$	(23,057	)	$	35,184
December 30, 2017	Gross Value		Accumulated Amortization			Net Book Value
Amortizable intangible assets:
Customer relationships(10-13 years)	$	13,294	$	(4,067	)	$	9,227
Publishing rights (20 years)		4,000		(917	)		3,083
Trademarks (20 years)		26,587		(5,283	)		21,304
Developed technology (7 years)		6,600		(4,321	)		2,279
Content (5 years)		4,400		(4,400	)		—
Perpetual license agreements (5 years)		1,200		(990	)		210
Favorable leasehold interests (10 years)		2,160		(1,100	)		1,060
Total intangible assets	$	58,241	$	(21,078	)	$	37,163
July 1, 2017	Gross Value		Accumulated Amortization			Net Book Value
Amortizable intangible assets:
Customer relationships(10-13 years)	$	11,300	$	(3,549	)	$	7,751
Publishing rights (20 years)		4,000		(817	)		3,183
Trademarks (20 years)		22,700		(4,635	)		18,065
Developed technology (7 years)		6,600		(3,850	)		2,750
Content (5 years)		4,400		(4,400	)		—
Perpetual license agreements (5 years)		1,200		(980	)		220
Favorable leasehold interests (10 years)		2,160		(882	)		1,278
Total intangible assets	$	52,360	$	(19,113	)	$	33,247

The gross values were determined by valuations performed either as part of fresh start accounting or the acquisition of Triumph Learning. In addition to the intangible assets above, the Company recorded $26,842 of goodwill. This includes $5,253 of goodwill associated with the purchase price allocation for the Triumph Learning acquisition.

Intangible asset amortization expense was including in selling, general and administrative expense. Intangible asset amortization expense for the three month periods ended June 30, 2018 and July 1, 2017, was $979 and $901, respectively. Intangible asset amortization expense for the six month periods ended June 30, 2018 and July 1, 2017, was $1,978 and $1,802, respectively.

19

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

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

Fiscal 2018 (6 months remaining)	$	1,878
Fiscal 2019		3,757
Fiscal 2020		3,207
Fiscal 2021		2,814
Fiscal 2022		2,814
Fiscal 2023		2,688

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

	Distribution Segment		Curriculum Segment		Total
Goodwill	$	22,262	$	4,580	$	26,842
Balance at June 30, 2018	$	22,262	$	4,580	$	26,842

NOTE 11 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

	June 30, 2018			December 30, 2017			July 1, 2017
Projects in progress	$	2,983		$	5,186		$	11,284
Buildings and leasehold improvements		2,971			3,048			3,298
Furniture, fixtures and other		64,828			60,046			49,383
Machinery and warehouse equipment		14,595			13,813			13,155
Total property, plant and equipment		85,377			82,093			77,120
Less: Accumulated depreciation		(53,314	)		(48,514	)		(44,940	)
Net property, plant and equipment	$	32,063		$	33,579		$	32,180

Depreciation expense for the three and six month periods ended June 30, 2018 and July 1, 2017 was $2,955 and $2,425 and $7,414 and $4,671, respectively.

NOTE 12 – DEBT

Long-term debt consisted of the following:

`	June 30, 2018			December 30, 2017			July 1, 2017
ABL Facility, maturing in 2022	$	61,500		$	—		$	44,132
New Term Loan, maturing in 2022		112,499			121,938			109,313
Unamortized New Term Loan Debt Issuance Costs		(2,872	)		(3,205	)		(3,533	)
Deferred Cash Payment Obligations, maturing in 2019		23,910			22,830			21,819
Total debt		195,037			141,563			171,731
Less: Current maturities		(64,600	)		(10,989	)		(46,882	)
Total long-term debt	$	130,437		$	130,574		$	124,849

ABL Facility

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

20

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

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) the30-day LIBOR rate plus 1.00% per annum) (the “Base Rate”) plus an applicable margin (equal to a specified margin based on the interest rate elected by the Company, the fixed charge coverage ratio under the ABL Facility and the applicable point in the life of the ABL Facility (the “Applicable Margin”)), or (2) a LIBOR rate plus the Applicable Margin (the “LIBOR Rate”). Interest on loans under the ABL Facility bearing interest based upon the Base Rate will be due monthly in arrears, and interest on loans bearing interest based upon the LIBOR Rate will be due on the last day of each relevant interest period or, if sooner, on the respective dates that fall every three months after the beginning of such interest period.

In November 2014, the Company amended the ABL Facility. The main purpose for the amendment was to provide the Company additional flexibility in its execution of certain restructuring actions by increasing the cap on the amount that may be added back under the definition of earnings before interest, taxes, depreciation, and amortization (“EBITDA”) fornon-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 “ABL 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 ABL Amendment extends the maturity of the ABL Facility, as amended, to April 7, 2022 (“ABL Termination Date”), provided that the ABL Termination Date will automatically become February 7, 2022 unless the New Term Loan (as defined below) has been repaid, prepaid, refinanced, redeemed, exchanged, amended or otherwise defeased or discharged prior to such date.

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 June 30, 2018 was 5.33%, which includes interest on borrowings of $455, amortization of loan origination fees of $104 and commitment fees on unborrowed funds of $73. The effective interest rate under the ABL Facility for the three months ended July 1, 2017 was 4.75%, which includes interest on borrowings of $250, amortization of loan origination fees of $104 and commitment fees on unborrowed funds of $83.

21

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

The effective interest rate under the ABL Facility for the six months ended June 30, 2018 was 6.54%, which includes interest on borrowings of $538, amortization of loan origination fees of $208 and commitment fees on unborrowed funds of $181. As of June 30, 2018, the outstanding balance on the ABL Facility was $61,500. The effective interest rate under the ABL Facility for the six months ended July 1, 2017 was 8.03%, which includes interest on borrowings of $263, amortization of loan origination fees of $299 and commitment fees on unborrowed funds of $199. As of July 1, 2017, the outstanding balance on the ABL Facility was $44,132. The Company has estimated that the fair value of its ABL Facility (valued under level 3) as of June 30, 2018 approximated the carrying value of $61,500.

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.

Term Loan

On June 11, 2013, the Company entered into a Credit Agreement (the “Term Loan Credit Agreement”) among the Company, Credit Suisse AG, as Administrative Agent and Collateral Agent, and the Lenders defined in the Term Loan Credit Agreement (the “Term Loan Lenders”). In November 2014, the Company amended the Term Loan Credit Agreement. 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 consolidated EBITDA fornon-recurring, unusual or extraordinary charges, business optimization expenses or other restructuring charges or reserves and cash expenses relating to earn outs or similar obligations.

Under the Term Loan Credit Agreement, the Term Loan Lenders agreed to make a term loan (the “Term Loan”) to the Company in aggregate principal amount of $145,000, including an original issue discount of $2,900. The outstanding principal amount of the Term Loan bore interest at a rate per annum equal to the applicable LIBOR rate (with a 1% floor) plus 8.50%, or the base rate plus a margin of 7.50%. Interest on loans under the Term Loan Credit Agreement bearing interest based upon the base rate were due quarterly in arrears, and interest on loans bearing interest based upon the LIBOR Rate were 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.

The remaining principal amount of the Term Loan, plus accrued interest, was repaid in full on April 7, 2017, and the Term Loan Credit Agreement was terminated on April 7, 2017.

The Term Loan Credit Agreement contained customary events of default and financial, affirmative and negative covenants, including but not limited to quarterly financial covenants, relating to the Company’s (1) minimum interest coverage ratio and (2) maximum net total leverage ratio and restrictions on indebtedness, liens, investments, asset dispositions and dividends and other restricted payments. The Company was in compliance with the financial covenants of the loan during the period of time in which the loan was outstanding during fiscal 2017.    

The Term Loan required the Company to enter into an interest rate hedge, within 90 days of its effective date, in an amount equal to at least 50% of the aggregate principal amount outstanding under the Term Loan. The purpose of the interest rate hedge was to effectively subject a portion of the Term Loan to a fixed or maximum interest rate. As such, the Company entered into an interest rate swap agreement on August 27, 2013 that effectively fixed the interest payments on a portion of the Company’s variable-rate debt. The swap, which terminated on September 11, 2016, effectively fixed the LIBOR-based interest rate on the debt in the amount of the notional amount of the swap at 9.985%. The Company did not enter into a subsequent interest rate swap after the termination of the above-mentioned interest rate swap.

22

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

Under this swap agreement, the Company paid the counterparty interest on the notional amount at a fixed rate per annum of 1.485% and the counterparty paid the Company interest on the notional amount at a variable rate per annum equal to the greater of1-month LIBOR or 1.0%. The notional amounts did not represent amounts exchanged by the parties, and thus were not a measure of exposure of the Company.    

New Term Loan

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

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

The New Term Loan matures on April 7, 2022. The New Term Loan requires scheduled quarterly principal payments of 0.625% of the original principal amount which commenced June 30, 2017 and continue through the quarter ended March 31, 2019. Subsequent to March 31, 2019, the scheduled quarterly principal payments are 1.250% of the original principal amount. Required scheduled quarterly principal payments on borrowings under the delayed-draw feature begin in the quarter following a draw on this feature. In addition to scheduled quarterly principal repayments, the New Term Loan Agreement requires prepayments at specified levels upon the Company’s receipt of net proceeds from certain events, including but not limited to certain asset dispositions, extraordinary receipts, and the issuance or sale of any indebtedness or equity interests (other than permitted issuances or sales). The New Term Loan Agreement also requires prepayments at specified levels from the Company’s excess cash flow. In the first quarter of fiscal 2018, the Company made a $7,801 repayment of principal based on fiscal 2017 excess cash flow. The Company is also permitted to voluntarily prepay the New Term Loan in whole or in part. Voluntary prepayments made before April 7, 2018 will be 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, will be subject to a 1.0% early prepayment fee. Voluntary prepayments made on or after April 7, 2019 will not be subject to an early payment fee. All prepayments of the loans will be applied first to that portion of the loans comprised of prime rate loans and then to that portion of loans comprised of LIBOR rate loans. The New Term Loan Agreement contains customary events of default and financial, affirmative and negative covenants, including but not limited to quarterly financial covenants commencing with the fiscal quarter ending September 30, 2017 relating to the Company’s fixed charge coverage ratio and net senior leverage ratio, and an annual limitation on capital expenditures and product development investments, collectively. The Company was in compliance with all such financial covenants during the second quarter of fiscal 2018.

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.

23

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

The effective interest rate under the New Term Loan for the three months ended June 30, 2018 was 8.70%, which includes interest on borrowings of $2,310 and amortization of loan origination fees of $180. The effective interest rate under the New Term Loan for the three months ended July 1, 2017 was 8.27%, which includes interest on borrowings of $2,139 and amortization of loan origination fees of $170.

As of July 1, 2017, the outstanding balance on the New Term Loan Credit Agreement was $109,313. Of this amount, $2,750 was reflected as currently maturing, long-term debt in the accompanying condensed consolidated balance sheets.

The effective interest rate under the New Term Loan for the six months ended June 30, 2018 was 8.63%, which includes interest on borrowings of $4,740 and amortization of loan origination fees of $358. As of June 30, 2018, the outstanding balance on the New Term Loan Credit Agreement was $112,499. Of this amount, $3,100 was reflected as currently maturing, long-term debt in the accompanying condensed consolidated balance sheets.

The Company has estimated that the fair value of its New Term Loan (valued under Level 3) as of June 30, 2018 approximated the carrying value of $112,499.

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 quarterlypaid-in-kind interest of 5% per annum beginning on June 11, 2013 (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 quarterlypaid-in-kind interest of 10% per annum. All deferred cash payment obligations, along with interestpaid-in-kind, are payable in December 2019.

The Company’s reconciliation of general unsecured claims was completed in fiscal 2015. As of June 30, 2018, the Company’s deferred payment obligations were $23,910, 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 $8,721 related to accruedpaid-in-kind interest.

The Company has estimated that the fair value of its Deferred Cash Payment Obligations (valued under Level 3) approximates $23,827 as of June 30, 2018. 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.

24

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

NOTE 13 – CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Changes in accumulated other comprehensive loss during the six months ended June 30, 2018 and July 1, 2017 were as follows:

	Foreign Currency Translation
Accumulated Other Comprehensive Income (Loss) at December 30, 2017	$	(1,425	)
Other comprehensive income (loss) before reclassifications		(236	)
Amounts reclassified from other comprehensive income		—
Accumulated Other Comprehensive Income (Loss) at March 31, 2018	$	(1,661	)
Other comprehensive income (loss) before reclassifications		(171	)
Amounts reclassified from other comprehensive income		—
Accumulated Other Comprehensive Income (Loss) at June 30, 2018	$	(1,832	)
	Foreign Currency Translation
Accumulated Other Comprehensive Income (Loss) at December 31, 2016	$	(1,784	)
Other comprehensive income before reclassifications		45
Amounts reclassified from other comprehensive income		—
Accumulated Other Comprehensive Income (Loss) at April 1, 2017	$	(1,739	)
Other comprehensive income before reclassifications		139
Amounts reclassified from other comprehensive income		—
Accumulated Other Comprehensive Income (Loss) at July 1, 2017	$	(1,600	)

NOTE 14 – RESTRUCTURING

In the three and six months ended June 30, 2018 and July 1, 2017, 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 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
	Distribution		Curriculum		Corporate			Total
Accrued Restructuring Costs at December 31, 2016	$	—	$	—	$	561		$	561
Amounts charged to expense		—		—		173			173
Payments		—		—		(574	)		(574	)
Accrued Restructuring Costs at April 1, 2017	$	—	$	—	$	160		$	160
Amounts charged to expense		—		—		44			44
Payments		—		—		(161	)		(161	)
Accrued Restructuring Costs at July 1, 2017	$	—	$	—	$	43		$	43

NOTE 15 –SEGMENT INFORMATION

The Company determines its operating segments based on the information utilized by the chief operating decision maker, the Company’s Chief Executive Officer, to allocate resources and assess performance. Based on this information, the Company has determined that it operates 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.

Beginning in the second quarter of fiscal 2017, the Company revised its internal management reporting structure whereby: a) a new Instruction & Intervention product line included in the Distribution segment was formed consisting of its Reading product lines, formerly managed as a separate product line, and the supplemental education products, which were previously included within the former Instructional Solutions product line: b) the early learning and special needs products from the former Instructional Solutions product line are reported within the Supplies product line: and, c) the science supplies, previously included in the Science product line, within the Curriculum operating segment, were combined within the Supplies product line within the Distribution operating segment. The Company has revised itsgo-to-market strategy and management structure resulting in the alignment of the reading and science supply products to be consistent with other distributed items within the Distribution operating segment. This change also is consistent with the Company’s internal realignment of the new team sell model established in 2017 whereby every customer, district and territory will have a Distribution team supporting their business. The Distribution sales team focuses on selling all Distribution segment products, including the reading and science supplies items. The Distribution segment offers products primarily to thepre-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 Curriculum segment is a publisher of proprietary core curriculum, primarily FOSS and Delta Science Module products, in the science category within thepreK-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 Form10-K for the fiscal year ended December 30, 2017.

26

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

The Company changed how cost variances are allocated between the two segments beginning in the second quarter of fiscal 2018. The changes were not material. The information prior to the second quarter of fiscal 2018 has been restated to reflect the change in allocation methodologies.

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.

27

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

	Three Months Ended		Three Months Ended		Six Months Ended			Six Months Ended
	June 30, 2018		July 1, 2017		June 30, 2018			July 1, 2017
Revenues:
Distribution	$	155,775	$	141,344	$	250,395		$	233,297
Curriculum		13,497		18,833		18,164			23,991
Total	$	169,272	$	160,177	$	268,559		$	257,288
Gross Profit:
Distribution	$	50,803	$	50,440	$	84,745		$	82,406
Curriculum		7,941		10,055		10,120			12,613
Total	$	58,744	$	60,495	$	94,865		$	95,019
Operating income (loss) and loss before taxes:
Operating income (loss)		4,765		8,730		(16,563	)		(4,387	)
Interest expense and reorganization items, net		3,688		8,495		7,194			12,545
Income (loss) before provision for or benefit from income taxes	$	1,077	$	235	$	(23,757	)	$	(16,932	)

	June 30, 2018		December 30, 2017		July 1, 2017
Identifiable assets:
Distribution	$	301,838	$	230,449	$	276,588
Curriculum		54,629		48,894		56,630
Corporate assets		16,300		33,064		5,089
Total	$	372,767	$	312,407	$	338,307

	Three Months Ended		Three Months Ended		Six Months Ended		Six Months Ended
	June 30, 2018		July 1, 2017		June 30, 2018		July 1, 2017
Depreciation and amortization of intangible assets and development costs:
Distribution	$	4,771	$	3,353	$	10,774	$	6,832
Curriculum		547		964		1,336		1,924
Total	$	5,318	$	4,317	$	12,080	$	8,756
Expenditures for property, plant and equipment, intangible and other assets and development costs:
Distribution	$	3,051	$	4,768	$	6,747	$	8,053
Curriculum		922		662		1,881		1,164
Total	$	3,973	$	5,430	$	8,628	$	9,217

28

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

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

	For the Three Months Ended						For the Six Months Ended
	June 30, 2018			July 1, 2017			June 30, 2018			July 1, 2017
Distribution revenues by product line:
Supplies	$	80,241		$	76,756		$	133,673		$	134,955
Furniture		52,354			42,774			76,305			65,370
Instruction & Intervention		14,337			10,238			26,858			16,420
AV Tech		4,089			4,502			8,366			9,286
Agendas		4,588			6,476			4,834			6,746
Freight Revenue		2,581			2,454			4,387			3,993
Customer Allowances / Discounts		(2,415	)		(1,856	)		(4,028	)		(3,473	)
Total Distribution Segment	$	155,775		$	141,344		$	250,395		$	233,297
Curriculum revenues by product line:
Science	$	13,497		$	18,833		$	18,164		$	23,991
Total Curriculum Segment	$	13,497		$	18,833		$	18,164		$	23,991
Total revenues	$	169,272		$	160,177		$	268,559		$	257,288

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

Revenues associated with the Triumph Learning acquisition are included within the Instruction & Intervention product line. The above table is consistent with disaggregated revenues in Note 4.

NOTE 16 – 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.

29

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Quarterly Overview

School Specialty is a leading provider of innovative solutions that support integrated learning environments. 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 (“instructional solutions”), 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 offering as the 21st Century Safe School™, a concept built around best-practice school environments that support the social, emotional, mental, and physical safety 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 21^st 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 thepreK-12 education market at the state, district and school levels. The Company is expanding its presence outside the education market into channels such as partnerships withe-tailers, and healthcare facilities.

Our goal is to grow profitably as a leading provider of innovative 21^st century classroom solutions including, supplies, furniture products, services and curriculum for the education market and select other markets. We have experienced three consecutive years of overall revenue growth. We expect to continue 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. New revenue streams may include opportunities in areas that could expand our addressable market, such as distribution tonon-education customers, expansion into new product lines, continued growth in oure-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;

• Establish momentum in delivering the “21st Century Safe School™” value proposition;

• Improve the effectiveness of pricing strategies and margin management;

• Development of effective strategies to manage margin in competitive bidding scenarios;

• Increase product line specific sales and support expertise; and

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

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

On August 18, 2017, the Company acquired of the assets of Triumph Learning. Triumph Learning is a publisher of state-specific test preparation, and supplemental and intervention curriculum products for theK-12 education market. For over 25 years, Triumph Learning’s flagship product, Coach, has been utilized throughout education, providing educational facilities and teachers withhands-on test preparation books for ELA, Math, Science and Social Studies, with materials customized to state-specific best practices, along with a comprehensive series of supplemental and intervention resources for Math, ELA and Science. Solutions are delivered through multiple platforms, including both print and digital, as well as through third-party platforms and applications.

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Triumph Learning’s products are complementary to School Specialty’s current offering and others that it intends to bring to market, as it expands its product offering in the Instruction & Intervention category. There are also significant potential synergies beyond the product offering as the Company anticipates the acquisition will result in a broader and more effective selling organization and an extended customer reach that will enable the Company to deliver a true blended learning solution to its customers.

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 vender payments for or the reimbursement of specific, incremental and identifiable costs, and net of early payment discounts.	•  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.
•  Amortization of product development costs.	•  Occupancy and operating costs for our fulfillment centers and office operations.
•  Freight expenses associated with moving merchandise from our vendors to fulfillment centers or from our vendors directly to our customers.	•  Freight expenses associated with moving our merchandise from our fulfillment centers to our customers.
	•  Catalog expenses, offset by vendor payments for or reimbursement of specific, incremental and identifiable costs.
	•  Depreciation and intangible asset amortization expense, other than amortization of product development costs.
The classification of these expenses varies across the distribution industry. As a result, the Company’s gross margin may not be comparable to other retailers or distributors.

Three Months Ended June 30, 2018 Compared to Three Months Ended July 1, 2017

Revenues

Revenue of $169.3 million for the three months ended June 30, 2018 increased by $9.1 million, or 5.7%, as compared to the three months ended July 1, 2017. The adoption of ASC 606 contributed $4.7 million of the incremental revenue, primarily within the Company’s Distribution segment.

Distribution segment revenues of $155.8 million for the three months ended June 30, 2018 increased by 10.2%, or $14.4 million, from the three months ended July 1, 2017. Revenues from the Triumph Learning products, acquired in the third quarter of fiscal 2017 and reported in our Instruction & Intervention product category, contributed $4.1 million of incremental revenues in the second quarter of fiscal 2018. After adjusting for the impact of revenues from our Triumph Learning products, Distribution segment revenues are up in the second quarter by $10.3 million compared to the prior year period. Revenues from the Supplies product category, our largest category, increased approximately $3.5 million in the quarter as incoming orders in the quarter were up over 11% compared to incoming orders in the second quarter orders in 2017. Second quarter revenues in our second largest category, Furniture, were up 22.4%, or $9.6 million, compared to last year’s second quarter. While the adoption of ASC 606 contributed $5.4 million of this increase, incoming orders remained strong throughout the quarter, up 16.5% versus last year’s second quarter. Adjusting the Instruction & Intervention category to exclude the incremental revenue associated with the Triumph Learning products, the category was flat to prior year. Agendas revenues were $4.6 million in the second quarter of fiscal 2018, or down $1.9 million from last year’s second quarter. AV Tech revenues of $4.1 million were down $0.4 million as compared to last year’s second quarter. The revenue performance of Agendas and AV Tech were modestly below our expectations.

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Curriculum segment revenues of $13.5 million for the three months ended June 30, 2018 decreased by 28.3%, or $5.3 million, from the three months ended July 1, 2017. The decline was primarily related to three large school district orders, totaling $4.4 million, which shipped in last year’s second quarter. With limited state science adoption related opportunities in 2018, we expected declines in segment revenues in fiscal 2018. However, based on the current pipeline of state adoption and significant opportunities in open territory states, we anticipate segment growth resuming in 2019 as adoption related opportunities are expected to increase.

Gross Profit

Gross profit for the three months ended June 30, 2018 was $58.7 million, as compared to $60.5 million for the three months ended July 1, 2017. Gross margin for the three months ended June 30, 2018 was 34.7%, as compared to 37.8% for the three months ended July 1, 2017.

Distribution segment gross margin was 32.6% for the three months ended June 30, 2018, as compared to 35.7% for the three months ended July 1, 2017. Rate variances at a product level negatively impacted gross margins by 250 basis points in the current year second quarter. These negative rate variances are related to certain state, regional and district-level pricing agreements, which became effective at various points in 2017. In addition, the strategic move to more competitive pricing on commodity items also is a contributing factor the decline. However, these pricing actions have driven growth and customer penetration in fiscal 2018. Higher product development amortization in the current year second quarter resulted in 20 basis points of lower gross margin.

Curriculum segment gross margin was 58.8% for the three months ended June 30, 2018, as compared to 53.4% for the three months ended July 1, 2017. Incremental training revenue in the current year’s second quarter contributed approximately 150 basis points to the gross margin improvement, while favorable lower product costs in the current year contributed approximately 360 basis points to the gross margin improvement. Lower product development amortization in the current year second quarter contributed 30 basis points of the gross margin increase.

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 andout-bound freight costs; catalog costs; general administrative overhead, which includes information systems, accounting, legal and human resources; and, depreciation and intangible asset amortization expense.

SG&A increased $2.1 million in the second quarter of fiscal 2018, from $51.7 million for the three months ended July 1, 2017 to $53.8 million for the three months ended June 30, 2018. The increase in SG&A is primarily related to the Triumph Learning acquisition completed in August 2017, higher transportation costs, and incremental depreciation and amortization. The impact of ASC 606 on second quarter SG&A costs was $1.5 million.

The Company’s acquisition of Triumph Learning during last year’s third quarter resulted in approximately $2.9 million of incremental SG&A costs in the second quarter of 2018 versus last year’s second quarter. Approximately $0.3 million of the costs associated with Triumph Learning were related directly to the integration through the finalization of first quarter 2018 estimates. Transportation costs increased by $1.9 million in the second quarter of fiscal 2018 due to a combination of incremental volume in the quarter and industry-wide increases in freight rates. Depreciation and amortization expense increased by $0.8 million in the current year second quarter related primarily to incremental depreciation associated with the Company’s implementation of its new e-commerce platform.

These increases were partially offset by a combination of $2.0 million of lower catalog expense associated with the adoption of ASC 606, reductions in marketing and selling costs, and lower incentive compensation expense in the quarter.

As a percent of revenue, SG&A decreased from 32.3% for the three months ended July 1, 2017 to 31.8% for the three months ended June 30, 2018.

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Facility exit costs and restructuring

For the three-month period ended June 30, 2018, the Company recorded $0.2 million of facility exit costs and restructuring charges. For the three-month period ended July 1, 2017, the Company recorded $0.1 million of facility exit costs and restructuring charges. The amounts in both periods were entirely related to severance.

Interest Expense

Interest expense decreased from $4.2 million for the three months ended July 1, 2017 to $3.7 million for the three months ended June 30, 2018. The decrease is related to a reduction innon-cash interest of $0.9 million. This decline innon-cash interest was due to lower interest attributable to the Company’s vendor note obligations. The decrease innon-cash interest expense in the second quarter of fiscal 2018 was partially offset by $0.4 million of incremental cash interest associated with an increase in average borrowings in the current quarter. The increase in average borrowings is related to the acquisition of Triumph Learning in the third quarter of fiscal 2017.

Loss on Early Extinguishment of Debt

During the three months ended July 1, 2017, the Company recorded anon-cash charge of $4.3 million related to thewrite-off of $3.1 million of remaining unamortized debt issuance costs and $1.2 million of remaining original issue discount both of which were associated with the term loan that was repaid on April 7, 2017. No such charge was recorded in fiscal 2018.

Provision for (Benefit from) Income Taxes

The provision for income taxes was $1.1 million for the three months ended June 30, 2018, as compared to tax of $0.1 million for the three months ended July 1, 2017.

The effective income tax rate for the three months ended June 30, 2018 and the three months ended July 1, 2017 was 98.3% and 42.1%, respectively. Due to the minimal amount of income before provision for income taxes in both periods, the effective income tax rate is not representative of the full year expected rate as discrete, such realized built-in loss and foreign tax adjustments, tax items in the quarter can have a large impact on the quarterly rate.

Six Months Ended June 30, 2018 Compared to Six Months Ended July 1, 2017

Revenues

Revenue of $268.6 million for the six months ended June 30, 2018 increased by $11.3 million, or 4.4%, as compared to the six months ended July 1, 2017. The adoption of ASC 606 contributed $5.4 million of the incremental revenue, primarily within the Company’s Distribution segment.

Distribution segment revenues of $250.4 million for the six months ended June 30, 2018 increased by 7.3%, or $17.1 million, from the six months ended July 1, 2017. Revenues from the Triumph Learning products, acquired in the third quarter of fiscal 2017 and which are reported in our Instruction & Intervention product category, contributed $11.1 million of incremental revenues in the first six months fiscal 2018. After adjusting for the impact of revenues from our Triumph Learning products, Distribution segment revenues are up in the first six months of 2018 by $6.0 million. Revenues in the first half of 2018 were impacted by peak season orders building later in the season. The Company entered the third quarter of fiscal 2018 with $11.8 million of incremental open orders, or up 15.4%, as compared to open orders entering last year’s third quarter. Although revenues from the Supplies product category declined approximately $1.3 million during the six months ended June 30, 2018, the open orders entering the third quarter in the Supplies category are up year-over-year by $2.7 million. In addition, incoming orders have continued to gain momentum in the third quarter. Third quarter to date incoming orders are up year-over-year by 7.8%, resulting in a 4.9% increase inyear-to-date orders for the Supplies category. Year-to-date revenues in Furniture were up 16.7%, or $10.9 million, compared to 2017. The adoption of ASC 606 drove $5.9 million of this increase year-over-year, although the full-year impact of the adoption of ASC 606 is expected to be minimal. The incoming order rate for Furniture products remains strong asyear-to-date orders were up 12.8% through the end of the second quarter. Third quarter to date Furniture orders are up year-over-year by 21.4% Adjusting the Instruction & Intervention category to exclude the incremental revenue associated with the Triumph Learning products, the category was down 4.0%, or $0.7 million. However, order trends have continued to improve as the year progresses, especially in core proprietary products such as Wordly Wise and Spire, which are up nearly 4%year-to-date. The Company’s Agendas and AV Tech categories are down $1.9 million and $0.9 million, respectively, through the first six months of fiscal 2018. Both the AV Tech and Agenda categories are performing modestly below expectations.

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Curriculum segment revenues of $18.2 million for the six months ended June 30, 2018 decreased by 24.3%, or $5.8 million, from the six months ended July 1, 2017. The limited amount of adoption activity in 2018 and fewer large opportunities in open territory states are contributing to the decline. However, the competitive positioning remains strong and the pipeline for opportunities for 2019 is building.

Gross Profit

Gross profit for the six months ended June 30, 2018 was $94.9 million, as compared to $95.0 million for the six months ended July 1, 2017. Gross margin for the six months ended June 30, 2018 was 35.3%, as compared to 36.9% for the six months ended July 1, 2017. Increased revenues contributed $4.6 million of additional gross profit offset by a combination of a shift in product mix, lower product level gross margins and higher product development amortization.

Distribution segment gross margin was 33.8% for the six months ended June 30, 2018, as compared to 35.3% for the six months ended July 1, 2017. Year-over-year product rate variances had a negative impact on gross margin of 170 basis points, which was partially offset by a shift in product mix, primarily related to the Triumph Learning products. A shift in product mix contributed approximately 50 basis points of gross margin improvement in the first six months of fiscal 2018. Higher product development amortization in the current year second quarter resulted in 30 basis points of lower gross margin. More aggressive pricing in certain large state, regional and district-level pricing agreements, which became effective at various points in 2017 resulted in approximately $3.0 million of the decline. In addition, the strategic move to more competitive pricing on commodity items also is a contributing factor the decline. However, these pricing actions have driven growth and customer penetration in fiscal 2018. The Company expects the year-over-year variance in gross margin associated with certain pricing agreements will stabilize or improve slightly in the second half of fiscal 2018.

Curriculum segment gross margin was 55.7% for the six months ended June 30, 2018, as compared to 52.6% for the six months ended July 1, 2017. Lower product development amortization in the current year second quarter contributed 90 basis points of the gross margin increase. The adoption of ASC 606 contributed approximately 120 basis points of the gross margin increase in the first six month of fiscal 2018 due to the increase in training revenues in the first half of 2018 as compared to the first half of 2017. The remaining difference in gross margin is related to a combination of year-over-year changes in product costs.

Selling, General and Administrative Expenses

SG&A increased $11.8 million in the first six months of fiscal 2018, from $99.2 million for the six months ended July 1, 2017 to $110.9 million for the six months ended June 30, 2018. The increase in SG&A is primarily related to the adoption of ASC 606, the Triumph Learning acquisition completed in August 2017, and incremental depreciation and amortization.

The adoption of ASC 606 resulted in a $2.5 million increase in catalog expenses in the first six months of fiscal 2018 as compared to the first six months of fiscal 2017. Under ASC 606, catalog costs are treated as a cost to acquire contracts and are not related to a specific contract, therefore are expensed when incurred. Prior to ASC 606, the Company capitalized catalog costs and amortized the costs over the revenue stream attributable to the catalogs. The Company expects to recognize lower catalog expenses over the remaining two quarters of fiscal 2018 as compared to the last two quarters of fiscal 2017, and full year catalog expenses for 2018 are anticipated to be lower as compared to 2017. The Company’s acquisition of Triumph Learning during last year’s third quarter resulted in approximately $7.2 million of incremental SG&A costs in the first six months of 2018 versus last year’s first six months. Approximately $1.7 million of the costs associated with Triumph Learning were related directly to the integration. As of the end of the first quarter of fiscal 2018, Triumph Learning is fully integrated into the operations of the Company. Depreciation and amortization expense increased by $2.9 million in the current year first half related primarily to incremental depreciation associated with the Company’s new phone system and new e-commerce platform implementations. Remaining SG&A costs were down $0.9 million in the six months ended June 30, 2018, as increases in transportation expenses associated with a combination of volume and increased industry-wide freight rates were offset by reductions in marketing and selling costs and incentive-based compensation expense.

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As a percent of revenue, SG&A increased from 38.6% for the six months ended July 1, 2017 to 41.3% for the six months ended June 30, 2018. The impact of the adoption of ASC 606 contributed 100 bps of this increase. Despite the year-to-date increase through June 30, 2018, the Company expects full-year 2018 SG&A as a percent of revenue to be down as compared to full-year 2017 SG&A as a percent of revenue due to the combination of cost leverage realized on anticipated revenue growth during the remainder of 2018, and further anticipated SG&A reductions tied to cost reduction and process improvement initiatives.    

Facility exit costs and restructuring

For the six month period ended June 30, 2018, the Company recorded $0.5 million of facility exit costs and restructuring charges. For the six month period ended July 1, 2017, the Company recorded $0.2 million of facility exit costs and restructuring charges. The amounts in both periods were related entirely to severance.

Interest Expense

Interest expense decreased from $8.2 million for the six months ended July 1, 2017 to $7.2 million for the six months ended June 30, 2018.Non-cash interest and amortization of debt fees were down approximately $1.0 million year-over-year primarily due to lower interest attributable to the Company’s vendor note obligations recorded in 2018 as compared to 2017. Cash interest expense was essentially flat in the first six months of 2018 as compared to the first six months of 2017. Incremental interest expense related to increased in borrowings of approximately $10.4 million in the first half of fiscal 2018, was offset by a lower interest rate.

Loss on Early Extinguishment of Debt

During the six months ended July 1, 2017, the Company recorded anon-cash charge of $4.3 million related to thewrite-off of $3.1 million of remaining unamortized debt issuance costs and $1.2 million of remaining original issue discount both of which were associated with the term loan that was repaid on April 7, 2017. No such charge was recorded in fiscal 2018.

Provision for (Benefit from) Income Taxes

The benefit from income taxes was $5.1 million for the six months ended June 30, 2018, as compared to $0.3 million for the six months ended July 1, 2017.

The effective income tax rate for the six months ended June 30, 2018 and the six months ended July 1, 2017 was 21.5% and 1.7%, respectively. The change in the effective income tax rate year-over-year is due to a combination of lower tax rates associated with the 2017 tax reform as well as the partial reversal of valuation allowances in the fourth quarter of fiscal 2017. The tax benefit recorded in the six months ended June 30, 2018 is expected to be entirely offset by tax provisions recognized against the net income expected to be generated over the remainder of fiscal 2018.

Liquidity and Capital Resources

At June 30, 2018, the Company had net working capital of $99.4 million, a decrease of $8.6 million as compared to July 1, 2017. Net working capital in the current year includes both $8.6 million of cash and $64.6 million of current maturities of long term debt. The Company estimates that the carrying values of its accounts receivable and accounts payable, as shown in the condensed consolidated balance sheets, approximate fair value. The Company’s capitalization at June 30, 2018 was $281.8 million and consisted of total debt of $195.0 million and stockholders’ equity of $86.8 million. The change in accounting principle (See Note 4) resulted in $4.8 million of decreased working capital, primarily related to the immediate expensing of catalog costs.    

Net cash used by operating activities was $65.9 million and $46.2 million for the six months ended June 30, 2018 and July 1, 2017, respectively. The increase in cash used by operating activities related primarily to an increased operating loss of $12.2 million in the first six months of 2018 versus the first six months of fiscal 2017. The remainder of the increase in cash used by operating activities was related to incremental working capital changes in the current year. Excluding the working capital impact of ASC 606, inventory and accounts receivable balances increased in the current year due to incremental volume.

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Net cash used in investing activities was $8.5 million in the first six months of fiscal 2018 as compared to $9.2 million in the first six months of fiscal 2017. The Company expects net cash used in investing activities to increase by approximately $2.4 million for the full year fiscal 2018 as compared to full year fiscal 2017 due to investments in the Company’s ecommerce platform, product information management systems and curriculum product development. The completion of these projects is expected to result in improvements to the Company’s platforms and processes, lower both ongoing operating costs and future investments in systems, and enable revenue growth.

Net cash provided from financing activities was $51.4 million in fiscal 2018 versus $27.2 million in fiscal 2017. 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 2017. Outstanding borrowings on the ABL Facility were $61.5 million as of June 30, 2018, while the excess availability on that date for the ABL Facility was $59.6 million. The company repaid principal on its Term Loan in the amount of $9.4 million during the first six months of fiscal 2018, which consisted of an excess cash flow payment of $7.8 million and regularly scheduled principal payments of $1.6 million.

The Company’s ABL Facility and New Term Loan contain customary events of default and financial, affirmative negative covenants. Based on current projections, the Company believes it will maintain compliance with these covenants throughout the next twelve months.

We believe that our cash flow from operations, borrowings available from our ABL Facility and the remaining portion of the delayed draw term loan available under the New Term Loan will be sufficient to meet our liquidity requirements for operations, including anticipated capital expenditures and our contractual obligations for the next twelve months.

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 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.

Inflation

Inflation, particularly in energy costs, wage rate, and transportation 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 Form10-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, belief or current expectation of School Specialty or its officers. Forward-looking statements include statements preceded by, followed by or that include forward-looking terminology such as “may,” “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 Form10-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 Form10-K for the fiscal year ended December 30, 2017.

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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 Form10-K for the fiscal year ended December 30, 2017.

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 Rule13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) were not effective for the purposes set forth in the definition of the Exchange Act rules due to a material weakness in internal control over financial reporting related to insufficient general information technology controls which impact the reliability of automated inventory and revenue controls. While the Company has operational procedures in the areas of inventory and revenue control, they are not designed, executed and/or documented in a manner that is sufficient to be considered effective manual controls in accordance with the criteria established by Internal Control—Integrated Framework 2013. Based on the Company’s inability rely on these automated and manual controls, the Company has concluded it has material weaknesses in controls related to: a) inventory quantities at the locations subject to routine cycle counts; and b) the accuracy of pricing and quantities shipped to customers. We did not identify any adjustments to our financial statements as a result of either the identification of these material weaknesses, our additional review of these areas, or our initial implementation of measures to remediate these material weaknesses.

Changes in Internal Control Over Financial Reporting

The Company has implemented a number of process-related manual controls in order to address, or compensate for, certain general information technology control deficiencies identified in 2017. In addition, the Company has remediation actions related to its general information technology control deficiencies, most notably remediation of access-related controls. The Company believes the changes or remediations to its process level internal control over financial reporting (as defined in Rule13a-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2018 are reasonably likely to strengthen, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 6. Exhibits

Exhibit No.	Description
10.1	School Specialty, Inc. 2014 Incentive Plan, as amended.
10.2	Form of Executive Restricted Stock Unit Agreement under the School Specialty, Inc. 2014 Incentive Plan, as amended.
10.3	Form of Director Restricted Stock Unit Agreement under the School Specialty, Inc 2014 Incentive Plan, as amended.
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 Form10-Q for the quarter ended June 30, 2018 are filed herewith, formatted in XBRL (Extensive Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statement of Operations, (iii) the Condensed Consolidated Statement of Comprehensive Income, (iv) the Condensed Consolidated Statement of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.

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SIGNATURES

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

	SCHOOL SPECIALTY, INC.
	(Registrant)
August 7, 2018	/s/ Joseph M. Yorio
Date	Joseph M. Yorio
	President and Chief Executive Officer
	(Principal Executive Officer)
August 7, 2018	/s/ Kevin L. Baehler
Date	Kevin L. Baehler
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)

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