School Specialty Inc.
Annual Report 2018

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K ☑ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934:For the fiscal year ended December 29, 2018OR ☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934:For the transition period from to Commission File No. 000-24385SCHOOL SPECIALTY, INC.(Exact name of Registrant as specified in its charter) Delaware 39-0971239(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.)W6316 Design DriveGreenville, Wisconsin 54942(Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code: (920) 734-5712Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registeredNone NoneSecurities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par valueIndicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑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 Actof 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 tosuch filing requirements for the past 90 days. Yes ☑ No ☐Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required tosubmit such files). Yes ☑ No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not becontained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K. ☑Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reportingcompany or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerginggrowth company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ☐ Accelerated filer ☑ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying withany new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑The aggregate market value of the Registrant’s common stock held by non-affiliates as of June 29, 2018 was $85,544,896. As of March 14, 2019there were 7,000,000 shares of the Registrant’s common stock outstanding.INCORPORATION BY REFERENCEPart III is incorporated by reference from the Proxy Statement from the Annual Meeting of Shareholders to be held on June 6, 2019.PART I Item 1.BusinessUnless the context requires otherwise, all references to “School Specialty,” “SSI,” the “Company,” “we” or “our” refer to School Specialty,Inc. and its subsidiaries. Effective December 26, 2015 the Company changed its fiscal year end from the last Saturday in April to the last Saturday inDecember. The December 27, 2015 to December 31, 2016, the January 1, 2017 to December 30, 2017 and the December 31, 2017 to December 29,2018 years will be referred to as “fiscal 2016,” “fiscal 2017,” and “fiscal 2018,” respectively, in this Annual Report.On August 15, 2017, the Board of Directors of School Specialty, Inc. (the “Board of Directors” or “Board”) approved an increase in the numberof authorized shares of School Specialty common stock from 2,000,000 shares to 50,000,000 shares, for the purpose of, among other things, effectinga seven-for-one stock split of School Specialty’s shares. The stock split became effective on August 23, 2017, and the number of outstanding shares ofSchool Specialty stock increased from 1,000,000 to 7,000,000. All previously stated values have been restated to adjust for this seven-for-one stocksplit.Company OverviewSchool Specialty is a leading distributor of innovative and proprietary products, programs and services to the education marketplace. TheCompany designs, develops, and sources products to provide educators with a comprehensive offering of school supplies, furniture and bothcurriculum and supplemental learning resources. Working in collaboration with educators, School Specialty reaches beyond the scope of textbooks tohelp teachers, guidance counselors and school administrators ensure that every student reaches his or her full potential. School Specialty’s productoffering includes supplies, furniture, technology products, supplemental learning products (“instruction and intervention”) and curriculum solutions,which are primarily sold to the education marketplace. The Company provides educators with its own innovative and proprietary products andservices, from basic school supplies to products and services that address student safety and well-being to Science, Reading, Language and Mathteaching materials, as well as planning and development tools and test preparation materials. Through its nationwide distribution network, SchoolSpecialty also provides its customers with access to a broad spectrum of well-recognized, third-party brands across its product categories. Thisassortment strategy enables the Company to offer a broad range of products primarily serving the pre-kindergarten through twelfth grade (“PreK-12”)education market at the state, district and school levels. The Company is expanding the distribution of its products beyond the education market byestablishing relationships with e-tailers and retailers and marketing a sub-set of its offering to healthcare facilities and the purchasing organizationsthat serve them. School Specialty offers its products through two operating segments: Distribution and Curriculum.We believe our Distribution group offers educators the broadest range and deepest assortment of basic school supplies, instruction andintervention solutions, furniture and equipment, technology products, physical education products, safety and security, and other classroom andschool equipment available from a single supplier. The Distribution group also offers a number of innovative and highly targeted teaching solutionsfor educators designed to help students who are performing below grade level or who could benefit from supplemental instruction in a specific area oflearning. This group continues to expand its portfolio of instructional programs, combining print-based and digital instructional and assessment toolsto deliver value to educators and build competitive advantages in the marketplace. This breadth of offering and unique positioning creates competitiveadvantages in our ability to aggregate an assortment of products to meet customer requirements across multiple categories. This group furtherdifferentiates itself through its distribution network and nationwide sales force, able to reach substantially all schools nationwide, as well as theCanadian marketplace. Another core differentiator is our commitment to innovation, which is achieved by working with teachers, administrators andother subject matter experts to develop proprietary products that result in innovative approaches to student development and learning. 2Our Curriculum group develops proprietary science curriculum programs to help educators deepen students’ subject matter understanding andaccelerate the learning process. This group offers curriculum and supplemental learning solutions for science and works with teachers and educators todrive new offerings based on standards, such as Common Core State Standards and Next Generation Science Standards, as well as its own and third-party customized products for various grade levels (primarily PreK-12).Across both groups, we reach our customers through a sales force of approximately 270 professionals (approximately 140 of which are insidesales representatives), 8.1 million catalogs, and our proprietary e-commerce websites. In fiscal 2018, we believe we sold products to approximately67% of the approximately 133,000 schools in the United States, and we believe we reached a majority of the 3.6 million teachers in those schools. Forfiscal 2018, we generated revenues of $673.5 million.The following is a more complete description of our two operating groups, or segments.Distribution Segment. Our Distribution segment provides a wide assortment of products, solutions and services primarily to the PreK-12education market, e-tail and retail channel partners, and to the healthcare market. Products include a comprehensive line of everyday consumables,specialized supplies, indoor and outdoor furniture and equipment, technology products, safety and security products, instructional teaching materials,planning and organizational products, supplemental and intervention products, including assessment tools, and state-specific test preparationmaterials, among others. Distribution products are sold via a nationwide sales force and distribution network, with reach to the majority of schoolsthroughout the United States. Distribution products are also sold direct to teachers and to consumers through the Company’s various e-commerceplatforms. Distribution products are grouped into five product categories which include: • Supplies • Furniture • Instruction and Intervention • Agendas • A/V TechnologyBy working closely with school administrators, teachers and other educators, the Distribution segment employs a curation strategy, offering asolutions-based approach across multiple product categories. The Company helps schools with their purchasing decisions by offering a suite of value-added products and services to fit within budget parameters, while also helping to manage supply chain issues, and back-to-school logistics to helpschool administrators save both time and money. This segment also offers project management and design services through its Project by Design® team(“PbD”), for both school refurbishment and new construction projects. As an end-to-end solution provider for schools, PbD is able to help schools outfitboth indoor and outdoor school facilities with state-of-the-art furniture and equipment, while also serving as a single source for additional proprietaryand/or third-party branded products.Distribution products include both proprietary branded products and other national brands. Among the segment’s well-known proprietary brandsare Childcraft®, Sax® Arts & Crafts, Califone®, Premier AgendasTM, Classroom Select®, Sportime®, Abilitations®, Hammond & StephensTM, BrodheadGarrett®, School Smart®, Royal Seating®, Projects by Design®, CPO ScienceTM, Frey Scientific®, Educator’s Publishing Service®, Wordly Wise3000®, Explode the Code®, ThinkMath!TM, SSI Guardian ®, Making Connections®, S.P.I.R.E®, Buckle Down®, and Coach®. Distribution productsaccounted for approximately 93% of our revenues for fiscal 2018.Curriculum Segment. Our Curriculum segment is a publisher of proprietary core curriculum in the Science area of the PreK-12 education market:Products in our Curriculum segment are typically sold to curriculum specialists and other educators with direct responsibility for advancingstudent outcomes. 3The Curriculum segment develops standards-based curriculum science products. Its offerings are tailored to address specific learning needs, driveimproved student performance, engage learners and accelerate the learning process. A team of approximately 12 product development associatesleverages long-standing relationships with outside developers, authors, co-publishing strategic partners and consultants to develop educationalproducts and solutions that meet curriculum standards and improve classroom teaching effectiveness.Our product portfolio is guided by PreK-12 curriculum standards, which can vary by state. However, there is a consistency throughout theportfolio that allows for the creation of nationally marketed programs that can be customized to meet state-specific curriculum standards where needed.We believe our Curriculum segment provides a broad collection of educational programs that effectively combines supplemental curriculum solutions,academic planning and organization, inquiry based (hands-on) learning, comprehensive learning kits, extensive performance assessments, andconsultant-led or web-delivered teacher training. New reading solutions, for example, combine research proven materials, technology, and teachingmethods to create dynamic, systematic, and individualized instruction. Additionally, when applicable these solutions are designed to address CommonCore State Standards at various grade levels as well as Next Generation Science Standards.Our Curriculum segment product lines include Delta Education® and FOSS®. Our Curriculum products accounted for approximately 7% of ourrevenues in fiscal 2018.School Specialty, Inc., founded in October 1959, was acquired by U.S. Office Products in May 1996. In June 1998, School Specialty was spun-offfrom U.S. Office Products in a tax-free transaction. In August 2000, we reincorporated from Delaware to Wisconsin. In accordance with the 2013Reorganization Plan (as disclosed in prior years), in June 2013, the Company was reincorporated in Delaware. Our principal offices are located atW6316 Design Drive, Greenville, Wisconsin 54942, and our telephone number is (920) 734-5712. Our general website address iswww.schoolspecialty.com. You may obtain, free of charge, copies of this Annual Report on Form 10-K, as well as our Quarterly Reports on Form 10-Qand our Current Reports on Form 8-K (and amendments to those reports) filed with, or furnished to, the Securities Exchange Commission as soon asreasonably practicable after we have filed or furnished such reports by accessing our website at http://www.schoolspecialty.com, selecting “Investors”and then selecting the “SEC Filings” link. Information contained in any of our websites is not deemed to be a part of this Annual Report.Industry OverviewThe United States PreK-12 education market is a large industry that has historically exhibited attractive and stable growth characteristics, despitefluctuations in the U.S. economy. For example, during the recessions of 1981-1983, 1991-1992 and 2001-2002, PreK-12 education funding in theUnited States grew at compound annual growth rates (“CAGRs”) of 5.3%, 5.0% and 4.7%, respectively. However, the significant downturn in thegeneral economy from 2008 through 2013 resulted in education spending ranging from flat to low single digit growth rates (0.1% to 1.9%). Totalexpenditures for public elementary and secondary education were $607 billion in 2008-2009 and grew to $610 billion in 2012-2013, or a 0.5% CAGR,according to the National Education Association (“NEA”). Since 2012-2013, however, total expenditures have increased to $698 billion through2016-2017, or a CAGR of 3.2%, according to the Rankings of States 2017 and Estimate of School Statistics 2018 published by the NEA in 2018. TheNEA estimates that total expenditures increased to $697 billion in 2017-2018. Over the long-term, we expect total educational expenditures(excluding capital outlays and interest on debt) to continue to increase 1%-2% annually based on projections from the National Center for EducationStatistics (“NCES”).Public education funding for school districts comes from three major sources: state funding which provided about 46%; local funding whichprovided about 45%; and federal funding which provided about 9%. State funding for elementary and secondary education is generally allocated toschool districts by formulas, typically based on number of students. Since 2012, overall state and local funding had increased steadily on an absolute 4dollar basis through 2016 (CAGR of 1.9%) and was estimated to have increased 1.6% in 2017. However, there is significant variation within individualstates. In 2016-2017, 23 states initiated mid-year budget cuts, which directly impacted education funding in 20 states. For 2017-2018, state budgets areexpected to grow by 2.3% according to the National Association of State Budget Officers. Thirty-eight states have enacted spending increases for PreK– 12 education while 10 states have enacted decreases to education funding. The majority of the funding provided by local governments is fromproperty taxes. Local tax revenues have grown to $282 billion in 2015-2016, a 2.4% CAGR since 2008-2009, according to the most recent data fromNEA. Continued increases in housing starts and projected increases in new home sale prices could be expected to drive up property tax collections andlocal tax revenue. The two largest programs providing federal funding are the No Child Left Behind Title I Grants to school districts and the IDEASpecial Education State Grants.Modest growth in student enrollment, an important driver of demand for education products and services, supports incremental educationspending in future years. According to the NCES, enrollment in public and private elementary and secondary schools has had slow and steady growthover the past 15 years. Looking forward, NCES projects that public and private PreK-12 enrollment will rise from 56 million in the 2013-2014 schoolyear to 57.7 million by the 2025-2026 school year. At the same time, per pupil expenditures are expected to rise each year. Expenditures in publicelementary and secondary schools were estimated at $12,490 per pupil in 2017-2018 and are expected to rise approximately 1.0% annually, inconstant dollars, through 2025-2026.There is increased activity at the federal and state level to increase investments in education, with a renewed focus on early learning. Specifically,in the 2018 Labor, Health & Human Services and Education Appropriations Bill, overall funding to Head Start, IDEA Grants and Title I grantsincreased. We believe there is also increasing demand for new school construction and retrofits. This belief is supported by industry reports fromMcGraw-Hill Dodge Data Analytics which indicate that overall education construction spending, which includes trade school, training facilities,higher education and other public institutions such as museums and libraries, is expected to grow from an estimated $50.2 billion in 2016 to$64.2 billion by 2019. This growth in construction spending is related to a combination of improving budgets, steady enrollment increases and thegrowing consumer confidence and a strong economy enabling the passage of bonds for school projects. According to a survey published in SchoolPlanning & Management, 56% of school districts completed construction projects in 2016 and 53% had planned to start projects in 2017. In addition,the impact of lower investment levels in recent years as maintenance construction projects were deferred and school districts placed an additionalnumber of students into its existing facilities are contributing to the increased school construction demand. It is estimated that 53% of schools need tomake investments in repairs, renovations or modernizations just to bring facilities to an acceptable condition.Our focus within the North America PreK-12 education market is on basic school supplies, specialty supplies in areas such as art, early childhoodeducation, special needs, physical education and safety and security, indoor and outdoor furniture and equipment, technology solutions, instructionalsolutions and curriculum-based teaching materials in targeted subject areas. Our customers are teachers, curriculum specialists, individual schools andschool districts who purchase products, instructional programs and materials, and teacher resources for school and classroom use. Our customers arealso parents who purchase similar products for their children via our proprietary e-commerce platform or those of our e-tail/retail channel partners, aswell as administrators in various healthcare related markets.The educational products and equipment market is highly fragmented with many retail and wholesale companies providing products andequipment, a majority of which are family- or employee-owned, regional companies. However, the market is also served by several large, well-recognized, national companies. The standards-based curriculum market is highly competitive and School Specialty competes with several large, well-known education companies as well as smaller, niche companies. In certain states, curriculum purchases are heavily influenced by statewide adoptionswhich typically occur on multi-year cycle; in open territory states, Curriculum decisions are more often made at the district level. According to SimbaInformation, the PreK-12 instructional materials market was estimated to be $8.6 billion in 2016 and is expected to grow to in excess of $9.5 billion by2020, a CAGR of 2.5%. 5We believe there is increasing customer demand for single source suppliers, prompt order fulfillment and competitive pricing in today’seconomic environment, particularly as school districts centralize their purchasing decision-making and/or increasingly seek to participate in local,state, regional or national purchasing cooperatives. We believe these changes should drive growth in our instructional and educational products aswell as our general school supplies, furniture and equipment and other technology-based solutions. We also believe that in the long-term, theseindustry trends will have a favorable competitive impact on our business, and that we are well positioned to utilize our operational capabilities,recognized proprietary and third-party brands, respected educational content and curriculum development expertise, and broad product offering tomeet evolving customer demands.Competitive StrengthsWe attribute our strong competitive position to the following key factors:A Market Leader in Fragmented Industry. We are one of the largest providers of educational supplies, furniture and equipment, and bothstandards-based and supplemental curriculum products to the PreK-12 education markets in the United States and Canada. Within our industry, wecompete with many retail and wholesale competitors, a majority of which are family or employee-owned, regional companies. We believe that our scaleand scope of operations relative to our education market competitors provide several competitive advantages, including a broader product offering,advantageous purchasing power, a national distribution network and the ability to manage the seasonality and peak shipping requirements of theschool purchasing cycle.Large Product Offering and Recognized, Proprietary Brands. Providing access to over 100,000 items ranging from classroom supplies, schoolfurniture and playground equipment, safety and security products, technology solutions and both standards-based and supplemental curriculumsolutions, we believe we are a leading national provider of a broad range of supplemental educational products and equipment to meet substantially allof the needs of schools and teachers in the PreK-12 education market. Our products include over 20 proprietary brands, as well as many widelyrecognized third-party brands. Our breadth of offerings creates opportunities to repurpose or repackage traditional supplemental materials withsupplemental curriculum solutions into kits or groups of related items that our customers value. In addition, we believe we offer many of the mostestablished brands in the industry that are recognized by educators across the country, with some brands more than 100 years old. Our assortmentstrategy, which combines our proprietary brands with other trusted third-party brands to create comprehensive offerings in a broad range of productcategories, enables us to serve our customers in a manner that we believe is unmatched in the industry. As such, we are in a position to leverage ourdepth, breadth and brand portfolio to further penetrate key product categories. Over 35% of our revenues are derived from our proprietary products,including the majority of our curriculum segment products; typically, our proprietary products generate higher margins than our non-proprietaryproducts.Strong Customer Reach and Relationships. We have developed a highly integrated, three-tiered sales and marketing approach, consisting of: anational sales force; paper-based catalogs and digital marketing campaigns; and our proprietary e-commerce websites. We believe this approachprovides us with a unique ability to reach teachers and curriculum specialists as well as school district and individual school administrators. The wideassortment of products and solutions we offer has enabled us to establish strong and long-standing relationships with many of the largest schooldistricts across the United States and Canada. We reach our customers through the industry’s largest sales force of approximately 270 professionals(approximately 140 of which are inside sales representatives), catalog mailings and our proprietary e-commerce websites. In fiscal 2018, we estimatethat we sold products to approximately 67% of the estimated 133,000 schools in the United States and reached a majority of the 3.6 million teachers inthose schools. We also estimate that, on average, we have enjoyed more than a 10-year relationship with our top accounts, and have recently investedin building our inside sales force to improve our nationwide coverage. We utilize our extensive customer databases to selectively target the appropriatecustomers for our catalog offerings and digital marketing campaigns. Additionally, we have invested 6heavily in the development of our e-commerce websites, which provide broad product offerings and which we believe generate higher internet salesthan many of our education competitors. Revenues derived directly from internet sales, which were approximately 35% of our sales in fiscal 2018compared to less than 17% of our sales in fiscal 2009, have increased as more school districts and teachers go online to place orders.Highly Diversified Business Mix. Our broad product portfolio and geographic reach minimize our concentration and exposure to any one schooldistrict, state, product or supplier. In fiscal 2018, our top 10 school district customers collectively accounted for just under 10% of revenues andcustomers within our top state collectively accounted for just over 12% of revenues. For the same period, our top 100 products accounted for slightlyless than 12% of revenues. Products from our top 10 suppliers generated just over 25% of revenues in fiscal 2018. We believe this diversificationsomewhat limits our exposure to state and local funding cycles and to product demand trends, and at the same time, opens up opportunities for growthas educational spending increases, both with current and new customer accounts.Strong Repeat Business. Over 60% of our revenues are generated from the sale of consumable products, which typically need to be orderedannually, if not more frequently. We continue to maintain strong relationships with schools, school districts and other customers and believe ourretention rate of our school and school district customers is approximately 87% in a highly competitive business. We continue to evaluate and modifyour product assortment, particularly in the consumable product area to ensure we have the right solutions for our customers and to capitalize on therecurring revenue opportunities from many of our long-standing accounts.Strong Cost Controls and Focus on Working Capital. We believe our focus on cost reductions and aggressive management of working capital,are positioning the Company to capitalize on future revenue growth opportunities, irrespective of the economy and school funding levels. In recentyears, several operational improvement initiatives resulted in cost reductions, and greater efficiencies throughout our organization. These initiativesalso facilitate effective working capital management and positive cash flow, which provided us with additional resources to invest in key growth areasof our business across both our Distribution and Curriculum business segments. We continue to focus on growing revenues and profits within ourCurriculum and Distribution segments by improving both our mix of proprietary products and our operations to enhance the customer experience. Wealso enjoy a highly predictable working capital cycle, which enables us to effectively manage our capital structure and invest in growth areas of ourbusiness and in our infrastructure.Focus on Growth Opportunities through Transformation Initiatives and Partnerships. We believe we have multiple long-term revenue growthand margin improvement opportunities, including enhancing our sales efforts in under-penetrated states, expanding our private-label business, furtherdeveloping and refining our educational supplies, furniture, safety and security, technology and curriculum offerings, optimizing direct marketingcampaigns, increasing supply chain efficiency and expanding our product line through strategic distribution relationships. We are actively pursuingpartnering opportunities for content development and distribution. We also believe our movement toward a team-based selling model will improve theeffectiveness of our go-to-market strategies, better inform our product development efforts and better leverage our deep supplier relationships. Webelieve that our uniquely comprehensive value proposition and our efforts to position the Company as a solution provider and not purely a productdistributor is an important factor in generating long-term revenue growth. Additionally, we have and continue to expand our business outside of schooldistricts by pursuing alternative distribution channels, such as e-commerce and health care markets, which we expect will further increase our brandrecognition and lead to additional sales opportunities throughout the upcoming fiscal year and beyond.Growth StrategyWe have implemented a number of operational changes that have strengthened our operations, lowered our cost structure and improvedefficiencies throughout our organization. In late fiscal 2016, we realigned our sales, 7marketing and merchandising organizations to better develop and execute sustainable growth strategies for core product categories or market segmentssuch as early childhood, special needs, physical education, art, furniture, technology, and instructional solutions. Our near-term strategy continues tobe focused on the following areas: • Improving and optimizing the performance of our product categories through cross-department alignment and collaboration among sales,marketing, merchandising and procurement focusing on assortment, pricing/margin strategies and sales/marketing strategies; • Optimizing our Distribution Centers to improve customer delivery both in terms of speed and accuracy and to operate at a lower cost; • Deploying an innovative team-based selling model that increases and enhances the effectiveness of customer touch points and betterleverages our deep product and market expertise; • Enhancing product management and marketing capabilities to promote our innovation and breadth of offerings and bring new andinnovative products to market; • Continuing to expand alternative channels that have annual purchasing cycles that will lessen our reliance on the heavy back-to-schoolspending season; • Introducing new and innovative curriculum-based training solutions and incorporating products, services and consulting that address theincreased need for school safety and security; • Identifying and exiting product lines with inadequate returns, while focusing on higher-margin, growth oriented product lines andcategories; • Continuing to invest in technologies to improve our customer service capabilities throughout all business areas to improve the customerexperience; • Continuing to build out our digital solutions and bundled packages, while enhancing our e-commerce platform; and • Driving a culture that focuses on accountability and collaboration towards the attainment of our growth and margin improvementobjectives.The Company’s longer-term initiatives are intended to enhance organic growth, improve margins, and better evaluate capital investments andallocation of resources. Among the key initiatives are: • Developing multi-year customer retention and growth plans by geography, category and product lines; • Upgrading our IT systems and related technologies to create efficiencies within our organization, streamline processes, and provideinsights that will enable us to better service customer needs; • Identifying potential acquisition opportunities which would synergistically enhance the revenue and EBITDA of the Company; • Leveraging our breadth of products to expand into new markets and customer segments, and expanding our product offering whereappropriate; • Optimizing and simplifying our pricing strategies in order to ensure competitive pricing for commodity items while simplifying thediscount structure and optimizing pricing for the entire product portfolio including proprietary products; and • Improving communication, both internally and externally to educate all parties on our business operations, product and solution offeringsand capabilities.As part of our various initiatives, we are highly focused on generating organic growth within our business, improving our margin structure,lowering our cost basis while making strategic investments in our business and generating higher returns for our stockholders.Organic Growth. We continue our focus on growing revenues and profits from our existing product lines and possible line extensions. We areoptimistic that demand for our products and services will remain stable and, 8in certain categories, experience modest growth as industry data suggests school spending will increase over the coming years based on continuedgrowth in student population and spending per student. We plan to increase our share of this spending and organically grow our revenues by: • Properly positioning our uniquely comprehensive value proposition in our marketing and sales activities; • Deploying our team-based sales model that leverages territory sales managers, inside sales representatives, category sales managers andsubject matter experts; • Optimizing product mix within each category; • Leveraging our Customer Relationship Management (“CRM”) system to more effectively communicate customer and performanceinformation to the sales organization, and collect market and customer intelligence which will enable more effective cross sellingthroughout the organization to drive balanced growth across our product categories; • Unifying and aligning our marketing efforts with sales and merchandising; • Enhancing the usability of our website and our web-based marketing initiatives to capture an increasing portion of online customer sales; • Developing new and updating current curriculum, supplemental learning and technology solutions in response to education standards andeducator needs; • Introducing new curriculum-based security solutions that address the increased need for school security solutions; • Expanding our reach into markets, such as health-care which purchase a large sub-set of our existing products; • Capitalizing on expected upcoming curriculum changes relating to Common Core State Standard and Next Generation Science Standards; • Increasing our focus and selling resources in under-penetrated states and districts; and • Expanding our relationships with e-tail/retail partners and large purchasing cooperatives.Margin Improvement. As we grow our revenues, we are seeking to optimize product gross margins through a mix of product innovation, buyingprograms, more effective margin management and supply chain improvements. Among the key initiatives are: • Continuing to expand our private label business through the introduction of new products; • Developing and implementing improved strategies related to margin management, including optimization of list prices and discountstrategies, managing the mix of items purchased based on line-item, bid pricing versus category discounts, and increasing sales ofproprietary items; • Improving the effectiveness of our sourcing activities and vendor management to, among other things, negotiate more favorable supplierpricing, terms and conditions; • Improving the efficiency of our supply chain activities, and driving overall efficiencies through our company-wide, process excellenceinitiative; • Realizing the benefits of consolidation of distribution centers and elimination of redundant expenses; • Utilizing our purchasing scale; • Driving new product innovation and introduction of products and solutions across both business segments that will generate better marginsand returns; and • Eliminating those product offerings that are not justified by the return they provide the Company. 9Reduction of Corporate Operating Expenses. We continue to focus on reducing our operating expenses to streamline our business and free upresources to invest in other key areas that will generate top-line growth and improve bottom-line performance. Initiatives in this area include: • Deploying process excellence and the implementation of lean principles across all departments to reduce complexity and improve businessprocesses in a manner that will lower our overall staffing levels and improve operational effectiveness; • Simplifying our current ERP environment and lowering related support costs by implementing best in class business applications inconjunction with more efficient business processes; • Leveraging shared corporate resources throughout our business segments to lower costs and optimize financial, IT, HR and marketingsupport; and • Refining our sales compensation plans to drive balanced growth across our product categories in a cost-effective manner.Evaluation of Capital Investment and Allocation: We identified several areas for investment in fiscal 2017 that strengthened our operations andback-end support, digital and e-commerce platform and solution sets, and overall systems management capabilities. These investments were made aspart of continuous improvement initiatives that are underway. We are also in the process of a major review of all of our product lines and businesses todetermine those with unacceptable or inadequate profitability, while simultaneously analyzing the appropriate solutions to maximize our returns,either from disposition or further capital investment. This analysis is to identify both cost saving drivers and new investment opportunities that willstrengthen our bottom-line performance both near- and long-term. The Company also intends to continue to analyze acquisition opportunities whichmay fill product offering gaps and provide improvement in the revenue and EBITDA of the Company.Product LinesWe market our proprietary brands and third-party product assortments across a wide variety of industry categories including general schoolsupplies, arts and crafts, physical education, school safety and security, instructional solutions and special needs, classroom furniture and equipment,outdoor furniture and equipment, technology solutions, and both standards-based and supplemental curriculum solutions. These products are marketedand sold through our two primary business segments: Distribution and Curriculum.Our Distribution offerings are focused in the following areas:Supplies Category: We believe we are the largest marketer of school and classroom supplies into the education market. Through our SchoolSpecialty Distribution catalogs, which offer both national brands and many of our proprietary School Smart® products, we provide an extensiveoffering of basic supplies that are consumed in schools and classrooms as well as in home use. This offering includes office products, classroomsupplies, janitorial and sanitation supplies, school equipment, school and student safety and security products and services, planning and developmentproducts, physical education products, art supplies and paper, among others. Certain of these products are more commodity-like in nature and requirean efficient supply chain and distribution and logistics expertise to be competitive. As a result of our large distribution network and supply chainexpertise, our customers view us as a preferred supplier in the Supplies category. Our School Smart private label products are primarily sourced directlyfrom low-cost, overseas manufacturers, which we believe will allow us to enhance our product offering and improve profitability.Our leading market position in the art supplies area of this category is led by Sax® Arts & Crafts, which offers products and programs focused onnurturing creativity and self-expression through hands-on learning. The product line ranges from original cross-curricular lesson plans and teachingresource materials to basic art materials, such as paints, brushes and papers. 10We also offer a full range of physical education programs, solutions, resources and equipment designed to help improve student and staffwellness. Our products, which are primarily offered under our Sportime® brand, range from traditional sports equipment to unique and innovativeproducts designed to encourage participation by all.We offer several proprietary and innovative instructional solutions and teaching materials to schools and school districts, all designed to helpteachers teach and students remain on par with grade-level learning requirements. We also offer a full range of solutions for children with speciallearning needs through our Abilitations® and Integrations® product lines as well as several third-party brands. Our proprietary solutions and productsare designed to help educate children with learning, behavioral, sensory or physical differences and are focused on helping educators and therapistsmake a real difference in a child’s life.Our early childhood offering provides educators of young children with products that promote learning and development. Our full-line, highlyproprietary offering provides educators with everything from advanced literacy and dramatic play to manipulatives, and basic arts and crafts. We haveseveral proprietary brands targeting the early childhood market and our flagship brand, Childcraft® is a well-known and trusted brand in the educationmarket.At Frey Scientific®, we offer a wide selection of science education products, supplemental curriculum, lab equipment and supplies, all of whichare a part of Science, Technology, Engineering, and Math (“STEM”) solutions that advance effective learning. By working with a network of classroomteachers at various grade levels, we continually seek to understand and adapt to customers’ needs and Next Generation Science Standards. Ourdedicated science education specialists, many with advanced degrees and teaching experience, provide powerful insights that continue to enhance ourproduct line. Frey Scientific elementary, middle and high school education products include supplemental curriculum, Inquiry Investigations®hands-on kits with virtual labs, innovative equipment and precision instrumentation, essential science classroom supplies and laboratory designservices and furniture.Instructional & Intervention: We believe we are one of the largest marketers of educator supplies and related educational materials andtechnology solutions, as well as instructional learning materials. Our Instructional Solutions category includes supplemental learning materials(reading, math and science), teaching resources, classroom libraries and manipulatives. We offer several proprietary and innovative instructionalsolutions and teaching materials to schools and school districts, all designed to help teachers and students remain on par with grade-level learningrequirements. Innovation, proprietary products, brand strength and direct marketing are key success factors. These product offerings create opportunityfor margin enhancement through innovation and unique assortments.Our reading and math intervention and supplemental learning programs, which are standards- and curriculum-based products, are focused onproviding educators and parents with effective tools to encourage and enhance literacy and mathematics skills, serving the K-12 grade levels.Educator’s Publishing Service® (EPS®) provides tailored reading and language arts instruction for students with special needs and proprietaryinstructional materials for educators. For over 60 years, EPS Literacy and Intervention has been the leader in developing and publishing programs tohelp struggling students, including those with dyslexia and other reading difficulties, as well as providing materials that support on-level students sothey can continue to meet their educational goals. Today, EPS provides K-12 blended, customized intervention solutions to help at-risk and on-levelstudents build proficiency in reading and math. A variety of programs connect time-tested content and innovation to give educators the power ofdifferentiation to reach all of their students and meet the changing demands of today’s classrooms. From screening through to intervention, progressmonitoring, reporting and professional development, EPS offers an integrated approach to address the Common Core State Standards and Response toIntervention (“RTI”).Our products offer reading, math and response to intervention solutions to help K-12 schools close the achievement gap for students who fallbelow proficiency benchmarks. Our print and technology resources 11combine to meet the instructional needs of students possessing learning disabilities or who are at risk for reading and math failure. Some of our otherinnovative teaching materials include Explode the Code®, Making Connections® and Making Connections InterventionTM, Path Driver for Math®and Path Driver for Reading®, Sitton Spelling and Word Skills®, S.P.I.R.E®, and Wordly Wise®, among others.With our acquisition in fiscal 2017 of the assets of Triumph Learning LLC (see Note 5 under Item 8, Financial Statements and SupplementaryData), our offering includes state-specific assessment preparation materials. Triumph Learning’s flagship brand, Coach®, has been utilized throughouteducation, providing educational facilities and teachers with hands-on test preparation books for ELA, math, science and social studies, with materialscustomized to state-specific best practices, along with a comprehensive series of supplemental and intervention resources for ELA, math and science.Solutions are delivered through multiple platforms, including both print and digital, as well as through third-party platforms and applications.Furniture Category: We believe we are one of the most comprehensive providers of school furniture in the United States, offering a full range ofschool-specific furniture and equipment, for both in-school, in-classroom and outdoor use. Our offering allows us to equip an entire facility, refurbish aspecific location within a school, such as a cafeteria, gymnasium or media center, or to replace individual items such as student desks and chairs. Wemanufacture award-winning early childhood wood furniture in our Bird-in-Hand® Woodworks facility. We launched a product line of proprietaryfurniture under our Classroom Select® brand and also provide innovative furniture offerings through our Royal Seating®, Childcraft®, and Korners forKids® product lines. We are authorized national or regional distributors for leading third-party lines. In addition, we offer our proprietary service,Projects by Design®, which provides turn-key needs assessment and conforming design, budget analysis and project management for new constructionprojects.Planning and Student Development: We believe we are one of the largest providers of planning and student organization products in the UnitedStates and Canada, which are delivered through student agendas and planners. Our offerings are focused on developing better personal, social andorganizational skills, as well as serving as an effective tool for students and parents to track and monitor their daily activities, assignments andachievements. Many of our agendas and planners are customized at the school level to include each school’s academic, athletic and extra-curricularactivities. Our agendas are primarily marketed under the Premier™ brand name. We are also a leading publisher of school forms, including recordbooks, grade books, teacher planners and other printed forms under the brand name Hammond & StephensTM.A/V Technology: We believe we are among the leading providers of educator-inspired quality audio technology products, including multi-media,audio visual and presentation equipment for the PreK-12 education market. These products are primarily marketed under the brand name Califone®.We also offer a host of other technology solutions under Califone and other third-party brands and are focused on expanding our assortment ofproducts to take advantage of increased investments by schools and school districts in new and emerging technology platforms.SSI GUARDIAN: We believe we have a comprehensive curriculum-based safety and security offering designed to keep schools and other facilitiessafe. Our SSI GUARDIAN® offering is focused on strengthening campus and school safety by providing administrators, teachers and other schoolpersonnel with the training and security-related products to address safety and risk mitigation. SSI GUARDIAN® also offers consulting services thathelp schools and school districts conduct vulnerability assessments for school sites, emergency planning, contingency planning, and safe schooldesign. Similar curriculum/training modules have also been developed for health care facilities, corporate offices and industrial facilities.Soar Life Products: Leveraging our current product assortment, Soar Life Products® offers thousands of innovative products intended to improvewell-being, from early childhood to adults in senior care facilities. The Soar Life Products® offering includes proprietary School Specialty brands,including Childcraft®, Classroom Select®, Sax Arts & Crafts®, Sportime®, Abilitations®, among others, as well as third-party brands. Products 12span a range of categories and are tailored to address the needs of healthcare organizations, focusing on Memory & Cognition, Daily Living Aids,Arts & Crafts, Physical Activity, Furniture, Therapeutic Needs and general supplies. Soar Life Products focuses on the healthcare industry, includingacute and non-acute settings such as hospitals, long-term care, therapeutic facilities, home care, surgery centers, early childhood and day care centers,physicians’ offices and clinics, both on a direct basis and through third parties.Our Curriculum offering is focused in the following area:Science: Our science product category, largely comprised of highly recognized proprietary or exclusive offerings, provides learning resourcesfocused on promoting scientific education and inquiry, literacy and achievement to the PreK-12 education market. Our products range from laboratorysupplies, equipment and furniture to highly effective hands-on learning curriculums. Our science brands include FOSS® (Full Option Science System),Frey Scientific®, Delta Science Module®, Delta Education®, CPO ScienceTM, and Neo/SCI®. We have structured our solutions to engage students,focusing on science and engineering practices that promote scientific inquiry, literacy and achievements, all while aligning to the Next GenerationScience Standards and supporting Common Core State Standards.For example, science classroom resources offered by Delta Education are focused on the pre-K to 8th-grade education level. Our sciencecurriculum products embody the best in inquiry-based STEM education. Delta provides the research-based FOSS® curriculum and other programs suchas Delta Science Module®, as well as hands-on classroom resources. FOSS has evolved from a philosophy of teaching and learning at the LawrenceHall of Science that has guided the development of successful active learning science curricula for more than 40 years. The FOSS program bridgesresearch and practice by providing tools and strategies to engage students and teachers in enduring experiences that lead to a deeper understanding ofthe natural and designed worlds. Science is a discovery activity, and our belief is that the best way for students to appreciate the scientific enterprise,learn important scientific and engineering concepts, and develop the ability to think well is to actively participate in scientific practices through theuse of manipulatives which enhance their own investigations and analyses. The FOSS Program was created specifically to provide students andteachers with meaningful experiences through active participation in scientific practices.For further information regarding our Distribution and Curriculum segments, see our “Segment Information” in the Notes to ConsolidatedFinancial Statements under Item 8, Financial Statements and Supplementary Data.Intellectual PropertyWe maintain a number of patents, trademarks, trade names, service marks and other intangible property rights that we believe have significantvalue and are important to our business. Our trademarks, trade names and service marks include the following: School Specialty®, EducationEssentials®, School Smart®, Royal Seating®, Projects by Design®, abc School Supply®, Integrations®, Abilitations®, Brodhead Garrett®, Califone®,Childcraft®, ClassroomDirect®, Coach®, Buckle Down®, Frey Scientific®, Hammond & StephensTM, Premier AgendasTM, Sax® Arts & Crafts, Sax®Family & Consumer Sciences, Sportime®, Delta Education®, Neo/SCI®, CPO Science™, EPS® , SSI GUARDIAN®, and Soar Life Products®. We alsosell products under brands we license, such as FOSS®, ThinkMath!™ and FranklinCovey® Seven Habits.Product Development and MerchandisingOur product development managers apply their extensive education industry experience to design instructional solutions, supplementalcurriculum and age-specific products to enhance the learning experience. New product ideas are reviewed with customer focus groups and advisorypanels comprised of educators to ensure new offerings will be well received and meet an educational need. 13Our merchandising managers continually review and update the product lines for each business. They determine whether current offerings areattractive to educators and anticipate future demand. The merchandising managers also travel to product fairs and conventions seeking out newproduct lines. This annual review process results in a continual reshaping and expansion of the educational materials and products we offer.Sales and MarketingProduct procurement decisions within the education market are generally made at the classroom level by teachers and curriculum specialists andat the district and school levels by administrators. The Company currently has an expansive sales force that sells our products at the classroom, schooland district level to educators nationwide.Our Distribution segment sales and marketing approach utilizes a sales force of approximately 240 professionals, approximately 44 distinctcatalog titles, and School Specialty Online®, an e-commerce solution that enables us to tailor our product offerings and pricing to individual schooldistricts and school administrators. Over the past two years, we took steps to realign our nationwide sales team and our go-to-market strategy, whichalso included the expansion of an inside sales team and the implementation of a team-based selling model focused on driving growth throughincreased customer penetration.In the Supplies category, we leverage our national sales force, which we believe represents the largest distribution network in the market, and oursupply chain expertise, to reduce our customers’ cost of acquisition in the most commonly purchased, highest volume commodity items used byschools. In the Instruction & Intervention category, we market our products through direct marketing channels and leverage category specific salespersonnel. We compete by offering deep assortments in the most commonly purchased products, by leveraging our size to reduce product costs, and bydriving customer retention and acquisition through sophisticated database analytics. In the Furniture category, our unique Projects by Design® servicegives us significant competitive advantages by providing customers with value-added construction management support, from interior design throughinstallation and field support. In the non-project related segment of furniture, we capitalize on relationship selling through a direct sales force webelieve is among the largest in the market.Schools typically purchase educational supplies and supplemental educational products based on established relationships with relatively fewvendors. We seek to establish and maintain these critical relationships by assigning accounts within a specific geographic territory to a territory salesmanager who is supported by inside sales, category specialists and a customer service team. The sales managers frequently call on existing customers toascertain and fulfill their supplemental educational resource and basic supply needs. The customer service representatives maintain contact with thesecustomers throughout the order cycle and assist in order processing.We have a national sales, marketing, distribution and customer service structure. We believe that this structure significantly improves oureffectiveness through better sales management, resulting in higher regional penetration and significant cost savings through the reduction ofdistribution centers.Projects by Design. Projects by Design® is a service we provide our customers free of charge to aid in the design, building and renovation ofschools. Our professional designers prepare a detailed analysis of the building and individual classrooms to optimize the layout of student and teacherdesks, student lockers and other classroom equipment and fixtures. Customers have the ability to view prospective classrooms through our innovativesoftware in order to efficiently manage the project. We believe this service makes us an attractive alternative to other furniture and school fixture andequipment suppliers.Our Curriculum segment sales and marketing approach utilizes a field sales force of approximately 30 professionals. The sales coverage isnationwide, with the largest student populated states served by a larger contingent of sales professionals. The field and inside sales associates aresupported by 7 targeted catalogs and our brand-specific websites to deliver premium educational products to teachers and curriculum specialists. 14Generally, for each Curriculum product line, a major catalog containing its full product offering is distributed near the end of the calendar yearand during the course of the year we mail additional supplemental catalogs. Schools, teachers and curriculum specialists can also access websites forproduct information and purchasing. Further, we believe that by cross-marketing our Curriculum brands to Distribution customers, we can achievesubstantial incremental sales.Internet Operations. Our internet channel activities through www.schoolspecialty.com are focused on enhancing customer loyalty, driving downcost by receiving more orders electronically and creating a customer self-service portal. Our brands are available through our website which allows ourcustomers a single access point for purchasing. Our systems provide functionality to meet the specific needs of school districts and school customers,who generally purchase Distribution products, as well as the needs of individual teachers and curriculum specialists, who tend to buy Curriculumproducts. Our website allows our customers to manage funding through the use of purchase order spending limits, approval workflows, ordermanagement and reporting. In addition, we offer schools and school districts the ability to fully integrate their procurement systems with our website,which gives us another important link to our customers and a significant competitive advantage. It also includes other features that are more helpful toteachers, curriculum specialists and others with more sophisticated online ordering needs, including product search, custom catalogs and emailnotification, allowing users to have access to the full line of School Specialty products. We have maintained an electronic ordering system for the past20 years and offer e-commerce solutions directed exclusively at the education market. Each of our Curriculum product lines has a dedicated website forits own products. We also continue to explore expanding our offerings provided through third party internet sources. As such, we have a relationshipwith Amazon.com under which we offer our propriety branded products through the Amazon.com shopping portal. We believe that this channel allowsus to reach educators, consumers and segments of the education space that we did not reach previously. Over the past two years, we have significantlyinvested in our ecommerce platform to improve website functionality, make the online ordering process easier and faster and improve the overallcustomer experience, which we believe will help us grow organically.Pricing. Pricing for our Distribution and Curriculum product offerings varies by product and market channel. We generally offer a negotiateddiscount from catalog or list prices for products from our Distribution catalogs, and respond to quote and bid requests. The pricing structure ofproprietary Curriculum products offered through direct marketing is generally less subject to negotiation.ProcurementNon-Proprietary Products. Each year, we add new items to our catalogs and our offerings. We begin to purchase and stock these items before thecatalogs are released so that we can immediately satisfy customer demand. We typically purchase under annual supply agreements with our vendors.For our larger vendors we typically negotiate annual contracts that usually provide negotiated pricing and/or extended terms and often include volumediscounts and rebate programs. We have exclusive distribution rights on several furniture and equipment lines.Proprietary Products. We develop many proprietary products and generally outsource the manufacturing of these items.Global Sourcing. We are decreasing our product unit costs by consolidating our international supplier network. We are also improving productquality by being very selective in our sourcing relationships. Working in conjunction with our supply partners, we have streamlined our internationalprocurement process, gained real-time visibility, added in-process quality checks, and established new systems and procedures to ensure productsafety.Private Label Product. We launched the School Smart® brand in 2005. Since that time we have focused our strategy on providing a private brandalternative for educators, using a combination of off-shoring and 15out-sourcing of products. In fiscal 2018, our revenue for School Smart branded products was approximately $51 million. We continue to evaluate thebalance of branded and private brand products and we believe that there are additional opportunities to grow sales through new products, product lineextensions and new product configurations.We maintain close and stable relationships with our vendors to facilitate a streamlined procurement process. At the same time, we continuallyreview alternative supply sources in an effort to improve quality and customer satisfaction and reduce product cost. Increasingly, transactions with ourvendors are processed through an electronic procurement process. This electronic process reduces costs and improves accuracy and efficiency in ourprocurement and fulfillment process. When more than one of our business units buys from the same vendor, we typically negotiate one contract to fullyleverage our combined purchasing power.LogisticsWe believe we have one of the largest and most sophisticated distribution networks among our direct competitors with three fully automated andseamlessly integrated distribution centers, two supporting the Distribution segment and one supporting the Curriculum segment, totalingapproximately one million square feet of operating space. We believe this network represents a significant competitive advantage, allowing us to reachany school in a fast and efficient fashion. We have enhanced our distribution model, allowing most of our customers to receive their orders of in-stockitems within 3 to 5 days, and, through third party strategic relationships, have the ability to offer next-day delivery for many items We utilize a third-party logistics provider in Asia to consolidate inbound shipments of items sourced overseas, lowering our transportation and inventory storage costs.In order to maintain the proprietary nature of certain furniture products, we operate one manufacturing facility. Our Lancaster, Pennsylvania plantmanufactures wood furniture for our early childhood offerings. Products that we manufacture accounted for less than 10% of sales during fiscal 2018,fiscal 2017, and fiscal 2016.Over the past three years, through a series of initiatives, we have realigned our Distribution Centers and warehouses to efficiently serve themajority of our customers and effectively access key suppliers. We have also invested significantly in lean manufacturing principles and upgradedtechnology and logistics platforms, which have strengthened our operational footprint, enabling us to provide better, more accurate and fastershipments to our customers. This remains one of our key corporate priorities.Information SystemsWe believe that through the utilization of technology for process improvement in areas such as procurement, inventory management, customerorder management, order fulfillment, and information management, we are able to offer customers more convenient and cost-effective ways to orderproducts, improve the order fulfillment process to increase on-time and complete performance and effectively focus our sales and marketing strategies.We have implemented a common enterprise resource planning (“ERP”) platform across all of our businesses. This platform primarily includessoftware from Oracle’s E-Business suite. One of the major benefits from the common ERP platform is the consolidation of both product and customerinformation, which is designed to enhance our ability to execute our sales and marketing strategies. In addition, by utilizing common business systemsacross the Company, we have improved business processes, reduced cycle time and enhanced integration between the business units. We believe thetechnologies of the systems will readily support continued growth and integration of our existing businesses. Our distribution centers utilize interfacedwarehouse management software to manage orders from our ERP and legacy systems. 16CompetitionThe supplemental educational products and equipment market is highly fragmented with many retail and wholesale companies providingproducts and equipment, many of which are family- or employee-owned, regional companies. We also compete, to a much lesser extent, with alternatechannel competitors such as office product contract stationers, office supply superstores, purchasing cooperatives and internet-based businesses. Theirprimary advantages over us include size, location, greater financial resources and purchasing power. Their primary disadvantage is that their productmix typically covers less of a school’s overall needs (measured by volume). We believe we compete favorably with these companies on the basis ofservice, product offering and customer reach. The standards-based curriculum market is highly competitive and School Specialty competes with severallarge, well-known education companies as well as small, niche companies.EmployeesAs of February 9, 2019, we had approximately 1,189 full-time employees. Since the beginning of fiscal 2015, we have reduced the number offull-time employees by over 200 as we have integrated and aligned core function areas across the Company, such as operations, supply chainmanagement, procurement and logistics, marketing, finance, information technology and human resources. Additionally, to meet the seasonal demandsof our customers, we employ many seasonal employees during the late spring and summer months. Historically, we have been able to meet ourrequirements for seasonal employment. None of our employees are represented by a labor union and we consider our relations with our employees to begood.BacklogWe had no material backlog at December 29, 2018. Our customers typically purchase products on an as-needed basis. Item 1A.Risk FactorsForward-Looking StatementsStatements in this Annual Report which are not historical are “forward-looking” statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995. The forward-looking statements include: (1) statements made under Item 1, Business and Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations, including, without limitation, statements with respect to internal growthplans, projected revenues, margin improvement, capital expenditures and adequacy of capital resources; (2) statements included or incorporated byreference in our future filings with the Securities and Exchange Commission; and (3) information contained in written material, releases and oralstatements issued by, or on behalf of, School Specialty including, without limitation, statements with respect to projected revenues, costs, earnings andearnings per share. Forward-looking statements also include statements regarding the intent, belief or current expectation of School Specialty or itsofficers. Forward-looking statements include statements preceded by, followed by or that include forward-looking terminology such as “may,”“should,” “believes,” “expects,” “anticipates,” “estimates,” “continues” or similar expressions.All forward-looking statements included in this Annual Report are based on information available to us as of the date hereof. We do notundertake to update any forward-looking statements that may be made by or on behalf of us, in this Annual Report or otherwise. Our actual results maydiffer 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 below. 17The agreements governing our debt contain various covenants that limit our discretion in the operation of our business, could prohibit us fromengaging in transactions we believe to be beneficial and could lead to the acceleration of our debt and/or an increased cost of capital.Our existing and future debt agreements impose and may impose operating and financial restrictions on our activities. These restrictions requireus to comply with or maintain certain financial tests and ratios, and restrict our ability and our subsidiaries’ ability to: • incur additional debt; • create liens; • make acquisitions and dispositions; • redeem and/or prepay certain debt; • sell or dispose of a minority equity interest in any subsidiary or other assets; • make capital expenditures; • make certain investments; • enter new lines of business; • engage in consolidations, mergers and acquisitions; • repurchase or redeem capital stock; • guarantee obligations; • engage in certain transactions with affiliates; and • pay dividends and make other distributions.Our credit facilities also require us to comply with certain financial ratios, including a net senior leverage ratio and a minimum fixed chargecoverage ratio, as well as an annual limitation on capital expenditures and product development investments and minimum liquidity levels at the endof each month. These restrictions may hamper our ability to operate our business or could seriously harm our business by, among other things, limitingour ability to take advantage of financing, mergers and acquisitions, and other corporate opportunities. Following the end of our third quarter and ourfourth quarter of fiscal 2018, as a result of our lower than expected financial performance, we were required to seek amendments to our credit facilitiesto adjust the financial ratios contained in our term loan facility so that we would remain in compliance as of the end of the third and fourth quarters offiscal 2018. In the event that we fail to comply with the financial ratios or minimum liquidity levels contained in our credit facilities and are unable toobtain future amendments to our credit facilities, the lenders could elect to declare all amounts outstanding to be immediately due and payable andterminate all commitments to extend further credit. If the lenders accelerate the repayment of borrowings, we may not have sufficient assets to repay theamounts due. Also, should there be an event of default, or a need to obtain waivers following an event of default, we may be subject to higherborrowing costs and/or more restrictive covenants in future periods.See the Liquidity and Capital Resources section of Item 7, Management’s Discussion and Analysis of Financial Condition and Results ofOperations, for a more detailed discussion of the Company’s projected compliance with these debt covenants.Our common stock is thinly traded, and as a result our investors do not have a meaningful degree of liquidity.Since October 2013, our common stock has been sporadically quoted on the OTCQB marketplace, meaning that the number of persons interestedin purchasing our common stock at or near bid prices at any given time may be relatively small or nonexistent. We cannot predict the extent to whichan active public market for our common stock will develop or be sustained. As a consequence, there may be extended periods of time when trading 18activity in our shares is minimal or nonexistent. We cannot give investors any assurance that a broader or more active public trading market for ourcommon stock will develop or be sustained. An investor may find it difficult or impossible to dispose of shares or obtain accurate information as to themarket value of the common stock. Investors may be unable to sell their shares of common stock at or above their purchase price if at all, which mayresult in substantial losses.We are highly leveraged. As of December 29, 2018, we had $134 million of reported total debt, or $137 million of gross debt, which excludes debtissuance costs. Approximately $30.4 million of this debt matures in 2019. This level of debt and the repayment of the amount due in fiscal 2019could adversely affect our operating flexibility and put us at a competitive disadvantage.Our level of debt and the repayment of the amount due in fiscal 2019 and the limitations imposed on us by our credit agreements could haveimportant consequences for investors, including the following: • we will have to use a significant portion of our cash flow from operations or borrowing capacity for debt service rather than for ouroperations; • we may not be able to obtain additional debt financing for future working capital, capital expenditures or other corporate purposes or mayhave to pay more for such financing; • our ability to finance our future working capital needs may be restricted; • the debt under our credit agreements is at a variable interest rates, making us more vulnerable to increases in interest rates; • we could be less able to take advantage of significant business opportunities, such as acquisition opportunities, and to react to changes inmarket or industry conditions; • we will be more vulnerable to general adverse economic and industry conditions; and • we may be disadvantaged compared to competitors with less leverage.We expect to service our debt primarily from cash flow from operations or refinance our debt using existing or new facilities. Our ability toservice our debt obligations thus depends on our future performance and borrowing capacity, which will be affected by financial, business, economicand other factors. We are not able to control many of these factors, such as economic conditions in the markets where we operate and pressure fromcompetitors. The cash flow we generate and our existing borrowing capacity may not be sufficient to allow us to service our debt obligations. If we donot have sufficient capital, we may be required to refinance all or part of our existing debt, sell assets or borrow additional funds. We may not be able totake such actions on terms that are acceptable to us, if at all. In addition, the terms of our existing or future debt agreements may restrict us fromadopting any of these refinancing alternatives.Our business depends upon the growth of the student population and school expenditures and can be adversely impacted by fixed or decliningschool budgets.Our growth strategy and profitability depend in part on growth in the student population and classroom expenditures per student in PreK-12schools. The level of student enrollment is largely a function of demographics, while classroom expenditures per student are affected by federal, stateand local government budgets. In addition, the softening of state and local tax collections may result in reduction to school funding, and thus, schoolbudgets. In school districts in states that primarily rely on local tax proceeds for funding, significant reductions in those proceeds for any reason canrestrict district expenditures and impact our results of operations. Any significant and sustained decline in student enrollment and/or classroomexpenditures per student could have a material adverse effect on our business, financial condition, and results of operations. Because school budgetsare fixed on a yearly basis, any shift by schools in expenditures during a given fiscal year to areas that are not part of our business, such as facilityoperating costs and employee related expenditures, could also materially affect our business. 19A decline in school spending will impact our ability to maintain operating margins.The Company’s revenues are influenced by school spending, and school spending cuts could have a significant impact on our revenues andoperating margins. The Company will pursue further cost reductions if school spending declines significantly from current levels, but the Companydoes not intend to cut costs in areas that it believes could have a significant impact on future revenue growth. To the extent we are unable to identifyadditional cost reductions that can be made consistent with our strategy and the weakness in school spending persists, our operating margin maydecline. Additionally, spending declines can cause schools to consider purchasing lower priced products, which will lower the Company’s operatingmargins.Increasing use of web-based products is affecting our printed supplemental materials business.The growth in web-based and digital-based supplements has reduced the physical paper-based supplements the Company currently markets.While we continue to enhance some of our product lines with digital alternatives, it is likely that our paper-based products will be further supplantedand/or replaced by online sources other than our own.Increased costs and other difficulties associated with the distribution of our products would adversely affect our results of operations.Higher than expected costs and other difficulties associated with the distribution of our products could affect our results of operations. To theextent we incur difficulties or higher-than-expected costs related to updating our distribution centers, such costs may have a material adverse effect onour business, financial condition and results of operations. Any disruption in our ability to service our customers may also impact our revenues orprofits. Moreover, as we update our distribution model, reduce the number of distribution centers or change the product mix of our remainingdistribution centers, we may encounter unforeseen costs or difficulties that may have an adverse impact on our financial performance. We alsoexperienced significant labor turnover in our fulfillment centers in 2018 that resulted in shipping delays, incremental costs and a shift in our cashconversion cycle. If this turnover continues, these issues may continue to intensify, which may have a material adverse effect on our financialcondition and results of operations.Our business is highly seasonal.Because most of our customers want their school supplies delivered before or shortly after the commencement of the school year, we record mostof our revenues from June to October. During this period, we receive, ship and bill the majority of orders for our products so that schools and teachersreceive their products by the start of each school year. To the extent we do not sell our products to schools during the peak shipping season, many ofsuch sales opportunities will be lost and will not be available in subsequent quarters. Our inventory levels increase in April through June inanticipation of the peak shipping season. We usually earn more than 100% of our annual net income from June to September of our fiscal year andoperate at a net loss from October to May. This seasonality causes our operating results and operating cash flows to vary considerably from quarter toquarter within our fiscal yearsIf our key suppliers or service providers were unable or unwilling to provide the products and services we require, our business could be adverselyaffected.We depend upon a limited number of suppliers for some of our products, especially furniture and proprietary products. We also depend upon alimited number of service providers for the delivery of our products. If these suppliers or service providers are unable or unwilling to provide theproducts or services that we require or materially increase their costs (especially during our peak season of June through October), our ability to deliverour products on a timely and profitable basis could be impaired and thus could have a material adverse effect on our business, financial condition andresults of operations. Many of our agreements with our suppliers are terminable at any time or on short notice, with or without cause, and we cannotassure that any or all of our relationships will not be terminated or that such relationships will continue as presently in effect. 20Our business is highly competitive.The market for supplemental educational products and equipment is highly competitive and fragmented with many retail and wholesalecompanies that market supplemental educational products and equipment to schools with PreK-12 as a primary focus of their business. We also facecompetition from alternate channel marketers, including office supply superstores, office product contract stationers, internet-based retailers andpurchasing cooperatives that have not traditionally focused on marketing supplemental educational products and equipment. Our competitors impactthe prices we are able to charge and we expect to continue to face pricing pressure from our competitors in the future, especially on our commodity-type products. These competitors are likely to continue to expand their product lines and interest in supplemental educational products andequipment. Some of these competitors have greater financial resources and buying power than we do. We believe that the supplemental educationalproducts and equipment market will consolidate over the next several years, which could increase competition in both our markets. We also faceincreased competition and pricing pressure as a result of the accessibility of the internet.If any of our key personnel discontinue their role with us, our business could be adversely affected.Our business depends to a large extent on the abilities and continued efforts of our executive officers and senior management. If we are unable toattract and retain key personnel and qualified employees, our business could be adversely affected. We do not intend to maintain key man lifeinsurance covering any of our executive officers or other members of our management.A failure to successfully implement our business strategy could materially and adversely affect our operations and growth opportunities.Our ability to achieve our business and financial objectives is subject to a variety of factors, many of which are beyond our control, and we maynot be successful in implementing our strategy. This includes limitations due to the inability to obtain financing and/or the restrictiveness of our debtcovenants. In addition, the implementation of our strategy may be costly in the short term and not lead to improved operating results and may result indeclining operating results. We may decide to alter or discontinue aspects of our business strategy and may adopt alternative or additional strategiesdue to business or competitive factors or factors not currently expected, such as unforeseen costs and expenses or events beyond our control. Anyfailure to successfully implement our business strategy could materially and adversely affect our results of operations and growth opportunities.We face risks associated with our increasing emphasis on imported goods and private label products.Increases in the cost or a disruption in the flow of our imported goods may adversely impact our revenues and profits and have an adverse impacton our cash flows. Our business strategy includes an increased emphasis on offering private label products and sourcing quality merchandise directlyfrom low-cost suppliers. As a result, we expect to rely more heavily on imported goods from China and other countries and we expect the sale ofimported goods to continue to increase as a percentage of our total revenues. To the extent we rely more heavily on the sale of private label products,our potential exposure to product liability claims may increase. In addition, our reputation may become more closely tied to our private label productsand may suffer to the extent our customers are not satisfied with the quality of such products. Private label products will also increase our risksassociated with returns and inventory obsolescence. Our reliance on imported merchandise subjects us to a number of risks, including: (a) increaseddifficulties in ensuring quality control; (b) disruptions in the flow of imported goods due to factors such as raw material shortages, work stoppages,strikes, and political unrest in foreign countries; (c) problems with oceanic shipping, including shipping container shortages; (d) economic crises andinternational disputes; (e) increases in the cost of purchasing or shipping foreign merchandise resulting from a failure of the United States to maintainnormal trade relations with China and the other countries we do business in; (f) import duties, import quotas, and other trade sanctions; and(g) increases in shipping rates imposed by the trans-Pacific shipping cartel. If imported merchandise becomes more expensive or unavailable, 21we may not be able to transition to alternative sources in time to meet our customers’ demands. A disruption in the flow of our imported merchandise oran increase in the cost of those goods due to these or other factors would significantly decrease our revenues and profits and have an adverse impact onour cash flows.We may be involved in lawsuits to defend against third party claims of intellectual property infringement, which in each case could require us tospend significant time and money and could prevent us from selling our products or conduct our business as presently conducted.From time to time we are involved in litigation because others allege that we infringe on their intellectual property. These claims and anyresulting lawsuits could subject us to significant liability for damages and invalidate our proprietary rights. In addition, these lawsuits, regardless oftheir merits, could be time consuming and expensive to resolve and may divert management’s time and attention. Any intellectual property litigationalleging our infringement of a third-party’s intellectual property also could force us or our customers to i) stop producing or using products that use thechallenged intellectual property, ii) obtain from the owner of the infringed intellectual property, at our expense, a license to sell or use the relevanttechnology at an additional cost, which license may not be available on reasonable terms, or at all, iii) redesign those products or services that use theinfringed technology, or iv) change the ways in which we conduct our business so as to avoid infringing the technology. Any costs we incur fromhaving to take any of these actions could be material.Currency exchange rates may impact our financial condition and results of operations and may affect the comparability of our results betweenfinancial periods.To the extent we source merchandise from overseas manufacturers and sell products internationally, exchange rate fluctuations could have anadverse effect on our results of operations and ability to service our U.S. dollar-denominated debt. All of our debt is in U.S. dollars while a portion ofour revenue is derived from imported products and international sales. Therefore, fluctuations in the exchange rate of foreign currencies versus the U.S.dollar could impact our costs and revenues. In addition, for the purposes of financial reporting, any change in the value of the foreign currenciesagainst the U.S. dollar during a given financial reporting period would result in a foreign currency loss or gain. Consequently, our reported earningscould fluctuate as a result of foreign exchange translation and may not be comparable from period to period.It is difficult to forecast our revenue stream given the seasonal purchasing patterns of our customers and delays in passage of state budgets and otherfactors.The seasonal purchasing patterns of our customers, the fact that our customers typically purchase products on an as-needed basis, and the lack ofvisibility into education funding levels if state budgets are delayed make it difficult for us to accurately forecast our revenue stream, which may varysignificantly from period to period. In addition, the categories or specific products to which customers allocate budget dollars can vary significantlyfrom year-to-year, as we experienced in 2018, and the shift in mix can have a material impact on our profitability. Third parties that may seek to projectour future performance face similar difficulties. The difficulty in accurately forecasting our revenue increases the likelihood that our financial resultswill differ materially from any projected financial results. Any shortfall in our financial results from our, or third-party, projected results could cause adecline in the trading price of our common stock.We may have a material amount of intangible assets which are potentially subject to impairment.At December 29, 2018, intangible assets represented approximately 14% of our total assets. We are required to evaluate goodwill for impairmenton an annual basis and other intangibles if indicators of impairment exist. As discussed in Note 6 to the consolidated financial statements in Item 8 ofthis report, the Company recorded an impairment charge of $22.3 million in fiscal 2018 related to goodwill. Goodwill and intangible assets areevaluated based on a fair value assessment of these assets. The fair value assessments of these assets are based on significant assumptions, includingearnings projections and discount rates. Changes in these assumptions can have a significant impact on the fair value assessment and the resultingconclusion as to any potential asset impairment and the amount of any such impairment. 22We have a material amount of capitalized product development costs which might be written-down.We had capitalized product development costs of $13.7 million and $14.9 million at December 29, 2018 and December 30, 2017, respectively,related to internally developed products, which are amortized to expense over the lesser of five years or the product’s life cycle. Any changes in theestimated sales volume or life cycle of the underlying products could cause the currently capitalized costs or costs capitalized in the future to beimpaired. In fiscal 2016, we recorded write-downs of capitalized product development costs of $1.3 million.Our operations are dependent on our information systems.We have integrated the operations of our divisions and subsidiaries on a single ERP, which operates on a system located at our third-party hostedERP system provider’s facilities. The system relies on continuous telecommunication connections to the main computers. If any of these connectionsbecomes disrupted, or unavailable, for an extended period of time, the disruption could materially and adversely affect our business, operations andfinancial performance.Increased cyber-security requirements and potential threats could pose a risk to our systems, networks, services and data. Harmful software,hackers, malicious insiders or vendor errors or misconduct, and other external hazards, could expose our information systems the Company to cyberextortion, security breaches, cyber-attacks, denial of service, or other disruptions. The nature of our business involves the receipt and transmission, andin some cases storage by us or third parties on our behalf, of customers’ personal information, shopping preferences and our customers’ credit cardinformation, in addition to employee information and the Company’s intellectual property, and financial and strategic data. The protection of ourcustomers’ personal information, as well as confidential Company and third-party data is vitally important to the Company. While we undertakevendor risk management and due diligence, and attempt to use secure methods to transmit sensitive information to our vendors and other third parties,any security failures or lack of controls at our vendors or third parties we do business with could put our customers’ or our Confidential information atrisk. Our information systems have been and will continue to be subject to myriad cyber threats, which are increasing in sophistication and volume,including malware, viruses, ransomware, and other harmful code, as well as unauthorized access, data exfiltration, and other cyber-attacks. Theseongoing cyber threats could expose us or our information systems to data loss, system interruptions, disclosure or compromise of personal,confidential, or proprietary information, and monetary and reputational damages that could cause us to lose the trust of our customers or businesspartners. The disclosure of or unauthorized access to personal, confidential or proprietary information could also subject us to costs and expenses toinvestigate and notify affected individuals, legal liability or regulatory investigations, fines and penalties under the ever-changing and increasinglycomplex laws, regulations, and self-regulatory guidelines, that govern the use, disclosure, security and privacy of sensitive information both in the U.S.and abroad. While we have partially mitigated some of the aforementioned cyber risk through the purchase of cyber liability insurance coverage, therecould be significant costs, expenses, liabilities, fines, penalties, and damages, including reputational damage, which would not be covered in whole orin part by our policy.Even though we have taken precautions to protect ourselves from unexpected events that could interrupt new and existing business operationsand systems, we cannot be sure that fire, flood or other natural disasters would not disable our information systems and/or prevent them fromcommunicating between business segments. The occurrence of any such event could have a material adverse effect on our business, results ofoperations and financial condition.We rely on our intellectual property in the design and marketing of our products.We rely on certain trademarks, trade names and service names, along with licenses to use and exploit certain intellectual property related todesigns of proprietary products, trademarks, trade names and service names (collectively, the “marks”) in the design and marketing of some of ourproducts. We could lose our ability to use 23our brands if our marks were found to be generic or descriptive, as well as the right to sell proprietary products which are based upon licensedintellectual property. While no single mark is material to our business, the termination of a number of these marks could have an adverse effect on ourbusiness. The loss of certain licensed intellectual property related to proprietary products (for example, FOSS®) may have a material adverse effect onour business. We also rely on certain copyrights, patents and licenses other than those described above, the termination or loss of which could have anadverse effect on our business. Item 1B.Unresolved Staff CommentsNone. Item 2.PropertiesOur corporate headquarters are located in a leased facility. The lease on this facility expires in April 2021. The facility located at W6316 DesignDrive, Greenville, Wisconsin, is a combined office and warehouse facility of approximately 332,000 square feet, which services both our Curriculumand Distribution segments. In addition, we leased the following principal facilities as of March 15, 2019: Locations ApproximateSquare Footage Owned/Leased Lease Expiration Bellingham, Washington (1) 25,000 Leased 31-Jul-20 Cambridge, Massachusetts (2) 5,200 Leased 31-Jan-19 Cameron, Texas (1)(3) 277,000 Leased 31-Mar-19 Jacksonville, Florida (1) 5,900 Leased 31-Mar-19 Lancaster, Pennsylvania (4) 73,000 Leased 30-Jun-20 Lancaster, Pennsylvania (1) 125,000 Leased 30-Jun-20 Lombard, Illinois (4) 4,200 Leased 31-Aug-20 Mansfield, Ohio (4) 315,000 Leased 31-Oct-20 Nashua, New Hampshire (2) 337,000 Leased 31-Dec-23 New York, New York (1) 5,900 Leased 30-Apr-21 (1)Location primarily services the Distribution segment(2)Location primarily services the Curriculum segment.(3)Lease automatically renews for a six-month term unless notice is provided.(4)Location services both business segments.The 73,000 square foot Lancaster, Pennsylvania facility is used for manufacturing wood products. The other facilities are distribution centersand/or office space. We believe that our properties are adequate to support our operations for the foreseeable future. We regularly review the utilizationof our facilities to identify consolidation opportunities. Item 3.Legal ProceedingsThe Company is not currently party to any material pending legal proceedings, other than routine litigation incidental to the Company’sbusiness in the ordinary course. Item 4.Mine Safety Disclosure.Not applicable. 24EXECUTIVE OFFICERS OF THE REGISTRANTAs of March 14, 2019, the following persons served as executive officers of School Specialty: Name and Age of Officer Michael BuenzowAge 54 Mr. Buenzow was appointed as the Company’s Interim Chief Executive Officer on February 1, 2019. Mr. Buenzowhas served as Senior Managing Director at FTI Consulting, Inc. (“FTI”) since 2002. His experience includesserving as Chief Executive Officer of several companies including Bush Industries, Inc. and Huffy Corporation.Prior to joining FTI in 2002, Mr. Buenzow was a partner at PricewaterhouseCoopers. Mr. Buenzow earned an MBAfrom the University of Notre Dame and a BBA from Niagara University.Ryan BohrAge 45 Mr. Bohr has served as Executive Vice President and Chief Operating Officer of the Company since June 2017.Mr. Bohr previously served as the Company’s Executive Vice President, Chief Financial Officer from October2014 to June 2017. Prior to joining the Company, Mr. Bohr served as Chief Executive Officer of Fresh MattersLLC, an early stage specialty beverage company, from January 2014 to October 2014 after serving as an operationsadvisor to the Company during 2013. Prior to that, Mr. Bohr was a Partner at Hilco Equity Partners, a privateequity firm focused on special situations, where he worked from March 2003 to December 2012. While with HilcoEquity, Mr. Bohr played a key role in all aspects of the Fund’s activities, including fundraising, day-to-dayoperations for certain portfolio companies and execution of the firm’s investment strategy across the consumer andindustrial industries. In addition, Mr. Bohr has previously held other senior operating and financial positions andworked in private equity, investment banking and public accounting for several years. Mr. Bohr holds a BBAdegree in accounting from the University of Notre Dame and earned the CPA designation in 1996.Todd A. ShawAge 54 Mr. Shaw has served as the Executive Vice President, Chief Supply Chain Officer of the Company since June 2017.Mr. Shaw previously served as the Company’s Vice President, Operational Excellence and ContinuousImprovement from July 2014 to November 2014 and Executive Vice President, Operations from December 2014 toJune 2017. Prior to joining the Company, Mr. Shaw served as Vice President of Operations of Prolitec Inc., aprovider of air treatment and indoor air quality technologies from September 2011 to July 2014. Prior to that,Mr. Shaw served as Chief Operating Officer of NYX Global LLC, a business services and consulting company, fromOctober 2010 to September 2011. From May 2009 to October 2010, Mr. Shaw served as Senior Vice President ofFacility Services and Logistics of Xe Services LLC (now known as Academi), a private aerospace and defensecompany. Earlier in his career, he worked primarily in operational roles, serving as Division Manager with ShorrPackaging Corporation, Vice President of Operations with Corporate Express, and Area Operations Director withUnisource Worldwide. Mr. Shaw attended the University of Wisconsin—Platteville where he studied criminaljustice. 25Name and Age of Officer Kevin BaehlerAge 55 Mr. Baehler has served as Executive Vice President, Chief Financial Officer of the Company since June 2017. Mr.Baehler joined the Company in 2004 as Corporate Controller, and was promoted to Vice President, CorporateController in 2007. From June 2007 to April 2008, he served as interim Chief Financial Officer. In April 2008, afterstepping down as interim Chief Financial Officer, he was appointed to the position of Senior Vice President,Corporate Controller. From January 2014 to October 2014, he served as interim Chief Financial Officer. FromOctober 2014 to June 2017, Mr. Baehler served as Senior Vice President, Corporate Controller and ChiefAccounting Officer. Since joining the Company, he has been responsible for all aspects of the Company’s financialreporting process. Prior to joining the Company, Mr. Baehler spent six years with GE Healthcare, a division ofGeneral Electric Company in various financial positions, most recently as Assistant Global Controller. Mr. Baehlerobtained his undergraduate degree in accounting from the University of Wisconsin – Whitewater and he is aCertified Public Accountant.The term of office of each executive officer is from one annual meeting of the Board of Directors until the next annual meeting of the Board ofDirectors or until a successor for each is selected. In connection with the appointment of Mr. Buenzow as Interim Chief Executive Officer, the Companyentered into a letter agreement (the “Engagement Agreement”) with FTI Consulting, Inc. (“FTI”). Pursuant to the terms of the Engagement Agreement,Mr. Buenzow, and any other person who may provide services to the Company under the Engagement Agreement, will remain an employee orindependent contractor, as applicable, of FTI and will not be an employee of the Company. The Company will not be responsible for payment of anyemployee benefits or other costs typically incurred as an employer, except that the Company has agreed to provide Mr. Buenzow and any other FTIemployee serving as a director or officer of the Company with coverage under its existing directors and officers insurance policy. Pursuant to theEngagement Agreement, the Company has agreed to compensate FTI on an hourly basis for Mr. Buenzow’s services. The Engagement Agreement alsoincludes an additional incentive fee based upon the Company’s adjusted EBITDA performance. In addition, the Company has agreed to reimburse FTIfor reasonable expenses incurred on the Company’s behalf. There are no other arrangements or understandings between any of our executive officersand any other person (not an officer or director of School Specialty acting as such) pursuant to which any of our executive officers was selected as anofficer of School Specialty. 26PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket InformationThe Company’s common stock trades on the OTCQB market place of the OTC Market Groups under the symbol “SCOO”. The table below setsforth the reported high and low closing sale prices for shares of our common stock, during the indicated quarters. Fiscal 2018 High Low Quarter ended March 31, 2018 $17.00 $16.05 Quarter ended June 30, 2018 20.02 16.65 Quarter ended September 29, 2018 19.90 17.00 Quarter ended December 29, 2018 17.90 7.09 Fiscal 2017 High Low Quarter ended April 1, 2017 $19.29 $14.29 Quarter ended July 1, 2017 18.00 16.64 Quarter ended September 30, 2017 18.75 16.50 Quarter ended December 30, 2017 16.86 16.26 Fiscal 2016 High Low Quarter ended March 26, 2016 $14.86 $10.00 Quarter ended June 25, 2016 15.29 14.29 Quarter ended September 24, 2016 14.57 13.86 Quarter ended December 31, 2016 16.00 12.43 HoldersAs of March 14, 2019, there were approximately 375 record holders of the common stock of the Company.DividendsWe have not declared or paid any cash dividends on our common stock to date. We currently intend to retain our future earnings to pay downdebt, finance the growth, development and expansion of our business or for other endeavors deemed prudent. Accordingly, we do not expect to paycash dividends on our common stock in the foreseeable future. In addition, our ability to pay dividends is restricted or prohibited from time to time byfinancial covenants in our credit agreements and debt instruments. Our asset based lending facility and our term loan credit agreement containrestrictions on, and in some circumstances, may prevent our payment of dividends. 27PERFORMANCE GRAPHThe following graph compares the total shareholder return on our Common Stock since October 30, 2013 with that of the Russell 3000 StockMarket Index and a peer group index including: Office Depot, Inc. (ODP), Staples, Inc. (SPLS), Cambium Learning Group, Inc. (ABCD), The McGraw-Hill Companies, Inc. (MHP), Pearson PLC (PSO), Scholastic Corporation (SCHL), Scientific Learning Corp (SCIL) and Virco Manufacturing Corp(VIRC).The total return calculations set forth below assume $100 invested on October 30, 2013, which is the first date on which shares of our CommonStock were traded on the OTCQB market place. The total return calculations assume the reinvestment of any dividends into additional shares of thesame class of securities at the frequency with which dividends were paid on such securities through December 29, 2018. The stock price performanceshown in the graph below should not be considered indicative of potential future stock price performance.COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among School Specialty, Inc., the Russell 3000 Index,and a Peer Group *$100 invested on 12/31/13 in stock or index, including reinvestment of dividends.Fiscal year ending December 29.Copyright© 2019 Russell Investment Group. All rights reserved. 12/31/14 12/26/15 12/31/16 12/30/17 12/29/18 School Specialty, Inc. 123.01 93.67 126.58 147.53 65.92 Russell 3000 115.17 117.80 131.66 159.48 149.81 Peer Group 116.99 106.24 112.38 157.83 162.35 28Item 6.Selected Financial DataSELECTED FINANCIAL DATA(In thousands, except per share data) Successor Company PredecessorCompany Fiscal YearEndedDecember 29,2018(52 weeks) Fiscal YearEndedDecember 30,2017(52 weeks) Fiscal YearEndedDecember 31,2016(53 weeks) Thirty-FiveWeeksEndedDecember26, 2015 Fiscal YearEndedApril 25,2015(52 weeks) Forty-SixWeeksEndedApril 26,2014 Six WeeksEndedJune 11,2013 Statement of Operations Data: Revenues $673,452 $658,383 $656,322 $504,278 $621,868 $572,045 $58,697 Cost of revenues 444,937 415,144 416,394 317,891 393,710 349,845 35,079 Gross profit 228,515 243,239 239,928 186,387 228,158 222,200 23,618 Selling, general and administrative expenses 222,168 217,960 215,227 155,593 232,479 213,144 27,473 Facility exit costs and restructuring 2,463 421 1,740 901 6,056 6,552 — Impairment charge 22,262 — — — 2,713 — — Operating income (loss) (18,378) 24,858 22,961 29,893 (13,090) 2,504 (3,855) Interest expense 15,548 15,190 17,682 12,973 19,599 16,882 3,235 Loss on early extinguishment of debt — 4,298 — 877 — — — Change in fair value of interest rate swap — — (271) (174) (45) 483 — Refund of early termination fee — — — — — (4,054) — Reorganization item, net — — — — 271 6,420 (84,799) Early termination of long-term indebtedness — — — 200 — — — Gain on sale of unconsolidated affiliate — — (9,178) — — — — Income (loss) before provision for (benefit from) incometaxes (33,926) 5,370 14,728 16,017 (32,915) (17,227) 77,709 Provision for (benefit from) income taxes 4,815 (1,409) (36) 716 617 258 1,641 Net income (loss) $(38,741) $6,779 $14,764 $15,301 $(33,532) $(17,485) $76,068 Weighted average shares outstanding: Basic EPS 7,000 7,000 7,000 7,000 7,000 7,000 132,454 Diluted EPS 7,000 7,024 7,000 7,000 7,000 7,000 132,454 Earnings (loss) per share of common stock: Basic and Diluted $(5.53) $0.97 $2.11 $2.19 $(4.79) $(2.50) $0.57 Balance Sheet Data: December 29,2018 December 30,2017 December 31,2016 December 26,2015 April 25,2015 April 26,2014 Working capital $87,132 $122,268 $130,988 $117,197 $100,595 $111,922 Total assets 270,676 312,407 287,607 274,489 307,672 334,377 Total debt 133,935 141,563 137,487 144,259 176,913 161,133 Stockholders’ equity 67,363 107,491 98,119 81,606 66,377 103,057 The Company adopted ASC 606 in fiscal 2018 which provides guidance for revenue recognition. Prior periods have not been restated. 29On January 28, 2013, School Specialty, Inc. and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the UnitedStates Code in the United States Bankruptcy Court for the District of Delaware. Pursuant to a plan of reorganization (“Reorganization Plan”) adoptedby the bankruptcy court, the Company emerged from bankruptcy on June 11, 2013. Any references to “Successor” or “Successor Company” show thefinancial position and results of operations of the reorganized Company subsequent to bankruptcy emergence on June 11, 2013. References to“Predecessor” or “Predecessor Company” refer to the financial position and results of operations of the Company prior to the bankruptcy emergence. 30Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)You should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes, includedelsewhere in this Annual Report.Factors Affecting ComparabilityBackgroundWe are a leading provider of educational products, services and programs serving the PreK-12 education market across the United States andCanada. We offer more than 100,000 items through an innovative two-pronged marketing and sales approach that targets both school administratorsand individual teachers.Our goal is to grow profitably as a leading provider of supplies, product, services and curriculum for the education market. We have experiencedfour consecutive years of overall revenue growth even while negative market conditions impacted our ability to grow in certain categories. One of ourfiscal 2019 objectives is to return to balanced revenue growth. We plan to achieve this goal over the long-term through an organic growth strategybased on leveraging our strong brand names and distribution capabilities and completing the transformation of the Company’s sales and marketing to ateam-based selling approach with a balance of new customer acquisition and customer retention, and exploring new markets or revenue streams. Inaddition, we will continue to present our uniquely comprehensive value proposition to schools. We believe this will enable us to drive deeperpenetration of the full scope of our product offerings. New revenue streams include exploring opportunities in areas that could expand our addressablemarket, such as distribution to non-education customers, expansion into new product categories, continued growth in the alternative channel segment,and potentially, abroad in select international markets. In addition, the Company is committed to continuing to invest in support of internal productdevelopment efforts in order to expand our core science curriculum and supplemental instruction and intervention product offerings.Our financial results for fiscal 2018 were negatively impacted by four primary factors, which we have addressed for fiscal 2019 and believe theprospective impact of these factors will be favorable. These factors include; 1.A significant decline in the number of opportunities for Science curriculum sales. Fewer states had scheduled science adoptions in 2018. Inaddition, we believe larger districts in non-adoption states delayed science curriculum purchases pending the evaluation of curriculumprograms developed for large state adoptions in process. The pipeline of opportunities for our Science offering in 2019 is much strongerthan 2018. Many school districts in the state of California will be adopting and purchasing science curriculum over the next two years andour science curriculum product is utilized in many districts across the state. In addition, we have a number of opportunities in other largedistricts throughout the country. Based on our strong opportunity pipeline, we expect strong growth in our science product category in2019. 2.Gross margin in our Supplies product category were down approximately 410 basis points in 2018 versus 2017. This decrease was due tothe impact of changes in the contractual pricing for certain large customers, a shift in mix towards our commodity, third-party brandedproducts which typically carry lower gross margins, and the net impact of pricing and cost changes. For 2019, we expect Supplies productcategory margins to be stable at current levels or modestly improve as targeted price increases take effect and efforts to improve sales mixand increase sales of our higher margin proprietary take hold. 3.An industry-wide increase in transportation costs resulted in approximately $8 million of increased freight costs in 2018 versus. 2017.Although freight rates are expected to increase modestly in 2019, we believe we will be able to mitigate the increases through acombination of operational improvements resulting in fewer split shipments and renegotiated parcel rates. We recently finalized a newparcel agreement which will provide favorable rebates in 2019. 31 4.Unusually high seasonal employee turnover in our fulfillment centers, partly attributable to lower unemployment rates contributed toshipping delays, increases in split shipments (multiple shipments to satisfy all items on an order), lower productivity and higher hourlywages. In addition, the combination of shipping delays and increased split shipments resulted in the Company’s cash conversion cyclebeing pushed to later into the year and into 2019, which negatively impacted 2018 cash flow. For 2019, the Company expects to avoid thereoccurrence of these staffing issues by leveraging a new partnership with a third-party staffing firm, adjusting wage rates and expandingflexible shift options. The Company believes that these improvements will lead to an improved fulfillment season at a lower overall cost.In fiscal 2018, the Company had revenues of $673.5 million and operating loss of $18.4 million, as compared to revenues of $658.4 million andoperating income of $24.9 million for fiscal 2017 and as compared to revenues of $656.3 million and operating income of $23.0 million for fiscal2016. In fiscal 2018, the Company’s revenue grew by 2.3% over fiscal 2017. In fiscal 2017, the Company’s revenues grew by 0.3% over fiscal 2016.The Company’s most significant revenue growth in fiscal 2018 as compared to fiscal 2017 was in the Instruction & Intervention and Furniturecategories. The full-year of impact of the Triumph Learning acquisition contributed $14.4 million of the fiscal 2018 revenue growth in theInstruction & Intervention product category. Gross margin declined by 300 basis points in fiscal 2018 as compared to fiscal 2017 through acombination of lower effective selling prices, item level cost increases, and product mix. The Company continues to focus on, and effectively manage,its SG&A costs. While SG&A expenses increased by 1.9%, or $4.2 million, in fiscal 2018 as compared to fiscal 2017, SG&A costs associated with full-year impact of the Triumph Learning acquisition represented $2.6 million of the increase in 2018 versus 2017.While remaining focused on lowering costs through consolidation and process improvements, the Company is equally focused on revenuegrowth and gross margin management. The Company believes the following initiatives will contribute to continued revenue growth, while effectivelymanaging gross margin and operating costs: • Successful execution of a new team sell model and go to market strategy; • Properly positioning the Company’s unique and comprehensive value proposition; • Improve the effectiveness of margin management through a renewed emphasis on selling proprietary brands; • Development of an effective strategy to manage pricing in competitive bidding scenarios; • Increase product category specific sales and support expertise; and • Execute on key platform investments to both drive efficiency and improve customer experiences.Our business and working capital needs are highly seasonal, and we operate assuming that schools and teachers are able to receive products tosupport the start of the school year. As such, our peak sales levels occur from June through September. We expect to ship orders representingapproximately 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 anet 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 revenuemonths. Historically, accounts receivable collections are strongest in the months of September through December as over 100% of our annualoperating cash flow is generated in those months. 32Results of OperationsThe following table sets forth our results of operations for fiscal 2018, fiscal 2017, and fiscal 2016. Fiscal Year EndedDecember 29,2018 (52 weeks) Fiscal Year EndedDecember 30,2017 (52 weeks) Fiscal Year EndedDecember 31,2016 (53 weeks) Revenues $673,452 $658,383 $656,322 Cost of revenues 444,937 415,144 416,394 Gross profit 228,515 243,239 239,928 Selling, general and administrative expenses 222,168 217,960 215,227 Facility exit costs and restructuring 2,463 421 1,740 Impairment charge 22,262 — — Operating income (18,378) 24,858 22,961 Other expense: Interest expense 15,548 15,190 17,682 Loss on early extinguishment of debt — 4,298 — Gain on sale of unconsolidated affiliate — — (9,178) Change in fair value of interest rate swap — — (271) Income (loss) before provision for (benefit from) income taxes (33,926) 5,370 14,728 Provision (benefit) from income taxes 4,815 (1,409) (36) Net income (loss) $(38,741) $6,779 $14,764 Costs of Revenues and Selling, General and Administrative ExpensesThe following table illustrates the primary costs classified in Cost of Revenues and Selling, General and Administrative Expenses: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 thereimbursement of specific, incremental and identifiable costs, and net ofearly payment discounts. •  Compensation and benefit costs for all selling (includingcommissions), marketing, customer care and fulfillment centeroperations (which include the pick, pack and shipping functions),and other general administrative functions such as finance, humanresources and information technology. •  Amortization of product development costs and certain depreciation.•  Freight expenses associated with receiving merchandise from ourvendors to our fulfillment centers. •  Occupancy and operating costs for our fulfillment centers andoffice operations.•  Freight expenses associated with merchandise shipped from our vendorsdirectly to our customers. •  Freight expenses associated with moving our merchandise fromour fulfillment centers to our customers. •  Catalog expenses, offset by vendor payments or reimbursement ofspecific, incremental and identifiable costs. •  Depreciation and intangible asset amortization expense, otherthan amortization of product development costs. 33The classification of these expenses varies across the distribution industry. As a result, the Company’s gross margin may not be comparable toother retailers or distributors.Financial InformationConsolidated ResultsOverview of Fifty-Two Weeks Ended December 29, 2018 Compared to the Fifty-Two Weeks Ended December 30, 2017RevenuesRevenue of $673.5 million for fiscal 2018 increased by $15.1 million, or 2.3%, as compared to fiscal 2017 revenues of $658.4 million.Distribution segment revenues of $629.4 million for fiscal 2018 increased by 5.8%, or $34.5 million, from fiscal 2017. Revenues of $21.7 millionfrom the Triumph Learning products, acquired in the third quarter of fiscal 2017 and which are reported in our Instruction & Intervention productcategory, contributed $14.4 million of incremental revenues in fiscal 2018; up from $7.3 million in fiscal 2017. After adjusting for the impact of a fullyear of revenues from our Triumph Learning products, Distribution segment revenues were up by $20.1 million, or 3.4%, in 2018. Revenues in 2018for the Supplies category increased $3.3 million, or 1.1%. Fiscal 2018 revenues in Furniture were up 9.5%, or $11.9 million as compared to 2017.However, the fiscal 2018 orders for our Furniture product category were up 13.5% as compared to the fiscal 2017 orders. As a result, we enter fiscal2019 with a higher open order position, up 23%, or $5.8 million. Revenues in the Instruction & Intervention product category were up $15.3 million infiscal 2018 versus fiscal 2017. Adjusting the Instruction & Intervention category to exclude the incremental revenue associated with the TriumphLearning products, the category was up 1.6%, or $0.9 million. The order trends continued to improve throughout the year, especially in coreproprietary products such as Wordly Wise and Spire, which are up nearly 3% year-to-date. In conjunction with the integration of the Triumph Learningsales force with our Instruction & Intervention sales specialists, we restructured our coverage model which reduced the effectiveness of our sales effortsin 2018. This integration is substantially completed and we expect to enter 2019 with a more effective sales team focused on the Instruction &Intervention category along with a stronger product portfolio. The Company’s Agendas and AV Tech categories were down $4.3 million and$1.3 million, respectively, in fiscal 2018, both modestly below Company expectations.Curriculum segment revenues of $44.0 million for fiscal 2018 decreased by 30.6%, or $19.4 million, from fiscal 2017. The limited amount ofstate-wide science adoption activity in 2018 and fewer large opportunities in open territory states were the primary drivers of the year-over-year declinealthough the decreases were more significant than we anticipated in early 2018. However, the competitive positioning of the product line remainsstrong and the pipeline of opportunities for 2019 is significant and building. We currently expect significant revenue growth in the Curriculumsegment in 2019.Gross ProfitGross profit for fiscal 2018 was $228.5 million, as compared to $243.2 million for fiscal 2017. Gross margin for fiscal 2018 was 33.9%, ascompared to 36.9% for fiscal 2017. Increased revenues contributed $6.1 million of additional gross profit offset by a combination of a shift in productmix, lower product level gross margins and higher product development amortization.Distribution segment gross margin was 32.4% for fiscal 2018, as compared to 34.9% for fiscal 2017. Year-over-year price and costs changes,along with mix shifts within categories had a negative impact on gross margin of 270 basis points and higher product development amortization in thecurrent year resulted in 10 basis points of lower gross margin. These negative variances were partially offset by a shift in product mix at the product 34category level which contributed approximately 30 basis points of gross margin improvement in fiscal 2018. This positive impact has been driven by arelative increase in sales within the Instruction & Intervention product line, the impact of which has been partially offset by growth in the Furnitureproduct line, which has gross margins that are below those reported for the Distribution segment. More aggressive pricing in certain large state,regional and district-level pricing agreements, which became effective at various points in 2017, contributed to the lower average selling prices notedabove as they had a full-year impact in 2018. In addition, the strategic move to more competitive pricing on certain commodity items was also acontributing factor in the decline. However, these pricing actions drove growth and customer penetration in fiscal 2018 and will enable future growthand margin improvement. Year-over-year variances in gross margins have stabilized and the Company is focused on improving our mix of sales toinclude higher margin items and increasing penetration of School Specialty’s proprietary brands. In addition, the Company believes it has anopportunity to better optimize performance within strategic purchasing cooperatives and large state and district-level pricing agreements. As publiceducation’s utilization of purchasing cooperatives increases, the Company also believes that its long-standing presence within and unique ability tomeet the needs of such cooperatives creates an opportunity for our organization.Curriculum segment gross margin was 55.2% for fiscal 2018, as compared to 54.3% for fiscal 2017. Year-over-year increases in product costsnegatively impacted gross margin by 90 basis points. Lower product development amortization in the current year of 50 basis points offset a portion ofthe gross margin decline.Selling, General and Administrative ExpensesSG&A increased $4.2 million in fiscal 2018, from $218.0 million in fiscal 2017 to $222.2 million in fiscal 2018. The increase in SG&A isprimarily related to the full-year impact of the Triumph Learning acquisition completed in August 2017, and incremental depreciation andamortization.The Company’s acquisition of Triumph Learning during last year’s third quarter resulted in approximately $3.4 million of incremental SG&Acosts in fiscal 2018 versus fiscal 2017. As of the end of the first quarter of fiscal 2018, Triumph Learning was fully integrated into the operations of theCompany and the full-year SG&A impact was favorable to expectations. Depreciation and amortization expense increased by $3.8 million in fiscal2018 related primarily to incremental depreciation associated with the Company’s new phone system and new e-commerce platform implementations.Transportation costs increased $5.0 million in fiscal 2018 primarily driven by carrier imposed rate increases and an increased number of split-shipments resulting from fulfillment center delays. The Company has taken several actions to reduce freight expenses, including renegotiating parcelrates in early 2019 and expects a significant reduction in peak-season split shipments. The Company experienced staffing challenges in certainfulfillment centers which resulted in higher wage rates, higher employee turnover and lower productivity, which collectively drove direct labor costsup approximately $1.4 million in fiscal 2018. For 2019, the Company has taken significant steps to address these challenges and ensure they will notbe repeated and the Company anticipates a return to historical levels of labor productivity.Catalog expenses were down $5.0 million in fiscal 2018 as the Company continues to rationalize its use of printed catalog and transitioninvestments to digital media and enhancements to its ecommerce platform. In addition, approximately $1.8 million of the decrease in catalog expensewas the result of a shift in catalog production timing which will impact fiscal 2019. Incentive compensation expense was down $2.7 million in fiscal2018 as the Company’s financial performance did not meet incentive targets. Remaining SG&A expenses declined by $2.4 million year-over-year,reflecting a continued focus on lowering fixed expenses throughout the Company.As a percent of revenue, SG&A decreased slightly from 33.1% for fiscal 2017 to 33.0% for fiscal 2018 due to the combination of operatingleverage on revenue growth during 2018, and continued SG&A reductions tied to cost reduction and process improvement initiatives. 35Facility exit costs and restructuringDuring fiscal 2018, the Company recorded $2.5 million of facility exit costs and restructuring charges. For fiscal 2017, the Company recorded$0.4 million of facility exit costs and restructuring charges. The amounts in both periods were related entirely to severance.ImpairmentThe Company recorded $22.3 million of goodwill impairment charges in fiscal 2018 based on the annual assessment conducted during the fourthquarter of fiscal 2018. The goodwill impairment charge was for the Distribution reporting unit. See Note 6 – Goodwill and Other Intangible to theconsolidated financial statements in Item 8 of this report.Interest ExpenseInterest expense increased from $15.2 million for fiscal 2017 to $15.5 million for fiscal 2018. Non-cash interest and amortization of debt feeswere down approximately $0.8 million year-over-year primarily due to $0.5 million of lower interest attributable to the Company’s vendor noteobligations recorded in 2018 as compared to 2017 and $0.2 million of lower amortization of debt issuance costs. Cash interest expense was up$1.2 million in fiscal 2018 as compared to fiscal 2017. The incremental interest expense is related to increased average borrowings of approximately$19.3 million in fiscal 2018. The increase in average borrowings was related to the acquisition of Triumph Learning during the third quarter of fiscal2017, and the impact of the Company’s cash conversion cycle shifting to later in the year due to shipping delays.Loss on Early Extinguishment of DebtDuring fiscal 2017, the Company recorded a non-cash charge of $4.3 million related to the write-off of $3.1 million of remaining unamortizeddebt 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.Income TaxesThe provision for income taxes was $4.8 million for fiscal 2018, as compared to benefit from income tax of $1.4 million for fiscal 2017.The effective income tax rate for fiscal 2018 and fiscal 2017 was -14.2% and -26.3%, respectively. The negative tax rate for fiscal 2018 wasrelated to an incremental valuation allowance of $11.5 million which the Company recorded against substantially all of its net deferred tax assets.Based on a combination of the Company’s fiscal 2018 performance, negative earnings before tax over the past thirty-six cumulative months, and futureyear taxable income projections, we believe it is more likely than not that the tax benefits associated with the majority of our net deferred tax assetswill not be realized. Prior to recording the valuation allowance in fiscal 2018, the Company’s income tax benefit was $6.7 million, resulting in aneffective income tax rate of approximately 19.8%. The current year effective tax rate before considering the valuation allowance is lower than thestatutory tax rate as the impact of certain discrete items, such as the one-time transition tax on accumulated foreign earnings totaling $0.7 million.Overview of Fifty-Two Weeks Ended December 30, 2017 Compared to the Fifty-Three Weeks Ended December 31, 2016RevenuesRevenues for fiscal 2017 were $658.4 million, an increase of $2.1 million, or 0.3%, as compared to fiscal 2016 revenues of $656.3 million. 36Distribution segment revenues in fiscal 2017 of $595.0 million were down $3.9 million, or 0.6%, as compared to Distribution segment revenuesof $598.8 million in fiscal 2016. Approximately $2.5 million of the decline in revenues was related to one less week in fiscal 2017 as compared tofiscal 2016. Revenues from our largest product line, Supplies, declined by $10.5 million in fiscal 2017. Unanticipated mid-year state budget cuts in2017 created some uncertainty in near-term spending, resulting in decreased school demand and budget delays impacting the 2017/2018 school year.Our Supplies category was most affected by the uncertainty created by budget cuts. In addition, we determined that our everyday published pricing oncertain high reference commodity items were not as competitive as they needed to be, which negatively impacted sales to mid and smaller size districts.Although a substantial portion of our Supplies category revenues transact through contracts or specific bids and quotes, which generally containcompetitive pricing on commodity items, our Supplies revenues declined in the mid-size and smaller districts and we believe non-competitivepublished pricing on commodity items was a contributing factor. We took steps to implement more transparent and effective pricing intended tobenefit the category in 2018 and subsequent years. Agendas revenues declined by $7.0 million in fiscal 2017 as compared to fiscal 2016. While amajority of the decline in Agendas revenue was expected due to decreasing demand for paper-based planners, we implemented changes in our productoffering, pricing and sales structure to stabilize Agendas revenues. Revenues in our Furniture product category increased by $7.7 million in fiscal 2017as compared to fiscal 2016. The Furniture category revenue growth was related to increased spending on new school construction and refurbishmentprojects, strong growth in our private label furniture lines, the introduction of new products and effective sales and marketing efforts. Revenues fromTriumph Learning products, which are reported in our Instruction & Intervention product line, were $7.3 million in fiscal 2017.Curriculum segment revenues increased 10.3%, or $5.9 million in fiscal 2017, from fiscal 2016. Despite minimal state science adoptionopportunities in fiscal 2017, success in open territories resulted in several larger district orders. Curriculum segment revenues in fiscal 2016 were notmaterially impacted by the additional week as the business is less transactional as compared to our Distribution segment.Gross ProfitGross profit for fiscal 2017 was $243.2 million, as compared to $239.9 million for fiscal 2016. Gross margin for fiscal 2017 was 36.9% ascompared to 36.6% for fiscal 2016. Lower product development amortization contributed 40 basis points of gross margin improvement in fiscal 2017.The Triumph Learning acquisition contributed 30 basis points of consolidated gross margin improvement. The gross margin increases were partiallyoffset by lower product gross margin rates, which contributed approximately 30 basis points of gross margin decline.Distribution segment gross margin of 35.1% for fiscal 2017 was flat as compared to fiscal 2016 gross margin. A shift in mix within the segment,particularly towards our Furniture category, resulted in a decline of 30 basis points. The Furniture category has lower product level margins primarilybecause a significant majority of Furniture orders is fulfilled from third-party warehouse locations and, as such, freight expense to the customer iscaptured within cost of revenues. The significant majority of non-Furniture category sales within the Distribution segment is fulfilled from Companyoperated distribution centers and, as such, freight expense to the customer is captured within SG&A. Lower gross margins at the product category levelresulted in 40 basis points of decline in fiscal 2017 segment gross margin. The decrease in product category gross margin for fiscal 2017 was relatedprimarily to lower Supplies gross margins driven by strategic agreement pricing and lower margins realized in our AV Tech products. Decreasedproduct development amortization, particularly in the Instruction & Intervention product category positively impacted the gross margin rate by 30basis points. The Triumph Learning acquisition contributed 40 basis points of gross margin improvement to the segment for fiscal 2017.Curriculum segment gross margin was 54.3% for fiscal 2017 as compared to 51.2% for fiscal 2016. The combination of a decrease in productdevelopment amortization of $1.4 million in fiscal 2017 as compared to fiscal 2016 and higher revenues resulted in 270 basis points of gross marginimprovement. Improved product margins within the Science category resulted in approximately 40 basis points of gross margin improvement in fiscal2017 versus fiscal 2016. 37Selling, General and Administrative ExpensesSG&A increased $2.8 million from $215.2 million for fiscal 2016 to $218.0 million for fiscal 2017. The increase was related $7.7 million ofincremental SG&A costs associated with the Triumph Learning acquisition, which was offset by $5.4 million of SG&A cost decreases in the remainderof the Company. Approximately $3.2 million of the Triumph Learning SG&A costs were related to transaction and integration costs.The $5.4 million of SG&A cost reductions in the remainder of the Company consisted primarily of lower incentive-based compensation.Commission expense in fiscal 2017 declined by $3.0 million versus fiscal 2016 due to a combination of a sales force restructuring in late 2016,restructured sales compensation plans, and revenue achievement falling short of internal targets. Management incentive compensation expense infiscal 2017 was $1.5 million lower than fiscal 2016. Professional service fees were down $0.8 million in fiscal 2017 as a result of the Company’s reviewand evaluation of its service providers. Marketing and selling costs, including catalog, were down $0.1 million in fiscal 2017. Stock-basedcompensation expense increased by $0.4 million in fiscal 2017 as compared to fiscal 2016 due to a combination of stock option awards made in March2017 and the award of restricted stock units in March 2016. We recognized a net foreign currency gain in fiscal 2016 of $0.7 million due to theCanadian dollar strengthening versus the U.S. dollar in the period, compared to a net foreign currency loss of $0.1 million in fiscal 2017.Depreciation and amortization expense in SG&A were flat in fiscal 2017 versus fiscal 2016.As a percent of revenue, SG&A was 33.0% in fiscal 2017 as compared to 32.8% for fiscal 2016.Facility exit costs and restructuringDuring fiscal 2017, the Company recorded $0.4 million of restructuring charges which were all related to severance.During fiscal 2016, the Company recorded $1.7 million of restructuring charges related primarily to severance.Interest ExpenseInterest expense decreased $2.5 million, from $17.7 million during fiscal 2016 to $15.2 million for fiscal 2017. Lower outstanding average loanbalances, particularly the average term loan balance, combined with a lower interest rate on the Company’s new term loan, resulted in a $2.6 milliondecrease in cash interest in fiscal 2017. The Company’s average debt balance was approximately $9.0 million lower in fiscal 2017 as compared tofiscal 2016. The Company’s average cash interest borrowing rate in fiscal 2017 was down approximately 110 basis points as compared to fiscal 2016.This decrease is related primarily to the refinancing of the Company’s debt in April 2017. In addition, as fiscal 2017 consisted of fifty-two weeks ascompared to fifty-three weeks in fiscal 2016, fiscal 2016 included an incremental week of cash interest of approximately $0.3 million. The reduction incash interest expense in fiscal 2017 was partially offset by $0.4 million of incremental non-cash interest expense during the year.Loss on Early Extinguishment of DebtDuring fiscal 2017, the Company recorded a $4.3 million non-cash charge consisting of the $3.1 million write-off of remaining unamortized debtissuance costs and $1.2 million of remaining original issue discount. These charges were associated with the term loan repaid on April 7, 2017. No suchcharge was incurred in fiscal 2016.Gain on Sale of Unconsolidated AffiliateDuring fiscal 2016, the Company sold its 35% ownership interest in Carson Dellosa LLC for $9.9 million. The Company recorded a gain on thesale of $9.2 million. No such gain was recorded in fiscal 2017. 38Change in Fair Value of Interest Rate SwapThe Company had an interest rate swap agreement 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 amountof 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.Thus, the Company did not have any gain or loss during fiscal 2017. Prior to the termination of the interest rate swap, the notional amount of the swapwas $72.5 million. During fiscal 2016, prior the termination of the interest rate swap, the fair value of the derivative increased by $0.3 million and,accordingly, a non-cash gain of $0.3 million was recorded. As the interest rate swap expired in the third quarter of fiscal 2016, no additional income orloss will be realized in future periods.Benefit from Income TaxesThe benefit from income taxes in fiscal 2017 was $1.4 million as compared to a benefit from income taxes of less than $0.1 million for fiscal2016.The effective tax rate for fiscal 2017 was -26.2% as compared to an effective tax rate of -0.3% for fiscal 2016. Approximately $1.7 million of thefiscal 2017 tax benefit related to the partial reversal of the Company’s valuation allowances. The reversal of the valuation allowance is net of theimpact of reduced federal income tax rates from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). As a result of the reduction in the U.S. corporateincome tax rate from the maximum 35% to 21% under the Tax Act, the Company revalued its ending deferred tax assets and liabilities at December 30,2017. This revaluation resulted in a reduction in the net deferred tax balance of $0.7 million.Liquidity and Capital ResourcesAt December 29, 2018, the Company had net working capital of $87.1 million, a decrease of $35.1 million as compared to fiscal 2017. Adecrease of $30.8 million in end of year cash balances and an increase of $20.4 million in end of year currently maturing long-term debt contributed$51.2 million of the decrease. The remaining working capital accounts increased by $15.1 million. Net working capital in the current year includesboth $1.0 million of cash and $30.3 million of current maturities of long term debt. The Company estimates that the carrying values of its accountsreceivable and accounts payable, as shown in the condensed consolidated balance sheets, approximate fair value. The Company’s capitalization atDecember 29, 2018 was $201.3 million and consisted of total debt of $133.9 million and stockholders’ equity of $67.4 million. The change inaccounting principle (See Note 4) resulted in $1.2 million of decreased working capital.Net cash used by operating activities was $2.6 million for fiscal 2018 and net cash provided from operating activities was $38.8 million for fiscal2017. The increase in cash used by operating activities related primarily to decreased operating income in fiscal 2018 versus fiscal 2017 and higherworking accounts receivable and inventory balances. While operating income was down year-over-year by $43.2 million, an increase in non-cashcharges, particularly goodwill impairment, contributed $29.9 million to the decrease in operating income. The Company’s fulfillment center staffingissues resulted in delayed customer shipments, and thus, a later cash conversion cycle, particularly in the collection of accounts receivable. As a result,the Company expects higher operating cash flow in fiscal 2019 as the end of year incremental receivables are collected during the first few months of2019.Net cash used in investing activities was $16.9 million in fiscal 2018 as compared to $37.8 million in fiscal 2017. Last year’s net cash used ininvesting activities included $18.1 million for the Triumph Learning acquisition. Excluding the net cash used to fund the acquisition, the remainingdecrease in net cash used in investing activities is due to lower level investments in the Company’s e-commerce platform, product informationmanagement systems and curriculum product development as these projects are approaching completion. The completion of these projects is expectedto result in improvements to the Company’s platforms and processes, lower both ongoing operating costs and future investments in systems, and enablerevenue growth. 39Net cash used by financing activities was $11.3 million in fiscal 2018 versus $4.3 million in fiscal 2017. In both periods the net cash providedfrom financing activities represents net draws from the ABL Facility, which combined with beginning of period cash balances, were used to fundoperating and investing cash outflows, as well as Term Loan repayments in fiscal 2017. Outstanding borrowings on the ABL Facility were zero as ofDecember 29, 2018, while the excess availability on that date for the ABL Facility was $61.1 million. The Company repaid principal on its Term Loanin the amount of $10.2 million during fiscal 2018, which consisted of an excess cash flow payment of $7.8 million and regularly scheduled principalpayments of $2.4 million.The Company’s ABL Facility and New Term Loan contain customary events of default and financial, affirmative and negative covenants.Following the end of the third quarter of fiscal 2018, the Company determined that the adoption of ASC 606 for purposes of calculating its fixed costcoverage ratio under the New Term Loan was required to maintain compliance with such ratio in the third quarter of fiscal 2018. On November 7, 2018,each of which was effective as of September 29, 2018, the Company entered into the Fifth Amendment to the ABL Facility and the Second Term LoanAmendment. The Second Term Loan Amendment was entered into in order to (1) reduce its fixed charge coverage ratio for the five fiscal quartersending December 29, 2018 through December 28, 2019, (2) reduce the number of days for fiscal 2018 during which the Company may have norevolving loans outstanding from 60 to 14 and adjust the time period of such reduction to be between December 15, 2018 and January 31, 2019, (3) togive effect to ASU 2014-09 for the purpose of the computation of any financial covenant retroactive to December 31, 2017 and for all other purposeseffective as of the date of the Second Term Loan Amendment, (4) change the delayed draw term loan commitment termination date from April 7, 2019to the effective date of the Second Term Loan Amendment and (5) provide that the Applicable Margin shall assume a net senior leverage ratio ofgreater than 3.75x from the date of the Second Term Loan Amendment until the Company delivers its financial statements for fiscal 2018 and therelated compliance certificate.The Fifth Amendment was entered into in order to: (1) give effect to ASU No. 2014-09 for the purpose of the computation of any financialcovenant retroactive to December 31, 2017 and for all other purposes effective as of the date of the ABL Amendment, and (2) substitute the LIBORScreen Rate (as defined in the ABL Amendment) with the LIBOR Successor Rate (as defined in the ABL Amendment) in the event that the LIBORScreen Rate is not available or published on a current basis, it was announced that LIBOR or LIBOR Screen Rate will no longer be made available or anew benchmark interest rate has been adopted to replace LIBOR.On March 13, 2019, and effective as of December 29, 2018, School Specialty, Inc. (the “Company”) entered into the Third Amendment (the“Term Loan Amendment”) of its Loan Agreement dated March 13, 2019 (the “Term Loan Agreement”) among the Company, as borrower, certain of itssubsidiaries, as guarantors, the financial institutions party thereto, as lenders (the “Term Loan Lenders”) and TCW Asset Management Company LLC,as the agent (the “Agent”), in order to, among other things: (1) increase the Applicable Margin based on the Net Senior Leverage Ratio and to furtherincrease the Applicable Margin by a PIK Interest Rate which will be subject to adjustment based on the Net Senior Leverage Ratio; (2) provide theAgent with certain board observation rights; (3) limit the aggregate amount of outstanding Revolving Loans to no more than $10,000,000 on the lastSaturday of Fiscal Year 2019 and each day during a twenty consecutive day period that includes the last Saturday of Fiscal Year 2019 if the Companyhas not raised $25,000,000 in junior capital proceeds which were used in the manner specified in the Term Loan Amendment (a “Junior Capital RaiseSatisfaction Event”), or $0 on the last Saturday of Fiscal Year 2019 and each day during a thirty-five consecutive day period that includes the lastSaturday of Fiscal Year 2019 if a Junior Capital Raise Satisfaction Event has occurred; (4) reduce the limit on Capital Expenditures to $12,500,000 inthe aggregate for the four fiscal quarters ending March 30, 2019, June 29, 2019, and September 28, 2019 and $10,000,000 in the aggregate for the fourfiscal quarters ending December 28, 2019; (5) remove the obligation to comply with the financial covenants in Section 10.3 for the fiscal year endedDecember 29, 2018; (6) amend the calculation of the Fixed Charge Coverage Ratio and reduce the Fixed Charge Coverage Ratio in Section 10.3.1 forthe remainder of the term of the Term Loan Agreement; (7) amend the calculation of the Net Senior Leverage Ratio and increase the Net SeniorLeverage Ratio in Section 10.3.2 for the remainder of the term of the Term Loan Agreement, which may be adjusted upon 40a Junior Capital Raise Satisfaction Event; (8) amend the cap on add-backs for non-recurring, unusual or extraordinary charges, business optimizationexpenses and other restructuring charges or reserves and cash expenses relating to earn outs and similar obligations in the definition of EBITDA andrequire the Company to maintain a Minimum EBITDA as set forth in Section 10.3.3 for the remainder of the term of the Term Loan Agreement, whichmay be adjusted upon a Junior Capital Raise Satisfaction Event; (9) require the Company to maintain Specified Availability under the ABL Agreementin an amount not less than the greater of $12,500,000 or 10% of the Commitments (as defined in the ABL Agreement); (10) expand the definition ofPermitted Indebtedness to include Subordinated Debt used to repay the Term Loan or the Specified Unsecured Prepetition Debt; and (10) provide foradditional inspection and audit rights to be conducted by an advisory firm to be appointed by the Agent. The Company separately agreed to issuewarrants under certain conditions (see Note 18 under Item 8, Financial Statements and Supplementary Data).Also on March 13, 2019, and effective as of December 29, 2018, the Company entered into the Sixth Amendment to Loan Agreement dated June11, 2013 (the “ABL Agreement”) among the Company, certain of its subsidiary borrowers, Bank of America, N.A. and Bank of Montreal as lenders (the“ABL Lenders”), and Bank of America, N.A., as agent for the ABL Lenders (the “ABL Amendment”) in order to, among other things: (1) amend the capon add-backs for non-recurring, unusual or extraordinary charges, business optimization expenses and other restructuring charges or reserves and cashexpenses relating to earn outs and similar obligations in definition of EBITDA; (2) limit the aggregate amount of outstanding Revolving Loans to nomore than $10,000,000 on the last Saturday of Fiscal Year 2019 and each day during a twenty consecutive day period that includes the last Saturday ofFiscal Year 2019 if a Junior Capital Raise Satisfaction Event has not occurred, or $0 on the last Saturday of Fiscal Year 2019 and each day during athirty-five consecutive day period that includes the last Saturday of Fiscal Year 2019 if a Junior Capital Raise Satisfaction Event has occurred;(3) expand the definition of Permitted Indebtedness to include Subordinated Debt in an aggregate principal amount not to exceed $30 million whichhas been used, first, to repay the Specified Unsecured Prepetition Debt, and second, to the extent the Specified Unsecured Prepetition Debt has beenrepaid in full, the Term Loan; and (4) condition the repayment of Indebtedness with Junior Capital Proceeds upon satisfaction of the PaymentConditions and requiring the Specified Unsecured Prepetition Debt to be repaid in full before Junior Capital Proceeds may be applied to the repaymentof other Indebtedness.The Company believes it will maintain compliance with these covenants over the next twelve months. We also believe that our cash flow fromoperations and borrowings available from our ABL Facility will be sufficient to meet our liquidity requirements for operations, including anticipatedcapital expenditures, repayment of deferred payment obligations (which is referred to a Specified Unsecured Prepetition Debt in our ABL Agreementand Term Loan Agreement) and our contractual obligations for the next twelve months.The increase in current maturities in fiscal 2018 is due to the deferred cash payment obligations which are payable in December 2019. TheCompany expects to have adequate capacity under the ABL Facility to pay such amounts. However, the amendments described above give thecompany the flexibility to raise new junior capital to refinance the deferred payment obligations on or before they mature subject to certain conditions.Off Balance Sheet ArrangementsNone. 41Summary of Contractual ObligationsThe following table summarizes our contractual debt and operating lease obligations as of December 29, 2018: Payments Due(in thousands) Total Less than1 year 1 - 3years 4 - 5years More than5 years Long-term debt obligations (1) $145,633 $16,790 $33,229 $95,614 $— Deferred cash payment obligations (1) 27,245 27,245 — — — Operating lease obligations 15,773 5,449 7,019 3,183 122 Purchase obligations (2) — — — — — Total contractual obligations $188,651 $49,484 $40,248 $98,797 $122 (1)Long-term debt obligations and deferred cash payment obligations include principal and interest using either fixed rates or variable rates ineffect as of December 29, 2018.(2)As of December 29, 2018, we did not have any material long-term or short-term purchase obligations.Fluctuations in Quarterly Results of OperationsOur business is subject to seasonal influences. Our historical revenues and profitability have been dramatically higher in the periods from Junethrough September, primarily due to increased shipments to customers coinciding with the start of each school year. Quarterly results also may bematerially affected by variations in our costs for the products sold, the mix of products sold and general economic conditions. Therefore, results for anyquarter are not indicative of the results that we may achieve for any subsequent fiscal quarter or for a full fiscal year.The following table sets forth certain unaudited consolidated quarterly financial data for fiscal 2018 and fiscal 2017 (in thousands, except pershare data). We derived this quarterly data from our unaudited consolidated financial statements. Fiscal 2018 First Second Third Fourth Total Revenues $99,287 $169,272 $290,280 $114,613 $673,452 Gross profit 36,121 58,744 97,504 36,146 228,515 Operating income (loss) (21,328) 4,765 37,230 (39,045) (18,378) Net income (loss) (18,678) 18 18,556 (38,637) (38,741) Basic earnings per share of common stock: Earnings/(loss) $(2.67) $0.00 $2.65 $(5.52) $(5.53) Diluted earnings per share of common stock: Earnings/(loss) $(2.67) $0.00 $2.63 $(5.52) $(5.53) Fiscal 2017 First Second Third Fourth Total Revenues $97,110 $160,177 $288,641 $112,455 $658,383 Gross profit 34,524 60,495 107,128 41,092 243,239 Operating income (loss) (13,117) 8,730 42,296 (13,051) 24,858 Net income (loss) (16,775) 136 34,145 (10,727) 6,779 Basic earnings per share of common stock: Earnings/(loss) $(2.40) $0.02 $4.88 $(1.53) $0.97 Diluted earnings per share of common stock: Earnings/(loss) $(2.40) $0.02 $4.86 $(1.53) $0.97 42The summation of quarterly net income (loss) per share may not equate to the calculation for the full fiscal year as quarterly calculations areperformed on a discrete basis.InflationInflation, particularly in areas such as wages, transportation, healthcare and energy costs, has had and is expected to have an effect on our resultsof operations and our internal and external sources of liquidity.Critical Accounting PoliciesWe believe the policies identified below are critical to our business and the understanding of our results of operations. The impact and anyassociated risks related to these policies on our business are discussed throughout this section where applicable. Refer to the notes to our consolidatedfinancial statements in Item 8 for a detailed discussion on the application of these and other accounting policies. The preparation of the consolidatedfinancial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during thereporting period. We evaluate our estimates and assumptions on an ongoing basis and base them on a combination of historical experience and variousother assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Our critical accountingpolicies that require significant judgments and estimates and assumptions used in the preparation of our consolidated financial statements are asfollows:Catalog Costs and Related AmortizationWe spend approximately $9 million annually to produce and distribute catalogs. We accumulate all direct costs incurred, net of vendorcooperative advertising payments, in the development, production and circulation of our catalogs, for which future revenue can be directlyattributable, on our balance sheet until such time as the related catalog is mailed. The Company evaluated its catalog costs under the new revenuerecognition standard and determined that its catalog costs should be treated as costs incurred to obtain contracts. Since catalog costs are incurredregardless 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 wasgenerally one year or less.Development CostsWe accumulate external and certain internal costs incurred in the development of our products which can include a master copy of a book, videoor other media, on our balance sheet. As of December 29, 2018, we had $13.7 million in development costs on our balance sheet. A majority of thesecosts are associated with supplemental instruction and intervention curriculum products within the Distribution Segment and Science curriculumproducts. The capitalized development costs are subsequently amortized into cost of revenues over the expected sales realization cycle of the products,which is typically five years. During fiscal 2018 we amortized development costs of $5.6 million to expense. We continue to monitor the expectedsales realization cycle for each product, and will adjust the remaining expected life of the development costs or recognize impairments, if warranted. Infiscal 2016, we recorded write-downs of capitalized product development costs of $1.3 million.Goodwill and Intangible AssetsAt December 29, 2018, intangible assets represented approximately 14% of our total assets. We review our goodwill intangible assets forimpairment annually, or more frequently if indicators of impairment exist. A significant amount of judgment is involved in determining if an indicatorof impairment has occurred. Such indicators may include, among others: a significant decline in our expected future cash flows; a sustained, 43significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipatedcompetition; the testing for recoverability of a significant asset group within a reporting unit; and slower growth rates. Any adverse change in thesefactors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements.As it relates to goodwill, we apply the impairment rules in accordance with FASB ASC Topic 350, “Intangibles – Goodwill and Other”. Asrequired by FASB ASC Topic 350, the recoverability of these assets is subject to a fair value assessment, which includes judgments regarding financialprojections, including forecasted cash flows and discount rates, and comparable market values. As it relates to finite life intangible assets, we apply theimpairment rules as required by FASB ASC Topic 360-10-15, “Impairment or Disposal of Long-Lived Assets” which also requires significantjudgments related to the expected future cash flows attributable to the primary asset. Key assumptions used in the impairment analysis include, but arenot limited to, expected future cash flows, business plan projections, revenue growth rates, and the discount rate utilized for discounting such cashflows. The impact of modifying any of these assumptions can have a significant impact on the estimate of fair value and thus the estimatedrecoverability, or impairment, if any, of the asset.As discussed in Note 6 – Goodwill and Other Intangible to the consolidated financial statements in Item 8 of this report, the Company recorded agoodwill impairment charge of $22.3 million related to its Distribution reporting unit. The impairment was determined as part of the fair valueassessment of these assets. There were no impairments recorded in fiscal 2016 and fiscal 2017.Indicators of impairment that were identified during the annual assessment were a significant decline during the fourth quarter of fiscal 2018 inthe Company’s stock price and market capitalization and a decline in our expected future cash flows based on the Company’s fiscal 2019 planningprocess completed in the fourth quarter of fiscal 2018. The decline in expected future cash flows was related to the decrease in gross margins.In completing the fiscal 2018 assessment, the Company determined that its Distribution reporting unit goodwill balance was impaired. The fairvalue assessment of the Science reporting unit indicated that the goodwill balance of this reporting unit was not impaired as the fair value exceeded thecarrying value by over 100%. In order to establish the assumptions for the discounted cash flow analysis, the Company considered multiple factors,including (a) macroeconomic conditions, (b) industry and market factors such as school funding trends and school construction forecasts, (c) overallfinancial performance such as planned revenue, profitability and cash flows and (d) the expected impact of revenue enhancing and cost savinginitiatives. These assumptions, along with discount rate assumptions, can have a material impact on the fair value determinations. As such, theCompany performs a sensitivity analysis whereby changes to the assumptions include: i) an increase in the discount rate to reflect 100 basis points ofadditional company-specific risk premium; ii) lower long-term revenue growth rates by over 40%; and iii) reduced operating margin assumptions by atleast 20 basis points. Based on this sensitivity analysis, these changes to the assumptions would not have resulted in a failure in the first step of thegoodwill impairment testing for the Science reporting unit.Valuation Allowance for Deferred Tax AssetsWe initially recorded a tax valuation allowance against our deferred tax assets in the fourth quarter of fiscal 2012. In recording the valuationallowance, management considered whether it was more likely than not that some or all of the deferred tax assets would be realized as the Company hasgenerated net operating losses in recent years and does not have an ability to carry these back to previous years. This analysis included considerationof scheduled reversals of deferred tax liabilities, projected future taxable income, carry back potential and tax planning strategies, in accordance withFASB ASC Topic 740, “Income Taxes”. At the end of fiscal 2017, the Company concluded that it was more likely than not that it would realize thebenefit of all of its net deferred tax assets, with the exception of the deferred tax asset related to foreign tax credits and capital loss carryforwards.Accordingly, $1.7 million of the valuation allowance was reversed in fiscal 2017. Based on a combination of fiscal 2018 results and prospective yeartaxable income projections, the Company assessed that it 44was more likely than not that the benefits of substantially all of its net deferred tax assets would not be realized. As a result, the Company increased itsvaluation allowance to $16.7 million as of December 29, 2018. Item 7A.Quantitative and Qualitative Disclosures About Market RiskOur financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and debt. Market risksrelating to our operations result primarily from changes in interest rates. Interest rates on our borrowings under our credit facility are primarilydependent upon LIBOR rates. Assuming no change in our financial structure, if variable interest rates were to have averaged 100 basis points higherduring fiscal 2018 and fiscal 2017, pre-tax earnings would have decreased by approximately $1.7 million and $1.5 million, respectively. This amountwas determined by considering a hypothetical 100 basis point increase in interest rates on average variable-rate debt outstanding. The estimated fairvalue of long-term debt was approximately $111.7 million as of December 29, 2018 based on its trading value. 45Item 8.Financial Statements and Supplementary DataREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and ShareholdersSchool Specialty, Inc.Opinion on the financial statementsWe have audited the accompanying consolidated balance sheets of School Specialty, Inc. (a Delaware corporation) and subsidiaries (the“Company”) as of December 29, 2018 and December 30, 2017, the related consolidated statements of operations comprehensive (loss) income, changesin shareholders’ equity, and cash flows for each of the two years in the period ended December 29, 2018, and the related notes and financial statementschedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in allmaterial respects, the financial position of the Company as of December 29, 2018 and December 30, 2017, and the results of its operations and its cashflows for each of the two years in the period ended December 29, 2018, in conformity with accounting principles generally accepted in the UnitedStates of America.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), theCompany’s internal control over financial reporting as of December 29, 2018, based on criteria established in the 2013 Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 14, 2019expressed an unqualified opinion.Basis for opinionThese financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’sfinancial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respectto the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and ExchangeCommission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits includedperforming procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing proceduresthat respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financialstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluatingthe overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.Prior period adjustments to financial statements audited by predecessor auditorWe have also audited the adjustments to the December 31, 2016 consolidated financial statements to retrospectively apply the changes incommon shares issued and outstanding, as described in note 2, and the changes in reportable segment disclosures, as described in note 14. In ouropinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to theDecember 31, 2016 consolidated financial statements of the Company other than with respect to such adjustments and, accordingly, we do not expressan opinion or any other forms of assurance on the December 31, 2016 consolidated financial statements taken as a whole./s/ GRANT THORNTON LLPWe have served as the Company’s auditor since 2017.Appleton, WisconsinMarch 14, 2019 46REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders ofSchool Specialty, Inc.Greenville, WisconsinWe have audited, before the effects of the adjustments to retrospectively apply changes resulting from the stock split discussed in Note 2 to theconsolidated financial statements and before the effects of the retrospective adjustments to the disclosures for a change in the composition ofreportable segments discussed in Note 14 to the consolidated financial statements, the consolidated statements of income, comprehensive income(loss), stockholders’ equity (deficit), and cash flows of School Specialty, Inc., and subsidiaries (the “Company”) for the year ended December 31, 2016and the related notes and the schedule listed in the Index at Item 15 (the 2016 consolidated financial statements before the effects of the adjustmentsdiscussed in Note 2 and Note 14 to the consolidated financial statements are not presented herein). These financial statements are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessingthe accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Webelieve that our audit provides a reasonable basis for our opinion.In our opinion, such 2016 consolidated financial statements, before the effects of the adjustments to retrospectively apply the changes resultingfrom the stock split discussed in Note 2 to the consolidated financial statements and before the effects of the retrospective adjustments to thedisclosures for a change in the composition of reportable segments discussed in Note 14 to the consolidated financial statements, present fairly, in allmaterial respects, the results of operations and cash flows of the Company and subsidiaries for the year ended December 31, 2016, in conformity withaccounting principles generally accepted in the United States of America.We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively apply the changes resulting from the stocksplit discussed in Note 2 to the consolidated financial statements or the effects of the retrospective adjustments to the disclosures for a change in thecomposition of reportable segments discussed in Note 14 to the consolidated financial statements and, accordingly, we do not express an opinion orany other form of assurance about whether such retrospective adjustments are appropriate and have been properly applied. Those retrospectiveadjustments were audited by other auditors./s/ DELOITTE & TOUCHE LLPMilwaukee, WisconsinMarch 14, 2017 47FINANCIAL STATEMENTSSCHOOL SPECIALTY, INC.CONSOLIDATED BALANCE SHEETS(In Thousands, except share data) December 29,2018 December 30,2017 ASSETS Current assets: Cash and cash equivalents $1,030 $31,861 Accounts receivable, less allowance for doubtful accounts of $1,909 and $1,059, respectively 77,888 69,297 Inventories, net 90,061 77,162 Deferred catalog costs — 3,450 Prepaid expenses and other current assets 15,763 14,121 Refundable income taxes 1,019 547 Total current assets 185,761 196,438 Property, plant and equipment, net 31,902 33,579 Goodwill 4,580 26,842 Intangible assets, net 33,306 37,163 Development costs and other, net 14,807 16,339 Deferred taxes long-term 320 2,046 Total assets $270,676 $312,407 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current maturities of long-term debt $30,352 $10,989 Accounts payable 41,277 26,591 Accrued compensation 7,302 11,995 Contract liabilities 5,641 3,454 Accrued royalties 2,678 5,699 Other accrued liabilities 11,379 15,442 Total current liabilities 98,629 74,170 Long-term debt less current maturities 103,583 130,574 Other liabilities 1,101 172 Total liabilities 203,313 204,916 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 Capital in excess of par value 125,072 123,083 Accumulated other comprehensive loss (2,079) (1,425) Accumulated deficit (55,637) (14,174) Total stockholders’ equity 67,363 107,491 Total liabilities and stockholders’ equity $270,676 $312,407 See accompanying notes to consolidated financial statements. 48SCHOOL SPECIALTY, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In Thousands, Except Per Share Amounts) Fiscal YearEnded December 29,2018(52 weeks) Fiscal YearEnded December 30,2017(52 weeks) Fiscal YearEnded December 31,2016(53 weeks) Revenues $673,452 $658,383 $656,322 Cost of revenues 444,937 415,144 416,394 Gross profit 228,515 243,239 239,928 Selling, general and administrative expenses 222,168 217,960 215,227 Facility exit costs and restructuring 2,463 421 1,740 Impairment charge 22,262 — — Operating (loss) income (18,378) 24,858 22,961 Other expense: Interest expense 15,548 15,190 17,682 Loss on early extinguishment of debt — 4,298 — Gain on sale of unconsolidated affiliate — — (9,178) Change in fair value of interest rate swap — — (271) Income (loss) before provision for (benefit from) incometaxes (33,926) 5,370 14,728 Provision (benefit) from income taxes 4,815 (1,409) (36) Net income (loss) $(38,741) $6,779 $14,764 Weighted average shares outstanding: Basic EPS 7,000 7,000 7,000 Diluted EPS 7,000 7,024 7,000 Net income (loss) per share: Basic EPS $(5.53) $0.97 $2.11 Diluted EPS $(5.53) $0.97 $2.11 See accompanying notes to consolidated financial statements. 49SCHOOL SPECIALTY, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(In Thousands) Fiscal YearEnded December 29,2018(52 weeks) Fiscal YearEnded December 30,2017(52 weeks) Fiscal YearEnded December 31,2016(53 weeks) Net income (loss) $(38,741) $6,779 $14,764 Other comprehensive (loss) income Foreign currency translation adjustments (654) 359 135 Total comprehensive income (loss) $(39,395) $7,138 $14,899 See accompanying notes to consolidated financial statements. 50SCHOOL SPECIALTY, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(In Thousands) CommonStock Capital inExcess ofParValue AccumulatedDeficit TreasuryStock AccumulatedOtherComprehensiveLoss TotalStockholders’Equity Balance, December 26, 2015 $7 $119,234 $(35,716) $— $(1,919) $81,606 Net income 14,764 14,764 Share-based compensation expense 1,615 1,615 Foreign currency translation adjustment 135 135 Balance, December 31, 2016 $7 $120,849 $(20,953) $— $(1,784) $98,119 Net income 6,779 6,779 Share-based compensation expense 2,234 2,234 Foreign currency translation adjustment 359 359 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 (38,741) (38,741) Share-based compensation expense 1,989 1,989 Foreign currency translation adjustment (654) (654) Balance, December 29, 2018 $7 $125,072 $(55,637) $— $(2,079) $67,363 (1)See Note 4, “Change in Accounting Principle,” of the notes of condensed consolidated financial statements for further discussion See accompanying notes to consolidated financial statements. 51SCHOOL SPECIALTY, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In Thousands) Fiscal YearEndedDecember 29,2018(52 weeks) Fiscal YearEndedDecember 30,2017(52 weeks) Fiscal YearEndedDecember 31,2016(53 weeks) Cash flows from operating activities: Net income (loss) $(38,741) $6,779 $14,764 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and intangible asset amortization expense 17,917 14,061 13,863 Amortization of development costs 5,602 5,559 7,488 Loss on early extinguishment of debt — 4,298 — Unrealized foreign exchange loss (gain) 31 6 (1,091) Gain on sale of unconsolidated affiliate — — (9,178) Amortization of debt fees and other 1,112 1,339 2,079 Change in fair value of interest rate swap — — (271) Share-based compensation expense 1,989 2,234 1,615 Impairment of goodwill and intangible assets 22,262 — — Deferred taxes 2,672 (1,851) (180) Gain on disposal of property, equipment, other (20) — — Non-cash interest expense 2,349 2,933 1,850 Changes in current assets and liabilities: Accounts receivable (8,572) (3,138) (3,429) Inventories (14,372) (731) 2,551 Deferred catalog costs — 1,810 1,292 Prepaid expenses and other current assets (614) (1,513) 422 Accounts payable 14,266 2,559 2,876 Accrued liabilities (8,477) 4,470 889 Net cash provided by (used in) operating activities (2,596) 38,815 35,540 Cash flows from investing activities: Additions to property, plant and equipment (12,464) (14,744) (11,816) Investment in product development costs (4,486) (3,999) (2,545) Cash paid in acquisitions — (19,026) — Proceeds from sale of unconsolidated affiliate — — 9,893 Proceeds from sale of assets 100 — — Net cash used in investing activities (16,850) (37,769) (4,468) Cash flows from financing activities: Proceeds from bank borrowings 231,152 395,050 284,720 Repayment of bank borrowings (241,366) (395,339) (294,594) Payment of debt fees and other (302) (4,016) — Earnout payment for acquisition (816) — — Net cash used in financing activities (11,332) (4,305) (9,874) Effect of exchange rate changes on cash (53) 23 1,034 Net increase (decrease) in cash and cash equivalents (30,831) (3,236) 22,232 Cash and cash equivalents, beginning of period 31,861 35,097 12,865 Cash and cash equivalents, end of period $1,030 $31,861 $35,097 Supplemental disclosures of cash flow information: Interest paid $12,087 $10,918 $13,753 Income taxes paid 1,805 $318 $1,524 See accompanying notes to consolidated financial statements. 52NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In Thousands, Except per Share Amounts)NOTE 1—ORGANIZATION AND BASIS OF PRESENTATIONSchool Specialty, Inc. and subsidiaries (the “Company”) is a leading provider of supplies, furniture, technology products and curriculumsolutions to the education market place, with operations in the United States and Canada. Primarily serving the pre-kindergarten through twelfth grade(“PreK-12”) market, the Company also sells through non-traditional channels, such as e-commerce in conjunction with e-tail and retail relationshipsand healthcare facilities.The accompanying consolidated financial statements and related notes to consolidated financial statements are prepared in conformity withaccounting principles generally accepted in the United States of America (“U.S. GAAP”), and include the accounts of School Specialty, Inc. and all ofits subsidiaries. All amounts in the accompanying consolidated financial statements and related notes to the consolidated financial statements areexpressed in thousands except for per share amounts. All inter-company accounts and transactions have been eliminated.NOTE 2—INCREASED AUTHORIZED SHARES AND STOCK-SPLITAt the Special Meeting of Stockholders of School Specialty, Inc. (the “Company”) held on August 15, 2017, the Company’s stockholders votedon a proposal to approve the proposed amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended, to increase thenumber 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 a seven-for-one stock split of the Common Stock as part of the Amendment. Ourconsolidated financial statements, related notes, and other financial data contained in this report have been adjusted to give retroactive effect to theincreased authorization and stock split for all periods presented.NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESUse of EstimatesThe preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.Definition of Fiscal Year and Change in Fiscal Year EndThe Company’s fiscal year ends on the last Saturday in December in each year. As used in these consolidated financial statements and relatednotes to the consolidated financial statements, “fiscal 2018,” “fiscal 2017” and “fiscal 2016” refer to the Company’s fiscal years ended December 29,2018, December 30, 2017, and December 31, 2016, respectively.Cash and Cash EquivalentsThe Company considers cash investments with original maturities of three months or less from the date of purchase to be cash equivalents.InventoriesInventories, which consist primarily of products held for sale, are stated at the lower of cost or net realizable value on a first-in, first-out basis inaccordance with FASB ASC Topic 330, “Inventories.” Excess and obsolete inventory reserves recorded were $7,176 and $7,664, as of December 29,2018, and December 30, 2017, respectively. 53Property, Plant and EquipmentProperty, plant and equipment are stated at cost. Additions and improvements are capitalized, whereas maintenance and repairs are expensed asincurred. Depreciation of property, plant and equipment is calculated using the straight-line method over the estimated useful lives of the respectiveassets. The estimated useful lives range from twenty-five to forty years for buildings and their components and three to fifteen years for furniture,fixtures and equipment.GoodwillGoodwill represents the combination of the excess of reorganization value over fair-value of identified net assets upon emergence frombankruptcy plus the excess of cost over the fair value of net assets acquired in business combinations accounted for under the purchase method. UnderFASB ASC Topic 350, “Intangibles – Goodwill and Other,” goodwill is not subject to amortization but rather must be tested for impairment annuallyor more frequently if events or circumstances indicate it might be impaired.In accordance with the accounting guidance on goodwill, the Company performs its impairment test of goodwill at the reporting unit levelannually each fiscal year, or more frequently if events or circumstances change that would more likely than not reduce the fair value of its reportingunits below their carrying values.The fair value assessment of the Distribution reporting unit indicated an impairment of $22.3 million in fiscal 2018. See Note 6 – Goodwill andOther Intangible Assets to the consolidated financial statements. There was no impairment charge recorded in fiscal 2017 or fiscal 2016 related togoodwill or indefinite-lived intangible assets.Impairment of Long-Lived AssetsAs required by FASB ASC Topic 360-10-35 “Impairment or Disposal of Long-Lived Assets,” the Company reviews property, plant andequipment, definite-lived, amortizable intangible assets and development costs for impairment if events or circumstances indicate an asset might beimpaired. Amortizable intangible assets include customer relationships, publishing rights, trademarks and trade names and copyrights and are beingamortized over their estimated useful lives. The Company assesses impairment and writes down to fair value long-lived assets when facts andcircumstances indicate that the carrying value may not be recoverable through future undiscounted cash flows. The analysis of recoverability is basedon management’s assumptions, including future revenue and cash flow projections. In fiscal 2016, the Company concluded $1,347 of its long-liveddevelopment costs would not be recovered by future cash flows from related products and, as such, recorded an impairment of certain productdevelopment costs. This incremental charge was related to decreased revenue projections for certain products as the Company re-evaluated its strategyfor certain product offerings. This change was recorded as accelerated development cost amortization included in the Company’s costs of revenue.There were no impairment charges recorded in fiscal 2018 and fiscal 2017.Development CostsDevelopment costs represent external and internal costs incurred in the development of a master copy of a book, workbook, video or othersupplemental educational materials and products. The Company capitalizes development costs and amortizes these costs into costs of revenues overthe lesser of five years or the product’s life cycle in amounts proportionate to expected revenues. At December 29, 2018 and December 30, 2017, netdevelopment costs totaled $13,674 and $14,900, respectively, and are included as a component of development costs and other assets, net, in theconsolidated balance sheets. 54Fair Value of Financial InstrumentsU.S. GAAP defines fair value as the price that would be received for an asset or paid to transfer a liability (exit price) in an orderly transactionbetween market participants in the principal or most advantageous market for the asset or liability. U.S. GAAP also classifies the inputs used to measurefair value into the following hierarchy: Level 1:Quoted prices in active markets for identical assets or liabilities. Level 2:Quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in marketsthat are not active, or input other than quoted prices that are observable for the asset or liability. Level 3:Unobservable inputs for the asset or liability.In accordance with FASB ASC Topic 825, “Financial Instruments” and FASB ASC Topic 820, “Fair Value Measurement,” the carrying amountsof the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities,approximate fair value given the short maturity of these instruments.The following table sets forth the financial instruments where carrying amounts may vary from fair value as of December 29, 2018: Description Balance Sheet Location Carrying Value Fair Value Categorization New Term Loan Long-term debt lesscurrent maturities $111,725 $111,725 Level 3 Deferred Cash Payment Obligations Long-term debt lesscurrent maturities 25,009 24,916 Level 3 The Company estimated the fair value of its amounts outstanding under its New Term Loan based on the current debt rate at the end of eachbalance sheet period. The Company estimated the fair value for its Deferred Cash Payment Obligations based upon the net present value of future cashflows using a discount rate that is consistent with our New Term Loan.The following table sets forth the financial instruments where carrying amounts may vary from fair value as of December 30, 2017: Description Balance Sheet Location Carrying Value Fair Value Categorization New Term Loan Long-term debt lesscurrent maturities $121,938 $121,938 Level 3 Deferred Cash Payment Obligations Long-term debt lesscurrent maturities 22,830 22,786 Level 3 The Company estimated the fair value of its amounts outstanding under its Term Loan based on traded prices at the end of each balance sheetperiod. The Company estimated the fair value for its Deferred Cash Payment Obligations based upon the net present value of future cash flows using adiscount rate that is consistent with our Term Loan.Income TaxesIn accordance with FASB ASC Topic 740, “Income Taxes.” income taxes have been computed utilizing the asset and liability approach whichrequires the recognition of deferred tax assets and liabilities for the tax consequences of temporary differences by applying enacted statutory tax ratesapplicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Valuationallowances are provided when it is anticipated that some or all of a deferred tax asset is not likely to be 55realized. As a result of the reduction in the U.S. corporate income tax rate from the maximum 35% to 21% under the Tax Cuts and Jobs Act of 2017, theCompany revalued its ending deferred tax assets and liabilities at December 30, 2017. This revaluation resulted in a reduction in the net deferred taxbalance of $704. As of December 29, 2018, the Company had a valuation allowance of $16,689 against substantially all of its net deferred tax assets.Revenue RecognitionThe Company adopted ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASC 606”), which superseded ASC 605, in the firstquarter of 2018 using the modified retrospective approach. The cumulative effect of adoption was recorded as an opening retained earningsadjustment. Revenue is recognized upon the satisfaction of performance obligations, which is when control is transferred to the customer. Refer to Note4 of the consolidated financial statements for details of the Company’s adoption.Concentration of Credit RisksThe Company maintains deposits in financial institutions that consistently exceed the Federal Deposit Insurance Corporation (FDIC) limit. TheCompany has not experienced any credit-related losses in such accounts and management believes it is not exposed to significant credit risk. TheCompany grants credit to customers in the ordinary course of business. The majority of the Company’s customers are school districts and schools.Concentration of credit risk with respect to trade receivables is limited due to the significant number of customers and their geographic dispersion.During fiscal 2018, fiscal 2017, and fiscal 2016, no customer represented more than 10% of revenues or accounts receivable.Vendor RebatesThe Company receives reimbursements from vendors (vendor rebates) based on annual purchased volume of products from its respective vendors.The Company’s vendor rebates are earned based on pre-determined percentage rebates on the purchased volume of products within a calendar year.The majority of the rebates are not based on minimum purchases or milestones, and therefore the Company recognizes the rebates on an accrual basisand reduces cost of revenues over the estimated period the related products are sold.Deferred Catalog CostsPrior to the adoption of ASC 606, the Company’s deferred catalog costs represented costs which had been paid to produce Company catalogs, netof vendor cooperative advertising payments, which will be used in and benefit future periods. Under the prior guidance, the Company capitalizedcatalog costs and amortized these costs over the period within which revenues attributable to the catalogs were generated, which was generally oneyear or less. These payments, as specified in our vendor agreements, are to reimburse the specific, incremental and identifiable costs the Companyincurs associated with promoting and selling the Company’s merchandise. The Company evaluated its catalog costs under ASC 606 and determinedthat its catalog costs should be treated as costs incurred to obtain contracts. Since catalog costs are incurred regardless of whether specific customercontracts or purchase orders are obtained, catalog costs are now expensed as incurred. Net catalog expense for fiscal 2018, fiscal 2017, and fiscal 2016consisted of the following: Fiscal YearEndedDecember 29,2018 Fiscal YearEndedDecember 30,2017 Fiscal YearEndedDecember 31,2016 Catalog expense $8,964 $14,199 $14,031 Less: Cooperative advertising payments (6,920) (7,196) (6,195) Net catalog expense $2,044 $7,003 $7,836 56RestructuringThe Company accounts for restructuring costs associated with both the closure or disposal of distribution centers and severance related toheadcount reductions in accordance with FASB ASC Topic 712, “Compensation – Retirement Benefits.” During fiscal 2018, fiscal 2017, and fiscal2016, the Company recorded $2,463, $421, and $1,740, respectively, of severance expense and lease termination fees. These costs are included in thefacility exit costs and restructuring line of the consolidated statement of operations. As of December 29, 2018, December 30, 2017, and December 31,2016, there was $1,133, $50, and $561, respectively, of accrued restructuring costs recorded in other accrued liabilities on the consolidated balancesheet primarily related to various cost reduction activities. See Note 15 for details of these restructuring charges.Shipping and Handling CostsIn accordance with ASC 606, which superseded ASC 605, the Company accounts for shipping and handling costs billed to customers as acomponent of revenues. The Company accounts for shipping and handling costs incurred as a cost of revenues for shipments made directly fromvendors to customers. For shipments made from the Company’s warehouses, the Company accounts for shipping and handling costs incurred as aselling, general and administrative expense. The amount of shipping and handling costs included in selling, general and administrative expenses forfiscal 2018, fiscal 2017, and fiscal 2016 was $36,725, $31,724, and $30,594, respectively.Foreign Currency TranslationThe financial statements of foreign subsidiaries have been translated into U.S. dollars in accordance with FASB ASC Topic 830, “ForeignCurrency Matters.” All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Amounts in thestatements of operations have been translated using the weighted average exchange rate for the reporting period. Resulting translation adjustments areincluded in foreign currency translation adjustment within other comprehensive income.Share-Based Compensation ExpenseThe Company accounts for its share-based compensation plans under the recognition and measurement principles of FASB ASC Topic 718,“Compensation – Stock Compensation” and FASB ASC Topic 505, “Equity-Based Payments to Non-Employees”. See Note 13. 57Costs of Revenues and Selling, General and Administrative ExpensesThe following table illustrates the primary costs classified in Cost of Revenues and Selling, General and Administrative Expenses: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 thereimbursement of specific, incremental and identifiable costs, and net ofearly payment discounts. •  Amortization of product development costs and certain depreciation. •  Freight expenses associated with receiving merchandise from ourvendors to our fulfillment centers. •  Freight expenses associated with merchandise shipped from our vendorsdirectly to our customers. •  Compensation and benefit costs for all selling (includingcommissions), marketing, customer care and fulfillment centeroperations (which include the pick, pack and shipping functions),and other general administrative functions such as finance, humanresources and information technology. •  Occupancy and operating costs for our fulfillment centers andoffice operations. •  Freight expenses associated with moving our merchandise fromour fulfillment centers to our customers. •  Catalog expenses, offset by vendor payments or reimbursement ofspecific, incremental and identifiable costs. •  Depreciation and intangible asset amortization expense, otherthan 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 toother retailers or distributors.Recent Accounting PronouncementsIn February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02,“Leases.” ASU No. 2016-02 requires lessees to recognize the assets and liabilities arising from leases on the balance sheet. The new guidance requiresthat all leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements.Subsequently, in July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements.” ASU 2018-11 offers alternativecomparative reporting requirements for initial adoption. Under ASU 2016-02, “Leases,” companies are required to adopt the new standard using amodified retrospective transition method. Under this method, a company initially applies the standard at the beginning of the earliest period presentedin the financial statements (which was January 1, 2017 for the Company). As such, entities would be required to recognize lease assets and liabilitiesfor all leases even though they may have expired prior to the effective date. Since this method has been costly and complex to implement, the FASBhas provided an additional transition method that allows entities to initially apply the new lease standard at the effective date and recognize acumulative-effect adjustment to the opening balance of retained earnings. Consistent with ASU 2016-02, “Leases,” this guidance will be effective forperiods beginning after December 15, 2018. The Company will adopt the standard beginning in fiscal 2019. The Company expects to elect the newtransition method permitted by ASU 2018-11.The Company expects the impact to the Company’s Consolidated Balance Sheet to be material, but at this time, the Company does not expectthe adoption of ASU 2016-02 to have a material impact on its Consolidated 58Statements of Income. The Company is in the process of analyzing existing leases, practical expedients, and deploying its implementation strategy.The Company does not anticipate any qualitative impacts based on the status of implementation. The Company is also in the process of updating itsaccounting policies, business process, controls, and disclosures.From a lessee perspective, the standard requires us to recognize right-of-use (ROU) assets and lease liabilities for our real estate and equipmentoperating leases and to provide expanded disclosures about our leasing activities. Based on our analysis to date, we expect we will elect the short-termlease recognition exemption and will not recognize ROU assets or lease liabilities for leases with a term less than 12 months. We will also elect thepractical expedient to not separate lease and non-lease components for our lessee portfolio.In June 2018, the FASB issued ASU No. 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” ASU 2018-07 simplifies the accounting for non-employee stock based compensation. Specifically, stock basedcompensation to non-employees is now measured on the grant date by estimating the fair value of the equity compensation to be issued. Entitiesshould remeasure non-employee stock based compensation only for those not settled as of the measurement date through a cumulative-effectadjustment to retained earnings as of the beginning of the fiscal year of adoption. The amendments in this update are effective for financial statementsissued for annual periods beginning after December 15, 2018, including interim periods within those annual periods, and early adoption is permittedfor interim or annual periods, but no earlier than the entity’s adoption date of Accounting Standards Codification (“ASC”) Topic 606. The adoption isnot expected to have a material impact on the consolidated financial statements.In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other-Internal-Use Software. ASU 2018-15 aligns the requirementsfor capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementationcosts incurred to develop or obtain internal-use software. The standard is effective beginning January 1, 2020, with early adoption permitted. We arecurrently assessing the impact this standard will have on our consolidated financial statements.In February 2018, the FASB issued ASU No. 2018-02, “Income Statement – Reporting Comprehensive Income: Reclassification of Certain TaxEffect from Accumulated Other Comprehensive Income.” ASU 2018-02 permits a company to reclassify the income tax effects of the U.S. Tax Cuts andJobs Act of 2017 (the “Tax Act”) on items within accumulated other comprehensive income or loss (AOCI-L) to retained earnings. Because most itemsthat are charged to AOCI-L are recorded net of applicable income taxes, the subsequent reclassification of these items from AOCI-L to the statement ofoperations will be at different income tax rates due to the Tax Act, thereby leaving a “stranded” tax balance within AOCI-L. ASU 2018-02 will allow acompany to transfer these “stranded” amounts from AOCI-L to retained earnings. ASU 2018-02 will be effective for the Company at the beginning offiscal 2019, and early adoption is permitted. The adoption is not expected to have a material impact on the consolidated financial statements.In May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation: Scope of Modification Accounting.” ASU 2017-09amends the scope of modification accounting for share-based payment arrangements. Specifically, an entity would not apply modification accountingif the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The amendments inthis update are effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within thoseannual periods, and early adoption is permitted for interim or annual periods. The adoption did not have a material impact on the consolidatedfinancial statements.In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment.” ASU2017-04 eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge; instead, an impairmentcharge will be based on the excess of 59the reporting unit’s carrying amount over its fair value. The Company has elected to early adopt ASU 2017-04 for fiscal 2018. As such, the ASU hasbeen applied to its annual goodwill impairment tests performed for fiscal 2018.In January 2017, the FASB issued ASU No. 2017-01, “Business Combination: Clarifying the Definition of a Business.” ASU 2017-01 clarifiesthe definition of a business and requires that an entity apply certain criteria in order to determine when a set of assets and activities qualifies as abusiness. This guidance will be effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. TheCompany has concluded that the adoption of this ASU will not have a material impact on the Company’s consolidated financial statements.In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows.” ASU No. 2016-15 is intended to reduce diversity in practice inthe manner certain transactions are classified in the statement of cash flows. This guidance will be effective for fiscal years beginning afterDecember 15, 2017 and interim periods within those fiscal years. The Company has adopted ASU No. 2016-15 and has concluded that the adoption ofthis ASU did not have a material impact on the Company’s consolidated financial statements.NOTE 4 – CHANGE IN ACCOUNTING PRINCIPLEIn the first quarter of 2018, the Company adopted ASC 606. ASC 606 provides guidance for revenue recognition. The standard’s core principle isthat a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which acompany expects to be entitled in exchange for those goods or services. The guidance within this standard must be applied using either of thefollowing transition methods: (1) a full retrospective approach reflecting the application of the standard in each prior reporting period with the optionto elect certain practical expedients; or (2) a modified retrospective approach with the cumulative effect of initially adopting the standard recognizedat the date of adoption (which requires additional footnote disclosures). The Company chose to adopt ASC 606 using the modified retrospectiveapproach applied to contracts not completed as of the date of adoption. We recognized the cumulative effect of initially applying the new revenuestandard, net of tax, as an increase of $2,722 to the opening balance of accumulated deficit. The comparative financial information has not beenrestated and continues to be reported under the accounting standards in effect for that period. We do not expect the adoption of the new revenuestandard 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 thecustomer. Approximately 98% of the Company’s consolidated revenues are related to the sale of products. Under our standard contracts or purchaseorders received from customers, the only performance obligation is the shipment of products. Revenue for products is recognized and the customer isinvoiced when the control of the product transfers to the customer, which is generally when the product is shipped. The Company determines the timeat 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 ofcontracts, sales agreements and purchase orders. Payment terms are generally established to be 30 days from the shipment date. We generally determinestandalone selling prices based on the prices charged to customers on a standalone basis 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 Companyreflected the right of return in accounts receivable. Under ASC 606, the Company has reclassified this right of return from accounts receivable into acombination of a refund liability, included within other accrued liabilities for the gross return or credit, and other current assets for the assumed valueof the returned product.Variable consideration is accounted for as a price adjustment (sales adjustment). Examples of variable consideration that affect the Company’sreported revenue include implicit rights of return and trade promotions. Implicit rights of return are typically contractually limited, amounts areestimable based upon historic return 60levels, and the Company records provisions for anticipated returns at the time revenue is recognized. Trade promotions are offered to cooperatives andend 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 areaccrued as sales occur based on the program rebate rates.Amounts billed to customers for shipping and handling are included in revenues when control of the goods and services transfers to the customer.Shipping and handling is arranged with third party carriers in connection with delivering goods to customers. Amounts billed to customers for sales taxare not included in revenues.The Company typically does not have contracts with significant financing components as payments are generally received within 60 days fromthe time of completion of the performance obligations. Cost incurred to obtain contracts are settled within 12 months of contract inception. Ouraccounting policy under ASC 606 remains consistent with past accounting policy whereby such costs are expensed as incurred.In the analysis of the revenue streams, the Company identified three areas for which the timing of revenue recognition would change. 1)Equipment and furniture revenue associated with projects was previously recognized upon the completion of the project, or at customeracceptance. Under ASC 606, the Company has determined that is has two performance obligations within the project revenue stream: a) thedelivery of equipment or furniture and b) the installation of the equipment or the furniture. Installation services are not typically complexand can be performed by multiple providers. The furniture is functional without customization or modification. For equipment or furnitureassociated with projects, the Company determined that control of the equipment or furniture was transferred to the customer upon deliveryof the equipment or furniture to the customer site as the customer is in possession of the product at that time. The revenue attributable tothe performance obligation associated with the delivery of the equipment or furniture is accelerated under the new revenue recognitionstandard and recognized upon delivery. The revenue attributable to installation is recognized over time during the installation processbased on costs incurred relative to total expected installation costs. Under the contract terms the customer is not billed for the equipment,furniture, or installation until the installation is complete. The Company allocates revenues to these two performance obligations using acost plus margin approach, whereby gross margins are consistent for each component. The revenue associated with unsatisfied performanceobligations for equipment or furniture is related to installation. The installation is typically completed and the associated revenue isrecognized within approximately 90 days following the delivery of the equipment or furniture. The cumulative impact of this changeduring fiscal 2018 was the acceleration of the recognition of $1,207 of revenue and $262 of gross profit. 2)Professional development or training days are provided to customers that order certain of the Company’s curriculum products, the mostprominent of which is the FOSS product line. The Company bills for these training days at the same time the customer is billed for theproduct based on the stand alone selling price. Prior to the adoption of ASC 606, the Company accrued the estimated costs associated withproviding training days, when the product was shipped. After the adoption of ASC 606, the Company is deferring revenue associated withproviding training days and will recognize the cost associated with providing the training when the costs are incurred. Training typically iscompleted and revenue is recognized within six to nine months following the shipment of the product. As the value of the trainingprovided in the fiscal period ended December 29, 2018 exceeded the value of training days billed in the respective periods, the adoption ofASC 606 resulted in incremental revenue, gross profit, and SG&A in the period. The cumulative impact of this change during fiscal 2018was the recognition of $598 of both revenue and gross profit and SG&A of $247. 3)Certain customer contracts specifically indicate that the customer obtains control of the product upon delivery. While the Company’s salesorders, invoices and catalog order forms indicate that control of the products has passed to the customer at time of shipment, a review ofcontracts has identified certain 61 contracts for which the language associated with control of the product is deemed to supersede invoice terms and conditions resulting intransfer of control upon receipt. The cumulative impact of this change during fiscal 2018 was the deferral of $216 of revenue and $73 ofgross profit.The Company also evaluated its catalog costs under the new revenue recognition standard and determined that its catalog costs should be treatedas 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 withinwhich revenues attributable to the catalogs were generated, which was generally one year or less. The cumulative impact of this change during fiscal2018 was lower catalog costs in SG&A of $2,878. This reduction reflects the difference between catalog costs incurred during the period and thecatalog amortization expense prior to adopting ASC 606.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 ofDecember 30,2017 AdjustmentsDue to ASC606 As AdjustedDecember 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.(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 refundliabilities, 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 toContract liabilities in accordance with ASC 606. 62The cumulative effect of the adjustments to our December 29, 2018 condensed consolidated statement of operations and condensed consolidatedbalance sheet for the adoption of ASC 606 were as follows: For the Twelve Months EndedDecember 29, 2018 Prior toAdoption ofASC 606 Adjustments Dueto ASC 606 As Reported Revenues $671,863 $1,589 $673,452 Cost of revenues 445,740 (803) 444,937 Gross profit 226,123 2,392 228,515 Selling, general and administrative expenses 224,799 (2,631) 222,168 Operating loss (23,401) 5,023 (18,378) Loss before benefit from income taxes (38,949) 5,023 (33,926) Provision from income taxes 3,518 1,297 4,815 Net loss $42,467 $3,726 $(38,741) December 29, 2018 Prior toAdoption ofASC 606 Adjustments Dueto ASC 606 As Reported ASSETS Accounts receivable (3) $77,711 $177 $77,888 Inventories, net 92,330 (2,269) 90,061 Deferred catalog costs 572 (572) — Prepaid expenses and other current assets (1) (3) 12,540 3,223 15,763 Deferred taxes long-term 320 — 320 Total Assets 270,117 559 270,676 LIABILITIES Contract liabilities (2) $3,480 $2,161 $5,641 Other accrued liabilities (2) (3) 12,937 (1,558) 11,379 Total Liabilities 202,710 603 203,313 STOCKHOLDERS’ EQUITY Accumulated deficit $(55,593) $(44) $(55,637) Total Stockholders’ Equity 67,407 (44) 67,363 Total Liabilities and Stockholders’ Equity $270,117 $559 $270,676 (1)Contract assets of $2,958 are included in Prepaid expenses and other current assets.(2)Customer rebates of $1,724 have been reclassed from Other accrued liabilities to Contract liabilities.(3)The reserve for customer returns, refunds and allowances, in the amount of $393, was reclassified as follows: a) the amount associated with refundliabilities, of $658, has been reclassified to Other accrued liabilities; and b) the amount associated with the estimated value of returned product,of $265, has been reclassified to Prepaid expenses and other current assets. 63The below table shows the Company’s disaggregated revenues for the periods ended December 29, 2018, December 30, 2017, and December 31,2016. Fiscal Year EndedDecember 29, 2018 Fiscal Year EndedDecember 30, 2017 Fiscal Year EndedDecember 31, 2016 Distribution revenues by product line: Supplies $308,900 $305,423 $315,986 Furniture 212,728 190,766 183,060 Instruction & Intervention 58,620 43,294 37,117 AV Tech 15,809 17,200 18,023 Planners 29,695 34,157 41,126 Freight Revenue 10,784 10,326 9,396 Customer Allowances / Discounts (7,101) (6,211) (5,868) Total Distribution Segment $629,435 $594,955 $598,840 Curriculum revenues by product line: Science $44,017 $63,428 $57,482 Total Curriculum Segment $44,017 $63,428 $57,482 Total revenues $673,452 $658,383 $656,322 Revenues from the sale of products comprise the significant portion of revenues in all product categories in the above table. The productrevenues associated with the above disaggregated revenues are recorded when control of goods or services are transferred to the customer. TheFurniture category includes installation revenues that are recorded over time as installation services are incurred. The Instruction & Interventioncategory includes subscription revenues which are recognized over the subscription period, typically twelve months. All product categories areimpacted 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 ASC606. During the period ended December 29, 2018, the Company cumulatively recognized into revenues $5,878, which had been included in thecontract liability balance as of December 31, 2017.NOTE 5 – BUSINESS COMBINATIONSOn August 18, 2017, the Company completed the acquisition of the assets of Triumph Learning, LLC (“Triumph Learning”) pursuant to theterms of an Asset Purchase Agreement dated August 18, 2017 (the “Purchase Agreement”) by and among School Specialty and Triumph Learning.School Specialty acquired all of the assets of Triumph Learning for $20,376 plus the assumption of certain liabilities. At closing, $18,114 of the totalpurchase price was paid using the Company’s existing debt facilities (see Note 8 – Debt). The Company drew $14,000 from the delayed draw term loanfeature of its New Term Loan and drew $4,114 from its Asset-Based Credit Agreement (“ABL Facility”) to fund this portion of the purchase price. InNovember 2017, the Company paid $912 as a final working capital adjustment, which was funded through the Company’s ABL facility. The remainingpurchase price in excess of the cash paid at closing represents the discounted fair value of the contingent portion of the purchase price. The contingentportion of the purchase price was 4.5% of net Triumph Learning revenues from certain Triumph Learning products over the period August 18, 2017through December 18, 2018, subject to a maximum consideration of $1.5 million. The contingent portion of the purchase 64price was scheduled to be paid quarterly over the above-mentioned period. The maximum present value of the contingent portion of the purchase pricewas $1,350. The Company accounted for this acquisition as a business combination in accordance with ASC 805. The actual contingent considerationearned was $1,317, which included $183 of implied interest. Since the actual amount of contingent consideration earned was less than the assessed fairvalue, the difference of $216 was reflected as incremental operating income in 2018. As of December 29, 2018, $501 of earned contingentconsideration, including implied interest expense, remained as unpaid. This amount was paid in January 2019.Triumph Learning is a publisher of state-specific assessment preparation, and supplemental and intervention curriculum products for the K-12education market. For over 25 years, Triumph Learning’s flagship product, Coach, has been utilized throughout education, providing educationalfacilities and teachers with hands-on test preparation books for English and Language Arts (ELA), Math, Science and Social Studies, with materialscustomized 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. TriumphLearning’s products are complementary to School Specialty’s current offering and others that it intends to bring to market, as it expands its productoffering in the Instruction & Intervention category. There are also significant synergies beyond product offering as the Company anticipates theacquisition will result in a broader and more effective selling organization and extended customer reach that will enable the Company to deliver a trueblended learning solution to its customers.School Specialty incurred acquisition and integration costs of $1,530 in fiscal 2018 and $3,203 in the third and fourth quarters of fiscal 2017related 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 were subject to change during the measurement period (up to one year from the acquisition date), as theCompany finalized the valuations of certain liabilities assumed in connection with the acquisition. The table below summarizes the final accountingfor 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 thehistorical results of Triumph Learning for those periods. The unaudited pro forma condensed combined statements of operations for the twelve monthsended December 30, 2017 give effect to the acquisition of Triumph Learning as if it had occurred at the beginning of the periods presented. 65Net income does reflect the incremental interest expense which would have been incurred if the acquisition had been completed at the beginningof the periods presented.PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)(In Thousands, Except Per Share Amounts) For the Twelve Months Ended December 30, 2017 December 31, 2016 Revenues $678,439 $685,974 Net income 5,895 12,183 Weighted average shares outstanding: Basic EPS 7,000 7,000 Diluted EPS 7,024 7,000 Net income per Share: Basic $0.84 $1.74 Diluted $0.84 $1.74 NOTE 6—GOODWILL AND OTHER INTANGIBLE ASSETSThe following table presents details of the Company’s intangible assets, including the estimated useful lives, excluding goodwill: December 29, 2018 Gross Value AccumulatedAmortization Net BookValue Amortizable intangible assets: Customer relationships (10-13 years) $13,294 $(5,136) $8,158 Publishing rights (20 years) 4,000 (1,117) 2,883 Trademarks (20 years) 26,587 (6,612) 19,975 Developed technology (7 years) 6,600 (5,264) 1,336 Content (5 years) 4,400 (4,400) — Perpetual license agreements (5 years) 1,200 (1,200) — Favorable leasehold interests (10 years) 2,160 (1,206) 954 Total intangible assets $58,241 $(24,935) $33,306 December 30, 2017 Gross Value AccumulatedAmortization Net BookValue Amortizable intangible assets: Customer relationships (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 Intangible asset amortization expense included in selling, general and administrative expenses for fiscal 2018, fiscal 2017, and fiscal 2016 was$3,857, $3,767, and $3,603 respectively. 66Intangible asset amortization expense for each of the five succeeding fiscal years is estimated to be: 2019 $3,758 2020 $3,207 2021 $2,814 2022 $2,814 2023 $2,688 The table below shows the allocation of the recorded goodwill as of December 30, 2017 and December 29, 2018 for both the reporting units andreporting segments. Reporting Unit DistributionSegment Reporting Unit CurriculumSegment Distribution Science Total Balance at December 30, 2017 $22,262 $22,262 $4,580 $4,580 $26,842 Balance at December 29, 2018 $— $— $4,580 $4,580 $4,580 A reporting unit is the level at which goodwill impairment is tested and can be an operating segment or one level below an operating segment,also known as a component. A component of an operating segment is a reporting unit if the component constitutes a business for which discretefinancial information is available for segment management to regularly review the operating results of that component. As the Company hasreorganized and modified its internal reporting structure, it has determined that both the Distribution and Curriculum segments consists of onereporting unit, using the criteria under ASC 350-20-25.Based on ASU 2017-04, which the Company has elected to early adopt, goodwill impairment is based on the excess of a reporting unit’s carryingamount over its fair value. The Company determines the fair value of the reporting unit, generally by utilizing a combination of the income approach(weighted 90%) and the market approach (weighted 10%) derived from comparable public companies. The Company believes that each approach hasits merits. However, in the instances where the Company has utilized both approaches, the Company has weighted the income approach more heavilythan the market approach because the Company believes that management’s assumptions generally provide greater insight into the reporting unit’s fairvalue. This fair value determination was categorized as level 3 in the fair value hierarchy pursuant to FASB ASC Topic 820, “Fair ValueMeasurement”. The estimated fair value of the reporting units is dependent on several significant assumptions, including earnings projections anddiscount rates.Assumptions utilized in the impairment analysis are subject to significant management judgment. Changes in estimates or the application ofalternative assumptions could have produced significantly different resultsIn performing the impairment assessments for fiscal 2018 and fiscal 2017, the Company estimated the fair value of its reporting units using thefollowing valuation methods and assumptions: 1.Income Approach (discounted cash flow analysis) – the discounted cash flow (“DCF”) valuation method requires an estimation of futurecash flows of a reporting unit and then discounting those cash flows to their present value using an appropriate discount rate. The discountrate selected should reflect the risks inherent in the projected cash flows. The key inputs and assumptions of the DCF method are theprojected cash flows, the terminal value of the reporting units and the discount rate. 67The growth rates used for the terminal value calculations and the discount rates of the respective reporting units were as follows: Fiscal 2018 Fiscal 2017 Terminal ValueGrowth Rates DiscountRate Terminal ValueGrowth Rates DiscountRate Distribution 1.4% 14.2% 1.4% 13.0% Science 1.4% 12.0% 1.4% 11.4% 2.Market Approach (market multiples) – this method begins with the identification of a group of peer companies in the same or similarindustries as the reporting unit being valued. A valuation average multiple is then computed for the peer group based upon a valuationmetric. The Company selected a ratio of enterprise value to projected earnings before interest, taxes, depreciation and amortization(“EBITDA”). Various operating performance measurements of the reporting unit being valued are then benchmarked against the peer groupand a discount rate or premium is applied to reflect favorable or unfavorable comparisons. The resulting multiple is then applied to thereporting unit being valued to arrive at an estimate of its fair value. A control premium is then applied to the equity value. The resultingmultiples and control premiums were as follows: Fiscal 2018 Fiscal 2017 EBITDAMultiples ControlPremium EBITDAMultiples ControlPremium Distribution 5.3x 10.3% 5.5x 10.3% Science 6.6x 11.7% 6.2x 11.7% In completing the fiscal 2018 assessment, the fair value of the Distribution reporting unit indicated an impairment of goodwill of $22.3 million.Indicators of impairment that were identified during the annual assessment were a significant decline during the fourth quarter of fiscal 2018 in theCompany’s stock price and market capitalization and a decline in our expected future cash flows based on the Company’s fiscal 2019 planning processcompleted in the fourth quarter of fiscal 2018. The decline in expected future cash flows was related to the decrease in gross margins. The long-livedassets of the reporting unit were tested for impairment before completing the goodwill impairment test in accordance with the accounting standard. Noimpairment of the long-lived assets was evident. The assessment of the Science reporting units indicated the fair value was in excess of its carryingvalues by over 100%. There was no impairment charge recorded in fiscal 2017 related to goodwill or indefinite-lived intangible assets.In order to establish the assumptions for the discounted cash flow analysis, the Company considered multiple factors, including(a) macroeconomic conditions, (b) industry and market factors such as school funding trends and school construction forecasts, (c) overall financialperformance such as planned revenue, profitability and cash flows and (d) the expected impact of revenue enhancing and cost saving initiatives.NOTE 7—PROPERTY, PLANT AND EQUIPMENTProperty, plant and equipment consist of the following: December 29,2018 December 30,2017 Projects in progress $3,768 $5,186 Buildings and leasehold improvements 2,876 3,048 Furniture, fixtures and other 68,285 60,046 Machinery and warehouse equipment 14,903 13,813 Total property, plant and equipment 89,832 82,093 Less: Accumulated depreciation (57,930) (48,514) Net property, plant and equipment $31,902 $33,579 68Depreciation expense for fiscal 2018, fiscal 2017, and fiscal 2016 was $14,060, $10,294, and $10,260, respectively.NOTE 8—DEBTLong-Term DebtLong-term debt as of December 29, 2018 and December 30, 2017 consisted of the following: December 29,2018 December 30,2017 ABL Facility, maturing in 2022 $— $— New Term Loan, maturing in 2022 111,725 121,938 Unamortized New Term Loan Debt Issuance Costs (2,799) (3,205) Deferred Cash Payment Obligations, maturing in 2019 25,009 22,830 Total debt 133,935 141,563 Less: Current maturities (30,352) (10,989) Total long-term debt $103,583 $130,574 ABL FacilityOn June 11, 2013, the Company entered into a Loan Agreement (the “ABL Facility”) by and among the Company, Bank of America, N.A., asAgent, SunTrust Bank, as Syndication Agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated and SunTrust Robinson Humphrey, Inc., as JointLead Arrangers and Bookrunners, and the Lenders that are party to the ABL Facility (the “Asset-Based Lenders”).Under the ABL Facility, the Asset-Based Lenders agreed to provide a revolving senior secured asset-based credit facility in an aggregateprincipal 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 will bear interest at a rate per annum equal to, at the Company’s election: (1) a base rate (equal tothe greatest of (a) the prime lending rate, (b) the federal funds rate plus 0.50%, and (c) the 30-day LIBOR rate plus 1.00% per annum) (the “Base Rate”)plus an applicable margin (equal to a specified margin based on the interest rate elected by the Company, the fixed charge coverage ratio under theABL 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 onloans 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 thatfall 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 additionalflexibility in its execution of certain restructuring actions by increasing the cap on the amount that may be added back under the definition of earningsbefore interest, taxes, depreciation, and amortization (“EBITDA”) for non-recurring, unusual or extraordinary charges, business optimization expensesor 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 forbase rate and LIBOR loans, reduce the unused line fee rate and extend the scheduled maturity date. As amended, the maturity date was extended toSeptember 16, 2020, which would have automatically become March 12, 2019 unless the Company’s term loan facility had been repaid, refinanced, 69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 scheduledmaturity date. In addition, the amendment provided for the withdrawal of Sun Trust Bank as a lender and the assumption of its commitments by theremaining lenders.On April 7, 2017, the Company executed the Third Amendment to its ABL Facility (the “ABL Amendment”). The ABL Amendment provided anew 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 monthsof March through August, and the inclusion of certain inventory in the borrowing base, which previously had been excluded. Additionally, certainconforming changes were made in connection with the entry into the New Term Loan Agreement (as defined below). The ABL Amendment extends thematurity of the ABL Facility, as amended, to April 7, 2022 (“ABL Termination Date”), provided that the ABL Termination Date will automaticallybecome due February 7, 2022 unless the New Term Loan (as defined below) has been repaid, prepaid, refinanced, redeemed, exchanged, amended orotherwise defeased or discharged prior to such date.On August 9, 2018, the Company entered into the Fourth Amendment to the ABL Facility (the “Fourth Amendment”) in order to: (1) update thedefinition of “Change of Control” set forth in the ABL Facility, and (2) update the definition of “Specified Unsecured Prepetition Debt” and associatedprovisions set forth in the ABL Facility. The Fourth Amendment deletes the reference to “35%” in the “Change of Control” definition and inserts“50%” in its place. The Company amended this provision of the ABL Facility in order to ensure certain shareholders with large positions did not putthe Company in violation of the terms within its loan agreements. The ABL Facility also amended and restated the definition “Specified UnsecuredPrepetition Debt” in order to increase the cap on amounts prepaid because the original cap set forth therein was less than the amount due at maturitydue to the fiscal 2017 revised interpretation of the interest calculation methodology pursuant to the bankruptcy Reorganization Plan (as defined in theABL Facility).On November 7, 2018, the Company entered into a Fifth Amendment to the ABL Facility (the “Fifth Amendment”) with its Asset-Based Lenders,effective as of September 29, 2018. The Sixth Amendment was entered into in order to: (1) give effect to ASU No. 2014-09 for the purpose of thecomputation of any financial covenant retroactive to December 31, 2017 and for all other purposes effective as of the date of the ABL Amendment, and(2) substitute the LIBOR Screen Rate (as defined in the ABL Amendment) with the LIBOR Successor Rate (as defined in the ABL Amendment) in theevent that the LIBOR Screen Rate is not available or published on a current basis, it was announced that LIBOR or LIBOR Screen Rate will no longerbe made available or a new benchmark interest rate has been adopted to replace LIBOR.On March 13, 2019, the Company entered into a Sixth Amendment to the ABL Facility (the “Sixth Amendment”) with its Asset-Based Lenders,effective as of December 29, 2018. See Note 18-Subsequent Events for details on this amendment.Pursuant to an Amended and Restated Guarantee and Collateral Agreement dated as of April 7, 2017 (the “ABL Security Agreement”), the ABLFacility is secured by a first priority security interest in substantially all assets of the Company and the subsidiary borrowers. Under the NewIntercreditor Agreement (as defined below), the ABL Lenders have a first priority security interest in substantially all working capital assets of theCompany and the subsidiary borrowers, and a second priority security interest in all other assets, subordinate only to the first priority security interestof the New Term Loan Lenders (as defined below) in such other assets.The effective interest rate under the ABL Facility for fiscal 2018 was 7.5%, which includes interest on borrowings of $2,028, amortization of loanorigination fees of $417 and commitment fees on unborrowed funds of $267. The effective interest rate under the ABL Facility for fiscal 2017 was5.7%, which includes interest on borrowings of $884, amortization of loan origination fees of $507 and commitment fees on unborrowed funds of$339. 70The Company may prepay advances under the ABL Facility in whole or in part at any time without penalty or premium. The Company will berequired to make specified prepayments upon the occurrence of certain events, including: (1) the amount outstanding on the ABL Facility exceedingthe 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 ordisposition of assets that are first priority collateral for the ABL Facility.The ABL Facility contains customary events of default and financial, affirmative and negative covenants, including but not limited to aspringing financial covenant relating to the Company’s fixed charge coverage ratio and restrictions on indebtedness, liens, investments, assetdispositions and dividends and other restricted payments.Term LoanOn June 11, 2013, the Company entered into a Credit Agreement (the “Term Loan Credit Agreement”) among the Company, Credit Suisse AG, asAdministrative Agent and Collateral Agent, and the Lenders defined in the Term Loan Credit Agreement (the “Term Loan Lenders”). In November2014, the Company amended the Term Loan Credit Agreement. The main purpose for the amendment was to provide the Company additionalflexibility in its execution of certain restructuring actions by increasing the cap on the amount that may be added back under the definition ofconsolidated EBITDA for non-recurring, unusual or extraordinary charges, business optimization expenses or other restructuring charges or reservesand 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 aggregateprincipal amount of $145,000, including an original issue discount of $2,900. The outstanding principal amount of the Term Loan bore interest at arate 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 theTerm Loan Credit Agreement bearing interest based upon the base rate were due quarterly in arrears, and interest on loans bearing interest based uponthe 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 thebeginning 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 CreditAgreement was terminated on April 7, 2017.The Term Loan Credit Agreement contained customary events of default and financial, affirmative and negative covenants, including but notlimited to quarterly financial covenants, relating to the Company’s (1) minimum interest coverage ratio and (2) maximum net total leverage ratio andrestrictions on indebtedness, liens, investments, asset dispositions and dividends and other restricted payments. The Company was in compliance withthe 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 the Effective Date, in an amount equal to at least50% of the aggregate principal amount outstanding under the Term Loan. The purpose of the interest rate hedge was to effectively subject a portion ofthe Term Loan to a fixed or maximum interest rate. As such, the Company entered into an interest rate swap agreement on August 27, 2013 thateffectively 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 enterinto a subsequent interest rate swap after the termination of the above-mentioned interest rate swap. During the second quarter of fiscal 2016, the fairvalue of the derivative increased by $91 and a gain of $91 was recognized. During the first half of fiscal 2016, the fair value of the derivative increasedby $174 and a gain of $174 was recognized. The gains related to the derivative were recorded in “Change in fair value of interest rate swap” on theconsolidated statement of operations. 71Under this swap agreement, the Company paid the counterparty interest on the notional amount at a fixed rate per annum of 1.485% and thecounterparty paid the Company interest on the notional amount at a variable rate per annum equal to the greater of 1-month LIBOR or 1.0%. Thenotional amounts did not represent amounts exchanged by the parties, and thus were not a measure of exposure of the Company.During fiscal 2017, the Company recorded a non-cash charge of $4.3 million related to the write-off of $3.1 million of remaining unamortizeddebt issuance costs and $1.2 million of remaining original issue discount both of which were associated with the repayment of the Term Loan onApril 7, 2017.New Term LoanOn April 7, 2017, the Company entered into a Loan Agreement (the “New Term Loan Agreement”) among the Company, as borrower, certain ofits subsidiaries, as guarantors, the financial parties party thereto, as lenders (the “New Term Loan Lenders”) and TCW Asset Management CompanyLLC, 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 aggregateprincipal amount of $140,000. The initial draw on the New Term Loan at closing was $110,000. These proceeds, along with proceeds received from adraw on the ABL Facility (as defined below), were used to repay the Term Loan which had a remaining principal balance including accrued interest of$118,167. The New Term Loan Agreement provided for a delayed draw feature that allowed the Company to draw up to an additional $30,000 throughApril 7, 2019. The ability to access the delayed draw commitment was subject to compliance with certain terms and conditions. The proceeds from thedelayed draw were allowed to be used to fund distributions, permitted acquisitions, and repayments of existing indebtedness. In the third quarter offiscal 2017, the Company drew $14,000 under the delayed draw term loan feature in conjunction with the Triumph Learning acquisition. At theCompany’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 applicablemargin 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 onloans under the New Term Loan Agreement bearing interest based on the LIBOR rate. The New Term Loan currently bears interest at a rate ofone-month LIBOR plus 625 basis points.The New Term Loan matures on April 7, 2022. The New Term Loan requires scheduled quarterly principal payments of 0.625% of the originalprincipal amount which commenced June 30, 2017 and continue through the quarter ended March 31, 2019. Subsequent to March 31, 2019, thescheduled quarterly principal payments are 1.250% of the original principal amount. Required scheduled quarterly principal payments on borrowingsunder the delayed-draw feature began at the end of the quarter following the draw. In addition to scheduled quarterly principal repayments, the NewTerm Loan Agreement requires prepayments at specified levels upon the Company’s receipt of net proceeds from certain events, including but notlimited to certain asset dispositions, extraordinary receipts, and the issuance or sale of any indebtedness or equity interests (other than permittedissuances or sales). The New Term Loan Agreement also requires prepayments at specified levels from the Company’s excess cash flow. As ofDecember 29, 2018, the Company’s excess cash flow obligation under the New Term Loan Agreement was $693. As such, this amount was classified ascurrent maturities of long-term debt. The Company’s excess cash flow obligation as of December 30, 2017 was $7,801. The Company is also permittedto voluntarily prepay the New Term Loan in whole or in part. Voluntary prepayments made before April 7, 2018 were subject to an early prepaymentfee 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 tothat portion of the loans comprised of prime rate loans and then to that portion of loans comprised of LIBOR rate loans. The New Term LoanAgreement contains customary events of default and financial, affirmative and negative covenants, including but not limited to quarterly financialcovenants commencing with the year ending December 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. 72On August 9, 2018, the Company entered into the First Amendment (the “First Term Loan Amendment”) of its New Term Loan Agreement datedApril 7, 2017 in order to: (1) update the definition of “Change of Control” set forth in the New Term Loan Agreement, and (2) update the definition of“Specified Unsecured Prepetition Debt” and associated provisions set forth in the New Term Loan Agreement. The First Term Loan Amendment deletesthe reference to “35%” in the “Change of Control” definition and inserts “50%” in its place. The Company amended this provision of the New TermLoan Agreement in order to accommodate certain shareholders of the Company with large positions. The New Term Loan Agreement also amended andrestated the definition “Specified Unsecured Prepetition Debt” in order to increase the cap on amounts prepaid because the original cap set forththerein was less than the amount due at maturity due to the fiscal 2017 revised interpretation of the interest calculation methodology pursuant to thebankruptcy Reorganization Plan (as defined in the New Term Loan Agreement).On November 7, 2018, the Company entered into a Second Amendment to the New Term Loan Agreement (the “Second Term LoanAmendment”) with its New Term Loan Lenders, each effective as of September 29, 2018. The Second Term Loan Amendment was entered into in orderto (1) reduce its fixed charge coverage ratio for the five fiscal quarters ending December 29, 2018 through December 28, 2019, (2) reduce the number ofdays for fiscal 2018 during which the Company may have no revolving loans outstanding from 60 to 14 and adjust the time period of such reduction tobe between December 15, 2018 and January 31, 2019, (3) to give effect to ASU 2014-09 for the purpose of the computation of any financial covenantretroactive to December 31, 2017 and for all other purposes effective as of the date of the Second Term Loan Amendment, (4) change the delayed drawterm loan commitment termination date from April 7, 2019 to the effective date of the Third Term Loan Amendment and (5) provide that theApplicable Margin shall assume a net senior leverage ratio of greater than 3.75x from the date of the Second Term Loan Amendment until theCompany delivers its financial statements for fiscal 2018 and the related compliance certificate.On March 13, 2019, the Company entered into a Third Amendment to the New Term Loan Agreement (the “Third Term Loan Amendment”) withits New Term Loan Lenders, each effective as of December 29, 2018. See Note 18-Subsequent Events for details of this amendment.The effective interest rate under the New Term Loan for fiscal 2018 was 12.1%, which includes interest on borrowings of $9,742 and loanorigination fees of $745. The effective interest rate under the New Term Loan for fiscal 2017 was 9.0%, which includes interest on borrowings of$9,667 and amortization of loan origination fees of $845. As of December 29, 2018, the outstanding balance on the New Term Loan Credit Agreementwas $111,725. Of this amount, $5,343 was reflected as currently maturing, long-term debt in the accompanying condensed consolidated balancesheets. As of December 30, 2017, the outstanding balance on the New Term Loan Credit Agreement was $121,938. Of this amount, $10,989 wasreflected 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 December 29, 2018 approximated the carryingvalue of $111,725.Deferred Cash Payment ObligationsIn connection with the previously disclosed 2013 Reorganization Plan, general unsecured creditors are entitled to receive a deferred cashpayment obligation of 20% of the allowed claim in full settlement of the allowed unsecured claims. Such payment accrues quarterly paid-in-kindinterest of 5% per annum beginning on the Effective Date.Trade unsecured creditors had the ability to make a trade election to provide agreed upon customary trade terms. If the election was made, thoseunsecured trade creditors received a deferred cash payment obligation of 45% of the allowed claim in full settlement of those claims. As of theEffective Date, the deferred payment obligations under the trade elections began to accrue quarterly paid-in-kind interest of 10% per annum. Alldeferred cash payment obligations, along with interest paid-in-kind, are payable in December 2019. As such, these obligations have been classified ascurrent maturities of long-term debt. 73The Company’s reconciliation of general unsecured claims was completed in fiscal 2015. As of December 29, 2018, the Company’s deferredpayment obligations were $25,009, of which $3,088 represents a 20% recovery for the general unsecured creditors and $12,100 represents a 45%recovery for those creditors who elected to provide the Company standard trade terms with the remaining $9,821 related to accrued paid-in-kindinterest.The Company has estimated that the fair value of its Deferred Cash Payment Obligations (valued under Level 3) approximates $24,916 as ofDecember 29, 2018. The Company estimated the fair value for its Deferred Cash Payment Obligations based upon the net present value of future cashflows using the discount rate that is consistent with our New Term Loan.NOTE 9—INCOME TAXESOn December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. In accordance with accounting standards, the effects of thislegislation were recognized in 2017 upon enactment. The primary impact of the Act for the Company related to the reduction of the Federal corporateincome tax rate from 35% to 21% beginning in 2018. At December 30, 2017, our previously recorded deferred tax assets and liabilities were re-measured to reflect the 21% rate at which these assets and liabilities would be realized in future periods. The net change in deferred taxes, of $704, wasrecorded through the provision for income taxes.A provisional amount related to a one-time transitional tax on foreign earnings and profits, disclosed but not recorded at December 31, 2017 inaccordance with the SEC staff accounting bulletin No. 118, was finalized during the fourth quarter of 2018 and $725 was recognized in the 2018provision.The provision for income taxes consists of: Fiscal Year EndedDecember 29, 2018(52 weeks) Fiscal Year EndedDecember 30, 2017(52 weeks) Fiscal Year EndedDecember 31, 2016(53 weeks) Current income tax expense/(benefit): Federal $468 $31 $(87) State 335 506 235 Foreign 1,484 (85) — Total 2,287 452 148 Deferred income tax expense/(benefit): Federal 2,265 (1,626) — State 177 (258) — Foreign 86 23 (184) Total 2,528 (1,861) (184) Total provision for/(benefit from) income taxes $4,815 $(1,409) $(36) 74Deferred taxes are comprised of the following: Fiscal Year EndedDecember 29, 2018(52 weeks) Fiscal Year EndedDecember 30, 2017(52 weeks) Fiscal Year EndedDecember 31, 2016(53 weeks) Inventory $3,305 $3,072 $4,762 Allowance for doubtful accounts 496 265 461 Accrued liabilities (407) 264 1,830 Debt issuance costs (30) (21) (1,249) Foreign tax and AMT credit carryforward 4,899 6,852 11,576 Net operating loss carryforward 4,381 1,367 3,016 Property and equipment (4,317) (4,200) (5,738) Accrued liabilities 2,615 1,383 705 Intangible assets 2,431 (585) 3,493 Interest expense limitation carryforward 2,724 — — Capital loss carryforward 912 912 — Valuation allowance (16,689) (7,263) (18,671) Net non-current deferred tax assets $320 $2,046 $185 In fiscal 2017, the Company concluded that the realization of substantially all of its deferred tax assets met the more likely than not thresholdand decreased its tax valuation allowance from $18,671 to $7,263. As of December 30, 2017, the Company continued to maintain a valuationallowance against its foreign tax credits and capital loss carryovers based on projections that reflect minimal to zero foreign source income and capitalgains. In fiscal 2018, the Company concluded that the realization of substantially all of its deferred tax assets did not meet the more likely than notthreshold. This conclusion was based primarily on a combination of the fiscal 2018 operating performance, cumulative pre-tax net losses over the priorthirty-six months, and future forecasts of taxable income. As a result, the Company increased its tax valuation allowance to $16,689 as of the end offiscal 2018. The Company has Federal and State net operating losses totaling $16,696. These net operating losses can not be carried back but theFederal net operating loss can be carried forward indefinitely and the majority of the State net operating loss can be carried forward for 20 years. TheCompany has foreign net operating loss of $229. As of December 29, 2018, the Company had an immaterial amount of unremitted earnings fromforeign investments, which are considered permanently reinvested in its foreign opportunities.The Company’s effective income tax rate varied from the U.S. federal statutory tax rate as follows: Fiscal Year EndedDecember 29, 2018(52 weeks) Fiscal Year EndedDecember 30, 2017(52 weeks) Fiscal Year EndedDecember 31, 2016(53 weeks) U.S. federal statutory rate 21.0% 35.0% 35.0% State income taxes, net of federal income tax benefit 4.8% 2.7% 1.6% Foreign income tax -1.5% -1.1% -1.3% Alternative Minimum Tax 0.7% — — Deemed dividend, meals and entertainment and other -4.4% 1.4% 0.0% Impact of tax reform on deferred — 13.1% — Realizable built-in loss adjustment -0.3% 20.9% 11.3% Valuation allowance -34.5% -98.3% -46.9% Effective income tax rate -14.2% -26.3% -0.3% 75The Company files income tax returns with the U.S., various U.S. states, and foreign jurisdictions. The most significant tax return the Companyfiles is with the U.S. The Company’s tax returns are no longer subject to examination by the U.S. and Canada for fiscal years before 2015. TheCompany has various tax audits and appeals in process at any given time. It is not anticipated that any adjustments resulting from tax examinations orappeals would result in a material change to the Company’s financial position or results of operations.As of December 29, 2018, December 30, 2017, and December 31, 2016, the Company’s liability for uncertain tax positions, net of federal taxbenefits, was $574, $172, and $84, respectively, all of which would impact the effective tax rate if recognized. The Company does not expect anymaterial changes in the amount of uncertain tax positions within the next twelve months. The Company classifies accrued interest and penalties relatedto unrecognized tax benefits as income tax expense in the consolidated statements of operations. The amounts of accrued interest and penaltiesincluded in the liability for uncertain tax positions are not material.The following table summarizes the activity related to the Company’s gross liability for uncertain tax positions: Balance at December 26, 2015 $482 Increase related to current year tax provision 227 Adjustments to provision related to assessments (625) Balance at December 31, 2016 $84 Increase related to current year tax provision 89 Adjustments to provision related to assessments (1) Balance at December 30, 2017 $172 Increase related to current year tax provision 403 Adjustments to provision related to assessments (1) Balance at December 29, 2018 $574 The reduction in uncertain tax provisions for fiscal 2016 was related to expiring state statutes of limitations.NOTE 10—OPERATING LEASE COMMITMENTSThe Company leases various types of warehouse and office facilities and equipment, under lease agreements which expire at various dates. Theseleases contain various rental extensions and escalations. Future minimum lease payments under operating leases for the Company’s fiscal years are asfollows: 2019 $5,449 2020 4,744 2021 2,275 2022 1,606 2023 1,577 Thereafter 122 Total minimum lease payments $15,773 Rent expense for fiscal 2018, fiscal 2017, and fiscal 2016, was $6,704, $7,232, and $7,066, respectively. 76NOTE 11—EMPLOYEE BENEFIT PLANSThe Company sponsored the School Specialty, Inc. 401(k) Plan (the “401(k) Plan”) which allows employee contributions in accordance withSection 401(k) of the Internal Revenue Code. The Company has the discretion to match a portion of employee contributions and virtually all full-timeemployees are eligible to participate in the 401(k) Plan after 90 days of service. The amount of the Company’s 401(k) match in fiscal 2018, fiscal 2017and fiscal 2016 was $772, $704 and $259 respectively. Prior to fiscal 2016, the Company had suspended the company 401(k) match. The Company’s401(k) match was reinstated in the third quarter of fiscal 2016.NOTE 12—STOCKHOLDERS’ EQUITYShare Repurchase ProgramsThe Company did not repurchase any shares of its outstanding common stock in any period.Earnings Per Share (“EPS”)Basic EPS excludes dilution and is computed by dividing income (loss) available to common stockholders by the weighted average number ofcommon shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities to issue common stock wereexercised or otherwise issued. The following information presents the Company’s computations of basic and diluted EPS for the periods presented inthe consolidated statements of operations: Income/(Loss)(Numerator) Shares(Denominator) Per ShareAmount Fiscal 2018: Basic EPS $(38,741) 7,000 $(5.53) Effect of dilutive stock options — — Effect of dilutive restricted stock units — — Diluted EPS $(38,741) 7,000 $(5.53) Fiscal 2017: Basic EPS $6,779 7,000 $0.97 Effect of dilutive stock options — — Effect of dilutive restricted stock units — 24 Diluted EPS $6,779 7,024 $0.97 Fiscal 2016: Basic EPS $14,764 7,000 $2.11 Effect of dilutive stock options — — Effect of dilutive restricted stock units — — Diluted EPS $14,764 7,000 $2.11 The Company had employee stock options and restricted stock units outstanding of 622, 714, and 490 for fiscal 2018, fiscal 2017, and fiscal2016, respectively, which were not included in the computation of diluted EPS because they were anti-dilutive. 77NOTE 13—SHARE-BASED COMPENSATION EXPENSEEmployee Stock PlansAs of December 29, 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’sstockholders. On April 24, 2014, School Specialty, Inc.’s CEO was awarded 228 stock options under the 2014 Plan with a fair value of $7.89 per share.Other members of management were awarded 455 stock options during fiscal 2015 with a weighted average fair value of $7.89 per share. September 4,2014, the date on which the stockholders approved the 2014 Plan, was considered the grant date, or measurement date, for those awards issued prior tothis date. As such, those awards made prior to September 4, 2014 were not considered outstanding and no expense associated with those awards wasrecognized prior to that date. There were 478 stock options awarded prior to the measurement date. On June 12, 2018, the Company’s stockholdersapproved an amendment to the 2014 Plan, which increased the number of shares available under the 2014 Plan by an additional 700 shares.The 228 stock options that were awarded to the Company’s CEO vested as to one-fourth of the options on the first four anniversaries of the dateof the award. The 455 options that were awarded to other members of management were scheduled to vest as to one-half of the options on the secondanniversary date of award and as to one-fourth of the options on each of the third and fourth anniversaries of the award date.The Company made awards of stock options to purchase 238 shares during fiscal 2017 to members of management including its CEO. Theoptions awarded to the Company’s CEO were scheduled to vest as to one-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 to one-half of the options on the second anniversary of the date of theaward and as to one-fourth of the options on each of the third and fourth anniversaries of the award date.The fair-value of the options granted in fiscal 2017 was $10.14 per share. The fair value of the options is estimated on the measurement dateusing the Black-Scholes single option pricing model. The assumptions included a risk-free rate of 1.92%, expected volatility of 59% and an expectedterm of 6.4 years.The Company did not grant stock options in fiscal 2018. 78All the options the Company granted under the 2014 Plan have an exercise price of $18.57 and a term of 10 years. A summary of optiontransactions for fiscal 2016, fiscal 2017, and fiscal 2018 were as follows: Options Outstanding Options Exercisable Options Weighted-AverageExercisePrice Options Weighted-AverageExercisePrice Balance at December 26, 2015 511 $18.57 56 $18.57 Granted — — Exercised — — Canceled (21) 18.57 Balance at December 31, 2016 490 $18.57 224 $18.57 Granted 238 — Exercised — — Canceled (7) 18.57 Balance at December 30, 2017 721 $18.57 350 $18.57 Granted — — Exercised — — Canceled (99) 18.57 Balance at December 29, 2018 622 $18.57 428 $18.57 The fair value of shares vested as of the end of fiscal 2015, 2016, 2017, and 2018 were as follows: $449, $1,766, $2,768, and $3,372,respectively.The weighted average life remaining of the stock options outstanding as of December 29, 2018 was 6.4 years and as of December 30, 2017 was7.4 years.As of December 29, 2018, and December 30, 2017, 428 and 350 outstanding options have vested and 99 and 7 options were forfeited. Thecanceled options of 99 for fiscal 2018 includes 34 options that vested and since have been expired.The weighted average fair value per share of options granted during fiscal 2017 was $10.14. There were no options granted during fiscal 2018 orfiscal 2016. The fair value of options is estimated on the date of grant using the Black-Scholes single option pricing model with the followingweighted average assumptions: Fiscal 2017 Average-risk free interest rate 1.92 - 2.31% Expected volatility 59.00% Expected term 6.3 years 79Restricted Stock UnitsOn June 18, 2018, the Compensation Committee granted an aggregate of 109 Restricted Stock Units (“RSUs”) under the Company’s 2014 Planto members of the Company’s senior management, with a value of $19.38 per share. In the third quarter of fiscal 2018, 15 RSUs were cancelled due totermination of employment, and the remaining number of outstanding RSUs under the June 18, 2018 award was 94 as of the end of fiscal 2018. TheRSUs have time-based vesting provisions, with one-third of the RSUs vested on each March 15 of 2019, 2020, and 2021. Also on June 18, 2018, theCompensation Committee granted an aggregate of 15 RSUs under the 2014 Plan to each of the non-employee members of the Board of Directors, withan aggregate value of $19.38 per share. The RSUs have time-based vesting provisions, with all of the RSUs vesting on June 18, 2019. All of the RSUsawarded to the Board of Directors remain outstanding as of the end of fiscal 2018.On March 23, 2016, the Compensation Committee of the Board of Directors of the Company granted an aggregate of 196 RSUs under theCompany’s 2014 Plan to members of the Company’s senior management. The RSUs are performance-based. A certain percentage of the RSUs will veston the third anniversary of the date of grant, with such percentage based on the 15 day Volume Weighted Average Price (“VWAP”) of the Company’scommon stock prior to the vesting date. The percentage of RSUs that will vest shall be determined as follows: Vesting% 15 Day VWAP0% VWAP less than $15.4320% VWAP greater than or equal to $15.43, but less than $16.8640% VWAP greater than or equal to $16.86, but less than $18.2960% VWAP greater than or equal to $18.29, but less than $19.7180% VWAP greater than or equal to $19.71, but less than $21.14100% VWAP greater than or equal to $21.14Due to the nature of the vesting conditions of the RSUs, a valuation methodology needed to incorporate potential equity value paths for theCompany. 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 adate 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 samplingof 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. Inthe third quarter of fiscal 2018, 22 of the RSU’s were cancelled due to termination of employment. The remaining number of outstanding performance-based RSU’s as of the end of fiscal 2018 were 174. Any RSU’s that vest will be settled in shares of Company common stock.Stock Appreciation RightsOn May 28, 2014, the Board granted 39 stock appreciation rights (“SARs”) to each of the non-employee members of the Board under the 2014Plan. On September 28, 2015, the Board granted 39 SARs to each of the two new non-employee members of the Board. On January 17, 2018, the Boardgranted 39 SARs to its new non-employee member of the Board. Each SAR has a grant date value of $18.57 and will be settled in cash upon exercise.As such, the SARs are accounted for as liability awards. As the Company’s stock trading price was less than each SAR’s exercise price as ofSeptember 29, 2018, expense of $99 recorded for the SARs during the three months ended June 30, 2018 was effectively reversed as of September 29,2018 based on the trading price of the stock on that date. The SARs vested as to one-half of the SARs on the second anniversary of the date of grantand vested as to one-fourth of the SARs on each of the third and fourth anniversaries of the date of grant. In the second quarter of 2018, 39 of theoutstanding SARs were exercised by a member of the Board and $31 of expense was recognized. Total SARs that remain outstanding as ofDecember 29, 2018 are 154. 80The following table presents the share-based compensation expense recognized for fiscal 2018, fiscal 2017, and fiscal 2016: Fiscal YearEndedDecember 29,2018 Fiscal YearEndedDecember 30,2017 Fiscal YearEndedDecember 31,2016 Gross Net ofTax Gross Net ofTax Gross Net ofTax Stock Options $885 $656 $1,470 $1,340 $1,043 $1,043 SARs 31 23 — — — RSUs 1,106 819 764 697 572 572 Total stock-based compensation expense $2,022 $1,499 $2,234 $2,037 $1,615 $1,615 The stock-based compensation expense is reflected in selling, general and administrative (“SG&A”) expenses in the accompanying consolidatedstatements of operations. The Company records actual forfeitures in the period the forfeiture occurs. The income tax benefit recognized related to share-based compensation expense was $0 for fiscal 2018, fiscal 2017, and fiscal 2016, respectively. Other than recording the effect of cancelling the equityawards, the Company recognized share-based compensation expense ratably over the vesting period of each award along with cumulative adjustmentsfor changes in the expected level of attainment for performance-based awards. Stock-based compensation expense associated with stock options andRSUs are non-cash expenses which are recorded to additional paid in capital. Stock-based compensation expense associated with SARs must be cash-settled and are recorded to other accrued liabilities until settled.The total unrecognized share-based compensation expense as of December 29, 2018, December 30, 2017, and December 31, 2016 were asfollows: December 29, 2018 December 30, 2017 December 31, 2016 Stock Options, net of actual forfeitures $1,090 $2,422 $1,683 SAR’s — — — RSU’s 1,674 928 1,697 The non-vested awards will be recognized into expense over the next 2.1 years.NOTE 14—SEGMENT INFORMATIONThe Company determines its operating segments based on the information utilized by the chief operating decision maker, the Company’s ChiefExecutive Officer, to allocate resources and assess performance. Based on this information, the Company has determined that it operates in twooperating segments, Distribution and Curriculum, which also constitute its reportable segments. The Company operates principally in the UnitedStates, 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 separateproduct line, and the supplemental education products, which were previously included within the former Instructional Solutions product line, b) theearly learning and special needs products from the former Instructional Solutions product line are reported within the Supplies product line and c) thescience supplies, previously included in the Science product line, within the Curriculum operating segment, were combined within the Suppliesproduct line within the Distribution operating segment. The Company has revised its go-to-market strategy and management structure resulting in thealignment of the reading and science supply products to be consistent with other distributed items within the Distribution operating segment. Thischange is also consistent with the Company’s internal realignment of the new team sell model established in 2017 whereby every customer, district andterritory will have a Distribution team supporting their business. The Distribution sales team focuses on selling 81all Distribution segment products, including the reading and science supplies items. The Distribution segment offers products primarily to the PreK-12education 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 sciencecategory within the preK-12 education market. The Curriculum segment has a sales team which is unique from the Distribution sales team and focusesexclusively on the products within this segment. In addition, these products have specific product development requirements, and customer purchasingdecisions are made in a different manner than the products represented in our Distribution segment.The Company measures profitability of its operating segments at a gross profit level. Since the majority of SG&A costs are managed centrally andallocation methodologies of these costs to the operating segments is arbitrary, the Company’s chief operating decision maker does not review segmentprofitability using operating profit, only gross profit. Accordingly, the segment information reports gross profit at the segment level.While a significant majority of revenue and assets are derived from the Company’s U.S. operations, the Company had Canadian revenue of$18,645, $20,504, and $20,306, for fiscal 2018, fiscal 2017, and fiscal 2016, respectively, and long-term assets of $0 and $6 as of December 29, 2108and December 30, 2017. As of December 29, 2018, and December 30, 2017 these long-term assets are primarily Property, Plant and Equipment. Themajority of the Canadian revenue is reflected in the Distribution segment and all of the Canadian assets are in the Distribution segment. 82The following table presents segment information: Fiscal YearEndedDecember 29,2018 Fiscal YearEndedDecember 30,2017 Fiscal YearEndedDecember 31,2016 Revenues: Distribution $629,435 $594,955 $598,840 Curriculum 44,017 63,428 57,482 Total $673,452 $658,383 $656,322 Gross Profit: Distribution $204,228 $208,771 $210,490 Curriculum 24,287 34,468 29,438 Total $228,515 $243,239 $239,928 Operating income (loss) and income (loss) before taxes: Operating income (loss) (18,378) 24,858 22,961 Interest expense and reorganization items, net 15,548 19,488 8,233 Income (loss) before provision for income taxes $(33,926) $5,370 $14,728 December 29,2018 December 30,2017 December 31,2016 Identifiable assets: Distribution $227,744 $230,449 $206,353 Curriculum 41,666 33,064 47,461 Corporate assets (1) 1,266 48,894 33,793 Total $270,676 $312,407 $287,607 Fiscal YearEndedDecember 29,2018 Fiscal YearEndedDecember 30,2017 Fiscal YearEndedDecember 31,2016 Depreciation and amortization of intangible assets and development costs: Distribution $20,783 $15,861 $16,216 Curriculum (2) 2,736 3,759 5,135 Total $23,519 $19,620 $21,351 Expenditures for property, plant and equipment, intangible and other assets and development costs: Distribution $13,632 $15,614 $12,207 Curriculum 3,318 3,129 2,154 Total $16,950 $18,743 $14,361 (1)Assets in Corporate include non-allocable cash, restricted cash, capitalized debt issuance costs for our ABL and investment in unconsolidatedaffiliate.(2)In fiscal 2016, the Company recorded accelerated amortization of certain product development assets in Curriculum of $1,347. 83The following table shows the Company’s revenues by each major product line within its two segments: Fiscal YearEndedDecember 29,2018 Fiscal YearEndedDecember 30,2017 Fiscal YearEndedDecember 31,2016 Distribution revenues by product line: Supplies $308,900 $305,423 $315,986 Furniture 212,728 190,766 183,060 Instruction & Intervention 58,620 43,294 37,117 AV Tech 15,809 17,200 18,023 Agendas 29,695 34,157 41,126 Freight Revenue 10,784 10,326 9,396 Customer Allowances / Discounts (7,101) (6,211) (5,868) Total Distribution Segment $629,435 $594,955 $598,840 Curriculum revenues by product line: Science $44,017 $63,428 $57,482 Total Curriculum Segment $44,017 $63,428 $57,482 Total revenues $673,452 $658,383 $656,322 NOTE 15—RESTRUCTURINGIn fiscal 2018, fiscal 2017, and fiscal 2016 the restructuring costs associated with severance related to headcount reductions. The following is areconciliation of accrued restructuring costs and are included in facility exit costs and restructuring in the Condensed Consolidated Statements ofOperations. ` Distribution Curriculum Corporate Total Accrued Restructuring at December 26, 2015 $— $— $375 $375 Amounts charged to expense — — 1,740 1,740 Payments — — (1,554) (1,554) Accrued Restructuring at December 31, 2016 $— $— $561 $561 Amounts charged to expense — — 421 421 Payments — — (932) (932) Accrued Restructuring at December 30, 2017 $— $— $50 $50 Amounts charged to expense 2,463 2,463 Payments (1,380) (1,380) Accrued Restructuring at December 29, 2018 $— $— $1,133 $1,133 NOTE 16—COMMITMENTS AND CONTINGENCIESVarious claims and proceedings arising in the normal course of business are pending against the Company. The results of these matters are notexpected to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. 84NOTE 17—QUARTERLY FINANCIAL DATA (UNAUDITED)The following presents certain unaudited quarterly financial data for fiscal 2018 and fiscal 2017: Fiscal 2018 First Second Third Fourth Total Revenues $99,287 $169,272 $290,280 $114,613 $673,452 Gross profit 36,121 58,744 97,504 36,146 228,515 Operating income (loss) (21,328) 4,765 37,230 (39,045) (18,378) Net income (loss) (18,678) 18 18,556 (38,637) (38,741) Basic earnings per share of common stock: Earnings/(loss) $(2.67) $0.00 $2.65 $(5.52) $(5.53) Diluted earnings per share of common stock: Earnings/(loss) $(2.67) $0.00 $2.63 $(5.52) $(5.53) Fiscal 2017 First Second Third Fourth Total Revenues $97,110 $160,177 $288,641 $112,455 $658,383 Gross profit 34,524 60,495 107,128 41,092 243,239 Operating income (loss) (13,117) 8,730 42,296 (13,051) 24,858 Net income (loss) (16,775) 136 34,145 (10,727) 6,779 Basic earnings per share of common stock: Earnings/(loss) $(2.40) $0.02 $4.88 $(1.53) $0.97 Diluted earnings per share of common stock: Earnings/(loss) $(2.40) $0.02 $4.86 $(1.53) $0.97 The summation of quarterly net income (loss) per share may not equate to the calculation for the full fiscal year as quarterly calculations areperformed on a discrete basis.The Company’s business activity is subject to seasonal influences. Our historical revenues and profitability have been dramatically higher fromJune through September of our fiscal year, primarily due to increased shipments to customers coinciding with the start of each school year. Quarterlyresults 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.NOTE 18—SUBSEQUENT EVENTSOn March 13, 2019, and effective as of December 29, 2018, the Company entered into the Third Amendment (the “Third Term LoanAmendment”) of its New Term Loan Agreement in order to, among other things: (1) increase the Applicable Margin based on the Net Senior LeverageRatio and to further increase the Applicable Margin by a PIK Interest Rate which will be subject to adjustment based on the Net Senior Leverage Ratio;(2) provide the Agent with certain board observation rights; (3) limit the aggregate amount of outstanding Revolving Loans to no more than$10,000,000 on the last Saturday of Fiscal Year 2019 and each day during a twenty consecutive day period that includes the last Saturday of FiscalYear 2019 if the Company has not raised $25,000,000 in junior capital proceeds which were used in the manner specified in the Term LoanAmendment (a “Junior Capital Raise Satisfaction Event”), or $0 on the last Saturday of Fiscal Year 2019 and each day during a thirty-five consecutiveday period that includes the last Saturday of Fiscal Year 2019 if a Junior Capital Raise Satisfaction Event has occurred; (4) reduce the limit on CapitalExpenditures to $12,500,000 in the aggregate for 85the four fiscal quarters ending March 30, 2019, June 29, 2019, and September 28, 2019 and $10,000,000 in the aggregate for the four fiscal quartersending December 28, 2019; (5) remove the obligation to comply with the financial covenants in Section 10.3 for the fiscal year ended December 29,2018; (6) amend the calculation of the Fixed Charge Coverage Ratio and reduce the Fixed Charge Coverage Ratio in Section 10.3.1 for the remainderof the term of the Term Loan Agreement; (7) amend the calculation of the Net Senior Leverage Ratio and increase the Net Senior Leverage Ratio inSection 10.3.2 for the remainder of the term of the Term Loan Agreement, which may be adjusted upon a Junior Capital Raise Satisfaction Event; (8)amend the cap on add-backs for non-recurring, unusual or extraordinary chargers, business optimization expenses and other restructuring chargers orreserves and cash expenses relating to earn outs and similar obligations in the definition of EBITDA and require the Company to maintain a MinimumEBITDA as set forth in Section 10.3.3 for the remainder of the term of the Term Loan Agreement, which may be adjusted upon a Junior Capital RaiseSatisfaction Event; (9) require the Company to maintain Specified Availability under the ABL Agreement in an amount not less than the greater of$12,500,000 or 10% of the Commitments (as defined in the ABL Agreement); (10) expand the definition of Permitted Indebtedness to includeSubordinated Debt used to repay the Term Loan or the Specified Unsecured Prepetition Debt; and (10) provide for additional inspection and auditrights to be conducted by an advisory firm to be appointed by the Agent.In connection with the Third Term Loan Amendment, the Company separately agreed that, commencing with the Fiscal Month endingSeptember 28, 2019, to the extent the payment in full in cash of the Obligations has not occurred on or prior to any such date, the Company shalldeliver to the Agent, in form and substance reasonably satisfactory to the Agent, on or prior to the date that is 30 days following the last day of eachFiscal Month (but within 60 days after the last month in a Fiscal Year), warrants to purchase, for a price of $0.001 per share, the Designated Percentageof the outstanding common stock of the Company, with such warrants earned in full and vesting immediately on the date of issuance; provided that theaggregate number of warrants delivered to the Agent shall not exceed warrants to purchase more than 18% of the outstanding common stock of theCompany in the aggregate. “Designated Percentage” means, with respect to each Fiscal Month, (x) if the financial statements delivered pursuant toclause (c) of Section 10.1.2 of the Term Loan Agreement with respect to such Fiscal Month demonstrate that the Net Senior Leverage Ratio for thetwelve consecutive Fiscal Month period ending on the last Saturday of such month is greater than or equal to 5.00:1.0, 2%, (y) if the financialstatements delivered pursuant to clause (c) of Section 10.1.2 of the Term Loan Agreement with respect to such Fiscal Month demonstrate that the NetSenior Leverage Ratio for the twelve (12) consecutive Fiscal Month period ending on the last Saturday of such Fiscal Month is greater than or equal to4.2:1.0 but less than 5.00:1.0, 1% and (z) if the financial statements delivered pursuant to clause (c) of Section 10.1.2 of the Term Loan Agreement withrespect to such Fiscal Month demonstrate that the Net Senior Leverage Ratio for the twelve (12) consecutive Fiscal Month period ending on the lastSaturday of such Fiscal Month is less than 4.20:1.0, 0%. Notwithstanding the foregoing, no warrants issued (collectively, the “Third AmendmentWarrants”) shall be exercisable until the date by which the Company is required to deliver the financial statements with respect to the Fiscal Yearending December 28, 2019 pursuant to clause (a) of Section 10.1.2 of the New Term Loan Agreement (such date, the “2019 Financial Delivery Date”).If, on or prior to the 2019 Financial Delivery Date, (i) the Obligations are paid in full in cash, (ii) the Junior Capital Raise Satisfaction Event hasoccurred or (iii) the financial statements delivered pursuant to clause (a) of Section 10.1.2 of the Term Loan Agreement with respect to the Fiscal Yearending December 28, 2019 demonstrate that, after giving effect to the payment of the Specified Unsecured Prepetition Debt, (x) the Net SeniorLeverage Ratio for the four consecutive Fiscal Quarter periods ending on December 28, 2019 is less than or equal to 4.00:1.0 and (y) EBITDA for thefour consecutive Fiscal Quarter periods ending on December 31, 2019 is at least $42,000,000 (any such event, a “Buy Back Event”), the Companyshall have the right to buy back, for a price of $0.001 per warrant, 50% of the amount of any Third Amendment Warrants prior to such Buy Back Event.Also on March 13, 2019, and effective as of December 29, 2018, the Company entered into the Sixth Amendment to Loan Agreement dated June11, 2013 (the “ABL Agreement”) with its Asset-Based Lenders in 86order to, among other things: (1) amend the cap on add-backs for non-recurring, unusual or extraordinary charges, business optimization expenses andother restructuring charges or reserves and cash expenses relating to earn outs and similar obligations in definition of EBITDA; (2) limit the aggregateamount of outstanding Revolving Loans to no more than $10,000,000 on the last Saturday of Fiscal Year 2019 and each day during a twentyconsecutive day period that includes the last Saturday of Fiscal Year 2019 if a Junior Capital Raise Satisfaction Event has not occurred, or $0 on thelast Saturday of Fiscal Year 2019 and each day during a thirty-five consecutive day period that includes the last Saturday of Fiscal Year 2019 if aJunior Capital Raise Satisfaction Event has occurred; (3) expand the definition of Permitted Indebtedness to include Subordinated Debt in anaggregate principal amount not to exceed $30 million which has been used, first, to repay the Specified Unsecured Prepetition Debt, and second, to theextent the Specified Unsecured Prepetition Debt has been repaid in full, the Term Loan; and (4) condition the repayment of Indebtedness with JuniorCapital Proceeds upon satisfaction of the Payment Conditions and requiring the Specified Unsecured Prepetition Debt to be repaid in full before JuniorCapital Proceeds may be applied to the repayment of other Indebtedness. Item 9.Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNot applicable Item 9A.Controls and ProceduresEvaluation of Disclosure Controls and ProceduresBased on an evaluation as of the end of the period covered by this annual report, the Company’s principal executive officer and principalfinancial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities ExchangeAct of 1934 (the “Exchange Act”)) were effective for the purposes set forth in the definition of the Exchange Act rules.Management’s Report on Internal Control Over Financial ReportingManagement is responsible for establishing and maintaining adequate internal control over financial reporting. As such term is defined inExchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the principal executiveand principal financial officers, or persons performing similar functions, and effected by the board of directors, management and other personnel, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes those policies andprocedures that: (1)pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of theCompany; (2)provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordancewith accounting principles generally accepted in the United States, and that receipts and expenditures of the Company are being madeonly in accordance with authorizations of management and the directors of the Company; and (3)provide reasonable assurance regarding prevention of unauthorized acquisition, use, or disposition of the Company’s assets that couldhave a material effect on the financial statements.Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the criteria inInternal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. 87In response to the prior period material weakness, the Company implemented new process-related manual controls and greatly enhanced existingmanual controls including the documentation of those control results. These changes were made specifically related to the areas of revenue andinventory in order to address, or compensate for, certain general information technology control deficiencies identified in 2017. These enhanced newcontrols include more robust cycle count procedures, reviews of items shipped, including pricing, and three-way match audits. In addition, theCompany has taken remediation actions related to its general information technology control deficiencies, most notably of access-related controls. TheCompany’s implementation of the process-related internal controls over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act)remediated control issues identified during 2017.Based on this evaluation under the criteria, management concluded that as of December 29, 2018, the Company’s internal control over financialreporting was effective for the purposes set forth in the definition of the Exchange Act.The Company’s internal control over financial reporting as of December 29, 2018 has been audited by Grant Thornton LLP, as independentregistered public accounting firm, as stated in their report dated March 14, 2019 which is included herein. 88REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders ofSchool Specialty, Inc.Greenville, WisconsinOpinion on internal control over financial reportingWe have audited the internal control over financial reporting of School Specialty, Inc. (a Delaware corporation) and subsidiaries (the“Company”) as of December 29, 2018 based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internalcontrol over financial reporting as of December 29, 2018, based on criteria established in the 2013 Internal Control—Integrated Framework issued byCOSO.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), theconsolidated financial statements of the Company as of and for the year ended December 29, 2018, and our report dated March 14, 2019 expressed anunqualified opinion on those financial statements.Basis for opinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over FinancialReporting (“Management’s Report). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based onour audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordancewith the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating thedesign and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary inthe circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and limitations of internal control over financial reportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could havea material effect on the financial statements. 89Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate. /s/ GRANT THORNTON LLP Appleton, Wisconsin March 14, 2019Changes in Internal ControlsNone Item 9B.Other InformationNot applicablePART III Item 10.Directors, Executive Officers and Corporate Governance (a)Executive Officers. Reference is made to “Executive Officers of the Registrant” in Part I hereof. (b)Directors. The information required by this Item is set forth in our Proxy Statement for the Annual Meeting of Stockholders to be held on June 6,2019, under the caption “Proposal One: Election of Directors,” which information is incorporated by reference herein. (c)Section 16 Compliance. The information required by this Item is set forth in our Proxy Statement for the Annual Meeting of Stockholders to beheld on June 6, 2019, under the caption “Section 16(a) Beneficial Ownership Reporting Compliance,” which information is incorporated byreference herein. (d)We have adopted a Code of Ethics that applies to our directors, officers and employees, including the principal executive officer, principalfinancial officer, principal accounting officer and controller. The Code of Ethics is posted on our internet website at www.schoolspecialty.com.We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K and Item 406 of Regulation S-K by posting such information on ourinternet website. (e)There were no material changes in fiscal 2018 to the procedures by which the Company’s stockholders may recommend nominees to theCompany’s Board of Directors. Item 11.Executive CompensationThe information required by this Item is set forth in our Proxy Statement for the Annual Meeting of Stockholders to be held on June 6, 2019,under the captions “Executive Compensation Discussion and Analysis,” and which information is incorporated by reference herein. Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.The information required by this Item is set forth in our Proxy Statement for the Annual Meeting of Shareholders to be held on June 6, 2019,under the captions “Security Ownership of Management and Certain Beneficial Owners” and “Equity Compensation Plan Information,” and whichinformation is incorporated by reference herein. 90Item 13.Certain Relationships and Related Transactions, and Director IndependenceThe information required by this Item is set forth in our Proxy Statement for the Annual Meeting of Stockholders to be held on June 6, 2019,under the captions “Related Party Transactions” and “Corporate Governance,” which information is incorporated by reference herein. Item14. Principal Accountant Fees and Services.The information required by this Item is set forth in our Proxy Statement for the Annual Meeting of Stockholders to be held on June 6, 2019,under the caption “Audit Committee Report,” which information is incorporated by reference herein.PART IV Item 15.Exhibits and Financial Statement Schedules (a)(1)Financial Statements (See Part II, Item 8).Consolidated Financial StatementsReport of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 29, 2018 and December 30, 2017Consolidated Statements of Operations for fiscal 2018, fiscal 2017, and fiscal 2016Consolidated Statements of Comprehensive Income (Loss) for fiscal 2018, fiscal 2017, and fiscal 2016Consolidated Statements of Stockholders’ Equity for fiscal 2018, fiscal 2017, and fiscal 2016Consolidated Statements of Cash Flows for fiscal 2018, fiscal 2017, and fiscal 2016Notes to Consolidated Financial Statements (a)(2)Financial Statement Schedule (See Exhibit 99.1).Schedule for Fiscal 2018, Fiscal 2017, and Fiscal 2016: Schedule II – Valuation and Qualifying Accounts. (a)(3)Exhibits.See (b) below (b)Exhibits.See the Exhibit Index, which is incorporated by reference herein (c)Financial Statements Excluded from Annual Report to Stockholders.Not applicable Item 16.Form 10-K Summary.Not applicable. 91INDEX TO EXHIBITS ExhibitNumber Document Description 3.1 Amended and Restated Certificate of Incorporation of School Specialty, Inc., (complete copy, as Amended through August 15, 2017)as filed on November 8, 2017, incorporated herein by reference to Exhibit 3.1(a) to School Specialty, Inc.’s Quarterly Report on Form10-Q for the period ended September 30, 2017. 3.2 Amended and Restated Bylaws dated July 9, 2014, incorporated herein by reference to Exhibit 3.1(a) of School Specialty, Inc., CurrentReport on Form 8-K filed July 15, 2014.10.3 Loan Agreement, dated June 11, 2013, by and among School Specialty, Inc. and certain of its subsidiaries, as borrowers, certain lendersparty thereto, and Bank of America, N.A. as agent, incorporated herein by reference to Exhibit 10.39 of School Specialty, Inc.’s AnnualReport on Form 10-K for the period ended April 27, 2013.10.10* Amended and Restated Employment Agreement between Joseph M. Yorio and School Specialty, Inc., dated March 23, 2016,incorporated herein by reference to Exhibit 10.1 of School Specialty, Inc.’s Current Report on Form 8-K dated March 23, 2016.10.11* Amended and Restated Stock Option Agreement between Joseph M. Yorio and School Specialty, Inc., dated March 23, 2016,incorporated herein by reference to Exhibit 10.2 of School Specialty, Inc.’s Current Report on Form 8-K dated March 23, 2016.10.12* School Specialty, Inc. 2014 Incentive Plan, as amended, incorporated by reference to Exhibit 10.1 of School Specialty’s QuarterlyReport on Form 10-Q for the quarter ended June 30, 2018.10.13* Form of Executive Stock Option Agreement, incorporated by reference to Exhibit 10.1 of School Specialty’s Current Report on Form8-K dated May 27, 2014.10.14* Form of Director Stock Appreciation Right Agreement, incorporated by reference to Exhibit 10.1 of School Specialty’s Current Reporton Form 8-K dated May 29, 2014.10.17 First Amendment, Consent and Limited Waiver to Loan Agreement among School Specialty, Inc., and certain of its subsidiaries, Bankof America, N.A., SunTrust Bank and Bank of Montreal, as lenders, and Bank of America, N.A. as agent for the lender, incorporated byreference to Exhibit 10.1 of School Specialty, Inc.’s Current Report on Form 8-K dated October 31, 2014.10.19* Employment Agreement between School Specialty, Inc. and Ryan Bohr, dated as of October 27, 2014, incorporated herein byreference to Exhibit 10.1 of School Specialty, Inc.’s Current Report on Form 8-K dated October 27, 2014.10.20* Stock Option Agreement by and between School Specialty, Inc. and Ryan Bohr, dated as of October 27, 2014, incorporated herein byreference to Exhibit 10.2 of School Specialty, Inc.’s Current Report on Form 8-K dated October 27, 2014.10.24 Second Amendment to Loan Agreement among the Company, certain of its subsidiaries, Bank of America, N.A. and Bank of Montreal,as lenders, and Bank of America, N.A., as agent for the lenders, incorporated by reference to the Company’s Current Report on Form8-K dated September 16, 2015.10.26 Loan Agreement, dated as of April 7, 2017, by and between School Specialty, Inc., as borrower, certain of its subsidiaries, asguarantors, the financial parties party thereto, as lenders, and TCW Asset Management Company, LLC, as agent, incorporated byreference to School Specialty, Inc.’s Current Report on Form 8-K dated April 13, 2017. 92ExhibitNumber Document Description10.27 Guarantee and Collateral Agreement, dated as of April 7, 2017, among School Specialty, Inc., the guarantors party thereto, and TCWAsset Management Company, LLC, as agent, incorporated by reference to School Specialty, Inc.’s Current Report on Form 8-K datedApril 13, 2017.10.28 Third Amendment, dated as of April 7, 2017, to the Loan Agreement among School Specialty, Inc. and certain of its subsidiaries, asborrowers, Bank of America, N.A. and Bank of Montreal, as lenders, Bank of Montreal as syndication agent, and Bank of America, N.A.,as agent for the lenders, incorporated by reference to School Specialty, Inc.’s Current Report on Form 8-K dated April 13, 2017.10.29 Amended and Restated Guarantee and Collateral Agreement, dated April 7, 2017, amending and restating the Guarantee and CollateralAgreement, dated as of June 11, 2013, among School Specialty, Inc., the guarantors party thereto and Bank of America, N.A., as agent,incorporated by reference to School Specialty, Inc.’s Current Report on Form 8-K dated April 13, 2017.10.30* Form of Restricted Stock Unit Award Agreement under the 2014 Incentive Plan of School Specialty, Inc., incorporated by reference toExhibit 10.3 of School Specialty, Inc.’s Current Report on Form 8-K dated March 23, 2016.10.31* Form of 2016 Incentive Bonus Agreement under the 2014 Incentive Plan of School Specialty, Inc., incorporated by reference to Exhibit10.4 of School Specialty, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 26, 2016.10.32* Employment Agreement between School Specialty, Inc. and Todd Shaw, dated as of October 12, 2016, incorporated herein byreference to Exhibit 10.1 of School Specialty, Inc.’s Current Report on Form 8-K dated October 12, 2016.10.33* Employment Agreement between School Specialty, Inc. and Kevin L. Baehler, dated as of October 12, 2016, incorporated herein byreference to Exhibit 10.2 of School Specialty, Inc.’s Current Report on Form 8-K dated October 12, 2016.10.34* Form of Executive Restricted Stock Unit Agreement under the School Specialty, Inc. 2014 Incentive Plan, as amended, incorporated byreference to Exhibit 10.2 of School Specialty’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018.10.35* Form of Director Restricted Stock Unit Agreement under the School Specialty, Inc 2014 Incentive Plan, as amended, incorporated byreference to Exhibit 10.2 of School Specialty’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018.10.36* First Amendment dated as of August 9, 2018 to the Loan Agreement, dated as of April 7, 2017, by and between School Specialty, Inc.,as borrower, certain of its subsidiaries, as guarantors, the financial parties party thereto, as lenders, and TCW Asset ManagementCompany, LLC, as agent, incorporated by reference to Exhibit 10.1 of School Specialty’s Quarterly Report on Form 10-Q for thequarter ended September 29, 2018.10.37* Fourth Amendment, dated as of August 9, 2018, to the Loan Agreement among School Specialty, Inc. and certain of its subsidiaries, asborrowers, Bank of America, N.A. and Bank of Montreal, as lenders, Bank of Montreal as syndication agent, and Bank of America, N.A.,as agent for the lenders, incorporated by reference to Exhibit 10.1 of School Specialty’s Quarterly Report on Form 10-Q for the quarterended September 29, 2018.10.38* Second Amendment, dated as of November 7, 2018, to the Loan Agreement, dated as of April 7, 2017, by and among School Specialty,Inc., as borrower, certain of its subsidiaries, as guarantors, the financial parties thereto, as lenders, and TCW Asset ManagementCompany, LLC, as agent, incorporated by reference to School Specialty’s Current Report on Form 8-K dated November 7, 2018. 93ExhibitNumber Document Description10.39* Fifth Amendment, dated as of November 7, 2018, to the Loan Agreement dated as of June 11, 2013, by and among School Specialty,Inc. and certain of its subsidiaries, as borrowers, Bank of America, N.A. and Bank of Montreal, as lenders, Bank of Montreal assyndication agent, and Bank of America, N.A., as agent for the lenders, incorporated by reference to School Specialty’s Current Reporton Form 8-K dated November 7, 2018.14.1 School Specialty, Inc. Code of Business Conduct/Ethics dated February 17, 2004, incorporated herein by reference to Exhibit 14.1 ofSchool Specialty, Inc.’s Annual Report on Form 10-K for the period ended April 24, 2004.21.1 Subsidiaries of School Specialty, Inc.23.1 Consent of Grant Thornton LLP23.2 Consent of Deloitte & Touche LLP31.1 Rule13a-14(a)/15d-14(a) Certification, by Chief Executive Officer.31.2 Rule13a-14(a)/15d-14(a) Certification, by Chief Financial Officer.32.1 Section 1350 Certification by Chief Executive Officer.32.2 Section 1350 Certification by Chief Financial Officer.99.1 Schedule II—Valuation and Qualifying Accounts. ExhibitNumber Document Description101 The following materials from School Specialty, Inc.’s Annual Report on Form 10-K for the year ended December 29, 2018 are filedherewith, formatted in XBRL (Extensive Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the ConsolidatedStatement of Operations, (iii) the Consolidated Statement of Comprehensive Income (Loss), (iv) the Consolidated Statements ofStockholders’ Equity (Deficit), (v) the Consolidated Statement of Cash Flows, and (vi) Notes to Consolidated Financial Statements,tagged as blocks of text. *Management contract or compensatory plan or arrangement. 94SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, on March 14, 2019. SCHOOL SPECIALTY, INC.By: /s/ Michael Buenzow Michael Buenzow Interim Chief Executive Officer(Principal Executive Officer)Each person whose signature appears below hereby constitutes and appoints Michael Buenzow and Kevin L. Baehler, and each of them, as his orher true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his behalf individually and in the capacity stated below and toperform any acts necessary to be done in order to file any and all amendments to this Annual Report on Form 10-K, and to file the same, with allexhibits thereto and all other documents in connection therewith and each of the undersigned does hereby ratify and confirm all that saidattorney-in-fact and agent, or his substitutes, shall do or cause to be done by virtue thereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrantand in the capacities and on the dates indicated below. Name Title Date/s/ Michael BuenzowMichael Buenzow Interim Chief Executive Officer and (PrincipalExecutive Officer) March 14, 2019/s/ Kevin L. BaehlerKevin L. Baehler Executive Vice President and Chief FinancialOfficer (Principal Financial Officer) March 14, 2019/s/ Gus D. Halas Chairman of the Board March 14, 2019Gus D. Halas /s/ Justin Lu Director March 14, 2019Justin Lu /s/ Scott P. Scharfman Director March 14, 2019Scott P. Scharfman /s/ Andrew E. Schultz Director March 14, 2019Andrew Schultz 95EXHIBIT 21.1SUBSIDIARIES OF THE REGISTRANT NAME STATE OR OTHER JURISDICTION OFINCORPORATION OR ORGANIZATION1. ClassroomDirect.com, LLC Delaware2. Childcraft Education, LLC Delaware3. Bird-in-Hand Woodworks, LLC Delaware4. Frey Scientific, LLC Delaware5. Sportime, LLC Delaware6. Sax Arts & Crafts, LLC Delaware7. Premier Agendas, LLC Delaware8. Premier School Agendas, Ltd. Canada9. Select Agendas, Corp. Canada10. Califone International, LLC Delaware11. Delta Education, LLC Delaware12. SSI Guardian, LCC Delaware 89EXHIBIT 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe have issued our reports dated March 14, 2019, with respect to the consolidated financial statements, schedule, and internal control over financialreporting in the Annual Report of School Specialty, Inc. on Form 10-K for the year ended December 29, 2018. We consent to the incorporation byreference of said reports in the Registration Statements of School Specialty, Inc. on Form S-8 (File No. 333-200677 and File No. 333-226744). /s/ GRANT THORNTON LLPAppleton, WisconsinMarch 14, 2019 90EXHIBIT 23.2CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in Registration Statement Nos. 333-226744 and 333-200677 on Form S-8 of our report dated March 14,2017, relating to the 2016 financial statements (before retrospective adjustments to the financial statements) (not presented herein) and financialstatement schedule of School Specialty, Inc. and subsidiaries (the “Company”), appearing in this Annual Report on Form 10-K of School Specialty,Inc. for the year ended December 29, 2018. /s/ Deloitte & Touche LLPMilwaukee, WisconsinMarch 14, 2019 91EXHIBIT 31.1CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002CERTIFICATIONI, Michael Buenzow, certify that: 1.I have reviewed this annual report on Form 10-K of School Specialty, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the registrant and have: a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared; b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 14, 2019 /s/ Michael Buenzow Michael Buenzow Interim Chief Executive Officer (Principal Executive Officer) 92EXHIBIT 31.2CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002CERTIFICATIONI, Kevin L. Baehler, certify that: 1.I have reviewed this annual report on Form 10-K of School Specialty, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the registrant and have: a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared; b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 14, 2019 /s/ Kevin L. Baehler Kevin L. Baehler Executive Vice President and Chief Financial Officer (Principal Financial Officer) 93EXHIBIT 32.1CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION906 OF THE SARBANES-OXLEY ACT OF 2002I, Michael Buenzow, President and Chief Executive Officer of School Specialty, Inc., certify, pursuant to Section 906 of the Sarbanes-Oxley Act of2002, that to the knowledge of the undersigned: 1.The Annual Report on Form 10-K for the period from December 31, 2017 to December 29, 2018 (the “Report”) which this statementaccompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or78o(d)) and 2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of SchoolSpecialty, Inc. Date: March 14, 2019 /s/ Michael Buenzow Michael Buenzow Interim Chief Executive Officer (Principal Executive Officer)This certification accompanies this Annual Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemedas filed by School Specialty, Inc. for purposes of Securities Exchange Act of 1934. 94EXHIBIT 32.2CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION906 OF THE SARBANES-OXLEY ACT OF 2002I, Kevin L. Baehler, Executive Vice President and Chief Financial Officer of School Specialty, Inc., certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the knowledge of the undersigned: 1.The Annual Report on Form 10-K for the period from December 31, 2017 to December 29, 2018 (the “Report”) which this statementaccompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or78o(d)) and 2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of SchoolSpecialty, Inc. Date: March 14, 2019 /s/ Kevin L. Baehler Kevin L. Baehler Executive Vice President and Chief Financial Officer (Principal Financial Officer)This certification accompanies this Annual report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed asfiled by School Specialty, Inc. for purposes of Securities Exchange Act of 1934. 95EXHIBIT 99.1SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTSFISCAL 2018, FISCAL 2017, AND FISCAL 2016 Description Date Balance atBeginning ofPeriod Charged to Costsand Expenses Charged toOther Accounts Deductions Balance at Endof Period Date Allowance for doubtfulaccounts December 27, 2015 1,077,000 750,000 — (1,391,000) 436,000 December 31, 2016 January 1, 2017 436,000 753,000 — (892,000) 297,000 December 30, 2017 December 31, 2017 297,000 775,000 — (12,000) 1,060,000 December 29, 2018 Restructuring reserve December 27, 2015 375,000 1,740,000 — (1,554,000) 561,000 December 31, 2016 January 1, 2017 561,000 389,000 — (900,000) 50,000 December 30, 2017 December 31, 2017 50,000 2,463,000 — (1,381,000) 1,132,000 December 29, 2018 Reserve for ObsoleteInventory December 27, 2015 7,016,000 2,416,000 — (1,260,000) 8,172,000 December 31, 2016 January 1, 2017 8,172,000 7,749,000 — (4,824,000) 11,097,000 December 30, 2017 December 31, 2017 11,097,000 1,644,005 — (5,565,005) 7,176,000 December 29, 2018 

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