On January 28, 2013 (the “Petition Date”), School Specialty, Inc, (“School Specialty” or “Debtor”), along with various affiliated entities, filed chapter 11 petitions for bankruptcy with the Delaware Bankruptcy Court. According to the Declaration of School Specialty’s Chief Administrative Officer, the company is one of the largest suppliers of educational products, equipment and curriculum for public school systems in the United States. See Declaration of Gerald T. Hughes in Support of Chapter 11 Petitions and First Day Motions (the “Decl.”) at *3. This post will look at School Specialty’s business and finances, why the company filed for bankruptcy as well as what the company’s objectives are while in bankruptcy.

Business Operations

Based in Greenville, Wisconsin, School Specialty’s business falls in to two segments – school supplies and curriculum based products. Decl. at *3-4. The company’s school supplies segment includes “commodity-based” supplies, furniture and supplemental learning items such as classroom technology products. Decl. at *4. School Specialty generates over 70% of its revenue from its school supply business, offering both its own proprietary products and “branded products.” Decl. at *3. At the curriculum level, the company develops and publishes products used by educators in teaching a particular subject such as math, reading or science. Decl. at *4.

As of its Petition Date, School Specialty employed over 2,000 employees, a quarter of which are sales professionals and administrative support staff. Decl. at *5. In addition to its sales force, the Debtor’s marketing program relies on the publication of over 12 million copies of its catalog and sales through various websites.   Id.

Debtor’s Financials

According to its Declaration, School Specialty generated revenues of $489 million in the first half of fiscal year 2013. Decl. at *6. The company’s revenues are extremely diverse. By that, no particular state or product offering accounts for a significant percentage of revenues. Instead, revenues are generated from school districts spread out across the country which purchase varying degrees of the Debtor’s products. Going in to bankruptcy, School Specialty has $193.6 million in outstanding secured debt under a revolving credit facility and term loan. Decl. at *8-9. The company also has $157 million in outstanding subordinated debentures which come due in 2026. Decl. at *11.

Events Leading to Bankruptcy

Despite its diverse revenue base, School Specialty must operate within a cyclical business cycle that is tied to the academic school year. Decl. at *13. This results in profitable months from May through October (when schools place orders for products), followed by months where the company operates at a loss. The cyclical nature of its business complicates School Specialty’s cash flow, budgeting and general finances. Id. Given that School Specialty sells primarily to public schools, the company’s revenues are correlated to a large degree to state and local budgets. Since the recession in 2008, state and local governments have delayed or suspended implementing new curriculum guidelines. This, in turn, has resulted in schools purchasing less instructional materials from the Debtor. Decl. at *14.

In the years leading up to bankruptcy, School Specialty implemented various programs geared toward reducing costs or improving business performance. Decl. at *14. Such measures included consolidating its call centers, reducing its workforce by 30% and renegotiating portions of its debt instruments. Decl. at *14-15. Despite these efforts, by January 4, 2013, the Debtor reported that it was not in compliance with the liquidity requirements of certain loan agreements. Soon after School Specialty filed for bankruptcy protection. Decl. at *17-18.

Objectives in Bankruptcy

In order to proceed in a chapter 11 bankruptcy proceeding, School Specialty would need to obtain postpetition financing. Leading up to bankruptcy, the company began negotiations with its prepetition lenders regarding bankruptcy financing. Eventually, a proposal was reached wherein the Debtor’s prepetition lender agreed to debtor financing of $144.7 million. Decl. at *19. This financing, however, was conditioned on Debtor’s agreement to conduct a sale of substantially all of its assets under section 363 of the Bankruptcy Code. Id.

As part of their negotiations with the lenders, School Specialty has agreed to an asset purchase agreement which will allow the lenders to credit bid a portion of their debt toward the purchase price of the company. Decl. at *20. The lenders bid, of course, is subject to higher and better offers pursuant to bid procedures and an auction that must be approved by the Bankruptcy Court.

The School Specialty bankruptcy proceeding is before Judge Kevin J. Carey. This case is proceeding under case no. 13-10125. School Specialty is represented by the law firm Young Conaway Stargatt & Taylor.