The Greenville, Wis., company and nine affiliates on Monday, Jan. 28, filed for Chapter 11 in the U.S. Bankruptcy Court for the District of Delaware in Wilmington with up to $319.67 million in debtor-in-possession financing from its prepetition lenders and plans to sell its assets to one of those lenders.

Judge Peter J. Walsh will consider interim approval of the DIP loans and joint administration of the debtors' cases on Tuesday.

Bayside Finance LLC is providing a $144.67 million DIP and has agreed to purchase substantially all of School Specialty's assets.

School Specialty has also requested to roll up $175 million in prepetition debt owed to Wells Fargo Capital Finance LLC in a superpriority revolver.

With interim approval, $200 million -- $25 million of the Bayside loan and the entire Wells Fargo loan -- would be available.

School Specialty is a key supplier of supplemental education products, equipment and curriculums to pre-kindergarten through 12th grade, according to a declaration from Gerald T. Hughes, School Specialty's executive vice president. The company offers more than 75,000 different items, ranging from erasers to furniture and curriculum programs, to public school districts, private and parochial schools, educators and individual consumers.

The company operates through two segments: educational resources and accelerated learning.

The educational resources segment accounted for about 72% of the company's revenue in fiscal year 2012. This business supplies items to educators and schools. The accelerated learning group segment develops and publishes curriculum products that include print and digital resources to aid learning in nontraditional, hands-on formats.

The company maintains six automated distribution centers and engages third-party logistic providers to streamline and consolidate shipments. School Specialty also has three manufacturing facilities where it produces furniture, agendas and other printed products. In total, the company has 15 facilities across the country.

Hughes said in the declaration that the company enjoys significant competitive advantages because it is a single supplier that can aggregate products for customers. Hughes estimated that in fiscal year 2012, the company supplied about 70% of the 130,000 schools in the U.S., reaching 3.8 million teachers.

School Specialty was founded in 1959 and acquired by U.S. Office Products in May 1996. The company was then spun off as a public company in June 1998 and grew substantially by acquiring other companies, including Premier Agendas Inc. in 2001 and Delta Education LLC in 2005.

Today, School Specialty's stock is traded on the Nasdaq stock exchange under the ticker SCHS. The stock price fell to 13 cents per share on Monday morning after closing at 60 cents per share on Jan. 25.

School Specialty has $139.6 million in secured debt, consisting of a revolver and a term loan entered into on May 22 to repay existing secured debt.

Wells Fargo Capital Finance is the lender for the $200 million revolver that matures Sept. 30, 2014, and accrues interest at Libor plus 225 to 275 basis points based on availability levels and other factors or at 125 to 175 basis points over a base rate equal to Libor plus 100 basis points, the prime rate or the federal funds rate plus 0.5%. As of petition date, $47.62 million was outstanding on the loan.

Bayside Finance is the administrative agent on School Specialty's term loan. The $70 million loan matures Oct. 31, 2014, and accrues interest at Libor plus 1,100 basis points with a floor of 1.5%. The loan requires School Specialty to maintain $20 million in minimum liquidation on a monthly basis.

The loan also includes a make-whole payment in the amount of $25 million due in the event of a prepayment of the debt during certain periods or upon acceleration of the debt due to an event of default.

School Specialty was heading toward a breach of the loan's liquidity covenants by the end of 2012, but reached a one-month forbearance agreement. However, on Jan. 4, the forbearance agreement expired, leading the lender to declare the loan in default. That day, the parties reached another agreement, under which Bayside agreed to forbear from exercising its rights until Feb. 1. The forbearance agreement reduced the minimum liquidity covenant amount to $3 million from $20 million. In return, School Specialty appointed Thomas E. Hill of Alvarez & Marsal North America LLC as chief restructuring officer.

As of petition date, School Specialty owed $92 million, including the make-whole payment, on the loan.

School Specialty also has about $157.5 million in outstanding convertible subordinate notes due 2026. The debtor issued the notes in 2011 in two separate exchanges that retired its existing notes that were issued five years earlier. School Specialty issued $100 million in convertible notes on March 1, 2011, and an additional $57.5 million on July 7, 2011. Bank of New York Mellon Trust Co. NA is the trustee on the notes.

The notes accrue interest at 3.75% per annum, plus the principal amount accrues interest at about 3.98% per annum. As of the petition date, School Specialty owes about $12.7 million in unpaid interest. The noteholders can convert the debt into equity and can require the company to repurchase the notes on certain dates, the first of which is Nov. 30, 2014.

Additionally, School Specialty owes $60 million in unpaid trade debt.

Hughes said the school supply market is a $6 billion to $7 billion industry, but it is highly fragmented. There are about 3,000 retail and wholesale companies that participate in the market, many of which are small regional companies with annual revenues under $10 million.

Hughes said the market is highly cyclical based on the school year calendar and the company historically has dramatically higher revenue from May to October. During the busy season -- when schools are buying supplies for the new year -- School Specialty generally earns all of its annual profits. School Specialty typically reports a loss the rest of the year.

The company's customers also depend on local and state funding, which has decreased since the recession started in 2008. Schools, in turn, have deferred purchases of certain of School Specialty's products such as new curriculums.

In the first half of fiscal year 2013, the company generated $489 million in revenue. School Specialty anticipates that its revenue in the second half of fiscal year 2013 will be similar to the prior fiscal year.

The company's revenue come from a diverse group of customers. In fiscal year 2012, School Specialty's top 10 school district customers accounted for less than 10% of its revenue and no single state accounted for more than 10% of revenue. The debtor's top 100 products also only account for 11% of revenue.

School Specialty also has two Canadian subsidiaries that did not file for bankruptcy. The Canadian arms accounted for $31 million if the company's revenue in fiscal year 2012.

The debtor's revenue for its discretionary and supplemental business lines, meanwhile, dropped to $731.9 million in fiscal year 2012 from $1.09 billion in fiscal year 2008.

School Specialty, meanwhile, is highly leveraged and while it has tried to rationalize its capital structure, the company has faced pressures regarding its ability to maintain certain liquidity levels.

Over the past few years, the company has reduced its employees by 30% to 2,000 employees and has frozen salaries and mandated furloughs.

Even so, School Specialty engaged its creditor constituencies to come up with a solution to its financial distress. The company notified its creditors that it intended to file for bankruptcy and received DIP proposals from its secured lenders, a group of convertible noteholders and a third-party bank. School Specialty then decided the Bayside proposal that required the company to sell substantially all of its assets was the best option.

Under the deal, Bayside has offered a $95 million credit bid to purchase substantially all of the debtor's assets. Under the bidding procedures, filed on the petition date, Bayside would be entitled to a $2.85 million breakup fee should it lose an auction.

Competing bids, due March 19, would have to be at least $99.5 million in cash. Should any competing bids be received, the auction would be on March 25, during which bids would have to increase in increments of $500,000. The sale hearing would follow two days thereafter.

School Specialty has requested a Feb. 8 hearing on its bidding procedures.

The debtor will effectuate the sale through the use of its DIP financing.

The Bayside DIP includes $50 million in new money and rolls up $94.67 million in prepetition debt. The loan matures the earlier of the consummation of a sale or June 30 and accrues interest Libor plus 1,400 basis points with a floor of 1.5%. Upon default, the interest rate would increase by 3%. The loan includes a $1 million commitment fee, a $500,000 closing fee, a 1% unused line fee, a 3% commitment termination fee and a $150,000 administrative agency fee.

Under the loan, School Specialty must obtain approval of bidding procedures by Feb. 7, conduct an auction by March 25 and close a sale by April 11.

The Wells Fargo $175 million rollup revolver also matures June 30. The loan accrues interest at either a base rate plus 275 basis points or Libor plus 375 basis points. The base rate is Libor plus 100 basis points. Upon default, the interest rate would increase by 3%.

The revolver also includes a $500,000 prepayment premium fee, a $2.6 million closing fee, a $100,000 arrangement fee, a 0.5% unused line fee and a $1,000 daily appraisal fee.

In its petition, School Specialty listed $100 million to $500 million in assets and liabilities.

Debtor counsel is Alan W. Kornberg, Jeffrey D. Saferstein and Lauren Shumejda of Paul, Weiss, Rifkind, Wharton & Garrison LLP and Pauline K. Morgan, Maris J. Kandestin and Morgan L. Seward of Young Conaway Stargatt & Taylor LLP.

Perella Weinberg Partners LP is the debtor's financial adviser.