NOTE 1—BANKRUPTCY PROCEEDINGS
On January 28, 2013 (the “Petition Date”), School Specialty, Inc. and certain of its subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief under Chapter 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The cases (the “Chapter 11 Cases”) were jointly administered as Case No. 13-10125 (KJC) under the caption “In re School Specialty, Inc., et al.” The Debtors continued to operate their business as “debtors-in-possession” (“DIP”) under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of Chapter 11 and orders of the Bankruptcy Court. The Company’s foreign subsidiaries (collectively, the “Non-Filing Entities”) were not part of the Chapter 11 Cases.
The Chapter 11 Cases were filed in response to an environment of ongoing declines in school spending and a lack of sufficient liquidity, including trade credit provided by the Debtors’ vendors, to permit the Debtors to pursue their business strategy to position the School Specialty brands successfully for the long term. As part of the Chapter 11 Cases and as discussed further in Note 24 – Subsequent Events, the Debtors’ developed and implemented a Chapter 11 reorganization plan that met the standards for confirmation under the Bankruptcy Code. The Chapter 11 reorganization plan will materially alter the classifications and amounts reported in the Company’s consolidated financial statements, which do not give effect to any adjustments to the carrying values of assets or amounts of liabilities that might be necessary as a consequence of confirmation of the Chapter 11 reorganization plan or the effect of any operational changes that may be implemented.
Operation and Implication of the Bankruptcy Filing
Under Section 362 of the Bankruptcy Code, the filing of voluntary bankruptcy petitions by the Debtors automatically stayed most actions against the Debtors, including most actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Company’s property. Accordingly, although the Company defaulted on certain of the Debtors’ debt obligations, creditors were stayed from taking any actions as a result of such defaults. Absent an order of the Bankruptcy Court, substantially all of the Company’s pre-petition liabilities were subject to settlement under a reorganization plan or in connection with a Section 363 sale.
Subsequent to the Petition Date, the Company received approval from the Bankruptcy Court to pay or otherwise honor certain pre-petition obligations generally designed to stabilize the Company’s operations. These obligations related to certain employee wages, salaries and benefits, and the payment of vendors and other providers in the ordinary course for goods and services received after the Petition Date. The Company retained, pursuant to Bankruptcy Court approval, legal and financial professionals to advise the Company in connection with the bankruptcy filing and certain other professionals to provide services and advice in the ordinary course of business.
Reorganization Plan
In order for the Company to emerge successfully from Chapter 11, the Company determined that it was in the best interests of the Debtors’ estates to seek Bankruptcy Court confirmation of a reorganization plan. A reorganization plan determines the rights and satisfaction of claims of various creditors and security holders, subject to the ultimate outcome of negotiations and Bankruptcy Court decisions ongoing through the date on which the reorganization plan is confirmed.
On May 23, 2013, the Bankruptcy Court entered an order confirming the Debtors’ Second Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (the “Reorganization Plan”), and a corrected copy of such order was entered by the Bankruptcy Court on June 3, 2013. The Reorganization Plan became effective on June 11, 2013 (the “Effective Date”). See Note 24 for additional information regarding the Reorganization Plan.
During fiscal 2013, the Company incurred $27,711 of legal, professional and financial fees related to the Company’s Chapter 11 filing. $4,732 of the charges were incurred pre-petition and are included in selling, general and administrative expense on the consolidated statements of operations. These pre-petition costs were related to professional services and advice in conjunction with the bankruptcy filing. $22,979 of these charges were incurred post-petition and are detailed in Note 5.
Financial Statement Presentation and Going Concern
We have prepared the accompanying consolidated financial statements in accordance with FASB ASC Topic 852 “Reorganizations” and on a going concern basis, which assumes continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business. During the Chapter 11 Cases, the Company’s ability to continue as a going concern was contingent upon its ability to comply with the financial and other covenants contained in its ABL DIP Agreement and Ad Hoc DIP Agreement (see Note 10), the Bankruptcy Court’s approval of the Company’s Reorganization Plan and the Company’s ability to successfully implement the Company’s plan and obtain exit financing, among other factors. As a result of the Chapter 11 Cases, the realization of assets and satisfaction of liabilities were subject to uncertainty. The Company emerged from Chapter 11 in June, 2013. Accordingly, management believes, subject to performance in accordance with the terms outlined in the Reorganization Plan upon emergence from Chapter 11 on the Effective Date (see Note 24), as well as projected compliance with applicable financial, affirmative, and negative covenants, that has resolved the substantial doubt and uncertainty relative to the Company’s ability to continue as a going concern, described above.
In connection with the Company’s emergence from Chapter 11, the Company adopted fresh start accounting as of June 11, 2013 in accordance with ASC 852 “Reorganizations”. Upon the adoption of fresh start accounting, the financial statements of the Company will not be comparable in various material respects, to any of the Company’s previously issued financial statements. The financial statements as of June 11, 2013 and for periods subsequent to the fresh start effective date reflect that of a new entity, resulting in changes to balances previously presented (see Note 23). Except as otherwise expressly stated in this Note 23, these financial statements do not reflect fresh start accounting adjustments.