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UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE In re DRAW ANOTHER ... PDF

221 Pages·2016·1.67 MB·English
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Preview UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE In re DRAW ANOTHER ...

Case 16-11452-KJC Doc 15 Filed 06/13/16 Page 1 of 221 UNITEDSTATESBANKRUPTCYCOURT DISTRICT OFDELAWARE Chapter11 In re CaseNo.:16-11452(__) DRAW ANOTHER CIRCLE, LLC, et al.,1 (Joint AdministrationRequested) Debtors. DEBTORS’MOTIONFORENTRYOFINTERIMAND FINAL ORDERS PURSUANT TO 11U.S.C.§§105,361,362,363,364, AND507AND FED. R. BANKR. P.2002,4001 AND9014(I)AUTHORIZINGDEBTORS ANDDEBTORS INPOSSESSION TO OBTAINPOSTPETITION FINANCING,(II) AUTHORIZINGUSE OFCASH COLLATERAL,(III)GRANTING LIENS ANDSUPER-PRIORITYCLAIMS,(IV) GRANTINGADEQUATE PROTECTIONTOPREPETITION SECUREDLENDERS,(V)MODIFYINGTHE AUTOMATICSTAY,(VI) SCHEDULINGA FINAL HEARING,AND (VII)GRANTING RELATEDRELIEF Draw Another Circle, LLC (“DAC”) and its chapter 11 affiliates, the debtors and debtors in possession (the “Debtors”) in the above-captioned chapter 11 cases (the “Cases”), hereby move the Court (the “Motion”) for entry of an interim order on an expedited basis (the “Interim Order”)2 substantially in the form attached hereto as Exhibit A, and following a final hearing to be set by the Court, entry of a final order (the “Final Order” and, with the Interim Order, the “DIP Orders”), pursuant to sections 105, 361, 362, 363, 364, and 507 of title 11 of the United States Code, 11 U.S.C. §§ 101–1532 (the “Bankruptcy Code”), Rules 2002, 4001 and 1 The Debtors and the last four digits of their respective federal taxpayer identification numbers are as follows: Draw Another Circle, LLC (2102); Hastings Entertainment, Inc. (6375); MovieStop, LLC (9645); SP Images, Inc. (7773); and Hastings Internet, Inc. (0809). The Debtors’ executive headquarters are located at 3601 PlainsBoulevard,Amarillo,TX79102. 2 CapitalizedtermsnotdefinedhereinshallhavethemeaningsascribedtothemintheInterimOrder. 132917634v4 Case 16-11452-KJC Doc 15 Filed 06/13/16 Page 2 of 221 9014oftheFederal Rules ofBankruptcyProcedure(the“BankruptcyRules”),andRule4001-2of the Local Rules of Bankruptcy Practice and Procedure of the United States Bankruptcy Court for the District of Delaware (the “Local Rules”), authorizing the Debtors, among other things, to obtain senior secured postpetition financing (the “DIP Facility”) and use cash collateral on an interim and final basis pursuant to the terms and conditions of that certain Senior Secured Superpriority Debtor-In-Possession Loan and Security Agreement, by and among Debtors Hastings Entertainment, Inc., Moviestop LLC, SP Images, Inc., Draw Another Circle, LLC and Hastings Internet, Inc., as Borrowers, Bank of America, N.A., as administrative and collateral agent (the “DIP Agent”), and the lenders party thereto (the “DIP Lenders”), substantially in the formattachedheretoasExhibitB (the“DIP CreditAgreement”). In support oftheMotion,theDebtors relyon theDeclarationof DuaneA.Huesers in Support of First Day Pleadings (the “First Day Declaration”) and the Declaration of Mike Nowlan in Support of Debtors’ (i) Financing Motion; (ii) Bidding Procedures and Sale Motion; and (iii)EmergencyStore Closing Sales Motion (the “NowlanDeclaration”, andtogether with the First Day Declaration, the “Declarations”), filed concurrently herewith. In further support of the Motion,theDebtors respectfullyrepresent as follows: OVERVIEW 1. Bythis Motion,theDebtors seekentryofthe Interim Order: a. authorizing the Debtors to obtain, on a joint and several basis, post- petition financing in the form of a revolving credit and letter of credit facility in accordance with the terms and conditions set forth in the DIP Credit Agreement, and in accordance with the Interim Order, secured by perfected senior priority security interests in and liens on the DIP Collateral pursuant to §§ 364(c)(2) and 364(c)(3), and 364(d) of the Bankruptcy Code (subject to the Carve-Out and the Permitted Liens); authorizing the Debtors to remit all collections, asset proceeds and payments to the DIP Agent and the DIP Lenders for application, or deemed application, first to all Prepetition ABL Loans (defined below) until such obligations are fully repaid, and then to the repayment of all 2 132917634v4 Case 16-11452-KJC Doc 15 Filed 06/13/16 Page 3 of 221 DIP Obligations (defined below); and deeming all letters of credit outstanding under the Prepetition Loan Agreement (defined below) as issuedpursuant toandoutstandingundertheDIP Credit Agreement; b. authorizing the Debtors to grant superpriority administrative claim status, pursuant to § 364(c)(1) of the Bankruptcy Code, to the DIP Agent, for the benefit of itself and the other DIP Lenders, in respect of all DIP Obligations (subject totheCarve-Out); c. subject to paragraphs 24 through 26 of the Interim Order, approving certain stipulations by the Debtors as set forth in the Interim Order in connection with the Prepetition Loan Agreement and the Prepetition Term Loan Documents; d. authorizing the Debtors to provide adequate protection to the DIP Agent and the DIP Lenders and Prepetition Term Agent and Prepetition Term Lenders; e. effective only upon entry of the Final Order, waiving the Debtors’ right to assert claims to surcharge against DIP Collateral pursuant to § 506(c) of theBankruptcyCode; f. modifying the automatic stay imposed by section 362 of the Bankruptcy Code to the extent necessary to implement and effectuate the terms and provisions ofthe Interim Order; g. setting a final hearing on the Motion (the “Final Hearing”) to consider entryofthe Final Order; and h. grantingrelated relief. JURISDICTION 2. The United States Bankruptcy Court for the District of Delaware (the “Court”) has jurisdiction over these Cases and the Motion pursuant to 28 U.S.C. §§ 157 and 1334 and the Amended Standing Order of Reference from the United States District Court for the District of Delaware dated February 29, 2012. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2). Venue of these Cases and the Motion in this district is proper under 28 U.S.C.§§1408and1409. 3. Pursuant to Rule 9013-1(f) of the Local Rules, the Debtors consent to the entry of a final judgment or order with respect to the Motion if it is determined that the Court, 3 132917634v4 Case 16-11452-KJC Doc 15 Filed 06/13/16 Page 4 of 221 absent consent of the parties, cannot enter final orders or judgments consistent with Article III of theUnitedStates Constitution. 4. The statutory and legal predicates for the relief requested herein are sections 105, 361, 362, 363, 364, and 507 of the Bankruptcy Code, Rules 2002, 4001, and 9014 oftheBankruptcyRules, andRule4001-2ofthe Local Rules. BACKGROUND 5. On the date hereof (the “Petition Date”), each of the Debtors commenced avoluntarycaseunder chapter11ofthe BankruptcyCode. 6. The Debtors are authorized to continue to operate their businesses and manage their property as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. No trustee, examiner or statutory committee has been appointed in these Cases by the Office of the United States Trustee for the District of Delaware (the “U.S. Trustee”). 7. Founded in 1968, Hastings Entertainment, Inc. (“Hastings”), a Texas corporation, is a leading multimedia entertainment and lifestyle retailer. Hastings operates entertainment superstores that buy, sell, trade and rent various home entertainment products, including books, music, software, periodicals, movies on DVD and Blu-ray, video games, video game consoles, hobby, sports and recreation, lifestyle and consumer electronics. Hastings also offers consumables and trends products such as apparel, t-shirts, action figures, posters, greeting cards and seasonal merchandise. Withthe assistance of over 3,500 employees, Hastings operates 123 superstores, averaging approximately 24,000 square feet, principally in medium-sized markets located in 19 states, primarily in the Northwestern, Midwestern, and Southeastern UnitedStates. 8. Hastings also operates a multimedia entertainment e-commerce web site, 4 132917634v4 Case 16-11452-KJC Doc 15 Filed 06/13/16 Page 5 of 221 goHastings.com, which offers a broad selection of books, software, video games, movies on DVD and Blu-ray, music, trends, comics, sports, recreation, and electronics. Hastings fills orders for new and used products placed at the website and also through Amazon and eBay Marketplaces using its proprietary goShip program, which allows Hastings to ship directly from its stores or distribution center. Hastings has one wholly-owned subsidiary, Hastings Internet, Inc. In2015,Hastings generatedrevenuetotalingapproximately$401.1million. 9. MovieStop, LLC (“MovieStop”), a Delaware limited liability company, is a value retailer of new and used movies based in Atlanta, GA. MovieStop currently operates 39 destination locations in 10 states, primarily along the coast of the Eastern United States. MovieStopis conductingstoreclosingsales at all ofits locations. 10. SP Images, Inc. (“SPI”), a Massachusetts corporation, is a full-service licensed distributor of sports and entertainment products and apparel headquartered in Franklin Massachusetts. SPI specializes in providing retail partners with an unmatched assortment of licensed merchandise that allows them to maximize turns, sales and gross margins. SPI stocks over 20,000 individual items licensed by Major League Baseball, the National Football League, the National Hockey League, the National Basketball Association, Marvel Comics, DC Comics andmanymore. 11. Hastings, MovieStop and SPI are each wholly-owned subsidiaries of DAC. 12. As is further discussed in the First Day Declaration filed contemporaneouslyherewith, the Debtors commenced these chapter 11 cases to (i) effectuate the sale of Hastings pursuant to a Court-approved bidding and auction process; (ii) complete the liquidation of the MovieStop business for the benefit of creditors; (iii) preserve SPI’s business 5 132917634v4 Case 16-11452-KJC Doc 15 Filed 06/13/16 Page 6 of 221 through a going concern sale process; and (iv) liquidate all of the Debtors’ remaining assets and discontinueall business linesthat cannot besoldforvalue. 13. Toward that end, the Debtors have entered into the DIP Facility, pursuant to which, subject to Court approval, the Debtors will receive a senior secured debtor-in- possession revolver that should provide them with sufficient runway to navigate through the chapter 11 process. The relief sought in this Motion is intended to preserve value and facilitate theDebtors’operations throughthis process. 14. More detailed factual background regarding the Debtors and the commencement ofthese Cases is set forthintheFirst DayDeclaration. I. Prepetition Capital Structureand Secured Indebtedness 15. As described below, the Debtors are borrowers under two credit facilities, namely, (1) a first lien revolving credit facility and (2) a second lien term loan facility, each as describedbelow. A. TheBank of America RevolvingCreditFacility(FirstLien) 16. Each of the Debtors is indebted under that certain Amended and Restated Loan and Security Agreement, dated as of July 22, 2010 (as amended, supplemented or otherwise modified from time to time, the “Prepetition Loan Agreement”) by and among Hastings, Moviestop, and SPI (collectively “Borrowers”), as borrowers, DAC and Hastings Internet, Inc. (collectively, “Guarantors”), as guarantors, the DIP Agent and the DIP Lenders (the “PrepetitionABLParties”).ThePrepetitionLoanAgreementprovides foranasset-basedrevolving creditfacilityofuptoamaximumof$115millionintheaggregate(the“PrepetitionABLLoans”). The Debtors’ ability to borrow under the facility is further subject to a borrowing base calculation containedinthePrepetitionLoanAgreement. 17. As of the Petition Date, the Debtors’ owed approximately $70 million 6 132917634v4 Case 16-11452-KJC Doc 15 Filed 06/13/16 Page 7 of 221 under the Prepetition Loan Agreement, exclusive of accrued and unpaid interest, costs, expenses and other fees owed to the Prepetition ABL Lenders (collectively, the “Prepetition Loan Obligations”). The Prepetition Loan Obligations are secured by first priority liens on substantiallyall oftheDebtors’personal property(the“PrepetitionCollateral”). B. ThePathlightTermLoan (Second Lien). 18. Each of the Debtors is also indebted under that certain Term Loan and SecurityAgreement dated as ofJuly15, 2014 (as amended, supplemented, or otherwise modified from time to time, the “Prepetition Term Loan Agreement”) by and among the Borrowers, as borrowers, the Guarantors, as guarantors, and Pathlight Capital LLC as agent (the “Prepetition Term Agent”,and togetherwiththe PrepetitionABLAgent,the “PrepetitionAgents”) andlender (the “Prepetition Term Lenders”, and together with the Prepetition Term Agent, the “Prepetition Term Parties”), pursuant to which the Prepetition Term Lenders extended to the Borrowers a term loan in the original principal amount of $15 million (the “Prepetition Term Loan”). The Prepetition Term Loan accrues interest at a rate of LIBOR plus 10.5%, which was increased by 3% prior to the Petition Date upon the Debtors’ default under the Prepetition Term Loan Agreement. The Prepetition Term Loan Agreement also provides for an early termination fee. The Prepetition Term Loan Agreement matures on July15, 2017, unless terminated prior thereto pursuant totheterms oftheagreement. 19. As of the Petition Date, the Debtors’ owed $10,000,000 under the Prepetition Term Loan Agreement, exclusive of accrued and unpaid interest, costs, expenses and other fees owed to the Prepetition Term Lenders (collectively, the “Prepetition Term Loan Obligations”, and together with the Prepetition ABL Obligations, the “Prepetition Secured Debt”). The Prepetition Term Loan Obligations are secured by second priority liens on the PrepetitionCollateral. 7 132917634v4 Case 16-11452-KJC Doc 15 Filed 06/13/16 Page 8 of 221 C. IntercreditorAgreements. 20. Therelativerights of the PrepetitionABLParties andthePrepetitionTerm Parties (collectively, the “Prepetition Secured Lenders”) with respect to the Prepetition Collateral are governed by the terms of that certain Intercreditor Agreement, dated as of July 15, 2014 (as amended, amended and restated, supplemented or otherwise modified from time to time, (the “Prepetition Intercreditor Agreement”), by and between the DIP Agent and the Prepetition Term Agent. The Prepetition Intercreditor Agreement provides, among other things, that the liens held bythe Prepetition Term Agent are junior and subordinate to the liens held bythe DIP Agent with respect tothePrepetitionCollateral. D. OtherSecured Debt. 21. As set forth in the First Day Declaration, other than the foregoing, the Debtors do not believe that they have any other secured debt as of the Petition Date, other than potentially secured claims of certain equipment lessors and/or taxing authorities in the ordinary courseofbusiness,allofwhom willreceivenotice. II. Events Leading Up totheDip Facilityand Negotiation of theDip Facility 22. As set forth in more detail in the First Day Declaration, after facing significant declines in its core business throughout 2015, in early2016 Hastings began to shift its merchandising and sales strategies, while also embarking on an aggressive reduction of expenses. The Debtors undertook these efforts with the assistance of FTI Consulting, Inc. (“FTI”). 23. Through these efforts, the Debtors successfully obtained $4.2 million in signed rent concessions from landlords and reduced employee headcount in Hastings’ warehouse and corporate headquarters by 15%. However, notwithstanding the initial positive results generated by Hastings’ operational restructuring, Hastings’ top line revenue continued to 8 132917634v4 Case 16-11452-KJC Doc 15 Filed 06/13/16 Page 9 of 221 deteriorate in the first quarter of 2016, as Hastings suffered significant year-over-year sales decreases while the Moviestop business continued to perform below expectations. These precipitous -- and unanticipated -- drops in revenue created a short term liquidity crisis in late April 2016. These constraints limited the Debtors’ ability to (i) pay rent to many of their landlords for the months of May and June 2016; (ii) pay vendors in accordance with applicable terms; (iii) purchase new inventory and normalize the inventory mix of their retail locations, all of which is especially essential with trends and new releases to maintain customer loyalty and drive customer traffic into their stores. This inventory shortfall negatively impacted sales even further, creating a vicious cycle that scuttled the Debtors’ recapitalization efforts and threatened todestroyvaluefor all of theDebtors’stakeholders. 24. In light of these results, in early May 2016 the Debtors took a number of steps to conserve liquidity and maximize value for the benefit of creditors. First, the decision was made to immediately commence a chain-wide liquidation of the MovieStop business. Second, management began to aggressively explore strategic alternatives for the Hastings business. In consultation with FTI and in conjunction with the efforts of RCS Real Estate Advisors, Hastings’ real estate disposition consultant and business broker, Hastings management began a targeted outreach to potential investors and strategic acquirers. Unfortunately, to date no indications of interest or letters of intent have been received and, as detailed in the First Day Declaration, the Debtors have determined that it would not be possible to restructure the Debtors out of court and that the commencement of chapter 11 cases offered the best path for the Debtors to restructure their balance sheets and maximize the value of their businesses and assets for their estates andcreditors. 9 132917634v4 Case 16-11452-KJC Doc 15 Filed 06/13/16 Page 10 of 221 25. Simultaneously in May 2016, the Debtors and FTI were authorized to negotiate the terms of DIP financing for the Debtors and related adequate protection arrangements in respect of the Debtors’ credit facilities. In exploring their options, the Debtors recognized that the obligations owed to their prepetition secured creditors are secured by substantially all of the Debtors’ assets, such that either (a) the liens of the prepetition secured creditors wouldhavetobeprimed toobtainpostpetitionfinancing, (b) the Debtors would have to find a postpetition lender willing to extend credit that would be junior to the liens of the prepetition secured creditors, or (c) a lender would have had to been willing to provide sufficient financingtosatisfytheDebtors’prepetitionsecuredindebtedness. 26. The DIP Lenders indicated a willingness to negotiate terms of a postpetition financing facility on the terms described herein. As set forth in the Nowlan Declaration, FTI, working closely with the Debtors’ management and other advisors, reached out to a number of other potential lenders to solicit interest in providing DIP financing to the Debtors on a pari passu basis with the Debtors’ existing secured lenders, on a junior secured basis, or on an unsecured, administrative expense basis, or, alternatively, by refinancing the existing secured debt. No parties provided a term sheet or expressed an interest in providing such financing under thecircumstancesandinthetimeframerequiredbytheDebtors giventheirliquidityissues. 27. The Debtors and their advisors and the Agent engaged in extensive, arm’s length negotiations with respect to the terms and conditions of the DIP Credit Facility, which again was the only proposal the Debtors received for postpetition financing. The material terms and conditions of the DIP Facility are summarized below. The Debtors, the Agent, and the DIP Lenders have agreed upon an initial budget, which is attached hereto as Exhibit C, projecting cash flow for the first four weeks of these cases (as it may be updated in accordance with the 10 132917634v4

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Liens in the DIP Collateral, (iii) the Prepetition Secured Debt,. (iv) the Prepetition Agents' 2, 2014), In re Coldwater Creek. Inc., Case No. 14-10867
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