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

221 Pages·2016·1.67 MB·English

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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.
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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
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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,
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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,
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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
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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
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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.
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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
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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.
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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
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