Case KJC Doc 471 Filed 07/27/16 Page 1 of 7 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE.

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1 Case KJC Doc 471 Filed 07/27/16 Page 1 of 7 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: DRAW ANOTHER CIRCLE, LLC, et al., Debtors. 1 Chapter 11 Case No (KJC) (Jointly Administered) Hearing Date: September 6, 2016 at 1:30 p.m. (ET) Objection Deadline: August 10, 2016 at 4:00 p.m. (ET) DEBTORS MOTION FOR ENTRY OF AN ORDER AUTHORIZING AMENDMENTS TO ASSET PURCHASE AGREEMENT Draw Another Circle, LLC and its chapter 11 affiliates, the debtors and debtors in possession (collectively, the Debtors ) in the above-captioned chapter 11 cases (the Cases ), hereby submit this motion (the Motion ) for entry of an order, substantially in the form attached hereto as Exhibit A (the Proposed Order ), pursuant to sections 363(b) of title 11 of the United States Code, 11 U.S.C (the Bankruptcy Code ), and Rule 6004 of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules ), authorizing the Debtor SP Images, Inc. ( SP Images ) to amend that certain asset purchase agreement (the APA and the APA as amended, the Amended APA ) between SP Images and Gamus LLC dba GTS Distribution ( GTS ) dated June 23, A copy of the Amended APA is attached hereto as Exhibit B. In support of the Motion, the Debtors submit the Declaration of Michael Tucker in Support of Debtors Motion for Entry of an Order Authorizing Amendments to Asset Purchase Agreement, filed contemporaneously with this Motion. In further support of this Motion, the Debtors respectfully represent as follows: 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 Plains Boulevard, Amarillo, TX

2 Case KJC Doc 471 Filed 07/27/16 Page 2 of 7 JURISDICTION 1. 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 as of February 29, 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 and Pursuant to Rule (f) of the Local Rules of Bankruptcy Practice and Procedure of the United States Bankruptcy Court for the District of Delaware (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, absent consent of the parties, cannot enter final orders or judgments consistent with Article III of the United States Constitution. 3. The statutory and legal predicates for the relief requested herein are section 363(b) of the Bankruptcy Code and Bankruptcy Rule BACKGROUND 4. On June 13, 2016 (the Petition Date ), each of the Debtors commenced a voluntary case under chapter 11 of the Bankruptcy Code. The Debtors are operating their businesses and managing their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. The Court has entered an order for joint administration of these Cases [D.I. 57]. No trustee or examiner has been appointed in these Cases. 5. On June 21, 2016, the Office of the United States Trustee for the District of Delaware (the U.S. Trustee ) appointed an official committee of unsecured creditors [D.I. 132] (the Committee ). 2

3 Case KJC Doc 471 Filed 07/27/16 Page 3 of 7 6. Further information regarding the Debtors business operations is set forth in the Declaration of Duane A. Huesers in Support of the Debtors First Day Pleadings [D.I. 18] (the First Day Declaration ). I. The APA. 7. As set forth in greater detail in the First Day Declaration, SP Images is a full-service licensed distributor of sports and entertainment products and apparel (the Products ) and subsidiary to Debtor Draw Another Circle LLC ( DAC ). On June 23, 2014, before being acquired by DAC, Sports Images, Inc., predecessor to SP Images, and its previous owners entered into the APA with GTS. Under the terms of the APA, SP Images sold to GTS its customer lists of hobby retailers (the Hobby Retailers or the Assets ) accumulated during the twelve (12) months prior to the closing of the APA on June 23, The APA sets forth a purchase price of the Assets of seven percent (7%) of GTS s gross sales less refunds, freight, and other reasonable inventory adjustments for sixty (60) months following the closing of the APA (the Purchase Price ). 2 GTS s Gross Margin is calculated on a monthly basis with distributions made to SP Images by the 15th of the following month. For the first twenty-four (24) monthly payments following the closing of the APA, the average monthly payment under the Purchase Price has been $8, (the Average Monthly Payment ) 9. Moreover, attached to the APA is a non-competition agreement (the Non-Compete ) whereby for the same sixty (60) month term of the Purchase Price, SP Images and DAC shall not compete with GTS in the marketing or sale of the Products to the Hobby 2 Due to the actual closing date of the APA, a small, pro-rated monthly payment on the Purchase Price was made for June 2014, which would result in sixty-one (61) monthly payments over the sixty (60) month term of the APA. 3

4 Case KJC Doc 471 Filed 07/27/16 Page 4 of 7 Retailers. Additionally, the APA provides that DAC and SP Images shall not knowingly solicit any of GTS s customers. II. The Amended APA. 10. On July 18, 2016, SP Images and GTS agreed in principle to the terms of the Amended APA. Under the amended terms, GTS will no longer make monthly payments on the Purchase Price for the remaining thirty-seven (37) months left under the APA. Instead, GTS will pay SP Images a lump sum of $250,000 (the Lump-Sum Payment ). 11. The Lump-Sum Payment was determined by estimating the remaining balance of the Purchase Price by extending the Average Monthly Payment over the remaining thirty-seven (37) monthly payments of the Purchase Price to be made under the current APA coming to $300, with a net present value (the NPV ) of $269, SP Images and GTS negotiated the Lump-Sum Payment, providing for a seven percent (7%) discount on the NPV of the estimated remaining portion of the Purchase Price under the APA. Given the current liquidity concerns of the Debtors, the Lump-Sum Payment provides a necessary benefit to the Debtors estates. 12. Neither the Lump-Sum Payment specifically nor the Amended APA generally will amend the Non-Compete, which shall remain in full force effect for the original sixty (60) month term of the APA. RELIEF REQUESTED 13. By this Motion, the Debtors seek entry of the Proposed Order authorizing SP Images to amend the APA and enter into the Amended APA attached hereto as Exhibit B. BASIS FOR RELIEF 14. Section 363(b) of the Bankruptcy Code provides, in pertinent part, that a debtor in possession, after notice and a hearing, may use, sell, or lease, other than in the 4

5 Case KJC Doc 471 Filed 07/27/16 Page 5 of 7 ordinary course of business, property of the estate. 11 U.S.C. 363(b)(1). In addition, section 105(a) of the Bankruptcy Code provides that the Court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code]. 11 U.S.C. 105(a). 15. The proposed use, sale, or lease of property of the estate may be approved under section 363(b) of the Bankruptcy Code if it is supported by sound business justification. See Institutional Creditors of Cont l Airlines, Inc. v. Cont l Air Lines, Inc. (In re Cont 1 Air Lines, Inc.), 780 P.2d 1223, 1226 (5th Cir. 1986); In re Abbotts Dairies of Pennsylvania Inc., 788 F.2d 143 (3d Cir. 1986); Committee of Equity Security Holders v. Lionel Corp. (In re Lionel Co.), 722 F.2d 1063, 1070 (2d Cir. 1983). Courts have applied four factors in determining whether a sound business justification exists: (i) whether a sound business reason exists for the proposed transaction; (ii) whether fair and reasonable consideration has been provided; (iii) whether the transaction has been proposed and negotiated in good faith; and (iv) whether adequate and reasonable notice has been provided. See In re Lionel Corp., 722 F.2d at 1071 (setting forth the sound business purpose test); In re Abbott Dairies of Pennsylvania, Inc., 788 F.2d at (adopting the articulated business justification test of Lionel and adding the good faith requirement). If a sound business justification exists, then a presumption attaches that the decision was informed, in good faith and in the honest belief that the action was in the best interests of the estate. Official Comm. of Subordinated Bondholders v. Integrated Resources, Inc. (In re Integrated Resources Inc.), 147 BR 650, 656 (S.D.N.Y. 1992). 16. In the Debtors reasoned business judgment, entry into the Amended APA is in the best interests of their estates. The negotiations between SP Images and the GTS that led to the Amended APA were conducted at arm s-length and in good-faith. Entry into the 5

6 Case KJC Doc 471 Filed 07/27/16 Page 6 of 7 Amended APA benefits all of the Debtors estates because it provides necessary liquidity that would otherwise have become available over a three-year period. Accordingly, the Debtors submit that there is ample business justification for entering into the Amended APA. WAIVER OF ANY APPLICABLE STAY 17. To the extent such waiver is necessary, the Debtors request that the Court waive the stay imposed by Bankruptcy Rule 6004(h), which provides that [a]n order authorizing the use, sale, or lease of property other than cash collateral is stayed until the expiration of 14 days after entry of the order, unless the court orders otherwise. Fed. R. Bankr. P. 6004(h). 18. To implement the relief requested in this Motion successfully, the Debtors request that the Court enter an order providing that the Debtors have established cause for such relief from the 14-day stay period under Bankruptcy Rule 6004(h). Absent relief from the 14-day stay period, the Debtors will not have the ability to immediately benefit from the favorable terms of the Amended APA that is the necessary liquidity from the Lump-Sum Payment, which would benefit the Debtors estates. RESERVATION OF RIGHTS 19. Nothing in the Proposed Order or this Motion (i) is intended or shall be deemed to constitute an assumption of any agreement pursuant to section 365 of the Bankruptcy Code or an admission as to the validity of any claim against the Debtors and their estates; (ii) shall impair, prejudice, waive, or otherwise affect the rights of the Debtors and their estates with respect to the validity, priority, or amount of any claim against the Debtors and their estates; or (iii) shall be construed as a promise to pay a claim. NOTICE 20. The Debtors will provide notice of this Motion to: (i) the U.S. Trustee; (ii) proposed counsel to the Committee; (iii) Bank of America, N.A.; (iv) Pathlight Capital LLC; 6

7 Case KJC Doc 471 Filed 07/27/16 Page 7 of 7 (v) GTS; and (vi) all parties who, as of the filing of the Application, have filed a notice of appearance and request for service of papers pursuant to Bankruptcy Rule In light of the nature of the relief requested herein, the Debtors submit that no other or further notice is necessary. 21. No previous request for the relief sought herein has been made by the Debtors to this or any other court. CONCLUSION WHEREFORE, for the reasons set forth herein, the Debtors respectfully request that this Court enter an order, substantially in the form attached hereto, granting the relief requested in the Motion and such other and further relief as is just and proper. Dated: July 27, 2016 Wilmington, Delaware Respectfully submitted, /s/ Christopher M. Samis Christopher M. Samis (No. 4909) L. Katherine Good (No. 5101) Chantelle D. McClamb (No. 5978) WHITEFORD, TAYLOR & PRESTON LLC The Renaissance Centre, Suite North King Street Wilmington, Delaware Telephone: (302) Facsimile: (302) csamis@wtplaw.com kgood@wtplaw.com cmcclamb@wtplaw.com Counsel for the Debtors and Debtors in Possession 7

8 Case KJC Doc Filed 07/27/16 Page 1 of 2 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: DRAW ANOTHER CIRCLE, LLC, et al., Debtors. 1 Chapter 11 Case No (KJC) (Jointly Administered) Hearing Date: September 6, 2016 at 1:30 p.m. (ET) Objection Deadline: August 10, 2016 at 4:00 p.m. (ET) NOTICE OF DEBTORS MOTION FOR ENTRY OF AN ORDER AUTHORIZING AMENDMENTS TO ASSET PURCHASE AGREEMENT PLEASE TAKE NOTICE that on July 27, 2016, the above-captioned debtors and debtors in possession (collectively, the Debtors ) filed the Debtors Motion for Entry of an Order Authorizing Amendments to Asset Purchase Agreement (the Motion ). A copy of the Motion is attached hereto. PLEASE TAKE FURTHER NOTICE that any responses or objections to the Motion must be (i) filed with the Clerk of the United States Bankruptcy Court for the District of Delaware, 824 Market Street, Wilmington, Delaware 19801, on or before August 10, 2016 at 4:00 p.m. (prevailing Eastern Time) (the Objection Deadline ) and (ii) served so as to be actually received no later than the Objection Deadline by the undersigned proposed counsel to the Debtors. PLEASE TAKE FURTHER NOTICE that, if any objections or responses are received, a hearing with respect to the Motion will be held before the Honorable Kevin J. Carey, United States Bankruptcy Judge, at the United States Bankruptcy Court for the District of 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 Plains Boulevard, Amarillo, TX

9 Case KJC Doc Filed 07/27/16 Page 2 of 2 Delaware, 5th floor, Courtroom No. 5, 824 Market Street, Wilmington, Delaware on September 6, 2016 at 1:30 p.m. (prevailing Eastern Time). IF NO OBJECTIONS TO THE MOTION ARE TIMELY FILED, SERVED AND RECEIVED IN ACCORDANCE WITH THIS NOTICE, THE COURT MAY GRANT THE RELIEF REQUESTED IN THE MOTION WITHOUT FURTHER NOTICE OR HEARING. Dated: July 27, 2016 Wilmington, Delaware Respectfully submitted, /s/ Christopher M. Samis Christopher M. Samis (No. 4909) L. Katherine Good (No. 5101) Chantelle D. McClamb (No. 5978) WHITEFORD, TAYLOR & PRESTON LLC The Renaissance Centre, Suite North King Street Wilmington, Delaware Telephone: (302) Facsimile: (302) csamis@wtplaw.com kgood@wtplaw.com cmcclamb@wtplaw.com Counsel for the Debtors and Debtors in Possession

10 Case KJC Doc Filed 07/27/16 Page 1 of 3 EXHIBIT A Proposed Order

11 Case KJC Doc Filed 07/27/16 Page 2 of 3 UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE Chapter 11 In re DRAW ANOTHER CIRCLE, LLC, et al., 1 Debtors. Case No.: (KJC) (Jointly Administered) Re: Docket No. ORDER AUTHORIZING AMENDMENTS TO ASSET PURCHASE AGREEMENT Upon the motion (the Motion ) 2 of Draw Another Circle, LLC and its chapter 11 affiliates, the debtors and debtors in possession (the Debtors ) in the above-captioned jointly administered chapter 11 cases (the Cases ), for entry of an order (this Order ), pursuant to sections 363(b) of title 11 of the United States Code, 11 U.S.C (the Bankruptcy Code ), and Rule 6004 of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules ), authorizing the Debtor SP Images, Inc. ( SP Images ) to amend that certain asset purchase agreement (the APA and the APA as amended, the Amended APA ) between SP Images and Gamus LLC dba GTS Distribution ( GTS ) dated June 23, 2014; and it appearing that the Court has jurisdiction to consider the Motion pursuant to 28 U.S.C and 157, and the Amended Standing Order of Reference from the United States District Court for the District of Delaware dated February 29, 2012; and it appearing that the Motion is a core matter pursuant to 28 U.S.C. 157(b)(2) and that the Court may enter a final order consistent with Article III of the United States Constitution; and it appearing that venue of these Cases and of the Motion is 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 Plains Boulevard, Amarillo, TX Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Motion.

12 Case KJC Doc Filed 07/27/16 Page 3 of 3 proper pursuant to 28 U.S.C and 1409; and it appearing that due and adequate notice of the Motion has been given under the circumstances, and that no other or further notice need be given; and it appearing that the relief requested in the Motion is in the best interests of the Debtors estates, their creditors, and other parties in interest; and after due deliberation, and good and sufficient cause appearing therefor, it is hereby ORDERED, ADJUDGED, AND DECREED THAT: 1. The Motion is GRANTED, as set forth herein. 2. Pursuant to section 363(b) of the Bankruptcy Code, the Debtors are authorized, but not directed, to enter into the Amended APA. waived. enforceable upon its entry. 3. The 14-day waiting period imposed by Bankruptcy Rule 6004(h) is hereby 4. The terms and conditions of this Order are immediately effective and 5. The Debtors are authorized to take all actions necessary to effectuate the relief granted pursuant to this Order in accordance with the Motion. 6. The Court retains jurisdiction with respect to all matters arising from or related to the implementation or interpretation of this Order. Dated:, 2016 Wilmington, Delaware HONORABLE KEVIN J. CAREY UNITED STATES BANKRUPTCY JUDGE 2

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