| Reorganization under Chapter 11 | Voluntary Reorganization Under Chapter 11 Filing Under Chapter 11 of the United States Bankruptcy Code Chapter 11 Cases and Effect of Automatic Stay On July 23, 2020 (the “Petition Date”), the Company and certain of the Company’s direct and indirect subsidiaries (collectively with the Company, the “Debtors”) commenced the Chapter 11 Cases, which are being jointly administered under the caption In re Ascena Retail Group, Inc., et al ., Case No. 20-33113. On February 25, 2021, the Bankruptcy Court entered an order confirming the Amended Joint Chapter 11 Plan (Technical Modifications) of Mahwah Bergen Retail Group, Inc. (f/k/a Ascena Retail Group, Inc.) and Its Debtor Affiliates (the “Plan of Reorganization”). The effective date of the Plan of Reorganization (the “Effective Date”) will occur as soon as all conditions precedent to the Plan of Reorganization have been satisfied. The Effective Date is currently expected to occur in March 2021; however, the Company can make no assurances as to when, or ultimately if, the Plan of Reorganization will become effective. It is also possible that amendments could be made to the Plan of Reorganization prior to the Effective Date in accordance with the Plan of Reorganization and applicable law. On the Effective Date, among other things, cash distributions will be made to those stakeholders entitled to such distributions under the Plan of Reorganization, all existing common equity in the Company will be cancelled, released and extinguished without any distribution, and certain releases of direct and derivative claims and causes of action will become effective as set forth in the Plan of Reorganization. For the remainder of the Chapter 11 Cases until the Effective Date, the Debtors will continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. The commencement of the Chapter 11 Cases on the Petition Date constituted an event of default that accelerated the Debtors’ obligations under the Term Loan and Amended Revolving Credit Agreement (the “Debt Instruments”), each of which provide that as a result of the Chapter 11 Cases, the principal then outstanding, together with accrued interest thereon and all fees and other obligations accrued thereunder shall be immediately due and payable. Any efforts to enforce such payment obligations under the Term Loan or the Amended Revolving Credit Agreement are automatically stayed as a result of the Chapter 11 Cases, and the creditors’ rights of enforcement in respect thereof are subject to the applicable provisions of the Bankruptcy Code. As a result, the Company’s obligations under the Term loan have been classified as Liabilities subject to compromise in the condensed consolidated balance sheet as of October 31, 2020 and August 1, 2020. Restructuring Support Agreement The Debtors filed the Chapter 11 Cases to implement the terms of a Restructuring Support Agreement, dated July 23, 2020 (together with all exhibits and schedules thereto, the “RSA”), which was entered into prior to the commencement of the Chapter 11 Cases by the Company and certain of its subsidiaries (each, a “Company Party” and collectively, the “Company Parties”) and members of an ad hoc group of lenders (the “Consenting Stakeholders”) under the Term Loan. The RSA was supported by Consenting Stakeholders holding approximately 68% of the Term Loan as of the Petition Date. The RSA originally contemplated a restructuring process, to be implemented through voluntary cases under chapter 11 of the Bankruptcy Code, that is expected to significantly reduce the Debtors’ debt. Specifically, the RSA provided: • the substantial equitization of the Term Loan; • a fully backstopped capital injection of $150 million in new money financing pursuant to a backstop commitment letter (together with all exhibits and schedules thereto and as amended on September 9, 2020, the “Backstop Commitment Letter”) on the terms described in more detail below; • each Consenting Stakeholder will receive (i) its pro rata share (based on such party’s holdings of loans under the First Out Exit Term Facility (as defined in the RSA)) of 44.9% of the equity in the reorganized Company and (ii) its pro rata share (based on such party’s Backstop Percentage (as defined in the RSA)) of an amount of equity in the reorganized Company equal to $7.5 million (the “Backstop Equity Premium”), in each case subject to dilution from the Management Incentive Plan (as defined in the RSA); • all lenders under the Term Loan will receive their pro rata share of 55.1% of the equity in the reorganized Company less the percentage of such equity distributed as the Backstop Equity Premium, subject to dilution from the Management Incentive Plan, and $88.2 million in new loans under the Last Out Exit Term Facility (as defined in the RSA); • holders of general unsecured claims will receive their pro rata share of $500,000, provided that holders of general unsecured claims vote as a class to accept the Debtors’ Chapter 11 plan; and • existing common equity in the Company will be canceled. In connection with the Company’s entry into the Sycamore APA (as defined and described in Note 18), on November 26, 2020, the Company Parties and the Consenting Stakeholders entered into the Second Amended Restructuring Support Agreement (the “Amended RSA”). In addition to providing for the Consenting Stakeholders’ support of the Sycamore Transaction, the Amended RSA provides, among other things, that each Consenting Stakeholder and each lender party to the Term Loan will receive its pro rata share (based on its term loan holdings under the Term Loan) of cash pursuant to distributions in accordance with the schedule set forth in Section 6.01(p) of the Amended RSA (instead of equity in the reorganized Company as previously contemplated in the RSA). The Amended RSA does not contemplate material changes to the treatment of any other stakeholders’ claims, including holders of general unsecured claims, and in particular, the Amended RSA continues to provide that the existing common equity in the Company be canceled. The Amended RSA may be terminated by the Consenting Stakeholders upon the occurrence of certain events set forth therein, including the Bankruptcy Court not having confirmed the Debtors’ Chapter 11 plan by February 25, 2021 (rather than the date that is 110 days after the Petition Date as was provided in the RSA) and the Plan Effective Date not having occurred by March 11, 2021 (rather than the date that is 130 days after the Petition Date as was provided in the RSA). A Company Party may also terminate the RSA upon the occurrence of certain events set forth therein, including in the event the board of directors, board of managers or such similar governing body of any Company Party determines, after consulting with counsel, (i) that proceeding with any of the transactions described therein would be inconsistent with the exercise of its fiduciary duties or applicable law or (ii) in the exercise of its fiduciary duties, to pursue an Alternative Restructuring Proposal. Capitalized terms used but not otherwise defined in this paragraph have the meanings given to them in the Amended RSA. As described above, the Bankruptcy Court confirmed the Plan of Reorganization on February 25, 2021. Debtors-in-Possession Financing On July 23, 2020, prior to commencement of the Chapter 11 Cases and as contemplated by the RSA, the Company entered into the Backstop Commitment Letter with certain of the Company’s creditors and/or their affiliates (the “Backstop Parties”), which was amended and restated on September 9, 2020, pursuant to which the Backstop Parties committed to provide the Company with a superpriority senior secured debtor-in-possession term loan credit facility in an aggregate amount equal to approximately $312.3 million (the “DIP Term Facility”), on the terms and conditions set forth therein, including the approval of the Bankruptcy Court. In addition, on August 14, 2020, the Company entered into a commitment letter (the “DIP ABL Commitment Letter”) with certain lenders (the “DIP ABL Lenders”) under the Amended Revolving Credit Agreement. Pursuant to the DIP ABL Commitment Letter, and on the terms and conditions set forth therein, including the approval of the Bankruptcy Court, the DIP ABL Lenders committed to provide the Company with a superpriority senior secured debtor-in-possession asset based revolving credit facility in an aggregate amount of up to $400 million (the “DIP ABL Facility” and, together with the DIP Term Facility, the “DIP Facilities”), pursuant to which the commitments and loans of the lenders party to the Amended Revolving Credit Agreement would convert into the DIP ABL Facility. In connection with the Chapter 11 Cases, the Debtors filed a motion for approval of the DIP Facilities, Docket No. 18, and on September 10, 2020, the Bankruptcy Court approved such motion and entered an order approving the DIP Facilities and use of cash collateral on a final basis, Docket No. 587 (collectively, the “DIP Order”). Upon consummation of the Sycamore Transaction, all obligations outstanding under the DIP Facilities were repaid in full. DIP Term Credit Agreement In accordance with the DIP Order, on September 16, 2020, the Company and AnnTaylor Retail, Inc., as borrowers (collectively, the “DIP Term Borrowers”), entered into a Senior Secured Super-Priority Debtor-in-Possession Term Credit Agreement (the “DIP Term Credit Agreement”) with the lenders party thereto (the “DIP Term Lenders”) and Alter Domus (US) LLC, as administrative agent. Capitalized terms used but not otherwise defined in this “DIP Term Credit Agreement” section of this Note 2 have the meanings given to them in the DIP Term Credit Agreement. In connection with the consummation of the Sycamore Transaction, on December 23, 2020, the obligations under the DIP Term Credit Agreements were repaid in full, and such credit agreements were terminated. The DIP Term Borrowers’ obligations under the DIP Credit Agreement were secured by substantially all of the real and personal property of the DIP Term Borrowers and each subsidiary of the Company that are guarantors (collectively, the “DIP Term Loan Parties”), subject to certain exceptions. The DIP Term Facility, which is governed by the DIP Term Credit Agreement, consisted of (i) $150.0 million in new money term loans (the “New Money DIP Loans”) and (ii) $162.3 million of certain prepetition term loan obligations that have been rolled into the DIP Term Facility. The proceeds of the New Money DIP Loans were permitted to be used, among other things, to pay certain costs, fees and expenses related to the Chapter 11 Cases and to prepay or repay up to $50.0 million of borrowings under the ABL Credit Agreement, in all cases, subject to the terms of the DIP Term Credit Agreement. Loans under the DIP Term Facility bore interest at a rate per annum equal to (i) in the case of a base rate loan, the base rate (which is subject to a floor of 2.00%) plus 10.75% or (ii) in the case of a Eurodollar rate loan, the adjusted London interbank offering rate (which is subject to a floor of 1.00%) plus 11.75%. Upon the occurrence and during the continuance of an event of default under the DIP Term Facility, the Company would be subject to a default rate of interest equal to 2.00% above the rate otherwise applicable. The DIP Term Credit Agreement included customary negative covenants for debtor-in-possession loan agreements of this type, including covenants limiting the DIP Term Borrowers’ and their restricted subsidiaries’ ability to, among other things, incur additional indebtedness, create liens on assets, make investments, loans, advances or guarantees, engage in mergers, consolidations, sales of assets and acquisitions and pay dividends and distributions, in each case subject to customary exceptions for debtor-in-possession loan agreements of this type. The DIP Term Credit Agreement also included representations and warranties, mandatory prepayments, affirmative covenants and events of default customary for financings of this type. Certain bankruptcy-related events were also events of default, including, but not limited to, the dismissal by the Bankruptcy Court of any of the Chapter 11 Cases, the conversion of any of the Chapter 11 Cases to a case under chapter 7 of the Bankruptcy Code, the appointment of a trustee pursuant to chapter 11 of the Bankruptcy Code, and certain other events related to the impairment of the DIP Term Lenders’ rights or liens granted under the DIP Term Credit Agreement. DIP ABL Credit Agreement In accordance with the DIP Order, on September 16, 2020, the Company and certain of its subsidiaries, as borrowers (collectively, the “DIP ABL Borrowing Parties”), and certain other subsidiaries of the Company, as guarantors (together with the DIP ABL Borrowing Parties, the “DIP ABL Loan Parties”), entered into a Senior Secured Super-Priority Debtor-in-Possession Credit Agreement (the “DIP ABL Credit Agreement”) with the DIP ABL Lenders and JPMorgan Chase Bank, N.A., as administrative agent, which provided the Company with a superpriority senior secured debtor-in-possession asset based revolving credit facility of up to $400 million in the aggregate with a $200 million letter of credit sublimit. Capitalized terms used but not otherwise defined in this “DIP ABL Credit Agreement” section of this Note 2 have the meanings given to them in the DIP ABL Credit Agreement. In connection with the consummation of the Sycamore Transaction, on December 23, 2020, the obligation under the DIP ABL Credit Agreement was repaid in full (but with respect to any outstanding letters of credit, such letters of credit were cash collateralized, backstopped, replaced, continued under new credit facilities or otherwise accommodated for), and the DIP ABL Credit Agreement was terminated. The obligations under the DIP ABL Credit Agreement were secured by substantially all of the real and personal property of the DIP ABL Loan Parties, subject to certain exceptions. The proceeds of the DIP ABL Facility were permitted to be used to pay certain costs, fees and expenses related to the Chapter 11 Cases, to repay certain prepetition indebtedness and for working capital, among other things, in all cases subject to the terms of the DIP ABL Credit Agreement. Loans under the DIP ABL Facility bore interest at a rate per annum equal to (i) in the case of a base rate loan, the base rate plus 1.50% or (ii) in the case of a Eurodollar rate loan, the adjusted London interbank offering rate (which is subject to a floor of 0.75%) plus 2.50%. If any principal of or interest on any loan or any fee or other amount payable under the DIP ABL Facility was not paid when due, such overdue amount would be subject to a default rate of interest equal to 2.00% above the rate otherwise applicable. The DIP ABL Credit Agreement included customary negative covenants for debtor-in-possession loan agreements of this type, including covenants limiting the DIP ABL Borrowing Parties’ and their restricted subsidiaries’ ability to, among other things, incur additional indebtedness, create liens on assets, make investments, loans, advances or guarantees, engage in mergers, consolidations, sales of assets and acquisitions and pay dividends and distributions, in each case subject to customary exceptions for debtor-in-possession loan agreements of this type. The DIP ABL Credit Agreement also included representations and warranties, mandatory prepayments, affirmative covenants and events of default customary for financings of this type. Certain bankruptcy-related events were also events of default, including, but not limited to, the dismissal by the Bankruptcy Court of any of the Chapter 11 Cases, the conversion of any of the Chapter 11 Cases to a case under chapter 7 of the Bankruptcy Code, the appointment of a trustee pursuant to chapter 11 of the Bankruptcy Code, and certain other events related to the impairment of the DIP ABL Lenders’ rights or liens granted under the DIP ABL Credit Agreement. Nasdaq Delisting On July 24, 2020, the Company received a letter from the Listing Qualifications Department staff of Nasdaq notifying the Company that, as a result of the Chapter 11 Cases and in accordance with Nasdaq Listing Rules 5101, 5110(b) and IM-5101-1, at the opening of business on August 4, 2020, trading of the Company’s common stock was suspended from Nasdaq and the Company’s common stock began trading on the OTC Pink Marketplace under the symbol “ASNAQ.” On August 11, 2020, Nasdaq filed a Form 25 with the Securities and Exchange Commission (the "SEC") to delist the Company’s common stock from Nasdaq. The deregistration of the common stock under Section 12(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), became effective 90 days after filing of the Form 25. The common stock remains registered under Section 12(g) of the Exchange Act. Liabilities Subject to Compromise Liabilities subject to compromise refers to prepetition obligations which may be affected by the Chapter 11 process. These amounts represent the Company's current estimate of known or potential obligations to be resolved in connection with the Chapter 11 Cases. Differences between the liabilities the Company has estimated and the claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. The Company will continue to evaluate these liabilities throughout the Chapter 11 Cases and adjust amounts as necessary. Such adjustments may be material. The components of Liabilities subject to compromise are presented below: October 31, 2020 August 1, 2020 Liabilities subject to compromise: (millions) Accounts payable $ 375.6 $ 395.3 Accrued expenses and other current liabilities 13.8 114.8 Current portion of long-term debt (a) 1,090.2 1,252.6 Current portion of lease liabilities 92.7 146.4 Lease-related liabilities 419.7 614.5 Other non-current liabilities 105.6 106.0 Liabilities subject to compromise $ 2,097.6 $ 2,629.6 ____________ (a) See Note 11 for more details of the prepetition debt reported as Liabilities subject to compromise. Interest Expense The Company has ceased recording interest on the Term Loan, which is classified as Liabilities subject to compromise as of the Petition Date. The contractual interest expense on Liabilities subject to compromise not accrued or recorded in the condensed consolidated statements of operations was approximately $18.3 million for the three months ended October 31, 2020. Reorganization Items, Net The Company has incurred, and will continue to incur, significant costs associated with the Chapter 11 Cases. The amount of these costs, which are being expensed as incurred, are expected to significantly affect the Company's results. Reorganization items, net of $177.4 million represent the post-petition costs directly associated with the Chapter 11 Cases for the three months ended October 31, 2020. The following table summarizes the components of the Reorganization items in the accompanying consolidated statement of operations: Three Months Ended October 31, 2020 (millions) Non-cash terminations of lease liabilities $ 196.1 Professional fees (17.2) Write-off of deferred financing fees (1.9) Other 0.4 Total reorganization items, net $ 177.4 Debtors-in-Possession Condensed Combined Financial Statements Condensed combined financial statements of the debtors-in-possession are set forth below. These condensed combined financial statements exclude the financial statements of certain non-debtor entities. Transactions and balances of receivables and payables between debtors-in-possession are eliminated in consolidation. However, the debtors-in-possession's condensed combined balance sheet includes receivables from related non-debtor entities and payables to related non-debtor entities. CONDENSED BALANCE SHEET October 31, 2020 August 1, 2020 (millions) ASSETS Current assets: Cash and cash equivalents $ 368.2 $ 548.2 Inventories 384.8 326.7 Prepaid expenses, and other current assets 185.3 143.2 Current assets related to discontinued operations 10.4 30.9 Total current assets 948.7 1,049.0 Property and equipment, net 404.1 453.8 Operating lease right-of-use assets 340.5 376.4 Goodwill 164.6 164.6 Other intangible assets, net 20.2 20.2 Equity method investment 52.4 45.2 Other assets 50.5 52.0 Non-current assets related to discontinued operations — 1.1 Investment in non-debtor subsidiaries 177.3 177.3 Total assets $ 2,158.3 $ 2,339.6 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 260.9 $ 125.7 Accrued expenses and other current liabilities 170.2 57.9 Deferred income 108.4 111.7 Current portion of long-term debt — 227.9 Current liabilities related to discontinued operations 38.4 75.7 Total current liabilities 577.9 598.9 Long-term debt 292.4 — Other non-current liabilities 26.7 28.7 Non-current liabilities related to discontinued operations 13.4 21.2 Amounts due to non-debtor subsidiaries 105.3 99.9 Liabilities subject to compromise 2,097.6 2,629.6 Total liabilities 3,113.3 3,378.3 Total shareholders' deficit (955.0) (1,038.7) Total liabilities and shareholders' deficit $ 2,158.3 $ 2,339.6 CONDENSED STATEMENT OF OPERATIONS Three Months Ended October 31, 2020 (millions) Net sales $ 572.9 Cost of goods sold (321.1) Gross margin 251.8 Other operating expenses: Buying, distribution and occupancy expenses (150.8) Selling, general and administrative expenses (225.6) Restructuring and other related charges (1.0) Depreciation and amortization expenses (46.9) Equity in losses of non-debtor subsidiaries (4.1) Total other operating expenses (428.4) Operating loss (176.6) Interest expense (8.1) Interest and other income, net 0.4 Reorganization items, net 177.4 Loss from continuing operations before provision for income taxes and income from equity method investment (6.9) Provision for income taxes from continuing operations (2.9) Income from equity method investment 7.2 Loss from continuing operations (2.6) Income from discontinued operations, net of taxes 40.0 Gain on disposal of discontinued operations, net of taxes 38.9 Net income $ 76.3 CONDENSED STATEMENT OF CASH FLOWS Three Months Ended October 31, 2020 (millions) Cash flows provided by operating activities $ (122.2) Cash flows from investing activities: Capital expenditures (2.9) Proceeds from the sale of intangible assets 40.8 Cash flows used in investing activities 37.9 Cash flows from financing activities: New term loan 312.3 Redemptions and repayments of term loan (162.3) Repayments of revolver borrowings (230.0) Payments of deferred financing fees (20.6) Cash flows provided by financing activities (100.6) Increase in cash and cash equivalents (184.9) Cash and cash equivalents, beginning of period 554.7 Cash and cash equivalents, end of period (a) $ 369.8 ____________ (a) Difference of $1.6 million to the Cash and cash equivalents balance on the debtor-in-possession balance sheet above represents restricted cash included in other assets and cash included in discontinued operations. |
