Fox & Hound Chapter 11 Bankruptcy Filing

On December 15, 2013, F&H and 41 of its affiliates (Fox & Hound Restaurants) each filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware under lead case no. 13-13220.

James Zielke is the Chief Financial Officer and President of F & H Acquisition Corp.

F&H is a operator of sports bar and casual family-dining restaurants under two well-recognized concepts, Fox & Hound and Champps. Prior to the Petition Date, the Debtors’ operations encompassed approximately 101 restaurants located in 27 states, and employed approximately 6,000 employees, consisting of approximately 5,500 hourly employees and 500 salaried employees.

According to Mr. Zielke, “In the years and months leading up to the Petition Date, the significant U.S. economic downturn hit the restaurant and casual dining industry hard, including the F&H business. As unemployment levels skyrocketed, discretionary spending by historically-loyal customers and other consumers dropped, leading to reduced consumer traffic and sales. Within the restaurant industry, the mid-scale sector – which encompasses the Debtors’ restaurant business – suffered deep top line sale declines. The Debtors’ sales decreased by approximately 9 percent over the two years leading to the Petition Date. The Debtors have also experienced significant inflation in commodity prices, energy prices and labor costs. The Debtors introduced new advertising campaigns, marketing, menu initiatives and cost-cutting programs to mitigate these effects on their business; however, the Debtors were not immune to the effects of the economy and rising commodity prices, and restaurant sales, and overall profitability and liquidity, suffered significantly.

“As the Debtors’ liquidity has suffered, the Debtors have struggled to meet their debt service obligations. Prior to the Petition Date, the Debtors were required under the Debtors’ prepetition secured credit facilities to maintain certain levels of EBITDA. In the months leading up to the Petition Date, the Debtors failed to meet these EBITDA targets, resulting in a default under the prepetition credit agreements; however, the Debtors were able to successfully negotiate a forbearance agreement with their secured lenders. The forbearance agreement, however, is subject to periodic testing and payments, pursuant to which the Debtors defaulted.

“In consultation with their professional advisors and after careful examination by the Debtors’ board of directors, the Debtors determined that chapter 11 would provide the necessary tools to preserve asset value, accomplish a meaningful operational restructuring, and run a streamlined sale process for substantially all of the Debtors’ assets. Through these chapter 11 cases, the Debtors intend to implement an efficient public sale process to preserve their going- concern operations and maximize the value of their assets for the benefit of their creditors and estates.

Debtors’ Businesses and Overview.

F&H is a Delaware corporation, headquartered in Wichita, Kansas, and is a operator of social destination casual dining restaurants. The Debtors’ portfolio of well- known concepts includes Fox & Hound, Bailey’s Sports Grille and Champps.

“While the Debtors’ restaurant concepts have distinct identities in the marketplace, they have a common cultural and operational support infrastructure in order to maximize efficiencies and consistency of operations and the guest experience. Through the year ending December 2012, the Debtors generated revenues of $297.6 million and adjusted EBITDA of $25 million. Through September 2013, the Debtors had revenues of $218.8 million, which represented a 5% overall reduction over the comparable period in the prior year.

Fox and Hound Restaurants.

F&H has two primary concepts – Fox & Hound and Champps. Within Fox & Hound, the Debtors operate under two brands – Fox & Hound and Bailey’s Sports Grille.

According to Mr. Zielke, “Founded in Arlington, Texas in 1994, Fox & Hound has been a pioneer in the neighborhood sports tavern segment in the U.S. Fox & Hound has created raving fans through warm and genuine hospitality, cold beer and great bar food. The concept has become a neighborhood gathering spot by providing a comfortable, familiar place to unwind with friends, colleagues, or family and have a genuinely good time. Fox & Hound offers its guests an energetic and social atmosphere with state-of-the-art Audio Visual (“AV”) entertainment, superior customer service, multiple billiards tables and other skill games, and a high-quality menu that includes shareable appetizers as well as entrée selections. The Debtors currently operate 50 Fox & Hound restaurants in 24 states, achieving success in a wide variety of geographic and demographic markets and in both major cities as well as secondary markets.

Bailey’s Sports Grille was founded in Charlotte, North Carolina in 1989. While Bailey’s operates under a separate name from Fox & Hound, the two concepts share a common brand positioning, menu, design and operational principles. The Debtors currently operate 16 Bailey’s restaurants in seven states.

“In early 2013, Fox & Hound underwent an extensive operational review and market positioning analysis, which resulted in a renewed emphasis on the brands’ core DNA, which now emphasizes: (i) “Beer Experts” – Fox & Hound offers over 100 local, draft and craft beer selections with over 30 taps in most locations; (ii) “Great Bar Food” – Fox & Hound focuses on sharable appetizers, interesting handheld sandwiches and burgers, creative flatbreads, fresh salads and more; and (iii) “Sports and Entertainment” – Fox & Hound prides itself on being the best neighborhood spot to watch your favorite sporting event, gather with friends for a game of pool or other special events.

Champps

Champps’ first location opened in St. Paul, Minnesota in 1986. The concept has since grown to 35 company-owned and 11 franchised locations in 17 states.

According to Mr. Zielke, “Champps is an energetic, premium sports bar and grill with an extensive menu of freshly prepared items providing guests with a comfortable atmosphere that promotes social interaction. The concept is the “go-to” establishment for enjoying local and national sporting events, with a more upscale environment than typical sports-themed restaurants and bars.

Champps’ brand DNA is focused on being a premium sports bar and grill destination that offers a seat for every occasion, freshly prepared items in the “from scratch” kitchen and an extensive selection of local craft beer.

Franchising.

Debtor Champps Entertainment, Inc. franchises 11 Champps restaurants under franchise agreements. Franchisees are offered the right to operate a Champps restaurant for an upfront fee. Franchised locations are operated under strict guidelines to present a unified brand image. Franchising offers stable cash flows from the collection of royalties and product purchases, accounting for a significant percentage of the Debtors’ EBITDA. Franchising operations generated $0.3 million in revenue (0.1 percent of total revenues) in the first ten months of 2013 with Adjusted EBITDA of $0.3 million.

The Debtors’ Prepetition Organizational Structure.

In February 2006, Fox & Hound was acquired by Newcastle Partners, LP and Steel Partners LLC through F&H Acquisition Corp. F&H is a privately held Delaware corporation. In October 2007, F&H acquired Champps, combining the two similar, yet distinct concepts under one parent company.

Organizational Chart

The Debtors’ Prepetition Capital Structure.

As of the Petition Date, the Debtors have outstanding debt obligations in the aggregate principal amount of approximately $119 million (excluding approximately $2.3 million in issued and unfunded letters of credit), consisting primarily of approximately (a) $68.4 million in secured debt under a first lien senior secured credit facility, (b) $39.8 million under a second lien secured credit facility, and (c) $11.2 million owed to vendors, landlords and other unsecured creditors.

The Prepetition Credit Agreements

As of the Petition Date, F&H and its co-borrower affiliates were parties to that certain $80,000,000 Credit Agreement dated as of March 19, 2012, by and among F&H and each of its Debtor affiliates as Borrowers, and General Electric Capital Corporation as Lender and as Agent on behalf of itself and other Lenders thereto. The First Lien Credit Agreement is secured by substantially all of the Debtors’ assets. As of the Petition Date, approximately $68.4 million is outstanding under the First Lien Credit Agreement, excluding approximately $2.3 million in issued and unfunded letters of credit.

In addition, as of the Petition Date, F&H and its co-borrower affiliates were parties to that certain $37,100,000 Credit Agreement dated as of March 19, 2012 by and among F&H and each of its Debtor affiliates as Borrowers, and Cerberus Business Finance, LLC as Lender and as Agent on behalf of itself and other Lenders thereto. The Second Lien Credit Agreement is secured by substantially all of the Debtors’ assets, junior in priority only to the liens granted pursuant to the First Lien Credit Agreement. As of the Petition Date, approximately $39.8 million is outstanding under the Second Lien Credit Agreement (inclusive of approximately $2.5 million of payment in kind interest).

An intercreditor agreement exists as between the first and second lien lenders. (ii) The November Forbearance Agreements

“In the fall of 2012, it became apparent that the Debtors would have difficulty performing certain of their obligations under the Credit Agreements. Specifically, the Debtors were unable to make a scheduled October 1, 2012 payment of $1.45 million due on the First Lien Credit Agreement. Also, the Debtors defaulted under their Credit Agreements by not paying down their first lien indebtedness the amount in excess of their maximum allowable senior leverage. These defaults resulted in late November, 2012 forbearance agreements and amendments to both Credit Agreements. Key to obtaining the forbearance agreements, however, was the understanding that the Debtors would proceed with their pending operational improvement plans. These plans included: (i) hiring a new chief executive officer of F&H; (ii) implementing certain performance improvement initiatives; (iii) evaluating the implementation of a four store Chicago pilot program repositioning of the Fox & Hound concept; and (iv) the implementation of a remodel program repositioning the Fox & Hound concept (ten locations having been completed to date).

The amendments to the Credit Agreements and forbearance agreements also required the Debtors to undergo a sale and refinancing process. Thus, in February 2013, the Debtors engaged Imperial Capital (“Imperial”) to evaluate strategic alternatives, including a potential sale or recapitalization of the Debtors. As explained below, since March 2013, Imperial has conducted an extensive process that has reached out to approximately 100 potential buyers/investors and over 60 lenders.

Unsecured Debt

The Debtors have approximately $11.2 million in unsecured debt.3 Most of this amount constitutes approximately $6.1 million of trade debt owed to hundreds of vendors and accruals to landlords of approximately $3.8 million.

Events Leading to the Chapter 11 Cases.

“Over the course of the last few years, a series of factors has contributed to the Debtors’ need to file these chapter 11 cases, as described below. The Debtors’ top line sales decreased, while their bottom line profitability declined as a result of an increase in commodity costs, energy costs, and labor costs. These factors placed significant strain on the Debtors’ business, liquidity, and ability to satisfy covenants under the Credit Agreements.

Declining Restaurant Sales

“Prior to the commencement of these chapter 11 cases, the Debtors’ operations and financial performance were adversely affected by the downturn in the economy, the highly competitive nature of the casual family dining sector and poor sales results. The recession has been a primary factor in the decline in the Debtors’ sales, as consumers prioritized the savings of dining at home over eating-out. With overall unemployment rates at historically high levels, discretionary income for customers has been severely constrained, directly correlating to depressed restaurant sales and reduced or eliminated customer traffic. In the first eleven months of 2013, the Debtors reported a 3.1 percent decline in comparable store sales compared to 2012. These decreases were driven primarily by a decline in consumer traffic. Throughout the economic recession and leading to the Petition Date, the Debtors’ management has focused on introducing new and strategic initiatives to combat the fall in consumer spending and improve guest traffic. Such initiatives include, amongst others, a remodeling program, new menu initiatives and quality improvements, enhancing marketing programs, including expanding the usage of loyalty programs and social media platforms.

Rise In Commodity and Food Prices

In addition to declining sales, the cost of certain commodities and key food items, principally cheese and meats, had an adverse impact on the Debtors’ operating results for several years. The Debtors have implemented strategies to mitigate or partially offset the impact of higher commodity prices, including price increases, cost reduction actions, work force reductions, wage freezes, and reductions in other employee benefits; however, due to the magnitude and duration of the increased food and commodity costs, these strategies offset only a portion of the overall adverse effect of commodity prices on the Debtors’ operating profits.

Turnaround Efforts

In the fourth quarter of 2012, the Debtors began to actively search for a new CEO and in January 2013, the Debtors hired Marc Buehler, a seasoned restaurant executive with experience executing turnaround and growth plans at several leading casual and full service dining chains.

Since joining in January, Mr. Buehler embarked on a thorough review of both the Fox & Hound and Champps concepts. Following his review, the Debtors implemented a comprehensive strategic plan to improve the guest experience, enhance the relevance of the brands and competitive positioning, grow same store sales, and stabilize and improve margins. Despite these efforts, the Debtors’ business operations continued to experience declines in sales and defaults under the Credit Agreements.

Lease Negotiations

In connection with the prepetition efforts to restructure, the Debtors also engaged Hilco Real Estate LLC (“Hilco”) in January 2013 to review its real estate portfolio and identify underperforming locations. Beginning in February 2013, Hilco began to reach out to landlords, particularly focused on the Champps portfolio, regarding potential lease concessions and potential closures. Hilco negotiated lease terms for several restaurant locations.

DIP Negotiations

Given the urgency to find an immediate comprehensive liquidity solution, including postpetition financing, the Debtors’ management team, together with Imperial, have worked to address certain risks presented by a continued deterioration of the Debtors’ liquidity position.

“Given the timing for a chapter 11 filing and the impending liquidity crisis, the Debtors’ were not able to secure financing proposals from third parties that would provide the Debtors with sufficient liquidity to fund these chapter 11 cases, including on an unsecured or non-consensual priming basis or on a priority junior to that of the Agents. Accordingly, the Debtors determined, in consultation with their advisors, including Imperial, that under the circumstances, including the Debtors’ capital structure, liquidity position, the current debtor-in- possession financing market, and the results of recent conversations with a variety of stakeholders and other parties, including several potential candidates regarding debtor in possession financing, the DIP Facility is the best option available to the Debtors to provide them with sufficient liquidity to continue to operate their business operations and to conclude their restructuring/sale.

Throughout the weeks leading up to the Petition Date, the Debtors and the First Lien Agent engaged in extensive good faith and arm’s length negotiations with respect to the terms and conditions of the proposed postpetition financing. The result of such good faith and arms’ length negotiations was the execution of the DIP Facility, which the Debtors have submitted to the Court for approval.

The Proposed Sale of the Debtors’ Assets.

The Debtors engaged Imperial in February 2013 to evaluate strategic alternatives for the Debtors, including a potential sale or recapitalization of the Debtors. Imperial prepared a “teaser” and a detailed confidential information memorandum and set up an electronic data room for interested parties to conduct due diligence. In connection with such efforts, Imperial contacted 164 parties, including banks and non-institutional investors, resulting in the Debtors’ entry into approximately 80 non-disclosure agreements. The Debtors received eight indications of interest from potential purchasers. The Debtors conducted five meetings with potential purchasers.

In connection with this process, Imperial had a second round of discussions with seven parties which had previously expressed interest. None of those discussions produced a stalking horse bidder. Then, in October 2013, Imperial contacted nine new possible buyers and 22 previously-contacted buyers with the objective of finding a qualified stalking horse bidder. Ultimately, notwithstanding extensive negotiations with the Agents, the Debtors have not come to terms on a stalking horse agreement as of the Petition Date.

…The Debtors are seeking the Court’s approval of the DIP Facility which, if approved, will, among other things, provide the Debtors with (i) a postpetition revolving credit facility in a principal amount not to exceed approximately $3.5 million on an interim basis and approximately $9.6 million on a final basis, and (ii) a postpetition letter of credit facility comprised of the Prepetition Letters of Credit, including any renewals thereof, in an aggregate face amount not to exceed $2.269 million, plus $1 million in postpetition letters of credit (to be applied against the postpetition revolving facility).

The Debtors in Bankruptcy

The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification number are provided below. , include: F & H Acquisition Corp. (2666); 505 Entertainment, Ltd. (4594); Alabama Fox & Hound, Inc. (5894); Bryant Beverage Corporation (0639); Champps Entertainment, Inc. (0491); Champps Entertainment of Texas, Inc. (7242); Champps of Maryland (1010); Champps Operating Corporation (5130); Downtown Beverage Corp. (3943); F & H of Iowa, Inc. (2434); F & H of Kennesaw, Inc. (5997); F & H Restaurant Corp. (8349); F & H Restaurant of Georgia, Inc. (2200); F & H Restaurant of Texas, Inc. (9871); Fox & Hound of Arizona, Inc. (3585); Fox & Hound of Colorado, Inc. (7166); Fox & Hound of Illinois, Inc. (3003); Fox & Hound of Indiana, Inc. (5676); Fox & Hound of Kansas, Inc. (7699); Fox & Hound of Kentucky, Inc. (0777); Fox & Hound of Littleton, Inc. (2894); Fox & Hound of Louisiana, Inc. (0477); Fox & Hound of Maryland, Inc. (7608); Fox & Hound of Nebraska, Inc. (5786); Fox & Hound of New Jersey, Inc. (0951); Fox & Hound of New Mexico, Inc. (5620); Fox & Hound of Ohio, Inc. (3963); Fox & Hound of Oklahoma, Inc. (2928); Fox & Hound of Texas, Inc. (0979); Fox & Hound Restaurant Group (6614); Fox & Hound, Inc. (9035); Fox & Hound II, Inc. (9540); Fuqua Beverage Corp. (4906); Jackson Beverage Corporation (3948); N. Collins Entertainment, Ltd. (4596); Raider Beverage Corporation (4993); Rocket Beverage Corporation (9829); Shenandoah Beverage Corporation (8087); Tent Finance, Inc. (5335); Tent Restaurant Operations, Inc. (5556); Willowbrook Beverage Corp. (1601); Winston-Salem Fox & Hound, Inc. (8319). The location of the Debtors’ corporate headquarters and the Debtors’ service address is: 1551 N. Waterfront Pkwy, Suite 310, Wichita, KS 67206).

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