Voluntary Reorganization Under Chapter 11

On September 8, 2015, the Company reached agreements with holders of approximately 73% of its 2018 Notes in the form of a PSA that if implemented pursuant to its terms, would significantly reduce the Company’s outstanding debt. The PSA and Term Sheet contemplates that a restructuring of the Company’s capital structure would be implemented through a jointly proposed Chapter 11 plan of reorganization. On September 9, 2015, Quiksilver, Inc. and each of its wholly owned U.S. subsidiaries - DC Direct, Inc., DC Shoes, Inc., Fidra, Inc., Hawk Designs, Inc., Mt. Waimea, Inc., Q.S. Optics, Inc., QS Retail, Inc., QS Wholesale, Inc., Quiksilver Entertainment, Inc. and Quiksilver Wetsuits, Inc. - filed voluntary petitions in the Bankruptcy Court seeking relief under the provisions of the Bankruptcy Code. The reorganization cases under Chapter 11 of the Bankruptcy Code are being jointly administered by the Bankruptcy Court as Case No. 15-11880.

Since the Petition Date, the Debtors have operated their business as “debtors-in-possession” pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code, which will allow the Debtors to continue their operations in the ordinary course during the reorganization proceedings. Each Debtor will remain in possession of its assets and properties, and its business and affairs will continue to be managed by its directors and officers, subject in each case to the supervision of the Bankruptcy Court.

None of the Company’s direct or indirect non-U.S. subsidiaries or affiliates have commenced proceedings under Chapter 11 of the Bankruptcy Code, and none are expected to voluntarily commence reorganization proceedings or seek protection from creditors under any insolvency or similar law in the U.S. or elsewhere.

The PSA provides for several milestones for consummation and implementation of the Proposed Plan, and on October 28, 2015, the Bankruptcy Court entered an order approving the Debtors’ assumption of the PSA with certain modifications to the milestones:


•	filing of the Proposed Plan, the Proposed Disclosure Statement, solicitation materials and the motion to approve the disclosure statement with the Bankruptcy Court no later than October 30, 2015;


•	approval of the Proposed Disclosure Statement by the Bankruptcy Court no later than December 4, 2015;


•	approval of the Plan by the Bankruptcy Court no later than January 29, 2016; and


•	consummation of the Plan no later than February 5, 2016.

On the Petition Date, the Company sought, and thereafter obtained, authority to take a broad range of actions, including, among others, authority to incur post-petition financing, continue certain customer programs, pay certain employee obligations and pay certain pre-petition vendor claims. Additionally, the Company sought, and thereafter obtained, other orders, including orders outlining the provisions of adequate assurance of payment to utility companies and the continued use of the Company’s existing cash management systems.

The Debtors have requested and obtained approval from the Bankruptcy Court on December 4, 2015 for Key Employee Incentive Plans and Key Executive Retention Plans, under which compensation of up to $2 million may be awarded to Company executives and other key employees upon successful execution of the Plan and other measurements. No compensation expense has been recognized for these plans as of October 31, 2015. In addition, $0.6 million of incentive compensation not subject to Bankruptcy Court approval has been recognized by the Company as of October 31, 2015.

The filing of the Bankruptcy Cases constituted an event of default that accelerated the obligations under the following debt instruments (collectively, the “Debt Documents”):


•	Amended and Restated Credit Agreement, dated as of May 24, 2013, (the "ABL Credit Facility") among the Company, as a guarantor, QS Wholesale, Inc., as lead borrower, the other borrowers and guarantors party thereto, Bank of America, N.A., as administrative agent, and the lenders and other agents party thereto.


•	Indenture, dated as of July 16, 2013, by and among the Company, QS Wholesale, Inc., the subsidiary guarantor parties thereto, and U.S. Bank, National Association (successor to Wells Fargo Bank, National Association), as trustee and collateral agent, with respect to an aggregate principal amount of $280 million of 2018 Notes, plus accrued and unpaid interest thereon.


•	Indenture, dated as of July 16, 2013, by and among the Company, QS Wholesale, Inc., the subsidiary guarantor parties thereto, and U.S. Bank, National Association (successor to Wells Fargo Bank, National Association), as trustee, with respect to an aggregate principal amount of $225 million of 2020 Notes, plus accrued and unpaid interest thereon.

Any efforts to enforce such payment obligations under the Debt Documents are automatically stayed as a result of the filing of the Petitions for relief and the holders’ rights of enforcement in respect of the Debt Documents are subject to the applicable provisions of the Bankruptcy Code. The filing of the Bankruptcy Cases constituted an event of default under the 2017 Notes; however, the Company obtained the consent of holders of more than the required majority in principal amount of the 2017 Notes to, among other things, rescind the acceleration of the obligations under the 2017 Notes and waive the events of default related thereto and compliance with the debt incurrence and lien covenants with respect to the incurrence of the DIP Facilities for a period of up to 210 days from September 9, 2015 which is February 5, 2016.

The filing of the Petitions on September 9, 2015 created defaults and cross defaults pursuant to the terms of the Company’s Indentures to its 2020 Notes, 2018 Notes, 2017 Notes, and the ABL Credit Facility, which accelerated the due dates for the obligations. Consequently, the Company has presented its outstanding debt under the 2018 Notes and 2020 Notes in liabilities subject to compromise on its consolidated balance sheet as of October 31, 2015. The filing of a petition under the Bankruptcy Code results in the automatic stay of virtually all actions of creditors to collect pre-petition debts, until such time the stay is modified or removed. With respect to the 2017 Notes, the Company has received waivers for the defaults and cross defaults and the rescission of the acceleration for a period of up to 210 days from September 9, 2015. The Company has presented its outstanding debt under the 2017 Notes in liabilities not subject to compromise on its consolidated balance sheet as of October 31, 2015. Lastly, as discussed below, the ABL Credit Facility was paid-off.

On September 10, 2015, the Bankruptcy Court approved, on an interim basis, the Company's debtor-in-possession financing in an aggregate amount of up to $175 million, consisting of (i) a $60 million DIP ABL Facility provided by Bank of America, N.A., and (ii) a $115 million DIP Term Loan Facility provided by affiliates of Oaktree Capital. Subject to the satisfaction of certain customary conditions to borrowing, the entire DIP ABL Facility and $70 million of the DIP Term Loan Facility became available upon entry of the interim order, and the balance of the DIP Term Loan Facility became available upon entry of the final order on October 28, 2015. A portion of the proceeds of the DIP Facilities was used in part to repay amounts outstanding under the pre-petition ABL Credit Facility under which there were approximately $93 million in borrowings and letters of credit outstanding.

A hearing to consider confirmation of the Proposed Plan is scheduled before the Bankruptcy Court on January 27, 2016.

The DIP Facilities will mature 150 days after the Petition Date, and will contain representations, conditions, covenants and events of default customary for similar facilities. The DIP Facilities are collectively be secured by all assets of the Debtors, and such liens will be senior to the lien of the 2018 Notes. The DIP ABL Facility will be secured by a first-priority lien on the ABL Collateral and a second-priority lien on Term Loan Collateral. The DIP Term Loan Facility will have a first-priority lien on Term Loan Collateral, and a second-priority lien on all ABL Collateral. A portion of the DIP ABL Facility will be funded to certain Australian, Canadian and Japanese subsidiaries of the Company, which loans will be secured by assets of such foreign subsidiaries.

On October 13, 2015, the Debtors filed with the Bankruptcy Court and the Securities and Exchange Commission the Proposed Plan for the resolution of the outstanding claims against and interests in the Debtors pursuant to section 1121(a) of the Bankruptcy Code. On October 16, 2015, the Debtors filed with the Bankruptcy Code the Proposed Disclosure Statement.

Pursuant to the Proposed Plan, upon the Company’s emergence from the Bankruptcy Cases, the Company’s existing debt and accrued interest will be reduced by $510 million, including the extinguishment of all of its 2018 Notes and 2020 Notes. The Company’s 2017 Notes would be reinstated upon the consummation of the transactions set forth in the Plan. As consideration for such extinguishment, the reorganized Company would issue:


•	new common shares to holders of its 2018 Notes; and


•	$12.5 million in cash, which will be allocated between holders of its 2020 Notes and holders of general unsecured claims.

All of the Company’s existing equity securities, including its shares of common stock and warrants, will be cancelled and extinguished without holders receiving any distribution. In addition, new common shares will be offered to the holders of the 2018 Notes and the 2020 Notes in the Rights Offerings, which would be backstopped in full by Oaktree pursuant to the Backstop Commitment Letter.

On November 17, 2015, the Debtors filed a first amended Proposed Disclosure Statement, which includes a first amended Proposed Plan as Exhibit A thereto. On December 4, 2015, the Bankruptcy Court entered an order approving the adequacy of the Proposed Disclosure Statement and the Debtors have commenced solicitation of votes from eligible claimants in connection with the Proposed Plan. The Company and its advisors continue to seek alternative restructuring transactions, including a sale of all or substantially all of the assets of the Company, and will continue such efforts pending confirmation of the Proposed Plan by the Bankruptcy Court.

Liabilities Subject to Compromise

Liabilities subject to compromise represent pre-petition liabilities of the Debtors which will ultimately be resolved by the bankruptcy proceedings. Such liabilities are subject to Bankruptcy Court approval and may ultimately be settled for less than the recorded amount. The Company has reclassified obligations of the Debtors for unsecured and under secured debt, pre-petition obligations for accounts payable, certain workforce restructuring related obligations, accrued interest, certain future lease obligations and other liabilities as the allowed claims for liabilities subject to compromise on its consolidated balance sheet at October 31, 2015. The Debtors' liabilities subject to compromise were as follows:



In thousands	October 31, 2015
Debt:
2018 Notes	$	280,000
2020 Notes	225,000
Other unsecured debt	1,749
Total debt subject to compromise	506,749
Accounts payable	44,545
Lease obligations ⁽¹⁾	3,363
Workforce restructuring liabilities ⁽¹⁾	9,715
Accrued interest - 2018 Notes and 2020 Notes⁽²⁾	4,703
Other miscellaneous claims subject to compromise ⁽¹⁾	6,585
Total liabilities subject to compromise	$	575,660

___________


(1)	Includes amounts transferred from accrued liabilities and other long-term liabilities on the consolidated balance sheet.


(2)	Includes amounts transferred from accrued liabilities on the consolidated balance sheet.

If the terms of the PSA are implemented, the 2018 Notes are to be exchanged for new common shares of the Company upon the consummation of the transactions set forth in the plan of reorganization under the Petitions.

If the terms of the PSA are implemented, the 2020 Notes are to be settled for less than their face value upon the consummation of the transactions set forth in the plan of reorganization under the Petitions.

As of the Petition Date, the Debtors have discontinued recording interest expense on the debt subject to compromise. Additional contractual interest expense of $6 million on debt subject to compromise was not reflected in the consolidated statement of operations or the consolidated balance sheet for fiscal 2015.