SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
/X/ Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 [Fee Required] For the fiscal year ended December 28, 1996
/ / Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the transition period from to Commission file number 1-13158
THE GREAT TRAIN STORE COMPANY
(Name of Small Business Issuer in Its Charter)
Delaware 75-2539189
(State or Other Jurisdiction (I.R.S. Employer
Incorporation or Organization) Identification No.)
14180 Dallas Parkway, Suite 618, Dallas, Texas 75240
(Address of Principal Executive Offices) (Zip Code)
(972) 392-1599
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
- ------------------- -------------------
Common Stock $0.01 par value Pacific Stock Exchange
Securities registered under Section 12(g) of the Act:
Common Stock $.01 par value
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this from, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. / /
The issuer's revenues for its most recent fiscal year are $18,998,461
At March 20, 1997, the aggregate market value of the voting stock held by
non-affiliates of The Great Train Store Company (the "Company") was
approximately $25,397,255, based on the last sale price of the common stock
reported by The Nasdaq SmallCap Market on March 20, 1997. At March 20, 1997, the
Company had outstanding 4,393,219 shares of Common Stock.
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TABLE OF CONTENTS
PART I
Page
ITEM 1. Description of Business 2
ITEM 2. Description of Property 9
ITEM 3. Legal Proceedings 9
ITEM 4. Submission of Matters to a Vote of Security Holders 9
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters 10
ITEM 6. Management's Discussion and Analysis 11
ITEM 7. Financial Statements 13
ITEM 8. Changes In and Disagreements With Accountants on 13
Accounting and Financial Disclosures
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 14
ITEM 10. Executive Compensation 17
ITEM 11. Security Ownership of Certain Beneficial Owners and Management 19
ITEM 12. Certain Relationships and Related Transactions 20
ITEM 13. Exhibits and Reports on Form 8-K 20
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PART I
ITEM 1. Description of Business
Overview
The Great Train Store Company is a national chain of unique, upscale specialty
retail stores which offer a broad selection of train-themed merchandise not
generally available from any other single retailer. Each of the twenty-nine
currently operating The Great Train Stores typically offer approximately 5,500
stock keeping units ("SKUs"), and significantly more SKUs are offered by The
Train Depot, including: (i) mechanical and non-mechanical toy trains, games,
plush animals, and other toys, (ii) model trains, tracks, buildings, scenery,
and accessories, (iii) men's, women's, and children's apparel, jewelry, and
accessories, (iv) decorative items, novelties and souvenirs, and (v) books,
magazines, printed material and audiovisual products, all of which are related
to a common train and railroad theme. As an important element of its strategic
positioning, the Company strives to create an exciting and entertaining shopping
experience which appeals to all segments of the population, whether male or
female, child or adult, by featuring attractions such as moving model trains,
train whistles and sounds, and audiovisual presentations.
The Company's growth plans include capitalizing on what it believes to be (i)
its role as a leading retailer of train-themed merchandise, (ii) the significant
national nostalgia for railroads and (iii) the growth of themed entertainment
retailing. To accomplish its objective, the Company strives to emphasize (i) the
entertaining quality of The Great Train Store shopping experience, (ii) the
broad merchandise selection offered by each of The Great Train Stores, and (iii)
the knowledgeable and personalized customer service rendered by The Great Train
Store sales personnel.
The Great Train Store concept was developed in 1985 by James H. Levi to
contribute to the unique retail shopping environment then under development as
part of the adaptive reuse of the landmark St. Louis Union Station in St. Louis,
Missouri, for which Mr. Levi was principally responsible. The Great Train Store
retail concept was well received in the renovated St. Louis Union Station. As a
result, it was apparent to the Company that the train-themed merchandise and
atmosphere of The Great Train Store had a customer base and general level of
interest among retail consumers which was much broader than and extended well
beyond the St. Louis Union Station store. In 1987 the second and third stores
were opened, from 1988 through 1993, an additional seven stores were opened, and
from 1994 to 1996 an additional twenty-one stores were opened and two stores
were closed. During 1996 the Company also acquired one additional store through
the purchase of The Train Depot in Winter Park, Florida.
The Great Train Store Concept
The Great Train Store Layout and Design. The Great Train Stores are distinctive
in appearance and the shopping experience which they provide. As a key element
of its strategic positioning, the Company has designed The Great Train Stores to
encourage shoppers to enter and browse the Company's merchandise. The Great
Train Stores are typically located in highly visible locations within regional
shopping malls or festival marketplaces. The prototypical storefront of
approximately 30 - 40 feet has a high quality appearance and is constructed of
wood and glass with a design which integrates with the internal decor and color
palette and is intended to draw the customer into its ambiance of an early 20th
century train station. Each of The Great Train Stores features attractions, such
as moving electrical trains, whistles, train sounds and audiovisual projections,
to increase the visibility of the store and enhance the quality of each
customer's shopping experience.
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The Great Train Stores range in size from 1,150 to 3,306 square feet of gross
rented space and 1,016 to 2,429 of selling square feet. The Train Depot has
approximately 6,867 square feet of gross rented space and 4,304 of selling
square feet. Merchandise is presented in a logical, accessible and
understandable manner to arouse interest and encourage customers, especially
children, to touch and experience the offered products. Large-scale moving
trains encircle the interior and, in most stores, the exterior of The Great
Train Store on a patented overhead trestle. Informational signage and displays
presented in close proximity to well-lighted shelving containing the featured
merchandise give prominence to selected products which the Company believes have
particular appeal to shoppers. Merchandise is regularly relocated and new
merchandise is added within the store to offer a fresh presentation to frequent
customers.
Merchandising and Pricing. A key element of the Company's business strategy is
to distinguish The Great Train Stores by carrying a broad selection of
train-themed merchandise. Management believes that offering an extensive
selection of high-quality train-themed merchandise significantly expands The
Great Train Stores' customer base and increases store traffic. The Company
closely monitors in-stock inventories through its management information system
and regularly replenishes and adds to the merchandise carried in order to
reinforce the customers' awareness of the wide and varied selection of products
offered by the stores.
The Company's pricing strategy considers a variety of factors, including gross
profit contribution and potential mark-up over cost. Notwithstanding its focus
on gross profit contribution and sales margin, however, the Company intends to
be generally competitive with prices charged by other comparable retailers.
Accordingly, the Company customarily prices its products at the manufacturers
suggested retail price and monitors price levels at its competitors' outlets in
order to insure that its prices remain competitive.
Each of The Great Train Stores is specifically merchandised to be compatible
with local railroad history and market characteristics. The prototypical The
Great Train Store stocks approximately 5,500 of the SKUs currently offered by
the Company throughout its store network. Merchandise is currently offered in
the following principal product lines:
Toy Trains and Train-Themed Merchandise. In 1996, approximately 31.5%
of the Company's net revenues were derived from the sale of toys
(including, for example, Brio, Learning Curve Toys, Tomy, Ertl, and
Playmobil), games, puzzles, and plush animals.
Model Trains and Accessories. The Great Train Stores offer a broad
selection of model railroad cars, track, and accessories in each of the
five principal scales, HO gauge, #1 gauge, 0/0-27 gauge, Z gauge and N
gauge, including merchandise from most of the best-known names in model
railroading, such as Lionel, Athearn, LGB, Bachmann, Marklin,
Life-Like, Model Power, Atlas, Kato, Rivarossi, Walthers, Woodland
Scenics, and Micro Trains. Net sales in 1996 from this product line
accounted for approximately 35.9% of the Company's annual net sales
volume.
Printed and Recorded Materials. Each of The Great Train Stores carries
a wide selection of books, magazines, posters, calendars, videotapes,
and children's educational material, which accounted for approximately
12.2% of the Company's annual net sales volume in 1996.
Decorative Gifts, Novelties and Souvenirs. The Company offers its
customers a large selection of train-themed decorative items, novelties
and souvenirs, including clocks, music boxes, porcelain, glass, marble
and pewter wares, mugs, whistles, postcards, stickers, pins, magnets,
signs, plaques, pens and pencils. Net sales from this product line in
1996 accounted for approximately 13.1% of the Company's annual net
sales volume.
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Apparel. Each of The Great Train Stores is stocked with a variety of
men's, women's and children's apparel and accessories, including hats,
T-shirts, sweatshirts, ties, jewelry, watches and belt buckles, the net
sales of which represented approximately 7.3% of the Company's annual
net sales volume in 1996.
A substantial portion of the Company's annual net sales in the last five years
have been derived from the sale of merchandise based on the award-winning
children's series, Shining Time Station, and its star, Thomas the Tank Engine.
This merchandise includes toys, printed material, audio-visual products and
apparel and is obtained by the Company from more than 25 licensed vendors.
The Company believes that the high quality of its stores and of the products
carried by its stores is valued by customers. The Company further believes that
the quality of The Great Train Store's products make them exceptionally well
suited for gift giving, especially for men and children. The Company's sales
personnel are taught the importance of educating the customer about the products
offered by the store and of assisting the customer in making suitable gift
selections. The Company constantly seeks to identify and introduce new products
which meet its quality and profitability standards. Its merchandise buyers
attend trade shows and meet with manufacturers throughout the year in search of
new products for The Great Train Stores. Products meeting the Company's initial
merchandise criteria are tested and reviewed by the Company's personnel. The
Company's management information system is used to track the popularity of new
products prior to chain-wide introduction.
Customer Service. The Company is committed to achieving total customer
satisfaction and encouraging repeat business by providing a high level of
knowledgeable, attentive and personalized customer service. Many of the
Company's sales personnel are train enthusiasts and are well-versed in the train
lore and history of their locality. The Company believes that educating its
broad range of consumers with respect to the suitability, benefits and
differences in all merchandise offered is an important component to its success.
In order to develop responsive and well trained sales personnel, the Company has
devoted substantial resources to developing and implementing employee training
and incentive programs.
Personnel; Training. An important aspect of the Company's customer service
strategy is "The Great Training Program" which has been developed to provide
each employee with education in product knowledge, salesmanship, and Company
policies and procedures. New store managers receive on-the-job training under
the supervision of an experienced store manager prior to assuming their
responsibilities. Each store manager participates in regular telephone
conferences, attends an annual managers' conference, and receives regular
communications. The Company believes that this communication process both
enhances the training of its store managers and establishes a direct flow of
relevant Company information from Company headquarters to all of The Great Train
Stores.
Each store is staffed with a store manager, one or two assistant managers and
such additional salespersons and support staff as are required to meet the
specific needs of the store. The Company provides financial incentives to its
store managers through incentive compensation programs based upon the
performance of the individual store in which the employee performs services. The
Company believes that its incentive compensation programs increase the
motivation and overall performance of its personnel, the Company's profitability
and the Company's ability to attract and retain qualified employees.
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Expansion Strategy
The Company intends to continue implementation of its growth strategy. As of
December 28, 1996 the Company operated thirty stores primarily located in
distinctive regional shopping malls and festival marketplaces in St. Louis,
Missouri; Indianapolis, Indiana; New Orleans, Louisiana; Washington, D.C.;
Bloomington (near Minneapolis), Minnesota; Scranton, Pennsylvania; Alpharetta
(near Atlanta), Georgia; Sacramento, California; Natick (near Boston),
Massachusetts; Milpitas (near San Jose), California; The Woodlands (near
Houston), Texas; Albany, New York; Laughlin, Nevada; Myrtle Beach, South
Carolina; Cleveland, Ohio; Raleigh, North Carolina; Holyoke, Massachusetts; King
of Prussia, Pennsylvania; McLean, Virginia; Woodbridge, New Jersey; Richmond,
Virginia; Kansas City, Missouri; Troy (near Detroit), Michigan; Orlando,
Florida; Bellevue (near Seattle), Washington; Louisville, Kentucky; Skokie (near
Chicago), Illinois; Columbia, South Carolina; Pineville (near Charlotte), North
Carolina; and Winter Park (near Orlando), Florida. In March 1997, the Company
anticipates opening a store in Paramus, New Jersey and in May 1997 in Peabody
(near Boston), Massachusetts. The Company also has signed a lease to open a
store in 1998 in Providence, Rhode Island. While there can be no assurance, each
of these locations is expected to open in 1997. Many other locations are under
active consideration and/or negotiation to open in 1997 and 1998. Because of the
broad market appeal of their merchandise mix, the Company seeks to locate The
Great Train Stores in high traffic shopping environments.
Prior to entering a new market, the Company reviews the market's demographic and
competitive situation to evaluate the suitability of and prospects for the
market. Among other factors, each site is evaluated on such information as local
market demographics, traffic counts, the retail mix of the center, the
visibility of available locations within the center, access to the center from
major thoroughfares, presence or absence of competition, overall retail activity
of the area and proposed lease terms. Actual site selection is the
responsibility of a committee which includes the Chief Executive Officer and all
Vice Presidents. The time period required to open a store after signing a lease
depends upon the landlord's ability to deliver the premises to the Company. Upon
acceptance of the premises from the landlord, the Company generally can open a
store within sixty days.
The Company's ability to open new stores in new markets has been a significant
factor in achieving its sales growth. Management believes the Company's ability
to open new stores will continue to be a significant factor in achieving growth
objectives for the future. To date, the Company has experienced no significant
difficulties in locating suitable sites for new stores. The Company believes
that substantial opportunities also exist to increase sales in existing markets
by improving sales persons productivity, increasing promotional activities and
opening additional stores in currently served markets. The Company believes that
expansion of the number of stores it operates will permit the Company to benefit
from economies of scale, enhanced negotiating leverage with respect to
purchasing terms and trade credit, and increased ability to obtain customized
and exclusive products.
The Company also believes that opportunities exist to achieve growth through the
identification and development of new and unique product lines and through the
development or acquisition of businesses complimentary to the Company's existing
business, including the possibility of mail order and catalog sales operations.
In 1996 the Company acquired an existing train hobby store in Winter Park,
Florida and may consider additional similar acquisitions. Currently, the Company
has no agreement, arrangement or understanding, with respect to any future
acquisition or complimentary expansion.
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Advertising and Promotion
The Company relies primarily on highly visible store locations and attractive
store design and visual presentation to attract the attention of prospective
consumers. Its marketing activities also include special event promotions and a
variety of public relations activities, such as sponsorship of Shining Time
Station television programming in some of the markets in which it operates,
promotion of local events relating to railroading, "how to" instructional
sessions, and book readings for children. Moreover, the Company considers media
relations to be an integral part of its image-building program and strives to
develop good working relationships by inviting media members to store grand
openings and maintaining access to the appropriate Company personnel. The
Company participates in cooperative advertising programs with certain of its
major vendors. The Company also maintains direct mail contact with customers,
highlighting sales promotions, as an important aspect of its marketing strategy.
Suppliers
Most of the Company's products are purchased directly from manufacturers. The
Company presently purchases products from approximately 650 vendors. No single
vendor, other than Learning Curve Toys (which represented approximately 11.6%)
and Lionel Trains, Inc. (which represented approximately 10.6%), supplied
products representing more than 10% of the Company's net sales in 1996. The
largest five vendors represented approximately 39.8% of net sales for the year.
Although the Company's net sales are not dependent on any single vendor, the
Company views its relationships with certain key vendors, such as Bachmann
Industries, Brio Scanditoy, Tomy, Ertl, LGB, Learning Curve Toys, and Lionel
Trains, Inc., to be important factors in its success. The Company deals with its
vendors principally on an order-by-order basis and has no long-term purchase
contracts or other contractual assurance of continued supply or pricing. The
Company believes that, due to its relative size, its purchasing activities,
which account for an important portion of many of its suppliers' sales, permit
it to achieve a lower cost of goods sold which, together with its broad
selection of merchandise, good locations, and exciting store presentation,
permit it to be highly competitive against other forms of train-themed
retailers. The Company also intends to increase the number of unique items
manufactured specifically for it, such as its patented G scale railroad trestle
system and its The Great Train Store neckties and whistles. The Company has not
experienced and does not anticipate any significant difficulty in obtaining
sufficient levels of merchandise.
Management Information Systems
The Company uses customized management information systems to assist in
directing its operations and finances. In addition to providing continuous
knowledge of the Company's inventories, these computerized systems enable the
Company's central office to reprice merchandise, replenish depleted store
inventories, identify sales trends and monitor merchandise mix at individual
stores and throughout the Company's store network. Management believes that
these systems provide a number of benefits, including lower average store
inventories and thus higher inventory turnover, higher operating efficiency,
better in-stock availability and fewer markdowns. The systems also enable the
Company to realize purchase discounts and to produce the financial reports
necessary for monitoring and developing budgets for the Company's expanding
business. The Company's point-of-sale system keeps daily records of each
merchandise item from receipt to sale.
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The Company has implemented a plan and has made substantial capital investments
to significantly upgrade and integrate its merchandise and financial information
systems to support its growth objectives and to enhance management's ability to
access and analyze information from all areas of the business. Among other
things, the new systems improved the Company's ability to compile and utilize
store level data bases, prepare customized mailing lists and track individual
sales personnel productivity. Although substantial improvements have been made,
the Company anticipates that it will continue to invest substantial amounts
indefinitely to enhance and improve its systems.
Competition
Competition is highly intense among specialty retailers, traditional toy and
hobby stores and mass merchant discounters in regional shopping malls and other
high traffic retail locations and could increase in the future. To the Company's
knowledge, there are no other national chains of stores specializing in
train-related merchandise. Consumers of train-related merchandise are generally
served by toy and hobby stores and mail order merchandisers. Competition is
fragmented and varies substantially from one geographic location to another.
National toy store chains, mail order merchandisers, discount stores and other
mass merchandisers have a significant market share and could increase
competitive pressures on the Company in the future. In addition, the mail order
industry has become increasingly competitive in recent years. Competition is
generally focused on product availability, customer service and price.
The Company believes that it differentiates itself from its competitors by
offering a broader selection of merchandise in a more exciting and entertaining
environment. The Company also believes that the train-related knowledge of its
sales personnel is a significant competitive advantage.
Trademarks
The name "The Great Train Store" and its related logo and the Company's slogan
"More trains than you ever imagined" are trademarks and service marks registered
in the United States and Canadian Patent and Trademark offices and are pending
registration in the Japanese and United Kingdom Patent and Trademark offices.
Management believes that the name "The Great Train Store" is an important, but
not critical, element of the Company's marketing strategy. The Company closely
monitors the use of its intellectual property and intends to vigorously defend
its rights with respect thereto.
Employees
As of December 28, 1996, the Company employed a total of 359 persons, of whom 95
were salaried personnel and 264 were employed on an hourly wage basis.
Twenty-six of the Company's employees were assigned to central office
responsibilities and 333 were engaged in activities in stores. None of the
Company's employees are covered by a collective bargaining agreement and the
Company considers its employee relations to be good.
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ITEM 2. Description of Properties
The Company leases all of its stores from developers or operators of the
regional shopping malls, festival marketplaces and other locations in which the
stores are located. Typically, the Company's leases provide for the payment of
minimum annual rent and additional rent calculated as a percentage of the
stores' net sales. Generally, the Company is also required to pay a portion of
the landlord's cost of insurance, taxes and other operating expenses. The leases
typically provide for an initial term of between five and twelve years and may
have various renewal terms. The following table summarizes the number of
expiration dates in each year for stores and the central office leases:
Number of
Year Leases Expiring
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1997 1
1998 2
1999 0
2000 3
2001 1
2002 and thereafter 24
The Company's central offices are presently located in approximately 7,661
square feet of leased space in Dallas, Texas under a lease which expires on
March 14, 2000. The Company believes this space is adequate for its present
needs.
ITEM 3. Legal Proceedings
The Company is not presently party to any material legal proceedings. The
Company does not believe that any claims and lawsuits to which it is a party
individually or in the aggregate, will have a material adverse effect on the
Company's financial condition.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of 1996 to a vote of security
holders.
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PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
The Great Train Store Company's common stock is traded on The Nasdaq SmallCap
Market and Pacific Stock Exchange under the symbols, GTRN and GTN, respectively.
At February 28, 1997 the number of common stockholders of record was 88. Based
on discussions with the Company's transfer agent and investment banker, the
Company believes that its common stock is beneficially held by more than four
hundred persons. Prior to January 4, 1995, the Company's stock and warrants sold
as Units. Each Unit consisted of one share of common stock and one warrant to
purchase one share of common stock at $5.00 per share. Effective January 4,
1995, the Units were separated into the constituent shares of common stock and
warrants. On August 4, 1996 the Company had received proceeds from the exercise
of 98.5% of the warrants. The following table sets forth, for the periods
indicated, the range of high and low bid prices with respect to the Company's
Common Stock as reported by The Nasdaq SmallCap Market.
Common Stock
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Period High Low
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1995:
First Quarter (beginning 1/4/95) 6-1/4 5
Second Quarter 6-1/4 5-1/4
Third Quarter 7 5-3/8
Fourth Quarter 6-7/8 5
1996:
First Quarter 6-15/32 5
Second Quarter 6-1/6 5-1/4
Third Quarter 8-1/4 5-1/8
Fourth Quarter 9-7/8 7-3/4
The foregoing quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
On March 20, 1997, the last sale price for the Common Stock as reported by The
Nasdaq SmallCap Market was $8-3/8.
The Company has not declared or paid any cash dividends on its Common Stock
since its inception, and the Board of Directors presently intends to retain cash
flow for the development of the Company's business for the foreseeable future.
The declaration and payment of cash dividends in the future will be at the
discretion of the Company's Board of Directors and will depend upon a number of
factors, including, among others, future earnings, operations, capital
requirements, the general financial condition of the Company and such other
factors as the Board of Directors may deem relevant.
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ITEM 6. Management's Discussion and Analysis
Results of Operations
The following table sets forth, for the periods indicated, selected statements
of operating data expressed as a percentage of net sales (prior year balances
include certain reclassifications to conform to the current year presentation).
The Company's fiscal year is based on a 52/53 week fiscal year ending on the
Saturday closest to December 31.
For the Year Ended
December 30, 1995 December 28, 1996
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Net Sales 100.0% 100.0%
Cost of Sales 52.0 51.8
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Gross Profit 48.0 48.2
Store operating expenses 19.0 19.4
Occupany expenses 13.2 11.7
Selling, general, & administrative
Expenses 10.9 9.3
Depreciation and amortization 1.9 2.1
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Operating income 3.0 5.7
Interest expense (1.0) (.7)
Interest income .9 .5
Other income .1 .1
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Income before income taxes 3.0 5.6
Income taxes - (1.5)
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Net income 3.0% 4.1%
Comparison of Fiscal Year Ended December 30, 1995 to the Fiscal Year Ended
December 28, 1996
Net sales increased approximately $6,183,000, or 48.3%, for the fiscal year
ended December 28, 1996 compared with the corresponding period last year. Of
this increase approximately $4,281,000 was attributable to net sales
generated by twelve stores which were not operated in the comparable period in
1995, partially offset by a decrease of approximately $696,000 attributable to
the Columbus location, which was closed on December 30, 1995. Approximately,
$2,337,000 of the increase was attributable to net sales generated during the
first part of 1996 by the six stores opened during 1995, and approximately
$261,000 was attributable to a 2.3% increase in comparable store sales.
Comparable store sales are calculated based on the stores open during both of
the entire months being compared.
Gross profit increased approximately $2,995,000 or 48.7%, for the fiscal year
ended December 28, 1996, compared with the corresponding period last year due
primarily to an increase in sales volume. Gross profit as a percentage of net
sales (gross margin) increased to 48.2% for the fiscal year ended December 28,
1996, compared with 48.0% for the corresponding period last year. The increase
in gross margin resulted from several factors including changes in product mix,
inventory shrink, and purchase discounts as a result of increased purchases from
certain vendors.
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Store operating expenses increased approximately $1,250,000 or 51.4%, for the
fiscal year ended December 28, 1996, compared with the corresponding period last
year. Approximately $919,000 of the increase resulted from the operation of the
twelve stores added during 1996, approximately $250,000 of which related to
pre-opening expenses incurred in the setup of these stores. In addition,
approximately $523,000 of the increase was attributable to the stores opened
during fiscal 1995 which were open the full fiscal year in 1996. This increase
was partially offset by an approximate $52,000 decrease in comparable store
operating expenses and an approximate $140,000 decrease due to closing the
Columbus store location on December 30, 1995. As a percentage of net sales,
store operating expenses increased to 19.4% for the fiscal year ended December
28, 1996, compared with 19.0% for the corresponding period last year. This
increase was primarily due to pre-opening expenses incurred in connection with
opening a larger number of stores in 1996 as compared to 1995. Unlike many
retailers, the Company expenses pre-opening costs as incurred.
Occupancy expenses increased approximately $527,000, or 31.0%, for the fiscal
year ended December 28, 1996, compared with the corresponding period last year.
Approximately $417,000 of the increase related to the stores opened during
fiscal 1995 which were open for the full fiscal year in 1996, and approximately
$308,000 of the increase was attributable to the twelve stores added during
fiscal 1996. The increase was partially offset by a decrease in comparable store
occupancy expenses of approximately $31,000 and an approximate $167,000 decrease
due to the closing of the Columbus store. As a percentage of net sales, overall
occupancy expenses decreased to 11.7% for the fiscal year December 28, 1996,
from 13.2% for the corresponding period last year. Occupancy expenses decreased
as a percentage of sales due to several factors, including more favorable
negotiations on recent leases, the elimination of the Columbus location which
had high occupancy costs as a percentage of sales, and other factors.
Selling, general and administrative expenses increased approximately $368,000 or
26.3%, for the fiscal year ended December 28, 1996, compared with the
corresponding period last year. The increase in selling, general and
administrative expenses was primarily due to approximately $169,000 of
additional expenses related to salaries and related expenses for additional
central office personnel to support the continuing growth of the Company and
approximately $41,000 related to an investor public relations program which was
implemented in the second quarter of 1996. The Company anticipates that selling,
general and administrative expenses will increase further in conjunction with
the Company's expansion strategy. As a percentage of net sales, selling, general
and administrative expenses decreased to 9.3% for the fiscal year ended December
28, 1996, from 10.9% for the corresponding period last year. This percentage
change resulted from the relatively fixed nature of selling, general and
administrative expenses and the increase in net sales experienced by the
Company. The Company anticipates that as additional stores are opened, selling,
general and administrative expenses will continue to decrease as a percentage of
net sales.
Depreciation and amortization expense increased approximately $148,000, or
59.9%, for the fiscal year ended December 28, 1996, compared with the
corresponding period last year. Such increases were primarily the result of an
increase in the asset base due to the opening of new stores and significant
additions to the Company's management information system, partially offset by an
approximate $41,000 decrease due to the closing of the Columbus store. As a
percentage of net sales, depreciation and amortization expense increased to 2.1%
for the fiscal year ended December 28, 1996, from 1.9% for the corresponding
period last year.
Pretax income increased 172% to approximately $1,052,000 in fiscal 1996 from
approximately $387,000 in fiscal 1995. The Company's effective tax rate was 0%
and 26.6% for the fiscal years ended December 30, 1995 and December 28, 1996,
respectively. The Company recorded no income tax expense in fiscal 1995,
primarily as a result of the utilization of net operating loss carryforwards and
a revision in the valuation allowance for deferred tax assets. In fiscal 1996,
the low effective income tax rate was primarily due to the elimination of the
remaining valuation allowance for deferred tax assets. The Company anticipates
its effective income tax rate will increase to approximate statutory income tax
rates in future years.
12
<PAGE>
As a result of the foregoing, the Company recorded net income of approximately
$772,000 for the fiscal year ended December 28, 1996, compared with net income
of approximately $387,000 for the corresponding period last year. As a
percentage of net sales, net income increased to 4.1% for fiscal 1996, from 3.0%
for fiscal 1995.
Liquidity and Capital Resources
The Company's primary uses of cash have been for the purchase of merchandise
inventories, the financing of new store openings, an acquisition and capital
expenditures.
For the fiscal year ended December 28, 1996, net cash used in operating
activities was approximately $946,000 compared with net cash provided by
operating activities of approximately $347,000 for the corresponding period last
year. The increase in net cash used in operating activities primarily results
from an increase in cash used for the purchase of merchandise inventories for
new stores opened in the period.
On August 4, 1996, 1,226,169 (or 98.5%) of the Company's 1,245,000 outstanding
warrants to purchase the Company's common stock at $5.00 per share were
exercised. Net proceeds were approximately $5,580,000. Net proceeds, after
repayment of promissory notes to management, are used to fund the costs of
opening new stores and to provide working capital.
In addition, in May 1996 the Company entered into a $3,000,000 revolving line of
credit with Bank One, Texas which was subsequently increased to $8 million in
March, 1997. The line of credit will be used to provide a source of additional
liquidity to manage cash flow and provide capital for expansion. As of December
28, 1996, there was no amount outstanding on the revolving line of credit.
As of December 28, 1996, the Company's capital lease obligations consisted of
approximately $426,000 payable under capital lease obligations related to the
management information systems, fixtures and equipment. Of such debt
obligations, approximately $129,000 under the fixtures and equipment financing
arrangements are payable during 1997.
The Company opened eleven new stores in 1996 and acquired one existing store.
The Company intends to finance anticipated capital expenditures, working capital
needs and debt obligations for the foreseeable future from net proceeds from the
warrant exercise, cash from the Company's operating activities, landlord
allowances, the available increased line of credit, possible fixtures and
equipment or inventory financing and trade credit.
ITEM 7. Financial Statements
The Company's Consolidated Balance Sheet as of December 28, 1996 and the
Consolidated Statements of Operations, Stockholders' Equity and Cash Flows for
the years ended December 30, 1995 and December 28, 1996, together with the notes
thereto and the report of the Company's independent auditors thereon are
included as a separate section of this report which begins on page F-1.
ITEM 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosures
None
13
<PAGE>
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16 (a) of the Exchange Act.
The following table sets forth certain information concerning the directors,
executive officers and other key employees of the Company:
Name Age Position
---- --- --------
James H. Levi 57 Director, Chairman of the Board, President
and Chief Executive Officer
Michael D. Glazer 46 Vice President - Real Estate
Stanley R. Herndon 41 Vice President - Buying
James L. Llewellyn 37 Vice President - Sales
Cheryl A. Taylor 28 Vice President - Finance and Administration
(principal financial and accounting officer)
Joel S. Pollack 57 Director
John J. Schultz 60 Director
Charles M. Tureen 66 Director
Robert M. Warner 76 Director
Each of the executive officers, other than Mr. Levi, is a full time employee of
the Company. In accordance with his employment agreement, Mr. Levi agreed to
devote such time to the business and affairs of the Company as is reasonable and
necessary. It is Mr. Levi's intention to devote at least 50% of the customary
work week to the Company's business for the foreseeable future. The non-employee
directors of the Company devote such time and attention to the affairs of the
Company as is reasonable and necessary. Set forth below are descriptions of the
backgrounds of the executive officers and directors of the Company.
James H. Levi has been the Chairman of the Board of Directors, President and
Chief Executive Officer and a Director of the Company since its organization in
1985. Since 1992, Mr. Levi has also been President of Levi Company, a real
estate and venture investing company and is involved in a number of investment
and other activities. In 1987, he co-founded and, until 1992, served as
President of Value Properties, Inc., a real estate investment firm. For more
than fifteen years prior thereto, Mr. Levi was President of Oppenheimer
Properties, Inc. and a number of related entities and was Executive Vice
President and a member of the Executive Committee of Oppenheimer & Co., Inc.,
investment bankers. He has been responsible for the creation of a large number
of enterprises among which was the adaptive reuse of St. Louis Union Station,
the location of the original The Great Train Store. Mr. Levi developed The Great
Train Store concept and has been the principal owner of the Company and all of
its predecessors since inception. He is a graduate of Harvard College and
received his M.B.A. degree from Harvard Business School.
Michael D. Glazer has served the Company as Vice President - Real Estate since
1990. Prior to Mr. Llewellyn joining the Company in March 1994, Mr. Glazer also
had responsibility for store operations. In his present capacity with the
Company, Mr. Glazer has senior responsibility for site selection, store design
and construction and lease administration. Mr. Glazer joined the Company in 1987
as Store Manager of the St. Louis store and was promoted to Regional Manager in
1988 and to Vice President in 1990. From 1984 to 1987, Mr. Glazer was the
principal owner and chief executive officer of Record Caravan, Inc., an owner
and operator of a retail music store. He is a graduate of the University of
Oklahoma.
14
<PAGE>
Stanley R. Herndon has served the Company since 1987 and is currently the Vice
President - Buying. In this capacity, Mr. Herndon supervises the buying and
merchandising functions of the Company. Until the promotion of Ms. Taylor to
Vice President - Finance and Administration, Mr. Herndon served as the Company's
principal financial officer and also supervised the administrative and financial
reporting functions of the Company. Prior to joining the Company, Mr. Herndon
served in various positions as a certified public accountant and audit manager
with Arthur Andersen LLP, an international accounting and auditing firm, in
which positions he provided services to a number of companies, including Pearle
Health Services, Inc., then the nation's largest retail optical chain. Mr.
Herndon has an M.B.A. degree from Southern Methodist University from which he
also received a Bachelor's degree in accounting.
James L. Llewellyn joined the Company in March 1994 as its Vice President -
Sales. From 1985 until joining the Company, Mr. Llewellyn served as Senior
District Manager of Club International Menswear, a chain of retail men's stores.
Mr. Llewellyn graduated in June, 1982 from the University of New Brunswick, New
Brunswick, Canada. Mr. Llewellyn supervises store sales operations, advertising,
promotion and merchandising.
Cheryl A. Taylor currently serves the Company as its Vice President - Finance
and Administration. Ms. Taylor joined the Company in May 1994 as its Controller.
From 1989 until joining the Company, Ms. Taylor served as a certified public
accountant with Coopers & Lybrand LLP, an international accounting and auditing
firm. She received her Bachelor's of Business Administration degree in
accounting from Texas A & M University.
Joel S. Pollack has been a Director of the Company since August, 1994. For more
than the last five years, Mr. Pollack has been a private investor in Beverly
Hills, California. From 1977 to 1987, he was Executive Vice President and
Co-Head of Retail Sales at Oppenheimer & Co., Inc., and was employed in various
capacities at Hayden Stone and predecessor companies. Mr. Pollack graduated from
The Wharton School of the University of Pennsylvania in 1961.
John J. Schultz has been a Director of the Company since August, 1994. Mr.
Schultz has more than thirty-five years of experience in the retail industry and
is presently a consultant specializing in the retail area and serves as a
director of Big Smith Brands, Inc. and A.R. Accessories, Inc. Previously, Mr.
Schultz served as Executive Vice President and General Merchandise Manager for
Bloomingdale's Department Stores and Sanger Harris Department Stores, President
and Chief Executive Officer of B. Altman & Co., and President of the Retail
Services Division and Executive Director of the National Retail Federation. Mr.
Schultz is a graduate of Fairleigh Dickenson University in Madison, New Jersey,
Dartmouth Institute and the Federated Senior Management Institute.
Charles M. Tureen has been a Director of the Company since April, 1994. Mr.
Tureen was a member in the St. Louis, Missouri law firm of Gallop, Johnson &
Neuman, L.C., from July, 1990 until December, 1996, when he became of counsel to
the firm. Until June, 1990 and for a number of years prior thereto, he was a
principal in the St. Louis, Missouri law firm of Blumenfeld, Sandweiss, Marx,
Tureen, Ponfil, and Kaskowitz P.C.
15
<PAGE>
Robert M. Warner has been a Director of the Company since August, 1994. For more
than seven years, Mr. Warner has been a retail store management consultant whose
present clients include many retailers, large and small. He is presently a
director of Cherry & Webb, a 50 store women's specialty chain. Previously, Mr.
Warner served as President and Chief Executive Officer of Steinbach, Inc., a
$200 million department store chain; President and Chief Executive Officer of
K-G Retail, Inc., a $100 million men's clothing chain; Senior Vice President of
Macy's, Inc., where, among other positions, he served as the General Manager of
Macy's-Herald Square store, the largest store in the world. Mr. Warner has also
worked for a number of other retail companies as either chief executive officer,
director or consultant. Mr. Warner is a graduate of the University of Michigan
and received an M.B.A. from the Harvard Business School.
The Board of Directors of the Company consists of five members, each of whom
serve in such capacity for a three-year term or until his successor has been
elected and qualified, subject to earlier resignation, removal or death. The
number of directors comprising the Board of Directors may be increased or
decreased by resolution adopted by the affirmative vote of a majority of the
Board of Directors. The Company's Certificate of Incorporation (the
"Certificate") and Bylaws provide for three classes of directorships serving
staggered three-year terms such that approximately one-third of the directors
are elected at each annual meeting of stockholders. The term of Mr. Levi and Mr.
Warner will continue until the 1997 annual meeting, the term of Mr. Tureen will
continue until the 1998 annual meeting and the term of office of Mr. Pollack and
Mr. Schultz will continue until the 1999 annual meeting. The Company's officers
serve at the discretion of the Board of Directors, subject to effective
contractual arrangements.
The Board of Directors of the Company has established an Audit Committee
(presently consisting of Mr. Pollack, Mr. Warner and Mr. Schultz) to be
comprised of at least two non-employee directors which has the responsibility of
reviewing the scope of the audit and services provided by the Company's
independent auditors. The Audit Committee meets with the financial staff of the
Company to review accounting procedures and policies. The Board of Directors
also has established a Compensation Committee (presently consisting of Mr.
Tureen, Mr. Pollack and Mr. Warner) also to be comprised of at least two
non-employee directors which has been given the responsibility of setting and
administering the policies which govern the annual compensation of the Company's
directors and executive officers, as well as the Company's stock option and
other benefit plans. The Board of Directors has also established an Executive
Committee (presently consisting of Mr. Levi and Mr. Tureen) with the power to
act, if necessary, on a broad range of matters during the interim periods
between Board of Directors meetings.
Compliance with Section 16 (a) of the Exchange Act
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
the Company during its most recent fiscal year and Form 5 and amendments
thereto, or written representations that no Form 5 is required, furnished to the
Company, the Company believes that, other than as set forth in the next
sentence, each person required to file reports under Section 16(a) relative to
the Company's equity securities has done so on a timely basis. In August 1996,
Ms. Taylor and Messrs. Levi, Glazer, Herndon, Llewellyn, Pollack, Schultz,
Tureen, and Warner each filed a Form 5 with respect to the Company's fiscal year
ended December 30, 1995 reporting a single grant of options awarded in an exempt
transaction under Rule 16b-3.
16
<PAGE>
ITEM 10. Executive Compensation
The following table summarizes information concerning cash and non-cash
compensation paid to or accrued for the benefit of the Company's Chief Executive
Officer for all services rendered in all capacities to the Company. No other
officer of the Company earned compensation of more than $100,000 during any of
the three fiscal years ended December 28, 1996.
<TABLE>
Summary Compensation Table
<CAPTION>
Annual Compensation
Name and Principal Position Year Salary Bonus Other
- --------------------------- ---- ------ ----- -----
<S> <C> <C> <C> <C>
James H. Levi 1996 $ 135,000 $ $ -
Chairman of the Board, President 1995 125,000 - -
and Chief Executive Officer 1994 61,561(a) - -
<FN>
(a) Includes amounts paid under a consulting arrangement with The Great Train
Store Partners, L.P.
</FN>
</TABLE>
<TABLE>
Option / SAR Grants in Last Fiscal Year
Individual Grants
<CAPTION>
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name and Principal Position Granted (#) Fiscal Year ($/sh) Date
- --------------------------- ----------- ----------- ------ ----
<S> <C> <C> <C> <C>
James H. Levi 10,000 (a) 4.6% $ 6.19 3/2001
Chairman of the Board, President 15,000 (a) 6.9% $ 6.19 7/2001
and Chief Executive Officer
<FN>
(a) 25% become exercisable annually commencing with the second anniversary of
the grant date
</FN>
</TABLE>
17
<PAGE>
<TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year and
FY-End Options/SAR Values
<CAPTION>
Value of
Number Of Unexercised Unexercised
Shares Securities In-The-Money
Acquired Underlying Options/SARs Options/SARs At
On Value At FY-End (#) FY-End ($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- ---- --- --- ------------- -------------
<S> <C> <C> <C> <C>
James H. Lev - - 4,250/42,750 $23,375/$139,425
</TABLE>
Director Compensation
The Company pays each non-employee director of the Company $750 in cash for each
Board meeting and reimburses all directors for out-of-pocket expenses incurred
in connection with their attendance at Board meetings. The Company has the
option to pay these directors in that number of shares of Common Stock
determined by reference to the fair market value of the Common Stock on the
meeting date. However, all payments during 1995 and 1996 were made in cash. In
addition, pursuant to its 1994 Director's Stock Option Plan, the Company granted
to each non-employee director, on the date of his initial selection, options to
purchase 5,000 shares of Common Stock at an exercise price equal to the fair
market value of the Common Stock on the date of the selection. Such options will
become first exercisable on the first anniversary of the recipient's election as
a director.
During 1995, the 1994 Director's Stock Option Plan was amended to award an
additional 2,500 options to each non-employee Director and establish an annual
award of 2,500 options on the date of each subsequent annual meeting of the
stockholders of the Company at which each remains a director of the Company.
Such options will be at a price equal to the fair market value of the Common
Stock on the date of award.
Employment Arrangements with Executive Officers
The Company entered into an employment agreement effective April 12, 1994 with
James H. Levi. Under this agreement, which expires August 12, 1999, Mr. Levi has
agreed to continue to serve as Chairman of the Board, President and Chief
Executive Officer of the Company in exchange for annual base compensation of
$135,000, subject to annual adjustment by the Compensation Committee of the
Board of Directors. Prior to this arrangement, Mr. Levi was entitled to
compensation of $25,000 per annum pursuant to his consulting arrangement. Mr.
Levi has agreed to devote such time to the business and affairs of the Company
as is reasonable and necessary. It is Mr. Levi's intention to devote at least
50% of the customary work week to the Company's business for the foreseeable
future. In addition, Mr. Levi is entitled to receive an annual bonus in such
amount as the Compensation Committee may determine in its sole discretion to be
appropriate. To date, Mr. Levi has not requested nor received any such bonuses.
In the event Mr. Levi's employment with the Company is terminated for reasons
other than for cause, permanent disability or death or there occurs a
significant reduction in the position, duties or responsibilities of Mr. Levi (a
"Termination") within two years following a "Change of Control" (as defined in
the agreement), Mr. Levi will be entitled to an additional bonus of 175% of the
Base Compensation payable in the fiscal year in which such termination occurs.
Mr. Levi has also agreed to refrain from disclosing information confidential to
the Company or engaging directly or indirectly, in the sale or distribution of
merchandise competitive with that sold by the Company during the term of his
employment agreement and for two years thereafter without the prior written
consent of the Company.
18
<PAGE>
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of February 28, 1997 with
respect to each person known to the Company to be the beneficial owner of more
than five percent of the Company's outstanding Common Stock, by each director,
by each executive officer named in the Summary Compensation Table above, and by
all directors and officers of the Company as a group. Each person named has sole
voting and investment power with respect to the shares indicated, except as
otherwise stated in the notes to the table.
<TABLE>
<CAPTION>
Beneficial Ownership
Number of
Shares Percent
------ -------
<S> <C> <C>
James H. Levi (a)..................................... 1,176,011 26.3%
The Great Train Store Company
85 Larchmont Avenue
Larchmont, New York 10538
Joel S. Pollack (b)................................... 87,838 2.0%
1150 Benedict Canyon Drive
Beverly Hills, California 90210
John J. Schultz (c)................................... 11,500 *
P.O. Box 1106 - Horseshoe Farm
Ridgefield, Connecticut 06877
Edmund H. Shea, Jr. (d)............................... 238,000 5.4%
655 Brea Canyon Road
Walnut, California 91789
Charles M. Tureen (e)................................. 37,012 *
101 South Hanley Road, Suite 1600
St. Louis, Missouri 63105
Robert M. Warner (f).................................. 2,500 *
1015 Nautilus Lane
Mamaroneck, New York 10543
All directors and officers as a group (9 persons).... 1,476,586 32.8%
<FN>
* Less than 1%
(a) Includes 10,000 shares of common stock owned by Mr. Levi's spouse. Mr. Levi
disclaims beneficial ownership of these shares. Also includes 75,000 shares of
Common Stock issuable upon the exercise of the warrants received by Mr. Levi
pursuant to the private placement of debt in 1994, which are beneficially owned
by Mr . Levi. Includes 4,250 shares of common stock issuable upon the exercise
of certain employee stock options which first became exercisable in May 1996.
Excludes 42,750 shares of Common Stock issuable upon the exercise of certain
employee stock options, some of which first became exercisable in May 1997.
19
<PAGE>
(b) Includes 80,338 shares held of record by The Pollack Family Trust dated May
13, 1986, of which Mr. Pollack and his spouse are co-trustees. Also includes
7,500 shares of Common Stock issuable upon the exercise of certain options
granted to Mr. Pollack. Excludes 2,500 shares of common stock issuable upon the
exercise of certain director stock options which first become exercisable in
July 1997.
(c) Includes 7,500 shares of Common Stock issuable upon the exercise of certain
options granted to Mr. Schultz. Excludes 2,500 shares of common stock issuable
upon the exercise of certain director stock options which first become
exercisable in July 1997.
(d) Includes 50,000 shares of common stock issuable upon the exercise of the
warrants received by Mr. Shea pursuant to the private placement of debt in 1994,
which are beneficially owned by Mr. Shea. All other shares are held of record by
E & M RP Trust, of which Mr. Shea is trustee.
(e) Includes 29,512 shares owned by "The Mary W. Tureen Revocable Trust" of
which Mary W. Tureen (spouse of Mr. Tureen) and Mr. Tureen are co-trustees.
Includes 7,500 shares of Common Stock issuable upon the exercise of certain
options granted to Mr. Tureen. Excludes 2,500 shares of common stock issuable
upon the exercise of certain director stock options which first become
exercisable in July 1997.
(f) Includes 2,500 shares of Common Stock issuable upon the exercise of certain
options granted to Mr. Warner. Excludes 2,500 shares of common stock issuable
upon the exercise of certain director stock options which first become
exercisable in July 1997.
</FN>
</TABLE>
ITEM 12. Certain Relationships and Related Transactions
From time to time, the Company has engaged in various transactions with its
directors, executive officers and other affiliated parties. The following
paragraphs summarize certain information concerning certain transactions and
relationships which have occurred during the last two years or which are
presently proposed.
From time to time, Messrs. Levi, Herndon and Glazer have loaned money to the
Company by advancing cash and/or deferring salary. Until April 12, 1994, such
indebtedness accrued interest at a rate of 15% per annum and was payable upon
demand. Effective April 12, 1994, Messrs. Levi, Herndon and Glazer agreed to
restructure the indebtedness owed to them by the Company. The indebtedness, as
restructured, provided for the payment of principle and interest, at a rate of
8% per annum, in quarterly installments. Such indebtedness was paid in full by
the Company.
The terms and conditions of the foregoing transactions were not negotiated on an
arm's-length basis. All future transactions between the Company and its
officers, directors, principal stockholders and affiliates are required to be
approved by a majority of the independent and disinterested outside directors
and must be on terms no less favorable to the Company than could be obtained
from unaffiliated third parties under similar circumstances.
ITEM 13. Exhibits and Reports on Form 8-K.
(a) Exhibits.
See Exhibit Index beginning on page F-14 of this Report.
(b) Reports on Form 8-K.
None
20
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
The Great Train Store Company:
We have audited the accompanying consolidated balance sheet of The Great Train
Store Company and subsidiaries as of December 28, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 30, 1995 and December 28, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Great Train
Store Company and subsidiaries as of December 28, 1996, and the results of their
operations and their cash flows for the years ended December 30, 1995 and
December 28, 1996, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Dallas, Texas
February 4, 1997, except as to note 3
which is as of March 19, 1997
F-1
<PAGE>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
December 28,
1996
-----------------
CURRENT ASSETS:
Cash and cash equivalents $ 4,864,539
Merchandise inventories 6,123,352
Accounts receivable and other current assets 1,123,634
-----------------
Total current assets 12,111,525
PROPERTY AND EQUIPMENT:
Store construction and leasehold improvements 3,374,593
Furniture, fixtures, and equipment 1,679,349
-----------------
5,053,942
Less accumulated depreciation and amortization (1,381,674)
-----------------
Property and equipment, net 3,672,268
DEFERRED TAXES 194,727
OTHER ASSETS, net 208,254
-----------------
Total assets $ 16,186,774
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 3,579,354
Sales taxes payable 404,634
Income taxes payable 301,601
Current portion of capital lease obligations 128,848
-----------------
Total current liabilities 4,414,437
CAPITAL LEASE OBLIGATIONS, net of current portion 297,536
OTHER LIABILITIES 106,001
-----------------
Total liabilities 4,817,974
-----------------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock; $.01 par value; 2,000,000 shares
authorized; none issued -
Common stock; $.01 par value; 18,000,000 shares
authorized; 4,384,119 shares issued and
outstanding 43,841
Paid-in capital 10,198,175
Unearned compensation - restricted stock (4,125)
Retained earnings 1,130,909
-----------------
Total stockholders' equity 11,368,800
-----------------
Total liabilities and stockholders' equity $ 16,186,774
=================
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
<TABLE>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
For the Fiscal Year Ended
December 30, 1995 December 28, 1996
-----------------------------------------
<S> <C> <C>
NET SALES $ 12,815,883 $ 18,998,461
COST OF SALES 6,659,753 9,847,463
------------------ ------------------
Gross profit 6,156,130 9,150,998
------------------ ------------------
OPERATING EXPENSES:
Store operating expenses 2,431,166 3,681,528
Occupancy expenses 1,696,980 2,223,853
Selling, general and administrative
expenses 1,400,359 1,768,713
Depreciation and amortization 247,699 396,136
Provision for store closing (3,562) -
------------------ ------------------
Total operating expenses 5,772,642 8,070,230
------------------ ------------------
OPERATING INCOME 383,488 1,080,768
------------------ ------------------
OTHER INCOME (EXPENSE):
Interest expense (124,235) (129,500)
Interest income 108,544 84,960
Other income 18,753 15,301
------------------ ------------------
Total other income
(expense), net 3,062 (29,239)
------------------ ------------------
INCOME BEFORE INCOME TAXES 386,550 1,051,529
PROVISION FOR INCOME TAXES
- 279,301
------------------ ------------------
NET INCOME $ 386,550 $ 772,228
================== ==================
NET INCOME PER SHARE $ 0.12 $ 0.20
================== ==================
WEIGHTED AVERAGE SHARES
OUTSTANDING 3,145,000 3,883,796
================== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
<TABLE>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Unearned Retained
Compensation Earnings
-Restricted (Accumulated
Shares Amount Capital Stock Deficit) Total
------------ ------------ ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 3,145,000 $ 31,450 $ 4,446,947 $ (22,664) $ (27,869) $ 4,427,864
Net income - - - - 386,550 386,550
Amortization of unearned compensation
-restricted stock - - - 16,999 - 16,999
------------ ------------ ------------- ------------ ------------ -------------
BALANCE, December 30, 1995 3,145,000 31,450 4,446,947 (5,665) 358,681 4,831,413
Net income - - - - 772,228 772,228
Net proceeds from warrant exercise 1,226,169 12,262 5,567,725 - - 5,579,987
Exercise of stock options and
related tax benefits 11,950 119 59,111 - - 59,230
Adjustments associated with unearned
compensation - restricted stock 1,000 10 124,392 1,540 - 125,942
------------ ------------ ------------- ------------ ------------ -------------
BALANCE, December 28, 1996 4,384,119 $ 43,841 $10,198,175 $ (4,125) $ 1,130,909 $11,368,800
============ ============ ============= ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
<TABLE>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For the Fiscal Year Ended
December 30, 1995 December 28, 1996
------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 386,550 $ 772,228
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 247,699 396,136
Deferred income taxes (44,534) (150,193)
Provision for store closing (8,351) -
Amortization of unearned compensation - restricted
stock 16,999 7,040
Loss on retirement of property and equipment 20,274 -
Changes in assets and liabilities:
Merchandise inventories (885,235) (3,240,392)
Accounts receivable and other current assets (127,318) (900,995)
Other assets (29,806) (122,491)
Accounts payable and accrued liabilities 672,236 1,868,066
Sales taxes payable 54,415 167,841
Income taxes payable 44,534 257,067
------------ ------------
Net cash provided by (used in) operating
activities 347,463 (945,693)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 7,000 -
Proceeds from sale of marketable securities 1,948,860 -
Purchases of property and equipment (707,528) (2,275,065)
------------ -------------
Net cash provided by (used in) investing
activities 1,248,332 (2,275,065)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock options exercised - 36,352
Tax benefit of stock option exercises - 141,780
Net proceeds from warrant exercise - 5,579,987
Proceeds from notes payable 25,000 144,269
Repayment of notes payable and capital leases (367,050) (1,054,789)
------------ -------------
Net cash provided by (used in) financing
activities (342,050) 4,847,599
------------ -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,253,745 1,626,841
CASH AND CASH EQUIVALENTS, beginning of year 1,983,953 3,237,698
------------ -------------
CASH AND CASH EQUIVALENTS, end of year $3,237,698 $4,864,539
============ =============
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Assets financed through capital lease obligations $ 302,179 $ 155,000
Interest paid $ 93,885 $ 187,444
Income taxes paid $ - $ 41,644
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation and Consolidation
The Great Train Store Company (the "Company") operates a chain of specialty
retail stores known as The Great Train Stores, which sell train-themed
merchandise including model trains, toys, books, video tapes, apparel, and
related merchandise. As of December 28, 1996, the Company operated thirty stores
in twenty-one states and the District of Columbia.
The Company's fiscal year is based on a 52/53 week retail calendar ending on the
Saturday closest to December 31. The consolidated financial statements present
the results of the Company and all of its subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all short-term investments with original maturities of
less than 90 days cash equivalents. The carrying value of these instruments
approximates market value due to their short maturities.
Merchandise Inventories
Merchandise inventories are stated at the lower of average cost or market.
Property and Equipment
Property and equipment are stated at cost. The costs of additions and
improvements which substantially extend the useful life of an asset are
capitalized. Repair and maintenance costs are charged to expense when incurred.
When assets are sold or otherwise disposed of, the estimated costs and related
accumulated depreciation or amortization are removed from the accounts, and any
resulting gain or loss is included in income or expense.
Depreciation of property and equipment, including assets held under capital
leases, is provided using the straight-line method based on the estimated useful
lives of the assets which generally range from three to five years. Leasehold
improvements and fixtures are amortized over the shorter of the estimated useful
life or the remaining lease term.
Effective December 31, 1995, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." This statement requires
that long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption of this statement had no effect on the consolidated
financial statements.
F-6
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Pre-Opening Costs
Store pre-opening costs are charged to expense in the period in which incurred.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense, net of vendor
reimbursements, was approximately $53,000 and $50,000, respectively during the
years ended December 30, 1995 and December 28, 1996.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Earnings Per Share
Earnings per share is computed by dividing net income by the weighted average
number of common shares and dilutive common share equivalents outstanding.
Common share equivalents were computed using the treasury stock method in 1996
and the modified treasury stock method in 1995. Under the modified treasury
stock method, all options and warrants are assumed to have been exercised and
the aggregate proceeds are applied first to repurchase up to 20% of the
Company's outstanding shares and second to reduce any borrowings and invest in
short term securities. Application of the modified treasury stock method was
antidilutive in 1995.
Stock Option Plan
The Company accounts for its stock option plan in accordance with the provisions
of Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees", and related interpretations. Compensation expense is
recorded on the date of grant only if the current market price of the underlying
stock exceeds the exercise price. Since the Company grants stock options with an
exercise price equal to the current market price of the stock on the grant date,
no compensation expense is recorded. On December 31, 1995, the Company adopted
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Under SFAS 123 the Company may elect to recognize
expense for stock-based compensation based on the fair value of the awards, or
continue to account for stock-based compensation under APB 25 and disclose in
the financial statements the effects of SFAS 123 as if the recognition
provisions were adopted. The Company has elected not to adopt the recognition
provision of SFAS 123 and will continue to account for stock-based compensation
under APB 25.
F-7
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. While
every effort has been made to ensure the integrity of these estimates, actual
results could differ from those estimates.
Prior Year Reclassifications
Prior year balances include certain reclassifications to conform to the current
year presentation.
2. WARRANT EXERCISE
On August 4, 1996, 1,226,169 (or 98.5%) of the Company's 1,245,000 outstanding
warrants to purchase the Company's common stock at $5.00 per share were
exercised. Net proceeds to the Company were approximately $5,580,000. The
Company used approximately $709,000 of the net proceeds to repay the 8%
promissory notes to management. In addition, the remaining net proceeds are
being used to fund the costs of opening new stores and provide working capital
for operations.
3. REVOLVING LINE OF CREDIT
In May 1996, the Company entered into a $3,000,000 revolving line of credit with
Bank One, Texas which was subsequently increased to $8,000,000 in March, 1997.
The line of credit has an initial contract period of two years and is secured by
certain assets of the Company, including inventory. Outstanding borrowings bear
interest at Bank One's base lending rate plus 1.0% and a commitment fee of 0.5%
is charged on the unused portion. The revolving credit facility provides a
source of additional liquidity to manage cash flow and provide capital for
expansion. As of December 28, 1996, there was no amount outstanding on the
revolving line of credit.
4. INCOME TAXES
Income tax expense consisted of the following:
December 30, 1995 December 28, 1996
----------------- -----------------
Federal income taxes - curre$t $ 44,534 $ 389,494
Federal income taxes - deferred (44,534) (150,193)
State income taxes - current - 40,000
-------- ----------
$ - $ 279,301
======== ==========
F-8
<PAGE>
INCOME TAXES - (Continued)
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34% to pretax income for the years ended December 30,
1995 and December 28, 1996, respectively, as a result of the following:
1995 1996
---- ----
Computed "expected" tax expense $ 131,427 $ 357,520
State income tax, net of federal tax benefit - 26,400
Change in the beginning-of-the-year balance of
the valuation allowance for deferred tax assets
allocated to income tax expense (44,534) (107,507)
Utilization of net operating loss carryforwards (87,221) -
Other 328 2,888
--------- -------
$ - $ 279,301
========= =======
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 28, 1996 are presented
below:
Deferred tax assets:
Deferred rent $ 179,433
Other 44,883
--------
Total deferred tax assets 224,316
Valuation allowance -
--------
Deferred tax assets 224,316
Deferred tax liabilities - property and equipment (29,589)
--------
Net deferred tax assets $ 194,727
========
The Company did not record a valuation allowance for deferred tax assets at
December 28, 1996. The net change in the total valuation allowance was a
decrease of $107,507 for the year ended December 28, 1996 and a decrease of
$131,755 for the year ended December 30, 1995. In assessing the realizibility of
deferred tax assets, management considers the carryback potential, the scheduled
reversal of deferred tax assets and liabilities, future taxable income and tax
planning strategies. Management believes that it is more likely than not the
Company will realize the benefits of these deductible differences at December
28, 1996.
F-9
<PAGE>
5. COMMITMENTS
Leases
The Company conducts its retail operations from leased locations with initial
lease terms ranging from five to twelve years. Certain store leases provide for
contingent rentals based on sales levels and require payment for all or part of
the applicable real estate taxes, common area maintenance, and certain other
allowable expenses. In addition to store lease space, the Company also leases
its central offices under a five year operating lease.
The Company records base rental expense using the straight-line method over the
life of the lease and, accordingly, has recorded a deferred liability of
approximately $528,000 at December 28, 1996, representing the excess of
straight-line rental expense over amounts paid.
Total rental expense under all noncancelable operating leases totaled
approximately $1,132,000 and $1,448,000 for the years ended December 30, 1995
and December 28, 1996, respectively. Included in these amounts is contingent
rent of approximately $240,000 and $224,000 for the years ended December 30,
1995 and December 28, 1996, respectively.
The Company has capital leases payable to a finance company which are secured by
certain property and equipment. These leases are payable in monthly installments
(together with interest) at rates ranging from 12.1% to 16.8%. During 1996, the
Company entered into capital leases in the amount of $155,000. At December 28,
1996, the gross amount of property and equipment and related accumulated
amortization recorded under capital leases were approximately $716,000 and
$279,000 respectively.
Scheduled future minimum lease payments under all lease commitments with initial
or noncancelable terms in excess of one year are as follows:
Operating Capital
--------- -------
1997 $1,931,868 $ 181,350
1998 1,882,713 122,312
1999 1,795,490 122,312
2000 1,698,768 100,430
2001 1,654,398 22,453
Thereafter 6,960,564 -
--------- ---------
Total minimum payments $15,923,801 $ 548,857
==========
Less interest 122,473
Less current portion 128,848
---------
Capital lease obligations,
net of current portion $ 297,536
=========
F-10
<PAGE>
6. STOCKHOLDERS' EQUITY:
The Company's authorized capital consists of 18,000,000 shares of common stock,
$.01 par value, and 2,000,000 shares of preferred stock, $.01 par value. The
Company's Board of Directors may establish one or more series of preferred stock
with terms, rights and preferences (including voting, dividend, liquidation,
conversion, and other rights) as it so determines. No preferred stock has been
issued.
As of December 28, 1996, the underwriter in the Company's initial public
offering has outstanding an option to purchase up to 120,000 shares of the
Company's common stock at $7.25 per share. The underwriter's option expires on
August 4, 1999.
In May 1994 the Company completed a private placement consisting of promissory
notes and warrants to purchase up to 187,500 shares of common stock at $4.50 per
share. The promissory notes were repaid with net proceeds from the Company's
initial public offering and the warrants expire in May 1999.
The Company's 1994 Incentive Compensation Plan provides for the granting of
restricted stock awards and incentive and nonqualified stock options. Options
are granted at the current market price on the date of grant and typically
terminate ten years from the date of grant. A portion of these options first
become exerciseable on the second anniversary of the date of grant and vest
ratably over a period of five years. Additionally, pursuant to the Company's
1994 Director Stock Option Plan, nonqualified stock options may be issued to
non-employee directors. Director's options become exercisable on the first
anniversary of the date of grant. The following summary sets forth the activity
under the plans:
<TABLE>
<CAPTION>
Incentive Director
Compensation Plan Stock Option Plan
----------------- -----------------
Weighted Weighted
Average Average
Options Exercise Price Options Exercise Price
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1994 120,900 $3.14 20,000 $3.38
Granted 50,100 $5.65 10,000 $5.63
Forfeited (16,300) $3.89 - -
-------- ------
Outstanding at December 30, 1995 154,700 $3.87 30,000 $4.13
Granted 216,600 $5.84 10,000 $5.63
Exercised (6,950) $3.07 (5,000) $3.00
Forfeited (16,300) $5.16 - -
------- ------
Outstanding at December 28, 1996 348,050 $5.05 35,000 $4.72
======= ======
Exercisable at December 28, 1996 19,000 $3.08 25,000 $4.35
======= ======
Reserved and available for grant at
December 28, 1996 105,000 10,000
======= ======
</TABLE>
At December 28, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $3.00 - $9.25 and 8.8
years for the Incentive Compensation Plan and $3.00 - $5.63 and 3.4 years for
the Director Stock Option Plan, respectively.
F-11
<PAGE>
6. STOCKHOLDERS' EQUITY - (Continued):
The per share weighted-average fair value of stock options granted during fiscal
1995 and fiscal 1996 was $3.57 in both years for the Incentive Compensation Plan
and $2.52 and $2.59 for the Director Stock Option Plan, respectively, on the
date of grant using the Black Scholes option-pricing model. The following
assumptions were used in the calculation:
<TABLE>
<CAPTION>
Incentive Compensation Plan Director Stock Option Plan
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Expected dividend yield - - - -
Risk-free interest rate 6.2% 6.4% 6.1% 6.9%
Expected life in years 10 10 5 5
Expected volatility 40% 40% 40% 40%
</TABLE>
The Company applies APB 25 in accounting for its Plan and, accordingly, no
compensation cost has been recognized for its stock options in the financial
statements. Had the Company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS 123, the Company's net income
would have been reduced to the pro forma amounts indicated below:
1995 1996
---- ----
Net income: As reported $386,550 $772,228
Pro forma $367,469 $687,928
Pro forma net income reflects only options granted in fiscal 1995 and fiscal
1996. Therefore, the full impact of calculating compensation cost for stock
options under SFAS 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of five years for the Incentive Compensation Plan and one year for the
Director's Stock Option Plan; and compensation cost for options granted prior to
January 1, 1995 is not considered.
F-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE GREAT TRAIN STORE COMPANY
3/24/97 /s/ Cheryl A. Taylor
- --------- -------------------------------
Date Cheryl A. Taylor
Vice President -
Finance and Administration
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
03/24/97 /s/ James H. Levi
- -------- -------------------------------
Date James H. Levi
President, Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
03/24/97 /s/ Cheryl A. Taylor
- ------- -------------------------------
Date Cheryl A. Taylor
Vice President -
Finance and Administration,
(Principal Financial and Accounting
Officer)
03/24/97 /s/ Joel S. Pollack
- -------- -------------------------------
Date Joel S. Pollack
Director
03/24/97 /s/ John J. Schultz
- -------- -------------------------------
Date John J. Schultz
Director
03/24/97 /s/ Charles M. Tureen
- -------- -------------------------------
Date Charles M. Tureen
Director
03/24/97 /s/ Robert M. Warner
- -------- -------------------------------
Date Robert M. Warner
Director
F-13
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page
- ------ ----------- ----
3.1* Certificate of Incorporation of the Registrant....................
3.2* Bylaws of the Registrant..........................................
4.1* Form of Stock Certificate.........................................
4.3* Form of Bridge Warrants...........................................
4.4* Form of Underwriter's Option......................................
10.1* The Great Train Store Company 1994 Incentive Compensation Plan....
10.2* The Great Train Store Company 1994 Director Stock Option Plan.....
10.3* Form of Restricted Stock Agreement with Stanley R. Herndon .......
10.4* Form of Employment Agreement with James H. Levi...................
10.5* The Great Train Store Partners, L.P. Agreement of Limited
Partnership dated as of...........................................
September 1, 1990 as amended......................................
10.7* First Amendment to The Great Train Store Company 1994 Incentive
Compensation Plan.................................................
10.8* Second Amendment to The Great Train Store Company 1994 Incentive
Compensation Plan.................................................
10.9* First Amendment to The Great Train Store Company 1994 Director
Stock Option Plan.................................................
10.10 Third Amendment to The Great Train Store Company 1994 Incentive
Compensation Plan.................................................
10.11 Loan and Security Agreement dated June 7, 1996 with Bank One,
Texas NA..........................................................
10.12 First Amendment to Loan and Security Agreement with Bank One,
Texas NA..........................................................
11.1 Statement re: Computation of Per Share Earnings ..................
21.1* Subsidiaries of the Registrant....................................
23.1 Independent Auditors' Consent.....................................
* Incorporated by reference to Registration Statement on Form SB-2 (commission
file no.33-79554) first filed on June 1, 1994
F-14
THIRD AMENDMENT TO
THE GREAT TRAIN STORE COMPANY
1994 INCENTIVE COMPENSATION PLAN
WHEREAS, The Great Train Store Company (the "Company") has heretofore
adopted, and subsequently amended, The Great Train Store Company 1994 Incentive
Compensation Plan (the "Plan"), under which Plan an aggregate of 460,000 shares
of the Company's common stock, $.01 par value per share (the "Common Stock") may
be awarded subject to forfeiture or may be issued upon the exercise of incentive
and nonqualified stock options granted pursuant to and in accordance with the
terms of the Plan;
WHEREAS, the Company has heretofore granted options to eligible
individuals under the Plan to purchase 153,700 shares of Common Stock issuable
under the Plan; and
WHEREAS, in order to provide additional incentive to certain persons
engaged by the Company to promote the long-term interests of the company, the
Board of Directors of the Company has authorized the amendment of the Plan to
extend the description of those persons eligible to receive awards under the
Plan to include consultants, advisors and other persons who renders similar
services to the Company on a regular basis;
NOW, THEREFORE, the Plan be and hereby is amended as follows:
A. Article I of the Plan is hereby deleted in its entirety, and the
following substituted in lieu thereof to constitute said Article I from and
after the effectiveness of this Amendment:
I. Purpose of the Plan
The Great Train Store Company 1994 Incentive Compensation Plan (the
"Plan") is intended to provide a means whereby certain key employees,
consultants, advisors and other persons who render similar services to The Great
Train Store Company, a Delaware corporation (the "Company") on a regular basis,
may develop a sense of proprietorship and personal involvement in the
development and financial success of the Company and its subsidiaries, and to
encourage them to remain with and devote their best efforts to the business of
the Company and its subsidiaries, thereby advancing the interests of the Company
and its stockholders. Accordingly, the Company may grant to eligible
participants awards ("Awards") in the form of stock options ("Options") with
respect to shares of the Company's common stock, par value $0.01 per share (the
"Stock") and in the form of shares of Stock which are subject to certain
restrictions and possible forfeiture ("Restricted Stock"). Options may either be
nonqualified stock options ("Nonqualified Options") or options ("Incentive Stock
Options") which are intended to qualify as incentive stock options under Section
422 of the Internal Revenue Code of 1986, as amended (the "Code").
<PAGE>
Notwithstanding the foregoing, participants who are not also key employees of
the Company shall not be entitled to receive awards in the form of Incentive
Stock Options or Restricted Stock.
B. The reference in the first sentence of the first paragraph of
Article II of the Plan to "disinterested persons" is hereby deleted in its
entirety, and the term "non-employee director" as defined in paragraph (b)(3)(i)
of Rule 16b-3 is substituted in lieu thereof from and after the effectiveness of
this Amendment.
C. The fourth paragraph of Article II of the Plan is hereby deleted in
its entirety, and the following substituted in lieu thereof to constitute said
paragraph from and after the effectiveness of this Amendment:
Only key employees, consultants, advisors and other persons who render
similar services to the Company and its subsidiaries shall be eligible to
receive Awards under the Plan. In granting Awards to a participant, the
Committee shall take into consideration the contribution the participant has
made or may make to the success of the Company or its subsidiaries and such
other considerations as the Committee shall determine. The Committee shall also
have the authority to consult with and receive recommendations from officers and
other employees of the Company and its subsidiaries with regard to these
matters. In no event shall any participant or his or her legal representatives,
heirs, legatees, distributees, or successors have any right to participate in
the Plan, except to such extent, if any, as the Committee shall determine.
D. Paragraph G. of Article IV of the Plan is hereby modified to include
the following phrase immediately before the first sentence of said paragraph:
"If the participant is an employee of the Company and...."
E. All references to "employee" in Articles VII, XI and XIII, shall be
and hereby are deleted and the term "participant" substituted in lieu thereof.
IN WITNESS WHEREOF, this Amendment is dated as of the 22th day of
August, 1996.
By: /s/ James H. Levi
James H. Levi
Chairman of the Board, President
and Chief Executive Officer
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT ("Agreement") is made and entered into
as of the day of acceptance by and between the DEBTOR GROUP and BANK ONE, TEXAS,
NATIONAL ASSOCIATION:
W I T N E S S E T H
1. Definitions. The following definitions shall apply:
(a) "Affiliate" shall mean any individual or entity directly
or indirectly controlling, controlled by, or under common control with,
or otherwise related to any member of the Debtor Group or any Obligated
Party and shall include but not be limited to any partnership, joint
venture, joint stock company, corporation, parent company or subsidiary
or other company or person in which any Obligated Party or any person
related to any Obligated Party by blood, adoption or marriage no more
remotely than two degrees of relationship shall own, directly or
indirectly, of record or beneficially, or hold, directly or indirectly,
the power to control the vote of, more than 10% of the voting stock of,
or other equity interest in, such entity.
(b) "Bank" shall mean BANK ONE, TEXAS, NATIONAL ASSOCIATION,
of Dallas, Texas, whose mailing address is 1717 Main Street, Dallas,
Texas 75201.
(c) "Borrower" shall mean The Great Train Store Partners,
L.P., a limited partnership organized and existing under the laws of
the State of Missouri, whose chief executive office is located at
141800 Dallas Parkway, Suite 618, Dallas, Texas 75240.
(d) "Borrowing Base" shall mean, as of any date of
determination, the lesser of (i) $3,000,000, or (ii) the sum of (1) the
product of (A) the Inventory Advance Rate, and (B) Borrower's Eligible
Inventory, less (2) the Reserve, and less (3) the Letter of Credit
Exposure, all determined as of such date of determination.
(e) "Business Day" shall mean any calendar day except
Saturday, Sunday and those legal public holidays specified in 5 U.S.C.
ss.6103(a), as may be amended from time to time.
Page 1
<PAGE>
(f) "Code" shall mean the Uniform Commercial Code as in effect
in the State of Texas on the date of this Agreement or as it may
hereafter be amended from time to time.
(g) "Collateral" shall mean all that certain property
described in Addendum II attached hereto and incorporated herein by
reference; provided, however, the property described in Schedule 10 (g)
shall be subject to the liens described in Schedule 10 (g) securing the
indebtedness described in such schedule.
(h) "Company" shall mean The Great Train Store Company, a
Delaware corporation.
(i) "Contract Rate" shall mean a rate calculated on the basis
of actual days elapsed but computed as if each year consisted of 360
days, equal to the sum of (i) the Base Rate (the "Base Rate") of
interest as established from time to time by Bank as its commercial
base rate of interest publicly announced from time to time (which may
not be the lowest, best or most favorable rate of interest which Bank
may charge on loans to its customers), plus (ii) one and one-half
percent (1.50%) per annum.
(j) "Current Ratio" shall mean the ratio of Company's
consolidated current assets to its consolidated current liabilities
(including any amounts funded under the Revolving Loans) determined in
accordance with GAAP.
(k) "Debtor Group" shall mean Company, GTS Partner, Inc., GTS
Limited Partner, Inc. and Borrower, jointly, severally, collectively
and individually.
(l) "Default" shall mean any of the events specified in
Section 14, regardless of whether there shall have occurred any passage
of time or giving of notice or both that would be necessary in order to
constitute such event an Event of Default.
(m) "Default Rate" shall mean at the time in question a per
annum rate equal to the lesser of (i) the Base Rate then in effect plus
four percent (4.0%), or (ii) the Maximum Rate.
(n) "Distributions" shall mean, in respect of any corporation,
cash distributions or dividends or any other distributions of property
on, or in respect of, any class of capital stock of such corporation,
Page 2
<PAGE>
except for distributions made solely in shares of stock of the same
class, and means, in respect of any partnership or other unincorporated
entity, cash distributions or any other distributions of property on,
or in respect of, any capital or profits interest in such partnership
or other entity.
(o) "Eligible Inventory" shall mean, as of any date of
determination (the value determined at the lower of cost or market on a
first-in, first-out basis) of all inventory owned by and in the
possession of Borrower and located in the United States of America that
Secured Party, in its sole credit judgment, deems to be eligible for
borrowing purposes. Without limiting the generality of the foregoing,
unless otherwise agreed by Secured Party, the following is not Eligible
Inventory: (a) work-in-progress; (b) finished goods which do not meet
the specifications of the purchase order for such goods; (c) inventory
which Secured Party determines, in its sole discretion, to be
unacceptable for borrowing purposes due to age, quality, type,
category, category margin deterioration and/or quantity; (d) inventory
with respect to which Secured Party does not have a valid, first
priority and fully perfected security interest; (e) inventory with
respect to which there exists any Lien in favor of any Person other
than Secured Party (unless such Lien has been subordinated upon terms
and conditions acceptable to Secured Party in its sole discretion); and
(f) inventory situated at a location for which there is no landlord
waiver or mortgagee waiver, as appropriate, in each instance in form
and substance acceptable to Secured Party in its sole discretion.
(p) "Fixed Charge Coverage Ratio" means, as of any date for
Company on a consolidated basis, the ratio of (i) Net Income, plus
depreciation and amortization expense, plus interest expense, plus
operating lease expense, to (ii) required principal payments made on
Funded Debt (excluding principal payments on the Revolving Loans but
including without limitation the principal portion of required payments
made on capital leases), plus operating lease expense, plus interest
expense, plus Unfunded Capital Expenditures.
(q) "Funded Debt" means, as of any date, the sum of the
following (without duplication) for Company on a consolidated basis:
(i) the aggregate of all indebtedness for borrowed money as of such
date, other than current liabilities, (ii) all indebtedness which would
be classified as "funded indebtedness" or "long-term indebtedness" (or
other similar classification) on a consolidated balance sheet of
Company prepared as of such date in accordance with GAAP, (iii) the
aggregate of all indebtedness outstanding under any revolving credit or
similar agreement providing for borrowing (and renewals and extensions
thereof) over a period of more than one year, notwithstanding the fact
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that any such indebtedness is created within one year of the expiration
of such agreement, and (iv) the amount of all obligations in respect of
capital leases booked in accordance with GAAP.
(r) "GAAP" means generally accepted accounting principles and
practices, consistently applied.
(s) "Guarantors" means Company, GTS Partner, Inc. and GTS
Limited Partner, Inc., each of whom will execute unconditional
guarantees of the Obligations.
(t) "Indemnified Persons" collectively means Secured Party and
its officers, directors, shareholders, employees, agents, attorneys and
representatives, and any Person owned or controlled by, or which owns
or controls or is under common control or is otherwise affiliated with,
Secured Party, and any other Person, if any, who acquires a portion of
the Collateral in any manner through Secured Party's exercise of rights
and remedies under the Loan Documents.
(u) "Inventory Advance Rate" shall mean the percentage of
Borrower's Eligible Inventory that may be used in determining the
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Borrowing Base. The Inventory Advance Rate for each type of Eligible
Inventory shall be the percentage set forth opposite such type below:
Type of Eligible Inventory: Inventory Advance Rate:
--------------------------- ----------------------
Model and toy trains 55%
Apparel, gifts, souvenirs, books
videos and other items 45%
Notwithstanding the foregoing, the advance rate for inventory
purchased with the proceeds of a commercial Letter of Credit shall not
exceed forty percent (40%) until such time as such inventory has been
delivered to Borrower and is located at one or more of the locations
described on Addendum IV.
(v) "Letter of Credit" means, individually, any commercial or
standby letter of credit issued by Secured Party pursuant hereto, and
any renewal or extension of any of the foregoing, and "Letters of
Credit" means all such letters of credit collectively.
(w) "Letter of Credit Exposure" means, as of any date, the
aggregate undrawn maximum face amount of all Letters of Credit
outstanding on such date.
(x) "Letter of Credit Obligations" means any obligations of
Borrower under this Agreement in connection with the Letters of Credit.
(y) "Loan Documents" shall mean this Agreement and all other
documents and instruments executed in connection herewith (including
without limitation, all notes, documents, agreements and instruments
evidencing, securing, governing, guaranteeing and/or pertaining to the
indebtedness created or arising hereunder and all documents and
agreements relating to any Letter of Credit), as the same may be
amended, restated, renewed, extended, or otherwise modified.
(z) "Maturity Date" shall mean April 30, 1998.
(aa) "Maximum Rate" shall mean at any particular time in
question the maximum rate of interest which, under applicable law
(including federal laws), may then be charged on the sums advanced
hereunder.
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(bb) "Net Income" shall mean, with respect to any period,
consolidated net earnings of the Company for such period, determined in
accordance with GAAP.
(cc) "Obligated Party" shall mean any party other than
Borrower who secures, guarantees and/or is otherwise obligated to pay
all or any portion of the Obligations.
(dd) "Obligations" shall mean (i) all loans or other advances
made by Secured Party to Borrower pursuant to this Agreement or
otherwise (including without limitation, all notes, documents,
agreements and instruments evidencing, securing, governing,
guaranteeing and/or pertaining to the indebtedness created or arising
hereunder and all documents and agreements relating to any Letter of
Credit); (ii) all future advances or other value, of whatever class or
for whatever purpose, at any time hereafter made or given by Secured
Party to Borrower, whether or not the advances or value are given
pursuant to commitment and whether or not Borrower is indebted to
Secured Party at the time of such advance; (iii) any and all other
debts, liabilities and duties of every kind and character of Borrower
to Secured Party, whether now or hereafter existing, and regardless of
whether such present or future debts, liabilities or duties are direct
or indirect, primary or secondary, joint, several, or joint and
several, fixed or contingent, and regardless of whether such present or
future debts, liabilities or duties may, prior to their acquisition by
Secured Party, be or have been payable to, or be or have been in favor
of, some other person or have been acquired by Secured Party in a
transaction with one other than Borrower (it being contemplated that
Secured Party may make such acquisitions from others), howsoever such
indebtedness shall arise or be incurred or evidenced; (iv) interest on
all of the debts, liabilities and duties set forth in (i), (ii), and
(iii) above; and (v) any and all renewals and extensions of such debts,
liabilities and duties set forth in (i), (ii), (iii) and (iv) above, or
any part thereof.
(ee) "Person" means an individual, corporation, partnership,
joint venture, association, governmental entity, court or any other
entity.
(ff) "Reserve" at any time shall mean (i) an amount from time
to time established by Secured Party in its sole discretion as a
reserve in reduction of the Borrowing Base in respect of contingencies
or other potential factors which, in the event they should occur, could
adversely affect or otherwise reduce the anticipated amount of proceeds
which could be realized upon liquidation of Eligible Inventory, plus
(ii) a shrinkage reserve equal to five percent (5%); provided, however
that Secured Party may, in its sole discretion, change the shrinkage
reserve by notice to Borrower. The "Reserve," if any from time to time,
does not represent cash funds.
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(gg) "Revolving Line" means $3,000,000.00.
(hh) "Revolving Loans" shall mean all loans and advances made
by Secured Party to Borrower pursuant to Section 2 herein.
(ii) "Secured Party" shall mean the Bank, and its successors
and assigns, including specifically, any party to whom the Bank, or its
successors or assigns, may assign its rights and interests under this
Agreement.
(jj) "Tangible Leverage Ratio" means the ratio of Total
Liabilities to Tangible Net Worth.
(kk) "Tangible Net Worth" means, as of any date, the total
shareholders' equity or partners' capital, as appropriate, (including
additional paid-in capital and retained earnings) which would appear on
a balance sheet of any Person prepared as of such date in accordance
with GAAP, less the aggregate book value of intangible assets shown on
such balance sheet, less amounts due from Affiliates.
(ll) "Total Liabilities" means, as of any date, consolidated
Funded Debt, plus consolidated current liabilities, plus all other
liabilities which would be reflected on a consolidated balance sheet
prepared in accordance with GAAP, of the Company.
(mm) "Unfunded Capital Expenditures" means, as of each fiscal
year end of Company, the amount of consolidated capital expenditures
for such year that are not financed by either (i) landlord contractual
adjustments and allowances, (ii) the proceeds of an equity infusion
used for capital expenditures during such period, or (iii) capital
leases or loans.
(nn) "Validity Guarantors" means James H. Levi and Cheryl
Taylor, each of whom shall execute validity guarantees.
All words and phrases used herein which are expressly defined in Section 1.201
or in Chapter 9 of the Code shall have the meaning provided for therein. Other
such words and phrases defined elsewhere in the Code shall have the meanings
specified therein except to the extent such meaning is inconsistent with a
definition in Section 1.201 or Chapter 9.
2. Revolving Loans.
(a) Revolving Loans. Subject to the terms and provisions hereof and
provided that no Default or Event of Default has occurred and is continuing and
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that the aggregate principal outstanding on the Revolving Loans does not then
exceed the Borrowing Base, Secured Party shall, from time to time, make loans to
Borrower secured by the Collateral and evidenced by one or more promissory notes
in the form of Exhibit A hereto. The maximum aggregate principal balance
outstanding at any one time under this Section 2 (a) shall not exceed the
Borrowing Base as then determined by the Bank in its sole discretion. Unless
accelerated in accordance with the terms hereof, all outstanding principal and
unpaid accrued interest constituting Revolving Loans shall be due and payable in
full on the Maturity Date.
(b) Letters of Credit. Subject to the terms hereof, Secured Party will,
from time to time, upon request by Borrower, issue Letters of Credit for the
account of Borrower provided that (i) the Letter of Credit Exposure at any time
(including the amount of the requested Letter of Credit) does not exceed
$500,000.00, (ii) Borrower would be entitled to an advance under Section 2(a) in
the amount of the requested Letter of Credit, (iii) the Letter of Credit is for
the importation of inventory by Borrower, and (iv) any Letter of Credit issued
hereunder shall terminate on or before the Maturity Date. As a condition to the
issuance of any Letter of Credit, Borrower shall execute and deliver to Secured
Party its customary application and agreement for Letter of Credit and shall pay
to Secured Party, in addition to clerical issuance and transaction costs charged
by Secured Party, a Letter of Credit fee as provided therein, in an amount equal
to one sixth (1/6) of one percent (1%) per month of the unfunded face amount
thereof. Each Letter of Credit and each application and agreement for Letter of
Credit shall be issued in form satisfactory to Secured Party. The amount, if
any, from time to time funded by Secured Party for the account of Borrower under
any Letter of Credit shall be reimbursed and paid by Borrower to Secured Party
on demand, or, at Secured Party's option, charged to Borrower as a Revolving
Loan, whether or not Borrower would be entitled to an advance for such amount
pursuant to Section 2(a).
3. Security Interest. As security for all Obligations, Borrower, for
value received, hereby transfers and assigns, and grants to Secured Party a
continuing security interest in, all of Borrower's right, title and interest in
and to the Collateral, whether now owned or hereafter acquired. Secured Party
may hold for security any property, securities, guaranties or monies of Borrower
which may at any time come into the possession of Secured Party and may apply
same or the proceeds thereof to payment of any Obligations then due, as the
Secured Party shall elect. To the extent that a security interest in the
inventory and/or the equipment of Borrower is granted to Secured Party
hereunder, such security interest shall continue through all stages of
manufacture and shall, without further act, attach to the accounts or other
proceeds resulting from the sale or other disposition thereof and to all such
Collateral as may be returned to Borrower by its account debtors. The
designation of proceeds does not authorize Borrower to sell, transfer or
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otherwise convey any of the Collateral except finished goods inventory intended
for sale in the ordinary course of Borrower's business.
4. Interest. (a) Contract Rate. Borrower agrees to pay, in addition to
all other amounts payable hereunder, interest on the principal amount of all
sums now or hereafter loaned or advanced by Secured Party to Borrower hereunder,
irrespective of whether such indebtedness of Borrower to Secured Party be
evidenced by promissory notes, drafts, acceptances or otherwise, at a
fluctuating rate per annum from the date any such indebtedness is created in
favor of Secured Party until maturity, which shall from day to day be equal to
the lesser of (a) the Maximum Rate, or (b) the Contract Rate, each change in the
rate to be charged hereunder to be effective without notice to Borrower on the
effective date of each change in the Maximum Rate or the Base Rate, as the case
may be; provided, however, that if at any time the Contract Rate shall exceed
the Maximum Rate, thereby causing the interest on the Revolving Loans to be
limited to the Maximum Rate, then any subsequent reduction in the Contract Rate
shall not reduce the rate of interest on the Revolving Loans below the Maximum
Rate until the total amount of interest accrued on the Revolving Loans equals
the amount of interest which would have accrued thereon if the Contract Rate had
at all times been in effect.
(b) General. If applicable law ceases to provide for such a maximum
rate of interest, the Maximum Rate shall be equal to eighteen percent (18%) per
annum. Interest accrued hereunder shall be payable monthly on the first day of
each calendar month. To the extent that any interest due by Borrower is not paid
on the first day of each month, Secured Party may, at its option, add such
accrued interest to the principal indebtedness due by Borrower under the
Revolving Loans. After the occurrence and during the continuance of an Event of
Default, the outstanding principal balance of the Revolving Loans shall bear
interest at a rate of interest equal to the Default Rate. Notwithstanding any
provisions contained iuments, the Secured Party shall never be entitled to
receive, collect or apply, as interest on the indebtedness arising hereunder,
any amount in excess of the Maximum Rate and, in the event the Secured Party
ever receives, collects or applies as interest any such excess, such amount
which could be excessive interest shall be applied to the reduction of the
unpaid principal balance of the indebtedness arising hereunder, and, if the
principal balance of such indebtedness is paid in full, any remaining excess
shall forthwith be paid to the Borrower. In determining whether or not the
interest paid or payable under any specific contingency exceeds the Maximum
Rate, Borrower and the Secured Party shall, to the maximum extent permitted
under applicable law, (i) characterize any non-principal payment as a standby
fee, commitment fee, prepayment charge, delinquency charge or reimbursement for
a third party expense, (ii) exclude voluntary prepayments and the effect
thereof, and (iii) amortize, prorate, allocate and spread in equal parts
throughout the entire period during which the indebtedness was outstanding the
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total amount of interest at any time contracted for, charged or received.
Subject to the terms of this section, all non-credit card inventory sales
proceeds received by Secured Party in payment of the Obligations shall be
subject to a clearance period of two (2) Business Days.
5. Conditions to Closing. Prior to or simultaneous with the execution
and delivery hereof and as conditions precedent to the obligation of Bank to
make any loan hereunder, Debtor Group shall deliver, or cause to be delivered,
to Bank, the following, all in form and substance satisfactory to Bank and its
counsel or the following shall be fulfilled to the satisfaction of Bank, as the
case may be:
(a) A Revolving Loan note in the form of Exhibit A executed by
Borrower.
(b) Unconditional guaranties of all Obligations executed by
the Guarantors and collateral validity guarantees executed by the
Validity Guarantors.
(c) An opinion of legal counsel for the Debtor Group
satisfactorily addressing such matters as may be required by Bank and
its counsel.
(d) A copy of the partnership agreement, and all amendments
thereto, forming Borrower accompanied by a certificate of limited
partnership for Borrower duly filed in the state of Borrower's
formation together with a certificate of the Secretary of State of such
state bearing a date no more than thirty (30) days prior to the date
hereof, to the effect that Borrower is a partnership, validly existing
in such state.
(e) A copy of the articles of incorporation, and all
amendments thereto, of each member of the Debtor Group (other than
Borrower), accompanied by the certificate of the Secretary of State of
the state of incorporation of such member of the Debtor Group bearing a
date no more than thirty (30) days prior to the date hereof, to the
effect that each such copy is correct and complete and that such member
of the Debtor Group is a corporation duly incorporated and validly
existing in such state, and certified by the corporate secretary or
assistant secretary of such member of the Debtor Group dated the date
hereof, as being correct and complete as of the date hereof.
(f) A copy of the bylaws, and all amendments thereto, of each
member of the Debtor Group (other than Borrower) accompanied by a
certificate from such Person's corporate secretary or assistant
secretary, dated the date hereof, to the effect that such copy is
correct and complete as of the date hereof.
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(g) Certification of incumbency of officers of each member of
the Debtor Group (other than Borrower) executed by such Person's
president or vice president and corporate secretary or assistant
secretary, as of the date hereof, certifying the name and signature of
each such officer.
(h) A copy of corporate resolutions of each member of the
Debtor Group approving this Agreement, authorizing the transactions
contemplated hereby, and authorizing and directing a named officer or
officers of each member of the Debtor Group to sign and deliver all
Loan Documents to be executed by such Person (or by such Person on
behalf of Borrower), duly adopted by such Person's board of directors,
accompanied by the certificate of the corporate secretary, dated the
date hereof, that such copy is a true and complete copy of resolutions
duly adopted by the board of directors, and that such resolutions have
not been amended, modified, or revoked in any respect and are in full
force and effect as of the date hereof.
(i) All financing statements required by Secured Party in
connection with perfection of Secured Party's security interests in the
Collateral and all termination statements and other amendments to
financing statements required by Secured Party to make Secured Party's
security interest in the Collateral a first priority security interest.
(j) Evidence of insurance in compliance with the requirements
of Section 11(g) and such loss payable endorsements as may be required
by Secured Party.
(k) Executed landlord's waivers and consents for each location
leased by Borrower to the extent reasonably obtainable.
(l) Receipt and satisfactory review by Secured Party of an
acceptable orderly liquidation value analysis of the inventory,
machinery, equipment, furniture, and fixtures of Borrower, completed by
an analyst acceptable to Secured Party.
(m) Borrower shall have implemented administrative procedures
reasonably satisfactory to Secured Party, including, but not limited
to, matters relating to financial statements, cash concentrations,
inventory summaries, customer and employee lists, collections,
borrowing base reporting, projections, and eligibility determination.
(n) Complete, current financial statements of each Guarantor
including cash flow and contingent liabilities.
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(o) A subordination agreement, in form and substance
acceptable to Secured Party in its sole discretion, executed by
Company, Stanley R. Herndon, Michael D. Glazer and James H. Levi
subordinating payment of all indebtedness and obligations of Borrower
to such Persons to the payment by Borrower of the Obligations.
(p) Such other agreements, instruments, certificates and
financing statements as Secured Party may reasonably request in order
to perfect or protect its interests and rights in the Collateral and
under the Loan Documents.
(q) There shall have occurred no material adverse change in
the financial condition of any member of the Debtor Group.
(r) There shall not have occurred any default or event of
default by any member of the Debtor Group on any of their obligations
to Secured party or to any third parties.
(s) No litigation or other legal proceedings shall be pending
or threatened against any member of the Debtor Group which Secured
Party determines, in its sole discretion, might materially and
adversely affect the financial condition of such Person. A list, and
brief explanation, of all currently pending litigation is set forth in
Schedule 5(s).
(t) A life insurance policy issued by The Travelers Insurance
Company for the benefit of Borrower insuring the life of James H. Levi
in the amount of $1,000,000.00.
(u) Collateral Assignment of Life Insurance Policy, executed
by Borrower and acknowledged by the issuer of the policies described in
clause (t) above.
(v) Security agreements and assignments executed by each
Guarantor granting to Secured Party a security interest in all property
described therein (including, without limitation, all agreements
between Borrower and such Persons) together with all financing
statements and other documents necessary or appropriate to perfect such
security interests and assignments.
(w) Evidence that the Company has converted to equity at least
$2,000,000.00 in intercompany indebtedness owed by Borrower to Company.
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(x) Evidence that immediately after closing and giving effect
to the initial advance under the Revolving Loan, there remains at least
$600,000.00 in availability under the Revolving Loan.
(y) A trademark collateral assignment and security agreement
executed by Company.
(z) UCC-3 partial releases that release all security interests
held by Stanley R. Herndon, Michael D. Glazer and James H. Levi except
for a subordinate security interest in furniture, fixtures and
equipment.
(aa) A copy of each license agreement, royalty agreement,
management agreement, fee agreement or other agreement between Borrower
and any member of the Debtor Group.
(bb) A payment account agreement, in form an substance
acceptable to Secured Party in its sole discretion, from each bank or
other financial institution where Borrower maintains any bank accounts
or with whom Borrower has a merchants service agreement relative to
credit cards accepted by Borrower.
6. Unused Facility Fee; Collateral Administration Fee. Borrower agrees
to pay to Secured Party an unused facility fee equal to one-half percent (0.50%)
per annum of the average daily unused portion of the Revolving Line in effect
from time to time, payable monthly in arrears, beginning July 1, 1996 and
continuing on the first (1st) day of each month thereafter during the term of
this Agreement and upon the termination hereof. Further, on the first (1st) day
of each calendar month Borrower shall pay to Secured Party a collateral
administration fee equal to $1,250.00 per month.
7. Assignment of Accounts. The execution and delivery of this Agreement
shall constitute, with respect to the accounts hereby assigned and pledged, an
agreement, representation and warranty by Borrower to Secured Party that, except
for the security interest of Secured Party therein:
(a) Borrower is the sole owner of and has full unrestricted
power and right to assign and pledge such accounts free from any lien,
security interest or encumbrance.
(b) Each account is in existence, unconditional and valid, and
arose from a bona fide outright sale of personal property usually sold
by Borrower, or for services usually performed by Borrower, in the
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ordinary course of its business, for liquidated amounts and maturing as
set forth on its face and that such personal property has been shipped
to respective account debtors or such services have been performed for
respective account debtors.
(c) No account is subject to any sale, assignment, claim or
security interest of any character and Borrower will not make any sale
or other assignment thereof or create any other security interest
therein.
(d) No account is subject to any claim for credit, deduction,
allowance or adjustment by an account debtor, or to any defense,
dispute, set-off or counterclaim, and there is no extension or
indulgence with respect thereto.
(e) Each account will be paid in full at maturity and if not
paid, Borrower will, upon demand, promptly pay the amount represented
to be owing thereon to Secured Party for application against the
Obligations in such manner as Secured Party may elect, or at Secured
Party's option such unpaid amount may be deducted from any payment then
or thereafter due from Secured Party to Borrower, and Secured Party may
retain such account as collateral for any of the Obligations.
8. Establishment of Lock Box. So long as this Agreement shall be in
effect or any Obligations shall be outstanding, Borrower agrees that, at the
request of Secured Party, all sums payable by any account debtor to Borrower in
payment or on account of any of Borrower's accounts shall be deposited in a
payment account (the "Payment Account") established pursuant to Secured Party's
standard form of Lock Box Agreement ("Lock Box Agreement") and maintained with
Secured Party in the name of Borrower, marked "Payment Account," over which
Secured Party alone has power of withdrawal. Such sums shall be deposited in the
form received, except for the endorsement of Borrower where necessary to permit
collection of items, which endorsement Borrower agrees to make, and which
Secured Party is also hereby authorized to make on Borrower's behalf. Borrower
hereby agrees, at the request of Secured Party, immediately upon receipt of
checks, drafts, cash and other remittances and payment of or on account of any
of Borrower's accounts, to immediately deposit all of the same into the Payment
Account. Borrower hereby also agrees, upon request by Secured Party, to notify
all of Borrower's present and future account debtors to send all amounts payable
to Borrower to the address indicated in the Lock Box Agreement. Secured Party is
authorized, empowered and directed to apply any and all funds in the Payment
Account toward the payment of the outstanding principal amount of, and interest
on, the Obligations then due in such order as Secured Party may determine in its
sole discretion, with any balance remaining after payment in full of the
Obligations to be deposited into an account maintained with Secured Party in the
name of Borrower, marked "Operating Account" and over which Borrower has the
right of withdrawal.
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9. Establishment of Blocked Account; Collection Account.
(a) Blocked Account. So long as this Agreement shall be in
effect or any of the Obligations shall be outstanding, Borrower agrees
that, at the request of Secured Party, all funds payable by any account
debtor to Borrower shall be deposited in special deposit accounts (each
a "Blocked Account") of Borrower set up in one or more banks acceptable
to Secured Party. In addition, all funds payable to Borrower under any
merchants service agreements with any such bank relating to credit
cards accepted by Borrower shall also be deposited into the Blocked
Account maintained at such bank. Each Blocked Account shall be
established pursuant to a tri-party agreement among Borrower, Secured
Party, and such bank (each a "Blocked Account Agreement"), in form and
substance satisfactory to Secured Party, which Blocked Account
Agreements shall include the following provisions:
(1) Agreement by Borrower that it has no power of
withdrawal over the funds in the Blocked Account;
(2) Agreement by the bank that it shall neither claim
nor exercise any right of off-set or banker's lien against the
funds in the Blocked Account;
(3) Waiver and release by the bank to Secured Party
of any right or claim which such bank may have in or to the
funds in the Blocked Account;
(4) Agreement by the bank to forward daily to Secured
Party by wire transfer (or by such other manner of transfer
acceptable to Secured Party) all funds in the Blocked Account
to the Collections Account (hereinafter defined) maintained by
Borrower with Secured Party;
(5) Assignment and pledge by Borrower to Secured
Party, as additional collateral security for the Obligations,
of all funds in each Blocked Account, and direction by
Borrower to each bank maintaining a Blocked Account (i) to
hold such funds as bailee for Secured Party, and (ii) to
distribute the funds daily to Secured Party in the manner
specified by Secured Party from time to time;
(6) Agreement by Borrower to pay directly to each
bank maintaining a Blocked Account all costs and expenses
associated with such Blocked Account; and
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(7) Agreement by Borrower that it may not
unilaterally terminate any Blocked Account or any Blocked
Account Agreement.
All funds forwarded to Secured Party from a Blocked Account pursuant to
this Section shall be deposited in the Collections Account and applied
as set forth in Section 9 (b). The provisions of this Section are in
addition to and not in limitation of the provisions of Section 8.
(b) Collection Account. So long as this Agreement shall be in
effect or any Obligations shall be outstanding, all funds in each
Blocked Account shall be wire transferred to (or transferred by other
manner of transfer acceptable to Secured Party), and all collections
and proceeds of Collateral shall be deposited in, a special account
(the "Collections Account") maintained with Secured Party in the name
of Borrower, marked "Collections Account," over which Secured Party
alone has power of withdrawal. Such sums shall be deposited in the form
received, except for the endorsement of Borrower where necessary to
permit collection of items, which endorsement Borrower agrees to make,
and which Secured Party is also hereby authorized to make on Borrower's
behalf. Borrower hereby agrees immediately upon receipt of checks,
drafts, cash and other remittances and payment of or on account of any
of Borrower's accounts, to immediately deposit all of the same into the
Collections Account. Borrower hereby also agrees, upon request by
Secured Party, to notify all of Borrower's present and future account
debtors to send to Secured Party any and all amounts payable to
Borrower for deposit in the Collections Account. Secured Party is
authorized, empowered and directed to apply any and all funds in the
Collections Account toward the payment of the outstanding principal
amount of, and interest on, the Obligations then due in such order as
Secured Party may determine in its sole discretion, with any balance
remaining after payment in full of the Obligations to be deposited into
an account maintained with Secured Party in the name of Borrower,
marked "Operating Account" and over which Borrower has the right of
withdrawal.
10. Other Representations and Warranties of Borrower. Each member of
the Debtor Group, jointly and severally, represents and warrants to Secured
Party that:
(a) Borrower is conducting, transacting, and carrying on its
business under the name shown above, or such other names as may be
specified in Addendum III attached hereto and incorporated herein by
reference, and is not engaged in business under any other name; and
Borrower's chief executive office is that set forth in Section 1(c)
above, at which office Borrower keeps, and will continue to keep, its
records concerning accounts. Borrower will promptly notify Secured
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Party in writing of any change in (i) the name of Borrower or any of
the names under which it is carrying on its business as specified on
Addendum III attached hereto, (ii) the address of Borrower, (iii)
Borrower's primary place of business, (iv) the location of the office
where records concerning accounts are kept, (v) the opening of any new
place of business, or (vi) the closing of any of its existing places of
business.
(b) Borrower is duly organized and validly existing under the
laws of the State of Missouri, is duly qualified and is in good
standing in each and every state in which it is doing business, and has
all the requisite power and authority to execute this Agreement and the
other Loan Documents to be executed by Borrower.
(c) The execution, delivery and performance of this Agreement
and all of the other Loan Documents by each member of the Debtor Group
have been duly authorized by all necessary corporate or partnership, as
the case may be, action by such member of the Debtor Group, and
constitute the legal, valid and binding obligations of each member of
the Debtor Group, enforceable in accordance with their respective
terms, except as limited by bankruptcy, insolvency or similar laws of
general application relating to the enforcement of creditors' rights
and except to the extent specific remedies may generally be limited by
equitable principles.
(d) The execution, delivery and performance of this Agreement
and the other Loan Documents, and the consummation of the transactions
contemplated hereby and thereby, do not (i) conflict with, result in a
violation of, or constitute a default under any provision of any member
of the Debtor Group's partnership agreement or Articles of
Incorporation or Bylaws, as appropriate, or any agreement or other
instrument binding upon such member of the Debtor Group, or any law,
governmental regulation, court decree, or order applicable to such
member of the Debtor Group, or (ii) require the consent, approval or
authorization of any third party.
(e) There are no actions, suits or proceedings, pending or, to
the knowledge of any member of the Debtor Group, threatened against or
affecting any member of the Debtor Group or the properties of any
member of the Debtor Group, before any court or governmental
department, commission or board, which, if determined adversely to such
member of the Debtor Group, would have a material adverse effect on the
financial condition, properties, or operations of such member of the
Debtor Group.
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(f) Borrower has not executed any other security agreement
currently affecting the Collateral or any financing statement regarding
the Collateral, and no financing statement executed by Borrower
regarding the Collateral is now on file.
(g) Except as otherwise set forth on Schedule 10 (g), all
Collateral is and will be owned by Borrower, free and clear of all
other liens, encumbrances, security interests or claims, shall be kept
at Borrower's address noted above and such other addresses as may be
listed in Addendum IV attached hereto and incorporated hereby by
reference, and Borrower shall not (without the prior written approval
of Secured Party) remove the Collateral therefrom except for the
purpose of sale or use in the ordinary course of business.
(h) Each member of the Debtor Group owns all of the assets
reflected on its most recent balance sheet delivered to Secured Party,
free and clear of all liens, security interests or other encumbrances,
except as disclosed in writing to Secured Party on Schedule 10(g).
(i) As of the date hereof, and after giving effect to this
Agreement and the completion of all other transactions contemplated by
Borrower at the time of its execution, (i) Borrower is and will be
solvent, (ii) the fair saleable value of Borrower's assets exceeds and
will continue to exceed Borrower's liabilities (both fixed and
contingent), (iii) Borrower is and will continue to be able to pay its
debts as they mature, and (iv) Borrower has and will have sufficient
capital to carry on its business and all businesses in which it is
about to engage.
(j) Each member of the Debtor Group has filed all federal,
state and local tax reports and returns required by any law or
regulation to be filed by it and has either duly paid all taxes, duties
and charges indicated due on the basis of such returns and reports, or
made adequate provision for the payment thereof, and the assessment of
any material amount of additional taxes in excess of those paid and
reported is not reasonably expected. There is no tax lien notice
against any member of the Debtor Group presently on file, judgment
entered against any member of the Debtor Group or levy on or attachment
of its property outstanding.
(k) Borrower (i) does not maintain or contribute to any
defined benefit pension plan ("Plan") under the Employee Retirement
Income Security Act of 1974, as amended from time to time ("ERISA"), or
(ii) is not in violation of any provisions of ERISA, or any other
applicable state or federal law with respect to any Plan that it
contributes to or maintains.
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(l) Except as disclosed in writing to Secured Party: (i)
Borrower is conducting Borrower's businesses in material compliance
with all applicable federal, state and local laws, statutes,
ordinances, rules, regulations, orders, determinations and court
decisions, including without limitation, those pertaining to health or
environmental matters such as the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended by the Superfund
Amendments and Reauthorization Act of 1986 (collectively, together with
any subsequent amendments, hereinafter called "CERCLA"), the Resource
Conservation and Recovery Act of 1976, as amended by the Used Oil
Recycling Act of 1980, the Solid Waste Disposal Act Amendments of 1980,
and the Hazardous Substance Waste Amendments of 1984 (collectively,
together with any subsequent amendments, hereinafter called "RCRA");
(ii) none of the operations of Borrower is the subject of a federal,
state or local investigation evaluating whether any material remedial
action is needed to respond to a release or disposal of any toxic or
hazardous substance or solid waste into the environment; (iii) Borrower
has not filed any notice under any federal, state or local law
indicating that Borrower is responsible for the release into the
environment, the disposal on any premises in which Borrower is
conducting its businesses or the improper storage, of any material
amount of any toxic or hazardous substance or solid waste or that any
such toxic or hazardous substance or solid waste has been released,
disposed of or is improperly stored, upon any premise on which Borrower
is conducting its businesses; and (iv) Borrower otherwise does not have
any known material contingent liability in connection with the release
into the environment, disposal or the improper storage, of any such
toxic or hazardous substance or solid waste. The terms "hazardous
substance" and "release", as used herein, shall have the meanings
specified in CERCLA, and the terms "solid waste" and "disposal", as
used herein, shall have the meanings specified in RCRA.
(m) There is no fact known to any executive officer of any
member of the Debtor Group that such Person has not disclosed to
Secured Party in writing which may result in any material adverse
change in such member of the Debtor Group's business, properties or
operations.
(n) No certificate or statement herewith or heretofore
delivered by any member of the Debtor Group to Secured Party in
connection herewith, or in connection with any transaction contemplated
hereby, contains any untrue statement of a material fact or fails to
state any material fact necessary to keep the statements contained
therein from being misleading.
(o) The representations, warranties, and covenants of each
member of the Debtor Group set forth in this Agreement are true and
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correct as of the time of the making of this Agreement, and each
request by Borrower for a loan or advance hereunder shall constitute,
without the necessity of a written certificate or agreement, a
representation and warranty by each member of the Debtor Group that, as
of the date of such request and at and as of the time of the making of
each loan or advance hereunder, (i) all of the representations and
warranties of each member of the Debtor Group contained in this
Agreement are true and correct, (ii) no material adverse change in any
member of the Debtor Group's financial condition since the effective
date of the most recent financial statements furnished to Secured Party
by such member of the Debtor Group shall have occurred and be
continuing, and (iii) no event has occurred and is continuing, or would
result from the requested advance, which constitutes an Event of
Default under this Agreement.
(p) Each financial statement of each member of the Debtor
Group previously supplied to Secured Party was prepared in accordance
with GAAP in effect on the date of such statements were prepared and
truly discloses and fairly presents such member of the Debtor Group's
financial condition as of the date of each statement, and there has
been no material adverse change in such financial condition or results
of operations of any member of the Debtor Group subsequent to March 31,
1996, which is the date of the most recent consolidated financial
statements of the Company supplied to Secured Party.
11. Affirmative Covenants. So long as this Agreement shall be in effect
or any of the Obligations shall be outstanding, the members of the Debtor Group,
jointly and severally, agree and covenant that, unless the Secured Party shall
otherwise consent in writing:
(a) Borrower shall promptly inform Secured Party of (i) any
and all material adverse changes in any member of the Debtor Group's
financial condition, and (ii) all litigation and claims affecting any
member of the Debtor Group which could materially affect the financial
condition of such member of the Debtor Group;
(b) Company and each member of the Debtor Group shall maintain
its books and records in accordance with GAAP, applied on a consistent
basis.
(c) Borrower shall execute and deliver to Secured Party such
financing statement or statements, in form satisfactory to Secured
Party, which Secured Party may at any time desire to file in order to
perfect and preserve its security interest in the Collateral and will
reimburse Secured Party for the costs of filing the same; and Borrower
will take any action and/or execute and deliver to Secured Party any
instrument, document, assignment or other writing which Secured Party
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in its reasonable discretion may deem necessary or appropriate (i) to
carry out the terms of this Agreement, (ii) to perfect Secured Party's
security interest in the Collateral, (iii) to comply with the Federal
Assignment of Claims Act, as amended, and/or (iv) to facilitate the
collection of Borrower's accounts. Further, each Guarantor shall
execute and deliver to Secured Party such financing statement or
statements, in form satisfactory to Secured Party, which Secured Party
may at any time desire to file in order to perfect and preserve secured
Party's security interest in the collateral in which such Guarantor has
granted a security interest to Secured Party and will reimburse Secured
Party for the costs of filing the same; and each Guarantor will take
any action and/or execute and deliver to Secured Party any instrument,
document, assignment or other writing which Secured Party in its sole
discretion may deem necessary or appropriate (i) to carry out the terms
of this Agreement, (ii) to perfect Secured Party's security interest in
such collateral, (iii) to comply with the Federal Assignment of Claims
Act, as amended, and/or (iv) to facilitate the collection of such
Person's accounts.
(d) Borrower shall, at its sole cost and expense, defend any
action which might affect Secured Party's security interest in or
Borrower's title to the Collateral.
(e) If sales of Collateral are made by Borrower in the
ordinary course of its business for cash, Borrower shall immediately
deliver to Secured Party the identical checks, cash or the forms of
payment which Borrower receives.
(f) Borrower shall perform, at its sole cost and expense, any
and all steps requested by Secured Party to protect Secured Party's
security interest in the Collateral, such as leasing warehouses to
Secured Party or its designee, placing and maintaining signs,
appointing custodians, executing and filing financing or continuation
statements in form and substance satisfactory to Secured Party,
maintaining stock records and transferring Collateral to warehouses. If
any Collateral is in the possession or control of any of Borrower's
agents or processors, Borrower shall notify such agent or processors of
Secured Party's security interest therein, and upon request instruct
them to hold all such Collateral for the account of Secured Party and
subject to Secured Party's instructions. A physical listing of all
Collateral, wherever located, shall be taken by Borrower whenever
requested by Secured Party, and a copy of each such physical listing
shall be supplied to Secured Party. Secured Party may examine and
inspect the Collateral at any time.
(g) Borrower shall keep or cause to be kept adequately insured
by financially sound and reputable insurers all of its property usually
insured by persons or entities engaged in the same or similar
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businesses. Without limiting the foregoing, Borrower will insure the
Collateral in Secured Party's name against loss or damage by fire,
theft, burglary, pilferage, loss in transit, and such other hazards as
Secured Party may specify in amounts and under policies by insurers
acceptable to Secured Party, and all premiums thereon shall be paid by
Borrower and the policies delivered to Secured Party. If Borrower fails
to do so, Secured Party may procure such insurance and charge the cost
to Borrower's account. Each policy of insurance covering the Collateral
shall provide that at least ten (10) days prior written notice of
cancellation or notice of lapse must be given to Secured Party by the
insurer.
(h) Borrower shall keep the Collateral in good order and
repair and will not waste or destroy the Collateral or any part thereof
and will not use the Collateral in violation of any statute or
ordinance.
(i) Borrower shall use good faith efforts to cause each
mortgagee of real property owned by Borrower and each landlord of real
property leased by Borrower to execute and deliver agreements
satisfactory in form and substance to Secured Party by which such
mortgagee or landlord waives or subordinates any rights it may have in
the Collateral.
(j) If any account debtor rejects, returns or refuses to
accept or receive property represented by any account, Borrower shall
notify Secured Party, and at the request of Secured Party, hold such
property separate and apart from Borrower's property in trust for
Secured Party and subject to its order or immediately deliver such
property to Secured Party. Secured Party may accept a return of
property represented by any account without discharging or affecting
the Obligations. Secured Party may take and sell such property for such
prices and upon such terms at public or private sale in the manner
provided in the Code. At Secured Party's option, Borrower shall
forthwith pay Secured Party the original invoice price of such property
for application against the Obligations in such manner as Secured Party
may elect. In the event such property is resold, any account created
thereby shall be deemed assigned and pledged to Secured Party
hereunder.
(k) Borrower shall give Secured Party or any persons
designated by it, at any time and from time to time, full access to all
records available to Borrower from any credit reporting service, bureau
or other similar agency and Secured Party and any persons designated by
it shall have the right to inspect and make and take away copies of any
such records.
(l) Borrower shall furnish such additional information and
statements, lists of assets and liabilities, tax returns, and other
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reports with respect to each member of the Debtor Group's financial
condition and business operations as Secured Party may request from
time to time.
(m) Secured Party shall have the right without hindrance or
delay to conduct field examinations, to inspect the Collateral and to
inspect, audit and copy each member of the Debtor Group's books,
records, journals, correspondence and other records and data relating
to the Collateral or each member of the Debtor Group's business.
Secured Party is authorized to discuss each member of the Debtor
Group's affairs with any Person, including without limitation employees
of such Person, as Secured Party may deem necessary in relation to the
Collateral, the Debtor Group's financial condition or Secured Party's
rights under the Loan Documents. Prior to the occurrence of an Event of
Default, Secured Party shall not disclose any such information to any
third party other than its accountants, attorneys, potential loan
participants and purchasers, and in response to credit inquiries in the
ordinary course of business and as may otherwise be required by law.
(n) Borrower shall pay and discharge when due all of its
indebtedness and obligations, including without limitation, all
assessments, taxes, governmental charges and levies, of every kind and
nature, imposed upon Borrower or its properties (including, without
limitation, the Collateral), income, or profits, prior to the date on
which penalties would attach, and all lawful claims that, if unpaid,
might become a lien or charge upon any of Borrower's properties,
income, or profits; provided, however, Borrower will not be required to
pay and discharge any such assessment, tax charge, levy or claim so
long as (i) the legality of the same shall be contested in good faith
by appropriate proceedings, and (ii) Borrower shall have established on
its books adequate reserves with respect to such contested assessment,
tax, charge, levy or claim in accordance with GAAP. Borrower, upon
demand of Secured Party, will furnish to Secured Party evidence of
payment of all assessments, taxes, charges, levies and claims against
Borrower or its properties, income or profits and will authorize the
appropriate governmental official to deliver to Secured Party at any
time a written statement of any assessments, taxes, charges, levies and
claims against Borrower or its properties, income or profits.
(o) Borrower shall conduct its business in an orderly and
efficient manner consistent with good business practices, and perform
and comply with all statutes, rules, regulations and/or ordinances
imposed by any governmental unit upon Borrower and its businesses and
operations, including, without limitation, those pertaining to
environmental matters.
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<PAGE>
(p) Borrower shall execute and deliver, or cause to be
executed and delivered, any and all other agreements, instruments or
documents which Secured Party may reasonably request in order to give
effect to the transactions contemplated under this Agreement and the
other Loan Documents.
(q) Each member of the Debtor Group shall do and perform all
acts required of it under this Agreement and the other Loan Documents
and furnish to Secured Party such other information respecting the
business, properties or condition, or the operations, financial or
otherwise, of the Debtor Group as Secured Party may from time to time
reasonably request. Prior to the occurrence of an Event of Default,
Secured Party shall not disclose any such information to any third
party other than its accountants, attorneys and loan participants, and
in response to credit inquiries in the ordinary course of business and
as may otherwise be required by law.
(r) Company shall maintain, as of the end of each fiscal
quarter and at the end of each fiscal year, a consolidated Tangible
Leverage Ratio of no more than 2.0 to 1.0.
(s) Company shall maintain, as of each date set forth below, a
consolidated Tangible Net Worth equal to or greater than the amount set
forth opposite such date below:
Period Tangible Net Worth
------ ------------------
June 29, 1996 $3,600,000.00
September 28, 1996 $3,400,000.00
December 28, 1996 $5,300,000.00
March 29, 1997 $4,300,000.00
June 28, 1997 $3,300,000.00
September 27, 1997 $2,700,000.00
December 27, 1997 $6,000,000.00
March 28, 1998 $5,000,000.00
(t) Borrower shall at all times maintain a positive Tangible
Net Worth.
(u) Company shall maintain a Current Ratio of not less than
1.5 to 1.0 at each fiscal year end and 1.1 to 1.0 at the end of each
fiscal quarter (other than the last) of each fiscal year of Company.
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<PAGE>
(v) At the end of each fiscal quarter of each fiscal year of
Borrower, the ratio of (A) the cost of goods sold by Borrower for the
previous 12 months to (B) Borrower's average inventory at book value
for the same period, shall be greater than or equal to 2.0 to 1.0.
(w) Borrower will furnish to Secured Party:
(1) As soon as possible and in any event within ten
(10) days after the occurrence of each Event of Default or
Default continuing on the date of such statement, the
statement of the President or the Chief Financial Officer of
the general partner of Borrower setting forth the details of
such Event of Default or Default and the action which Borrower
proposes to take with respect thereto.
(2) As soon as available, and in any event within
thirty (30) days after the end of each calendar month, (i) a
balance sheet, income statement and statement of cash flow of
Company as of the end of such month, and (ii) a statement of
all contingent liabilities of Company, all in form and
substance and in reasonable detail satisfactory to Secured
Party and duly certified (subject to year-end audit
adjustments) by the Chief Financial Officer of Company (A) as
being true and correct in all material aspects to the best of
his or her knowledge, and (B) as having been prepared in
accordance with GAAP. Further, as soon as available, and in
any event within thirty (30) days after the end of each
calendar month, (i) a balance sheet, income statement and
statement of cash flow of Borrower as of the end of such
month, and (ii) a statement of all contingent liabilities of
Borrower, all in form and substance and in reasonable detail
satisfactory to Secured Party and duly certified (subject to
year-end audit adjustments) by the Chief Financial Officer of
the general partner of Borrower (A) as being true and correct
in all material aspects to the best of his or her knowledge,
and (B) as having been prepared in accordance with GAAP.
(3) As soon as available, and in any event within
forty-five (45) days after the end of each fiscal quarter of
Company, (i) a consolidated and consolidating balance sheet,
income statement and statement of cash flow of Company as of
the end of such quarter, and (ii) a statement of all
contingent liabilities of Company, all in form and substance
and in reasonable detail satisfactory to Secured Party and
duly certified (subject to year-end audit adjustments) by the
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Chief Financial Officer of Company (A) as being true and
correct in all material aspects to the best of his or her
knowledge, and (B) as having been prepared in accordance with
GAAP.
(4) As soon as available, and in any event within ten
(10) days after the filing thereof, a copy of each 10Q or 10K
prepared by Company.
(5) As soon as available and in any event within one
hundred and twenty (120) days after the end of each fiscal
year of Company, certified, audited consolidated and
consolidating balance sheet, income statement, statement of
cash flow and reconciliation of capital of Company as of the
end of such fiscal year, together with a certificate of
independent public accountants of recognized standing
acceptable to Secured Party stating that in the course of
their audit of Company, such accountants obtained no knowledge
that an Event of Default or Default, has occurred and is
continuing, or if, in the opinion of such accountants, an
Event of Default or Default has occurred and is continuing, a
statement as to the nature thereof. For purposes hereof, Peat
Marwick shall be deemed satisfactory certified public
accountants.
(6) As soon as the same is received by Company, a
copy of any management letter delivered to Company by its
independent accountants.
(7) As soon as available, and in any event at least
30 days prior to the commencement of each fiscal year of
Company, the following financial statements on a one (1) year
pro forma basis: (i) consolidated and consolidating balance
sheet and income statement of Company, and (ii) cash flow
statement, all in form and substance and in reasonable detail
satisfactory to Secured Party.
(8) Promptly after the commencement thereof, notice
of all actions, suits and proceedings before any court or any
governmental department, commission or board involving any
member of the Debtor Group.
(9) Within forty-five (45) days after the end of each
fiscal quarter of Company, a certificate from the Chief
Financial Officer of Company stating that each member of the
Debtor Group is in full compliance with all of its obligations
under this Agreement and the other Loan Documents, and is not
in default of any term or provision hereof or thereof and
demonstrating compliance (with calculations provided) with all
financial ratios and covenants set forth in this Agreement.
Such certificate shall be in the form of Exhibit B attached
hereto.
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(10) Within thirty (30) days after the end of each
month (i) if requested by Secured Party, an analysis of
Borrower's accounts showing an aging of accounts as follows:
accounts 30 days old and less; accounts over 30 days and less
than 61 days old; accounts over 60 days old and less than 91
days old; accounts over 90 days old and less than 120 days
old; and accounts 120 days old and older, (ii) an aging of
Borrower's payables, (iii) a listing of Borrower's inventory
and inventory analysis in such form as Secured Party may
request.
(11) Daily during any periods in which any Revolving
Loans or Letters of Credit are outstanding and weekly at all
other times, an activity report setting forth (i) inventory by
store, (ii) inventory by type, (iii) inventory received in
dollars and units by store, and (iv) inventory sold in dollars
and units by store. Such report shall be in form and substance
reasonably acceptable to Secured Party.
(12) With each request for an advance or a Letter of
Credit (but in any event not less often than weekly), a
borrowing base report and certificate signed by the President
or Chief Financial Officer of the general partner of Borrower,
along with supporting documentation, in form and substance
satisfactory to Secured Party.
(13) Upon the request of Secured Party, an appraisal
of all inventory. Such appraisal shall be at the sole expense
of Borrower after the occurrence and during the continuation
of any Event of Default but otherwise shall be at the expense
of Secured Party.
(14) Such additional information and reports
regarding inventory as Secured Party may from time to time
reasonably request.
(x) Company will deliver to its independent public accountants
contemporaneously with the execution hereof the irrevocable
instructions, in the form attached as Addendum V, that such accountants
are to send to Secured Party copies of all financial statements
(whether preliminary or final) and reports which are prepared as a
result of any audit or other review of the operations, business,
finances or internal controls of Company, including, without
limitation, any management reports and any reports concerning improper
accounting practices, defalcations, financial reporting errors or
misstatements or fraud.
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(y) Borrower will use all advances made by Secured Party
pursuant hereto for working capital purposes only and no part of any
advance shall be used, directly or indirectly, to pay any fees,
royalties or other obligations or indebtedness of Borrower to Company.
(z) Borrower shall give Secured Party written notice
immediately upon the occurrence of a default or event of default under
any real property lease to which the Borrower is a party or the
occurrence of any event or condition which, with the giving of notice
or lapse of time or both, could become a default or event of default.
(aa) Unless he dies or becomes permanently disabled, James H.
Levi shall at all times be the President and Chief Executive Officer of
the Company.
12. Negative Covenants. So long as this Agreement shall be in effect or
any of the Obligations shall be outstanding, each member of the Debtor Group,
jointly and severally, agrees that, without the prior written consent of Secured
Party:
(a) Borrower shall not permit any financing statement
regarding the Collateral to be filed other than a financing statement
or statements in favor of Secured Party and those described on Schedule
10 (g).
(b) Borrower shall not liquidate, merge or consolidate with or
into any other entity.
(c) Borrower shall not sell, transfer or otherwise dispose of
its inventory or any of its assets or properties, other than in the
ordinary course of its business.
(d) Borrower shall not grant, create, incur, assume or permit
to exist any security interest, lien or encumbrance on any of its
assets or properties, including the Collateral, except with respect to
capital leases and liens to secure indebtedness for tenant finish-out
of retail stores, not to exceed $2,400,000.00 in the aggregate in any
fiscal year.
(e) Borrower shall not create, incur or assume any
indebtedness for borrowed money or issue or assume any other note,
debenture, bond or other evidences of indebtedness, or enter into any
operating or capital leases, or guarantee any such indebtedness or such
evidences of indebtedness of others, other than (i) borrowing from
Secured Party, (ii) capital leases and indebtedness for tenant finish-
out of retail stores, not to exceed $2,400,000.00 in the aggregate in
any fiscal year, and (iii) other indebtedness (the "Subordinated Debt")
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that has been subordinated to the Obligations pursuant to subordination
agreements in form and substance acceptable to Secured Party in its
sole discretion.
(f) Borrower shall not change its primary line of business.
(g) Borrower shall not declare or pay any Distributions or
make any other distribution with respect to any payment on account of
the purchase, redemption, or other acquisition or retirement of any
interest in Borrower, or make any payments upon the Subordinated Debt;
provided, however, so long as no Default or Event of Default has
occurred and is continuing or will exist after giving effect to such
payment, Borrower may make Distributions and, subject to the
limitations set forth in the subordination agreements, payments on the
Subordinated Debt.
(h) Except for credit card transactions and accounts
receivable in the ordinary course of business, Borrower shall not make
or permit to exist any loans or advances to any person or entity.
(i) Except in the ordinary course of business, Borrower shall
not pay or cause to be paid any advance rentals for any leased
property, real or personal, utilized by Borrower in the conduct and
operation of its business.
(j) Borrower shall not enter into any transaction with an
Affiliate except on arms-length terms that are as favorable to Borrower
as could have been obtained from a non-Affiliate.
(k) Borrower shall not make any Investments (hereinafter
defined) except for the following:
(i) loans, advances or investments the material
details of which have been set forth in the financial
statements of Borrower heretofore furnished to the Secured
Party;
(ii) investments in direct obligations of the United
States of America or any agency thereof;
(iii) investments in certificates of deposit issued
by Secured Party or certificates of deposit with maturities of
less than one year issued by other commercial banks in the
United States having capital and surplus in excess of
$500,000,000; and
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(iv) money market accounts established at Secured
Party.
As used herein, "Investment" in any Person means any
investment, whether by means of share purchase, loan, advance, purchase
of debt instrument, extension of credit (other than accounts receivable
arising from the sale of goods or services in the ordinary course of
business), capital contribution or otherwise, in or to such Person, the
guaranty of any indebtedness of such Person or the subordination of any
claim against such Person to other indebtedness of such person or
entity.
(l) Company shall not permit its Fixed Charge Coverage Ratio,
as of the end of any fiscal year of Company, to be less than 1.2 to
1.0.
13. Rights of Secured Party. Secured Party shall have the rights
contained in this Section at all times during the period of time this Agreement
is effective.
(a) Borrower hereby authorizes Secured Party to file, without
the signature of Borrower, one or more financing or continuation
statements, and amendments thereto, relating to the Collateral.
Borrower further agrees that a carbon, photographic or other
reproduction of this Agreement or any financing statement describing
any Collateral is sufficient as a financing statement and may be filed
in any jurisdiction Secured Party may deem appropriate.
(b) Borrower hereby irrevocably appoints Secured Party as
Borrower's attorney-in-fact and proxy, with full authority in the place
and stead of Borrower and in the name of Borrower or otherwise, from
time to time in Secured Party's discretion, to take any action and to
execute any instrument which Secured Party may deem necessary or
appropriate to accomplish the purposes of this Agreement, including
without limitation: (i) to obtain and adjust insurance required by
Secured Party hereunder; (ii) to demand, collect, sue for, recover,
compound, receive and give acquittance and receipts for moneys due and
to become due under or in respect of the Collateral; (iii) to receive,
endorse and collect any checks, drafts or other instruments, documents
and chattel paper in connection with clause (i) or (ii) above; and (iv)
to file any claims or take any action or institute any proceedings
which Secured Party may deem reasonably necessary or appropriate for
the collection and/or preservation of the Collateral or otherwise to
enforce the rights of Secured Party with respect to the Collateral.
(c) If Borrower fails to perform any agreement or obligation
provided herein (including without limitation, the payment and
discharge of any taxes, liens or encumbrances affecting the
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<PAGE>
Collateral), Secured Party may itself perform, or cause performance of,
such agreement or obligation, and the expenses of Secured Party
incurred in connection therewith shall be a part of the Obligations,
secured by the Collateral and payable by Borrower on demand.
(d) Secured Party or any persons designated by it shall have
the right to call at each member of the Debtor Group's place or places
of business during normal business hours to inspect, audit, check and
make and take away copies or extracts from such member of the Debtor
Group's books, records, journals, orders, receipts and any
correspondence and other data relating to such member of the Debtor
Group's business or to any other transactions between the parties
hereto, without hindrance or delay. Prior to the occurrence of an Event
of Default, Secured Party shall not disclose any such information to
any third party other than its accountants, attorneys and potential
loan participants and purchasers and in response to credit inquiries in
the ordinary course of business and as may otherwise be required by
law.
(e) All amounts and proceeds (including instruments and
writings) received by Borrower in respect of Borrower's accounts or
general intangibles shall be received in trust for the benefit of
Secured Party hereunder and, upon request of Secured Party, shall be
segregated from other property of Borrower and shall be forthwith
delivered to Secured Party in the same form as so received (with any
necessary endorsement), deposited in the Collections Account and
applied in accordance with Section 9 (b).
(f) Secured Party shall have the right of set-off against each
member of the Debtor Group for all of the Obligations at any and all
times and in any and all proceedings and instances including, but not
limited to, bankruptcy, reorganization, receivership or insolvency of
Borrower.
14. Events of Default. The occurrence of any one or more of the
following events shall constitute an Event of Default hereunder:
(a) The failure, refusal or neglect of Borrower to make
payment of the Obligations or any portion thereof, as the same shall
become due and payable;
(b) The failure of any member of the Debtor Group or any
Obligated Party to timely and properly observe, keep or perform any
covenant, agreement, warranty or condition required (i) in this
Agreement, (ii) in any of the other Loan Documents, or (iii) in any of
the Agreements (as defined hereinbelow); and, with respect to the
covenants set forth in Sections 11 (b), (d), (i), (j), (k), (l), (o),
(p), (q), (v) (2), (6), (7), (13) and (14), such failure shall not be
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<PAGE>
cured within ten (10) days after the earlier of (A) the date when such
member of the Debtor Group or such Obligated Party knew or should have
known of such failure or (B) Secured Party's notice to Borrower or such
Obligated Party of such failure;
(c) The occurrence of an event of default under (i) any of the
other Loan Documents, or (ii) any of the Agreements;
(d) Any representation made by any member of the Debtor Group
or any Obligated Party contained herein or contained in any of the
other Loan Documents or the Agreements is false or misleading in any
material respect;
(e) Any member of the Debtor Group or any Obligated Party
shall (i) apply for or consent to the appointment of a receiver,
trustee, custodian, intervenor or liquidator of such Person or of all
or a substantial part of such Person's assets, (ii) file a voluntary
petition in bankruptcy, admit in writing that such Person is unable to
pay such Person's debts as they become due, (iii) make a general
assignment for the benefit of creditors, (iv) file a petition or answer
seeking reorganization or an arrangement with creditors or to take
advantage of any bankruptcy or insolvency proceeding, or (vi) take
corporate or partnership action for the purpose of effecting any of the
foregoing;
(f) An involuntary petition or complaint shall be filed
against any member of the Debtor Group or any Obligated Party seeking
bankruptcy or reorganization of such Person or the appointment of a
receiver, custodian, trustee, intervenor or liquidator of such Person,
or of all or substantially all of such Person's assets, and such
petition or complaint shall not have been dismissed within sixty (60)
days of the filing thereof; or an order, order for relief, judgment or
decree shall be entered by any court of competent jurisdiction or other
competent authority approving a petition or complaint seeking
reorganization of such intervenor or liquidator of such Person, or of
all or substantially all of such Person's assets;
(g) the failure of any member of the Debtor Group or any
Obligated Party to pay any money judgment against such Person at least
thirty (30) days prior to the date on which such Person's assets may be
sold to satisfy such judgment;
(h) the failure, within a period of ten (10) days after the
commencement thereof, to have discharged any attachment, sequestration,
or similar proceedings against any member of the Debtor Group's or any
Obligated Party's assets;
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(i) the guaranty agreement executed by any Guarantor shall for
any reason cease to be in full force and effect, or be declared null
and void or unenforceable in whole or in part; or the validity or
enforceability of such guaranty agreement shall be challenged or denied
by such Guarantor;
(j) The filing of a tax lien notice by the United States, any
state or any governmental subdivision thereof against any of the
property of any member of the Debtor Group;
(k) The Collateral or any portion thereof is taken on
execution or other process of law in any action against Borrower;
(l) Borrower abandons the Collateral or any portion thereof
except for obsolete or unsalable items of nominal value disposed of in
the ordinary course of Borrower's business;
(m) The holder of any lien or security interest on any of the
assets of Borrower, including without limitation, the Collateral
(without hereby implying the consent of Secured Party to the existence
or creation of any such lien or security interest on the Collateral),
declares a default thereunder or institutes foreclosure or other
proceedings for the enforcement of its remedies thereunder;
(n) The occurrence of a default or event of default under any
other indebtedness of any member of the Debtor Group or the occurrence
of any event or condition which, with the giving of notice or lapse of
time or both, could become a default or event of default under such
other indebtedness;
(o) The liquidation, dissolution, merger or consolidation of
any member of the Debtor Group or any Obligated Party;
(p) Should any party to a subordination agreement that
subordinates any indebtedness to the Obligations fail to fully perform
the terms of such subordination agreement; or
(q) The occurrence of a default or event of default under any
real property lease to which the Borrower is a party or the occurrence
of any event or condition which, with the giving of notice or lapse of
time or both could become a default or event of default.
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15. Remedies. Upon the occurrence of any Event of Default, and at any
time thereafter, Secured Party shall have, in addition to all other rights and
remedies provided herein, in any other agreement between Secured Party and
Borrower or by law, the remedies of a secured party under the Code, including,
but not limited to, the right to take possession of the Collateral, and for that
purpose, Secured Party may, so far as Borrower can give authority therefor,
enter upon any premises on which the Collateral may be situated and remove the
same therefrom. The rights and remedies referred to in this Agreement are
cumulative, and in addition to the general remedies set forth above, Secured
Party shall have the following specific remedies upon the occurrence of an Event
of Default:
(a) At its option, Secured Party may terminate any further
loans or advances to Borrower hereunder and may refuse to issue any
Letters of Credit. Further, Secured Party may require that Borrower
deposit with Secured Party in cash the Letter of Credit Exposure.
(b) The entire unpaid balance of the Obligations then owing by
Borrower to Secured Party (including, without limitation, the Revolving
Loans) shall, at the option of Secured Party, become immediately due
and payable without notice of default, presentment, demand for payment,
notice of intent to accelerate, notice of acceleration or dishonor,
protest or notice of protest or non-payment, or any other notice of any
kind whatsoever, all of which are expressly waived, jointly and
severally, by each member of the Debtor Group; provided, however, upon
the occurrence of any of the Events of Default described in Section 14
(e) or (f), the entire unpaid balance of the Obligations shall, without
any action by Secured Party, immediately become due and payable without
notice of default, presentment, demand for payment, notice of intent to
accelerate, notice of acceleration or dishonor, protest or notice of
protest or non-payment, or any other notice of any kind whatsoever, all
of which are expressly waived, jointly and severally, by each member of
the Debtor Group.
(c) At its option, Secured Party may require Borrower to
assemble the Collateral and make it available to Secured Party at a
place to be designated by Secured Party which is reasonably convenient
to Secured Party. Unless the Collateral is perishable or threatens to
decline speedily in value or is of a type customarily sold on a
recognized market, Secured Party will give Borrower reasonable notice
of the time and place of any public sale thereof or of the time after
which any private sale or any other intended disposition thereof is to
be made. The requirements of reasonable notice shall be met if such
notice is mailed, postage prepaid, to Borrower at least five (5) days
before the time of sale or other intended disposition of the
Collateral.
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(d) Secured Party may at any time in its discretion transfer
any other property constituting the Collateral into its own name or
that of its nominee and receive the income thereon and hold the same as
security for the Obligations or apply it to the principal or interest
due on the Obligations, as the Secured Party may elect. Secured Party
may demand, collect, receipt for, settle, compromise, adjust, sue for,
foreclose, or realize upon the Collateral as Secured Party may
determine, whether or not any of the Obligations are then due; and for
the purpose of asserting, protecting or enforcing any of Secured
Party's rights therein, Secured Party may receive, open, and dispose of
mail addressed to Borrower and endorse notes, checks, drafts, money
orders, documents of title, or other evidences of payment, shipment, or
storage of any part of the Collateral on behalf of and in the name of
Borrower.
(e) Borrower shall pay to Secured Party on demand any and all
reasonable expenses, including legal expenses, attorneys' fees, court
costs, collection costs, and traveling expenses, incurred or paid by
Secured Party in protecting or enforcing any of its rights hereunder,
including its right to take possession of the Collateral, to hold,
store, prepare for sale, sell, or otherwise dispose of the Collateral,
and in collecting the proceeds thereof. After deducting all of such
expenses, the residue of any proceeds of collection or sale of the
Collateral shall be applied to the payment of the Obligations in such
order of preference as Secured Party may determine, proper allowance
for interest on Obligations not then due being made, and any excess
shall be returned to Borrower, and Borrower shall remain liable for any
deficiency. Secured Party is hereby authorized to add, from time to
time, all such expenses to the balance of indebtedness due by Borrower
to Secured Party, and such expenses shall become a part of the
Obligations.
16. Other Agreements. If at any time any member of the Debtor Group and
Secured Party are parties to any other financing agreements (all of such
agreements, whether one or more, being hereinafter referred to as the
"Agreements"), and if the Agreements (or any of them, if more than one) should
be breached in whole or in part by any member of the Debtor Group or should
terminate for any reason whatsoever, such event shall constitute an Event of
Default hereunder. Any sums due hereunder or under the Agreements, or any one or
more of them, may be collected by Secured Party out of sums or credits due
Secured Party under the terms of this Agreement or the Agreements, or any one or
more of them, and any collateral or security for the performance of this
Agreement or any of the Agreements may be realized upon by Secured Party for the
satisfaction of any indebtedness arising with respect to this Agreement or any
of the Agreements. The Debtor Group and Secured Party hereby agree that all
indebtedness, securities and remedies available to Secured Party under this
Agreement or the Agreements may be utilized by Secured Party for the enforcement
of its rights and the collection of any indebtedness due it under the terms of
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this Agreement or the Agreements, the rights and remedies of Secured Party
hereunder being cumulative of all other rights and remedies of Secured Party,
and not in substitution thereof or as an alternative thereto.
17. Term.
(a) This Agreement shall become effective upon acceptance by
Secured Party, as of the date hereinafter set forth, and shall continue
in full force and effect until the Maturity Date (the "Initial Term")
unless earlier terminated by Secured Party in connection with the
exercise of its rights and remedies under this Agreement upon the
occurrence of an Event of Default.
(b) If Borrower terminates this Agreement prior to the end of
the Initial Term, Borrower acknowledges that (i) such termination would
result in the loss to Secured Party of the benefits of this Agreement
and that the damages incurred by Secured Party as a result of such
termination are and would be difficult of ascertainment and (ii) no
such termination shall be effective until Borrower has paid to Secured
Party all of the Obligations in immediately available funds, together
with a sum certain as liquidated damages, being Borrower's and Secured
Party's best and fairest estimate of Secured Party's damages caused by
such termination, equal to two percent (2.0%) of the average loan
balance of the Revolving Loans for the twelve consecutive months ending
on the date the Revolving Loans are paid in full if the termination
occurs on or before the first anniversary of this Agreement and one
percent (1.0%) of the average loan balance of the Revolving Loans for
the twelve consecutive months ending on the date the Revolving Loans
are paid in full if the termination occurs after the first anniversary
but before the second anniversary of this Agreement.
(c) Notwithstanding anything to the contrary, any proposed
termination of this Agreement, shall not be effective, and shall not
release or affect the Collateral already assigned to Secured Party or
any Obligations incurred or rights accrued hereunder, unless and until
all Obligations, whether incurred pursuant to this Agreement or
otherwise, have been paid in full and all Letters of Credit have either
expired by their terms or have been returned to Secured Party undrawn.
(d) Upon the payment in full of the Obligations and the
expiration or return of all Letters of Credit, Secured Party shall
release all collateral (including the Collateral) for the Obligations.
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18. Miscellaneous.
(a) Waiver of Rights. Each member of the Debtor Group waives
notice of default, nonpayment, presentment, notice of demand, demand,
notice of intention to accelerate, notice of acceleration, protest or
notice thereof and all other notices of any kind whatsoever.
(b) Entire Agreement. This Agreement contains the entire
agreement of Secured Party and the Debtor Group. If the parties hereto
are parties to any prior agreement, either written or oral, relating to
the subject matter hereof, the terms of this Agreement shall amend and
supersede the terms of such prior agreements as to transactions on or
after the effective date of this Agreement, but all security
agreements, financing statements, guaranties, other contracts and
notices for the benefit of Secured Party shall continue in full force
and effect to secure all Obligations of Borrower to Secured Party under
the terms hereof or thereof unless Secured Party specifically releases
its rights thereunder by separate release.
(c) Fees and Expenses. Borrower agrees that all reasonable
fees and expenses, including, without limitation, legal, accounting,
audit and field examination fees and expenses, incurred by Secured
Party in connection with the preparation of this Agreement and the
other Loan Documents, the closing of any loan secured hereby, and in
administering this Agreement and the matters referenced herein shall be
paid and borne by Borrower, and Secured Party is hereby authorized by
Borrower to deduct all such fees and expenses from the proceeds of any
loan secured hereby or to add, from time to time, all such fees and
expenses to the balance of the Revolving Loan due by Borrower to
Secured Party hereunder, with such fees and expenses becoming a part of
the Obligations. Field examination expenses will be charged to Borrower
as follows: actual out of pocket expenses for examiner's travel,
lodging and meals plus $500.00 per day per examiner; provided, however,
so long as no Default or Event of Default has occurred and is
continuing, Borrower shall not be required to pay for more than four
(4) field exams in year one nor more than two (2) exams in year two and
fees for exams in year one shall not exceed $20,000.00 and fees for
exams in year two shall not exceed $15,000.00. Secured Party may
conduct such additional examinations as it may desire at the expense of
Secured Party. After the occurrence and during the continuation of an
Event of Default, there is no limit on the number of examinations that
may be conducted by Secured Party and Borrower shall be liable for all
reasonable fees and expenses arising in connection therewith. Actual
costs for the initial field examination conducted prior to the date
hereof shall be reimbursed to Secured Party by Borrower at closing and
shall not be included in examinations fees paid by Borrower in year
one.
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(d) Account Debtor Notification. Borrower will immediately
notify Secured Party in the event (i) that any account debtor fails to
accept, refuses to accept, returns, offers to return or revokes the
acceptance of any personal property which is the subject of any
account, (ii) of the bankruptcy, insolvency or financial embarrassment
of any account debtor, and (iii) of any claim asserted by any account
debtor for credit, allowance, adjustment, dispute, set-off or
counterclaim. Borrower will immediately, upon receipt thereof, endorse
and deliver to Secured Party any and all checks, notes, trade
acceptances, drafts or other instruments with respect to or in payment
of any account or any chattel paper with respect to personal property
or services performed giving rise to any account.
(e) Effectiveness of Agreement. This Agreement shall become
effective only upon acceptance by Secured Party at its offices in
Dallas, Texas. All transactions hereunder shall take place at Secured
Party's offices in Dallas, Texas.
(f) Waiver. Neither the failure nor any delay on the part of
Secured Party to exercise any right, power or privilege herein or under
any of the Loan Documents shall operate as a waiver thereof, nor shall
any single or partial exercise of such right, power or privilege
preclude any other or further exercise thereof or the exercise of any
other right, power or privilege. No waiver of any provision in this
Agreement or in any of the other Loan Documents and no departure by
Borrower therefrom shall be effective unless the same shall be in
writing and signed by Secured Party, and then shall be effective only
in the specific instance and for the purpose for which given and to the
extent specified in such writing.
(g) Amendment. No modification or amendment to this Agreement
or to any of the other Loan Documents shall be valid or effective
unless the same is signed by the party against whom it is sought to be
enforced.
(h) Parties In Interest. This Agreement shall be binding upon
the parties and their successors or assigns, and shall inure to the
benefit of the parties and the successors or assigns of Secured Party,
but shall not inure to the benefit of any heirs, representatives,
successors or assigns of Borrower.
(i) Venue. All warranties and representations of the Debtor
Group contained herein and any payment on any indebtedness secured
hereby have been or shall be made in Dallas County, Texas, and all
parties hereto agree that venue is proper only in such county, that
such county is a convenient forum in which to decide any dispute
arising hereunder and to submit themselves to the personal jurisdiction
of the courts located in such county.
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(j) Governing Law. The laws of Texas shall govern the
construction of this Agreement and the rights, remedies, duties and
obligations of the parties hereto with respect to all transactions
hereunder and any and all Collateral, to the extent that federal law is
not applicable.
(k) Cumulative Rights. All rights of Secured Party under the
terms of this Agreement shall be cumulative of, and in addition to, the
rights of Secured Party under any and all other agreements between any
member of the Debtor Group and Secured Party (including, but not
limited to, the other Loan Documents and any other agreements
referenced herein), and not in substitution or diminution of any rights
now or hereafter held by Secured Party under the terms of any other
agreement.
(l) Notices. Any notice or other communication required or
permitted hereunder shall be in writing and shall be deemed to have
been given when personally delivered or when deposited in the United
States mail, registered or certified, postage prepaid, and addressed as
follows:
If to Borrower or any
member of the Debtor
Group: The Great Train Store Partners, L.P.
14180 Dallas Parkway, Suite 618
Dallas, Texas 75240
Attention: Ms. Cheryl Taylor
with a copy to: Michael E. Long, Esq.
Blumenfeld, Kaplan & Sandweiss, P.C.
168 North Meramec Avenue, Suite 400
St. Louis, Missouri 63105
If to Secured Party: BANK ONE, TEXAS, NATIONAL ASSOCIATION
P.O. Box 660094
Dallas, Texas 75266-0094
Attn: Asset Based Lending Group
Each of the parties hereto shall be entitled to specify a different
address by giving written notice to the other party hereto in
accordance with this Subsection.
(m) Indemnification. Borrower hereby indemnifies and agrees to
hold harmless and defend all Indemnified Persons from and against any
and all Indemnified Claims. Upon notification and demand, Borrower
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agrees to provide defense of any Indemnified Claim and pay all costs
and reasonable expenses of counsel selected by any Indemnified Person
in respect thereof. The indemnification provided for in this paragraph
shall survive any termination of this Agreement and shall continue for
the benefit of all Indemnified Persons. Except as specifically provided
in this paragraph, Borrower waives all notices from any Indemnified
Person with respect to such indemnification. As used herein,
"Indemnified Claims" means any and all claims, demands, actions, causes
of action, judgments, obligations, liabilities, losses, damages and
consequential damages, penalties, fines, costs, fees, expenses and
disbursements (including without limitation, reasonable fees and
expenses of attorneys and other professional consultants and experts in
connection with investigation or defense) of every kind, known or
unknown, existing or hereafter arising, foreseeable or unforeseeable,
which may be imposed upon, threatened or asserted against, or incurred
or paid by, any Indemnified Person at any time and from time to time,
because of, resulting from, in connection with, or arising out of any
transaction, act, omission, event or circumstance in any way connected
with the Collateral or the Loan Documents (including enforcement of
Secured Party's rights thereunder or defense of Secured Party's actions
thereunder and specifically including any and all Indemnified Claims
arising from Secured Party's ordinary negligence, but in any event
excluding Secured Party's gross negligence or intentional misconduct or
breach of any Loan Document) or any breach by any member of the Debtor
Group or any Obligated Party of any representation, warranty, covenant,
agreement or condition contained in any Loan Document.
(n) Descriptive Headings. The captions in this Agreement are
for convenience only and shall not define or limit the provisions
hereof.
(o) Participation of Obligations. Each member of the Debtor
Group agrees that Secured Party may, at its option, sell interests in
the Obligations and its rights under this Agreement to a financial
institution or institutions and, in connection with each such sale,
Secured Party may disclose any financial and other information
available to Secured Party concerning the Debtor Group to each
prospective purchaser. Secured Party shall require that any such
purchaser (or potential purchaser) agree to keep such information
confidential to the same extent that Secured Party is required to do so
hereunder; provided, however, Secured Party shall have no liability for
the failure of such Person to comply with such agreement.
(p) Invalid Provisions. If any provision of this Agreement or
any of the other Loan Documents is held to be illegal, invalid or
unenforceable under present or future laws, such provision shall be
fully severable and the remaining provisions of this Agreement or any
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<PAGE>
of the other Loan Documents shall remain in full force and effect and
shall not be affected by the illegal, invalid or unenforceable
provision or by its severance.
IN WITNESS THEREOF, this Agreement is executed, to be effective as of
the date of acceptance by Secured Party.
BORROWER:
The Great Train Store Partners, L.P.
By: GTS Partner, Inc.
By:_________________________________
Cheryl Taylor, Vice President
ADDITIONAL MEMBERS OF THE
DEBTOR GROUP:
The Great Train Store Company
By:_________________________________
Cheryl Taylor, Vice President
GTS Partner, Inc.
By:_________________________________
Cheryl Taylor, Vice President
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<PAGE>
GTS Limited Partner, Inc.
By:_________________________________
Cheryl Taylor, Vice President
ACCEPTED at Dallas, Texas,
this 7th day of June, 1996:
BANK ONE, TEXAS, NATIONAL ASSOCIATION
By:_______________________________
Mark Champion, Vice President
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ADDENDUM I
TO
LOAN AND SECURITY AGREEMENT
Dated June 7, 1996
By and Between
BANK ONE, TEXAS, NATIONAL ASSOCIATION
AND
THE GREAT TRAIN STORE PARTNERS, L.P.
This Addendum I intentionally left blank.
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<PAGE>
ADDENDUM II
TO
LOAN AND SECURITY AGREEMENT
Dated June 7, 1996
By and Between
BANK ONE, TEXAS, NATIONAL ASSOCIATION
AND
THE GREAT TRAIN STORE PARTNERS, L.P.
The Collateral, as defined and referred to in Section 1(g), shall mean:
See Schedule A attached hereto and incorporated herein by reference.
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<PAGE>
SCHEDULE A
TO
LOAN AND SECURITY AGREEMENT
Dated June 7, 1996
By and Between
BANK ONE, TEXAS, NATIONAL ASSOCIATION
AND
THE GREAT TRAIN STORE PARTNERS, L.P.
All of the following property, whether now owned or hereafter acquired:
1. All present and future accounts, chattel paper, contract rights,
documents, instruments, investment property, security accounts, security deposit
accounts and general intangibles (including, without limitation, any right to
payment for goods sold or services rendered arising out of the sale or delivery
of personal property or work done or labor performed by Borrower and any and all
income tax refunds), now or hereafter owned, held, or acquired by Borrower,
together with any and all books of account, customer lists (including, without
limitation, the Conductors Club database and member list) and other records
relating in any way to the foregoing, and in any case where an account arises
from the sale of goods, the interest of Borrower in such goods; together with
any and all PROCEEDS of any of the foregoing property, including insurance
payable by reason of loss or damage to such property.
2. All present and hereafter acquired inventory (including without
limitation, all raw materials, work-in-process and finished goods) held,
possessed, owned, held on consignment, or held for sale or return, in whole or
in part, by Borrower wherever located, and further including all PRODUCTS and
all PROCEEDS of the foregoing, including insurance payable by reason of loss or
damage to such property. The designation of proceeds does not authorize Borrower
to sell, transfer or otherwise convey any of the property described herein
except finished goods intended for sale in the usual course of Borrower's
business.
3. All equipment and fixtures of whatsoever kind and character now or
hereafter possessed, held, acquired by Borrower and used or usable in Borrower's
business together with all replacements, accessories, additions, substitutions
and accessions to all of the foregoing, and all PROCEEDS thereof, including
insurance payable by reason of loss or damage to such property. The designation
of proceeds does not authorize Borrower to sell, transfer or otherwise convey
any of the property described herein. To the extent that the foregoing property
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is located on, attached to, annexed to, related to, or used in connection with,
or otherwise made a part of, and is or shall become fixtures upon, real
property, such real property and the record owner thereof is described on
Exhibit B attached hereto.
4. All computer programs, software, management information systems,
firmware, routines, systems, algorithms, codes, printouts and instructions of
any kind, whether now owned or after-acquired, for use on any variety of
computing machinery, whether in machine or human-readable form, and stored in or
on media of any kind, including, without limitation, tape, disk, card, strip or
cartridge (whether paper, magnetic or optical), and electronic circuitry,
together with all instruction manuals or documentation of any kind, stored in or
on media of any kind, pertaining in any way to the property described herein,
and all PROCEEDS thereof, including insurance payable by reason of loss or
damage to such property. The designation of proceeds does not authorize Borrower
to sell, transfer or otherwise convey any of the property described herein.
5. Borrower's merchants service agreement(s) relating to all credit
cards accepted by Borrower.
6. All trademarks, trade names, licenses and other intellectual
property of Borrower.
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<PAGE>
ADDENDUM III
TO
LOAN AND SECURITY AGREEMENT
Dated June 7, 1996
By and Between
BANK ONE, TEXAS, NATIONAL ASSOCIATION
AND
THE GREAT TRAIN STORE PARTNERS, L.P.
The other names referenced in Section 10(a) are:
The Great Train Store
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<PAGE>
ADDENDUM IV
TO
LOAN AND SECURITY AGREEMENT
Dated June 7, 1996
By and Between
BANK ONE, TEXAS, NATIONAL ASSOCIATION
AND
THE GREAT TRAIN STORE PARTNERS, L.P.
The other addresses referenced in Section 10(g) are:
St. Louis Union Station
122 St. Louis Union Station
St. Louis, MO 63103
Indianapolis Union Station
39 W. Jackson Place, #147
Indianapolis, IN 46225
Riverwalk Marketplace
1 Poydras Street, #114
New Orleans, LA 70130
Union Station
50 Massachusetts Ave., N.E., #109
Washington, DC 20002
Mall of America
166 E. Broadway
Bloomington, MN 55425
Mall at Steamtown
211 The Mall at Steamtown
Scranton, PA 18503
North Point Mall
1000 North Point Circle, #1030
Alpharetta, GA 30202
Page 48
<PAGE>
Downtown Plaza
545 Downtown Plaza, #1001
Sacramento, CA 95814
Natick Mall
1245 Worcester Street, #2172
Natick, MA 01760
The Great Mall of the Bay Area
150 Great Mall Dr.
Milpitas, CA 95035
The Woodlands Mall
1201 Lake Woodlands Dr., #2140
The Woodlands, TX 77380
Crossgates Mall
#1 Crossgates Mall Rd., #B-129
Albany, NY 12203
Ramada Express Hotel
2121 S. Casino Dr.
Laughlin, NV 89029
Broadway at the Beach
1211 Celebrity Circle, #H-136
Myrtle Beach, SC 29577
Avenue at Tower City
230 Huron Rd., NW, #85.85
Cleveland, OH 44113
Crabtree Valley Mall
4325 Glenwood Avenue
Raleigh, NC 27612
Holyoke Mall at Ingleside
50 Holyoke Street, #B312
Holyoke, MA 01040
Page 49
<PAGE>
The Plaza at King of Prussia
160 N. Gulph Rd., #5211
King of Prussia, PA 19406
Tysons Corner Center
8045 Tysons Corner Center
McLean, VA 22101
Oxmoor Center
Louisville, KY
Regency Square
Federal Street Joint Venture
Richmond, VA
Florida Mall Shopping Center
Sand Lake Road and Orange Blossom Trail
Orlando, FL
Woodbridge Center
Woodbridge Township, NJ
Country Club Plaza
J. C. Nichols
Kansas City, MO
Page 50
<PAGE>
ADDENDUM V
TO
LOAN AND SECURITY AGREEMENT
Dated June 7, 1996
By and Between
BANK ONE, TEXAS, NATIONAL ASSOCIATION
AND
THE GREAT TRAIN STORE PARTNERS, L.P.
[LETTERHEAD OF COMPANY]
[NAME AND ADDRESS OF
Borrower'S OUTSIDE AUDITOR]
Ladies and Gentlemen:
This letter instructs you to send to BANK ONE, TEXAS NATIONAL
ASSOCIATION ("Bank") all financial statements (whether preliminary or
final) and reports which you prepare as a result of any audit or other
review of our operations, business, finances or internal controls,
including without limitation, any management reports and any reports
concerning improper accounting practices, defalcations, financial
reporting errors or misstatements or fraud perpetrated on us or by any
of our employees or agents.
The undersigned further authorizes and instructs you to
communicate and discuss its financial condition and the financial
condition of its subsidiaries (including The Great Train Store
Partners, L.P.), if any, with the Bank and to disclose to the Bank upon
request any information in your possession relating to its financial
condition and the financial condition of its subsidiaries (including
The Great Train Store Partners, L.P.). The undersigned hereby agrees
that such discussions or communications will be without liability to
the Bank or to you.
All of the foregoing which is reduced to writing must be sent
to the Bank at the following address prior to or contemporaneously with
the sending of said written information to us :
BANK ONE, TEXAS, NATIONAL ASSOCIATION
1717 Main Street
Dallas, Texas 75201
Attn: Secured Lending Group
Page 51
<PAGE>
These instructions may only be revoked by the Bank's delivery
to you of a revocation notice signed by an officer of the Bank.
Page 52
<PAGE>
EXHIBIT A
TO
LOAN AND SECURITY AGREEMENT
Dated June 7, 1996
By and Between
BANK ONE, TEXAS, NATIONAL ASSOCIATION
AND
THE GREAT TRAIN STORE PARTNERS, L.P.
[Form of Revolving Loan Note]
Page 53
FIRST AMENDMENT TO
LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment"),
dated as of March __, 1997, is made and entered into by and among Bank One,
Texas, N.A. and the Debtor Group.
RECITALS
A. Secured Party and the Debtor Group entered into that certain Loan
and Security Agreement, dated June 7, 1996 (the "Loan Agreement").
B. Secured Party and the Debtor Group desire to amend the Loan
Agreement as herein set forth.
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree as follows:
ARTICLE I
Definitions
Section 1.01. Definitions. Capitalized terms used in this Amendment, to
the extent not otherwise defined herein, shall have the same definitions
assigned to such terms in the Loan Agreement, as amended hereby.
ARTICLE II
Amendments to the Loan Agreement
Section 2.01. Amendment to Definitions. From and after the date hereof
Section 1 of the Loan Agreement is amended by deleting Sections 1 (d), (i) and
(gg) in their entirety and, in place thereof, adding new Sections 1 (d), (i) and
(gg) which shall read as follows:
"(d) 'Borrowing Base' shall mean, as of any date of
determination, the lesser of (i) $8,000,000, or (ii) the sum of (1) the
product of (A) the Inventory Advance Rate, and (B) Borrower's Eligible
Inventory, less (2) the Reserve, and less (3) the Letter of Credit
Exposure, all determined as of such date of determination.
(i) 'Contract Rate' shall mean a rate calculated on the basis
of actual days elapsed but computed as if each year consisted of 360
days, equal to the sum of (i) the Base Rate (the "Base Rate") of
interest as established from time to time by Bank as its commercial
base rate of interest publicly announced from time to time (which may
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<PAGE>
not be the lowest, best or most favorable rate of interest which Bank
may charge on loans to its customers), plus (ii) one percent (1.0 %)
per annum.
(gg) 'Revolving Line' means $8,000,000.00."
Section 2.02 New Definitions. Section 1 of the Loan Agreement is hereby
amended by the addition of a new Section 1 (oo) which shall read as follows:
"(oo) 'Intercreditor Agreement' means that certain
Intercreditor Agreement dated the __ day of November, 1996, by
and between Marshall's Train Depot, Inc., a Florida
corporation, Bank and Borrower."
Section 2.03. Amendment to Section 11 (s) of the Loan Agreement. From
and after the date hereof Section 11(s) of the Loan Agreement is deleted in its
entirety and in place thereof shall be a new Section 11(s) which shall read as
follows:
"(s) Company shall maintain, as of each date set
forth below, a consolidated Tangible Net Worth equal to or
greater than the amount set forth opposite such date below:
Period Tangible Net Worth
June 29, 1996 $ 3,600,000.00
September 28, 1996 $ 3,400,000.00
December 28, 1996 $10,000,000.00
March 29, 1997 $ 8,000,000.00
June 28, 1997 $ 7,000,000.00
September 27, 1997 $ 6,000,000.00
December 27, 1997 $10,000,000.00 plus the net
proceeds for any stock
offering of Company
conducted after December
28, 1996, and plus 50% of
Adjusted Net Income (but
not losses) of Company for
Company's fiscal year
ending December 27, 1997
March 28, 1998 75% of Tangible Net Worth
Covenant as of December 27,
1997"
Section 2.04. Amendment to Section 11 (w) (11) of the Loan Agreement.
From and after the date hereof Section 11 (w) (11) of the Loan Agreement is
deleted in its entirety and in place thereof shall be a new Section 11 (w) (11)
which shall read as follows:
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<PAGE>
"(11) Daily during any periods in which any Revolving
Loans or Letters of Credit are outstanding and monthly (within
7 days after the end of each month) at all other times, an
activity report setting forth (i) inventory by store, (ii)
inventory by type, (iii) inventory received in dollars and
units by store, and (iv) inventory sold in dollars and units
by store. Such report shall be in form and substance
reasonably acceptable to Secured Party."
Section 2.05. Amendment to Section 12 (a) of the Loan Agreement. From
and after the date hereof Section 12 (a) of the Loan Agreement is deleted in its
entirety and replaced with a new Section 12 (a) which shall read as follows:
"(a) Borrower shall not permit any financing statement
regarding the Collateral to be filed other than (i) a financing
statement or statements in favor of Secured Party, (ii) those described
on Schedule 10 (g), and (iii) financing statements that evidence the
"Marshall Liens" (as defined in the Intercreditor Agreement)."
Section 2.06. Amendment to Section 12 (d) of the Loan Agreement. From
and after the date hereof Section 12 (d) of the Loan Agreement is deleted in its
entirety and replaced with a new Section 12 (d) which shall read as follows:
"(d) Borrower shall not grant, create, incur, assume or permit
to exist any security interest, lien or encumbrance on any of its
assets or properties, including the Collateral, except (i) with respect
to capital leases and liens to secure indebtedness for tenant
finish-out of retail stores, not to exceed $2,400,000.00 in the
aggregate in any fiscal year, and (ii) the Marshall Liens."
Section 2.07. Amendment to Section 12 (e) of the Loan Agreement. From
and after the date hereof Section 12 (e) of the Loan Agreement is deleted in its
entirety and replaced with a new Section 12 (e) which shall read as follows:
"(e) Borrower shall not create, incur or assume any
indebtedness for borrowed money or issue or assume any other note,
debenture, bond or other evidences of indebtedness, or enter into any
operating or capital leases, or guarantee any such indebtedness or such
evidences of indebtedness of others, other than (i) borrowing from
Secured Party, (ii) capital leases and indebtedness for tenant
finish-out of retail stores, not to exceed $2,400,000.00 in the
aggregate in any fiscal year, (iii) other indebtedness (the
"Subordinated Debt") that has been subordinated to the Obligations
pursuant to subordination agreements in form and substance acceptable
to Secured Party in its sole discretion, and (iv) the Marshall Debt (as
defined in the Intercreditor Agreement)."
Section 2.08. Amendment to Section 17 (b) of the Loan Agreement. From
and after the date hereof Section 17 (b) of the Loan Agreement is deleted in its
entirety and replaced with a new Section 17 (b) which shall read as follows:
3
<PAGE>
"(b) If Borrower terminates this Agreement prior to the end of
the Initial Term, Borrower acknowledges that (i) such termination would
result in the loss to Secured Party of the benefits of this Agreement
and that the damages incurred by Secured Party as a result of such
termination are and would be difficult of ascertainment, and (ii) no
such termination shall be effective until Borrower has paid to Secured
Party all of the Obligations in immediately available funds, together
with a sum certain as liquidated damages, being Borrower's and Secured
Party's best and fairest estimate of Secured Party's damages caused by
such termination, equal to one half of one percent (0.5%) of the
Revolving Line."
Section 2.09. Exhibit A to the Loan Agreement. From and after the date
hereof (i) Exhibit A to the Loan Agreement is deleted in its entirety and
replaced with a new Exhibit A in the form of Exhibit A-1 attached hereto, and
(ii) all references in the Loan Agreement to Exhibit A shall refer to Exhibit
A-1 attached hereto.
ARTICLE III
Conditions Precedent
Section 3.01. Conditions Precedent. The effectiveness of this Amendment
is subject to the satisfaction of the following conditions precedent, unless
specifically waived in writing by Investor:
(a) The representations and warranties contained herein and in
each of the other Loan Documents shall be true and correct as of the
date hereof as if made on the date hereof.
(b) Unless waived by Bank, no Event of Default shall have
occurred and be continuing and no event or condition shall have
occurred that with the giving of notice or lapse of time or both would
be an Event of Default.
(c) The Debtor Group and each of the other parties listed on
the signature pages to this Amendment shall have executed this
Amendment.
(d) All corporate proceedings taken in connection with the
transactions contemplated by this Amendment and all documents,
instruments and other legal matters incident thereto shall be
reasonably satisfactory to Secured Party and its legal counsel.
(e) Borrower shall have delivered to Secured Party a
certificate signed by the corporate secretary of the general partner of
Borrower (i) certifying to Secured Party that Borrower's partnership
agreement has not been amended since Borrower's certification thereof
under Certificate of Corporate Secretary dated June 7, 1996 previously
delivered to Secured Party in connection with the Loan Agreement, and
that the officers of the general partner of Borrower specified therein
4
<PAGE>
are duly elected, qualified and acting in the capacities therein
stated, as of the effective date hereof, and (ii) attaching and
certifying resolutions duly adopted by the board of directors of the
general partner of Borrower authorizing and directing one or more named
officers of the general partner of Borrower to execute and deliver this
Amendment, and all related documentation required by Secured Party, on
behalf of Borrower, which certificate shall be in form satisfactory to
Secured Party.
(f) All conditions precedent set forth in the Loan Agreement
shall have been satisfied.
(g) Borrower has delivered to Bank the inventory reports for
January and February, 1997, and the financial statements for January,
1997, that Borrower is required to deliver in accordance with Section
11 (w) of the Loan Agreement.
ARTICLE IV
Ratifications, Representations, and Warranties
Section 4.01. Ratifications by Borrower and Debtor Group. The terms and
provisions set forth in this Amendment shall modify and supersede all
inconsistent terms and provisions set forth in the Loan Agreement and, except as
expressly modified and superseded by this Amendment, the terms and provisions of
the Loan Agreement are ratified and confirmed and shall continue in full force
and effect. The Loan Agreement as amended by this Amendment shall continue to be
legal, valid, binding and enforceable in accordance with its terms.
Section 4.02. Renewal and Extension of Security Interests and Liens.
Borrower and each Guarantor hereby renews, affirms and ratifies all security
interests created and granted in the Loan Documents. Borrower and each Guarantor
agrees that this Amendment shall in no manner affect or impair the liens and
security interests securing the Obligations, and that such liens and security
interests shall not in any manner be waived, the purposes of this Amendment
being to modify the Loan Agreement as herein provided, and to carry forward all
liens and security interest securing same, which are acknowledged by Borrower
and each Guarantor to be valid and subsisting.
Section 4.03. Ratification by Guarantors. Each Guarantor and each
Validity Guarantor (i) consents, acknowledges, and agrees to the execution,
delivery, and performance by Borrower of this Amendment, (ii) acknowledges and
agrees that this Amendment does not affect, diminish, waive, or release
his/her/its obligations under guaranty agreement delivered by him/her/it to
Bank, and (iii) ratifies and confirms his/her/its obligations pursuant to such
guaranty agreement. Further, each Guarantor covenants, acknowledges, and agrees
that such Guarantor guaranties the repayment of the "Guaranteed Indebtedness" as
provided in the guaranty agreement executed by such Guarantor.
Section 4.04. Representations and Warranties. Borrower and each
Guarantor represents and warrants to Bank as follows: (i) the execution,
5
<PAGE>
delivery and performance of this Amendment and any and all Loan Documents
executed and/or delivered in connection herewith have been authorized by all
requisite corporate action on the part of Borrower and each Guarantor and will
not violate the partnership agreement, articles or bylaws, as appropriate, of
Borrower or any Guarantor or any agreement to which Borrower or any Guarantor is
a party; (ii) the representations and warranties contained in the Loan Agreement
as amended hereby and in each of the other Loan Documents are true and correct
on and as of the date hereof as though made on and as of the date hereof; (iii)
no Event of Default under the Loan Agreement has occurred and is continuing; and
(iv) Borrower is in full compliance with all covenants and agreements contained
in the Loan Agreement, as amended hereby.
Section 4.05. Ratification by Subordinated Lenders. Company (i)
consents, acknowledges, and agrees to the execution, delivery, and performance
by Borrower of this Amendment, (ii) acknowledges and agrees that this Amendment
does not affect, diminish, waive, or release its obligations under Subordination
Agreement dated June 7, 1996, executed and delivered by it to Bank, and (iii)
ratifies and confirms the Subordination Agreement executed by it and its
obligations pursuant to such Subordination Agreement.
ARTICLE V
Miscellaneous
Section 5.01. Survival of Representations and Warranties. All
representations and warranties made in the Loan Agreement or any other Loan
Document, including without limitation, any Loan Document furnished in
connection with this Amendment, shall survive the execution and delivery of this
Amendment and the other Loan Document, and no investigation by Secured Party or
any closing shall affect such representations and warranties or the right of
Secured Party to rely thereon.
Section 5.02. Reference to Loan Agreement. Each of the Loan Documents
and the Loan Agreement and any and all other agreements, documents or
instruments now or hereafter executed and delivered pursuant to the terms hereof
or pursuant to the terms of the Loan Agreement as amended hereby, are hereby
amended so that any reference in such Loan Documents to the Loan Agreement shall
mean a reference to the Loan Agreement as amended hereby.
Section 5.03. Expenses of Secured Party. Borrower agrees to pay on
demand all reasonable costs and expenses incurred by Secured Party directly in
connection with the preparation, negotiation and execution of this Amendment and
the other Loan Documents executed pursuant hereto and any and all amendments,
modifications, and supplements thereto, including, without limitation, the costs
and fees of Secured Party's legal counsel, and all costs and expenses incurred
by Secured Party in connection with the enforcement or preservation of any
rights under the Loan Agreement, as amended hereby, or any other Loan Document,
including, without limitation, the reasonable costs and fees of Secured Party's
legal counsel.
6
<PAGE>
Section 5.04. Severability. Any provision of this Amendment held by a
court of competent jurisdiction to be invalid or unenforceable shall not impair
or invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
SECTION 5.05. APPLICABLE LAW. THIS AMENDMENT SHALL BE DEEMED TO HAVE
BEEN MADE AND TO BE PERFORMABLE IN AND SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
Section 5.06. Successors and Assigns. This Amendment is binding upon
and shall inure to the benefit of the parties hereto and their respective
successors, assigns, heirs, executors, and legal representatives, except that
none of the parties hereto other than Secured Party may assign or transfer any
of its rights or obligations hereunder without the prior written consent of
Secured Party.
Section 5.07. Counterparts. This Amendment may be executed in one or
more counterparts, each of which when so executed shall be deemed to be an
original, but all of which when taken together shall constitute one and the same
instrument.
Section 5.08. Effect of Waiver. No consent or waiver, express or
implied, by Bank to or for any breach of or deviation from any covenant,
condition or duty by Borrower, shall be deemed a consent to or waiver of any
other breach of the same or any other covenant, condition or duty.
Section 5.09. Headings. The headings, captions, and arrangements used
in this Amendment are for convenience only and shall not affect the
interpretation of this Amendment.
Section 5.10. Conflicting Provisions. If any provision of the Loan
Agreement as amended hereby conflicts with any provision of any other Loan
Document, the provision in the Loan Agreement shall control.
SECTION 5.11. RELEASE. BORROWER AND EACH GUARANTOR HEREBY ACKNOWLEDGES
THAT NEITHER BORROWER NOR ANY GUARANTOR HAS ANY DEFENSE, COUNTERCLAIM, OFFSET,
CROSS-COMPLAINT, CLAIM OR DEMAND OF ANY KIND OR NATURE WHATSOEVER THAT CAN BE
ASSERTED TO REDUCE OR ELIMINATE ALL OR ANY PART OF BORROWER'S OR ANY GUARANTOR'S
LIABILITY TO REPAY THE OBLIGATIONS OR TO SEEK AFFIRMATIVE RELIEF OR DAMAGES OF
ANY KIND OR NATURE FROM SECURED PARTY. BORROWER AND EACH GUARANTOR HEREBY
VOLUNTARILY AND KNOWINGLY RELEASES AND FOREVER DISCHARGES SECURED PARTY, ITS
PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE
CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES, AND
7
<PAGE>
LIABILITIES WHATSOEVER, KNOWN OR UNKNOWN, ANTICIPATED OR UNANTICIPATED,
SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW OR IN
EQUITY, ORIGINATING IN WHOLE OR IN PART ON OR BEFORE THE DATE THIS AMENDMENT IS
EXECUTED, WHICH BORROWER OR ANY GUARANTOR MAY NOW OR HEREAFTER HAVE AGAINST
SECURED PARTY, ITS PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, IF
ANY, AND IRRESPECTIVE OR WHETHER ANY SUCH CLAIMS ARISE OUT OF CONTRACT, TORT,
VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE OR ARISE FROM ANY LOAN, INCLUDING,
WITHOUT LIMITATION, ANY CONTRACTING FOR, CHARGING, TAKING, RESERVING, COLLECTING
OR RECEIVING INTEREST IN EXCESS OF THE HIGHEST LAWFUL RATE, THE EXERCISE OF ANY
RIGHTS AND REMEDIES UNDER THE LOAN DOCUMENTS, AND NEGOTIATION AND EXECUTION OF
THIS AMENDMENT.
SECTION 5.12. ENTIRE AGREEMENT. THIS AMENDMENT, THE LOAN AGREEMENT AND
ALL OTHER LOAN DOCUMENTS EXECUTED AND DELIVERED IN CONNECTION WITH AND PURSUANT
TO THIS AMENDMENT AND THE LOAN AGREEMENT REPRESENT THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS,
OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
Section 5.13. Waivers. Borrower failed to provide to Bank certain of
the monthly and weekly reports required by Section 11 (w) of the Loan Agreement
to be delivered by Borrower to Bank during November and December, 1996 and
January, 1997. Borrower has requested that Bank waive such failure and any Event
of Default caused thereby. Bank hereby consents to the failure of Borrower to
deliver such reports and waives any Event of Default caused thereby. Such waiver
and consent is expressly limited to as set forth in this Section 5.13 and does
not, and shall not, constitute a consent or waiver to any other, additional or
future breach of Section 11(w) or any other provision of the Loan Agreement or
any other Loan Document. Except as set forth in this Section 5.13, Bank is not
aware of the occurrence and continuation of any Events of Default under the Loan
Agreement.
8
<PAGE>
EXECUTED as of the date first written above.
BANK:
Bank One, Texas, N.A.
By:__________________________________
Kathleen S. Robertson, Vice President
BORROWER:
The Great Train Store Partners, L.P.
By: GTS Partner, Inc.
By:____________________________
Cheryl Taylor, Vice President
ADDITIONAL MEMBERS OF THE DEBTOR GROUP
and GUARANTORS:
The Great Train Store Company
By:_________________________________
Cheryl Taylor, Vice President
GTS Partner, Inc.
By:__________________________________
Cheryl Taylor, Vice President
GTS Limited Partner, Inc.
By:__________________________________
Cheryl Taylor, Vice President
9
<PAGE>
VALIDITY GUARANTORS: The undersigned have executed
this Amendment for the purpose of consenting,
acknowledging and agreeing to the terms of Section
4.03 hereof
------------------------------------
James H. Levi
-------------------------------------
Cheryl Taylor
SUBORDINATED LENDER: The undersigned haS executed
this Amendment for the purpose of consenting,
acknowledging and agreeing to the terms of Section
4.05 hereof
The Great Train Store Company
By:_________________________________
Cheryl Taylor, Vice President
10
EXHIBIT 11.1
The Great Train Store Company
Computation of Per Share Earnings
For the Fiscal Year Ended
December 30, 1995 December 28, 1996
----------------------------------------
Weighted Average of:
Common Stock Outstanding 3,145,000 3,663,780
Common Stock Equivalents - 220,016
--------- ---------
Shares Outstanding 3,145,000 3,883,796
========= =========
Net Income $ 386,550 $ 772,228
Shares Outstanding 3,145,000 3,883,796
--------- ---------
Net Loss Per Share $ 0.12 $ 0.20
========= =========
EXHIBIT 23.1
Independent Auditors' Consent
The Board of Directors
The Great Train Store Company:
We consent to the incorporation by reference in the registration statements on
Form S-8 ( Nos. 33-82626 and 333-10427) of The Great Train Store Company of our
report dated February 4, 1997, except as to note 3 which is as of March 19,
1997, relating to the consolidated balance sheet of The Great Train Store
Company and subsidiaries as of December 28, 1996 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 30, 1995 and December 28, 1996, which report appears in the
December 28, 1996 annual report on Form 10-KSB of The Great Train Store Company.
/s/ KPMG Peat Marwick LLP
Dallas, Texas
March 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> DEC-28-1996
<EXCHANGE-RATE> 1
<CASH> 4,864,539
<SECURITIES> 0
<RECEIVABLES> 1,123,634
<ALLOWANCES> 0
<INVENTORY> 6,123,352
<CURRENT-ASSETS> 12,111,525
<PP&E> 5,053,942
<DEPRECIATION> 1,381,674
<TOTAL-ASSETS> 16,186,774
<CURRENT-LIABILITIES> 4,414,437
<BONDS> 0
0
0
<COMMON> 43,841
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 16,186,774
<SALES> 18,998,461
<TOTAL-REVENUES> 18,998,461
<CGS> 9,847,467
<TOTAL-COSTS> 8,070,230
<OTHER-EXPENSES> (29,239)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 129,500
<INCOME-PRETAX> 1,051,529
<INCOME-TAX> 279,301
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 772,228
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
