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 for the fiscal year ended January 3, 1998
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(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 $28,090,948.
At March 10, 1998, the aggregate market value of the voting stock held by
non-affiliates of The Great Train Store Company (the "Company") was
approximately $11,742,199 based on the last sale price of the common stock
reported by The Nasdaq National Market on March 10, 1998. At March 10, 1998, the
Company had outstanding 4,415,764 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders (to be filed pursuant to Regulation 14A within 120 days of the end
of the registrant's most recently completed fiscal year) are incorporated by
reference to Part III of this Form 10-KSB.
<PAGE>
TABLE OF CONTENTS
PART I
Page
ITEM 1. Description of Business
ITEM 2. Description of Property
ITEM 3. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of Security Holders
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
ITEM 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
ITEM 7. Financial Statements
ITEM 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosures
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the Exchange
Act
ITEM 10. Executive Compensation
ITEM 11. Security Ownership of Certain Beneficial Owners
and Management
ITEM 12. Certain Relationships and Related Transactions
PART IV
ITEM 13. Exhibits and Reports on Form 8-K
<PAGE>
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 forty-two
currently operating The Great Train Stores typically offer approximately 4,200
stock keeping units ("SKUs"), and the Train Depot offers approximately 10,000
SKUs, 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. The Company expanded slowly at first
but much more rapidly in the last few years. In 1987 the second and third stores
were opened, from 1988 through 1994, an additional eleven stores were opened,
and from 1995 to 1997 an additional thirty stores were opened, two stores were
closed, and one was relocated. During 1996 the Company also acquired one
additional store through the purchase of The Train Depot in Winter Park,
Florida. In 1997, the Company also opened five The Great Train Store Express,
temporary holiday stores.
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 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, railroad crossing signals, train sounds
and audiovisual projections, to increase the visibility of the store and enhance
the quality of each customer's shopping experience.
The Great Train Stores range in size from 1,150 to 3,301 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 4,200 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 1997, approximately 34.1%
of the Company's 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, Con-Cor,
Woodland Scenics, and Micro Trains. Sales in 1997 from this product
line accounted for approximately 36.6% of the Company's annual 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
11.5% of the Company's annual sales volume in 1997.
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. Sales from this product line in 1997
accounted for approximately 11.3% of the Company's annual sales volume.
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
sales of which represented approximately 6.5% of the Company's annual
sales volume in 1997.
A substantial portion of the Company's annual 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 approximately 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 with the Regional Sales Managers who participate in a weekly
conference call with the Company's Director - Stores and the Vice President -
Sales 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 the Company's
central office to all of The Great Train Stores.
Each store is staffed with a Store Manager, one or two Assistant Managers and
such additional Sales Associates 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. In
August 1997, the Company implemented a sales commission program for all Sales
Associates which supplements the employee's hourly pay rate. The Company
believes that it's 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.
Expansion Strategy
The Company intends to continue implementation of its growth strategy. As of
January 3, 1998 the Company operated forty-two 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; Winter Park (near Orlando), Florida; Paramus, New Jersey; Peabody,
Massachusetts; Westbury, New York; Milwaukee, Wisconsin; Waterbury, Connecticut;
San Diego, California; Miami, Florida; Syracuse, New York; Grapevine, Texas
(near Dallas/Fort Worth); Cincinnati, Ohio; Youngstown, Ohio; and Pittsburgh,
Pennsylvania. In 1997, the Company also operated five The Great Train Store
Express, temporary holiday stores in Olathe, Kansas; Dallas, Texas; Nashville,
Tennessee; Tulsa, Oklahoma, and Columbia, Maryland. The Company has announced
1998 store openings in West Nyack (Rockland County), New York; Chattanooga,
Tennessee; Tulsa, Oklahoma; and Scottsdale, Arizona. A 1999 opening in
Providence, Rhode Island has also been announced. Many other locations are under
active consideration and/or negotiation to open in 1998 and 1999. Because of the
broad market appeal of their merchandise mix, the Company seeks to locate The
Great Train Stores in high traffic shopping environments.
<PAGE>
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. 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 vendor funded 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.
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 have included 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 600 vendors. No single
vendor, other than Learning Curve Toys (whose products represented approximately
14.6% of total net sales) and Lionel Trains, Inc. (whose products represented
approximately 11.2% of total net sales), supplied products representing more
than 10% of the Company's net sales in 1997. The largest five vendors
represented approximately 43.8% 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.
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.
<PAGE>
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 which include helping to reduce
average store inventories and thus achieve higher inventory turnover, and better
in-stock availability. 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 SKU from receipt to sale.
The Company has determined that enhancements to its information systems are
necessary to accommodate its growth. The Company is actively developing an
action plan for upgrading systems beginning mid-year 1998. The Company
anticipates that it will continue to invest significant capital indefinitely to
enhance and improve its systems.
The Company is actively evaluating plans to deal with the "Year 2000 problem" to
ensure its computer systems will be Year 2000 compliant. Such plans provide for
the conversion efforts to be completed by the end of 1999. The Year 2000 problem
is the result of computer programs being written using two digits rather than
four to define the applicable year. The cost of such project is unknown at this
time. However, all costs are expected to be funded through operating cash flows
and/or the Company's line of credit or possibly through additional equipment
financing.
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 broad selection of merchandise in a more exciting and entertaining
environment. The Company also believes that the train-related knowledge of many
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 European Union and Canadian Patent and Trademark offices and are pending
registration in the Japanese and European Union 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 January 3, 1998, the Company employed a total of 499 persons, of whom 134
were salaried personnel and 365 were employed on an hourly wage basis.
Thirty-two of the Company's employees were assigned to central office
responsibilities and 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.
<PAGE>
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
---- ---------------
1998 2
1999 0
2000 3
2001 1
2002 0
2003 and thereafter 37
The Company's central offices are presently located in approximately 8,245
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 1997 to a vote of security
holders.
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 National
Market under the symbol GTRN. At March 10, 1998 the number of common
stockholders of record was 136. 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. The following table sets
forth, for the periods indicated, the range of high and low sales prices with
respect to the Company's Common Stock as reported by The Nasdaq National Market.
Common Stock
------------------------
Period High Low
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
1997:
First Quarter 9 3/8 8 1/4
Second Quarter 8 7/8 6 3/4
Third Quarter 9 3/8 7
Fourth Quarter 8 1/2 5 5/8
<PAGE>
The foregoing quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
On March 10, 1998, the last sale price for the Common Stock as reported by The
Nasdaq National Market was $3 3/4 .
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.
ITEM 6. Management's Discussion and Analysis
Actual results may differ materially from any "forward-looking" statements due
to a number of important factors. Those factors include possible difficulties in
opening new stores when expected or at all, successfully operating such stores
in accordance with the Company's new operating initiatives and in general,
controlling the Company's central overhead and producing overall profitability
as well as satisfying the various requirements of the Company's financial
arrangements. These risk factors and others, are more fully discussed in Exhibit
99.1 attached to the Company's Form 10-QSB for the third quarter of 1997, a copy
of which is available without charge from the Company.
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. Fiscal year 1997 consisted of a 53 week period
ended January 3, 1998 as compared to fiscal 1996 which consisted of a 52 week
period ended December 28, 1996.
For the Fiscal Year Ended
December 28, 1996 January 3, 1998
Net Sales 100.0% 100.0%
Cost of Sales 51.8 53.7
----- -----
Gross Profit 48.2 46.3
Store operating expenses 18.8 19.3
Occupancy expenses 11.7 13.2
Selling, general and
administrative expenses 9.9 9.7
Depreciation and amortization 2.1 2.7
----- -----
Operating income 5.7 1.4
Interest expense (0.7) (0.7)
Interest income .5 .2
Other income (expense) .1 1.4
----- -----
Income before income taxes 5.6 2.3
Income tax (1.5) (.8)
------ -----
Net income 4.1% 1.5%
===== =====
Comparison of Fiscal Year Ended December 28, 1996 to the Fiscal Year Ended
January 3, 1998
Net sales increased approximately $9,092,000, or 47.9%, for the fiscal year
ended January 3, 1998 compared with the corresponding period last year.
Substantially all of this increase (approximately $9,091,000) was attributable
to net sales generated by new stores not included in the comparable store
calculation. Approximately $1,000 of the increase was attributable to a slight
increase in comparable store sales. The calculation of comparable store sales
includes sales for stores open in all periods for both fiscal years. The
disappointing sales performance of comparable store sales was primarily related
to a combination of several factors. Most notably, the Company's buying staff
did not cope as ably as they might have with the rapid growth of the Company
and, on many occasions, ordered product later than they should have, creating
periods in which key product was out of stock. In addition, there were external
factors, such as certain manufacturers not meeting promised quantity or delivery
dates and the well-publicized UPS strike. The Company has added to and believes
it has substantially improved the quality and experience level of people on its
buying staff, as well as changing the overall leadership of the department. The
Company has also recently developed a new program of much closer relationships
with most of its important vendors, including various data sharing arrangements
as well as establishing vendor managed inventory programs in a number of cases.
The Company is now also using its purchasing power much more effectively
ensuring that new items are received more promptly into its stores and are
developing much more exclusive product. Through these changes, the Company
believes that it now has a department which is proactive and focused on the key
performance indicators which it hopes will make a significant contribution to
increasing sales. Another contributing factor during 1997 related to poor
traffic in certain of the malls where the Company's stores are located. In
several instances, the Company believes the disappointing traffic was related to
certain events including major store closings, a mall which closed, bad weather,
and a ship having hit a riverfront center where a store was located. While these
issues adversely impacted the overall results, many stores performed
significantly above last year and all stores continued to have a positive store
level contribution. As the Company's base of stores continues to grow, the
performance of any individual store is expected to have a less material effect
on the Company.
Gross profit increased approximately $3,867,000 or 42.3%, for the fiscal year
ended January 3, 1998, compared with the corresponding period last year, due
primarily to an increase in sales volume. Gross profit as a percentage of net
sales decreased to 46.3% for the fiscal year ended January 3, 1998, compared
with 48.2% for the corresponding period last year. The decrease in gross profit
as a percentage of sales resulted from several factors. One of the principle
focus areas of the new buying staff was to reallocate certain portions of the
Company's inventory among its stores which resulted in significant freight
charges related to the transfer of product. Gross profit was also adversely
impacted by a charge of approximately $188,000 related to the management of the
Company's inventory. This charge was discovered in reconciling the computer
generated accounts payable and detailed vendor statements. In addition, due to
disappointing sales results, the Company made some efforts to counteract this by
reducing certain selling prices which, in turn, adversely impacted gross profit.
In the past, the Company has not found it necessary to significantly promote its
product through price promotions. As part of the improved vendor arrangements,
the Company has been able to negotiate significant improvements to the prices
and terms on which it is buying merchandise and will continue to review its
pricing strategy going forward. The gross profit was also impacted by out of
stock issues in high margin departments and certain reduced cash discounts.
Store operating expenses increased approximately $1,848,000 or 51.7%, for the
fiscal year ended January 3, 1998, compared with the corresponding period last
year. Approximately $1,882,000 of the increase resulted from the operation of
the new stores. This increase was partially offset by an approximate $34,000
decrease in comparable store operating expenses. As a percentage of net sales,
store operating expenses increased to 19.3% for the fiscal year ended January 3,
1998, compared with 18.8% for the corresponding period last year. This increase
was primarily due to lower than anticipated sales, pre-opening expenses incurred
in connection with more new stores and the opening of The Great Train Store
Express temporary holiday stores and an increase in store personnel compensation
which included changes in the federal minimum wage standards.
Occupancy expenses increased approximately $1,489,000, or 67.0%, for the fiscal
year ended January 3, 1998, compared with the corresponding period last year.
Approximately $1,364,000 of the increase related to the new stores and
comparable store occupancy expenses increased approximately $40,000, mostly from
increases in shared expenses charged by certain of the malls in which the
Company has stores. In addition, approximately $85,000 of the increase was
related to the Company leasing additional central office space in order to
support future growth and leasing additional space adjacent to an existing store
for the purpose of redistributing a small portion of the Company's merchandise
which could not economically or otherwise be shipped directly to the stores. The
Company believes the current central office space is adequate for the
foreseeable future. As a percentage of net sales, overall occupancy expenses
increased to 13.2% for the fiscal year January 3, 1998, from 11.7% for the
corresponding period last year, primarily due to lower than planned sales.
<PAGE>
Selling, general and administrative expenses increased approximately $854,000 or
45.5%, for the fiscal year ended January 3, 1998, compared with the
corresponding period last year. The increase in selling, general and
administrative expenses was primarily due to approximately $474,000 of
additional expenses related to salaries and related expenses for additional
central office personnel to support the continuing growth of the Company. A
significant portion of such increase is related to the Company's promotion of
certain of its Store Managers to Regional Sales Managers. These positions, which
did not exist in the prior year, are a new level of management created to
supervise the operation of the Company's rapidly growing number of existing
stores and assist in the opening of new stores as part of the Company's
increasing expansion program. In addition, the Company expended more significant
funds than in prior years in aggressive marketing programs in several locations
in an effort to enhance sales. A considerable portion of this included the
existing train hobby store location which the Company acquired in November 1996.
The Company anticipates that selling, general and administrative expenses will
increase further as a result of increased staffing and other costs in
anticipation of opening additional stores pursuant to the Company's expansion
strategy. As a percentage of net sales, selling, general and administrative
expenses decreased to 9.7% for the fiscal year ended January 3, 1998, from 9.9%
for the corresponding period last year. 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 $362,000, or
91.5%, for the fiscal year ended January 3, 1998, compared with the
corresponding period last year. Such increases were primarily the result of an
increase in the asset base related to new stores, the external development of a
SQL server to facilitate enhanced operational reporting in the central office
and additions to fixed assets related to the central office expansion discussed
above. As a percentage of net sales, depreciation and amortization expense
increased to 2.7% for the fiscal year ended January 3, 1998, from 2.1% for the
corresponding period last year. This increase as a percentage of net sales was
primarily related to the central office developments discussed above.
Other income increased approximately $363,000 for the fiscal year ended January
3, 1998 compared with the corresponding period last year. This increase was
primarily due to a $350,000 settlement the Company received from the City of
Indianapolis in connection with the closing of Union Station requiring the
Company to close its store during the term of the lease.
Pretax income decreased 39.0% to approximately $642,000 for the fiscal year
ended January 3, 1998. In fiscal 1997, the effective income tax rate was higher
than in fiscal 1996, primarily due to the elimination of the remaining valuation
allowance for deferred tax assets in 1996. As anticipated, the Company's
effective income tax rate in 1997 approximated statutory income tax rates.
As a result of the foregoing, the Company recorded net income of approximately
$411,000 for the fiscal year ended January 3, 1998, compared with net income of
approximately $772,000 for the corresponding period last year. As a percentage
of net sales, net income decreased to 1.5% for fiscal 1997, from 4.1% for fiscal
1996.
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, and capital expenditures.
For the fiscal year ended January 3, 1998, net cash provided by operating
activities was approximately $1,175,000 compared with net cash used in operating
activities of approximately $946,000 for the corresponding period last year. The
increase in net cash provided by operating activities primarily results from an
increase in accounts payable related to better terms with merchandise vendors.
<PAGE>
Subsequent to year end, the Company replaced its existing $8 million facility
with a $15 million revolving line of credit with BankAmerica Business Credit,
Inc. The enhanced line of credit features increased availability, a lower rate
of interest and improved advance rates. The initial term of the facility is
three years and it is secured by certain assets of the Company, primarily
inventory. 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 January
3, 1998, there was no balance outstanding on the $8 million Bank One revolving
line of credit.
As of January 3, 1998, the Company's capital lease obligations consisted of
approximately $298,000 payable under capital lease obligations related to
management information systems, fixtures and other equipment. Of such debt
obligations, approximately $86,000 under these financing arrangements are
payable during 1998.
During fiscal 1997, the Company opened twelve new stores and relocated a store
in Indianapolis. The new store replaced the Company's store in Indianapolis
Union Station which closed on July 20, 1997 after the City announced the
Station's closing.
The Company intends to finance anticipated capital expenditures, working capital
needs and debt obligations for the foreseeable future from cash from the
Company's operating activities, landlord allowances, the available increased
line of credit, possible fixtures and equipment or inventory financing, trade
credit and/or the public or private sale of debt or equity securities.
The Company is actively evaluating plans to deal with the "Year 2000 problem" to
ensure its computer systems will be Year 2000 compliant. Such plans provide for
the conversion efforts to be completed by the end of 1999. The Year 2000 problem
is the result of computer programs being written using two digits rather than
four to define the applicable year. The cost of such project is unknown at this
time. However, all costs are expected to be funded through operating cash flows
and/or the Company's line of credit or possibly through additional equipment
financing.
Authoritative Pronouncements
The Financial Accounting Standards Board has issued Statements of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") and
No. 131, "Disclosure about Segments of an Enterprise and Related Information"
("SFAS 131"). Both are required to be adopted in fiscal 1998. Statement 130 will
require the Company to report comprehensive income and its components with the
same prominence as other financial statements. SFAS 131 is not expected to
significantly change the Company's current disclosures.
ITEM 7. Financial Statements
The Company's Consolidated Balance Sheet as of January 3, 1998 and the
Consolidated Statements of Income, Stockholders' Equity and Cash Flows for the
years ended December 28, 1996 and January 3, 1998, 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
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16 (a) of the Exchange Act.
Information regarding Directors, Executive Officers, Promoters and Control
Persons is incorporated by reference to the material contained in the Company's
1998 Proxy Statement.
ITEM 10. Executive Compensation
Information regarding Executive Compensation is incorporated by reference to the
material contained in the Company's 1998 Proxy Statement.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
Information regarding Security Ownership of Certain Beneficial Owners and
Management is incorporated by reference to the material contained in the
Company's 1998 Proxy Statement.
ITEM 12. Certain Relationships and Related Transactions
None
ITEM 13. Exhibits and Reports on Form 8-K.
(a) Exhibits.
See Exhibit Index.
(b) Reports on Form 8-K.
None
<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 January 3, 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years ended December 28, 1996 and January 3, 1998. 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 January 3, 1998 and the results of their
operations and their cash flows for the years ended December 28, 1996 and
January 3, 1998, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas,
February 10, 1998
F-1
<PAGE>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
January 3, 1998
CURRENT ASSETS
Cash and cash equivalents $ 3,490,721
Merchandise inventories 8,978,789
Accounts receivable and other current assets 1,482,246
----------
Total current assets 13,951,756
PROPERTY AND EQUIPMENT:
Store construction and leasehold improvements 4,741,495
Furniture, fixtures and equipment 2,650,600
----------
7,392,095
Less accumulated depreciation and amortization 1,827,691
----------
Property and equipment, net 5,564,404
DEFERRED TAXES 316,344
OTHER ASSETS, net 315,138
----------
Total assets $20,147,642
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $6,044,099
Sales taxes payable 660,547
Income taxes payable 241,716
Current portion of capital lease obligations 85,497
----------
Total current liabilities 7,031,859
CAPITAL LEASE OBLIGATIONS, net of current portion 212,221
DEFERRED RENT AND OTHER LIABILITIES 873,117
----------
Total liabilities 8,117,197
----------
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; 4,415,764 shares issued and outstanding 44,158
Additional paid-in capital 10,444,765
Retained earnings 1,541,522
----------
Total stockholders' equity 12,030,445
----------
Total liabilities and stockholders' equity $20,147,642
===========
The accompanying notes are an integral part of these consolidated financial
statements
F-2
<PAGE>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Fiscal Year Ended
December 28, 1996 January 3, 1998
NET SALES $ 18,998,461 $ 28,090,948
COST OF SALES 9,847,463 15,072,692
----------- -----------
Gross profit 9,150,998 13,018,256
---------- -----------
OPERATING EXPENSES:
Store operating expenses 3,574,171 5,421,714
Occupancy expenses 2,223,853 3,713,162
Selling, general and
administrative expenses 1,876,070 2,730,032
Depreciation and
amoritization expenses 396,136 758,562
---------- ---------
Total operating expenses 8,070,230 12,623,470
---------- ----------
OPERATING INCOME 1,080,768 394,786
---------- ----------
OTHER INCOME (EXPENSE):
Income expense (129,500) (188,128)
Interest income 84,960 56,664
Other income 15,301 378,618
---------- ---------
Total other income (expense), net (29,239) 247,154
---------- --------
INCOME BEFORE INCOME TAXES 1,051,529 641,940
PROVISION FOR INCOME TAXES 279,301 231,327
--------- -------
NET INCOME $ 772,228 $ 410,613
======== =======
BASIC EARNINGS PER SHARE $ 0.21 $ 0.09
======== =======
DILUTED EARNINGS PER SHARE $ 0.20 $ 0.09
======== =======
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 STOCKHOLDER EQUITY
<CAPTION>
Compensation
Common Stock Paid-In - Restricted Retained
Shares Amount Capital Stock Earnings Total
<S> <C> <C> <C> <C> <C> <C>
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
Net income - - - - 410,613 410,613
Exercise of stock options
and related tax benefits 31,645 317 169,176 - - 169,493
Adjustments associated
with unearned
compensation - restricted
stock - - 77,414 4,125 - 81,539
-------- ----- --------- ----- ------- ----------
BALANCE, January 3, 1998 4,415,764 $ 44,158 $10,444,765 $ - $1,541,522 $12,030,445
========= ======= ========== ====== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Year Ended
December 28, 1996 January 3, 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 772,228 $ 410,613
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 396,136 758,562
Deferred income taxes (150,193) (121,617)
Loss on retirement of assets - 14,728
Amortization of unearned
compensation - restricted stock 7,040 4,125
Changes in assets and liabilities:
Merchandise inventories (3,240,392) (2,855,437)
Accounts receivable and other
current assets (900,995) (358,612)
Other assets (122,491) (122,585)
Accounts payable and accrued
liabilities 1,600,976 3,035,797
Sales taxes payable 167,841 255,913
Income taxes payable 257,067 (59,885)
Other long term liabilities 267,090 213,517
--------- ---------
Net cash provided by (used in)
operating activities (945,693) 1,175,119
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,275,065) (2,649,724)
--------- ---------
Net cash used in investing activities (2,275,065) (2,649,724)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock options exercised 36,352 116,291
Tax benefit of stock option exercises 141,780 130,616
Net proceeds from warrant exercise 5,579,987 -
Proceeds from notes payable 144,269 -
Repayment of notes payable and
capital leases (1,054,789) (146,120)
--------- -------
Net cash provided by financing
activities 4,847,599 100,787
--------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,626,841 (1,373,818)
CASH AND CASH EQUIVALENTS,
beginning of year 3,237,698 4,864,539
--------- ---------
CASH AND CASH EQUIVALENTS,
end of year $4,864,539 $ 3,490,721
========== ===========
SUPPLEMENTAL NONCASH INVESTING AND
FINANCING ACTIVITIES:
Assets financed through capital
lease obligations $ 155,000 $ -
Interest paid $ 187,444 $ 146,289
Income taxes paid $ 41,644 $ 282,213
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 January 3, 1998, the Company operated forty-two
stores in twenty-three 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. Fiscal year 1997 consisted of a 53 week period
ended January 3, 1998 as compared to fiscal 1996 which consisted of a 52 week
period ended December 28, 1996. 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. Substantially all of the Company's cash at
December 28, 1996 and January 3, 1998 was invested in money market funds. 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. The Company reviews all
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount exceeds the fair value of
the assets.
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.
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 $50,000 and $139,000 respectively during
fiscal 1996 and fiscal 1997.
F-6
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
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
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") which became effective on a retroactive basis
with the issuance of the Company's consolidated financial statements for fiscal
1997. Accordingly, the Company has restated its prior year earnings per share
data to conform with SFAS 128.
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share is
computed by dividing net income by the weighted average number of common shares
plus the number of additional shares that would have resulted from potentially
dilutive securities.
1996 1997
---- ----
Weighted Average of Common Stock
Outstanding 3,663,780 4,401,225
Common Stock Equivalents 193,300 196,737
--------- ---------
Weighted Average of Common Stock Outstanding
and Common Stock Equivalents 3,857,080 4,597,962
========= =========
Stock Option Plan
The Company accounts for its stock option plan in accordance with the provisions
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), 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. Under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("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 provisions of SFAS 123.
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. REVOLVING LINE OF CREDIT
Subsequent to year end, the Company replaced its existing $8 million facility
with a $15 million revolving line of credit with BankAmerica Business Credit,
Inc. The initial term of the facility is three years and it is secured by
certain assets of the Company, primarily inventory. The revolving credit
facility provides a source of additional liquidity to manage cash flow and
provide capital for expansion. As of January 3, 1998, there was no balance
outstanding on the $8 million Bank One facility.
F-7
<PAGE>
3. INCOME TAXES
Income tax expense for the years ended December 28, 1996 and January 3, 1998
consisted of the following:
1996 1997
---- ----
Federal income taxes - current $389,494 $ 341,332
Federal income taxes - deferred (150,193) (121,617)
State income taxes - current 40,000 11,612
-------- -------
$ 279,301 $ 231,327
========== =========
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 28,
1996 and January 3, 1998, respectively, as a result of the following:
1996 1997
---- ----
Computed "expec$ed" tax expense $ 357,520 $ 218,260
State income tax, net of federal
tax benefit 26,400 7,664
Change in the beginning-of-the-year
balance of the valuation allowance
for deferred tax assets allocated
to income tax expense (107,507) -
Other
2,888 5,403
------- -------
$ 279,301 $ 231,327
========== ===========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at January 3, 1998 are presented
below:
Deferred tax assets:
Deferred rent $ 267,240
Other 73,016
--------
Total deferred tax assets 340,256
Deferred tax liabilities - property and equipment (23,912)
--------
Net deferred tax assets $ 316,344
=========
The Company did not record a valuation allowance for deferred tax assets at
January 3, 1998 nor 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. 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 January 3, 1998.
4. 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, some stores lease obligations are secured by
fixtures and equipment of the Company. 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 $786,000 at January 3, 1998, representing the excess of
straight-line rental expense over amounts paid.
F-8
<PAGE>
4. COMMITMENTS - (Continued)
Total rental expense under all noncancelable operating leases totaled
approximately $1,448,000 and $2,388,000 for the years ended December 28, 1996
and January 3, 1998 respectively. Included in these amounts is contingent rent
of approximately $224,000 and $281,000 for the years ended December 28, 1996 and
January 3, 1998 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%. At January 3,
1998, the gross amount of property and equipment and related accumulated
amortization recorded under capital leases were approximately $716,000 and
$423,000 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
1998............................. 2,982,014 $ 122,312
1999............................. 2,919,961 122,312
2000............................. 2,816,450 100,430
2001............................. 2,794,266 22,453
2002............................. 2,766,566 -
Thereafter ...................... 11,190,522 -
---------- ------
Total minimum payments $25,469,779 $ 367,507
----------
Less interest 69,789
Less current portion 85,497
Capital lease obligations, net of
current portion $ 212,221
============
5. 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 January 3, 1998, 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 (which expire in May 1999) 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.
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'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 exercisable 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:
F-9
<PAGE>
5. STOCKHOLDERS' EQUITY - (Continued):
Incentive Director
Compensation Plan Stock Option Plan
Weighted Weighted
Average Average
Options Exercise Price Options Exercise Price
Outstanding at
December 30, 1995 154,700 $3.87 30,000 $4.25
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 $4.82
Granted 228,150 $7.96 20,000 $7.88
Exercised (22,650) $3.19 (10,000) $4.41
Forfeited (89,950) $5.91 - -
-------- ------
Outstanding at
January 3, 1998 463,600 $6.40 45,000 $6.27
======= ======
Exercisable at
January 3, 1998 30,750 $3.69 25,000 $4.99
======== =======
Reserved and available
for grant at
January 3, 1998 166,800 40,000
======== ======
At January 3, 1998, the range of exercise prices and weighted-average remaining
contractual life of outstanding options was $3.00 - $9.25 and 8.6 years for the
Incentive Compensation Plan and $3.00 - $7.88 and 5.6 years for the Director
Stock Option Plan, respectively.
The per share weighted-average fair value of stock options granted during fiscal
1996 and fiscal 1997 was $3.57 and $4.83, respectively for the Incentive
Compensation Plan and $2.59 and $3.67 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:
Incentive Compensation Director Stock Option
Plan Plan
1996 1997 1996 1997
Expected dividend yield - - - -
Risk-free interest rate 6.4% 6.4% 6.9% 6.6%
Expected life in years 10 10 5 10
Expected volatility 40% 59% 40% 59%
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:
1996 1997
---- ----
Net Income: As reported $ 772,228 $ 410,613
Pro forma $ 687,928 $ 191,165
Diluted Earnings Per Share: As reported $ 0.21 $ 0.09
Pro forma $ 0.18 $ 0.04
Pro forma net income reflects only options granted in fiscal 1995 and later.
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-10
<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
March 16, 1998 /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.
March 16, 1998 /s/ James H. Levi
- ----------------------------- ------------------------------------------
Date James H. Levi
President, Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
March 16, 1998 /s/ Cheryl A. Taylor
- ----------------------------- ------------------------------------------
Date Cheryl A. Taylor
Vice President - Finance and Administration,
(Principal Financial and Accounting Officer)
March 16, 1998 /s/ Joel S. Pollack
- ----------------------------- ------------------------------------------
Date Joel S. Pollack
Director
March 16, 1998 /s/ John J. Schultz
- ---------------------------- ------------------------------------------
Date John J. Schultz
Director
March 16, 1998 /s/ Charles M. Tureen
- ---------------------------- ------------------------------------------
Date Charles M. Tureen
Director
March 16, 1998 /s/ Robert M. Warner
- ---------------------------- ------------------------------------------
Date Robert M. Warner
Director
<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 Amended and Restated 1994
Incentive Compensation Plan..................................
10.2 * The Great Train Store Company 1994 Director Stock
Option Plan..................................................
10.4 * Form of Employment Agreement with James H. Levi..............
10.6 * The Great Train Store Partners, L.P. Agreement of Limited
Partnership dated as of September 1, 1990, as amended.........
10.9 ** First Amendment to The Great Train Store Company 1994
Director Stock Option Plan...................................
10.13*** Second Amendment to The Great Train Store Company 1994
Director Stock Option Plan..................................
10.14 Amended and Restated Loan and Security Agreement dated as
of January 27, 1998 with BankAmerica Business Credit, Inc....
21.1 Subsidiaries of the Registrant...............................
23.1 Independent Auditors' Consent................................
27.1 Financial Data Schedule (filed only in EDGAR format).........
99.1**** Cautionary Statements Identifying Important Factors
that Could Cause the Company's Actual Results to Differ
from those Projected in Forward Looking Statements...........
- ---------------
* Incorporated by reference to Registrant's Registration Statement on Form
SB-2 (commission file no.33-79554) first filed on June 1, 1994
** Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 30, 1995.
*** Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Commission file No. 333-37705) filed on October 10, 1997.
**** Incorporated by reference to the Registrant's Quarterly Report on
Form 10-QSB for the period ended September 27, 1997.
Exhibit 10.14
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
Dated as of January 27, 1998
Among
BANKAMERICA BUSINESS CREDIT, INC.
as the Lender
and
THE GREAT TRAIN STORE PARTNERS, L.P.
as the Borrower
and
THE GREAT TRAIN STORE COMPANY
GTS PARTNER, INC.
GTS LIMITED PARTNER, INC.
as members of the GTS Consolidated Group
<PAGE>
TABLE OF CONTENTS
Page
1. DEFINITIONS..........................................................1
Account 1
Account Debtor.......................................................1
Adjusted Net Earnings from Operations................................2
Affiliate............................................................2
Affiliate Guaranties.................................................2
Anniversary Date.....................................................2
Applicable Inventory Advance Rate....................................2
Availability.........................................................3
Available Development Capital........................................3
Average Eligible Inventory...........................................4
Bank.................................................................4
Borrowing............................................................4
Business Day.........................................................4
Capital Adequacy Regulation..........................................5
Capital Expenditures.................................................5
Capital Lease........................................................5
Closing Date.........................................................5
Closing Fee..........................................................5
Code.................................................................5
Collateral...........................................................5
Contaminant..........................................................5
Debt.................................................................5
Distribution.........................................................6
DOL..................................................................6
Dollar...............................................................6
EBITDA...............................................................6
ECO/Marshall Debt....................................................6
Eligible Inventory...................................................6
Environmental Compliance Reserve.....................................7
Environmental Laws...................................................7
Environmental Lien...................................................7
ERISA................................................................7
ERISA Affiliate......................................................7
ERISA Event..........................................................7
Event................................................................8
Event of Default.....................................................8
Existing Store Locations.............................................8
Facility Fee.........................................................8
Financed Capital Expenditures........................................8
Financial Statements.................................................8
Fiscal Year..........................................................8
Fixed Charges........................................................8
Funding Date.........................................................8
GAAP.................................................................8
GTS Consolidated Group...............................................8
Guaranty.............................................................9
Holiday Stores.......................................................9
Intercompany Accounts................................................9
Interest Period......................................................9
Inventory............................................................9
Investment Property.................................................10
IRS.................................................................10
Latest Projections..................................................10
Letter of Credit....................................................10
Letter of Credit Fee................................................10
LIBOR Interest Payment Date.........................................10
LIBOR Interest Rate Determination Date..............................10
LIBOR Rate..........................................................10
LIBOR Revolving Loan................................................11
Lien................................................................11
Loans...............................................................11
Loan Documents......................................................11
Multiemployer Plan..................................................11
New Store Equipment Financing.......................................12
New Store Opening...................................................12
New Store Opening Costs.............................................12
New Store Locations.................................................12
Notice of Borrowing.................................................12
Notice of Conversion/Continuation...................................12
Obligations.........................................................12
Other Taxes.........................................................12
Parent..............................................................12
Parent Guaranty.....................................................12
Participating Lender................................................13
Patent and Trademark Assignment.....................................13
Payment Account.....................................................13
PBGC................................................................13
Pension Plan........................................................13
Permitted Debt......................................................13
Permitted Distributions.............................................13
Permitted Liens.....................................................13
Person..............................................................14
Plan................................................................14
Premises............................................................14
Proceeds............................................................14
Property............................................................14
Proprietary Rights..................................................14
Public Authority....................................................15
Receivables.........................................................15
Reference Rate......................................................15
Reference Rate Revolving Loans......................................15
Reportable Event....................................................15
Requirement of Law..................................................15
Restricted Investment...............................................16
Reversions..........................................................16
Revolving Loans.....................................................16
Security Interest...................................................16
Solvent.............................................................16
Stated Termination Date.............................................17
Subordinated Debt...................................................17
Subsidiary..........................................................17
Taxes...............................................................17
Total Facility......................................................17
Triggering Event....................................................17
UCC.................................................................17
Unused Line Fee.....................................................17
Accounting Terms....................................................17
Other Terms.........................................................17
1.2 Interpretive Provisions....................................18
2. LOANS AND LETTERS OF CREDIT.........................................18
2.1 Total Facility.............................................18
2.2 Revolving Loans............................................19
2.3 Letters of Credit..........................................20
3. INTEREST AND OTHER CHARGES..........................................24
3.1 Interest...................................................24
3.2 Conversion and Continuation Elections.... .................25
3.3 Maximum Interest Rate......................................26
3.4 Facility Fee...............................................26
3.5 Closing Fee................................................26
3.6 Letter of Credit Fee.......................................27
4. PAYMENTS AND PREPAYMENTS............................................27
4.1 Revolving Loans............................................27
4.2 Place and Form of Payments: Extension of Time.............27
4.3 Application and Reversal of Payments.......................27
4.4 INDEMNITY FOR RETURNED PAYMENTS............................27
5. LENDER'S BOOKS AND RECORDS: MONTHLY STATEMENTS......................28
6. TAXES, YIELD PROTECTION AND ILLEGALITY..............................28
6.1 Taxes......................................................28
6.2 Illegality.................................................29
6.3 Increased Costs and Reduction of Return....................29
6.4 Funding Losses.............................................30
6.5 Inability to Determine Rates...............................30
6.6 Survival...................................................31
7. COLLATERAL..........................................................31
7.1 Grant of Security Interest.................................31
7.2 Perfection and Protection of Security Interest.............31
7.3 Location of Collateral.....................................32
7.4 Title to, Liens on, and Sale and Use of Collateral.........33
7.5 Appraisals.................................................33
7.6 Access and Examination.....................................33
7.7 Insurance..................................................33
7.8 Collateral Reporting.......................................34
7.9 Accounts...................................................34
7.10 Collection of Accounts: Payments...........................35
7.11 Inventory..................................................36
7.12 RESERVED...................................................36
7.13 RESERVED...................................................36
7.14 Documents, Instruments, and Chattel Paper..................36
7.15 Right to Cure..............................................36
7.16 Power of Attorney..........................................37
7.17 Lender's Rights, Duties, and Liabilities...................37
8. BOOKS AND RECORDS: FINANCIAL INFORMATION: NOTICE....................38
8.1 Books and Records..........................................38
8.2 Financial Information......................................38
8.3 Notices to Lender..........................................40
9. GENERAL WARRANTIES AND REPRESENTATIONS..............................41
9.1 Authorization, Validity, and Enforceability of
this Agreement and the Loan Documents....................41
9.2 Validity and Priority of Security Interest.................42
9.3 Organization and Qualification.............................42
9.4 Corporate Name; Prior Transactions.........................42
9.5 Subsidiaries and Affiliates................................42
9.6 Financial Statements and Projections.......................42
9.7 Capitalization.............................................43
9.8 Solvency...................................................43
9.9 Debt.......................................................43
9.10 Distributions..............................................43
9.11 Title to Property..........................................43
9.12 Adequate Assets............................................43
9.13 Real Property; Leases......................................44
9.14 Proprietary Rights.........................................44
9.15 Trade Names and Terms of Sale..............................44
9.16 Litigation.................................................44
9.17 Restrictive Agreements.....................................44
9.18 Labor Disputes.............................................44
9.19 Environmental Laws.........................................45
9.20 No Violation of Law........................................45
9.21 No Default.................................................45
9.22 ERISA Compliance...........................................45
9.23 Taxes......................................................46
9.24 Use of Proceeds............................................46
9.25 Private Offerings..........................................46
9.26 Broker's Fees..............................................46
9.27 No Material Adverse Change.................................46
9.28 Disclosure.................................................47
10. AFFIRMATIVE AND NEGATIVE COVENANTS..................................47
10.1 Taxes and Other Obligations................................47
10.2 Existence and Good Standing................................47
10.3 Compliance with Law and Agreements.........................47
10.4 Maintenance of Property and Insurance......................47
10.5 Environmental Laws.........................................48
10.6 ERISA......................................................48
10.7 Mergers, Consolidations, Acquisitions, or Sales............48
10.8 Distributions; Capital Changes.............................48
10.9 Transactions Affecting Collateral or Obligations...........48
10.10 Guaranties.................................................48
10.11 Debt.......................................................48
10.12 Prepayment.................................................48
10.13 Transactions with Affiliates...............................49
10.14 Business Conducted.........................................49
10.15 Liens......................................................49
10.16 New Store Equipment Financing..............................49
10.17 New Subsidiaries...........................................49
10.18 Restricted Investments.....................................49
10.19 Capital Expenditures.......................................49
10.20 Fixed Charge Coverage Ratio................................49
10.21 New Store Openings.........................................50
10.22 EBITDA.....................................................50
10.23 Further Assurances.........................................50
11. CLOSING; CONDITIONS TO CLOSING......................................50
11.1 Conditions Precedent to Making of Loans on the
Closing Date.............................................51
11.2 Conditions Precedent to Each Loan..........................51
12. DEFAULT; REMEDIES...................................................52
12.1 Events of Default..........................................52
13. REMEDIES............................................................54
14. TERM AND TERMINATION................................................55
15. MISCELLANEOUS.......................................................56
15.1 Cumulative Remedies; No Prior Recourse to Collateral.......56
15.2 No Implied Waivers.........................................56
15.3 Severability...............................................56
15.4 GOVERNING LAW..............................................56
15.5 Consent to Jurisdiction and Venue; Service of Process......56
15.6 Waiver of Jury Trial.......................................57
15.7 Survival of Representations and Warranties.................57
15.8 Other Security and Guaranties..............................57
15.9 Fees and Expenses..........................................57
15.10 Notices....................................................58
15.11 Indemnification............................................59
15.12 Waiver of Notices..........................................60
15.13 Binding Effect; Assignment.................................60
15.14 NO ORAL AGREEMENTS; ENTIRE AGREEMENT.......................60
15.15 Counterparts...............................................61
15.16 Captions...................................................61
15.17 Right of Set-Off...........................................61
15.18 Participating Lender's Security Interests..................61
15.19 AMENDMENT AND RESTATEMENT..................................61
<PAGE>
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT, dated as of January
27, 1998, by and between BANKAMERICA BUSINESS CREDIT, INC., a Delaware
corporation, with offices at 231 S. LaSalle Street, 16th Floor, Chicago,
Illinois 60697 (the "Lender") and THE GREAT TRAIN STORE PARTNERS, L.P., a
Missouri limited partnership, with offices at 14180 Dallas Parkway, Suite 618,
Dallas, Texas 75240 (the "Borrower"), and THE GREAT TRAIN STORE COMPANY, GTS
PARTNER, INC., and GTS LIMITED PARTNER, INC. as members of the GTS Consolidated
Group.
W I T N E S S E T H
WHEREAS, on June 7, 1996 BankOne, Texas, N.A. ("BankOne") entered into
a Loan and Security Agreement (the "BankOne Loan Agreement") with The Great
Train Store Partners, L.P. as "Borrower" and The Great Train Store Company, GTS
Partner, Inc., GTS Limited Partner, Inc., who, along with Borrower, are members
of the "Debtor Group"; and
WHEREAS, the BankOne Loan Agreement as amended by the First Amendment
to Loan and Security Agreement dated as of March 19, 1997 and by the Second
Amendment to Loan and Security Agreement dated as of July 29, 1997 is referred
to herein as the "Original Loan Agreement" and all documents and agreements
executed in connection therewith are referred to as the "Original Loan
Documents"; and
WHEREAS, BankOne has agreed to assign its right, title and interest in
and to the Original Loan Agreement and the Original Loan Documents to Lender,
and Lender has agreed to accept such assignment and to continue to provide
Borrower with a working capital facility; and
WHEREAS, the Borrower has requested the Lender to make available to the
Borrower a revolving line of credit for loans and letters of credit in an amount
not to exceed $15,000,000.00. which extensions of credit the Borrower will use
for its working capital needs and general business purposes;
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth in this Agreement, and for good and valuable consideration,
the receipt of which is hereby acknowledged, the Borrower and the Lender hereby
agree as follows:
1. DEFINITIONS. As used herein:
"Account" means the right to payment for a sale or lease and delivery of
goods or rendition of services by Borrower or any member of the GTS Consolidated
Group.
"Account Debtor" means each Person obligated in any way on or in connection
with an Account.
<PAGE>
"Adjusted Net Earnings from Operations" means, with respect to any fiscal
period of the Borrower, the GTS Consolidated Group's net income after provision
for income taxes for such fiscal period, as determined in accordance with GAAP
and reported on the Financial Statements for such period, less any and all of
the following included in such net income: (a) gain or loss arising from the
sale of any capital asset; (b) gain arising from any write-up in the book value
of any asset; (c) earnings of any corporation, substantially all the assets of
which have been acquired by any member of the GTS Consolidated Group in any
manner, to the extent realized by such other corporation prior to the date of
acquisition; (d) earnings of any business entity in which any member of the GTS
Consolidated Group has an ownership interest unless (and only to the extent)
such earnings shall actually have been received by any member of the GTS
Consolidated Group in the form of cash distributions; (e) earnings of any Person
to which assets of any member of the GTS Consolidated Group shall have been
sold, transferred or disposed of, or into which any member of the GTS
Consolidated Group shall have been merged, or which has been a party with any
member of the GTS Consolidated Group to any consolidation or other form of
reorganization, prior to the date of such transaction; (f) gain arising from the
acquisition of debt or equity securities of any member of the GTS Consolidated
Group or from cancellation or forgiveness of Debt; and (g) gain arising from
extraordinary items, as determined in accordance with GAAP, or from any other
nonrecurring transaction.
"Affiliate" means: (a) a Person which, directly or indirectly, controls, is
controlled by or is under common control with, the Borrower; (b) a Person which
beneficially owns or holds, directly or indirectly, five percent or more of any
class of voting stock of the Borrower; or (c) a Person in which five percent of
any class of the voting stock is beneficially owned or held, directly or
indirectly, by the Borrower. The term "control" (including the terms "controlled
by" and "under common control with"), means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of the Person in question.
"Affiliate Guaranties" means the Guaranties of the Obligations made by the
Affiliates identified on Schedule 8.5 hereto in favor of the Lender and
delivered to the Lender pursuant to Section 10.2.
"Anniversary Date" means each anniversary of the Closing Date.
"Applicable Inventory Advance Rate" means:
(i) fifty percent (50%) during the period beginning the last day of each
Fiscal Year through and including January 31 of each year; and
(ii) sixty percent (60%) during the period beginning on February 1 through
and including the day preceding the last day of each Fiscal Year; provided,
however, that as long as Borrower's Availability during the entire month of June
in each Fiscal Year is at least $1,250,000 after taking into consideration all
then outstanding Revolving Loans and Letters of Credit, then the Applicable
Inventory Advance Rate shall be increased as follows:
(x) seventy-five percent (75%) during the period beginning
August 1 through and including the day preceding the last day of each
Fiscal Year with respect to Inventory located at Existing Store
Locations and Holiday Stores;
<PAGE>
(y) one hundred percent (100%) during the period beginning
August 1 through and including the day preceding the last day of each
Fiscal Year with respect to Inventory located at New Store Locations.
In no event shall the Loans and Letters of Credit outstanding exceed an amount
that would be permitted to be outstanding if the Availability were calculated
using an advance rate of eighty-five percent (85%).
"Availability" means at any time the lesser of:
(a) The amount of Ten Million and No/100 Dollars ($10,000,000)
from the Closing Date through and including July 31, 1998, and Fifteen Million
and No/100 Dollars ($15,000,000) thereafter (the "Maximum Revolving Credit
Line") or
(b) the value of Eligible Inventory multiplied by the
Applicable Inventory Advance Rate;
provided, however, that at all times Availability shall be
reduced by the sum of:
(a) the unpaid balance of Revolving Loans at that time;
(b) the aggregate undrawn face amount of all
outstanding Letters of Credit which the Lender has caused to be issued or
obtained for the Borrower's account;
(c) reserves for accrued interest on the Revolving Loans;
(d) the Environmental Compliance Reserve; and
(e) all other reserves which the Lender in its reasonable
discretion deems necessary or desirable to maintain with respect to the
Borrower's account, including, without limitation, any amounts which the Lender
may be obligated to pay in the future for the account of the Borrower.
"Available Development Capital" means the following, in each instance
calculated as of the end of each fiscal quarter of Borrower:
A. The sum of:
(i) Borrower's existing cash on hand regardless of
the source of such cash, including, but not limited to, net
proceeds from New Store Equipment Financing and additional
equity contributions, plus
<PAGE>
(ii) sixty percent (60%) of the Average Eligible
Inventory multiplied by the number of Existing Store Locations
plus New Store Locations; LESS
B. The sum of:
(i) $8,000 multiplied by the number of Existing
Store Locations plus the number of New Store Locations; plus
(ii) the unpaid balance of Revolving Loans, and
all issued and outstanding Letters of Credit at that time, if
any; plus
(iii) the aggregate amount of all trade payables
which exceed normal trade terms, if any; plus
(iv) EBITDA projected from the end of such fiscal
quarter through the fiscal month of October of such Fiscal
Year. It is understood that all such projections are to be
based on conservative assumptions (e.g. historical actual
comparative store sales, store operating expenses, and
selling, general and administrative expenses, adjusted only
for current trends and specific expected future events); plus
(v) Fixed Charges projected from the end of such
fiscal quarter through the fiscal month ending in October of
such Fiscal Year.
"Average Eligible Inventory" means (i) Eligible Inventory at all stores,
other than Holiday Stores, for the period beginning January 1 through and
including July 31 during the prior Fiscal Year divided by (ii) the number of all
such stores.
"Bank" means Bank of America National Trust and Savings Association in San
Francisco, California.
"Borrowing" means a borrowing hereunder consisting of Revolving Loans by
the Lender to the Borrower.
"Business Day" means (a) any day that is not a Saturday, Sunday, or a day
on which banks in San Francisco, California, are required or permitted to be
closed, and (b) with respect to all notices, determinations, fundings and
payments in connection with the LIBOR Rate or LIBOR Revolving Loans, any day
that is a Business Day pursuant to clause (a) above and that is also a day on
which trading is carried on by and between banks in the London interbank market.
"Capital Adequacy Regulation" means any guideline, request or directive of
any central bank or other Public Authority, or any other law, rule or
regulation, whether or not having the force of law, in each case, regarding
capital adequacy of any bank or of any corporation controlling a bank.
<PAGE>
"Capital Expenditures" means all payments due (whether or not paid) as
determined in accordance with GAAP, during a Fiscal Year in respect of the cost
of any fixed asset or improvement, or replacement, substitution, or addition
thereto, which has a useful life of more than one year, including, without
limitation, those arising in connection with the direct or indirect acquisition
of such assets by way of increased product or service charges or offset items or
in connection with Capital Leases.
"Capital Lease" means any lease of Property by the Borrower that, in
accordance with GAAP, should be reflected as a liability on the balance sheet of
the Borrower.
"Closing Date" means the date of this Agreement, being the date first above
written.
"Closing Fee" has the meaning specified in Section 3.4.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral" has the meaning given to such term in Section 7.1.
"Contaminant" means any waste, pollutant, hazardous substance, toxic
substance, hazardous waste, special waste, petroleum or petroleum-derived
substance or waste, asbestos in any form or condition, polychlorinated biphenyls
("PCBs"), or other substance or material, the handling, release, or possession
of which is regulated to protect health, safety, or environment, or any
constituent of any such substance or waste.
"Debt" means all liabilities, obligations and indebtedness of the Borrower
to any Person, of any kind or nature, now or hereafter owing, arising, due or
payable, howsoever evidenced, created, incurred, acquired or owing, whether
primary, secondary, direct, contingent, fixed or otherwise, and including,
without in any way limiting the generality of the foregoing: (a) the Borrower's
liabilities and obligations to trade creditors; (b) all Obligations; (c) all
obligations and liabilities of any Person secured by any Lien on the Borrower's
Property, even though the Borrower shall not have assumed or become liable for
the payment thereof; provided, however, that all such obligations and
liabilities which are limited in recourse to such Property shall be included in
Debt only to the extent of the book value of such Property as would be shown on
a balance sheet of the Borrower prepared in accordance with GAAP; (d) all
obligations or liabilities created or arising under any Capital Lease or
conditional sale or other title retention agreement with respect to Property
used or acquired by the Borrower, even if the rights and remedies of the lessor,
seller or lender thereunder are limited to repossession of such Property;
provided, however, that all such obligations and liabilities which are limited
in recourse to such Property shall be included in Debt only to the extent of the
book value of such Property as would be shown on a balance sheet of the Borrower
prepared in accordance with GAAP; (e) all accrued pension fund and other
employee benefit plan obligations and liabilities; (f) all obligations and
liabilities under Guaranties; and (g) deferred taxes.
"Distribution" means, in respect of any corporation: (a) the payment or
making of any dividend or other distribution of Property in respect of capital
stock of such corporation, other than distributions in capital stock of the same
class; or (b) the redemption or other acquisition of any capital stock of such
corporation.
"DOL" means the United States Department of Labor or any successor
department or agency.
<PAGE>
"Dollar" and "$" means dollars in the lawful currency of the United States.
"EBITDA" means with respect to the GTS Consolidated Group, for any period,
Adjusted Net Earnings from Operations, plus the sum of (i) interest expenses,
whether paid or accrued, (ii) depreciation, (iii) amortization, (iv) income
taxes paid or accrued with respect to such period, and (v) other non-cash
expenses (including, without limitation, amortization of goodwill, deferred
financing fees, LIFO reserve adjustments and other intangibles), each to the
extent deducted in determining Adjusted Net Earnings from Operations for that
period, less non-cash income included in the calculation of Adjusted Net
Earnings from Operations for that period; and plus or minus the adjustment
needed to state rental expense on a cash paid or payable basis with respect to
such period.
"ECO/Marshall Debt" means all Debt owed by Borrower: (i) to ECO Leasing
Corp. under five (5) leases entered into by and between Borrower and ECO Leasing
Corp. dated April 1, 1995, May 24, 1995, September 15, 1995, April 11, 1996 and
April 12, 1996; and (ii) to Marshall's Train Depot, Inc. pursuant to a
Promissory Note dated November 3, 1996 in the original principal amount of
$115,137.80.
"Eligible Inventory" means Borrower's Inventory, valued at the lower of
cost or market, that constitutes first quality merchandise held for sale or
resale and that: (a) is not, in the Lender's reasonable opinion, "slow moving"
(i.e. Inventory for which Borrower has more than 52 weeks of sales on hand),
obsolete or unmerchantable, or produced in violation of the Federal Fair Labor
Standards Act of 1938, as amended; (b) is located at Premises owned or leased by
the Borrower or on Premises otherwise reasonably acceptable to the Lender,
provided, however, that Inventory located on Premises leased to the Borrower
shall not be Eligible Inventory unless the Borrower shall have delivered to the
Lender a written waiver, duly executed on behalf of the appropriate landlord and
in form and substance acceptable to the Lender, of all Liens which the landlord
for such Premises may be entitled to assert against such Eligible Inventory; (c)
is subject to the Lender's first priority perfected security interest; (d) is
not packaging and shipping materials, supplies, bill-and-hold Inventory,
returned or defective Inventory, or Inventory delivered to the Borrower on
consignment; and (e) the Lender, in the exercise of its reasonable discretion,
deems eligible as the basis for Revolving Loans based on such collateral and
credit criteria as the Lender may from time to time establish. If any Inventory
at any time ceases to be Eligible Inventory, such Inventory shall promptly be
excluded from the calculation of Eligible Inventory.
"Environmental Compliance Reserve" means all reserves which the Lender from
time to time establishes for amounts that are reasonably required to be expended
in order for the Borrower and the Borrower's operations and Property to comply
with Environmental Laws or in order to correct any violation by the Borrower or
the Borrower's operations or Property of Environmental Laws.
<PAGE>
"Environmental Laws" means all federal, state and local laws, rules,
regulations, ordinances, programs, permits, guidance, orders and consent decrees
relating to health, safety, hazardous substances, and environmental matters
applicable to the Borrower's business and facilities (whether or not owned by
it). Such laws and regulations include but are not limited to the Resource
Conservation and Recovery Act, 42 U.S.C. ss. 6901 et seq., as amended; the
Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C.
ss. 9601 et seq., as amended; the Toxic Substances Control Act, 15 U.S.C. ss.
2601 et seq., as amended; the Clean Water Act, 33 U.S.C. ss. 466 et seq., as
amended; the Clean Air Act, 42 U.S.C. ss. 7401 et seq., as amended; state and
federal lien and environmental cleanup programs; and U.S. Department of
Transportation regulations.
"Environmental Lien" means a Lien in favor of any Public Authority for (a)
any liability under any Environmental Laws, or (b) damages arising from, or
costs incurred by such Public Authority in response to, a Release or threatened
Release of a Contaminant into the environment.
"ERISA" means the Employee Retirement Income Security Act of 1974., as
amended.
"ERISA Affiliate" means any trade or business (whether or not incorporated)
under common control with the Borrower within the meaning of Section 414(b) or
(c) of the Code (and Sections 414(m) and (o) of the Code for purposes of
provisions relating to Section 412 of the Code).
"ERISA Event" means, with respect to the Borrower, any ERISA Affiliate or
any Pension Plan, the occurrence of any of the following: (a) a Reportable
Event; (b) a withdrawal by a substantial employer (as defined in Section 4001
(a)(12) of ERISA) subject to Section 4063 of ERISA; (c) a cessation of
operations which is treated as a withdrawal under Section 4062(e) of ERISA; (d)
a complete or partial withdrawal under Section 4203 or 4205 of ERISA from a
Multiemployer Plan; (e) a notification that a Multiernployer Plan is in
reorganization under Section 4242 of ERISA; (f) the filing of a notice of intent
to terminate a Pension Plan under 4041 of ERISA; (g) the treatment of an
amendment of a Pension Plan as a termination under 4041 of ERISA; (h) the
termination of a Multiemployer Plan under Section 4041A of ERISA; (i) the
commencement of proceedings by the PBGC to terminate a Pension Plan under 4042
of ERISA; (j) an event or condition which could reasonably be expected to
constitute grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, a Pension Plan; or (k) the imposition of
any liability under Title IV of ERISA, other than PBGC premiums due but not
delinquent under Section 4007 of ERISA.
"Event" means any event or condition which, with notice, the passage of
time, the happening of any other condition or event, or any combination thereof,
would constitute an Event of Default.
"Event of Default" has the meaning specified in Section 12.1.
"Existing Store Locations" means, as of the date of determination, all of
Borrower's stores which are currently opened and operated but excluding (i) the
Holiday Stores and (ii) New Store Locations.
"Facility Fee" has the meaning specified in Section 3.4.
"Financed Capital Expenditures" means Capital Expenditures financed by
either Available Development Capital or New Store Equipment Financing or other
Permitted Debt.
"Financial Statements" means, according to the context in which it is used,
the financial statements attached hereto as Exhibit D-1, and the projections
attached hereto as Exhibit D-2 or any financial statements required to be given
to the Lender pursuant to Section 8.2(a), (b), and (c), or any combination
thereof.
<PAGE>
"Fiscal Year" means the Borrower's fiscal year for financial accounting
purposes. The current Fiscal Year of the Borrower will end on January 2, 1999.
"Fixed Charges" means the sum of interest expense and income taxes plus
scheduled principal payments on Debt for borrowed money (other than the
Revolving Loans) plus Capital Expenditures (other than Financed Capital
Expenditures) plus all Distributions (other than certain "designated equity
offering proceeds"), in each instance with respect to the applicable period.
"Funding Date" means the date on which a Borrowing occurs.
"GAAP" means at any particular time generally accepted accounting
principles as in effect at such time.
"GTS Consolidated Group" means Borrower, Parent, GTS Partner, Inc., and GTS
Limited Partner, Inc.
"Guaranty" by any Person means all obligations of such Person which in any
manner directly or indirectly guarantee or assure, or in effect guarantee or
assure, the payment or performance of any indebtedness, dividend or other
obligation of any other Person (the "guaranteed obligations"), or to assure or
in effect assure the holder of the guaranteed obligations against loss in
respect thereof, including, without limitation, any such obligations incurred
through an agreement, contingent or otherwise: (a) to purchase the guaranteed
obligations or any Property constituting security therefor; (b) to advance or
supply funds for the purchase or payment of the guaranteed obligations or to
maintain a working capital or other balance sheet condition; (c) to lease
Property or to purchase any debt or equity securities or other Property or
services.
"Holiday Stores" means stores operated by Borrower on a temporary basis
that are projected to be open for a limited period of time not to exceed six
months and where opening costs do not exceed $30,000 for each such store.
"Intercompany Accounts" means all assets and liabilities, however arising,
which are due to the Borrower from, which are due from the Borrower to, or which
otherwise arise from any transaction by the Borrower with, any Affiliate.
"Interest Period" means, as to any LIBOR Revolving Loan, the period
commencing on the Funding Date of such Loan or on the Conversion/Continuation
Date on which the Loan is converted into or continued as a LIBOR Revolving Loan,
and ending on the date one, two, or three months thereafter as selected by the
Borrower in its Notice of Borrowing or Notice of Conversion/Continuation;
provided, however, that:
(i) if any Interest Period would otherwise end on a day that
is not a Business Day, that Interest Period shall be extended to the
following Business Day unless the result of such extension would be to
carry such Interest Period into another calendar month, in which event
such Interest Period shall end on the preceding Business Day;
<PAGE>
(ii) any Interest Period pertaining to a LIBOR Revolving Loan
that begins on the last Business Day of a calendar month (or on a day
for which there is no numerically corresponding day in the calendar
month at the end of such Interest Period) shall end on the last
Business Day of the calendar month at the end of such Interest Period;
and
(iii) no Interest Period shall extend beyond the Stated
Termination Date or any renewal term.
"Inventory" means all of the now owned and hereafter acquired inventory,
goods, merchandise, and other personal property of Borrower or any member of the
GTS Consolidated Group, wherever located, to be furnished under any contract of
service or held for sale or lease, all finished goods, returned goods, and
materials and supplies of any kind, nature or description which are or might be
used or consumed in the business of such entity or used in connection with the
packing, shipping, advertising or selling of such goods, merchandise and such
other personal property, and all documents, of title or other documents
representing them.
"Investment Property" means:
(a) a security, whether certificated or uncertificated;
(b) a security entitlement;
(c) a securities account;
(d) a commodity contract; or
(e) a commodity account.
"IRS" means the Internal Revenue Service or any successor agency.
"Latest Projections" means: (a) on the Closing Date and thereafter until
the Lender receives new projections pursuant to Section 8.2(f), the projections
of the Borrower's monthly financial condition, results of operations, and cash
flow for the year period ending January 3, 1998, attached hereto as Exhibit A-2;
and (b) thereafter, the projections most recently received by the Lender
pursuant to Section 8.2(f).
"Letter of Credit" has the meaning specified in Section 2.3.
"Letter of Credit Fee" has the meaning specified in Section 3.6.
"LIBOR Interest Payment Date" means, with respect to a LIBOR Revolving
Loan, the last day of each Interest Period applicable to such Loan.
<PAGE>
"LIBOR Interest Rate Determination Date" means each date of calculating the
LIBOR Rate for purposes of determining the interest rate with respect to an
Interest Period. The LIBOR Interest Rate Determination Date for any LIBOR
Revolving Loan shall be the second Business Day prior to the first day of the
related Interest Period for such LIBOR Revolving Loan.
"LIBOR Rate" means, for any Interest Period, with respect to LIBOR
Revolving Loans comprising part of the same Borrowing, the rate of interest per
annum (rounded upward to the next 1/1000th of 1.0%) determined as follows:
LIBOR Rate = LIBOR
1.00 - Eurodollar Reserve Percentage
Where,
"Eurodollar Reserve Percentage" means for any day for
any Interest Period the maximum reserve percentage (expressed
as a decimal, rounded upward to the next 1/100th of 1.0%) in
effect on such day (whether or not applicable to the Lender)
under regulations issued from time to time by the Federal
Reserve Board for determining the maximum reserve requirement
(including any emergency, supplemental or other marginal
reserve requirement) with respect to Eurocurrency funding
(currently referred to as "Eurocurrency liabilities"); and
"LIBOR" means the rate of interest per annum (rounded
upward to the next 1/16 of 1%) notified to the Lender by Bank
as the rate of interest at which United States Dollar deposits
in the approximate amount of the Loan to be made or continued
as, or converted into, a LIBOR Revolving Loan and having a
maturity comparable to such Interest Period would be offered
by Bank's applicable lending office to major banks in the
London interbank market at their request at approximately
11:00 a.m. (London time) two Business Days prior to the
commencement of such Interest Period.
"LIBOR Revolving Loan" means a Revolving Loan during any period in which it
bears interest based on the LIBOR Rate.
"Lien" means: (a) any interest in Property securing an obligation owed to,
or a claim by, a Person other than the owner of the Property, whether such
interest is based on the common law, statute, or contract, and including without
limitation, a security interest, charge, claim, or lien arising from a mortgage,
deed of trust, encumbrance, pledge, hypothecation, assignment, deposit
arrangement, agreement, security agreement, conditional sale or trust receipt or
a lease, consignment or bailment for security purposes; and (b) to the extent
not included under clause (a), any reservation, exception, encroachment,
easement, right-of-way, covenant, condition, restriction, lease or other title
exception or encumbrance affecting Property.
"Loans" means, collectively, all loans and advances provided for in Section
2.
<PAGE>
"Loan Documents" means this Agreement, the Patent and Trademark
Assignments, the Parent Guaranty, the Affiliate Guaranties and all other
agreements, instruments, and documents heretofore, now or hereafter evidencing,
securing, guaranteeing or otherwise relating to the Obligations, the Collateral,
the Security Interest, or any other aspect of the transactions contemplated by
this Agreement.
"Multiemployer Plan" means a Multiemployer plan as defined in Section
4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate makes, is
making, made, or was at any time during the current year or the immediately
preceding six (6) years obligated to make contributions.
"New Store Equipment Financing" means term debt financing provided to
Borrower by a third party lender and secured by part or all of Borrower's
equipment.
"New Store Opening" means a new store, other than a Holiday Store, opened
by Borrower after the Closing Date.
"New Store Opening Costs" means the sum of (i) Capital Expenditures
required to open the new store less those amounts paid up front by the landlord,
plus (ii) costs incurred by the Borrower prior to opening the new store which
related directly to the new store, plus (iii) an estimate of the value of forty
percent (40%) of Eligible Inventory (other than seasonal Inventory) that would
be at the newly acquired store immediately following the opening thereof.
"New Store Locations" means all of Borrower's stores, other than the
Holiday Stores, which were opened during the then current Fiscal Year.
"Notice of Borrowing" has the meaning specified in Section 2.2(b).
"Notice of Conversion/Continuation" has the meaning specified in Section
3.2(b).
"Obligations" means all present and future loans, advances, liabilities,
obligations, covenants, duties, and Debt owing by the Borrower to the Lender,
whether or not arising under this Agreement, whether or not evidenced by any
note, or other instrument or document, whether arising from an extension of
credit, opening of a letter of credit, acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment from others, and any participation by
the Lender in the Borrower's debts owing to others) absolute or contingent, due
or to become due, primary or secondary, as principal or guarantor, and
including, without limitation, all interest, charges, expenses, fees, attorneys.
fees, filing fees and any other sums chargeable to the Borrower hereunder, under
another Loan Document, or under any other agreement or instrument with the
Lender. "Obligations" includes, without limitation, all debts, liabilities, and
obligations now or hereafter owing from Borrower to Lender under or in
connection with the Letters of Credit.
"Other Taxes" means any present or future stamp or documentary taxes or any
other excise or property taxes, charges or similar levies which arise from any
payment made hereunder or from the execution, delivery or registration of, or
otherwise with respect to, this Agreement or any other Loan Documents.
"Parent" means The Great Train Store Company, a Delaware corporation.
<PAGE>
"Parent Guaranty" means the Guaranty of the Obligations made by Parent in
favor of the Lender.
"Participating Lender" means any Person who shall have been granted the
right by the Lender to participate in the Loans and who shall have entered into
a participation agreement in form and substance satisfactory to the Lender.
"Patent and Trademark Assignment" means the Collateral Assignment of
Patents (Security Agreement) and the Collateral Assignment of Trademarks
(Security Agreement), each dated as of the date hereof, executed and delivered
by the Parent to the Lender to evidence and perfect the Lender's Security
Interest in the Parent's present and future patents, trademarks, and related
licenses and rights.
"Payment Account" means each blocked bank account or bank account
associated with a lock box, established pursuant to Section 7.10, to which the
funds of the Borrower (including, without limitation, Proceeds of Accounts and
other Collateral) are deposited or credited, and which is maintained in the name
of the Lender or the Borrower, as the Lender may determine, on terms acceptable
to the Lender.
"PBGC" means the Pension Benefit Guaranty Corporation or any Person
succeeding to the functions thereof.
"Pension Plan" means a pension plan (as defined in Section 3(2) of ERISA)
subject to Title IV of ERISA which the Borrower or an ERISA Affiliate sponsors,
maintains, or to which it makes, is making, or is obligated to make
contributions or, in the case of a Multiemployer Plan, has made contributions at
any time during the current year or the immediately preceding six (6) plan
years.
"Permitted Debt" means the New Store Equipment Financing consented to by
Lender in accordance with Section 10.16, and the Debt described on Schedule
10.11.
"Permitted Distributions" means those Distributions listed on Schedule
10.8.
<PAGE>
"Permitted Liens" means: (a) Liens for taxes not yet delinquent or Liens
for taxes in an amount not to exceed $100,000 being contested in good faith by
appropriate proceedings diligently pursued, provided that a reserve or other
appropriate provision, if any, as shall be required by GAAP shall have been made
therefor on the applicable Financial Statements and that a stay of enforcement
of any such Lien is in effect; (b) Liens in favor of the Lender; (c) Liens
arising by operation of law in favor of warehousemen, landlords, carriers,
mechanics, materialmen, laborers, employees or suppliers, incurred in the
ordinary course of business of the Borrower and not in connection with the
borrowing of money, for sums not yet delinquent or which are being contested in
good faith and by proper proceedings diligently pursued, provided that a reserve
or other appropriate provision, if any, required by GAAP shall have been made
therefor on the applicable Financial Statements and a stay of enforcement of any
such Lien is in effect; (d) Liens in connection with worker's compensation or
other unemployment insurance incurred in the ordinary course of the Borrower's
business; (e) Liens created by deposits of cash to secure performance of bids,
tenders, leases (to the extent permitted under this Agreement), or trade
contracts, incurred in the ordinary course of business of the Borrower and not
in connection with the borrowing of money; (f) Liens arising by reason of cash
deposit for surety or appeal bonds in the ordinary course of business of the
Borrower; (g) Liens of or resulting from any judgment or award, the time for the
appeal or petition for rehearing of which has not yet expired, or in respect of
which the Borrower is in good faith prosecuting an appeal or proceeding for a
review, and in respect of which a stay of execution pending such appeal or
proceeding for review has been secured; (h) Liens securing the New Store
Equipment Financing, and (i) Permitted Liens set forth on Schedule 10.15.
"Person" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, limited liability company
association, corporation, Public Authority, or any other entity.
"Plan" means an employee benefit plan (as defined in Section 3(3) of ERISA)
which the Borrower or an ERISA Affiliate sponsors or maintains or to which the
Borrower or an ERISA Affiliate makes, is making, or is obligated to make
contributions and includes any Pension Plan.
"Premises" means the land identified by addresses on Schedule 9.13 together
with all buildings, improvements, and fixtures thereon and all tenements,
hereditament, and appurtenances belonging or in any way appertaining thereto,
and which constitutes all of the real property in which the Borrower has any
interests on the Closing Date.
"Proceeds" means all products and proceeds of any Collateral, and all
proceeds of such proceeds and products, including, without limitation, all cash
and credit balances, all payments under any indemnity, warranty, or guaranty
payable with respect to any Collateral, all awards for taking by eminent domain,
all proceeds of fire or other insurance, and all money and other Property
obtained as a result of any claims against third parties or any legal action or
proceeding with respect to Collateral.
"Property" means any interest in any kind of property or asset, whether
real, personal or mixed, or tangible or intangible.
"Proprietary Rights" means all of the following now owned and hereafter
arising or acquired assets of the Borrower or any member of the GTS Consolidated
Group: all licenses, franchises, permits, patents, patent rights, copyrights,
works which are the subject matter of copyrights, trademarks, trade names, trade
styles, patent and trademark applications and licenses and rights thereunder,
including without limitation those patents, trademarks and copyrights set forth
on Schedule 9.14, and all other rights under any of the foregoing, all
extensions, renewals, reissues, divisions, continuations, and
continuations-in-part of any of the foregoing, and all rights to sue for past,
present, and future infringement of any of the foregoing; inventions, trade
secrets, formulae, processes, compounds, drawings, designs, blueprints, surveys,
reports, manuals, and operating standards; goodwill; customer and other lists in
whatever form maintained; and trade secret rights, copyright rights, rights in
works of authorship, and contract rights relating to computer software programs,
in whatever form created or maintained.
<PAGE>
"Public Authority" means the government of any country or sovereign state,
or of any state, province, municipality, or other political subdivision thereof,
or any department, agency, public corporation or other instrumentality of any of
the foregoing.
"Receivables" means all of the following now owned and hereafter arising or
acquired assets of Borrower or any member of the GTS Consolidated Group: all
Accounts (whether or not earned by performance), including Accounts owed to the
Borrower by any member of the GTS Consolidated Group, together with all
interest, late charges, penalties, collection fees, and other sums which shall
be due and payable in connection with any Account; proceeds of any letters of
credit naming the Borrower or any member of the GTS Consolidated Group as
beneficiary; contract rights, chattel paper, instruments, documents, general
intangibles (including without limitation choices in action, causes of action,
tax refunds, tax refund claims, and Reversions and other amounts payable to the
Borrower or any member of the GTS Consolidated Group from or with respect to any
Plan) and all forms of obligations owing to the Borrower or any member of the
GTS Consolidated Group (including, without limitation, in respect of loans,
advances, and extensions of credit by or to any member of the GTS Consolidated
Group); guarantees and other security for any of the foregoing; goods
represented by or the sale, lease or delivery of which gave rise to any of the
foregoing; merchandise returned to or repossessed by the Borrower or any member
of the GTS Consolidated Group and rights of stoppage in transit, replevin, and
reclamation; and other rights or remedies of an unpaid vendor, lienor, or
secured party; provided, however, that 'Receivables" does not include
cooperative advertising and tenant allowances in favor of Borrower relating to
real estate leases.
"Reference Rate" means the rate of interest publicly announced from time to
time by the Bank as its reference rate. It is a rate set by the Bank based upon
various factors including the Bank's costs and desired return, general economic
conditions, and other factors, and is used as a reference point for pricing some
loans. However, the Bank may price loans at, above, or below such announced
rate. Any changes in the Reference Rate shall take effect on the day specified
in the public announcement of such change.
"Reference Rate Revolving Loans" means a Revolving Loan during any period
in which it bears interest based on the Reference Rate.
"Reportable Event" means, any of the events set forth in Section 4043(b) of
ERISA or the regulations thereunder, other than any such event for which the
30-day notice requirement under ERISA has been waived in regulations issued by
the PBGC.
"Requirement of Law" means any law (statutory or common), treaty, rule or
regulation or determination of an arbitrator or of a Public Authority.
<PAGE>
"Restricted Investment" means any acquisition of Property by the Borrower
or any member of the GTS Consolidated Group in exchange for cash or other
Property, whether in the form of an acquisition of stock, debt security, or
other indebtedness or obligation, or the purchase or acquisition of any other
Property, or a loan, advance, capital contribution, or subscription, except
acquisitions of the following: (a) fixed assets to be used in the business of
the Borrower, so long as the acquisition costs thereof constitute Capital
Expenditures permitted hereunder; (b) current assets arising from the sale or
lease of goods or rendition of services in the ordinary course of business of
the Borrower; (c) direct obligations of the United States of America, or any
agency thereof, or obligations guaranteed by the United States of America,
provided that such obligations mature within one year from the date of
acquisition thereof, (d) certificates of deposit maturing within one year from
the date of acquisition, bankers acceptances, Eurodollar bank deposits, or
overnight bank deposits, in each case issued by, created by, or with a bank or
trust company organized under the laws of the United States or any state thereof
having capital and surplus aggregating at least $100,000,000; and (e) commercial
paper given the highest rating by a national credit rating agency and maturing
not more than 270 days from the date of creation thereof; and (f) provided no
Revolving Loans are then outstanding, money market mutual funds of the quality
offered by Fidelity, T. Rowe Price, or similar organizations.
"Reversions" means any funds which may become due to the Borrower in
connection with the termination of any Plan or other employee benefit plan.
"Revolving Loans" has the meaning specified in Section 2.2.
"Security Interest" means collectively the Liens granted to the Lender in
the Collateral pursuant to this Agreement, the other Loan Documents, or any
other agreement or instrument.
"Solvent" means when used with respect to any Person that at the time of
determination:
(i) the assets of such Person, at a fair valuation, are
in excess of the total amount of its debts (including, without
limitation, contingent liabilities); and
(ii) the present fair saleable value of its assets is greater
than its probable liability on its existing debts as such debts become
absolute and matured; and
(iii) it is then able and expects to be able to pay its debts
(including, without limitation, contingent debts and other commitments)
as they mature; and
(iv) it has capital sufficient to carry on its business as
conducted and as proposed to be conducted.
For purposes of determining whether a Person is Solvent, the amount of any
contingent liability shall be computed as the amount that, in light of all the
facts and circumstances existing at such time, represents the amount that can
reasonably expected to become an actual or matured liability.
"Stated Termination Date" means the third Anniversary Date.
"Subordinated Debt" means Debt for borrowed money which is unsecured and is
specifically subordinated to the Obligations on terms acceptable to the Lender.
"Subsidiary" of a Person means any corporation, association, partnership,
joint venture or other business entity of which more than 50% of the voting
stock or other equity interests (in the case of Persons other than
corporations), is owned or controlled directly or indirectly by the Person, or
one or more of the Subsidiaries of the Person, or a combination thereof. Unless
the context otherwise clearly requires, references herein to a "Subsidiary"
refer to a Subsidiary of the Borrower.
<PAGE>
"Taxes" means any and all present or future taxes, assessments, levies,
imposts, impositions, deductions, charges or withholdings, and all liabilities
with respect thereto, excluding, in the case of the Lender, such taxes
(including income taxes or franchise taxes) as are imposed on or measured by the
Lender's net income by the jurisdiction (or any political subdivision thereof)
under the laws of which the Lender is organized or maintains a lending office.
"Total Facility" has the meaning specified in Section 2.1.
"Triggering Event" means the occurrence of either of the following events:
(a) an Event of Default, or (b) existing Availability is less than fifteen
percent of gross Availability (with gross Availability calculated for this
purpose as if there were no outstanding Revolving Loans and Letters of Credit).
"UCC" means the Uniform Commercial Code (or any successor statute) of the
State of Missouri or of any other state the laws of which are required by
Section 9-103 thereof to be applied in connection with the issue of perfection
of security interests.
"Unused Line Fee" has the meaning specified in Section 3.1(c).
Accounting Terms. Any accounting term used in this Agreement shall have,
unless otherwise specifically provided herein, the meaning customarily given in
accordance with GAAP, and all financial computations hereunder shall be
computed, unless otherwise specifically provided herein, in accordance with GAAP
as consistently applied and using the same method for inventory valuation as
used in the preparation of the Financial Statements.
Other Terms. All other undefined terms contained in this Agreement shall,
unless the context indicates otherwise, have the meanings provided for by the
UCC to the extent the same are used or defined therein. Wherever appropriate in
the context, terms used herein in the singular also include the plural, and vice
versa, and each masculine, feminine, or neuter pronoun shall also include the
other genders.
1.2 Interpretive Provisions.
(a) The meanings of defined terms are equally applicable to
the singular and plural forms of the defined terms.
(b) The words "hereof," "herein," "hereunder," and similar
words refer to this Agreement as a whole and not to any particular provision of
this Agreement; and Subsection, Section, Schedule and Exhibit references are to
this Agreement unless otherwise specified.
(c) (i) The term "documents" includes any and all instruments,
documents, agreements, certificates, indentures, notices and other writings,
however evidenced.
(ii) The term "including" is not limiting and means
"including without limitation."
<PAGE>
(iii) In the computation of periods of time from a
specified date to a later specified date, the word "from" means "from and
including," the words "to" and "until" each mean "to but excluding" and the word
"through" means "to and including."
(d) Unless otherwise expressly provided herein, (i) references
to agreements (including this Agreement) and other contractual instruments shall
be deemed to include all subsequent amendments and other modifications thereto,
but only to the extent such amendments and other modifications are not
prohibited by the terms of any Loan Document, and (ii) references to any statute
or regulation are to be construed as including all statutory and regulatory
provisions consolidating, amending, replacing, supplementing or interpreting the
statute or regulation.
(e) The captions and headings of this Agreement are for
convenience of reference only and shall not affect the interpretation of this
Agreement.
(f) This Agreement and other Loan Documents may use several
different limitations, tests or measurements to regulate the same or similar
matters. All such limitations, tests and measurements are cumulative and shall
each be performed in accordance with their terms.
(g) This Agreement and the other Loan Documents are the result
of negotiations among and have been reviewed by counsel to Lender, the Borrower,
and the other parties, and are the products of all parties. Accordingly, they
shall not be construed against Lender merely because of Lender's involvement in
their preparation.
2. LOANS AND LETTERS OF CREDIT.
2.1 Total Facility. Subject to all of the terms and conditions of this
Agreement, the Lender shall make available a total credit facility of up to
$15,000,000 (the "Total Facility") for Borrower's use from time to time during
the term of this Agreement. The Total Facility shall be comprised of a revolving
line of credit up to the limits of the Availability, consisting of revolving
loans and letters of credit as described in Sections 2.2 and 2.3.
<PAGE>
2.2 Revolving Loans.
(a) The Lender shall, upon the Borrower's request from time to time,
make revolving loans (the "Revolving Loans") to the Borrower up to the limits of
the Availability. The Lender, in its discretion, may elect to exceed the limits
of the Availability on one or more occasions, but if it does so, the Lender
shall not be deemed thereby to have changed the limits of the Availability or to
be obligated to exceed the limits of the Availability on any other occasion. If
the unpaid balance of the Revolving Loans exceeds the Availability (determined
for this purpose as if the amount of the Revolving Loans were zero), then the
Lender may refuse to make or otherwise restrict Revolving Loans on such terms as
the Lender determines until such excess has been eliminated. The Borrower may
request Revolving Loans either telephonically or in writing. Each oral request
for a Revolving Loan shall be conclusively presumed to be made by a person
authorized by the Borrower to do so and the crediting of a Revolving Loan to the
Borrower's deposit account, or transmittal to such Person as the Borrower shall
direct, shall conclusively establish the obligation of the Borrower to repay
such Revolving Loan as provided herein. The Lender will charge all Revolving
Loans and other Obligations to a loan account of the Borrower maintained with
the Lender. All fees, commissions, costs, expenses, and other charges under or
pursuant to the Loan Documents, and all payments made and out-of-pocket expenses
incurred by the Lender pursuant to the Loan Documents, will be charged as
Revolving Loans to the Borrower's loan account as of the date due from the
Borrower or the date paid or incurred by the Lender, as the case may be.
(b) Procedure for Borrowing.
(i) Each Borrowing shall be made upon the Borrower's
irrevocable written notice delivered to the Lender in the form of a "Notice of
Borrowing", a form of which is attached hereto as Exhibit "B", (which notice
must be received by the Lender prior to 11:00 a.m. (Chicago, Illinois time) (1)
three Business Days prior to the requested Funding Date, in the case of LIBOR
Revolving Loans and (2) no later than 11:00 a.m. on the requested Funding Date,
in the case of Reference Rate Revolving Loans, specifying:
(A) the amount of the Borrowing;
(B) the requested Funding Date, which shall be a Business
Day;
(C) whether the Revolving Loans requested are to be
Reference Rate Revolving Loans or LIBOR Revolving Loans; and
(D) the duration of the Interest Period if the requested
Revolving Loans are to be LIBOR Revolving Loans. If the Notice of Borrowing
fails to specify the duration of the Interest Period for any Borrowing comprised
of LIBOR Revolving Loans, such Interest Period shall be three months; provided,
however, that with respect to the Borrowings to be made on the Closing Date,
such Borrowings will consist of Reference Rate Revolving Loans only.
(ii) After giving effect to any Borrowing, there may
not be more than two different Interest Periods in effect.
(iii) With respect to any request for Reference Rate Revolving
Loans, in lieu of delivering the above-described Notice of Borrowing the
Borrower may give the Lender telephonic notice of such request by the required
time, with such telephonic notice to be confirmed in writing within 24 hours of
the giving of such notice but Lender shall be entitled to rely on the telephonic
notice in making such Revolving Loans.
<PAGE>
2.3 Letters of Credit. (a) Subject to the terms and conditions of this
Agreement, the Lender shall, upon the Borrower's request from time to time,
cause merchandise or standby letters of credit to be issued for the Borrower's
account (the "Letters of Credit"'). The Lender will not cause to be opened any
Letter of Credit if: (i) the maximum face amount of the requested Letter of
Credit, plus the aggregate undrawn face amount of all outstanding Letters of
Credit, would exceed $500,000; (ii) the maximum face amount of the requested
Letter of Credit, and all commissions, fees, and charges due from Borrower to
Lender in connection with the opening thereof, would cause the Availability to
be exceeded at such time; or (iii) the expiration date of the Letter of Credit
would exceed the Stated Termination Date or any renewal term or be greater than
twelve (12) months from the date of issuance. All payments made and expenses
incurred by the Lender pursuant to or in connection with the Letters of Credit
will be charged to the Borrower's loan account as Revolving Loans.
(b) Other Conditions. In addition to being subject to the
satisfaction of the applicable conditions precedent contained in Section 11, the
obligation of the Lender to cause to be issued any Letter of Credit is subject
to the following conditions precedent having been satisfied in a manner
satisfactory to the Lender:
(1) The Borrower shall have delivered to the
proposed issuer of such Letter of Credit, at such times and in such manner as
such proposed issuer may prescribe, an application in form and substance
satisfactory to such proposed issuer and the Lender for the issuance of the
Letter of Credit and such other documents as may be required pursuant to the
terms thereof, and the form and terms of the proposed Letter of Credit shall
be satisfactory to the Lender and such proposed issuer; and
(2) As of the date of issuance, no order of any
court, arbitrator or Public Authority shall purport by its terms to enjoin
or restrain money center banks generally from issuing letters of credit of
the type and in the amount of the proposed Letter of Credit, and no law, rule
or regulation applicable to money center banks generally and no request or
directive (whether or not having the force of law) from any Public Authority
with jurisdiction over money center banks generally shall prohibit, or
request that the proposed issuer of such Letter of Credit refrain from, the
issuance of letters of credit generally or the issuance of such Letters of
Credit.
(c) Issuance of Letters of Credit.
(1) Request for Issuance. The Borrower shall give the Lender
three (3) Business Days' prior written notice of the Borrower's request for the
issuance of a Letter of Credit. Such notice shall be irrevocable and shall
specify the original face amount of the Letter of Credit requested, the
effective date (which date shall be a Business Day) of issuance of such
requested Letter of Credit, whether such Letter of Credit may be drawn in a
single or in partial draws, the date on which such requested Letter of Credit is
to expire (which date shall be a Business Day), the purpose for which such
Letter of Credit is to be issued, and the beneficiary of the requested Letter of
Credit. The Borrower shall attach to such notice the proposed form of the Letter
of Credit that the Lender is requested to cause to be issued.
(2) No Extensions or Amendment. The Lender shall not be
obligated to cause any Letter of Credit to be extended or amended unless the
requirements of this Section 2.3 are met as though a new Letter of Credit were
being requested and issued.
(d) Payments Pursuant to Letters of Credit.
<PAGE>
(1) Payment of Letter of Credit Obligations. The Borrower
agrees to reimburse the issuer for any draw under any Letter of Credit
immediately upon demand, and to pay the issuer of the Letter of Credit the
amount of all other obligations and other amounts payable to such issuer under
or in connection with any Letter of Credit immediately when due, irrespective of
any claim, set off, defense or other right which the Borrower may have at any
time against such issuer or any other Person.
(2) Revolving Loans to Satisfy Reimbursement Obligations. In
the event that the issuer of any Letter of Credit honors a draw under such
Letter of Credit and the Borrower shall not have repaid such amount to the
issuer of such Letter of Credit pursuant to Section 2.3(d)(1), the Lender shall
pay the issuer and such amount when paid shall constitute a Revolving Loan which
shall be deemed to have been requested by the Borrower.
(e) Compensation for Letters of Credit.
(1) Letter of Credit Fee. The Borrower agrees to pay to the
Lender with respect to each Letter of Credit, the Letter of Credit Fee specified
in, and in accordance with the terms of, Section 3.6.
(2) Issuer Fees and Charges. The Borrower shall pay to the
issuer of any Letter of Credit, or to the Lender, for the account of the issuer
of any such Letter of Credit, solely for such issuer's account, such fees and
other charges as are charged by such issuer for letters of credit issued by it,
including, without limitation, its standard fees for issuing, administering,
amending, renewing, paying and canceling letters of credit and all other fees
associated with issuing or servicing letters of credit, as and when assessed.
(f) Indemnification: Exoneration: Power of Attorney
(1) Indemnification. In addition to amounts payable as
elsewhere provided in this Section 2.3, the Borrower hereby agrees to protect,
indemnify, pay and save the Lender harmless from and against any and all claims,
demands, liabilities, damages, losses, costs, charges and expenses (including
reasonable attorneys' fees) which the Lender may incur or be subject to as a
consequence, direct or indirect, of the issuance of any Letter of Credit or the
provision of any credit support or enhancement in connection therewith. The
agreement in this Section 2.3(f)(1) shall survive payments of all Obligations.
<PAGE>
(2) Assumption of Risk by the Borrower. As between the
Borrower and the Lender, the Borrower assumes all risks of the acts and
omissions of, or misuse of any of the Letters of Credit by, the respective
beneficiaries of such Letters of Credit. In furtherance and not in limitation of
the foregoing, the Lender shall not be responsible for: (A) the form, validity,
sufficiency, accuracy, genuineness or legal effect of any document submitted by
any Person in connection with the application for and issuance of and
presentation of drafts with respect to any of the Letters of Credit, even if it
should prove to be in any or all respects invalid, insufficient, inaccurate,
fraudulent or forged; (B) the validity or sufficiency of any instrument
transferring or assigning or purporting to transfer or assign any Letter of
Credit or the rights or benefits thereunder or proceeds thereof, in whole or in
part, which may prove to be invalid or ineffective for any reason; (C) the
failure of the beneficiary of any Letter of Credit to comply duly with
conditions required in order to draw upon such Letter of Credit; (D) errors,
omissions, interruptions, or delays in transmission or delivery of any messages,
by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher;
(E) errors in interpretation of technical terms; (F) any loss or delay in the
transmission or otherwise of any document required in order make a drawing under
any Letter of Credit or of the proceeds thereof; (G) the misapplication by the
beneficiary of any Letter of Credit of the proceeds of any drawing under such
Letter of Credit; or (H) any consequences arising from causes beyond the control
of the Lender, including, without limitation, any act or omission, whether
rightful or wrongful, of any present or future de jure or de facto Public
Authority. None of the foregoing shall affect, impair or prevent the vesting of
any rights or powers of the Lender under this Section 2.3.
(3) Exoneration. In furtherance and extension, and not in
limitation, of the specific provisions set forth above, any action taken or
omitted by the Lender under or in connection with any of the Letters of Credit
or any related certificates, if taken or omitted in the absence of gross
negligence or willful misconduct, shall not put the Lender under any resulting
liability to the Borrower or relieve the Borrower of any of its obligations
hereunder to any such Person.
(4) Power of Attorney. In connection with all Inventory
financed by Letters of Credit, the Borrower hereby appoints the Lender, or the
Lender's designee, as its attorney, with full power and authority: (a) to sign
and/or endorse the Borrower's name upon any warehouse or other receipts; (b) to
sign the Borrower's name on bills of lading and other negotiable and
non-negotiable documents; (c) to clear Inventory through customs in the Lender's
or the Borrower's name, and to sign and deliver to customs officials powers of
attorney in the Borrower's name for such purpose; (d) to complete in the
Borrower's or the Lender's name, any order, sale, or transaction, obtain the
necessary documents in connection therewith, and collect the proceeds thereof;
and (e) to do such other acts and things as are necessary in order to enable the
Lender to obtain possession of the Inventory and to obtain payment of the
Obligations. Neither the Lender nor its designee, as the Borrower's attorney,
will be liable for any acts or omissions, nor for any error of judgement or
mistakes of fact or law. This power, being coupled with an interest, is
irrevocable until all Obligations have been paid and satisfied.
(5) Account Party. The Borrower hereby authorizes and
directs any issuer of a Letter of Credit to name the Borrower as the "Account
Party" therein and to deliver to the Lender all instruments, documents and other
writings and property received by the issuer pursuant to the Letter of Credit,
and to accept and rely upon the Lender's instructions and agreements with
respect to all matters arising in connection with the Letter of Credit or the
application therefor.
(6) Control of Inventory. In connection with all Inventory
financed by Letters of Credit, the Borrower will, at the Lender's request,
instruct all suppliers, carriers, forwarders, warehouses or others receiving or
holding cash, checks, Inventory, documents or instruments in which the Lender
holds a security interest to deliver them to the Lender and/or subject to the
Lender's order, and if they shall come into the Borrower's possession, to
deliver them, upon request, to the Lender in their original form. The Borrower
shall also, at the Lender's request, designate the Lender as the consignee on
all bills of lading and other negotiable and non-negotiable documents.
<PAGE>
(g) Supporting Letter of Credit: Cash Collateral. If,
notwithstanding the provisions of this Section 2.3 and Section 14 any Letter of
Credit is outstanding upon the termination of this Agreement, then upon such
termination the Borrower shall deposit with the Lender, at its discretion, with
respect to each Letter of Credit then outstanding, either (A) a standby letter
of credit (a "Supporting Letter of Credit") in form and substance satisfactory
to the Lender, issued by an issuer satisfactory to the Lender in an amount equal
to the greatest amount for which such Letter of Credit may be drawn, under which
Supporting Letter of Credit the Lender is entitled to draw amounts necessary to
reimburse the Lender for payments made by the Lender under such Letter of Credit
or under any credit support or enhancement provided through the Lender with
respect thereto, or (B) cash in amounts necessary to reimburse the Lender for
payments made by the Lender under such Letter of Credit or under any credit
support or enhancement provided through the Lender. Such Supporting Letter of
Credit or deposit of cash shall be held by the Lender, as security for, and to
provide for the payment of, the aggregate undrawn amount of such Letters of
Credit remaining outstanding.
3. INTEREST AND OTHER CHARGES.
3.1 Interest.
(a) All Obligations shall bear interest on the unpaid
principal amount thereof from the date made until paid in full in cash at a rate
determined by reference to the Reference Rate or the LIBOR Rate and Sections 3.1
(a)(i) or (ii), as applicable, but not to exceed the Maximum Rate. Subject to
the provisions of Section 3.2, any of the Loans may be converted into, or
continued as, Reference Rate Revolving Loans or LIBOR Revolving Loans in the
manner provided in Section 3.2. If at any time Loans are outstanding with
respect to which notice has not been delivered to Lender in accordance with the
terms of this Agreement specifying the basis for determining the interest rate
applicable thereto, then those Loans shall be Reference Rate Revolving Loans and
shall bear interest at a rate determined by reference to the Reference Rate
until notice to the contrary has been given to the Lender and such notice has
become effective. Except as otherwise provided herein, the Obligations shall
bear interest as follows:
(i) For all Obligations, other than LIBOR Revolving Loans,
then at a fluctuating per annum rate equal to one quarter of one percent (.25%)
(the "Reference Rate Margin") plus the Reference Rate;
and
(ii) If the Loans are LIBOR Revolving Loans, then at a per
annum rate equal to two and one quarter of one percent (2.25%) (the "LIBOR
Margin") plus the LIBOR Rate determined for the applicable Interest Period.
Each change in the Reference Rate shall be reflected in the interest
rate described in (i) above as of the effective date of such change. All
interest charges shall be computed on the basis of a year of three hundred sixty
(360) days and actual days elapsed. All interest shall be payable to Lender on
the first day of each month hereafter.
(b) If any Event of Default occurs, then, from the date such
Event of Default occurs until it is cured, or if not cured until all Obligations
are paid and performed in full, the Borrower will pay interest on the unpaid
principal balances of the Revolving Loans at a per annum rate 2% greater than
the rate of interest otherwise specified herein, and the Letter of Credit Fee
shall be increased to three and one-half percent (3.50%) per annum.
<PAGE>
(c) Unused Line Fee. For every month during the term of this
Agreement, the Borrower shall pay the Lender a fee (the "Unused Line Fee") in an
amount equal to three-eighths of one percent (.375%) per annum, multiplied by
the average daily amount by which the Maximum Revolving Credit Line exceeds the
sum of (i) the average daily outstanding amount of Revolving Loans and (ii) the
undrawn face amount of all outstanding Letters of Credit during such month, with
the unpaid balance calculated for this purpose by applying payments immediately
upon receipt. Such a fee, if any, shall be calculated on the basis of a year of
three hundred sixty (360) days and actual days elapsed, and shall be payable to
the Lender on the first day of each month with respect to the prior month.
3.2 Conversion and Continuation Elections.
(a) The Borrower may, upon irrevocable written notice to
the Lender in accordance with Subsection 3.2(b):
(i) elect, as of any Business Day, in the case of
Reference Rate Revolving Loans to convert any such Loans (or any part
thereof in an amount not less than $1,000,000, or that is in an
integral multiple of $1,000,000 in excess thereof) into LIBOR Revolving
Loans; or
(ii) elect, as of the last day of the applicable
Interest Period, to continue any LIBOR Revolving Loans having Interest
Periods expiring on such day (or any part thereof) in an amount not
less than $1,000,000 or that is in an integral multiple of $1,000,000
in excess thereof;
provided, that if at any time the aggregate amount of LIBOR Revolving Loans in
respect of any Borrowing is reduced, by payment, prepayment, or conversion of
part thereof to be less than $1,000,000, such LIBOR Revolving Loans shall
automatically convert into Reference Rate Revolving Loans, and on and after such
date the right of the Borrower to continue such Loans as, and convert such Loans
into, LIBOR Revolving Loans, as the case may be, shall terminate.
(b) The Borrower shall deliver a notice in the form attached
hereto as Exhibit "C" ("Notice of Conversion/Continuation") to be received by
the Lender not later than 11:00 a.m. (Chicago, Illinois time) at least three (3)
Business Days in advance of the date of conversion or continuing, if the Loans
are to be converted into or continued as LIBOR Revolving Loans and specifying:
(A) the proposed Conversion/Continuation Date;
(B) the aggregate amount of Loans to be converted or
continued;
(C) the type of Loans resulting from the proposed
conversion or continuation; and
(D) the duration of the requested Interest Period.
<PAGE>
(c) If upon the expiration of any Interest Period applicable
to LIBOR Revolving Loans, the Borrower has failed to select timely a new
Interest Period to be applicable to LIBOR Revolving Loans or if any Default or
Event of Default then exists, the Borrower shall be deemed to have elected to
convert such LIBOR Revolving Loans into Reference Rate Revolving Loans effective
as of the expiration date of such Interest Period.
(d) During the existence of a Default or Event of Default, the
Borrower may not elect to have a Loan converted into or continued as a LIBOR
Revolving Loan.
(e) After giving effect to any conversion or continuation of
Loans, there may not be more than two (2) different Interest Periods in effect.
3.3 Maximum Interest Rate. In no event shall any interest rate provided for
hereunder exceed the maximum rate permissible for corporate borrowers under
applicable law for loans of the type provided for hereunder (the "Maximum
Rate"). If, in any month, any interest rate, absent such limitation, would have
exceeded the Maximum Rate, then the interest rate for that month shall be the
Maximum Rate, and, if in future months, that interest rate would otherwise be
less than the Maximum Rate, then that interest rate shall remain at the Maximum
Rate until such time as the amount of interest paid hereunder equals the amount
of interest which would have been paid if the same had not been limited by the
Maximum Rate. In the event that, upon payment in full of the Obligations under
this Agreement, the total amount of interest paid or accrued under the terms of
this Agreement is less than the total amount of interest which would, but for
this Section 3.3, have been paid or accrued if the interest rates otherwise set
forth in this Agreement had at all times been in effect, then the Borrower
shall, to the extent permitted by applicable law, pay the Lender, an amount
equal to the difference between (a) the lesser of (i) the amount of interest
which would have been charged if the Maximum Rate had, at all times, been in
effect or (ii) the amount of interest which would have accrued had the interest
rates otherwise set forth in this Agreement, at all times, been in effect and
(b) the amount of interest actually paid or accrued under this Agreement. In the
event that a court determines that the Lender has received interest and other
charges hereunder in excess of the Maximum Rate, such excess shall be deemed
received on account of, and shall automatically be applied to reduce, the
Obligations other than interest, in the inverse order of maturity, and if there
are no Obligations outstanding, the Lender shall refund to the Borrower such
excess.
3.4 Facility Fee. The Borrower will pay the Lender a facility fee in the
amount of $7,500 (the "Facility Fee"), which Facility Fee will be payable on the
Closing Date, and on each March 31 (except for March 31, 1998), June 30,
September 30 and December 31 after the Closing Date. The Lender and the Borrower
agree that the Facility Fee shall be financed by the Lender as a Revolving Loan.
3.5 Closing Fee. The Borrower will pay the Lender on the Closing Date a
closing fee in the amount of $75,000 (the "Closing Fee"). The Lender and the
Borrower agree that the Closing Fee shall be financed by the Lender as a
Revolving Loan.
<PAGE>
3.6 Letter of Credit Fee. The Borrower agrees to pay to the Lender a fee
(the "Letter of Credit Fee") equal to one and one-half percent (1.50%) per annum
of the undrawn face amount of each Letter of Credit issued for the Borrower's
account at the Borrower's request, plus out-of-pocket costs, fees and expenses
incurred by the Lender in connection with the application for, issuance of, or
amendment to any Letter of Credit, which costs, fees and expenses could include
a "fronting fee" required to be paid by the Lender to such issuer for the
assumption of the settlement risk in connection with the issuance of such Letter
of Credit; the Letter of Credit Fee shall be payable monthly in arrears on the
first day of each month following any month in which a Letter of Credit was
issued and/or in which a Letter of Credit remains outstanding. The Letter of
Credit Fee shall be computed on the basis of a 360-day year for the actual
number of days elapsed.
4. PAYMENTS AND PREPAYMENTS.
4.1 Revolving Loans. The Borrower shall repay the outstanding principal
balance of the Revolving Loans, plus all accrued but unpaid interest thereon,
upon the termination of this Agreement for any reason. In addition, and without
limiting the generality of the foregoing, the Borrower shall pay to the Lender,
on demand, the amount by which the unpaid principal balance of the Revolving
Loans at any time exceeds the Availability at such time (determined for this
purpose as if the amount of the Revolving Loans were zero).
4.2 Place and Form of Payments: Extension of Time. All payments of
principal, interest, premium, and other sums due to the Lender shall be made at
the Lender's address set forth in Section 15.10. Except for Proceeds received
directly by the Lender, all such payments shall be made in immediately available
funds. If any payment of principal, interest, premium, or other sum to be made
hereunder becomes due and payable on a day other than a Business Day, the due
date of such payment shall be extended to the next succeeding Business Day and
interest thereon shall be payable at the applicable interest rate during such
extension.
4.3 Application and Reversal of Payments. The Lender shall determine in its
sole discretion the order and manner in which Proceeds of Collateral and other
payments that the Lender receives are applied to the Revolving Loans, interest
thereon, and the other Obligations, and the Borrower hereby irrevocably waives
the right to direct the application of any payment or Proceeds. The Lender shall
have the continuing and exclusive right to apply and reverse and reapply any and
all such Proceeds and payments to any portion of the Obligations.
<PAGE>
4.4 INDEMNITY FOR RETURNED PAYMENTS. IF AFTER RECEIPT OF ANY PAYMENT WHICH
IS APPLIED TO THE PAYMENT OF ALL OR ANY PART OF THE OBLIGATIONS, THE LENDER IS
FOR ANY REASON COMPELLED TO SURRENDER SUCH PAYMENT TO ANY PERSON BECAUSE SUCH
PAYMENT IS INVALIDATED, DECLARED FRAUDULENT, SET ASIDE, DETERMINED TO BE VOID OR
VOIDABLE AS A PREFERENCE, IMPERMISSIBLE SETOFF, OR A DIVERSION OF TRUST FUNDS,
OR FOR ANY OTHER REASON, THEN: THE OBLIGATIONS OR PART THEREOF INTENDED TO BE
SATISFIED SHALL BE REVIVED AND CONTINUE AND THIS AGREEMENT SHALL CONTINUE IN
FULL FORCE AS IF SUCH PAYMENT HAD NOT BEEN RECEIVED BY THE LENDER AND THE
BORROWER SHALL BE LIABLE TO PAY TO THE LENDER AND HEREBY DOES INDEMNIFY THE
LENDER AND HOLD THE LENDER HARMLESS FOR THE AMOUNT OF SUCH PAYMENT SURRENDERED.
The provisions of this Section 4.4 shall be and remain effective notwithstanding
any contrary action which may have been taken by the Lender in reliance upon
such payment, and any such contrary action so taken shall be without prejudice
to the Lender's rights under this Agreement and shall be deemed to have been
conditioned upon such payment having become final and irrevocable. The
provisions of this Section 4.4 shall survive the termination of this Agreement.
5. LENDER'S BOOKS AND RECORDS: MONTHLY STATEMENTS. The Borrower and each
member of the GTS Consolidated Group agrees that the Lender's books and records
showing the Obligations and the transactions pursuant to this Agreement and the
other Loan Documents shall be admissible in any action or proceeding arising
therefrom, and shall constitute prima facie proof thereof, irrespective of
whether any Obligation is also evidenced by a promissory note or other
instrument. The Lender will provide to the Borrower a monthly statement of
Loans, payments, and other transactions pursuant to this Agreement. Such
statement shall be deemed correct, accurate, and binding on the Borrower and as
an account stated (except for reversals and reapplications of payments made as
provided in Section 4.3 and corrections of errors discovered by the Lender),
unless the Borrower notifies the Lender in writing to the contrary within thirty
(30) days after such statement is rendered. In the event a timely written notice
of objections is given by the Borrower, only the items to which exception is
expressly made will be considered to be disputed by the Borrower.
6. TAXES, YIELD PROTECTION AND ILLEGALITY.
6.1 Taxes.
(a) Any and all payments by the Borrower to the Lender under
this Agreement and any other Loan Document shall be made free and clear of, and
without deduction or withholding for any Taxes. In addition, the Borrower shall
pay all Other Taxes.
(b) The Borrower agrees to indemnify and hold harmless the
Lender for the full amount of Taxes or Other Taxes (including any Taxes or Other
Taxes imposed by any jurisdiction on amounts payable under this Section) paid by
the Lender and any liability (including penalties, interest, additions to tax
and expenses) arising therefrom or with respect thereto, whether or not such
Taxes or Other Taxes were correctly or legally asserted. Payment under this
indemnification shall be made within 30 days after the date the Lender makes
written demand therefor.
(c) If the Borrower shall be required by law to deduct or
withhold any Taxes or Other Taxes from or in respect of any sum payable
hereunder to Lender, then:
(i) the sum payable shall be increased as necessary so
that after making all required deductions and withholdings (including deductions
and withholdings applicable to additional sums payable under this Section) the
Lender receives an amount equal to the sum it would have received had no such
deductions or withholdings been made;
(ii) the Borrower shall make such deductions and
withholdings;
(iii) the Borrower shall pay the full amount deducted or
withheld to the relevant taxing authority or other authority in accordance with
applicable law; and
<PAGE>
(iv) the Borrower shall also pay to the Lender at the time
interest is paid, all additional amounts which the Lender specifies as necessary
to preserve the after-tax yield the Lender would have received if such Taxes or
Other Taxes had not been imposed.
(d) Within 30 days after the date of any payment by the
Borrower of Taxes or Other Taxes, the Borrower shall furnish the Lender the
original or a certified copy of a receipt evidencing payment thereof, or other
evidence of payment satisfactory to the Lender.
6.2 Illegality. (a) If the Lender determines that the introduction of any
Requirement of Law, or any change in any Requirement of Law, or in the
interpretation or administration of any Requirement of Law, has made it
unlawful, or that any central bank or other Public Authority has asserted that
it is unlawful, for the Lender or its applicable lending office to make LIBOR
Revolving Loans, then, on notice thereof by the Lender to the Borrower, any
obligation of the Lender to make LIBOR Revolving Loans shall be suspended until
the Lender notifies the Borrower that the circumstances giving rise to such
determination no longer exist.
(b) If the Lender determines that it is unlawful to maintain
any LIBOR Revolving Loan, the Borrower shall, upon its receipt of notice of such
fact and demand from the Lender, prepay in full such LIBOR Revolving Loans then
outstanding, together with interest accrued thereon, and amounts required under
Section 6.4, either on the last day of the Interest Period thereof, if the
Lender may lawfully continue to maintain such LIBOR Revolving Loans to such day,
or immediately, if the Lender may not lawfully continue to maintain such LIBOR
Revolving Loan. If the Borrower is required to so prepay any LIBOR Revolving
Loan, then concurrently with such prepayment, the Borrower shall borrow from the
Lender, in the amount of such repayment, a Reference Rate Revolving Loan.
6.3 Increased Costs and Reduction of Return. (a) If the Lender determines
that, due to either (i) the introduction of or any change in the interpretation
of any law or regulation or (ii) the compliance by the Lender with any guideline
or request from any central bank or other Public Authority (whether or not
having the force of law), there shall be any increase in the cost to the Lender
of agreeing to make or making, funding or maintaining any LIBOR Revolving Loans,
then the Borrower shall be liable for, and shall from time to time, upon demand,
pay to the Lender, additional amounts as are sufficient to compensate the Lender
for such increased costs.
<PAGE>
(b) If the Lender shall have determined that (i) the
introduction of any Capital Adequacy Regulation, (ii) any change in any Capital
Adequacy Regulation, (iii) any change in the interpretation or administration of
any Capital Adequacy Regulation by any central bank or other Public Authority
charged with the interpretation or administration thereof, or (iv) compliance by
the Lender or any corporation controlling the Lender with any Capital Adequacy
Regulation, affects or would affect the amount of capital, reserves, or special
deposits required or expected to be maintained by the Lender or any corporation
controlling the Lender and (taking into consideration such Lender's or such
corporation's policies with respect to capital adequacy and such Lender's
desired return on capital) determines that the amount of such capital, reserves,
or special deposits is increased as a consequence of its loans, credits or
obligations under this Agreement, then, upon demand of the Lender to the
Borrower, the Borrower shall pay to the Lender, from time to time as specified
by the Lender, additional amounts sufficient to compensate the Lender for such
increase. Notwithstanding the foregoing, (i) all such amounts shall be subject
to the provisions of Section 3.3, and (ii) if, as a result of the additional
amounts required under this Section 6.3(b), the result is an increase in the
otherwise applicable interest rate by at least one-half of one percent (.50%),
then Borrower may, within ninety (90) days of the imposition of such additional
amounts and upon giving Lender thirty (30) days notice in advance of its
election to do so, terminate this Agreement and prepay all Obligations, such
prepayment to be without premium or penalty except as provided in Section 6.4,
if applicable.
6.4 Funding Losses. The Borrower shall reimburse the Lender and hold the
Lender harmless from any loss or expense which the Lender may sustain or incur
as a consequence of:
(a) the failure of the Borrower to make on a timely basis any
payment of principal of any LIBOR Revolving Loan;
(b) the failure of the Borrower to borrow, continue or convert a
Loan after the Borrower has given (or is deemed to have given) a Notice of
Borrowing or a Notice of Conversion/Continuation;
(c) the prepayment or other payment (including after acceleration
thereof) of an LIBOR Revolving Loan on a day that is not the last day of the
relevant Interest Period; including any such loss or expense arising from the
liquidation or reemployment of funds obtained by it to maintain its LIBOR
Revolving Loans or from fees payable to terminate the deposits from which such
funds were obtained.
6.5 Inability to Determine Rates. If the Lender reasonably determines that
for any reason adequate and reasonable means do not exist for determining the
LIBOR Rate for any requested interest Period with respect to a proposed LIBOR
Revolving Loan, or that the LIBOR Rate for any requested Interest Period with
respect to a proposed LIBOR Revolving Loan does not adequately and fairly
reflect the cost to the Lender of funding such Loan, the Lender will promptly so
notify the Borrower. Thereafter, the obligation of the Lender to make or
maintain LIBOR Revolving Loans hereunder shall be suspended until the Lender
revokes such notice in writing. Upon receipt of such notice, the Borrower may
revoke any Notice of Borrowing or Notice of Conversion/Continuation then
submitted by it. If the Borrower does not revoke such Notice, the Lender shall
make, convert or continue the Loans, as proposed by the Borrower, in the amount
specified in the applicable notice submitted by the Borrower, but such Loans
shall be made, converted or continued as Reference Rate Revolving Loans instead
of LIBOR Revolving Loans.
6.6 Survival. The agreements and obligations of the Borrower in this
Section 6 shall survive the payment of all other Obligations.
<PAGE>
7. COLLATERAL.
7.1 Grant of Security Interest.
(a) As security for the Obligations, the Borrower and each
member of the GTS Consolidated Group hereby grant to the Lender a continuing
security interest in, lien on, and assignment of: (i) all Receivables,
Inventory, Proprietary Rights, Investment Property and Proceeds, wherever
located and whether now existing or hereafter arising or acquired; (ii) all
moneys, securities and other property and the Proceeds thereof, now or hereafter
held or received by, or in transit to, the Lender from or for the Borrower or
any member of the GTS Consolidated Group, whether for safekeeping, pledge,
custody, transmission, collection or otherwise, including, without limitation,
all of the deposit accounts, credits, and balances with the Lender and all
claims of the Borrower and each member of the GTS Consolidated Group against the
Lender at any time existing; (iii) all deposit accounts with any financial
institutions with which Borrower or any member of the GTS Consolidated Group
maintains deposits; and (iv) all books, records and other Property relating to
or referring to any of the foregoing, including, without limitation, all books,
records, ledger cards, data processing records, computer software and other
property and general intangibles at any time evidencing or relating to the
Receivables, Inventory, Proprietary Rights, Investment Property, Proceeds, and
other property referred to above (all of the foregoing, together with all other
property in which the Lender may at any time be granted a Lien, being herein
collectively referred to as the "Collateral"). The Lender shall have all of the
rights of a secured party with respect to the Collateral under the UCC and other
applicable laws.
(b) All Obligations shall constitute a single loan secured by
the Collateral. The Lender may, in its sole discretion, (i) exchange, waive, or
release any of the Collateral, (ii) apply Collateral and direct the order or
manner of sale thereof as the Lender may determine, and (iii) settle,
compromise, collect, or otherwise liquidate any Collateral in any manner, all
without affecting the Obligations or the Lender's right to take any other action
with respect to any other Collateral.
7.2 Perfection and Protection of Security Interest. The Borrower and each
member of the GTS Consolidated Group shall, at its expense, perform all steps
reasonably requested by the Lender at any time to perfect, maintain, protect,
and enforce the Security Interest including, without limitation: (a) causing
Parent to execute and record the Patent and Trademark Assignments (provided,
however, that Lender agrees not to record any such assignments outside of the
United States unless and until an Event of Default has occurred) and executing
and filing financing or continuation statements, and amendments thereof, in form
and substance satisfactory to the Lender; (b) delivering to the Lender the
original certificates of title for motor vehicles with the Security Interest
properly endorsed thereon if required; (c) delivering to the Lender the
originals of all instruments, documents, and chattel paper, and all other
Collateral of which the Lender determines it should have physical possession in
order to perfect and protect the Security Interest therein, duly endorsed or
assigned to the Lender without restriction; (d) delivering to the Lender
warehouse receipts covering any portion of the Collateral located in warehouses
and for which warehouse receipts are issued; (e) transferring Inventory to
warehouses designated by the Lender; (f) placing notations on the Borrower's
books of account to disclose the Security Interest; (g) executing and delivering
to the Lender a security agreement relating to the Reversions in form and
substance satisfactory to the Lender; (h) delivering to the Lender all letters
<PAGE>
of credit on which the Borrower is named beneficiary; and (i) taking such other
steps as are deemed necessary by the Lender to maintain the Security Interest.
To the extent permitted by applicable law, the Lender may file, without the
Borrower's signature or that of any member of the GTS Consolidated Group, one or
more financing statements disclosing the Security Interest. All parties agree
that a carbon, photographic, photostatic, or other reproduction of this
Agreement or of a financing statement is sufficient as a financing statement. If
any Collateral is at any time in the possession or control of any warehouseman,
bailee or any of the Borrower's agents or processors, then the Borrower shall
notify the Lender thereof and shall notify such Person of the Security Interest
in such Collateral and, upon the Lender's request, instruct such Person to hold
all such Collateral for the Lender's account subject to the Lender's
instructions. If at any time any Collateral is located on any Premises that are
not owned by the Borrower, then the Borrower shall obtain written waivers, in
form and substance satisfactory to the Lender, of all present and future Liens
to which the owner or lessor or any mortgagee of such Premises may be entitled
to assert against the Collateral. From time to time, the Borrower shall, upon
Lender's request, execute and deliver confirmatory written instruments pledging
to the Lender the Collateral, but the Borrower's failure to do so shall not
affect or limit the Security Interest or the Lender's other rights in and to the
Collateral. So long as this Agreement is in effect and until all Obligations
have been fully satisfied, the Security Interest shall continue in full force
and effect in all Collateral (whether or not deemed eligible for the purpose of
calculating the Availability or as the basis for any advance, loan, extension of
credit, or other financial accommodation).
7.3 Location of Collateral. The Borrower and each member of the GTS
Consolidated Group represent and warrant to the Lender that: (a) Schedule 7.3
hereto is a correct and complete list of the chief executive office of the
Borrower and each member of the GTS Consolidated Group, the location of its
books and records, the locations of the Collateral, and the locations of all of
its other places of business and (b) Schedule 7.3 correctly identifies any of
such facilities and locations that are not owned by the Borrower and sets forth
the names of the owners and lessors or sub-lessors of, and, to the best of the
Borrower's knowledge, the holders of any mortgages on, such facilities and
locations. The Borrower and each member of the GTS Consolidated Group covenant
and agree that they will not maintain any Collateral at any location other than
those listed on Schedule 7.3, and they will not otherwise change or add to any
of such locations, unless they give the Lender at least 30 days prior written
notice thereof and execute any and all financing statements and other documents
that the Lender requests in connection therewith.
7.4 Title to, Liens on, and Sale and Use of Collateral. The Borrower and
each member of the GTS Consolidated Group represent and warrant to the Lender
that: (a) all Collateral is and will continue to be owned by the Borrower and
the members of the GTS Consolidated Group free and clear of all Liens
whatsoever, except for the Security Interest and other Permitted Liens; (b) the
Security Interest will not be subject to any prior Lien except for the Liens
described in (b), (c), (e), (f), (h), (i) and (j) of the definition of Permitted
Liens; (c) the Borrower and each member of the GTS Consolidated Group will use,
store, and maintain the Collateral with all reasonable care and will use the
Collateral for lawful purposes only; and (d) the Borrower and each member of the
GTS Consolidated Group will not, without the Lender's prior written approval,
sell, lease, or dispose of or permit the sale or disposition of the Collateral
or any portion thereof, except for sales of Inventory and sales of Equipment in
the ordinary course of business. The inclusion of Proceeds in the Collateral
shall not be deemed the Lender's consent to any sale or other disposition of the
Collateral except as expressly permitted herein.
<PAGE>
7.5 Appraisals. Whenever an Event or Event of Default exists, and at such
other times not more frequently than once a year as the Lender requests, the
Borrower shall, at its expense and upon the Lender's request, provide the Lender
with appraisals or updates thereof of any or all of the Collateral from an
appraiser. The expenses for all appraisals conducted prior to the occurrence of
an Event of Default for which Borrower shall be liable will not exceed, in each
instance, an amount equal to $200 times the number of stores open at that time.
After an Event or Event of Default, Borrower will be liable for all such
expenses, regardless of amount.
7.6 Access and Examination. The Lender may at all reasonable times have
access to, examine, audit, make extracts from and inspect the Borrower's
records, files, and books of account and the Collateral and may discuss the
Borrower's affairs with the Borrower's officers and management. The Borrower
will deliver to the Lender any instrument necessary for the Lender to obtain
records from any service bureau maintaining records for the Borrower. The Lender
may, at any time when an Event of Default exists and at the Borrower's expense,
make copies of all of the Borrower's books and records, or require the Borrower
to deliver such copies to the Lender. The Lender may, without expense to the
Lender, use such of the Borrower's personnel, supplies, and Premises as may be
reasonably necessary for maintaining or enforcing the Security Interest. Lender
shall have the right, at any time, in Lender's name or in the name of a nominee
of the Lender, to verify the validity, amount or any other matter relating to
the Accounts, by mail, telephone, or otherwise.
7.7 Insurance. The Borrower shall insure the Collateral against loss or
damage by fire with extended coverage, theft, burglary, pilferage, loss in
transit, and such other hazards as the Lender shall specify, in amounts, under
policies and by insurers acceptable to the Lender. Borrower shall also maintain
flood insurance for all Premises where Inventory is located, in the event of a
designation of the area in which real estate is located as a "flood prone" or a
"flood risk area" (hereinafter "SFHA") as defined by the Flood Disaster
Protection Act of 1973, in an amount to be reasonably determined by the Lender,
and shall comply with the additional requirements of the National Flood
Insurance Program as set forth therein. The Borrower shall also maintain flood
insurance for its Inventory which is located at any time in an SFHA. The
Borrower shall cause the Lender to be named in each such policy as secured party
or mortgagee and loss payee or additional insured, in a manner acceptable to the
Lender. Each policy of insurance shall contain a clause or endorsement requiring
the insurer to give not less than thirty (30) days prior written notice to the
Lender in the event of cancellation of the policy for any reason whatsoever and
a clause or endorsement stating that the interest of the Lender shall not be
impaired or invalidated by any act or neglect of the Borrower or the owner of
any premises where Collateral is located nor by the occupation of such premises
for purposes more hazardous than are permitted by such policy. The Borrower
shall pay, upon Lender's request, all fees incurred by the Lender to determine
whether any of the real estate and other Collateral is located in a SFHA. The
Borrower shall also pay all premiums for such insurance when due, and shall
deliver to the Lender certificates of insurance and, if requested, photocopies
of the policies. If the Borrower fails to pay such fees or to procure such
insurance or the premiums therefor when due, the Lender may (but shall not be
required to) do so and charge the costs thereof to the Borrower's loan account
as a Revolving Loan. The Borrower shall promptly notify the Lender of any loss,
damage, or destruction to the Collateral or arising from its use, whether or not
covered by insurance. The Lender is hereby authorized to collect all insurance
proceeds directly. After deducting from such proceeds the expenses, if any,
incurred by Lender in the collection or handling thereof, the Lender may apply
such proceeds to the reduction of the Obligations in such order as Lender
determines, or at the Lender's option may permit or require the Borrower to use
such money, or any part thereof, to replace, repair, restore or rebuild the
Collateral in a diligent and expeditious manner with materials and workmanship
of substantially the same quality as existed before the loss, damage or
destruction.
<PAGE>
7.8 Collateral Reporting. The Borrower will provide the Lender with the
following documents at the following times in form satisfactory to the Lender:
(a) on a monthly basis from January 1 through July 31 of each year and on a
bi-weekly basis from August 1 through December 31 of each year, or on a weekly
basis if requested by Lender, perpetual inventory reports by category and
location; (b) monthly agings of accounts payable no later than the 10th day of
the following month; (c) upon request, copies of purchase orders, invoices, and
delivery documents for Inventory acquired by the Borrower; (d) such other
reports as to the Collateral as the Lender shall request from time to time; and
(e) certificates of an officer of the Borrower certifying as to the foregoing.
If any of the Borrower's records or reports of the Collateral are prepared by an
accounting service or other agent, the Borrower hereby authorizes such service
or agent to deliver such records, reports, and related documents to the Lender.
7.9 Accounts. The Borrower and each member of the GTS Consolidated Group
hereby represents and warrants to the Lender and agrees with the Lender that:
(i) each existing Account represents, and each future Account will represent, a
bona fide sale or lease and delivery of goods by the Borrower, or rendition of
services by the Borrower, in the ordinary course of the Borrower's business;
(ii) each existing Account is, and each future Account will be, for a liquidated
amount payable by the Account Debtor thereon on the terms set forth in the
invoice therefor or in the schedule thereof delivered to the Lender, without
offset, deduction, defense, or counterclaim; (iii) no payment will be received
with respect to any Account, and no credit, discount, or extension, or agreement
therefor will be granted on any Account, except as reported to the Lender in
accordance with this Agreement; and (iv) all goods described in each invoice
will have been delivered to the Account Debtor and all services of the Borrower
described in each invoice will have been performed.
7.10 Collection of Accounts: Payments.
(a) Until the Lender notifies the Borrower to the contrary,
the Borrower shall make collection of all Accounts and other Collateral for the
Lender, shall receive all payments as the Lender's trustee, and shall
immediately deliver all payments to the Lender in their original form duly
endorsed in blank into a Payment Account established for the account of the
Borrower at a bank acceptable to Lender and subject to documentation acceptable
to lender. All fund deposited into a Payment Account shall remain subject to the
control of the Borrower until such time as a Triggering Event shall occur. Upon
the happening of a Triggering Event, all funds deposited into a Payment Account
shall be wire transferred each day to the Lender for application against
outstanding Revolving Loans. In the event that a Triggering Event no longer
exists for a period of ninety (90) consecutive days, the Lender shall instruct
the bank maintaining a Payment Account to cease transferring funds to the Lender
and to resume following the instructions of the Borrower. Following the
occurrence of a Triggering Event, all collections received in any Payment
Account or directly by the Borrower or the Lender, and all funds in any Payment
Account or other account to which such collections are deposited, shall be the
sole property of the Lender and subject to the Lender's sole control. The Lender
or the Lender's designee may, at any time, notify obligors that the Accounts
have been assigned to the Lender and of the Security Interest therein, and may
collect them directly and charge the collection costs and expenses to the
Borrower's loan account as a Revolving Loan. At the Lender's request, the
Borrower shall execute and deliver to the Lender such documents as the Lender
shall require to grant the Lender access to any post office box in which
collections of Accounts are received.
<PAGE>
(b) If sales of Inventory are made for cash, the Borrower
shall immediately deliver to the Lender the identical checks, cash, or other
forms of payment which the Borrower receives.
(c) All payments received by the Lender on account of Accounts
or as Proceeds of other Collateral will be the Lender's sole property and will
be credited to the Borrower's loan account (conditional upon final collection)
immediately upon receipt.
(d) In the event the Borrower repays all of the Obligations
upon the termination of this Agreement, other than through the Lender's receipt
of payments on account of Accounts or Proceeds of other Collateral, such payment
will be credited (conditional upon final collection) to the Borrower's loan
account immediately after the Lender's receipt thereof.
7.11 Inventory. The Borrower and each member of the GTS Consolidated Group
represent and warrant to the Lender that all of the Inventory is and will be
held for sale or lease, or to be furnished in connection with the rendition of
services in the ordinary course of the Borrower's business and is and will be
fit for such purposes. The Borrower will keep the Inventory in good and
marketable condition, at its own expense. The Borrower will not, without prior
written notice to the Lender, acquire or accept any Inventory on consignment or
approval. The Borrower agrees that Borrower will make all reasonable efforts to
assure that all Inventory will be produced in accordance with the Federal Fair
Labor Standards Act of 1938, as amended, and all rules, regulations, and orders
thereunder. The Borrower will maintain a perpetual inventory reporting system at
all times. The Borrower will conduct a physical count of the Inventory at least
once per Fiscal Year, and at such other times as the Lender requests, and shall
promptly supply the Lender with a copy of such count accompanied by a report of
the value of such Inventory (valued at the lower of cost, on an average cost
basis, or market value). The Borrower will not without the Lender's prior
written consent, sell any Inventory on a bill-and-hold, guaranteed sale, sale
and return, sale on approval, consignment, or other repurchase or return basis.
7.12 RESERVED.
7.13 RESERVED.
7.14 Documents, Instruments, and Chattel Paper. The Borrower and each
member of the GTS Consolidated Group represent and warrant to the Lender that:
(a) all documents, instruments, and chattel paper describing, evidencing, or
constituting Collateral, and all signatures and endorsements thereon, are and
will be complete, valid, and genuine; and (b) all goods evidenced by such
documents, instruments, and chattel paper are and will be owned by the Borrower
free and clear of all Liens other than Permitted Liens.
<PAGE>
7.15 Right to Cure. The Lender may, in its sole discretion and at any time,
pay any amount or do any act required of the Borrower hereunder to preserve,
protect, maintain or enforce the Obligations, the Collateral or the Security
Interest, and which the Borrower fails to pay or do, including, without
limitation, payment of any judgment against the Borrower, any insurance premium,
any warehouse charge, any finishing or processing charge, any landlord's claim,
and any other Lien upon or with respect to the Collateral. All payments that the
Lender makes under this Section 7.15, and all out-of-pocket costs and expenses
that the Lender pays or incurs in connection with any action taken by it
hereunder shall be charged to the Borrower's loan account as a Revolving Loan.
Any payment made or other action taken by the Lender under this Section 7.15
shall be without prejudice to any right to assert an Event of Default hereunder
and to proceed thereafter as herein provided.
7.16 Power of Attorney. The Borrower and each member of the GTS
Consolidated Group hereby appoint the Lender and the Lender's designees as the
attorney for the Borrower, with power: (a) following the occurrence of a
Triggering Event, to endorse such entity's name on any checks, notes,
acceptances, money orders, or other forms of payment or security that come into
the Lender's possession, and to sign such entity's name on any invoice, bill of
lading, or other document of title relating to any Collateral, on drafts against
customers; (b) to sign such entity's name on assignments of Accounts, on notices
of assignment, financing statements and other public records, on verifications
of Accounts and on notices to Account Debtors; (c) to notify the post office
authorities, when an Event of Default exists, to change the address for delivery
of such entity's mail to an address designated by the Lender and to receive,
open and dispose of all mail addressed to the Borrower; (d) to send requests for
verification of Accounts to Account Debtors; and (e) to do all things necessary
to carry out this Agreement. The Borrower and each member of the GTS
Consolidated Group ratify and approve all acts of such attorney. Neither the
Lender nor the attorney will be liable for any acts or omissions or for any
error of judgment or mistake of fact or law. This power, being coupled with an
interest, is irrevocable until this Agreement has been terminated and the
Obligations have been fully satisfied.
7.17 Lender's Rights, Duties, and Liabilities. The Borrower and each member
of the GTS Consolidated Group assumes all responsibility and liability arising
from or relating to the use, sale, or other disposition of the Collateral.
Neither the Lender nor any of its officers, directors, employees, and agents
shall be liable or responsible in any way for the safekeeping of any of the
Collateral, or for any act or failure to act with respect to the Collateral, or
for any loss or damage thereto, or for any diminution in the value thereof, or
for any act or default of any warehouseman, carrier, forwarding agency or other
person whomsoever, all of which shall be at the Borrower's sole risk. The
Obligations shall not be affected by any failure of the Lender to take any steps
to perfect the Security Interest or to collect or realize upon the Collateral,
nor shall loss of or damage to the Collateral release the Borrower from any of
the Obligations. The Lender may (but shall not be required to), without notice
to or consent from the Borrower or any member of the GTS Consolidated Group, sue
upon or otherwise collect, extend the time for payment of, modify or amend the
terms of, compromise or settle for cash, credit, or otherwise upon any terms,
grant other indulgences, extensions, renewals, compositions, or releases, and
take or omit to take any other action with respect to the Collateral, any
security therefor, any agreement relating thereto, any insurance applicable
thereto, or any Person liable directly or indirectly in connection with any of
the foregoing, without discharging or otherwise affecting the liability of the
Borrower or any member of the GTS Consolidated Group for the Obligations or
under this Agreement or any other agreement now or hereafter existing between
the Lender and the Borrower or any member of the GTS Consolidated Group.
<PAGE>
8. BOOKS AND RECORDS: FINANCIAL INFORMATION: NOTICE.
8.1 Books and Records. Each member of the GTS Consolidated Group shall
maintain, at all times, correct and complete books, records and accounts in
which complete, correct and timely entries are made of its transactions in
accordance with GAAP consistent with those applied in the preparation of the
Financial Statements. Each member of the GTS Consolidated Group shall, by means
of appropriate entries, reflect in such accounts and in all Financial Statements
proper liabilities and reserves for all taxes and proper provision for
depreciation and amortization of Property and bad debts, all in accordance with
GAAP. Each member of the GTS Consolidated Group shall maintain at all times
books and records pertaining to the Collateral in such detail, form, and scope
as the Lender shall reasonably require, including without limitation records of:
(a) all payments received and all credits and extensions granted with respect to
the Accounts; (b) the return, rejections repossession, stoppage in transit,
loss, damage, or destruction of any Inventory; and (c) all other dealings
affecting the Collateral.
8.2 Financial Information. Each member of the GTS Consolidated Group shall
promptly furnish to the Lender or its agents all such financial information as
the Lender shall reasonably request, and notify its auditors and accountants
that the Lender is authorized to obtain such information directly from them.
Without limiting the foregoing, the Parent and its Subsidiaries will furnish to
the Lender, in such detail as the Lender shall request, the following:
(a) As soon as available, but in any event not later than 90
days after the close of each Fiscal Year, consolidated and consolidating audited
balance sheets, and statements of income and expense, retained earnings, and
statements of cash flows and stockholders' equity for the Parent and its
consolidated Subsidiaries for such Fiscal Year, and the accompanying notes
thereto, setting forth in each case in comparative form figures for the previous
Fiscal Year, all in reasonable detail, fairly presenting the financial position
and the results of operations of the Parent and its consolidated Subsidiaries as
at the date thereof and for the Fiscal Year then ended, and prepared in
accordance with GAAP. Such statements shall be examined in accordance with
generally accepted auditing standards by and accompanied by a report thereon
unqualified as to scope of independent certified public accountants selected by
the Parent and reasonably satisfactory to the Lender.
(b) As soon as available, but in any event not later than 45
days after the close of each fiscal quarter other than the fourth quarter of a
Fiscal Year, consolidated and consolidating unaudited balance sheets of the
Parent and its consolidated Subsidiaries as at the end of such quarter, and
consolidated and consolidating unaudited statements of income and expense and
statements of cash flows for the Parent and its consolidated Subsidiaries for
such quarter and for the period from the beginning of the Fiscal Year to the end
of such quarter, together with the accompanying notes thereto, all in reasonable
detail, fairly presenting the financial position and results of operation of the
Parent and its consolidated Subsidiaries as at the date thereof and for such
periods, prepared in accordance with GAAP consistent with the audited Financial
Statements required pursuant to Section 8.2(a). Such statements shall be
certified to be correct by the chief financial or accounting officer of the
Parent, subject to normal year-end adjustments.
<PAGE>
(c) As soon as available, but in any event not later than 30
days after the end of each month, consolidated and consolidating unaudited
balance sheets of the Parent and its consolidated Subsidiaries as at the end of
such month, and consolidated and consolidating unaudited statements of income
and expenses for the Parent and its consolidated Subsidiaries for such month and
for the period from the beginning of the Fiscal Year to the end of such month,
all in reasonable detail, fairly presenting the financial position and results
of operation and cash flows of the Parent and its consolidated Subsidiaries as
at the date thereof and for such periods, and prepared in accordance with GAAP
consistent with the audited Financial Statements required pursuant to Section
8.2(a). Such statements shall be certified to be correct by the chief financial
or accounting officer of the Parent, subject to normal year-end adjustments.
(d) With each of the audited Financial Statements delivered
pursuant to Section 8.2(a), a certificate of the independent certified public
accountants that examined such statements to the effect that they have reviewed
and are familiar with the Loan Documents and that, in examining such Financial
Statements, they did not become aware of any fact or condition which then
constituted an Event or Event of Default, except for those, if any, described in
reasonable detail in such certificate.
(e) With each of the annual audited and quarterly unaudited
Financial Statements delivered pursuant to Sections 8.2(a) and 8.2(b), a
certificate of the chief executive or chief financial officer of the Parent (i)
setting forth in reasonable detail the calculations required to establish that
the GTS Consolidated Group was in compliance with its covenants set forth in
Sections 10.19 through 10.22 during the period covered in such Financial
Statements, and (ii) stating that, except as explained in reasonable detail in
such certificate, (A) all of the representations and warranties of the GTS
Consolidated Group contained in this Agreement and the other Loan Documents are
correct and complete as at the date of such certificate as if made at such time,
(B) no Event or Event of Default then exists or existed during the period
covered by such Financial Statements, and (iii) describing and analyzing in
reasonable detail all material trends, changes and developments in such
Financial Statements. If such certificate discloses that a representation or
warranty is not correct or complete, or that a covenant has not been complied
with, or that an Event or Event of Default existed or exists, such certificate
shall set forth what action the Borrower has taken or proposes to take with
respect thereto.
(f) No sooner than 90 days and no later than 30 days prior to
the beginning of each Fiscal Year, consolidated and consolidating projected
balance sheets, statements of income and expense, and statements of cash flow
for the GTS Consolidated Group as at the end of and for each month of such
Fiscal Year.
(g) Within 45 days after the end of each fiscal quarter, a
report of Available Development Capital, a roll-forward of Available Development
Capital from the prior fiscal quarter, a report of the Capital Expenditures of
the Borrower for such quarter and a schedule of the total investments in New
Store Openings and the amount and terms of landlord concessions received with
respect to each new store, prepared in accordance with GAAP consistent with the
audited Financial Statements required pursuant to Section 8.2(a).
(h) Promptly after their preparation, copies of any and all
proxy statements, financial statements, and reports which the Parent makes
available to its stockholders.
<PAGE>
(i) Promptly after filing with the PBGC, DOL, or IRS, a copy
of each annual report or other filing or notice filed with respect to each Plan
of the Parent or any ERISA Affiliate.
(j) Such additional information as the Lender may from time to
time reasonably request regarding the financial and business affairs of the GTS
Consolidated Group, including, without limitation, projections of future
operations on both a consolidated and consolidating basis.
8.3 Notices to Lender. The Borrower shall notify the Lender in writing of
the following matters at the following times:
(a) Immediately after becoming aware of the existence of any
Event or Event of Default.
(b) Immediately after becoming aware that the holder of any
capital stock of the Borrower or of any Debt has given notice or taken any
action with respect to a claimed default.
(c) Immediately after becoming aware of any material adverse
change in the Borrower's Property, business, operations, or condition (financial
or otherwise).
(d) Immediately after becoming aware of the entry of any final
judgment by any court, or of any pending or threatened action, suit, proceeding,
or counterclaim by any Person, or any pending or threatened investigation by a
Public Authority, which may materially and adversely affect the Collateral, the
repayment of the Obligations, the Lender's rights under the Loan Documents, or
the Borrower's Property, business, operations, or condition (financial or
otherwise).
(e) Immediately after becoming aware of any pending or
threatened strike, work stoppage, material unfair labor practice claim, or other
material labor dispute affecting the Borrower or any member of the GTS
Consolidated Group.
(f) Immediately after becoming aware of any violation of any
law, statute, regulation, or ordinance of a Public Authority applicable to
Borrower, any Subsidiary, or their respective Properties which may materially
and adversely affect the Collateral, the repayment of the Obligations, the
Lender's rights under the Loan Documents, or the Borrower's Property, business,
operations, or condition (financial or otherwise).
(g) Immediately after becoming aware of any violation by the
Borrower of Environmental Laws or immediately upon receipt of any notice that a
Public Authority has asserted that the Borrower is not in compliance with
Environmental Laws or that its compliance is being investigated.
(h) Thirty (30) days prior to the Borrower changing its name.
<PAGE>
(i) Immediately after becoming aware of any ERISA Event,
accompanied by any materials required to be filed with the PBGC with respect
thereto; immediately after the Borrower's receipt of any notice concerning the
imposition of any withdrawal liability under Section 4042 of ERISA with respect
to a Plan; immediately upon the establishment of any Pension Plan not existing
at the Closing Date or the commencement of contributions by the Borrower to any
Pension Plan to which the Borrower was not contributing at the Closing Date; and
immediately upon becoming aware of any other event or condition regarding a Plan
or the Borrower's or an ERISA Affiliate's compliance with ERISA, which may
materially and adversely affect the Borrower's Property, business, operation, or
condition (financial or otherwise).
Each notice given under this Section 8.3 shall describe the subject matter
thereof in reasonable detail and shall set forth the action that the Borrower
has taken or proposes to take with respect thereto.
9. GENERAL WARRANTIES AND REPRESENTATIONS.
The Borrower and each member of the GTS Consolidated Group continuously
warrant and represent to the Lender, at all times during the term of this
Agreement and until all Obligations have been satisfied, that, except as
hereafter disclosed to and accepted by the Lender in writing:
9.1 Authorization, Validity, and Enforceability of this Agreement and the
Loan Documents. The Borrower and each member of the GTS Consolidated Group have
the corporate power and authority to execute, deliver and perform this Agreement
and the other Loan Documents, to incur the Obligations, and to grant the
Security Interest. The Borrower and each member of the GTS Consolidated Group
have taken all necessary corporate action (including, without limitation,
obtaining approval of its stockholders) to authorize its execution, delivery,
and performance of this Agreement and the other Loan Documents. No consent,
approval, or authorization of, or declaration or filing with, any Public
Authority, and no consent of any other Person, is required in connection with
the execution, delivery, and performance of this Agreement and the other Loan
Documents by the Borrower or any member of the GTS Consolidated Group, except
for those already duly obtained. This Agreement and the other Loan Documents
have been duly executed and delivered by the Borrower and constitute the legal,
valid and binding obligation of the Borrower and each member of the GTS
Consolidated Group, enforceable against it in accordance with its terms without
defense, setoff, or counterclaim. The execution, delivery, and performance of
this Agreement and the other Loan Documents by the Borrower and each member of
the GTS Consolidated Group do not and will not conflict with, or constitute a
violation or breach of, or constitute a default under, or result in the creation
or imposition of any Lien upon the Property of the Borrower or any member of the
GTS Consolidated Group (except as contemplated by this Agreement and the other
Loan Documents) by reason of the terms of (a) any mortgage, lease, agreement, or
instrument to which the Borrower or any member of the GTS Consolidated Group is
a party or which is binding upon it, (b) any judgment, law, statute, rule or
governmental regulation applicable to the Borrower or any member of the GTS
Consolidated Group, or (c) the Certificate or Articles of Incorporation or
By-Laws of the Borrower or any member of the GTS Consolidated Group.
<PAGE>
9.2 Validity and Priority of Security Interest. The provisions of this
Agreement and the other Loan Documents create legal and valid Liens on all the
Collateral in the Lender's favor, and when all proper filings, recordings, and
other actions necessary to perfect such Liens have been made or taken, such
Liens will constitute perfected and continuing Liens on all the Collateral,
having priority over all other Liens on the Collateral except for the Permitted
Liens identified in Section 7.4 and enforceable against the Borrower and all
third parties.
9.3 Organization and Qualification. The Borrower: (a) is a Missouri limited
partnership duly organized and validly existing in good standing under the laws
of the State of Missouri; (b) is qualified to do business and is in good
standing in the States set forth on Schedule 9.3, which are the only states in
which qualification is necessary in order for it to own or lease its Property
and conduct its business; and (c) has all requisite power and authority to
conduct its business and to own its Property.
9.4 Corporate Name; Prior Transactions. The Borrower has not, during the
past five years, been known by or used any other corporate or fictitious name,
or been a party to any merger or consolidation, or acquired all or substantially
all of the assets of any Person, or acquired any of its Property out of the
ordinary course of business, except as set forth on Schedule 9.4.
9.5 Subsidiaries and Affiliates. Schedule 9.5 is a correct and complete
list of the name and relationship to the Borrower of each and all of the
Borrower's Subsidiaries and other Affiliates. Each Subsidiary is (a) duly
incorporated and organized and validly existing in good standing under the laws
of its state of incorporation set forth on Schedule 9.5, and (b) qualified to do
business as a foreign corporation and in good standing in the states set forth
opposite its name on Schedule 9.5, which are the only states in which such
qualification is necessary in order for it to own or lease its Property and
conduct its business.
9.6 Financial Statements and Projections.
(a) The Borrower has delivered to the Lender the audited
balance sheet and related statements of income, retained earnings, changes in
financial position, and changes in stockholders' equity for the Borrower as of
December 28, 1996 and for the Fiscal Year then ended, accompanied by the report
thereon of the Borrower's independent certified public accountants, Peat Marwick
& Co. The Borrower has also delivered to the Lender the unaudited balance sheet
and related statements of income and changes in financial position for the
Borrower, as at November 22, 1997, and for the eleven months then ended. Such
financial statements are attached hereto as Exhibit A-1. All such financial
statements have been prepared in accordance with GAAP and present accurately and
fairly the Borrower's financial position as at the dates thereof and its results
of operations for the periods then ended.
<PAGE>
(b) The Latest Projections attached hereto as Exhibit A-2
represent the Borrower's best estimate of the Borrower's future financial
performance for the periods set forth therein. The Latest Projections have been
prepared on the basis of the assumptions set forth therein, which the Borrower
believes are fair and reasonable in light of current and reasonably foreseeable
business conditions.
9.7 Capitalization. The Parent's authorized capital stock consists of 18
million shares of common stock, par value $.01 per share, of which 4,405,269
shares are validly issued and outstanding, fully paid and non-assessable as of
September 27, 1997.
9.8 Solvency. The Borrower is Solvent prior to and after giving effect to
the transactions contemplated by this Agreement and each Revolving Loan.
9.9 Debt. The Borrower has no Debt, except (a) the Obligations, (b) Debt
set forth in the most recent Financial Statements delivered to the Lender, or
the notes thereto, (c) trade payables and other contractual obligations arising
in the ordinary course of business since the date of such Financial Statements,
and (d) Debt incurred since the date of such Financial Statements to finance
Capital Expenditures permitted hereby.
9.10 Distributions. Since September 27, 1997, no Distribution has been
declared, paid, or made upon or in respect of any capital stock or other
securities of the Borrower.
9.11 Title to Property. Except for Property which the Borrower leases, the
Borrower has good and marketable title in fee simple to the Premises and good,
indefeasible, and merchantable title to all of its other Property including,
without limitation, the assets reflected on the most recent Financial Statements
delivered to the Lender, except as disposed of since the date thereof in the
ordinary course of business.
9.12 Adequate Assets. The Borrower possesses adequate assets for the
conduct of its business.
9.13 Real Property; Leases. Schedule 9.13 is a correct and complete list of
all real property owned by the Borrower, all leases and subleases of real or
personal property by the Borrower as lessee or sublessee, and all leases and
subleases of real or personal property by the Borrower as lessor or sublessor.
Each of such leases and subleases is valid and enforceable in accordance with
its terms and is in full force and effect and no default by any party to any
such lease or sublease exists.
9.14 Proprietary Rights. Schedule 9.14 is a correct and complete list of
all the Borrower's Proprietary Rights. None of the Proprietary Rights are
subject to any licensing agreement or similar arrangement except as set forth on
Schedule 9.14. None of the Proprietary Rights infringe on or conflict with any
other Person's Property and no other Person's Property infringes on or conflicts
with the Proprietary Rights. The Proprietary Rights described on Schedule 9.14
constitute all of the Property of such type necessary to the current and
anticipated future conduct of the Borrower's business.
<PAGE>
9.15 Trade Names and Terms of Sale. All trade names or styles under which
the Borrower will sell Inventory or create Accounts, or to which instruments in
payment of Accounts may be made payable, are listed on Schedule 9.15.
9.16 Litigation. Except as set forth on Schedule 9.16, there is no pending
or, to the best of the Borrower's knowledge, threatened action, suit,
proceeding, or counterclaim by any Person, or investigation by any Public
Authority, or any basis for any of the foregoing, which may materially and
adversely affect the Collateral, the repayment of the Obligations, the Lender's
rights under the Loan Documents, or the Borrower's Property, business,
operations, or condition (financial or otherwise).
9.17 Restrictive Agreements. The Borrower is not a party to any contract or
agreement, and is not subject to any charter or other corporate restriction,
which affects its ability to execute, deliver, and perform the Loan Documents
and repay the Obligations or which materially and adversely affects the
Borrower's Property, business, operations, or condition (financial or
otherwise).
9.18 Labor Disputes. Except as set forth on Schedule 9.18: (a) there is no
collective bargaining agreement or other labor contract covering employees of
the Borrower or any member of the GTS Consolidated Group; (b) no such collective
bargaining agreement or other labor contract is scheduled to expire during the
term of this Agreement; (c) no union or other labor organization is seeking to
organize, or to be recognized as, a collective bargaining unit of employees of
the Borrower or any member of the GTS Consolidated Group or for any similar
purpose; and (d) there is no pending or, to the best of the Borrower's
knowledge, threatened strike, work stoppage, material unfair labor practice
claims, or other material labor dispute against or affecting the Borrower, or
any member of the GTS Consolidated Group or their respective employees.
9.19 Environmental Laws. Except as otherwise disclosed on Schedule 9.19,
the Borrower and its Subsidiaries have complied in all material respects with
all Environmental Laws applicable to its Premises and business, and neither the
Borrower nor any Subsidiary nor any of its present Premises or operations, nor
its past property or operations, is subject to any enforcement order from or
liability agreement with any Public Authority or private Person respecting (i)
compliance with any Environmental Law, or (ii) any potential liabilities and
costs or remedial action arising from the release or threatened release of a
contaminant.
9.20 No Violation of Law. The Borrower is not in violation of any law,
statute, regulation, ordinance, judgment, order, or decree applicable to it
which violation would in any respect materially and adversely affect the
Collateral, the repayment of the Obligations, the Lender's rights under the Loan
Documents, or the Borrower's Property, business, operations, or condition
(financial or otherwise).
<PAGE>
9.21 No Default. The Borrower is not in default with respect to any note,
indenture, loan agreement, mortgage, lease, deed, or other agreement to which
the Borrower is a party or bound, which default could reasonably be expected to
materially and adversely affect the Collateral, the repayment of the
Obligations, the Lender's rights under the Loan Documents, or the Borrower's
Property, business, operations, or condition (financial or otherwise).
9.22 ERISA Compliance. Except as specifically disclosed in Schedule 9.22:
(a) Each Plan is in compliance in all material respects with
the applicable provisions of ERISA, the Code and other federal or state law.
Each Plan which is intended to qualify under Section 401(a) of the Code has
received a favorable determination letter from the IRS and to the best knowledge
of the Borrower, nothing has occurred which would cause the loss of such
qualification. The Borrower and each ERISA Affiliate have made all required
contributions to any Plan subject to Section 412 of the Code, and no application
for a funding waiver or an extension of any amortization period pursuant to
Section 412 of the Code has been made with respect to any Plan.
(b) There are no pending or, to the best knowledge of
Borrower, threatened claims, actions or lawsuits, or action by any Public
Authority, with respect to any Plan which has resulted or could reasonably be
expected to result in a material adverse effect on the Borrower's business or
operations. There has been no prohibited transaction or violation of the
fiduciary responsibility rules with respect to any Plan which has resulted or
could reasonably be expected to result in a material adverse effect on the
Borrower's business or operations.
(c) (i) No ERISA Event has occurred or is reasonably expected
to occur; (ii) no Pension Plan has any unfunded pension liability; (iii) neither
the Borrower nor any ERISA Affiliate has incurred, or reasonably expects to
incur, any liability under Title IV of ERISA with respect to any Pension Plan
(other than premiums due and not delinquent under Section 4007 of ERISA); (iv)
neither the Borrower nor any ERISA Affiliate has incurred, or reasonably expects
to incur, any liability (and no event has occurred which, with the giving of
notice under Section 4219 of ERISA, would result in such liability) under
Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v)
neither the Borrower nor any ERISA Affiliate has engaged in a transaction that
could subject any Person to Section 4069 or 4212(c) of ERISA.
9.23 Taxes. The Borrower and its Subsidiaries have filed all tax returns
and other reports required to be filed and have paid all Taxes, assessments,
fees and other governmental charges levied or imposed upon them or their
properties, income or assets that are otherwise due and payable.
<PAGE>
9.24 Use of Proceeds. None of the transactions contemplated in this
Agreement (including, without limitation, the use of proceeds from the Loans)
will violate or result in the violation of Section 7 of the Securities Exchange
Act of 1934, as amended, or any regulations issued pursuant thereto, including
without limitation, Regulations G, T, U and X of the Board of Governors of the
Federal Reserve System ("Federal Reserve Board"), 12 CFR, Chapter II. Borrower
does not own or intend to carry or purchase any "margin stock" within the
meaning of said Regulations U or G. None of the proceed of the loans will be
used, directly or indirectly, to purchase or carry (or refinance any borrowing,
the proceeds of which were used to purchase or carry) any "security" within the
meaning of the Securities Exchange Act of 1934, as amended.
9.25 Private Offerings. Borrower has not, directly or indirectly, offered
the Loans for sale to, or solicited offers to buy part thereof from, or
otherwise approached or negotiated with respect thereto with any prospective
purchaser other than Lender. Borrower hereby agrees that neither it nor anyone
acting on its behalf has offered or will offer the Loans or any part thereof or
any similar securities for issue or sale to or solicit any offer to acquire any
of the same from anyone so as to bring the issuance thereof within the
provisions of Section 5 of the Securities Act of 1933, as amended.
9.26 Broker's Fees. No Person is entitled to any brokerage or finder's fee
with respect to the transactions described in this Agreement.
9.27 No Material Adverse Change. No material adverse change has occurred in
the Borrower's Property, business, operations, or conditions (financial or
otherwise) since the date of the Financial Statements delivered to the Lender.
On the basis of a comprehensive review and assessment undertaken by Borrower of
Borrower's computer applications and inquiry made of Borrower's material
suppliers, vendors, and customers Borrower reasonably believes that the "Year
2000 problem" (that is, the risk that computer applications used by any Person
may be unable to recognize and perform properly date sensitive functions
involving certain dates prior to and any date after December 31, 1999) will not
result in a material adverse change in the operations, business, properties, or
condition (financial or otherwise) of the Borrower.
9.28 Disclosure. Neither this Agreement nor any document or statement
furnished to the Lender by or on behalf of the Borrower hereunder contains any
untrue statement of a material fact or omits to state any material fact
necessary in order to make the statements contained herein or therein not
misleading.
10. AFFIRMATIVE AND NEGATIVE COVENANTS. The Borrower and each member of the
GTS Consolidated Group covenants that, so long as any of the Obligations remain
outstanding or this Agreement is in effect:
10.1 Taxes and Other Obligations. The Borrower and each member of the GTS
Consolidated Group of its Subsidiaries shall: (a) file when due all tax returns
and other reports which it is required to file, pay, or provide for the payment,
when due, of all Taxes, fees, assessments and other governmental charges against
it or upon its Property, income, and franchises, make all required withholding
and other tax deposits, and establish adequate reserves for the payment of all
such items, and shall provide to the Lender, upon request, satisfactory evidence
of its timely compliance with the foregoing; and (b) pay when due all Debt owed
by it and perform and discharge in a timely manner all other obligations
undertaken by it; provided, however that the Borrower and its Subsidiaries need
not pay any tax, fee, assessment, governmental charge, or Debt, or perform or
discharge any other obligation, that it is contesting in good faith by
appropriate proceedings diligently pursued.
<PAGE>
10.2 Existence and Good Standing. The Borrower and each member of the GTS
Consolidated Group shall maintain its existence and its qualification and good
standing in all states necessary to conduct its business and own its Property,
and shall obtain and maintain all licenses, permits, franchises and governmental
authorizations necessary to conduct its business and own its Property.
10.3 Compliance with Law and Agreements. The Borrower and each member of
the GTS Consolidated Group shall comply with the terms and provisions of each
judgment, law, statute, rule, and governmental regulation applicable to it and
each contract, mortgage, lien, lease, indenture, order, instrument, agreement,
or document to which it is a party or by which it is bound.
10.4 Maintenance of Property and Insurance. The Borrower and each member of
the GTS Consolidated Group shall: (a) maintain all of its Property necessary and
useful in its business in good operating condition and repair, ordinary wear and
tear excepted; and (b) in addition to the insurance required by Section 7.7,
maintain with financially sound and reputable insurers such other insurance with
respect to its Property and business against casualties and contingencies of
such types (including, without limitation, business interruption, environmental
liability, public liability, product liability, and larceny, embezzlement or
other criminal misappropriation) and in such amounts as is customary for Persons
of established reputation engaged in the same or a similar business and
similarly situated, naming the Lender, at its request, as additional insured
under each such policy.
10.5 Environmental Laws. The Borrower shall conduct its business in full
compliance with all Environmental Laws applicable to it, including, without
limitation, those relating to the Borrower's generation, handling, use, storage,
and disposal of hazardous and toxic wastes and substances.
10.6 ERISA. The Borrower shall cause each Plan, which has been designated
to be so, to be qualified within the meaning of Section 401(a) of the Code and
to be administered in all respects in compliance with Section 401(a) of the
Code. The Borrower shall cause each Plan to be administered in all respects in
compliance with ERISA.
10.7 Mergers, Consolidations, Acquisitions, or Sales. Neither the Borrower
nor any member of the GTS Consolidated Group shall enter into any transaction of
merger, reorganization, or consolidation, or transfer, sell, assign, lease, or
otherwise dispose of all or any part of its Property, or wind up, liquidate or
dissolve, or agree to do any of the foregoing, except sales of Inventory or
equipment in the ordinary course of its business. Notwithstanding the foregoing,
Borrower may grant Permitted Liens and incur Permitted Debt in connection with
its Property which is not part of the Collateral.
10.8 Distributions; Capital Changes. Except for Permitted Distributions,
neither the Borrower nor any member of the GTS Consolidated Group shall: (a)
directly or indirectly declare or make, or incur any liability to make, any
Distribution, except Distributions to the Borrower by a member of the GTS
Consolidated Group; or (b) make any change in its capital structure which could
adversely affect the repayment of the Obligations.
10.9 Transactions Affecting Collateral or Obligations. Neither the Borrower
nor any member of the GTS Consolidated Group shall enter into any transaction
which materially and adversely affects the Collateral or the Borrower's ability
to repay the Obligations.
<PAGE>
10.10 Guaranties. Neither the Borrower nor any member of the GTS
Consolidated Group shall make, issue, or become liable on any Guaranty, except
(i) Guaranties in favor of the Lender, (ii) endorsements of instruments for
deposit, and (iii) guaranties by Parent of Borrower's lease obligations and
Permitted Debt.
10.11 Debt. Neither the Borrower nor any member of the GTS Consolidated
Group shall incur or maintain any Debt, other than: (a) the Obligations; (b)
trade payables and contractual obligations to suppliers and customers incurred
in the ordinary course of business; (c) other Debt existing on the Closing Date
and reflected in the Financial Statements attached as Exhibit A-1; and (d)
Permitted Debt.
10.12 Prepayment. Neither the Borrower nor any member of the GTS
Consolidated Group shall voluntarily prepay any Debt, except (i) the Obligations
in accordance with their terms, (ii) the ECO/Marshall Debt in an amount not to
exceed $300,000, and (iii) the prepayment of trade payables in the ordinary
course to take advantage of cash discounts.
10.13 Transactions with Affiliates. Except as set forth below and except
for Permitted Distributions, neither the Borrower nor any member of the GTS
Consolidated Group shall: sell, transfer, distribute, or pay any money or
Property to any Affiliate, or lend or advance money or Property to any
Affiliate, or invest in (by capital contribution or otherwise) or purchase or
repurchase any stock or indebtedness or any Property of any Affiliate, or become
liable on any Guaranty of the indebtedness, dividends, or other obligations of
any Affiliate. Notwithstanding the foregoing, if no Event of Default has
occurred and is continuing, the Borrower and its Subsidiaries may engage in
transactions with Affiliates in the ordinary course of business in amounts and
upon terms fully disclosed to the Lender and no less favorable to the Borrower
or such Subsidiary than would obtain in a comparable arm's length transaction
with a third party who is not an Affiliate.
10.14 Business Conducted. The Borrower and each member of the GTS
Consolidated Group shall not engage, directly or indirectly, in any line of
business other than the businesses in which the Borrower and any member of the
GTS Consolidated Group are engaged on the Closing Date.
10.15 Liens. Neither the Borrower nor any member of the GTS Consolidated
Group shall create, incur, assume, or permit to exist any Lien on any Property
now owned or hereafter acquired by any of them, except Permitted Liens.
10.16 New Store Equipment Financing. Borrower has advised Lender of its
intent to obtain New Store Equipment Financing after the Closing Date. Borrower
and Lender have agreed that Borrower will not enter into any agreements for New
Store Equipment Financing without Lender's prior written consent thereto, which
consent will not be unreasonably withheld. If Lender elects to withhold its
consent and Borrower enters into a New Store Equipment Financing arrangement
without such consent, then Borrower may prepay all Obligations owed to Lender
without premium or penalty, notwithstanding the provisions of Section 14, and
terminate this Agreement.
10.17 New Subsidiaries. The Borrower shall not, directly or indirectly,
organize or acquire any Subsidiary other than those listed on Schedule 10.17.
<PAGE>
10.18 Restricted Investments. Neither the Borrower nor any member of the
GTS Consolidated Group shall make any Restricted Investment.
10.19 Capital Expenditures. Neither the Borrower nor any member of the GTS
Consolidated Group shall make or incur any Capital Expenditure other than
Capital Expenditures related to New Store Openings, if, after giving effect
thereto, the aggregate amount of all Capital Expenditures by the Borrower and
its Subsidiaries in any Fiscal Year would exceed $1,500,000.
10.20 Fixed Charge Coverage Ratio. The GTS Consolidated Group will not
permit the ratio of (a) EBITDA to (b) Fixed Charges to be less than the
following ratios as of the last day of each of the following fiscal quarters
with each calculation based on a trailing 12-month basis:
Period Ratio
------ -----
First fiscal quarter of 1998 1.0 to 1.0
Second fiscal quarter of 1998 1.0 to 1.0
Third fiscal quarter of 1998 1.0 to 1.0
Fourth fiscal quarter of 1998 1.5 to 1.0
First fiscal quarter of 1999 1.0 to 1.0
Second fiscal quarter of 1999 1.0 to 1.0
Third fiscal quarter of 1999 .0 to 1.0
Fourth fiscal quarter of 1999, and
each fiscal quarter ending thereafter 1.2 to 1.0
10.21 New Store Openings. The Borrower shall not make any New Store Opening
after the Closing Date unless:
(1) at the time of any such New Store Opening, no Event or
Event of Default has occurred or would result from such New Store
Opening; and
(2) sufficient Available Development Capital exists at the
time the Borrower makes a commitment with regard to the proposed New
Store Opening to pay all New Store Opening Costs associated with the
proposed New Store Opening.
10.22 EBITDA. The GTS Consolidated Group will not allow EBITDA to be less
than (i) $1,600,000 as of the end of the 1997 Fiscal Year, and (ii) $3,250,000
as of the end of the 1998 Fiscal Year and thereafter.
10.23 Further Assurances. The Borrower and each member of the GTS
Consolidated Group shall execute and deliver, or cause to be executed and
delivered, to the Lender such documents and agreements, and shall take or cause
to be taken such actions, as the Lender may, from time to time, request to carry
out the terms and conditions of this Agreement and the other Loan Documents.
11. CLOSING; CONDITIONS TO CLOSING. The Lender will not be obligated to
make the initial Loans or to obtain any Letters of Credit on the Closing Date,
unless the following conditions precedent have been satisfied in a manner
satisfactory to Lender:
<PAGE>
11.1 Conditions Precedent to Making of Loans on the Closing Date.
(a) Representations and Warranties; Covenants. The
representations and warranties contained in this Agreement and the other Loan
Documents by the Borrower and each member of the GTS Consolidated Group shall be
correct and complete; the Borrower shall have performed and complied with all
covenants, agreements, and conditions contained herein and in the other Loan
Documents which are required to have been performed or complied with.
(b) Delivery of Documents. The Borrower shall have delivered,
or caused to be delivered, to the Lender the Loan Documents, and such documents,
instruments and agreements as the Lender shall request in connection herewith,
duly executed by all parties thereto other than the Lender, and in form and
substance satisfactory to the Lender and its counsel.
(c) Termination of Liens. The Lender shall have received duly
executed UCC-3 Termination Statements and other instruments, in form and
substance satisfactory to the Lender, as shall be necessary to terminate and
satisfy all Liens on the Property of the Borrower and each member of the GTS
Consolidated Group except Permitted Liens.
(d) Closing and Facility Fees. The Borrower shall have paid
in full the Closing Fee and the Facility Fee.
(e) Required Approvals. The Lender shall have received
certified copies of all consents or approvals of any Public Authority or other
Person which the Lender determines is required in connection with the
transactions contemplated by this Agreement.
(f) No Material Adverse Change. There shall have occurred no
material adverse change in the Borrower's business or financial condition or in
the Collateral since September 27, 1997, and the Lender shall have received a
certificate of Borrower's chief executive officer to such effect.
(g) Proceedings. All proceedings to be taken in connection
with the transactions contemplated by this Agreement, and all documents,
contemplated in connection herewith, shall be satisfactory in form and substance
to the Lender and its counsel.
11.2 Conditions Precedent to Each Loan. The obligation of the Lender to
make each Loan or to provide for the issuance of any Letter of Credit shall be
subject to the condition precedent that on the date of any such extension of
credit the following statements shall be true, and the acceptance by the
Borrower of any extension of credit shall be deemed to be a statement to the
effect set forth in clauses (a) and (b), with the same effect as the delivery to
the Lender of a certificate signed by the chief executive officer and chief
financial officer of the Borrower, dated the date of such extension of credit,
stating that:
<PAGE>
(a) The representations and warranties contained in this
Agreement and the other Loan Documents are correct in all material respects on
and as of the date of such extension of credit as though made on and as of such
date, except to the extent the Lender has been notified by the Borrower that any
representation or warranty is not correct and the Lender has explicitly waived
in writing compliance with such representation or warranty; and
(b) No Event or Event of Default has occurred and is
continuing, or would result from such extension of credit.
12. DEFAULT; REMEDIES.
12.1 Events of Default. It shall constitute an event of default ("Event of
Default") if any one or more of the following shall occur for any reason:
(a) failure to make payment of principal, interest, fees
or premium on any of the Obligations when due;
(b) any representation or warranty made or deemed made by the
Borrower or by any member of the GTS Consolidated Group in this Agreement or in
any of the other Loan Documents, any Financial Statement, or any certificate
furnished by the Borrower or any member of the GTS Consolidated Group at any
time to the Lender shall prove to be untrue in any material respect as of the
date when made, deemed made, or furnished;
(c) default shall occur in the observance or performance of
any of the covenants and agreements contained in this Agreement, the other Loan
Documents, or any other agreement entered into at any time to which the Borrower
or any member of the GTS Consolidated Group and the Lender are party, or if any
such agreement or document shall terminate (other than in accordance with its
terms or with the written consent of the Lender) or become void or unenforceable
without the written consent of the Lender;
(d) default shall occur in the payment of any principal or
interest on any indebtedness for borrowed money (other than the Obligations)
beyond any period of grace provided with respect thereto;
(e) the Borrower or any member of the GTS Consolidated Group
shall: (i) file a voluntary petition in bankruptcy or file a voluntary petition
or an answer or otherwise commence any action or proceeding seeking
reorganization, arrangement or readjustment of its debts or for any other relief
under the Federal Bankruptcy Code, as amended, or under any other bankruptcy or
insolvency act or law, state or federal, now or hereafter existing, or consent
to, approve of, or acquiesce in, any such petition, action or proceeding; (ii)
apply for or acquiesce in the appointment of a receiver, assignee, liquidator,
sequestrator, custodian, trustee or similar officer for it or for all or any
part of its Property; (iii) make an assignment for the benefit of creditors; or
(iv) be unable generally to pay its debts as they become due;
(f) an involuntary petition shall be filed or an action or
proceeding otherwise commenced seeking reorganization, arrangement or
readjustment of the debts of Borrower or any member of the GTS Consolidated
Group or for any other relief under the Federal Bankruptcy Code, as amended, or
under any other bankruptcy or insolvency act or law, state or federal, now or
hereafter existing;
<PAGE>
(g) a receiver, assignee, liquidator, sequestrator,
custodian, trustee or similar officer for the Borrower or any member of the GTS
Consolidated Group or for all or any part of their Property shall be appointed
involuntarily; or a warrant of attachment, execution or similar process shall be
issued against any part of the Property of the Borrower or any member of the GTS
Consolidated Group;
(h) the Borrower or any member of the GTS Consolidated Group
shall file a certificate of dissolution under applicable state law or shall be
liquidated, dissolved or wound-up or shall commence or have commenced against it
any action or proceeding for dissolution, winding-up or liquidation, or shall
take any corporate action in furtherance thereof,
(i) all or any part of the Property of the Borrower shall be
nationalized, expropriated or condemned, seized or otherwise appropriated, or
custody or control of such Property or of the Borrower shall be assumed by any
Public Authority or any court of competent jurisdiction at the instance of any
Public Authority, except where contested in good faith by proper proceedings
diligently pursued where a stay of enforcement is in effect;
(j) any guaranty of the Obligations shall be terminated,
revoked or declared void or invalid;
(k) one or more final judgments for the payment of money
aggregating in excess of $100,000 (unless fully covered by insurance) shall be
rendered against the Borrower or any member of the GTS Consolidated Group and
the Borrower or such member of the GTS Consolidated Group shall fail to
discharge the same within thirty (30) days from the date of notice of entry
thereof or to appeal therefrom;
(l) any loss, theft, damage or destruction of any item
or items of Collateral occurs which: (i) materially and adversely affects
the operation of the Borrower's business or (ii) is material in amount and is
not adequately covered by insurance;
(m) Parent ceases to control the Borrower (the term "control"
having the meaning given to it in the definition of Affiliate herein);
(n) any event or condition shall occur or exist with respect
to a Plan that could, in the Lender's reasonable judgment, subject the Borrower
or any member of the GTS Consolidated Group to any tax, penalty or liability
under ERISA, the Code or otherwise which in the aggregate is material in
relation to the business, operations, Property or financial or other condition
of the Borrower; or
(o) there occurs any material adverse change in the
Borrower's Property, business, operations, or condition (financial or
otherwise).
<PAGE>
13. REMEDIES.
(a) If an Event of Default exists, the Lender may, without notice to or
demand on the Borrower or any member of the GTS Consolidated Group, do one or
more of the following at any time or times and in any order: (i) reduce the
Availability or one or more of the elements thereof; (ii) restrict the amount of
or refuse to make Revolving Loans and restrict or refuse to arrange for Letters
of Credit; (iii) terminate this Agreement; (iv) declare any or all Obligations
to be immediately due and payable (provided however that upon the occurrence of
any Event of Default described in Sections 12.1(e), 12.1(f), 12.1(g), or
12.1(h), all Obligations shall automatically become immediately due and
payable); and (v) pursue its other rights and remedies under the Loan Documents
and applicable law.
(b) If an Event of Default exists: (i) the Lender shall have, in
addition to all other rights, the rights and remedies of a secured party under
the UCC; (ii) the Lender may, at any time, take possession of the Collateral and
keep it on the Borrower's premises, at no cost to the Lender, or remove any part
of it to such other place or places as the Lender may desire, or the Borrower
shall, upon the Lender's demand, at the Borrower's cost, assemble the Collateral
and make it available to the Lender at a place reasonably convenient to the
Lender; and (iii) the Lender may sell and deliver any Collateral at public or
private sales, for cash, upon credit or otherwise, at such prices and upon such
terms as the Lender deems advisable, in its sole discretion, and may, if the
Lender deems it reasonable, postpone or adjourn any sale of the Collateral by an
announcement at the time and place of sale or of such postponed or adjourned
sale without giving a new notice of sale. Without in any way requiring notice to
be given in the following manner, the Borrower agrees that any notice by the
Lender of sale, disposition or other intended action hereunder or in connection
herewith, whether required by the UCC or otherwise, shall constitute reasonable
notice to the Borrower if such notice is mailed by registered or certified mail,
return receipt requested, postage prepaid, or is delivered personally against
receipt, at least five (5) days prior to such action to the Borrower's address
specified in or pursuant to Section 15.10. If any Collateral is sold on terms
other than payment in full at the time of sale, no credit shall be given against
the Obligations until the Lender receives payment, and if the buyer defaults in
payment, the Lender may resell the Collateral. without further notice to the
Borrower. In the event the Lender seeks to take possession of all or any portion
of the Collateral by judicial process, the Borrower irrevocably waives: (a) the
posting of any bond, surety or security with respect thereto which might
otherwise be required; (b) any demand for possession prior to the commencement
of any suit or action to recover the Collateral; and (c) any requirement that
the Lender retain possession and not dispose of any Collateral until after trial
or final judgment. The Borrower agrees that the Lender has no obligation to
preserve rights to the Collateral or marshal any Collateral for the benefit of
any Person. The Lender is hereby granted a license or other right to use,
without charge, the Borrower's labels, patents, copyrights, name, trade secrets,
trade names, trademarks, and advertising matter, or any similar property, in
completing production of, advertising or selling any Collateral, and the
Borrower's rights under all licenses and all franchise agreements shall inure to
the Lender's benefit. The proceeds of sale shall be applied first to all
expenses of sale, including attorneys' fees, and second, in whatever order the
Lender elects, to all Obligations. The Lender will return any excess to the
Borrower or such other Person as shall be legally entitled thereto and the
Borrower shall remain liable for any deficiency.
(c) If an Event of Default occurs, the Borrower and each member of the
GTS Consolidated Group hereby waives (i) all rights to notice and hearing prior
to the exercise by the Lender of the Lender's rights to repossess the Collateral
without judicial process or to replevy, attach or levy upon the Collateral
without notice or hearing, and (ii) all rights of set-off and counterclaim
against Lender.
<PAGE>
(d) If the Lender terminates this Agreement upon an Event of Default,
the Borrower shall pay the Lender, immediately upon termination, an early
termination penalty equal to the early termination fee that would have been
payable under Section 14 if this Agreement had been terminated on that date
pursuant to the Borrower's election.
14. TERM AND TERMINATION. This Agreement shall expire on the Stated
Termination Date unless terminated or automatically extended as provided in this
Section 14. This Agreement shall automatically be renewed thereafter for
successive one-year terms, unless this Agreement is terminated as provided
below. The Lender and the Borrower shall have the right to terminate this
Agreement, without premium or penalty, at the end of the initial term or at the
end of any renewal term by giving the other written notice not less than sixty
(60) days prior to the end of such term by registered or certified mail. The
Borrower may also terminate this Agreement at any time during its initial term
or any successive renewal term if: (a) it gives the Lender sixty (60) days prior
written notice of termination by registered or certified mail; (b) it pays and
performs all Obligations on or prior to the effective date of termination; and
(c) it pays the Lender, on or prior to the effective date of termination, and in
addition to the fees required by Section 6.4, (i) one and one-half percent
(1.50%) of the average amount of the Revolving Loans and Letters of Credit
outstanding during the prior 180 day period (or lesser period if within 180 days
of the Closing Date) if such termination is made on or prior to the first
Anniversary Date; and (ii) three-quarters of one percent (.75%) of the average
amount of the Revolving Loans and Letters of Credit outstanding during the prior
180 day period if such termination is after the first Anniversary Date,
including during any renewal term. The Lender may also terminate this Agreement
without notice upon an Event of Default. Upon the effective date of termination
of this Agreement for any reason whatsoever, all Obligations shall become
immediately due and payable and Borrower shall immediately arrange for the
cancellation of Letters of Credit then outstanding. Notwithstanding the
termination of this Agreement, until all Obligations are paid and performed in
full, the Lender shall retain all its rights and remedies hereunder (including,
without limitation) in all then existing and after-arising Collateral).
15. MISCELLANEOUS.
15.1 Cumulative Remedies; No Prior Recourse to Collateral1. The enumeration
herein of the Lender's rights and remedies is not intended to be exclusive, and
such rights and remedies are in addition to and not by way of limitation of any
other rights or remedies that the Lender may have under the UCC or other
applicable law. The Lender shall have the right, in its sole discretion, to
determine which rights and remedies are to be exercised and in which order. The
exercise of one right or remedy shall not preclude the exercise of any others,
all of which shall be cumulative. The Lender may, without limitation, proceed
directly against the Borrower to collect the Obligations without any prior
recourse to the Collateral.
15.2 No Implied Waivers. No act, failure or delay by the Lender shall
constitute a waiver of any of its rights and remedies. No single or partial
waiver by the Lender of any provision of this Agreement or any other Loan
Document, or of breach or default hereunder or thereunder, or of any right or
remedy which the Lender may have, shall operate as a waiver of any other
provision, breach, default, right or remedy or of the same provision, breach,
default, right or remedy on a future occasion. No waiver by the Lender shall
affect its rights to require strict performance of this Agreement.
<PAGE>
15.3 Severability. If any provision of this Agreement shall be prohibited
or invalid, under applicable law, it shall be ineffective only to such extent,
without invalidating the remainder of this Agreement.
15.4 GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED TO HAVE BEEN MADE IN THE
STATE OF MISSOURI AND SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH
THE LAWS OF SUCH STATE, EXCEPT THAT NO DOCTRINE OF CHOICE OF LAW SHALL BE USED
TO APPLY THE LAWS OF ANY OTHER STATE OR JURISDICTION.
15.5 Consent to Jurisdiction and Venue; Service of Process. The Borrower
and each member of the GTS Consolidated Group agree that, in addition to any
other courts that may have jurisdiction under applicable laws, any action or
proceeding to enforce or arising out of this Agreement or any of the other Loan
Documents may be commenced in the appropriate state court of the State of Texas
for Dallas County, Texas, or in the United States District Court for the
Northern District of Texas, and the Borrower and each member of the GTS
Consolidated Group consent and submit in advance to such jurisdiction and agrees
that venue will be proper in such courts on any such matter. The Borrower and
each member of the GTS Consolidated Group hereby waive personal service of
process and agree that a summons and complaint commencing an action or
proceeding in any such court shall be properly served and shall confer personal
jurisdiction if served by registered or certified mail to the Borrower. Should
the Borrower or any member fail to appear or answer any summons, complaint,
process or papers so served within thirty (30) days after the mailing or other
service thereof, it shall be deemed in default and an order or judgment may be
entered against it as demanded or prayed for in such summons, complaint, process
or papers. The choice of forum set forth in this Section 15.5 shall not be
deemed to preclude the enforcement of any judgment obtained in such forum, or
the taking of any action under this Agreement to enforce the same, in any
appropriate jurisdiction.
15.6 Waiver of Jury Trial. THE BORROWER AND EACH MEMBER OF THE GTS
CONSOLIDATED GROUP HEREBY WAIVE TRIAL BY JURY, RIGHTS OF SET OFF, AND THE RIGHT
TO IMPOSE COUNTERCLAIMS IN ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN
CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, THE
OBLIGATIONS OR THE COLLATERAL, OR ANY INSTRUMENT OR DOCUMENT DELIVERED PURSUANT
HERETO OR THERETO, OR ANY OTHER CLAIM OR DISPUTE HOWSOEVER ARISING, BETWEEN THE
BORROWER, ANY MEMBER OF THE GTS CONSOLIDATED GROUP, AND THE LENDER. THE BORROWER
AND EACH MEMBER OF THE GTS CONSOLIDATED GROUP CONFIRM THAT THE FOREGOING WAIVERS
ARE INFORMED AND FREELY MADE.
15.7 Survival of Representations and Warranties. All of the representations
and warranties by the Borrower and each member of the GTS Consolidated Group
contained in this Agreement shall survive the execution, delivery, and
acceptance thereof by the parties, notwithstanding any investigation by the
Lender or its agents.
<PAGE>
15.8 Other Security and Guaranties. The Lender may, without notice or
demand and without affecting the Borrower's obligations hereunder, from time to
time: (a) take from any Person and hold collateral (other than the Collateral)
for the payment of all or any part of the Obligations and exchange, enforce or
release such collateral or any part thereof; and (b) accept and hold any
endorsement or guaranty of payment of all or any part of the Obligations and
release or substitute any such endorser or guarantor, or any Person who has
given any Lien in any other collateral as security for the payment of all or any
part of the Obligations, or any other Person in any way obligated to pay all or
any part of the Obligations.
15.9 Fees and Expenses. The Borrower shall pay to the Lender on demand all
costs and expenses that the Lender pays or incurs in connection with the
negotiation, preparation, consummation, administration, enforcement, and
termination of this Agreement and the other Loan Documents, including, without
limitation: (a) reasonable attorneys' and paralegals' fees and disbursements of
counsel to the Lender (including, without limitation, a reasonable estimate of
the allocable cost of in-house counsel and staff); (b) costs and expenses
including attorneys' and paralegals' fees and disbursements (including, without
limitation, a reasonable estimate of the allocable cost of in-house counsel and
staff) for any amendment, supplement, waiver, consent, or subsequent closing in
connection with the Loan Documents and the transactions contemplated thereby;
(c) costs and expenses of lien and title searches and title insurance; (d)
taxes, fees and other charges for recording the mortgages, filing financing
statements and continuations, and other actions to perfect, protect, and
continue the Security Interest; (e) sums paid or incurred to pay any amount or
take any action required of the Borrower under the Loan Documents that the
Borrower fails to pay or take; (f) costs of appraisals, inspections, and
verifications of the Collateral, including, without limitation, travel, lodging,
and meals together with an allocated charge of $600 per day for each auditor
employed by the Lender for inspections of the Collateral and the Borrower's
operations; (g) costs and expenses of forwarding loan proceeds, collecting
checks and other items of payment, and establishing and maintaining Payment
Accounts and lock boxes; (h) costs and expenses of preserving and protecting the
Collateral; and (i) costs and expenses including attorneys' and paralegals' fees
and disbursements (including, without limitation, a reasonable estimate of the
allocable cost of in-house counsel and staff) paid or incurred to obtain payment
of the Obligations, enforce the Security Interest, sell or otherwise realize
upon the Collateral, and otherwise enforce the provisions of the Loan Documents,
or to defend any claims made or threatened against the Lender arising out of the
transactions contemplated hereby (including without limitation, preparations for
and consultations concerning any such matters). The foregoing shall not be
construed to limit any other provisions of the Loan Documents regarding costs
and expenses to be paid by the Borrower. All of the foregoing costs and expenses
shall be charged to the Borrower's loan account as Revolving Loans.
15.10 Notices. Except as otherwise provided herein, all notices, demands,
and requests that either party is required or elects to give to the other shall
be in writing, shall be delivered personally against receipt, or sent by
recognized overnight courier services, or mailed by registered or certified
mail, return receipt requested, postage prepaid, and shall be addressed to the
party to be notified as follows:
<PAGE>
If to the Lender: BankAmerica Business Credit, Inc.
231 S. LaSalle Street, 16th Floor
Chicago, Illinois 60697
Attention: L. Frank Melazzo
with a copy to: Bank of America NT&SA, Legal Department
10124 Old Grove Road
San Diego, California 92131
If to the Borrower: The Great Train Store
14180 Dallas Parkway, Suite 618
Dallas, Texas 75240
Attn: Cheryl A. Taylor,
Chief Financial Officer
with a copy to: Gallop Johnson & Newman, L.L.C.
101 South Hanley Road, 16th Floor
St. Louis, Missouri 63105
Attn: Douglas Bates
or to such other address as each party may designate for itself by like notice.
Any such notice, demand, or request shall be deemed given when received if
personally delivered or sent by overnight courier, or when deposited in the
United States mails, postage paid, if sent by registered or certified mail.
<PAGE>
15.11 Indemnification. (a) BORROWER AND EACH MEMBER OF THE GTS CONSOLIDATED
GROUP HEREBY INDEMNIFIES, DEFENDS AND HOLDS LENDER, AND ITS DIRECTORS, OFFICERS,
AGENTS, EMPLOYEES AND COUNSEL, HARMLESS FROM AND AGAINST ANY AND ALL LOSSES,
CLAIMS. DAMAGES, LIABILITIES, DEFICIENCIES, JUDGMENTS, PENALTIES OR EXPENSES
IMPOSED ON, INCURRED BY OR ASSERTED AGAINST ANY OF THEM, WHETHER DIRECT,
INDIRECT OR CONSEQUENTIAL ARISING OUT OF OR BY REASON OF ANY LITIGATION,
INVESTIGATIONS, CLAIMS, OR PROCEEDINGS (WHETHER BASED ON ANY FEDERAL, STATE OR
LOCAL LAWS OR OTHER STATUTES OR REGULATIONS, INCLUDING, WITHOUT LIMITATION,
SECURITIES, ENVIRONMENTAL, OR COMMERCIAL LAWS AND REGULATIONS, UNDER COMMON LAW
OR AT EQUITY, OR ON CONTRACT OR OTHERWISE) COMMENCED OR THREATENED, WHICH ARISE
OUT OF OR ARE IN ANY WAY BASED UPON THE NEGOTIATION, PREPARATION, EXECUTION,
DELIVERY, ENFORCEMENT, PERFORMANCE OR ADMINISTRATION OF THIS AGREEMENT, ANY
OTHER LOAN DOCUMENT, OR ANY UNDERTAKING OR PROCEEDING RELATED TO ANY OF THE
TRANSACTIONS CONTEMPLATED HEREBY OR ANY ACT, OMISSION TO ACT, EVENT OR
TRANSACTION RELATED OR ATTENDANT THERETO, INCLUDING, WITHOUT LIMITATION, AMOUNTS
PAID IN SETTLEMENT, COURT COSTS, AND THE FEES AND EXPENSES OF COUNSEL REASONABLY
INCURRED IN CONNECTION WITH ANY SUCH LITIGATION, INVESTIGATION, CLAIM OR
PROCEEDING AND FURTHER INCLUDING, WITHOUT LIMITATIONS, ALL LOSSES, DAMAGES
(INCLUDING CONSEQUENTIAL DAMAGES), EXPENSES OR LIABILITIES SUSTAINED BY THE
LENDER IN CONNECTION WITH ANY ENVIRONMENTAL INSPECTION, MONITORING, SAMPLING, OR
CLEANUP OF THE ENCUMBERED REAL ESTATE REQUIRED OR MANDATED BY ANY ENVIRONMENTAL
LAW; PROVIDED, HOWEVER, THAT NEITHER BORROWER NOR ANY MEMBER OF THE GTS
CONSOLIDATED GROUP SHALL INDEMNIFY LENDER, ITS DIRECTORS, OFFICERS, AGENTS,
EMPLOYEES AND COUNSEL FROM SUCH DAMAGES RESULTING FROM THEIR GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT.
(b) The Borrower and each member of the GTS Consolidated Group hereby
indemnify, defend and hold harmless the Lender from any loss or liability
directly or indirectly arising out of the use, generation, manufacture,
production, storage, release, threatened release, discharge, disposal or
presence of a hazardous substance. This indemnity will apply whether the
hazardous substance is on, under or about the Borrower's property or operations
or property leased to the Borrower. The indemnity includes but is not limited to
attorneys' fees (including the reasonable estimate of the allocated cost of
in-house counsel and staff). The indemnity extends to the Lender, its parent,
subsidiaries and all of their directors, officers, employees, agents,
successors, attorneys and assigns. "Hazardous substances" means any substance,
material or waste that is or becomes designated or regulated as "toxic,"
"hazardous," "pollutant," or "contaminant" or a similar designation or
regulation under any federal, state or local law (whether under common law,
statute, regulation or otherwise) or judicial or administrative interpretation
of such, including without limitation petroleum or natural gas. This indemnity
will survive termination of the Agreement.
(c) Without limiting the foregoing, if, by reason of any suit or
proceeding of any kind, nature, or description against Borrower, or by Borrower
or any other party against Lender, which in Lender's sole discretion makes it
advisable for Lender to seek counsel for protection and preservation of its
liens and security assets, or to defend its own interest, such expenses and
counsel fees shall be allowed to Lender. To the extent that the undertaking to
indemnify, pay and hold harmless set forth in this Section 15.11 may be
unenforceable because it is violative of any law or public policy, Borrower
shall contribute the maximum portion which it is permitted to pay and satisfy
under applicable law, to the payment and satisfaction of all indemnified matters
incurred by Lender. The foregoing indemnity shall survive the payment of the
Obligations and the termination of this Agreement. All of the foregoing costs
and expenses shall be part of the Obligations and secured by the Collateral.
15.12 Waiver of Notices. Unless otherwise expressly provided herein, the
Borrower and each member of the GTS Consolidated Group waive presentment, notice
of intent to accelerate and notice of acceleration, protest and notice of demand
or dishonor and protest as to any instrument, as well as any and all other
notices to which it might otherwise be entitled. No notice to or demand on the
Borrower which the Lender may elect to give shall entitle the Borrower to any or
further notice or demand in the same, similar or other circumstances.
<PAGE>
15.13 Binding Effect; Assignment. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective representatives,
successors and assigns of the parties hereto; provided, however, that no
interest herein may be assigned by the Borrower without the prior written
consent of the Lender. The rights and benefits of the Lender hereunder shall, if
the Lender so agrees, inure to any party acquiring any interest in the
Obligations or any part thereof.
15.14 NO ORAL AGREEMENTS; ENTIRE AGREEMENT. ORAL AGREEMENTS OR COMMITMENTS
TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT,
INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT, ARE NOT ENFORCEABLE. TO PROTECT
BORROWER AND LENDER FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS
REACHED BY BORROWER AND LENDER COVERING SUCH MATTERS ARE CONTAINED IN THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS, WHICH AGREEMENT AND OTHER LOAN DOCUMENTS
ARE A COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENTS BETWEEN BORROWER AND
LENDER, EXCEPT AS BORROWER AND LENDER MAY LATER AGREE IN WRITING TO MODIFY THEM.
This Agreement embodies the entire agreement and understanding between the
parties hereto and supersedes all prior agreements and understandings (oral or
written) relating to the subject matter hereof.
15.15 Counterparts. This Agreement may be executed in any number of
counterparts, and by the Lender and the Borrower in separate counterparts, each
of which shall be an original, but all of which shall together constitute one
and the same agreement.
15.16 Captions. The captions contained in this Agreement are for
convenience only, are without substantive meaning and should not be construed to
modify, enlarge, or restrict any provision.
15.17 Right of Set-Off. Whenever an Event of Default exists, the Lender is
hereby authorized at any time and from time to time, to the fullest extent
permitted by law, to set off and apply any and all deposits (general or special,
time or demand, provisional or final) at any time held and other indebtedness at
any time owing by the Lender or any affiliate of the Lender to or for the credit
or the account of the Borrower against any and all of the Obligations, whether
or not then due and payable. Lender agrees promptly to notify Borrower after any
such set-off and application made by Lender, provided that the failure to give
such notice shall not affect the validity of such set-off and application.
<PAGE>
15.18 Participating Lender's Security Interests. The Lender may, without
notice to or consent by the Borrower or any member of the GTS Consolidated
Group, grant one or more participations in the Loans to Participating Lenders.
If a Participating Lender shall at any time with the Borrower's knowledge
participate with the Lender in the Loans, the Borrower hereby grants to such
Participating Lender, and the Lender and such Participating Lender shall have
and are hereby given, a continuing lien on and security interest in any money,
securities and other property of the Borrower in the custody or possession of
the Participating Lender, including the right of set off, to the extent of the
Participating Lender's participation in the Obligations, and such Participating
Lender shall be deemed to have the same right of set off to the extent of
Participating Lender's participation in the Obligations under this Agreement, as
it would have it were a direct lender.
15.19 AMENDMENT AND RESTATEMENT. THIS AGREEMENT AMENDS, EXTENDS AND
RESTATES IN ITS ENTIRETY THE ORIGINAL LOAN AGREEMENT. THE EXECUTION OF THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS EXECUTED IN CONNECTION HEREWITH DOES NOT
EXTINGUISH THE INDEBTEDNESS OUTSTANDING IN CONNECTION THEREWITH NOR DOES IT
CONSTITUTE A NOVATION WITH RESPECT TO THE INDEBTEDNESS OUTSTANDING IN CONNECTION
WITH THE ORIGINAL LOAN AGREEMENT. BORROWER REPRESENTS AND WARRANTS THAT AS OF
THE CLOSING DATE THERE ARE NO CLAIMS OR OFFSETS AGAINST OR DEFENSES OR
COUNTERCLAIMS TO ITS OBLIGATIONS UNDER THE ORIGINAL LOAN AGREEMENT OR ANY OTHER
LOAN DOCUMENTS. BORROWER WAIVES ANY AND ALL SUCH CLAIMS, OFFSETS, DEFENSES OR
COUNTERCLAIMS, WHETHER KNOWN OR UNKNOWN, ARISING PRIOR TO THE CLOSING DATE.
IN WITNESS WHEREOF, the parties have entered into this Agreement on the
date first above written.
THE GREAT TRAIN STORE PARTNERS, L.P.
By: GTS PARTNER, INC., its General Partner
By:
Cheryl A. Taylor
Vice President
BANKAMERICA BUSINESS CREDIT, INC.
By:
Raymond Gore
Vice President
<PAGE>
ACKNOWLEDGED AND AGREED TO:
Each of the following members of the GTS Consolidated Group hereby
executes this Agreement to acknowledge (i) its grant of a security interest in
its Collateral to Lender and (ii) its agreement to comply with and be bound by
all those particular warranties, representations, covenants, and agreements set
forth herein that are expressly applicable to the GTS Consolidated Group by the
terms of this Agreement.
THE GREAT TRAIN STORE COMPANY
By:
Cheryl A. Taylor
Vice President
GTS PARTNER, INC.
By:
Cheryl A. Taylor
Vice President
GTS LIMITED PARTNER, INC.
By:
Cheryl A. Taylor
Vice President
<PAGE>
List of Exhibits/Schedules
Exhibit A Financial Statements and Projections
- Exhibit A-1 Financial Statement
- Exhibit A-2 Projections
Exhibit B Notice of Borrowing
Exhibit C Notice of Conversion/Continuation
Schedule 7.3 Locations of Borrower
Schedule 9.3 States Where Borrower is In Good Standing
Schedule 9.4 Names of Borrower and Trade Styles
Schedule 9.5 Subsidiaries and Affiliates and states of incorporation
and qualification
Schedule 9.13 Real Estate - Owned and Leased
Schedule 9.14 Proprietary Rights Collateral (patents, trademarks, and
copyrights)
Schedule 9.15 Trade Names
Schedule 9.16 Litigation
Schedule 9.18 Labor Disputes
Schedule 9.19 Environmental Laws
Schedule 9.22 ERISA Compliance
Schedule 10.8 Permitted Distributions
Schedule 10.11 Permitted Debt
Schedule 10.15 Permitted Liens
Schedule 10.17 New Subsidiaries
Exhibit 21.1
SUBSIDIARIES OF THE COMPANY
The following is a list of all direct and indirect Subsidiaries of the
Company, and the state of organization of each, as of the date hereof:
Subsidiary State of Organization
---------- ---------------------
GTS Partner, Inc. Missouri
GTS Limited Partner, Inc. Missouri
The Great Train Store Partners, L.P. Missouri
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. 333-37705, 333-10427 and 33-82626) of The Great Train Store
Company of our report dated February 10, 1998, relating to the consolidated
balance sheet of The Great Train Store Company and subsidiaries as of January 3,
1998 and the related consolidated statements of income, stockholders' equity and
cash flows for the years ended December 28, 1996 and January 3, 1998, which
report appears in the January 3, 1998 annual report on Form 10-KSB of The Great
Train Store Company.
KPMG Peat Marwick LLP
Dallas, Texas
March 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Balance Sheet at January 3, 1998 and the Company's Income Statement
for the fiscal year ended January 3, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Jan-03-1998
<PERIOD-START> Dec-29-1996
<PERIOD-END> Jan-03-1998
<CASH> 3,490,721
<SECURITIES> 0
<RECEIVABLES> 1,482,246
<ALLOWANCES> 0
<INVENTORY> 8,978,789
<CURRENT-ASSETS> 13,951,756
<PP&E> 7,392,095
<DEPRECIATION> 1,872,691
<TOTAL-ASSETS> 20,147,642
<CURRENT-LIABILITIES> 7,031,859
<BONDS> 0
0
0
<COMMON> 44,158
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 20,147,642
<SALES> 28,090,948
<TOTAL-REVENUES> 28,090,948
<CGS> 15,072,692
<TOTAL-COSTS> 12,623,470
<OTHER-EXPENSES> (435,282)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 188,128
<INCOME-PRETAX> 641,940
<INCOME-TAX> 231,327
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 410,613
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
