U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the twenty-six week period ended July 4, 1998.
Commission file number 1-13158
The Great Train Store Company
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 75-2539189
(State or Other Jurisdiction of (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)
Check whether the Issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities 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
State the number of shares outstanding of each of the Issuer's classes of common
equity, as of the latest practicable date:
Number of Shares Outstanding
Title of Class as of July 4, 1998
- ------------------ -------------------
Common Stock $0.01 par value 4,415,764
<PAGE>
THE GREAT TRAIN STORE COMPANY
QUARTERLY REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE FISCAL QUARTER ENDED
July 4, 1998
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements Page
Unaudited Consolidated Balance Sheet as of July 4, 1998 3
Unaudited Consolidated Statements of Operations
for the thirteen and twenty-six weeks ended June 28, 1997
and July 4, 1998 4
Unaudited Consolidated Statements of Cash Flows for the
twenty-six weeks ended June 28, 1997 and July 4, 1998 5
Notes to Unaudited Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis 8
PART II - OTHER INFORMATION
ITEM 5. Other Information 11
ITEM 6. Exhibits and Reports on Form 8-K 13
SIGNATURE PAGE 14
EXHIBIT INDEX 15
<PAGE>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
July 4, 1998
-----------------
CURRENT ASSETS:
Cash and cash equivalents $ 219,085
Merchandise inventories 8,011,406
Accounts receivable and other current assets 641,931
-----------------
Total current assets 8,872,422
PROPERTY AND EQUIPMENT:
Store construction and leasehold improvements 5,572,387
Furniture, fixtures, and equipment 2,934,481
-----------------
8,506,868
Less accumulated depreciation and amortization (2,311,092)
-----------------
Property and equipment, net 6,195,776
DEFERRED TAXES 1,591,190
OTHER ASSETS, net 644,898
-----------------
Total assets $ 17,304,286
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 1,522,278
Sales taxes payable 144,559
Current portion of capital lease obligations 177,818
-----------------
Total current liabilities 1,844,655
CAPITAL LEASE OBLIGATIONS, net of current portion 364,259
LINE OF CREDIT PAYABLE 1,272,049
DEFERRED RENT AND OTHER LIABILITIES 1,063,404
SUBORDINATED DEBENTURES 2,842,231
-----------------
Total liabilities 7,386,598
-----------------
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
Warrants 76,006
Accumulated deficit (647,241)
-----------------
Total stockholders' equity 9,917,688
-----------------
Total liabilities and stockholders' equity $ 17,304,286
=================
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the Thirteen Weeks Ended For the Twenty-Six Weeks Ended
June 28, 1997 July 4, 1998 June 28, 1997 July 4, 1998
-------------------------------- -------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 4,015,005 $ 5,132,035 $ 7,905,126 $ 10,498,921
COST OF SALES 2,106,807 2,939,243 4,170,516 6,428,006
---------------- ------------- -------------- --------------
Gross profit 1,908,198 2,192,792 3,734,610 4,070,915
---------------- ------------- -------------- --------------
OPERATING EXPENSES:
Store operating expenses 897,143 1,292,769 1,859,717 2,607,670
Occupancy expenses 830,377 1,208,699 1,629,521 2,360,532
Selling, general and
administrative expenses 911,393 874,444 1,627,321 1,826,773
Depreciation and amortization
expenses 197,742 258,926 361,477 494,671
---------------- ------------- -------------- --------------
Total operating expenses 2,836,655 3,634,838 5,478,036 7,289,646
---------------- ------------- -------------- --------------
OPERATING LOSS (928,457) (1,442,046) (1,743,426) (3,218,731)
---------------- ------------- -------------- --------------
OTHER INCOME (EXPENSE):
Interest expense (37,403) (126,194) (71,500) (261,776)
Interest income 11,922 3,661 44,346 9,040
Other income (expense) 2,496 (1,101) 6,404 7,858
---------------- ------------- -------------- --------------
Total other expense, net (22,985) (123,634) (20,750) (244,878)
---------------- ------------- -------------- --------------
LOSS BEFORE INCOME TAXES (951,442) (1,565,680) (1,764,176) (3,463,609)
INCOME TAX BENEFIT (352,033) (572,612) (652,745) (1,274,846)
---------------- ------------- -------------- --------------
NET LOSS $ (599,409) $ (993,068) $ (1,111,431) $ (2,188,763)
================ ============= ============== ==============
BASIC EARNINGS PER SHARE $ (0.14) $ (0.22) $ (0.25) $ (0.50)
================ ============= ============== ==============
DILUTED EARNINGS PER SHARE $ (0.14) $ (0.22) $ (0.25) $ (0.50)
================ ============= ============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING 4,399,601 4,415,764 4,398,160 4,415,764
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Twenty-Six Weeks Ended
June 28, 1997 July 4, 1998
----------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (1,111,431) $ (2,188,763)
Adjustments to reconcile net loss to net cash used in
operating activites:
Depreciation and amortization 361,477 494,671
Deferred income taxes (652,744) (1,274,846)
Amortization of unearned compensation - restricted stock 4,125 -
Changes in assets and liabilities:
Merchandise inventories (523,541) 967,383
Accounts receivable and other current assets 844,139 840,315
Other assets (188,999) (130,578)
Accounts payable and accrued liabilities (1,363,632) (4,521,821)
Sales taxes payable (297,498) (515,988)
Income taxes payable (272,106) (241,716)
Other long term liabilities 122,006 110,732
-------------- ---------------
Net cash used in operating activities (3,078,204) (6,460,611)
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (898,467) (814,773)
-------------- ---------------
Net cash used in investing activities (898,467) (814,773)
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock options exercised 63,738 -
Net proceeds from line of credit - 1,272,049
Net proceeds from subordinated debentures and warrants - 2,791,161
Repayment of notes payable and capital leases (69,896) (59,462)
----------------- ----------------
Net cash provided by (used in) financing activities (6,158) 4,003,748
----------------- ----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,982,829) (3,271,636)
CASH AND CASH EQUIVALENTS, beginning of period 4,864,539 3,490,721
----------------- ----------------
CASH AND CASH EQUIVALENTS, end of period $ 881,710 $ 219,085
================= ===============
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Assets acquired through capital lease transactions $ - $ 300,000
Interest paid $ 32,528 $ 171,989
Income taxes paid $ 272,106 $ 241,716
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of The Great Train
Store Company and subsidiaries (the "Company") as of and for the thirteen and
twenty-six week periods ended June 28, 1997 and July 4, 1998 have been prepared
in accordance with the rules and regulations of the Securities and Exchange
Commission ("SEC") and do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation of the
results of the interim periods have been included. Operating results for any
interim period are not necessarily indicative of the results that may be
expected for the entire fiscal year. The Company's business is heavily dependent
on fourth quarter sales. Historically, the fourth quarter has accounted for a
significantly disproportionate share of the Company's sales and earnings. These
statements should be read in conjunction with the financial statements and notes
thereto for the year ended January 3, 1998 included in the Company's 1997 Annual
Report on Form 10-KSB as filed with the SEC.
Prior year balances include certain reclassifications to conform to the current
year presentation.
In January 1998, the Company entered into a $15,000,000 revolving line of credit
with BankAmerica Business Credit, Inc. The initial term of the facility is three
years and borrowings are secured by certain assets of the Company, primarily
inventory. Outstanding borrowings bear interest at BankAmerica Business Credit,
Inc.'s base lending rate plus 0.25% and a commitment fee of 0.375% is charged on
the unused portion. The revolving credit facility provides a source of
additional liquidity to manage cash flow and provide capital for expansion. As
of July 4, 1998 there was approximately $1,272,000 outstanding on the revolving
line of credit.
In June 1998, the Company sold $3,000,000 aggregate principal amount of 12%
subordinated debentures due 2003 and warrants to purchase 175,000 shares of the
Company's common stock at an exercise price of $3.75 per share to Tandem
Capital. The warrants were allocated an imputed fair value of $76,006 on the
date of issuance, resulting in a discount in face amount of the subordinated
debentures, using the Black-Sholes Option pricing model with the following
weighted average assumptions: dividend yield of 0%; expected volatility of
40.0%; risk free interest rate of 5.04%; an expected life of four years; and a
block trading discount. Net proceeds to the Company from the sale of these
securities were approximately $2,790,000 and are expected to be used to support
new store openings in 1998 and 1999 and for general working capital purposes.
The subordinated debentures are secured by certain assets, primarily fixtures
and equipment. Upon satisfaction of certain conditions, the Company was granted
the right to require Tandem to purchase an additional $2,000,000 aggregate
principal amount of such debentures and warrants to purchase 116,667 shares of
common stock at an exercise price based on the fair market value of such shares
on the date of issuance. The Company has the right to repay the subordinated
debentures at any time without penalty. If not previously repaid, Tandem will
receive additional warrants at the end of each year, exercisable at a price
based on the fair market value of such shares on the date of issuance. The
warrants anticipated to be issued in the future periods have been recorded at an
aggregate fair value of $83,376 using the Black-Sholes Option pricing model with
the following weighted average assumptions: dividend yield of 0%; expected
volatility of 40.0%; risk free interest rate of 5.04%; an expected life of four
years; and a block trading discount. The aggregate fair value of these warrants
is reflected on the balance sheet in deferred financing charges and deferred
rent and other liabilities. Prior to their issuance, the fair value assigned to
these warrants will be adjusted to reflect their then current estimated fair
value.
During 1998, the Company has opened four new stores, the most recent of which
opened on July 2 in Virginia Beach, Virginia. The three additional stores were
opened in Palisades Center in West Nyack, New York; in Hamilton Place,
Chattanooga, Tennessee; and in Woodland Hills Mall in Tulsa, Oklahoma. The
Company has also opened a The Great Train Store Express temporary store at
Faneuil Hall Marketplace in Boston, Massachusetts. In addition, the Company has
signed leases for additional new stores to open in 1998 in Scottsdale Fashion
Square, Scottsdale, Arizona; Smith Haven Mall, Lake Grove, New York; The
Westchester, White Plains, New York; Fairfield Commons, Dayton, Ohio; Glendale
Galleria, Glendale, California; and Newport Fashion Island, Newport Beach,
California. The Company has also signed a lease for a store to open in 1999 in
Providence Place, Providence, Rhode Island. Additional leases for stores to open
in 1998 and 1999 are expected to be signed soon.
The AICPA has issued Statement of Position 98-5 "Reporting on the Costs of
Start-up Activities" ("SOP 98-5") which is required for fiscal years beginning
after December 15, 1998. The Company has considered the impact of SOP 98-5 and
does not anticipate the adoption of this statement will have any effect on the
Company's financial statements.
The Financial Accounting Standards Board has issued Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") which becomes effective for all fiscal quarters and
fiscal years beginning after June 15, 1999. The Company does not anticipate the
adoption of this statement will have any effect on the Company's financial
statements.
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. There were no potentially dilutive securities for the
quarters ended June 28, 1997 or July 4, 1998.
ITEM 2. 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 including attaining
sales and gross profit objectives 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 hereto.
Results of Operations
Operating results for any interim period are not necessarily indicative of the
results that may be expected for the entire fiscal year. The Company's business
is heavily dependent on fourth quarter sales which historically have accounted
for a significantly disproportionate share of the Company's annual sales and
earnings. The results of operations in any particular quarter also may be
significantly impacted by the opening of new stores. Prior year balances include
certain reclassifications to conform to the current year presentation. The
following table sets forth, for the periods indicated, selected statements of
operations data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
For the Thirteen For the Twenty-six
Weeks Ended Weeks Ended
June 28, 1997 July 4, 1998 June 28, 1997 July 4, 1998
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 52.5 57.3 52.8 61.2
--------- --------- -------- ------
Gross Profit 47.5 42.7 47.2 38.8
Stores operating expenses 22.3 25.2 23.5 24.8
Occupancy expenses 20.7 23.6 20.6 22.5
Selling, general and administrative expenses 22.7 17.0 20.6 17.4
Depreciation and amortization expenses 4.9 5.0 4.6 4.7
-------- -------- ------- -----
Operating loss (23.1) (28.1) (22.1) (30.6)
Interest expense (0.9) (2.5) (0.9) (2.5)
Interest income 0.3 0.1 0.6 0.1
Other income (expense) 0.1 0.0 0.1 0.1
-------- -------- ------- -----
Loss before income taxes (23.6)% (30.5)% (22.3)% (32.9)%
Income tax benefit 8.8 11.2 8.3 12.1
-------- --------- -------- ------
Net loss (14.8)% (19.3)% (14.0)% (20.8)%
======= =========== ======= =======
</TABLE>
Comparison of the Thirteen Week Period Ended June 28, 1997 to the Thirteen Week
Period Ended July 4, 1998
Net sales increased approximately $1,117,000 or 27.8%, for the thirteen weeks
ended July 4, 1998, compared with the corresponding period last year. Of this
increase, approximately $1,342,000 was attributable to net sales generated by
stores which were not open for both periods compared. This increase was
partially offset by a decrease in comparable store sales of approximately
$225,000 or 6.0%. Comparable store sales are calculated based on the stores
open in all periods for both fiscal years. The Company experienced a
significant problem which began in 1997 and continued into 1998 related to stock
outages of some of the Company's best and fastest selling merchandise. This was
further exacerbated by a timing problem caused by a licensor (Britt Allcroft) of
the very popular Thomas the Tank Engine merchandise who canceled certain
licenses which were held by vendors before new licenses were in place and
producing properly and a similar abrupt change in the method of distribution of
a major vendor (Tomy) which resulted in a hiatus in shipments. The new Thomas
licenses are now in place and beginning to ship adequate supplies of the product
as well as new and expanded product lines, and Tomy's U.S. distribution
arrangements have been favorably resolved. However, in the interim, this hiatus
in availability, although primarily related to only four vendors, was
significant to the Company. If the sales in the prior period of merchandise from
the vendors involved are excluded from the calculation, all other comparable
store sales increased by approximately $10,000 or 0.3% in the thirteen weeks
ended July 4, 1998. The Company continues to implement significant changes in
its merchandise programs and believes it has made much progress in ensuring more
timely replenishment, regionally realigning the merchandise carried in its
various stores, obtaining new and exciting product (much of it exclusive to The
Great Train Stores) and developing important new relationships with many of its
vendors.
Gross profit increased approximately $285,000 or 14.9%, for the thirteen weeks
ended July 4, 1998, compared with the corresponding period last year. As a
percentage of net sales, gross profit decreased to 42.7% for the thirteen weeks
ended July 4, 1998 compared with 47.5% for the corresponding period last year.
The decrease in gross margin was primarily related to significant markdowns of
certain product lines and the costs associated with a regional realignment of
the Company's inventory. In an effort to improve the Company's inventory turn
and to increase sales by improving the in-stock position in key product for all
stores, the Company significantly refined product selection during the first
part of 1998, balancing its overall inventories among the stores and
significantly reducing slow moving items. The Company also initiated a
comprehensive program to reallocate the existing inventory, primarily rail-line
specific merchandise such as train hobby merchandise, books, videos and apparel,
to the appropriate region of the country where the rail line is indigenous. This
involved significant transfer costs and certain markdowns where necessary. This
process has already successfully resulted in a 15.5% decrease in average store
inventory as of July 4, 1998 when compared to the inventory level at June 28,
1997.
Store operating expenses increased approximately $396,000 or 44.1%, for the
thirteen weeks ended July 4, 1998, compared with the corresponding period last
year. The increase was primarily due to approximately $366,000 of store
operating expense for the stores which were not open in both periods and an
increase of approximately $30,000 in comparable store expenses. As a percentage
of net sales, store operating expenses increased to 25.2% for the thirteen weeks
ended July 4, 1998, compared with 22.3% for the corresponding period last year.
The increase as a percentage of sales was primarily due to lower than
anticipated sales.
Occupancy expenses increased approximately $378,000, or 45.6%, for the thirteen
weeks ended July 4, 1998, compared with the corresponding period last year.
Approximately $336,000 of the increase in occupancy expenses was attributable to
the stores which were not open for both periods compared. In addition,
approximately $42,000 of the increase was related to comparable store rent
expense. As a percentage of net sales, overall occupancy expenses increased to
23.6% for the thirteen weeks ended July 4, 1998, compared with 20.7% for the
corresponding period last year. The increase as a percentage of sales was
primarily due to lower than anticipated sales.
Selling, general and administrative expenses decreased approximately $37,000, or
4.1%, for the thirteen weeks ended July 4, 1998, compared with the corresponding
period last year. The decrease in selling, general and administrative expenses
was primarily due to the Company's ability to operate efficiently with the
elimination of several positions by automating processes and streamlining
functions. As a percentage of net sales, selling, general and administrative
expenses decreased to 17.0% for the second quarter of 1998, from 22.7% for the
same period in 1997. The Company anticipates that, as additional stores are
opened, selling, general and administrative expenses will continue to increase
but at a slower rate than the rate of sales growth, resulting in a continuing
decline in selling, general and administration expenses as a percentage of
sales.
Depreciation and amortization expense increased approximately $61,000, or 30.9%,
for the thirteen weeks ended July 4, 1998, compared with the corresponding
period last year. The increase was primarily due to $74,000 of depreciation and
amortization for the stores not open for both periods compared and a decrease of
$13,000 for comparable stores. As a percentage of net sales, depreciation and
amortization expense increased slightly to 5.0% for the thirteen weeks ended
July 4, 1998, from 4.9% for the corresponding period in 1997.
Interest expense increased approximately $89,000, for the thirteen weeks ended
July 4, 1998, compared with the corresponding period last year. The increase
resulted from increased borrowings on the line of credit due to seasonal net
losses for additional open stores in 1998 compared to the same period in 1997
and amortization of closing costs for the BankAmerica Business Credit, Inc. line
of credit.
The Company's pretax loss increased to 30.5% of sales for the thirteen weeks
ended July 4, 1998 from 23.6% of sales for the corresponding period last year.
The Company recorded an income tax benefit of approximately $573,000 based on
the Company's effective tax rate of 37%.
As a result of the foregoing, the Company recorded a net loss of approximately
$993,000 for the thirteen weeks ended July 4, 1998, compared with a net loss of
approximately $599,000 for the corresponding period last year. The Company
anticipates that it will continue to incur seasonal net losses during the third
quarter of the year. As the Company's stores typically lose money in the first
part of the year, the losses in the first half of the year most likely will
increase as more stores are opened. As a percentage of net sales, net loss
increased to 19.3% from 14.8% of sales for the corresponding period last year.
Comparison of the Twenty-six Week Period Ended June 28, 1997 to the Twenty-six
Week Period Ended July 4, 1998
Net sales increased approximately $2,594,000 or 32.8%, for the twenty-six weeks
ended July 4, 1998 compared with the corresponding period last year. Of this
increase, approximately $2,859,000 was attributable to net sales generated by
stores which were not open for both periods compared. This increase was
partially offset by a decrease of approximately $265,000 or 3.5% in comparable
store sales. Comparable store sales are calculated based on the stores opened
during both of the entire years being compared. The Company experienced a
significant problem which began in 1997 and continued into 1998 related to stock
outages of some of the Company's best and fastest selling merchandise. This was
further exacerbated by a timing problem caused by a licensor (Britt Allcroft) of
the very popular Thomas the Tank Engine merchandise who canceled certain
licenses which were held by vendors before new licenses were in place and
producing properly and a similar abrupt change in the method of distribution of
a major vendor (Tomy) which has resulted in a hiatus in shipments. The new
Thomas licenses are now in place and beginning to ship adequate supplies of the
product as well as new and expanded product lines, and Tomy's U.S. distribution
arrangements have been favorably resolved. However, in the interim, this hiatus
in availability, although primarily related to only four vendors, was
significant to the Company. If the sales in the prior period of merchandise from
the vendors involved are excluded from the calculation, all other comparable
store sales increased by approximately $78,000 or 1.1% in the first twenty-six
weeks of 1998. The Company continues to implement significant changes in its
merchandise programs and believes it has made much progress in ensuring more
timely replenishment, regionally realigning the merchandise carried in its
various stores, obtaining new and exciting product (much of it exclusive to The
Great Train Stores) and developing important new relationships with many of its
vendors.
Gross profit increased approximately $336,000, or 9.0%, for the twenty-six weeks
ended July 4, 1998, compared with the corresponding period last year. As a
percentage of net sales, gross profit decreased to 38.8% for the twenty-six
weeks ended July 4, 1998 compared to 47.2% of sales in the corresponding period
last year. The decrease in gross margin was primarily relates to significant
markdowns of certain product lines and the costs associated with a regional
realignment of the Company's inventory. In an effort to improve the Company's
inventory turn and to increase sales by improving the in-stock position in key
product for all stores, the Company significantly refined product selection
during the first part of 1998, balancing its overall inventories among the
stores and significantly reducing slow moving items. The Company also initiated
a comprehensive program to reallocate the existing inventory, primarily
rail-line specific merchandise such as train hobby merchandise, books, videos
and apparel, to the appropriate region of the country where the rail line is
indigenous. This involved significant transfer costs and certain markdowns where
necessary. This process has already successfully resulted in a 15.5% decrease in
average store inventory as of July 4, 1998 when compared to the inventory level
at June 28, 1997.
Store operating expenses increased approximately $748,000, or 40.2%, for the
twenty-six weeks ended July 4, 1998, compared with the corresponding period last
year. Approximately $735,000 of the increase resulted from the operation of the
stores which were not open for both periods compared and an increase in
comparable store operating expenses of approximately $13,000. As a percentage of
net sales, store operating expenses increased to 24.8% for the twenty-six weeks
ended July 4, 1998, compared with 23.5% for the corresponding period last year.
The increase as a percentage of sales was primarily due to lower than
anticipated sales.
Occupancy expenses increased approximately $731,000, or 44.9%, for the
twenty-six weeks ended July 4, 1998, compared with the corresponding period last
year. Approximately $696,000 of the increase in occupancy expenses was
attributable to the stores which were not open for both periods compared, and
approximately $35,000 related to comparable stores. As a percentage of net
sales, overall occupancy expenses increased to 22.5% for the twenty-six weeks
ended July 4, 1998, from 20.6% for the corresponding period last year. The
increase as a percentage of sales was primarily due to lower than anticipated
sales.
Selling, general and administrative expenses increased approximately $199,000 or
12.3%, for the twenty-six weeks ended July 4, 1998, compared with the
corresponding period last year. As a percentage of net sales, selling, general
and administrative expenses decreased to 17.4% for the twenty-six weeks ended
July 4, 1998, from 20.6% for the corresponding period last year. The decrease in
selling, general and administrative expenses was primarily due to the Company's
ability to operate efficiently with the elimination of several positions by
automating processes and streamlining functions. The Company anticipates that as
additional stores are opened, selling, general and administrative expenses will
continue to increase but at a slower rate than the rate of sales growth,
resulting in a continuous decrease in selling, general and administrative
expenses as a percentage of net sales.
Depreciation and amortization expense increased approximately $133,000, or
36.9%, for the twenty-six weeks ended July 4, 1998, compared with the
corresponding period last year. Approximately $143,000 of this increase was the
result of depreciation of assets in stores not open for both periods compared.
The increase was partially offset by a decrease of $10,000 in comparable stores.
As a percentage of net sales, depreciation and amortization expense increased
slightly to 4.7% for the twenty-six weeks ended July 4, 1998, from 4.6% for the
corresponding period last year.
Interest expense increased approximately $190,000, for the twenty-six weeks
ended July 4, 1998, compared with the corresponding period last year. The
increase resulted from increased borrowings on the line of credit due to
seasonal net losses for additional open stores in 1998 compared to the same
period in 1997, as well as, amortization of the closing cost for the BankAmerica
Business Credit, Inc. line of credit, and a fee related to the termination of
the Company's previous line of credit which was replaced during the first
quarter of 1997.
The Company's pretax loss increased to 32.9% of sales for the twenty-six weeks
ended July 4, 1998 from 22.3% of sales for the corresponding period last year.
The Company recorded an income tax benefit of approximately $1,275,000 based on
the Company's effective tax rate of 37%.
As a result of the foregoing, the Company recorded a net loss of approximately
$2,189,000 for the twenty-six weeks ended July 4, 1998, compared with a net loss
of approximately $1,111,000 for the corresponding period last year. The Company
anticipates that it will continue to incur seasonal net losses during the third
quarter of the year. As the Company's stores typically lose money in the first
part of the year, the losses in the first half of the year most likely will
increase as more stores are opened. As a percentage of net sales, net loss
increased to 20.8% for the first half of 1998, from 14.0% for the first half of
1997.
Liquidity and Capital Resources
The Company's primary uses of cash have been for new store openings, capital
expenditures and funding anticipated seasonal operating losses.
For the twenty-six weeks ended July 4, 1998, net cash used in operating
activities was approximately $6,461,000 compared to approximately $3,078,000 for
the corresponding period last year. The increase in net cash used in operating
activities primarily resulted from the timing of payments and the increased
activity due to the larger number of stores, a payment of approximately $242,000
in income taxes, and seasonal net losses as adjusted for non-cash items.
In January 1998, the Company entered into a $15,000,000 revolving line of credit
with BankAmerica Business Credit, Inc. The initial term of the facility is three
years and is secured by certain assets of the Company, primarily inventory.
Outstanding borrowings bear interest at BankAmerica Business Credit, Inc.'s base
lending rate plus 0.25% and a commitment fee of 0.375% is charged on the unused
portion. The revolving credit facility provides a source of additional liquidity
to manage cash flow and provide capital for expansion. As of July 4, 1998 there
was approximately $1,272,000 outstanding on the revolving line of credit.
In June 1998, the Company sold $3,000,000 aggregate principal amount of 12%
subordinated debentures due 2003 and warrants to purchase 175,000 shares of the
Company's common stock at an exercise price of $3.75 per share to Tandem
Capital. Net proceeds to the Company from the sale of these securities were
approximately $2,790,000 and are expected to be used to support new store
openings in 1998 and 1999 and for general working capital purposes. The
subordinated debentures are secured by certain assets, primarily fixtures and
equipment. Under the terms of purchase, and upon satisfaction of certain
conditions, the Company was granted the right to require Tandem to purchase an
additional $2,000,000 aggregate principal amount of such debentures and warrants
to purchase 116,667 shares of common stock at an exercise price based on the
fair market value of such shares on the date of issuance. The Company has the
right to repay the subordinated debentures at any time. If not previously
repaid, Tandem will receive additional warrants at the end of each year,
exercisable at a price based on the fair market value of such shares on the date
of issuance.
During 1998, the Company has opened four new stores, the most recent of which
opened on July 2 in Virginia Beach, Virginia. The three additional stores were
opened in Palisades Center in West Nyack, New York; in Hamilton Place,
Chattanooga, Tennessee; and in Woodland Hills Mall in Tulsa, Oklahoma. The
Company has also opened a The Great Train Store Express temporary store at
Faneuil Hall Marketplace in Boston, Massachusetts. In addition, the Company has
signed leases for additional new stores to open in 1998 in Scottsdale Fashion
Square, Scottsdale, Arizona; Smith Haven Mall, Lake Grove, New York; The
Westchester, White Plains, New York; Fairfield Commons, Dayton, Ohio; Glendale
Galleria, Glendale, California; and Newport Fashion Island, Newport Beach,
California. The Company has also signed a lease for a store to open in 1999 in
Providence Place, Providence, Rhode Island. Additional leases for stores to open
in 1998 and 1999 are expected to be signed soon.
Year 2000
The Company is actively evaluating plans to deal with the "Year 2000 problem" to
ensure its computer systems will be Year 2000 compliant. The computer systems in
use today at The Great Train Stores are made up entirely of PC-compatible
microcomputers and do not include any mini or mainframe computers. On August 2,
1998, the Company upgraded its point of sale software, which is the core
software in use at the central office and all store locations, and it is now
Year 2000 compliant. In addition, the Company has verified that a substantial
portion of its hardware and software is ready for the Year 2000 and the Company
is scheduled to have the remaining conversion efforts completed by the middle of
1999. The Company does not anticipate that these efforts will have a material
effect on the financial statements. All costs are expected to be funded through
operating cash flows and/or the Company's line of credit or possible additional
equipment financing. The Company is also engaging in discussion with each of its
vendors to ensure that the vendors will have resolved the Year 2000 issues for
any system which interoperates with that of The Great Train Stores. The Year
2000 problem is the result of computer programs being written using two digits
rather than four to define the applicable year.
PART II - OTHER INFORMATION
Item 5. Other Information
Unless otherwise required by law, under applicable regulations of the Securities
and Exchange Commission, proxies solicited by the Company in connection with its
1999 annual meeting of shareholders shall confer upon the individuals named
therein discretionary voting authority to vote on matters the Company did not
receive notice of by February 3, 1999.
Item 6. Exhibits and Reports on Form 8-K
(A) See Exhibit Index.
(B) No current reports on Form 8-K have been filed during
the twenty-six week period ended July 4, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements 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
/s/ Cheryl A. Taylor
--------------------------------------------
Date August 14, 1998 Cheryl A. Taylor
Vice President - Finance and Administration,
Principal Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
4.5 Stock Purchase Warrants with Tandem Capital
10.15 Initial Debenture with Tandem Capital
27. Financial Data Schedule
99.1 Cautionary Statement Identifying Important Factors
that Could Cause the Company's Actual Results
to Differ from those Projected in Forward
Looking Statements
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE SECURITIES LAW. THESE SECURITIES MAY NOT BE TRANSFERRED WITHOUT SUCH
REGISTRATION OR EXEMPTION THEREFROM.
STOCK PURCHASE WARRANT
[Initial Warrant]
This Warrant is issued this __________ day of __________, _____, by THE
GREAT TRAIN STORE COMPANY, a Delaware corporation (the "Company"), to SIRROM
CAPITAL CORPORATION d/b/a TANDEM CAPITAL, a Tennessee corporation (SIRROM
CAPITAL CORPORATION and any subsequent assignee or transferee hereof are
hereinafter referred to collectively as "Holder" or "Holders"). Capitalized
terms not defined herein shall have the meanings assigned by the Debenture
Purchase Agreement referred to in Section 1.
Agreement:
1. Issuance of Warrant; Term. For and in consideration of Sirrom
Capital Corporation d/b/a Tandem Capital purchasing from the Company and other
Borrowers a Subordinated Debenture in the original principal amount of Three
Million Dollars ($3,000,000.00) (the "Debenture") pursuant to the terms of a
Debenture Purchase Agreement dated ___________ ____, 1998 (the "Debenture
Purchase Agreement"), and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company hereby grants to
Holder the right to purchase at any time and from time to time, in whole or in
part, on or after ________ ___, 1998, up to175,000 shares of the Company's
common stock, $.01 par value (the "Common Stock"). The shares of Common Stock
issuable upon exercise of this Warrant are hereinafter referred to as the
"Shares." This Warrant shall be exercisable at any time and from time to time
from _________ , 1998, until ___________ ____, 20___ .
2. Exercise Price. The exercise price (the "Exercise Price") per share
for which all or any of the Shares may be purchased shall be equal to an initial
Exercise Price of $3.75 per share, adjusted as provided by Section 7.
3. Exercise. This Warrant may be exercised by the Holder hereof as to
all or any increment or increments of 100 Shares (or the balance of the Shares
if less than such number), upon delivery of written notice of intent to exercise
to the Company at the address set forth in the Debenture Purchase Agreement, or
such other address as the Company shall designate in a written notice to the
Holder hereof, together with this Warrant and payment to the Company of the
aggregate Exercise Price of the Shares so purchased. The Exercise Price shall be
payable, at the option of the Holder, (i) by certified or bank check, (ii) by
the surrender of the Debenture or portion thereof having an outstanding
principal balance equal to the aggregate Exercise Price, or (iii) by the
surrender of a portion of this Warrant where the excess of (A) the Fair Market
Value of the Shares subject to the portion of this Warrant that is surrendered
(the "Surrendered Shares"), over (B) the aggregate Exercise Price of the
Surrendered Shares, is equal to the aggregate Exercise Price for the Shares to
be issued. Upon payment of the Exercise Price, the Holder shall be deemed to be
the holder of record of the Shares, notwithstanding that the stock transfer
books of the Company may then be closed or that certificates representing such
Shares may not then be actually delivered to the Holder. The Company shall as
promptly as practicable thereafter, and in any event within 15 days thereafter,
execute and deliver to the Holder of this Warrant a certificate or certificates
for the total number of whole Shares for which this Warrant is being exercised
in such names and denominations as are requested by such Holder. If this Warrant
shall be exercised with respect to less than all of the Shares, the Holder shall
be entitled upon surrender of the old Warrant to receive a new Warrant covering
the number of Shares in respect of which this Warrant shall not have been
exercised, which new Warrant shall in all other respects be identical to this
Warrant. The Company covenants and agrees that it will pay when due any and all
state and federal issue taxes which may be payable in respect of the issuance of
this Warrant or the issuance of any Shares upon exercise of this Warrant.
4. Covenants, Conditions, and Repurchase. The above provisions are
subject to the following:
4.1 Restrictive Legend . Each certificate representing Shares shall
bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES
LAW. THESE SECURITIES MAY NOT BE TRANSFERRED WITHOUT SUCH
REGISTRATION OR EXEMPTION THEREFROM.
4.2 Validity; Reservation of Shares . The Company covenants and agrees
that all Shares which may be issued upon exercise of this Warrant will, upon
issuance and payment therefor pursuant to this Warrant, be validly issued and
outstanding, fully paid and nonassessable, free from all taxes, liens, charges
and preemptive rights, if any, with respect thereto or to the issuance thereof.
The Company shall at all times reserve and keep available for issuance upon the
exercise of this Warrant such number of authorized but unissued shares of Common
Stock as will be sufficient to permit the exercise in full of this Warrant.
4.3 Repurchase. The Company may at any time upon 10 Business Days prior
notice repurchase all or less than all of the then outstanding Warrants at a
price of $0.01 per Share issuable upon exercise of such Warrants, provided that
on the date notice is given (i) the Common Stock issuable upon exercise of the
Warrants shall be subject to an effective registration statement under the
Securities Act of 1933, and (ii) the average closing bid price (or, if the
Common Stock is not then listed for trading on the NASDAQ National Market, the
Fair Market Value) of the Common Stock for the 20 preceding trading days shall
be at least 200% of the Exercise Price of the Warrants to be repurchased. On and
after the date the indebtedness evidenced by the Debentures has been paid in
full, the Company may upon 10 Business Days prior notice repurchase all or less
than all of the then outstanding Warrants at a price equal to the aggregate
Exercise Price of the shares issuable upon exercise of such Warrants, provided
that on the date notice is given the Common Stock issuable upon exercise of the
Warrants shall be subject to an effective registration statement under the
Securities Act of 1933. Provided further, that in either case, the holder of
Warrants may during the ten Business Days following the date of notice, give
notice of exercise of the Warrants called for repurchase, in which event the
Company's right to repurchase the Warrants shall be suspended for the period
provided for closing of the purchase of Common Stock issuable upon exercise of
the Warrants.
5. Transfer and Replacement of Warrant. Subject to the provisions of
Section 4, this Warrant may be transferred, in whole or in part, but only in
multiples of 10,000 Shares, to any person or business entity, by presentation of
the Warrant to the Company with written instructions for such transfer; provided
that the transferee is an accredited investor as defined in Regulation D of the
Securities Act of 1933, and in compliance with all applicable federal and state
securities laws. Upon such presentation for transfer, the Company shall promptly
execute and deliver a new Warrant or Warrants in the form hereof in the name of
the transferee or transferees and in the denominations specified in such
instructions. Upon receipt by the Company of evidence reasonably satisfactory to
it of the loss, theft or destruction of this Warrant, and of indemnity or
security reasonably satisfactory to it, or upon surrender of this Warrant if
mutilated, the Company will make and deliver a new Warrant of like tenor,
bearing the restrictive legend set forth above, in lieu of this Warrant. This
Warrant shall be promptly canceled by the Company upon the surrender hereof in
connection with any transfer or replacement. The Company shall pay all expenses
incurred by it in connection with the preparation, issuance and delivery of
Warrants under this Section.
6. Warrant Holder Not Shareholder; Rights Offering; Preemptive Rights.
Except as otherwise provided herein, this Warrant does not confer upon the
Holder, as such, any right whatsoever as a shareholder of the Company.
Notwithstanding the foregoing, if the Company should offer to all of the
Company's shareholders the right to purchase any securities of the Company, then
all shares of Common Stock that are then issuable upon exercise of this Warrant
shall be deemed to be outstanding and owned by the Holder and the Holder shall
be entitled to participate in such rights offering. The Company shall not grant
any preemptive rights with respect to any of its Common Stock without the prior
written consent of the Holder.
7. Adjustment of Number of Shares and Exercise Price.
7.1 Recapitalizations -- Adjustment of Number of Shares. If all or any
portion of this Warrant shall be exercised subsequent to any transaction in
which the Company shall (i) pay a stock dividend or otherwise make a
distribution or distributions on shares of its Common Stock payable in shares of
its capital stock (whether payable in shares of its Common Stock or of capital
stock of any other class), (ii) subdivide outstanding shares of Common Stock
into a larger number of shares, (iii) combine outstanding shares of Common Stock
into a smaller number of shares, (iv) issue by reclassification of shares of
Common Stock any shares of capital stock of the Company, or (v) otherwise change
its capital structure, occurring after the date hereof, as a result of which
shares of Common Stock shall be changed into the same or a different number of
shares of the same or another class or classes of securities of the Company,
then the Holder exercising this Warrant shall receive, for the aggregate price
paid upon such exercise, the aggregate number and class of shares and such other
securities which such Holder would have received if this Warrant had been
exercised immediately prior to the record date for such transaction.
7.2 Mergers, Etc. -- Adjustment of Number of Shares. If all or any
portion of this Warrant shall be exercised subsequent to any merger,
consolidation, exchange of shares, separation, reorganization, or liquidation of
the Company, or other similar event, occurring after the date hereof, as a
result of which Shares of Common Stock shall be changed into the same or a
different number of shares of the same or another class or classes of securities
of the Company or another entity, or the holders of Common Stock are entitled to
receive cash or other property, then the Holder exercising this Warrant shall
receive, for the aggregate price paid upon such exercise, the aggregate number
and class of shares, cash or other property which such Holder would have
received if this Warrant had been exercised immediately prior to such merger,
consolidation, exchange of shares, separation, reorganization or liquidation, or
other similar event.
7.3 Adjustment of Exercise Price Upon Issuance of Shares, Warrants,
Rights, Etc.
(a) Initial Exercise Price. The initial Exercise Price shall be $3.75
per share.
(b) Recapitalizations. If the Company, at any time prior to the
expiration of this Warrant, shall (i) pay a stock dividend or otherwise make a
distribution or distributions on shares of its Common Stock payable in shares of
its capital stock (whether payable in shares of its Common Stock or of capital
stock of any class), (ii) subdivide outstanding shares of Common Stock into a
larger number of shares, (iii) combine outstanding shares of Common Stock into a
smaller number of shares, (iv) issue by reclassification of shares of Common
Stock any shares of capital stock of the Company, or (v) otherwise change its
capital structure, then the Exercise Price then in effect shall be multiplied by
a fraction of which the numerator shall be the number of shares of Common Stock
of the Company outstanding before such event and of which the denominator shall
be the number of shares of Common Stock outstanding after such event. Such
adjustment shall become effective immediately after the record date in the case
of a dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or reclassification.
(c) [Reserved].
(d) Issuance of Warrants, Rights, or Convertible Securities at Less
Than Exercise Price. If the Company, at any time prior to the expiration of this
Warrant, shall issue (i) options or warrants entitling the holder to subscribe
for or purchase shares of Common Stock at an exercise price less than the
Exercise Price, or (ii) securities convertible into Common Stock at a conversion
price less than the Exercise Price, then the Exercise Price then in effect shall
be reset at such lower amount. Provided, that the adjustment provided by this
Section 7.3(d) shall not apply to issuance of securities pursuant to options,
warrants, or conversion rights outstanding on the date this Warrant is issued,
plus up to a maximum of 100,000 additional shares issuable to officers,
directors, or employees (but not consultants or independent contractors) under
the Company's 1994 Incentive Compensation Plan, 1994 Director Stock Option Plan,
or other stock based compensation plan which may be approved by the stockholders
of the Company. Such adjustment shall be made whenever such options, warrants or
convertible securities are issued at an exercise or conversion price less than
the Exercise Price, and such adjustment shall become effective immediately after
the date on which such options, warrants or convertible securities are issued.
Provided, that upon the expiration of any right or warrant to purchase or
convert into Common Stock the issuance of which resulted in an adjustment in the
Exercise Price pursuant to this Section 7.3(d), if such right or warrant shall
expire and shall not have been exercised, the Exercise Price shall immediately
upon such expiration be recomputed and effective immediately upon such
expiration be increased to the price which it would have been (but reflecting
any other adjustments in the Exercise Price made pursuant to the provisions of
this Section 7 after the issuance of such rights or warrants) had the adjustment
of the Exercise Price made upon the issuance of such rights or warrants been
made on the basis of offering for subscription or purchase only that number of
shares of Common Stock actually purchased or obtained upon the exercise of such
rights or warrants actually exercised.
(e) Distributions of Other Property. If the Company, at any time prior
to the expiration of this Warrant, shall distribute to all holders of Common
Stock (and not to holders of Warrants on an as-exercised basis) evidences of its
indebtedness, or any of its assets, or rights or warrants to subscribe for or
purchase any security (excluding those referred to in Section 7.3(d) above), the
Exercise Price at which this Warrant shall thereafter be exercisable shall be
determined by multiplying the Exercise Price in effect prior to the record date
fixed for determination of stockholders entitled to receive such distribution by
a fraction of which (x) the denominator shall be the per share Fair Market Value
of Common Stock determined as of the record date mentioned above, and of which
(y) the numerator shall be such per share Fair Market Value of the Common Stock
on such record date less the then fair market value at such record date of the
portion of such evidence of indebtedness, assets, or rights or warrants so
distributed applicable to one outstanding share of Common Stock, as determined
by the Board of Directors of the Company in good faith; provided, however that
in the event of a distribution exceeding ten percent of the net assets of the
Company, then such fair market value shall be determined by a nationally
recognized or major regional investment banking firm or firm of independent
certified public accountants of recognized standing (which may be the firm that
regularly examines the financial statements of the Company) (an "Appraiser")
selected in good faith by the Holders of majority in interest of the Warrants;
and provided, further, that the Company, after receipt of the determination by
such Appraiser shall have the right to select an additional Appraiser, in which
case the fair market value shall be equal to the average of the determination by
each such Appraiser. Provided, that no such adjustment shall be made which has
the effect of increasing the Exercise Price. In either case the adjustments
shall be described in a statement provided to all Holders of Warrants. Such
adjustment shall be made whenever any such distribution is made and shall become
effective immediately after the record date mentioned above.
7.4 Other Adjustments, Etc.
(a) Rounding. All calculations under this Section 7 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be.
(b) Notice of Adjustments. Whenever the Exercise Price is adjusted
pursuant to this Section 7, the Company shall promptly mail to each holder of
Warrants, a notice setting forth the Exercise Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment.
(c) Exercise After Reclassification, Merger, Share Exchange, or Sale of
Assets. In case of any reclassification of the Common Stock, any consolidation
or merger of the Company with or into another person, any sale or transfer of
all or substantially all of the assets of the Company, or any compulsory share
exchange pursuant to which share exchange the Common Stock is converted into
other securities, cash or property, then the holders of Warrants shall have the
right thereafter to purchase upon exercise of such Warrants only the kind and
amount of shares of stock and other securities and property receivable upon or
deemed to be held following such reclassification, consolidation, merger, sale,
transfer, or share exchange by a holder of the number of shares of the Common
Stock which the holder of this Warrant would have received upon exercise of this
Warrant immediately prior to such reclassification, consolidation, merger, sale,
transfer, or share exchange. The terms of any such consolidation, merger, sale
transfer or share exchange shall include such terms so as to continue to give to
the holder of this Warrant the right to receive the securities or property set
forth in this Section 7.4(c) upon any exercise following such consolidation,
merger, sale, transfer, or share exchange. This provision shall similarly apply
to successive reclassifications, consolidations, mergers, sales, transfers, or
share exchanges.
(d) Procedure for Other Adjustments. In case at any time conditions
shall arise by reason of action taken by the Company which in the opinion of the
Board of Directors of the Company are not adequately covered by the other
provisions hereof and which might materially and adversely affect the rights of
the holders of Warrants (different than or distinguished from the effect
generally on the rights of holders of any securities of the Company) or in case
at any time any such conditions are expected to arise in the opinion of the
Board of Directors of the Company by reason of any action contemplated by the
Company, an Appraiser selected by the holders of more than 50% of the Warrants
shall give its opinion as to the adjustment, if any (not inconsistent with the
standards established in this Section 7), of the Exercise Price (including, if
necessary, any adjustment as to the securities which may be acquired upon
exercise) and any distribution which is or would be required to preserve without
diluting the rights of the holders of the Warrants; provided, however, that the
Company, after receipt of the determination by such Appraiser, shall have the
right to select an additional Appraiser, in which case the adjustment shall be
equal to the average of the adjustments recommended by each such Appraiser. The
Board of Directors of the Company shall make the adjustment recommended
forthwith upon the receipt of such opinion or opinions or the taking of any such
action contemplated, as the case may be; provided, however, that no such
adjustment of the Exercise Price shall be made which in the opinion of the
Appraiser(s) giving the aforesaid opinion or opinions would result in an
increase of the Exercise Price then in effect.
(e) No Double Counting. Notwithstanding anything to the contrary
contained in this Warrant, to the extent that any adjustment is made under the
terms of this Section 7 to the Exercise Price or the number of shares issuable
hereunder, no further adjustment shall be made with respect to the
recapitalization, issuance of securities, or distribution requiring adjustment.
No adjustment shall be made with respect to the issuance of Common Stock upon
the exercise of rights for which an adjustment was made under Section 7.4(d), or
for any securities issued in connection with the Debenture Purchase Agreement or
the exercise of any such securities. (f) Definition of Fair Market Value. "Fair
Market Value" per share of common stock means (i) in the case of a security
listed or admitted to trading on any national securities exchange, the last
reported sale price, regular way (as determined in accordance with the practices
of such exchange), on each day, or if no sale takes place on any day, the last
reported sale price, regular way) as determined in accordance with the practices
of such exchange) on the immediately preceding trading day (and in the case of a
security traded on more than one national securities exchange, at such price
upon the exchange on which the volume of trading during the last calendar year
was the greatest), (ii) in the case of a security not then listed or admitted to
trading on any national securities exchange, the average closing bid price of
the security for the 20 trading days preceding such day, (iii) in the case of a
security not then listed or admitted to trading on any securities exchange and
as to which no such reported sale price or bid and asked prices are available,
the average of the reported high bid and low asked prices on such day, as
reported by a reputable quotation service, or The Wall Street Journal, or if
there are no bids and asked prices on such day, the average of the high bid and
low asked prices, as so reported, on the most recent day (not more than 30 days
prior to the date in question) for which prices have been so reported, and (iv)
in the case of a security determined by the Company's Board of Directors as not
having an active quoted market or in the case of other property, if the Common
Stock is no longer publicly traded the fair market value of a share of Common
Stock or other property as determined by an Appraiser (as defined in Section
7.3(e) above) selected in good faith by the holders more than 50% of the
Warrants; provided, however, that the Company, after receipt of the
determination by such Appraiser, shall have the right to select an additional
Appraiser, in which case, the fair market value shall be equal to the average of
the determinations by each such Appraiser.
8. Certain Notices. If at any time the Company shall propose to (i)
declare any cash dividend upon its Common Stock; (ii) declare any dividend upon
its Common Stock payable in stock or make any special dividend or other
distribution to the holders of its Common Stock; (iii) offer for subscription to
the holders of any of its Common Stock any additional shares of stock in any
class or other rights; (iv) reorganize, or reclassify the capital stock of the
Company, or consolidate, merge or otherwise combine with, or sell all or
substantially all of its assets to another corporation; (v) voluntarily or
involuntarily dissolve, liquidate or wind up the affairs of the Company; or (vi)
redeem or purchase any shares of its capital stock or securities convertible
into its capital stock, then the Company shall give to the Holder of this
Warrant, by certified or registered mail, (i) at least 10 days' prior written
notice of the date on which the books of the Company shall close or a record
shall be taken for such dividend, distribution or subscription rights or for
determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, and (ii) in the case of such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, at least 15
days' prior written notice of the date when the same shall take place. Any
notice required by clause (i) shall also specify, in the case of any such
dividend, distribution or subscription rights, the date on which the holders of
Common Stock shall be entitled thereto, and any notice required by clause (ii)
shall specify the date on which the holders of Common Stock shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, as the case may be.
9. Article and Section Headings. Numbered and titled article and
section headings are for convenience only and shall not be construed as
amplifying or limiting any of the provisions of this Warrant.
10. Notice. Any and all notices, elections or demands permitted or
required to be made under this Warrant shall be in writing, signed by the party
giving such notice, election or demand and shall be delivered personally,
telecopied, telexed, or sent by certified mail or overnight via nationally
recognized courier service, to the other party at the address set forth below,
or at such other address as may be supplied in writing and of which receipt has
been acknowledged in writing. The date of personal delivery or telecopy; or the
date two business days after the date of mailing, or the date of the next
business day after delivery to a courier service, as the case may be, shall be
deemed to be the date of such notice, election or demand.
To the Holder: Sirrom Capital Corporation d/b/a Tandem Capital
500 Church Street
Suite 200
Nashville, Tennessee 37219
Attention: Craig Macnab
Facsimile No.: (615) 242-0842
with a copy to: C. Christopher Trower, Esq.
3159 Rilman Road, N.W.
Atlanta, Georgia 30327-1503
Facsimile No.: (404) 816-6854
To the Company: The Great Train Store Company
14180 Dallas Parkway-- Suite 618
Dallas, Texas 75240
Attention: President
Facsimile No. 972-392-1698
with a copy to: Douglas J. Bates, Esq.
Gallop, Johnson & Neuman, L.C.
Interco Corporate Tower-- Suite 1600
101 South Hanley Road
St. Louis, Missouri 63105
Facsimile No.: 314-862-1219
11. Severability. If any provision of this Warrant or the application
thereof to any person or circumstances shall be invalid or unenforceable to any
extent, the remainder of this Warrant and the application of such provisions to
other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
12. Entire Agreement. This Warrant between the Company and Holder
represents the entire agreement between the parties concerning the subject
matter hereof, and all oral discussions and prior agreement are merged herein.
13. Governing Law and Amendments. This Warrant shall be construed and
enforced under the laws of the State of Missouri applicable to contracts to be
wholly performed in such State. No amendment or modification hereof shall be
effective except in a writing executed by each of the parties hereto.
14. Counterparts. This Warrant may be executed in any number of
counterparts and by different parties to this Warrant in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same Warrant.
15. Jurisdiction and Venue. The Company hereby consents to
jurisdiction, service of process, and venue in the courts of the State of
Tennessee or the State of Texas, for the purpose of any action arising out of
any of its obligations under this Warrant, and expressly waives jury trial and
any and all objections it may have as to jurisdiction, service of process, and
venue in such courts.
16. Equity Participation. This Warrant is issued in connection with the
Debenture Purchase Agreement. It is intended that this Warrant constitute an
equity participation under and pursuant to T.C.A. ss.47-24-101, et. seq. and
that equity participation be permitted under said statutes and not constitute
interest on the Debenture. If under any circumstances whatsoever, fulfillment of
any obligation of this Warrant, the Debenture Purchase Agreement, or any other
agreement or document executed in connection with the Debenture Purchase
Agreement, shall violate the lawful limit of any applicable usury statute or any
other applicable law with regard to obligations of like character and amount,
then the obligation to be fulfilled shall be reduced to such lawful limit, such
that in no event shall there occur, under this Warrant, the Debenture Purchase
Agreement, or any other document or instrument executed in connection with the
Debenture Purchase Agreement, any violation of such lawful limit, but such
obligation shall be fulfilled to the lawful limit. If any sum is collected in
excess of the lawful limit, such excess shall be applied to reduce the principal
amount of the Debenture.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Stock
Purchase Warrant this ____________ day of _______________, ____.
COMPANY: THE GREAT TRAIN STORE COMPANY
By: _______________________________________
Title: _______________________________________
HOLDER: SIRROM CAPITAL CORPORATION
d/b/a TANDEM CAPITAL
By: _____________________________________
Title: _____________________________________
DPA.exe.doc
TABLE OF CONTENTS
1. Sale and Purchase of Debentures and Warrants. 1
1.1 Debentures. 1
1.2 Optional Redemption. 2
1.3 Warrants. 2
1.4 Commitment; Closing Dates. 3
1.5 Processing Fee. 4
2. Representations and Warranties of the Borrowers. 4
2.1 Corporate Status. 4
2.2 Capitalization. 5
2.3 Authorization. 6
2.4 Validity and Binding Effect. 6
2.5 Contracts and Other Commitments. 6
2.6 Litigation. 6
2.7 Financial Statements. 7
2.8 SEC Reports. 7
2.9 Absence of Changes. 7
2.10 No Defaults. 7
2.11 Compliance With Law. 8
2.12 Taxes. 8
2.13 Certain Transactions. 8
2.14 Title to Property. 8
2.15 Intellectual Property. 9
2.16 Environmental Matters. 10
2.17 Accounting Matters. 10
2.18 Distributions to Company. 10
2.19 Prior Sales. 11
2.20 Regulatory Compliance. 11
2.21 Margin Regulations. 11
2.22 1940 Act Compliance. 11
2.23 Limited Offering. 11
2.24 Registration Obligations. 11
2.26 Governmental Consents. 12
2.27 Employees 12
2.28 ERISA 12
2.29 Fees/Commissions 13
2.30 Survival. 13
3. Representations and Warranties of Purchaser 13
3.1 Corporate Status. 13
3.2 Authorization. 13
3.3 Validity and Binding Effect 13
3.4 Accredited Investor, Investment Intent 14
3.5 Survival 14
4. Conditions Precedent to the Obligations of Purchaser 14
4.1 Representations and Warranties 14
4.2 Officer's Certificate 14
4.3 Satisfactory Proceedings and Secretary's
Certificate 14
4.4 Legal Opinion 15
4.5 Authorization Agreement 15
4.6 Existence and Authority 15
4.7 Delivery of Operative Documents--
First Closing 15
4.8 Delivery of Operative Documents--
Second Closing. 15
4.9 Required Consents 16
4.10 Waiver of Conditions 16
5. Covenants of the Borrowers. 16
5.1 Use of Proceeds 16
5.2 Corporate Existence, Etc 17
5.3 Maintenance of Properties, Etc. 17
5.4 Nature of Business 17
5.5 Insurance 17
5.6 Taxes, Claims for Labor and Materials. 17
5.7 Compliance with Laws, Agreements, Etc 17
5.8 ERISA Matters 18
5.9 Books and Records: Rights of Inspection 18
5.10 Reports 18
5.11 Limitations on Debt and Obligations. 19
5.12 Guaranties 20
5.13 Limitation on Liens 20
5.14 Restricted Payments 21
5.15 Investments 22
5.16 Mergers, Consolidations and Sales of Assets 22
5.17 Transactions with Affiliates 24
5.18 Notice 24
5.19 Board of Directors Observer Rights. 25
5.20 Annual Plan. 25
5.21 Further Assurances. 25
6. Subordination of Debentures 25
6.1 Subordination. 25
6.2 Subrogation. 25
6.3 Borrowers' Obligations Not Impaired. 26
7. [Reserved]. 26
8. Restrictions on Transfer; Registration Rights. 26
8.1 Legends; Restrictions on Transfer. 26
8.2 Registration Rights. 26
9. Events of Default; Remedies 26
9.1 Events of Default 26
9.2 Remedies Upon Default 29
9.3 Acceleration of Maturities 29
9.4 Joint and Several Obligations 30
10. Amendments, Waivers and Consents 30
10.1 Consent Required. 30
10.2 Solicitation of Debenture Holders 30
10.3 Effect of Amendment or Waiver 30
11. Interpretation of Agreement; Definitions 30
11.1 Definitions. 30
11.2 Accounting Principles 34
11.3 Directly or Indirectly 34
12. Miscellaneous 34
12.1 Expenses, Stamp Tax Indemnity 34
12.2 Powers and Rights Not Waived;
Remedies Cumulative 34
12.3 Notices 35
12.4 Assignments 35
12.5 Survival of Covenants and Representations 36
12.6 Severability. 36
12.7 Governing Law; Jurisdiction and Venue. 36
12.8 Captions; Counterparts. 36
12.9 Confidentiality. 36
12.10 Publicity. 37
<PAGE>
DEBENTURE PURCHASE AGREEMENT
BETWEEN
SIRROM CAPITAL CORPORATION
d/b/a
TANDEM CAPITAL
AND
THE GREAT TRAIN STORE COMPANY,
THE GREAT TRAIN STORE PARTNERS, L.P.,
GTS PARTNER, INC.,
GTS LIMITED PARTNER, INC.
AS BORROWERS
_________________, ____ 1998
<PAGE>
DEBENTURE PURCHASE AGREEMENT
This DEBENTURE PURCHASE AGREEMENT (the "Agreement ") entered into the
___________ day of _______________, 1998, by and between THE GREAT TRAIN STORE
COMPANY, a Delaware corporation (the "Company"), GTS PARTNER, INC., a Missouri
corporation (a "Co-Maker"), GTS LIMITED PARTNER, INC., a Missouri corporation (a
"Co-Maker"), THE GREAT TRAIN STORE PARTNERS, L.P., a Missouri limited
partnership (a "Co-Maker"), and SIRROM CAPITAL CORPORATION d/b/a TANDEM CAPITAL,
a Tennessee corporation (the "Purchaser").
W I T N E S S E T H:
WHEREAS, the Company and each Co-Maker (each a "Borrower" and
collectively the "Borrowers") desires to obtain additional capital for use in
connection with its business through the issue and sale of certain securities,
and Purchaser is willing to purchase such obligations from the Company and each
Co-Maker, on the terms and conditions set forth herein. Capitalized terms shall
have the meanings assigned by Section 11 unless otherwise defined herein.
NOW, THEREFORE, in mutual consideration of the premises and the
respective representations, warranties, covenants and agreements contained
herein, the parties agree as follows:
1. Sale and Purchase of Debentures and Warrants.
1.1 Debentures. The Borrowers have authorized the issue and sale of (i)
Three Million Dollars ($3,000,000.00) aggregate principal amount of 12.0%
Subordinated Debentures due June 30, 2003 (the "Initial Debentures"), to be
dated the date of issue, to bear interest from such date at the rate of 12.0%
per annum, with interest payable quarterly by automatic debit on the first day
of each March, June, September, and December in each year, commencing September
1, 1998, and at maturity, to mature on June 30, 2003, and to bear such other
terms as are set forth in the form attached hereto as Exhibit A-1, and (ii) Two
Million Dollars ($2,000,000.00) aggregate principal amount of 12.0% Subordinated
Debentures due June 30, 2003 (the "Additional Debentures"), to be dated the date
of issue, to bear interest from such date at the rate of 12.0% per annum, with
interest payable quarterly by automatic debit on the first day of each March,
June, September, and December in each year, commencing on the first day of such
month following the Second Closing (as defined in Section 1.4), and at maturity,
to mature on June 30, 2003, and to bear such other terms as are set forth in the
form attached hereto as Exhibit A-2. Interest on the Debentures shall be
computed on the basis of a 360-day year of twelve 30-day months. The Borrowers
may prepay the indebtedness evidenced by the Debentures without penalty and as
provided by Section 1.2. The term "Debenture" and "Debentures" as used herein
includes the Initial Debenture in the form of Exhibit A-1, the Additional
Debenture in the form of Exhibit A-2, and any other Debenture delivered pursuant
to this Agreement.
1.2 Optional Redemption.
(a) The Debentures may be redeemed, at the Borrowers' option, in whole
at any time or in part from time to time, provided that in case of each optional
redemption, the Company shall give written notice (the "Redemption Notice") to
each holder of a Debenture to be redeemed not less than 10 nor more than 20
Business Days prior to the date fixed for such redemption (the "Redemption
Date"). The Redemption Notice shall specify the Redemption Date, the aggregate
principal amount of the Debentures to be redeemed on the Redemption Date, the
principal amount of Debentures held by such holder to be redeemed on such date,
and the Redemption Price, which shall be equal to the sum of (A) the aggregate
principal amount of the Debentures called for redemption, plus (B) all accrued
but unpaid interest on such Debentures, plus (C) interest on (i) any principal
payment not paid when due, and (ii) any accrued but unpaid interest not paid
when due, at an annual rate of 19% (or, if less, the maximum rate permitted by
applicable law), plus (D) any expenses or costs of collection to which the
holder of the Debentures is entitled pursuant to the Debentures. After the
Redemption Notice is mailed, Debentures called for redemption shall become due
and payable on the Redemption Date at the Redemption Price.
(b) Neither the Borrowers nor any Affiliate of any Borrower, directly
or indirectly, may repurchase or make any offer to repurchase any Debentures
unless the offer has been made to repurchase Debentures, pro rata, from all
holders of the Debentures at the same time and upon the same terms. If any
Debentures are redeemed or otherwise acquired by the Borrowers or any Affiliate
of any Borrower, such Debentures shall be deemed to be no longer outstanding for
purposes of any provisions of this Agreement.
1.3 Warrants. In consideration of the Purchaser's commitment to
purchase the Debentures, the Company shall grant to Purchaser the following
Warrants.
(a) First Closing. At the First Closing (as defined in Section 1.4),
the Company shall grant, issue, and deliver to Purchaser a Stock Purchase
Warrant, dated the First Closing Date, in the form attached hereto as Exhibit
A-3 (the "Initial Warrant"), entitling Purchaser to purchase, at any time and
from time to time during the five year period beginning on the First Closing
Date, up to 175,000 Shares of the Company's Common Stock at an initial Exercise
Price of $3.75 per share. Until the indebtedness evidenced by the Initial
Debenture has been paid in full, on the anniversary of the First Closing Date of
each year beginning on the anniversary of the First Closing Date, 1999, the
Company shall grant, issue, and deliver to Purchaser additional Stock Purchase
Warrants, in the form of Exhibit A-4 ("Contingent Warrants"), each entitling
Purchaser to purchase up to 90,000 Shares of Common Stock at an Exercise Price
equal to the average closing bid price of the Company's Common Stock (or, if the
Common Stock is not then listed for trading on the NASDAQ National Market, the
Fair Market Value, as defined in Section 11) for the 20 trading days preceding
such anniversary date, at any time and from time to time during the lesser of
(i) the five year period beginning on the date of issue of such Contingent
Warrant, or (ii) the two year period beginning on the date the indebtedness
evidenced by the Initial Debenture has been paid in full.
(b) Second Closing. At the Second Closing, the Company shall grant,
issue, and deliver to Purchaser a Stock Purchase Warrant, dated the Second
Closing Date, in the form attached hereto as Exhibit A-5 (the "Additional
Warrant"), entitling Purchaser to purchase up to 116,667 Shares of the Company's
Common Stock at an Exercise Price equal to the average closing bid price of the
Company's Common Stock (or, if the Common Stock is not then listed for trading
on the NASDAQ National Market, the Fair Market Value, as defined in Section 11)
for the 20 trading days preceding the Second Closing Date, at any time and from
time to time during the five year period beginning on the Second Closing Date.
Until the indebtedness evidenced by the Additional Debenture has been paid in
full, on the anniversary of the Second Closing Date of each year beginning on
the anniversary of the Second Closing Date, 2000, the Company shall grant,
issue, and deliver to Purchaser additional Stock Purchase Warrants, in the form
of Exhibit A-4 ("Contingent Warrants"), each entitling Purchaser to purchase up
to 60,000 Shares of Common Stock at an Exercise Price equal to the average
closing bid price of the Company's Common Stock (or, if the Common Stock is not
then listed for trading on the NASDAQ National Market, the Fair Market Value, as
defined in Section 11) for the 20 trading days preceding such anniversary date,
at any time and from time to time during the lesser of (i) the five year period
beginning on the date of issue of such Contingent Warrant, or (ii) the two year
period beginning on the date the indebtedness evidenced by the Additional
Debenture has been paid in full.
(c) Repurchase of Warrants. The Company may at any time upon 10
Business Days prior notice repurchase all or less than all of the then
outstanding Warrants at a price of $0.01 per Share issuable upon exercise of
such Warrants, provided that on the date notice is given (i) the Common Stock
issuable upon exercise of the Warrants shall be subject to an effective
registration statement under the Securities Act of 1933, and (ii) the average
closing bid price (or, if the Common Stock is not then listed for trading on the
NASDAQ National Market, the Fair Market Value) of the Common Stock for the 20
preceding trading days shall be at least 200% of the Exercise Price of the
Warrants to be repurchased. On and after the date the indebtedness evidenced by
the Debentures has been paid in full, the Company may upon 10 Business Days
prior notice repurchase all or less than all of the then outstanding Warrants at
a price equal to the aggregate Exercise Price of the shares issuable upon
exercise of such Warrants, provided that on the date notice is given the Common
Stock issuable upon exercise of the Warrants shall be subject to an effective
registration statement under the Securities Act of 1933. Provided further, that
in either case, the holder of Warrants may during the ten Business Days
following the date of notice, give notice of exercise of the Warrants called for
repurchase, in which event the Company's right to repurchase the Warrants shall
be suspended for the period provided for closing of the purchase of Common Stock
issuable upon exercise of the Warrants. 1.4 Commitment; Closing Dates. Subject
to the terms and conditions hereof and on the basis of the representations and
warranties hereinafter set forth, (i) the Company agrees to issue and sell to
Purchaser, and Purchaser agrees to purchase from the Company, the Initial
Debentures in the aggregate principal amount of Three Million Dollars
($3,000,000.00) at a purchase price equal to 100% of the principal amount
thereof, at the First Closing, and (ii) at the Company's option, the Company may
issue and sell to Purchaser, and Purchaser agrees to purchase from the Company,
the Additional Debentures in the aggregate principal amount of Two Million
Dollars ($2,000,000.00) at a purchase price equal to 100% of the principal
amount thereof, at the Second Closing. Delivery of the Initial Debenture (the
"First Closing") shall be made at the offices of Tandem Capital, Inc.,
Nashville, Tennessee, against payment therefor by federal funds wire transfer in
immediately available funds and to the accounts and in the amounts set forth in
the Company's wire instructions in the form of Exhibit B hereto, at 10:00 A.M.,
Nashville time, on _______________ ____, 1998, or such later date as the Company
and Purchaser shall agree (the "First Closing Date"). If the Company exercises
its option to issue the Additional Debentures, delivery of the Additional
Debentures (the "Second Closing") shall be made at the offices of Tandem
Capital, Inc., Nashville, Tennessee, against payment therefor by federal funds
wire transfer in immediately available funds and to the accounts and in the
amounts set forth in the Company's wire instructions in the form of Exhibit B
hereto, at 10:00 A.M., Nashville time, not later than five Business Days after
the release of the Company's audited financial statements for its fiscal year
ended January 2, 1999, or such later date as the Company and Purchaser shall
agree (the "Second Closing Date"). Provided, that (i) Purchaser shall have no
obligation whatsoever to purchase the Additional Debentures unless the Company's
operating income determined in accordance with GAAP for its fiscal year ended
January 2, 1999 shall be greater than $1,500,000.00, and (ii) Purchaser's
obligation to purchase the Additional Debentures shall expire at 5:00 P.M.,
Nashville time, on the Second Closing Date. The Debentures delivered to
Purchaser on the Closing Dates shall be delivered to Purchaser in the form of a
single Debenture for the full amount of such purchase price (unless different
denominations are specified by Purchaser), registered on the books of the
Company in Purchaser's name or in the name of such nominee as Purchaser may
specify and, with appropriate insertions, in the forms attached hereto as
Exhibit A-1 and Exhibit A-2, all as Purchaser may specify at least 24 hours
prior to the date fixed for delivery.
1.5 Processing Fee. The Borrowers shall pay to Purchaser on or before
the First Closing Date a processing fee in an amount equal to $100,000.00.
2. Representations and Warranties of the Borrowers. Each of the
Borrowers hereby represents and warrants to Purchaser as follows:
2.1 Corporate Status.
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware, and has the corporate
power to own and operate its properties, to carry on its business as now
conducted and to enter into and to perform its obligations under this Agreement,
the Debentures, the Registration Rights Agreement, and any other document
executed and delivered by the Borrowers in connection herewith or therewith
(collectively, the "Operative Documents"). The Company is qualified to do
business and is in good standing in each state or other jurisdiction in which
such qualification is necessary under applicable law, except where the failure
to so qualify would not have a Material Adverse Effect. Each Co-Maker is duly
organized, validly existing and in good standing under the laws of the state of
its organization, and has the corporate power to own and operate its properties,
to carry on its business as now conducted and to enter into and to perform its
obligations under the Operative Documents. Each Co-Maker is qualified to do
business and is in good standing in each state or other jurisdiction in which
such qualification is necessary under applicable law, except where the failure
to so qualify would not have a Material Adverse Effect .
(b) Schedule 2.1(b) sets forth a complete list of each (i) Subsidiary,
and (ii) corporation, partnership, joint venture, limited liability company or
other business organization which is an Affiliate of the Company, in which any
Borrower owns, directly or indirectly, any capital stock or other equity
interest in excess of $1,000, which list shows the jurisdiction of incorporation
or other organization and the percentage of stock or other equity interest of
each such entity owned by the Company. Each such entity is duly organized,
validly existing and in good standing under the laws of the jurisdiction of
incorporation or other organization as indicated on Schedule 2.1(b), each has
all requisite power and authority and holds all material licenses, permits and
other required authorizations from government authorities necessary to own its
properties and assets and to conduct its business as now being conducted, and
each is qualified to do business and is in good standing in every jurisdiction
in which such qualification is necessary under applicable law, except where the
failure to so qualify would not have a Material Adverse Effect . Except as set
forth on Schedule 2.1(b), all of the outstanding shares of capital stock, or
other equity interest, of each such entity owned, directly or indirectly, by any
Borrower have been validly issued, are fully paid and nonassessable, and are
owned by the Borrower free and clear of all liens, charges, security interests,
or encumbrances.
2.2 Capitalization.
(a) The authorized capital stock of the Company consists of (i)
2,000,000 shares of Preferred Stock, par value $.01 per share, none of which are
issued and outstanding as of the date hereof, and (ii) 18,000,000 shares of
Common Stock, $.01 par value, 4,415,764 of which were issued and outstanding as
of June 1, 1998. All shares of Common Stock outstanding have been validly issued
and are fully paid and nonassessable. Except as set forth on Schedule 2.2(a),
there are no statutory or contractual preemptive rights, rights of first
refusal, antidilution rights, or any similar rights held by any party with
respect to the issuance of the Debentures.
(b) The Company has not granted, or agreed to grant or issue, any
options, warrants or rights to purchase or acquire from the Company any shares
of capital stock of the Company, there are no securities outstanding or
committed to be issued by the Company or any Subsidiary which are convertible
into or exchangeable for any shares of capital stock or other securities of the
Company, and there are no contracts, commitments, agreements, understandings,
arrangements or restrictions as to which the Company is a party, or by which it
is bound, relating to any shares of capital stock or other securities of the
Company, whether or not outstanding except for (i) the Debentures and Warrants
to be issued pursuant to this Agreement, and (ii) such options, warrants and
other rights to acquire capital stock of the Company set forth on Schedule
2.2(b). Except as set forth on Schedule 2.2(b), all such shares have been duly
reserved for issuance, have been duly and validly authorized, and upon issuance
in accordance with the terms of the respective instruments and receipt of
payment therefor, will be validly issued, fully paid, and nonassessable.
(c) The Common Stock issuable upon exercise of the Warrants has been
duly and validly reserved for issuance and, upon issuance in accordance with,
and upon receipt of the consideration required under, the terms of this
Agreement, the Debentures, and the Warrants, will be duly and validly issued,
fully paid, and nonassessable and will be free of restrictions on transfer other
than restrictions under applicable state and federal securities laws.
2.3 Authorization. Except as set forth on Schedule 2.3, each of the
Borrowers has full legal right, power and authority to enter into and perform
its obligations under the Operative Documents without the consent or approval of
any other person, firm, governmental agency, or other legal entity, and any
required consents or approvals shall have been obtained prior to the First
Closing. The execution and delivery of this Agreement, the issuance of the
Debentures hereunder, the execution and delivery of each other document in
connection herewith or therewith to which any Borrower is a party, and the
performance by each Borrower of its obligations hereunder or thereunder, have
been duly authorized by all necessary corporate action properly taken, have
received all necessary governmental approvals, if any were required, and except
as set forth on Schedule 2.3 do not and will not contravene or conflict with (i)
the articles of incorporation or partnership or the bylaws or of any Borrower,
(ii) any material agreement to which any Borrower is a party or by which any of
them or any of their properties is bound, or constitute a default thereunder, or
result in the creation or imposition of any lien, charge, security interest, or
encumbrance of any nature upon any of the property or assets of any Borrower
pursuant to the terms of any such agreement or instrument, or (iii) violate any
provision of law or any applicable judgment, ordinance, regulation or order of
any court or governmental agency. The officer executing this Agreement, the
Debentures, and any other document executed and delivered by any Borrower in
connection herewith or therewith, is duly authorized to act on behalf of such
Borrower.
2.4 Validity and Binding Effect. Each of the Operative Documents is the
legal, valid and binding obligation of the Borrowers, enforceable against the
Borrowers in accordance with its terms, subject to such limitations on
enforceability as may exist under equitable principles of law or the application
of bankruptcy or insolvency laws.
2.5 Contracts and Other Commitments. Other than as filed by the Company
with the Securities and Exchange Commission ("SEC") as an exhibit pursuant to
any of the SEC Reports (each such disclosed or filed agreement an "Applicable
Contract"), none of the Borrowers is bound by any material loans, liens,
pledges, security interests, agreements, indentures, or instruments defining the
rights of security holders under any securities or other financings upon which
any Borrower is obligated or by which any Borrower is bound.
2.6 Litigation. There is no litigation, arbitration, claim, proceeding
or investigation pending or threatened in writing to which any Borrower is a
party or of which any of its respective properties or assets is the subject
which, if determined adversely to the Borrower, would individually or in the
aggregate have a Material Adverse Effect.
2.7 Financial Statements. The consolidated financial statements of the
Company for the fiscal years ended January 3, 1998 and December 28, 1996; and
the unaudited consolidated financial statements of the Company and its
Subsidiaries as of and for the fiscal quarter ended April 4, 1998, and the
related notes, copies of which the Company previously has delivered to
Purchaser, fairly present the financial position, results of operations, cash
flows and changes in stockholders' equity of the Company, at the respective
dates of and for the periods to which they apply in such financial statements,
and have been prepared in accordance with generally accepted accounting
principles ("GAAP") consistently applied throughout the periods indicated,
subject, in the case of interim financial statements, to normal recurring
year-end adjustments (the effect of which will not, individually or in the
aggregate, be materially adverse) and the absence of notes (that, if presented,
would not differ materially from those included in the most recent audited
consolidated financial statements). No financial statements of any other
person(s) are required by GAAP to be included in the consolidated financial
statements of the Company.
2.8 SEC Reports. The Company's Common Stock is listed for trading on
the NASDAQ National Market and has been duly registered under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Company has filed all
reports, registrations, proxy or information statements, and all other
documents, together with any amendments required to be made thereto, required to
be filed with the SEC under the Securities Act and the Exchange Act
(collectively, the "SEC Reports"). As of their respective dates, the SEC Reports
complied in all material respects with all rules and regulations promulgated by
the SEC and did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
2.9 Absence of Changes. Except as set forth on Schedule 2.9, since
January 3, 1998, (i) none of the Borrowers has incurred any liabilities or
obligations, direct or contingent, or entered into any transactions, not in the
ordinary course of business, that are material to the Company, (ii) none of the
Borrowers has purchased any of its outstanding capital stock or declared, or
paid any dividend or other distribution or payment in respect of its capital
stock, (iii) there has not been any material change in the authorized or issued
capital stock, long-term debt, or short-term debt of the Borrowers, and (iv)
there has not been any material adverse change in or affecting the business,
operations, properties, assets, or condition (financial or otherwise) of the
Company.
2.10 No Defaults. Except as set forth on Schedule 2.10 and except where
a default or event of default does not constitute a Material Adverse Event, no
default or event of default by any Borrower exists under this Agreement or any
of the other Operative Documents, or under any Applicable Contract, or other
material instrument or agreement to which any Borrower is a party or by which
any Borrower or its respective properties are bound or, to the knowledge of the
Borrowers, affected, and to the knowledge of the Borrowers no event has occurred
and is continuing that with notice or the passage of time or both would
constitute a default or event of default thereunder.
2.11 Compliance With Law. The Borrowers are in compliance with all
foreign, federal, state or local laws, regulations, decrees and orders directly
applicable to them (including but not limited to the Foreign Corrupt Practices
Act, occupational and health standards and controls, antitrust, monopoly,
restraint of trade or unfair competition), except to the extent that
noncompliance, in the aggregate, does not constitute a Material Adverse Event.
2.12 Taxes. Except where failure to file would not constitute a
Material Adverse Event, the Borrowers have filed or caused to be filed all
federal, state and local income, excise and franchise tax returns for taxable
years ending during calendar years 1995, 1996, 1997, and 1998 required to be
filed (except for returns that have been appropriately extended), and have paid,
or provided for the payment of, all taxes shown to be due and payable on said
returns and all other taxes, impositions, assessments, fees or other charges
imposed on them by any governmental authority, agency or instrumentality, prior
to any delinquency with respect thereto (other than taxes, impositions,
assessments, fees and charges currently being contested in good faith by
appropriate proceedings, for which amounts have been reserved in accordance with
GAAP), and the Borrowers do not know of any proposed assessment for additional
taxes or any basis therefor. No tax liens have been filed against any of the
Borrowers or any of their properties.
2.13 Certain Transactions. Except as set forth in the SEC Reports and
except as to indebtedness incurred in the ordinary course of business and
approved by the Board of Directors of the Company, none of the Borrowers is
indebted, directly or indirectly, to any of its officers or directors, or to
their respective spouses or children, or to any of their affiliates, in excess
of an aggregate amount of $60,000, and none of such officers or directors or any
member of their immediate families or affiliates, is indebted to any of the
Borrowers in excess of an aggregate amount of $60,000, or has any direct or
indirect ownership interest in any firm or corporation with which any Borrower
is affiliated or with which any Borrower has a business relationship, or any
firm or corporation which competes with any Borrower. Except as set forth in the
proxy statements or other SEC Reports, no officer or director of any Borrower or
any member of their immediate families or affiliates is, directly or indirectly,
interested in any contract with any Borrower that would require disclosure under
Item 404 of Regulation S-B. No Borrower is a guarantor or indemnitor of any
indebtedness of any other person, firm or corporation (except other Borrowers).
2.14 Title to Property. Each Borrower has good and marketable title to
all real and personal property owned by it, free and clear of all liens,
security interests, pledges, encumbrances, claims and restrictions of every kind
and nature whatsoever, except as disclosed on Schedule 2.14, and except for such
liens, security interests, pledges, encumbrances, claims and restrictions which
individually or in the aggregate are not material. Any real property and
buildings held under lease by any Borrower are held under valid existing and
enforceable leases, and to the best of the Borrowers' knowledge no default has
occurred or is continuing thereunder which might result in any Material Adverse
Effect.
2.15 Intellectual Property.
(a) Except as set forth in Schedule 2.15, or for items that
individually or in the aggregate do not constitute a Material Adverse Event, to
the Borrowers' knowledge, each of the Borrowers is the lawful owner or has a
valid right to use the proprietary information used in its business free and
clear of any claim, right, trademark, patent or copyright protection of any
third party; provided, however, that this paragraph (a) shall not be deemed to
include any representation regarding the absence of infringements or conflicts
with the rights of others, which representation is made only in paragraph (c)
hereof. As used herein, "proprietary information" includes without limitation
(i) any computer software and any documentation, inventions, and technical and
nontechnical data related thereto, and (ii) other documentation, inventions and
data related to patterns, plans, methods, techniques, drawings, finances,
customer lists, suppliers, products, special pricing and cost information,
designs, processes, procedures, formulas, research data owned or used by any
Borrower or marketing studies conducted by any Borrower, which the Borrowers
consider to be commercially important and competitively sensitive and which
generally has not been disclosed to third parties other than customers in the
ordinary course of business.
(b) Except as set forth in Schedule 2.15, or for items that
individually or in the aggregate do not constitute a Material Adverse Event, to
the Borrowers' knowledge, each of the Borrowers has good and marketable title to
or has a valid right to use all patents, trademarks, trade names, service marks,
copyrights or other intangible property rights, and registrations or
applications for registration thereof, owned by the Company or any Subsidiary or
used or required by such Borrower in the operation of its business as presently
being conducted; provided, however, that this paragraph (b) shall not be deemed
to include any representation regarding the absence of infringements or
conflicts with the rights of others, which representation is made only in
paragraph (c) hereof.
(c) Except as disclosed on Schedule 2.15, none of the Borrowers has any
knowledge of any infringements or conflicts by any Borrower with asserted rights
of others with respect to copyrights, patents, trademarks, service marks, trade
names, trade secrets or other intangible property rights or know-how, which
constitute a Material Adverse Event. To the Borrowers' knowledge, except for
items that individually or in the aggregate do not constitute a Material Adverse
Event, no products or processes of the Borrowers infringe or conflict with any
rights of patent or copyright, or any discovery, invention, product or process,
that is the subject of a patent or copyright application or registration known
to any Borrower. Except for items that individually or in the aggregate do not
constitute a Material Adverse Event, each Borrower follows such procedures as
are necessary or appropriate to provide reasonable protection of the Borrowers'
trade secrets and proprietary rights in intellectual property of all kinds. To
the knowledge of the Borrowers, no person employed by or affiliated with the
Company or any Co-Maker has employed or proposes to employ any trade secret or
any information or documentation proprietary to any former employer, and to the
knowledge of the Borrowers, no person employed by or affiliated with any
Borrower has violated any confidential relationship that such person may have
had with any third person, in connection with the development, manufacture or
sale of any product or proposed product or the development or sale of any
service or proposed service of the Borrowers, except for items that individually
or in the aggregate do not constitute a Material Adverse Event.
2.16 Environmental Matters. Each Borrower has duly complied in all
material respects with, and its business, operations, assets, equipment,
property, leaseholds or other facilities are in compliance in all material
respects with, the provisions of all federal, state and local environmental,
health, and safety laws, codes and ordinances, and all rules and regulations
promulgated thereunder, except to the extent that the violation thereof does not
constitute a Material Adverse Event. Each Borrower has been issued and will
maintain all required material federal, state and local permits, licenses,
certificates and approvals relating to (i) air emissions; (ii) discharges to
surface water or groundwater; (iii) noise emissions; (iv) solid or liquid waste
disposal; (v) the use, generation, storage, transportation or disposal of toxic
or hazardous substances or wastes (which shall include any and all such
materials listed in any federal, state or local law, code or ordinance and all
rules and regulations promulgated thereunder as hazardous or potentially
hazardous); or (vi) other environmental, health or safety matters, except to the
extent that the violation thereof does not constitute a Material Adverse Event.
No Borrower has received notice of, and no Borrower knows of, a material
violation of any federal, state or local environmental, health or safety laws,
codes or ordinances, and any rules or regulations promulgated thereunder with
respect to its businesses, operations, assets, equipment, property, leaseholds,
or other facilities. Except in accordance with a valid governmental permit,
license, certificate or approval, there has been no emission, spill, release or
discharge into or upon (i) the air; (ii) soils, or any improvements located
thereon; (iii) surface water or groundwater; or (iv) the sewer, septic system or
waste treatment, storage or disposal system servicing the premises, of any toxic
or hazardous substances or wastes at or from the premises of any Borrower,
except to the extent that the violation thereof does not constitute a Material
Adverse Event. To the best of its knowledge, none of the Borrowers has any
material indebtedness, obligation or liability (absolute or contingent, matured
or not matured), with respect to the storage, treatment, cleanup or disposal of
any solid wastes, hazardous wastes or other toxic or hazardous substances
(including without limitation any such indebtedness, obligation, or liability
with respect to any current regulation, law or statute regarding such storage,
treatment, cleanup or disposal).
2.17 Accounting Matters. The Borrowers maintain a system of internal
accounting controls sufficient to provide reasonable assurance that in all
material respects (i) transactions are executed in accordance with management's
general or specific authorization; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with GAAP and to
maintain accountability for the assets of the Borrowers; (iii) access to the
assets of each Borrower is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets of the Borrowers is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
2.18 Distributions to Company. Except for limitations under applicable
law and under the Senior Credit Agreement, none of the other Borrowers are
currently prohibited, directly or indirectly, from paying any dividends or
making any other distributions to the Company or to any other Borrower, from
repaying to the Company or to any other Borrower any loans or advances to such
Borrower, or from transferring any of such Borrower's property or assets to the
Company or to any other Borrower.
2.19 Prior Sales. All offers and sales of the Company's capital stock
prior to the date hereof were at all relevant times (i) exempt from the
registration requirements of the Securities Act or were duly registered under
the Securities Act, and (ii) were duly registered or were the subject of an
available exemption from the registration requirements of all applicable state
securities or Blue Sky laws.
2.20 Regulatory Compliance. The conduct of the business and the
ownership of the assets of the Borrowers is not dependent on any license,
permit, approval, waiver or other authorization of any federal, state or local
governmental or regulatory body which the Borrowers have not obtained, except to
the extent that the absence thereof does not constitute a Material Adverse
Event. All material licenses, permits and authorizations held by the Borrowers
are in full force and effect.
2.21 Margin Regulations. No Borrower is engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock. No
proceeds received pursuant to this Agreement will be used to purchase or carry
any equity security of a class which is registered pursuant to Section 12 of the
Exchange Act.
2.22 1940 Act Compliance. Each Borrower is an "eligible portfolio
company" as such term is defined in Section 2(a)(46) of the Investment Company
Act of 1940, as amended, and the issuance and sale by the Borrowers of the
Debentures does not constitute a "public offering" as such term is used in
Section 55(a)(1) thereof.
2.23 Limited Offering. Subject in part to the truth and accuracy of
Purchaser's representations set forth in this Agreement, the offer, sale and
issuance of the Debentures is exempt from the registration requirements of the
Securities Act, and no Borrower nor any authorized agent acting on behalf of any
Borrower has taken or will take any action hereafter that would cause the loss
of such exemption.
2.24 Registration Obligations. Except as described in Schedule 2.24,
and except with respect to any registration statement on Form S-8 to be filed in
connection with the Company's stock option plan, the Company is not under any
obligation to register under the Securities Act or the Trust Indenture Act of
1939, as amended, any of its presently outstanding securities or any of its
securities that are proposed to be subsequently issued.
2.25 Insurance. Each of the Borrowers has maintained insurance coverage
with respect to their respective properties and business in such forms and
amounts and against such risks, casualties and contingencies as are customary
for companies of comparable size and condition (financial and otherwise) engaged
in the same or a similar business and owning and operating similar properties.
2.26 Governmental Consents. No consent, approval, qualification, order
or authorization of, or filing with, any local, state, or federal governmental
authority is required on the part of the Borrowers in connection with the their
valid execution, delivery, or performance of this Agreement, except such filings
as have been made prior to the Closing, and except notices of sale required to
be filed with the Securities and Exchange Commission under Regulation D of the
Securities Act or such post-closing filings as may be required under applicable
state securities laws, which will be timely filed within the applicable periods
therefor.
2.27 Employees . To the best of the Borrowers' knowledge, there is no
strike, labor dispute or union organization activity pending or threatened
between any Borrower and its employees. None of the Borrowers' employees belongs
to any union or collective bargaining unit. Each Borrower has complied in all
material respects with all applicable state and federal equal opportunity and
other laws related to employment. To the best of the Borrowers' knowledge, no
employee of any Borrower is in violation of any material judgment, decree, or
order, or any term of any employment contract, patent disclosure agreement, or
other contract or agreement relating to the relationship of any such employee
with such Borrower or any other party because of the nature of the business
conducted or presently proposed to be conducted by the Borrowers or to the use
by the employee of his best efforts with respect to such business. Other than as
set forth on Schedule 2.27, no Borrower is a party to or bound by any material
employment contract, deferred compensation agreement, bonus plan, incentive
plan, profit sharing plan, or retirement agreement. To the best of the
Borrowers' knowledge, no officer or key employee, or any group of key employees,
intends to terminate employment with any Borrower, nor does any Borrower have a
present intention to terminate the employment of any of the foregoing. Subject
to general principles related to wrongful termination of employees, to
applicable state law, and to existing employment contracts set forth on Schedule
2.27, the employment of each officer and employee of the Borrowers is terminable
at will. 2.28 ERISA . Each Borrower is in compliance in all material respects
with all applicable provisions of Title IV of the Employee Retirement Income
Security Act of 1974, Pub. L. No. 93-406, September 2, 1974, 88 Stat. 829, 29
U.S.C.A. SS 1001 et seq. (1975), as amended from time to time ("ERISA"). Neither
a reportable event nor a prohibited transaction (as defined in ERISA) has
occurred and is continuing with respect to any "pension plan" maintained by any
Borrower (as such term is defined in ERISA, a "Plan"); no notice of intent to
terminate a Plan has been filed nor has any Plan been terminated; no
circumstances exist which constitute grounds entitling the Pension Benefit
Guaranty Corporation (together with any entity succeeding to or all of its
functions, the 'PBGC") to institute proceedings to terminate, or appoint a
trustee to administer, a Plan, nor has the PBGC instituted any such proceedings;
no Borrower nor any commonly controlled entity (as defined in ERISA) has
completely or partially withdrawn from a multiemployer plan (as defined in
ERISA). Each Borrower and each commonly controlled entity has met its minimum
funding requirements under ERISA with respect to all of its Plans and the
present fair market value of all Plan property exceeds the present value of all
vested benefits under each Plan, as determined on the most recent valuation date
of the Plan and in accordance with the provisions of ERISA and the regulations
thereunder for calculating the potential liability of the Borrower or any
commonly controlled entity to the PBGC or the Plan under Title IV or ERISA; and
no Borrower has incurred any liability to the PBGC under ERISA.
2.29 Fees/Commissions . Except as set forth on Schedule 2.29, no
Borrower has agreed to pay any finder's fee, commission, origination fee or
other fee or charge to any person or entity with respect to or as a result of
the consummation of the transactions contemplated hereunder, except for (i) the
processing fee due to Purchaser under Section 1.5, and (ii) reimbursement of
Purchaser's expenses under Section 12.1.
2.30 Survival. The representations and warranties of the Borrowers
contained in this Agreement are made as of the date hereof and shall survive
until this Agreement terminates in accordance with Section 12.5 hereof.
3. Representations and Warranties of Purchaser. The Purchaser hereby
represents to the Borrowers as follows:
3.1 Corporate Status. Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the State of Tennessee
and has the corporate power to own and operate its properties, to carry on its
business as now conducted and to enter into and to perform its obligations under
this Agreement and any other document executed or delivered by Purchaser in
connection herewith.
3.2 Authorization. Purchaser has full legal right, power and authority
to enter into and perform its obligations under this Agreement and any other
document executed and delivered by Purchaser in connection herewith, without the
consent or approval of any other person, firm, governmental agency or other
legal entity. The execution and delivery of this Agreement and any other
document executed and delivered by Purchaser in connection herewith, and the
performance by Purchaser of its obligations hereunder and/or thereunder are
within the corporate powers of Purchaser, have received all necessary
governmental approvals, if any were required, and do not and will not contravene
or conflict with (i) the Charter or Bylaws of Purchaser, (ii) any material
agreement to which Purchaser is a party or by which it or any of its properties
is bound, or constitute a default thereunder, or result in the creation or
imposition of any lien, charge, security interest or encumbrance of any nature
upon any of the property or assets of Purchaser pursuant to the terms of any
such agreement or instrument, or (iii) violate any provision of law or any
applicable judgment, ordinance, regulation or order of any court or governmental
agency. The officer(s) executing this Agreement and any other document executed
and delivered by Purchaser in connection herewith, is duly authorized to act on
behalf of Purchaser. 3.3 Validity and Binding Effect . This Agreement and any
other document executed and delivered by Purchaser in connection herewith have
been authorized by all requisite corporate action, and are the legal, valid and
binding obligations of the Purchaser, enforceable against it in accordance with
their respective terms, subject to such limitations on enforceability as may
exist under equitable principles of law or the application of bankruptcy or
insolvency laws.
3.4 Accredited Investor, Investment Intent . Purchaser is a registered
investment company under the Investment Company Act and as such is an
"accredited investor" under Rule 501(a) under the Securities Act. Purchaser is
acquiring the Debentures for its own account, for investment, and not with a
view to the distribution or resale thereof, in whole or in part, in violation of
the Securities Act or any applicable state securities law, and Purchaser has no
present intention of selling, negotiating or otherwise disposing of the
Debentures; it being understood that Purchaser intends to transfer and assign
the Debentures and all Purchaser's rights and obligations under this Agreement
to one or more wholly-owned Subsidiaries of Purchaser. Purchaser has relied
solely upon an independent investigation made by it and its representatives, if
any, and has, prior to the date hereof, been given access to and the opportunity
to examine all books and records of the Company, and all material contracts and
documents of the Company. In making its investment decision to purchase the
Debentures, Purchaser is not relying on any oral or written representations or
assurances from the Company or any other person or any representation of the
Company or any other person other than as set forth in this Agreement, or on any
information other than that contained in the Company's SEC Reports. Purchaser
has such experience in business and financial matters that it is capable of
evaluating the risk of its investment and determining the suitability of its
investment.
3.5 Survival . The representations and warranties of the Purchaser
contained in this Agreement shall survive until this Agreement terminates in
accordance with Section 12.5 hereof.
4. Conditions Precedent to the Obligations of Purchaser. The obligation
of Purchaser to purchase and pay for the Debentures on the Closing Dates shall
be subject to the satisfaction, on or before the Closing Dates, of each of the
conditions set forth below. These conditions are for Purchaser's sole benefit
and may be waived by Purchaser at any time in its sole discretion.
4.1 Representations and Warranties . The representations and warranties
of the Borrowers contained in this Agreement and in any Schedule hereto or any
document or instrument delivered to Purchaser or its representatives hereunder,
shall have been true and correct when made and shall be true and correct in all
material respects as of the Closing Dates as if made on such date, except to the
extent such representations and warranties expressly relate to a specific date.
Each of the Borrowers shall have duly performed all of the covenants and
agreements to be performed by it hereunder on or prior to the Closing Dates.
4.2 Officer's Certificate . The Borrowers shall have delivered to
Purchaser a certificate, dated the respective Closing Date, signed by the
President of the Company, substantially in the form attached hereto as Exhibit
C.
4.3 Satisfactory Proceedings and Secretary's Certificate . All
proceedings taken in connection with the transactions contemplated by this
Agreement, and all documents necessary to the consummation thereof, shall be
satisfactory in form and substance to Purchaser and Purchaser's counsel, and the
Borrowers shall have delivered to Purchaser a certificate, dated the respective
Closing Date, signed by the Secretary of the Company, substantially in the form
attached hereto as Exhibit D.
4.4 Legal Opinion . Purchaser shall have received the opinion of
counsel for the Borrowers, dated the respective Closing Date, addressed to
Purchaser, in form and substance satisfactory to Purchaser's counsel, and
covering the matters set forth in Exhibit E hereto.
4.5 Authorization Agreement . The Borrowers shall have delivered to
Purchaser an Authorization Agreement for Pre-Authorized Payments (Debit), dated
the respective Closing Date, executed by a duly authorized officer, in the form
attached hereto as Exhibit F.
4.6 Existence and Authority . The Borrowers shall have delivered to
Purchaser the following certificates of public officials, in each case as of a
date within ten days of the Closing Date:
(a) the certificate or articles of incorporation of the Company and
each of the Subsidiaries, certified by the Secretary of State or other
appropriate official in the jurisdiction by which each such entity is
incorporated; and
(b) a certificate as to the legal existence and good standing of the
Company and each of the Subsidiaries issued by the Secretary of State or other
appropriate official of the jurisdiction by which each such entity is
incorporated.
4.7 Delivery of Operative Documents -- First Closing . The Borrowers
shall have delivered to Purchaser the following documents, executed by the
Borrowers and dated the First Closing Date:
(a) the Initial Debenture;
(b) the Initial Warrant;
(c) the Security Agreement in the form of Exhibit G, executed by the
each of the Borrowers;
(d) the Financing Statements; (e) Warrant Valuation Letter in the form
of Exhibit H;
(f) Closing Statement in the form of Exhibit I; and
(g) Registration Rights Agreement between the Company and the Purchaser
in the form of Exhibit J.
4.8 Delivery of Operative Documents -- Second Closing. The Borrowers
shall have delivered to Purchaser the following documents, executed by the
Company and dated the Second Closing Date:
(a) the Additional Debenture;
(b) the Additional Warrant;
(c) a Security Agreement in the form of Exhibit G, executed by each of
the Borrowers;
(d) the Financing Statements;
(e) Warrant Valuation Letter in the form of Exhibit H;
(f) Closing Statement in the form of Exhibit I; and
(g) Registration Rights Agreement between the Company and the Purchaser
in the form of Exhibit J.
4.9 Required Consents . Any consents or approvals required to be
obtained from any third party, including any holder of indebtedness or any
outstanding security of the Company, and any amendments of agreements which
shall be necessary to permit the consummation of the transactions contemplated
hereby on the respective Closing Date, shall have been obtained and all such
consents or amendments shall be satisfactory in form and substance to Purchaser
and Purchaser's counsel.
4.10 Waiver of Conditions . If on the respective Closing Date the
Borrowers fail to tender to Purchaser the Debentures to be issued to Purchaser,
or if the conditions specified in this Section 4 have not been fulfilled,
Purchaser may thereupon elect to be relieved of all further obligations under
this Agreement and shall (i) be paid the processing fee provided by Section 1.5,
and (ii) be paid the expense allowance provided by Section 12.1, which
processing fee and expense reimbursement shall be treated as liquidated damages
and as Purchaser's sole remedy if on the respective Closing Date the Borrowers
fail to tender to Purchaser the Debentures or if the conditions specified in
this Section 4 have not been fulfilled. Without limiting the foregoing, if the
conditions specified in this Section 4 have not been fulfilled, Purchaser may
waive compliance by the Borrowers with any such condition to such extent as
Purchaser, in Purchaser's sole discretion, may determine. Nothing in this
Section 4.10 shall operate to relieve any Borrower of any of its obligations
hereunder, or to waive any of Purchaser's rights against the Borrowers.
5. Covenants of the Borrowers. From and after the Closing Dates and
continuing so long as any amount remains unpaid on any of the Debentures,
5.1 Use of Proceeds . The Borrowers shall use the proceeds of the
Debentures for general corporate purposes, including acquisitions, working
capital and debt repayment.
5.2 Corporate Existence, Etc . Each Borrower shall preserve and keep in
force and effect its corporate existence and good standing in the state of its
organization, its qualification and good standing in each jurisdiction where
such qualification is required by applicable law except where the failure to so
qualify would not have a Material Adverse Effect, and all licenses and permits
necessary to the proper conduct of its business.
5.3 Maintenance of Properties, Etc. Each Borrower will maintain,
preserve and keep its properties and assets which are used or useful in the
conduct of its business (whether owned in fee or pursuant to a leasehold
interest) in good repair and working order, excepting normal wear and tear, and
from time to time will make all necessary repairs, replacements, renewals and
additions required to maintain the efficiency thereof.
5.4 Nature of Business . None of the Borrowers will engage in any
business if, as a result, the general nature of the business, taken on a
consolidated basis, which would then be engaged in by the Company would be
substantially changed from the general nature of the business engaged in by the
Company on the date of this Agreement.
5.5 Insurance . Each Borrower will maintain insurance coverage with
respect to their respective properties and business in such forms and amounts
and against such risks, casualties and contingencies as are customary for
corporations of comparable size and condition (financial and otherwise) engaged
in the same or a similar business and owning and operating similar properties.
5.6 Taxes, Claims for Labor and Materials. The Borrowers will promptly
pay and discharge (i) all lawful taxes, assessments and governmental charges or
levies imposed upon the respective property or business of the Borrowers, (ii)
all trade accounts payable in accordance with usual and customary business
terms, and (iii) all claims for work, labor or materials, which if unpaid might
become a lien or charge upon any property of a Borrower; provided, the Borrowers
shall not be required to pay any such tax, assessment, charge, levy, account
payable or claim if (i) the validity, applicability or amount thereof is being
contested in good faith by appropriate actions or proceedings which will prevent
the forfeiture or sale of any property of any Borrower or any material
interference with the use thereof by any Borrower, and (ii) each of the
Borrowers shall set aside on its books, reserves deemed by it to be adequate
with respect thereto, and (iii) failure to pay such item individually or in the
aggregate would not constitute a Material Adverse Event.
5.7 Compliance with Laws, Agreements, Etc . Except where failure to do
so does not and would not constitute a Material Adverse Event, each Borrower
shall maintain its business operations and property owned or used in connection
therewith in compliance with (i) all applicable federal, state and local laws,
regulations and ordinances, and such laws, regulations and ordinances of foreign
jurisdictions, governing such business operations and the use and ownership of
such property, and (ii) all agreements, licenses, franchises, indentures and
mortgages to which the it is a party or by which it or any of its properties is
bound.
5.8 ERISA Matters . If any Borrower has in effect, or hereafter
institutes, a pension plan that is subject to the requirements of Title IV of
ERISA (a "Plan"), then the following covenants shall be applicable during such
period as any such Plan shall be in effect: (i) throughout the existence of the
Plan, the Borrower's contributions under the Plan will meet the minimum funding
standards required by ERISA and the Borrower will not institute a distress
termination of the Plan; and (ii) the Borrower will send to Purchaser a copy of
any notice of a reportable event (as defined in ERISA) required by ERISA to be
filed with the Labor Department or the PBGC, at the time that such notice is so
filed.
5.9 Books and Records: Rights of Inspection . Each Borrower will keep
proper books of record and account in which entries will be made of all dealings
or transactions of or in relation to the business and affairs of the Borrower,
in accordance with GAAP consistently maintained. Each Borrower shall permit a
representative of Purchaser to visit any of its properties and inspect its books
and financial records, and will discuss its accounts, affairs and finances with
a representative of Purchaser, during normal business hours, at all such times
as Purchaser may reasonably request, and subject to Purchaser's execution of a
confidentiality agreement in form and substance reasonably acceptable to
Purchaser.
5.10 Reports . The Borrowers will furnish to Purchaser the following
information, which information shall be subject to confidential treatment by
Purchaser:
(a) Monthly Statements. Within 30 days after the end of each month,
beginning the month of June, 1998, monthly internal financial reports consisting
of an unaudited consolidated balance sheet and an unaudited statement of
operations for the one-month period then ended; (b) Quarterly Statements. As
soon as available and in any event within 45 days after the end of each
quarterly fiscal period (except the last) of each fiscal year, copies of:
(i) consolidated balance sheets of the Company as of the close of the
fiscal period then ended, setting forth in comparative form the consolidated
figures at the end of the preceding fiscal year,
(ii) consolidated statements of income of the Company for the fiscal
period then ended, setting forth in comparative form the consolidated figures
for the corresponding period of the preceding fiscal year, and (iii)
consolidated statements of cash flows of the Company for the portion of the
fiscal year ending with such fiscal period, setting forth in comparative form
the consolidated figures for the corresponding period of the preceding fiscal
year,
all in reasonable detail and accompanied by a certificate of an authorized
financial officer of the Company that such financial statements fairly present
the financial condition and results of operations and cash flows of the Company
at and for the periods presented, subject to normal year-end adjustment;
provided, that delivery of the Company's quarterly report on Form 10-Q or Form
10-QSB as filed with the SEC shall be deemed satisfaction of the obligations
imposed by this Section 5.10(b);
(c) Annual Statements. As soon as available and in any event within 90
days after the close of each fiscal year of the Company, copies of:
(i) consolidated balance sheets of the Company as of the close of such
fiscal year, and
(ii) consolidated statements of income and consolidated statements of
changes in stockholders' equity and cash flows of the Company for such fiscal
year,
in each case setting forth in comparative form the consolidated figures for the
preceding fiscal year, all in reasonable detail and accompanied by an
unqualified report thereon of a firm of independent public accountants of
recognized national standing; provided, that delivery of the Company's annual
report on Form 10-K or Form 10-KSB as filed with the SEC shall be deemed
satisfaction of the obligations imposed by this Section 5.10(c);
(d) Special Audit Reports. Promptly upon receipt thereof, one copy of
each interim or special audit made by independent accountants of the books of
any Borrower;
(e) SEC and Other Reports. Promptly upon their becoming available, one
copy of each financial statement, report, notice or proxy statement sent by the
Company to stockholders generally and of each periodic or current report, and
any registration statement or prospectus filed by the Company with any
securities exchange or the SEC or any successor agency, and copies of any orders
in any proceedings to which any Borrower is a party, issued by any governmental
agency, federal or state, having jurisdiction over the Borrower. Each Borrower
specifically covenants to use reasonable commercial efforts to timely file each
such item required to be filed with the SEC and each state requiring securities
laws filings; and
(f) Requested Information. With reasonable promptness, such financial
data and other information relating to the business of the Borrowers as
Purchaser may from time to time reasonably request, subject to Purchaser's duty
of confidentiality.
5.11 Limitations on Debt and Obligations. Except as to
(i) Indebtedness existing on the date hereof and reflected on (a) the
Company's unaudited balance sheet as of April 4, 1998, and (b) Schedule 5.11, as
the same Indebtedness may be extended or renewed or increased in accordance with
the last sentence of this Section 5.11 but not otherwise;
(ii) the Indebtedness incurred pursuant to the Debentures;
(iii) accounts payable and other trade payables incurred in the
ordinary course of business;
(iv) purchase money indebtedness incurred in the purchase of equipment
and other property used by the Borrowers in the ordinary course of business,
such purchase money indebtedness not to exceed an aggregate additional amount of
principal and accrued interest thereon of $1,000,000 at any time outstanding;
(v) obligations of any Borrower pursuant to capitalized leases;
(vi) Indebtedness that refinances secured Indebtedness under clause (i)
above, provided that the collateral for such new Indebtedness is the same type
of collateral for the refinanced secured Indebtedness and the aggregate
principal amount of such Indebtedness does not exceed the maximum principal
amount outstanding and/or committed under the refinanced Indebtedness plus
interest accrued to the date of refinancing; and
(vii) Indebtedness incurred in connection with the acquisition of a
business (including the assets of a business), provided such Indebtedness is
secured solely by the assets of the business so acquired, and is otherwise
nonrecourse to each of the Borrowers;
the Company shall not, on a consolidated basis, incur additional indebtedness
which is senior to or pari passu with the Debentures without the prior written
consent of Purchaser. Notwithstanding the foregoing, the aggregate principal
amount of the Indebtedness of the Borrowers under the Amended and Restated Loan
and Security Agreement dated as of January 27, 1998, between the Borrowers and
the Senior Lender (the "Senior Credit Agreement"), may be increased to an amount
not to exceed, at the time of any determination thereof, the sum of (i) the
greater of (A) $15,000,000, or (B) 85% of the Inventory (as defined in the
Senior Credit Agreement) of the Borrowers as reflected in the most recent
borrowing base certificate delivered by the Borrowers to the Senior Lender, plus
(ii) $1,000,000.
5.12 Guaranties . Without the prior written consent of Purchaser, no
Borrower will become or be liable in respect of any Guaranty except Guaranties
by the Borrowers which are limited in maximum financial exposure to the amounts
set forth in, and are incurred in compliance with, the provisions of Section
5.11 of this Agreement.
5.13 Limitation on Liens . Without the prior written consent of
Purchaser, no Borrower will create or incur, or suffer to be incurred or to
exist, any mortgage, pledge, security interest, encumbrance, lien or charge of
any kind (collectively, "Liens") on its property or assets, whether now owned or
hereafter acquired, or upon any income or profits therefrom, or transfer any
property for the purpose of subjecting the same to the payment of obligations in
priority to the payment of its general creditors, or acquire or agree to acquire
any property or assets upon conditional sales agreement or other title retention
devices, except those Liens which exist as of the date hereof as set forth on
Schedule 2.14, Liens securing the Senior Debt, Liens on accounts receivable
and/or inventory of the Company permitted by Section 5.11, Liens securing
Indebtedness permitted by Section 5.11(vi), and except:
(a) purchase money liens on and security interests in equipment
hereafter acquired securing Indebtedness permitted by Section 5.11(iv) of this
Agreement, provided that such liens and security interests attach only to the
equipment so acquired and do not encumber any other property of any Borrower;
(b) liens for taxes (excluding federal and state income taxes) not yet
payable or being contested in good faith by appropriate proceedings and for
which reserves determined in accordance with GAAP have been provided on the
books of the Borrowers;
(c) mechanics', materialmen's, warehousemen's, landlords', carriers' or
other like liens arising in the ordinary course of business, arising with
respect to obligations which are not overdue for a period longer than 90 days or
which are being contested in good faith by appropriate proceedings and for which
reserves determined in accordance with GAAP have been provided on the books of
the Borrowers;
(d) deposits or pledges to secure the performance of bids, tenders,
contracts, leases, public or statutory obligations, surety or appeal bonds or
other deposits or pledges for purposes of a like general nature or given in the
ordinary course of business by a Borrower;
(e) other encumbrances consisting of zoning restrictions, easements,
restrictions on the use of real property or minor irregularities in the title
thereto, which do not arise in connection with the borrowing of, or any
obligation for the payment of, money and which, in the aggregate, do not
materially detract from the value of the premises or the business, properties or
assets of any Borrower; and
(f) liens securing term debt financing provided to the Company by Eco
Leasing Corp., and secured by part or all of the Borrowers' equipment.
5.14 Restricted Payments . Except as set forth on Schedule 5.14, no
Borrower shall, without the prior written consent of Purchaser and except as
hereinafter provided:
(a) declare or pay any dividends, either in cash or property, on any
shares of its capital stock of any class, except dividends or other
distributions payable solely in shares of Common Stock of the Company; or
(b) directly or indirectly, or through any Affiliate, purchase, redeem
or retire any shares of its capital stock of any class or any warrants, rights
or options to purchase or acquire any shares of its capital stock (other than in
exchange for or out of the net proceeds to the Borrower from the substantially
concurrent issue or sale of other shares of capital stock or warrants, rights or
options to purchase or acquire any shares of its capital stock); or
(c) make any other payment or distribution, either directly or
indirectly or through any Subsidiary, in respect of its capital stock, provided,
that distributions from any Borrower to another Borrower, shall be permitted; or
(d) make any payment or distribution, either directly or indirectly or
through any Affiliate, with respect to any indebtedness of a Borrower, to any
Affiliate of the Borrower.
5.15 Investments . The Borrowers will not make any Investments outside
the ordinary course of business, without the prior written consent of Purchaser,
except:
(a) Investments in direct obligations of the United States of America,
or any agency or instrumentality of the United States of America, the payment or
guaranty of which constitutes a full faith and credit obligation of the United
States of America, in either case maturing in twelve months or less from the
date of acquisition thereof;
(b) Investments in certificates of deposit maturing within one year
from the date of origin, issued by a bank or trust company organized under the
laws of the United States or any state thereof, having capital, surplus and
undivided profits aggregating at least $100,000,000 and whose long-term
certificates of deposit are, at the time of acquisition thereof by Company or a
Subsidiary, rated AA or better by Standard & Poor's Corporation or AA or better
by Moody's Investors Service, Inc.;
(c) Investments in commercial paper maturing in 270 days or less from
the date of issuance which, at the time of acquisition by the Company or any
Subsidiary, is accorded the highest rating by Standard & Poor's Corporation,
Moody's Investors Service, Inc. or another nationally recognized credit rating
agency of similar standing;
(d) Loans or advances in the usual and ordinary course of business to
officers, directors and employees for expenses (including moving expenses
related to a transfer) incidental to carrying on the business of the Borrowers;
(e) receivables arising from the sale of goods and services in the
ordinary course of business;
(f) acquisitions, mergers, and consolidations permissible under Section
5.16(a)(ii); and
(g) money market mutual funds of the quality offered by Fidelity, T.
Rowe Price, or similar organizations.
5.16 Mergers, Consolidations and Sales of Assets .
(a) Without the prior written consent of Purchaser, no Borrower shall
(i) consolidate with or be a party to a merger or share exchange with any other
corporation, or (ii) sell, lease or otherwise dispose of all or any substantial
part (as defined in paragraph (d) of this Section 5.16) of its assets; provided,
however, that:
(i) any Borrower may merge or consolidate with or into the Company or
any wholly-owned Subsidiary so long as in any merger or consolidation involving
the Company, the Company shall be the surviving or continuing corporation; and
(ii) the Company may consolidate or merge with any other corporation,
or acquire all or a substantial portion of the assets or stock of any other
entity, provided that such corporation or entity is engaged primarily in the
Company's general line of business on a consolidated basis as conducted on the
date hereof, and further provided that (A) Company shall be the surviving or
continuing corporation, (B) at the time of such consolidation or merger or
acquisition and after giving effect thereto, no Default or Event of Default
shall have occurred and be continuing, (C) such consolidation or merger or
acquisition shall be deemed in the good faith estimate of the Board of Directors
to be a consolidation or merger or acquisition that will be accretive to
earnings per share not later than the second fiscal year following the
consolidation or merger, and (D) such consolidation or merger or acquisition
shall be approved unanimously by the Company's Board of Directors; and
(iii) any Borrower may sell, lease or otherwise dispose of all or any
substantial part of its assets to the Company or any other Wholly-owned
Subsidiary.
(b) Without the prior written consent of Purchaser, no Borrower other
than the Company shall issue or sell any shares of stock of any class (including
as "stock" for the purposes of this Section 5.16, any warrants, rights or
options to purchase or otherwise acquire stock or other securities exchangeable
for or convertible into stock) of such Borrower to any person other than the
Company or a Wholly-owned Subsidiary, except for the purpose of qualifying
directors.
(c) Without the prior written consent of Purchaser, the Company will
not sell, transfer or otherwise dispose of any shares of stock in any Subsidiary
(except to qualify directors) or any indebtedness of any Subsidiary, and will
not permit any Subsidiary to sell, transfer or otherwise dispose of (except to
the Company or a Wholly-owned Subsidiary) any shares of stock or any
indebtedness of any other Subsidiary, unless all of the following conditions are
met:
(i) simultaneously with such sale, transfer or disposition, all shares
of stock and all indebtedness of such Subsidiary at the time owned by the
Company and by every other Subsidiary shall be sold, transferred or disposed of
as an entirety;
(ii) the Board of Directors of the Company shall have determined, as
evidenced by a resolution thereof, that the retention of such stock and
indebtedness is no longer in the best interests of the Company;
(iii) such stock and Indebtedness is sold, transferred or otherwise
disposed of to a person, for a cash consideration and on terms reasonably deemed
by the Board of Directors to be adequate and satisfactory;
(iv) the Subsidiary being disposed of shall not have any continuing
investment in the Company or any other Subsidiary not being simultaneously
disposed of; and
(v) such sale or other disposition does not involve a substantial part
(as hereinafter defined) of the assets of the Company and its Subsidiaries taken
as a whole.
Provided, that, notwithstanding this Section 5.16(c), without the prior written
consent of Purchaser, no Borrower shall sell, transfer, or otherwise dispose of
any shares of stock or other equity interest of any other Borrower, or any
indebtedness of any other Borrower, except sales, transfers, or other
dispositions between Borrowers.
(d) As used in this Agreement, a sale, lease or other disposition of
assets shall be deemed to be a "substantial part" of the assets of the Company
and its Subsidiaries only if the book value of such assets, when added to the
book value of all other assets sold, leased or otherwise disposed of by the
Company and its Subsidiaries (other than in the ordinary course of business and
other than expressly permitted by this Section 5.16) during the twelve month
period ending on the date of such sale, lease or other disposition, exceeds 25
percent of the consolidated net tangible assets of the Company and its
Subsidiaries determined as of the end of the immediately preceding fiscal year.
5.17 Transactions with Affiliates . Except as set forth on Schedule
5.17, without the prior written consent of Purchaser, the Borrowers shall not
enter into or be a party to any transaction or arrangement with any officer,
director or Affiliate (including, without limitation, the purchase from, sale
to, or exchange of property with, or the rendering of any service by or for, any
Affiliate), except in the ordinary course of and pursuant to the reasonable
requirements of the Borrowers' business and upon fair and reasonable terms no
less favorable to the Borrowers than could be obtained in an arm's-length
transaction with a person other than an Affiliate, in each case as determined in
good faith by a majority of the disinterested directors of the Company.
5.18 Notice . The Borrowers shall promptly upon the discovery thereof
give written notice to Purchaser of (i) the occurrence of any Default or Event
of Default under this Agreement, (ii) the occurrence of any default or event of
default under any other material agreement providing for Indebtedness of any
Borrower or under any material capitalized lease obligation, (iii) any material
actions, suits or proceedings instituted by any person against any Borrower or
affecting any of their assets, or (iv) any investigation initiated by, or any
dispute between and any governmental regulatory body, on the one hand, and any
Borrower, on the other hand, which dispute might materially interfere with the
normal operations of the Borrowers; provided, however, that Purchaser shall not
disclose any such information provided in (iii) or (iv) above to any third party
other than Purchaser's counsel and except to the extent required by law or
otherwise authorized by the Company.
5.19 Board of Directors Observer Rights. For so long as the Purchaser
or any Affiliate of Purchaser owns Debentures representing at least 25% of the
original principal amount of the Debentures, the Company shall invite one
representative of Purchaser to attend, at the Company's expense, all meetings of
the Company's Board of Directors and all committees of the Company's Board of
Directors in a nonvoting observer capacity and, in this respect, shall provide
such representative copies of all notices and meeting agenda in advance of such
meetings and shall permit such representative to review all documents and other
materials provided to directors at such meetings. The Company shall also provide
Purchaser, in advance, with copies of all actions proposed to be taken by the
Board of Directors in lieu of meeting. Purchaser shall execute a confidentiality
and nondisclosure agreement with respect to any information obtained by or
provided to Purchaser's representative.
5.20 Annual Plan. The Board of Directors shall adopt no later than the
thirtieth day of each fiscal year, a financial plan for the Company, which shall
include at least a projection of income and expenses (including capital
expenditures) and a projected cash flows statement for each fiscal period in
such fiscal year, and a projected balance sheet as of the end of each month in
such fiscal year (the "Annual Plan"). The Annual Plan may only be amended or
revised, in any material manner, with the approval of the Board of Directors.
5.21 Further Assurances. The Borrowers will take and cause to be taken
all actions reasonably requested by Purchaser to effect the transactions
contemplated by this Agreement and the other Operative Documents. 6.
Subordination of Debentures.
6.1 Subordination. The indebtedness evidenced by the Debentures,
including principal and interest, shall be subordinate and junior to the prior
payment of the indebtedness of the Borrowers to the Senior Lender as provided by
the Subordination Agreement, but otherwise the indebtedness evidenced by the
Debentures shall not be subordinate and junior to the prior payment of any other
indebtedness of the Borrowers for borrowed money. The indebtedness evidenced by
the Debentures shall be senior in right of payment to all other Indebtedness of
the Borrowers incurred or issued after the Closing Date which is expressly
stated to be subordinate or junior in any respect to other Indebtedness of the
Borrowers.
6.2 Subrogation. Upon the prior payment in full of all Senior Debt, the
Purchaser shall be subrogated to the rights of the holders of the Senior Debt to
receive payments or distributions of assets of the Borrowers applicable to the
Senior Debt until all amounts owing on the Debentures shall be paid in full, and
for the purpose of such subrogation, no payments or distributions to the
Purchaser otherwise payable or distributable to the holders of Senior Debt
shall, as between the Borrowers, its creditors, other than the holders of Senior
Debt, and Purchaser, be deemed to be payment by the Borrowers to or on account
of the Debentures, it being understood that the provisions of this Section 6 are
and are intended solely for the purpose of defining the relative rights of
Purchaser, on the one hand, and the holders of the Senior Debt, on the other
hand.
6.3 Borrowers' Obligations Not Impaired. Nothing contained in this
Section 6 or in the Debentures is intended to or shall impair, as between the
Borrowers and Purchaser, the obligation of each Borrower, which is absolute and
unconditional, joint and several, to pay the Purchaser the principal of and
interest on the Debentures as and when the same shall become due and payable in
accordance with the terms of the Debentures, or is intended to or shall affect
the relative rights of the Purchaser other than with respect to the holders of
the Senior Debt, nor, except as expressly provided in this Section 6, shall
anything herein or therein prevent the Purchaser from exercising all remedies
otherwise permitted by applicable law upon the occurrence of an Event of Default
under this Agreement or under the Debentures.
7. [Reserved].
8. Restrictions on Transfer; Registration Rights.
8.1 Legends; Restrictions on Transfer. Neither the Debentures, nor the
Warrants, nor the shares of Common Stock issuable upon exercise of Warrants have
been registered under the Securities Act or any state securities laws. Each
Debenture and Warrant issued pursuant to this Agreement and each stock
certificate issued upon exercise of Warrants shall bear a legend in
substantially the following form:
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES
LAW. THESE SECURITIES MAY NOT BE TRANSFERRED WITHOUT SUCH
REGISTRATION OR EXEMPTION THEREFROM.
8.2 Registration Rights. The Purchaser shall be entitled to register
Common Stock issuable upon exercise of Warrants as provided in the Registration
Rights Agreement in the form of Exhibit J.
9. Events of Default; Remedies.
9.1 Events of Default . The occurrence of any one of the following
shall constitute an "Event of Default" under this Agreement:
(a) Default shall occur in the payment of interest on any Debenture
when the same shall have become due, provided, that any such default shall be
curable within two Business Days if the failure to make such payment when due
was caused by a financial institution's error in effecting an automatic debit
transaction against an account containing sufficient funds; or
(b) Default shall occur in the making of any payment of the principal
of any Debenture or the premium, if any, thereon at the expressed or any
accelerated maturity date or at any date fixed by the Borrowers for prepayment,
provided, that any such default shall be curable within two Business Days if the
failure to make such payment when due was caused by a financial institution's
error in effecting an automatic debit transaction against an account containing
sufficient funds; or
(c) Default shall be made in the payment of the principal of or
interest on any Indebtedness (other than the Debentures) of any Borrower in
excess of $1,000,000 and such default shall continue beyond the period of grace,
if any, allowed with respect thereto; or
(d) [Reserved]; or
(e) Default shall occur in the observance or performance of any
covenant or agreement contained in Sections 5.11 through 5.20 hereof which is
not remedied within 30 days; or
(f) Default shall occur in the observance or performance of any other
provision of this Agreement which is not remedied within 30 days after the
earlier of (i) the date on which either any Borrower first obtains knowledge of
such default, and (ii) the date on which written notice thereof is given to the
Borrowers by the holder of any Debenture; or
(g) Any representation or warranty made by the Borrowers herein, or
made by any Borrower in any statement or certificate furnished by such Borrower
in connection with the consummation of the issuance and delivery of the
Debentures or furnished by such Borrower pursuant hereto, is untrue in any
material respect as of the date of the issuance or making thereof and would have
a Material Adverse Effect, subject to the limitations on survival of Section
12.5; or
(h) Final judgments for the payment of money in uninsured amounts
aggregating in excess of $100,000, are outstanding against any Borrower or
against any property or assets of such Borrower and any one of such judgments
has remained unpaid, unvacated, unbonded or unstayed by appeal or otherwise for
a period of 30 days from the date of its entry; or
(i) Any Borrower becomes insolvent or bankrupt, is generally not paying
its debts as they become due or makes an assignment for the benefit of
creditors, or any Borrower applies for or consents to the appointment of a
custodian, trustee, liquidator, or receiver or for the major part of its
property; or
(j) A custodian, trustee, liquidator, or receiver is appointed for any
Borrower or for a substantial part of its property (as defined by Section
5.16(d)) and is not discharged within 60 days after such appointment; or
(k) Bankruptcy, reorganization, arrangement or insolvency proceedings,
or other proceedings for relief under any bankruptcy or similar law or laws for
the relief of debtors, are instituted by or against any Borrower, and are
consented to or are not dismissed within 60 days after such institution.
(l) James H. Levi shall resign or be terminated, other than for cause
and other than as a result of death or disability, as President and Chief
Executive Officer of the Company, and a successor acceptable to Purchaser shall
not have been elected within 90 days after such resignation or termination;
provided, that if no such successor is elected, an Event of Default shall be
deemed to have occurred and have been continuing from and after the date of such
resignation or termination.
(m) Except as set forth on Schedule 9.1(m), James H. Levi, or any of
his Affiliates, shall, without Purchaser's prior written consent, either (i)
sell, exchange, transfer, or otherwise dispose of any shares of the Company's
Common Stock at a price less than $5.00 per share (adjusted for stock splits,
stock dividends, combinations of shares, recapitalizations, or other similar
events occurring hereafter), or (ii) sell, exchange, transfer, or otherwise
dispose of more than 10% of their aggregate holdings of the Company's
outstanding Common Stock in any calendar year.
9.2 Remedies Upon Default .
(a) If an Event of Default shall occur, and for so long as such Event
of Default continues, the interest rate on the Debentures shall increase by 7%
per annum, that is, to 19.00% per annum, until such Event of Default is cured or
waived.
(b) Purchaser shall be entitled to appoint an additional representative
to attend, at the Company's expense, all meetings of the Company's Board of
Directors and all committees of the Company's Board of Directors in a nonvoting
observer capacity and, in this respect, shall provide such representative copies
of all notices and meeting agenda in advance of such meetings and shall permit
such representative to review all documents and other materials provided to
directors at such meetings. The Company shall also provide Purchaser, in
advance, with copies of all actions proposed to be taken by the Board of
Directors in lieu of meeting. Purchaser shall execute a confidentiality and
nondisclosure agreement with respect to any information obtained by or provided
to Purchaser's representative.
(c) When any Event of Default has occurred, or if the holder of any
Debenture or of any other evidence of indebtedness of the Company gives any
notice or takes any other action with respect to a reasonably claimed default,
the Company agrees to give notice within three Business Days of such event to
all holders of the Debentures then outstanding.
9.3 Acceleration of Maturities . When any Event of Default described in
paragraph (a), (b) or (c) of Section 9.1 has occurred and is continuing, any
holder of any Debenture may, and when any Event of Default described in
paragraphs (d) through (i), inclusive, and (l) through (m), inclusive, of
Section 9.1 has occurred and is continuing, the holder or holders of 50% or more
of the principal amount of Debentures at the time outstanding may, by notice to
the Borrowers, declare the entire principal and all interest accrued on all
Debentures to be, and all Debentures shall thereupon become, forthwith due and
payable, without any presentment, demand, protest or other notice of any kind,
all of which are hereby expressly waived. When any Event of Default described in
paragraph (j) or (k) of Section 9.1 has occurred, then all outstanding
Debentures shall immediately become due and payable without presentment, demand
or notice of any kind, all of which are hereby expressly waived. Upon the
Debentures becoming due and payable as a result of any Event of Default as
aforesaid, the Borrowers will forthwith pay to the holders of the Debentures the
entire principal and interest accrued on the Debentures. No course of dealing on
the part of any Debenture holder nor any delay or failure on the part of any
Debenture holder to exercise any right shall operate as a waiver of such right
or otherwise prejudice such holder's rights, powers and remedies. Each Borrower
further agrees, to the fullest extent permitted by law, to pay to the holder or
holders of the Debentures all costs and expenses, including reasonable
attorneys' fees, incurred by them in the collection of any Debentures upon any
Event of Default hereunder or thereon.
9.4 Joint and Several Obligations . The obligations of the Borrowers
under this Agreement, the Debentures, and the other Operative Documents, are
joint and several. Each of the Borrowers shall be fully responsible for payment
and performance of such obligations.
10. Amendments, Waivers and Consents.
10.1 Consent Required. Any term, covenant, agreement or condition of
this Agreement may, with the consent of the Company, be amended or compliance
therewith may be waived (either generally or in a particular instance and either
retroactively or prospectively), if the Company shall have obtained the consent
in writing of the holders of at least 50% in aggregate principal amount of
outstanding Debentures; provided that without the written consent of the holders
of all of the Debentures then outstanding, no such waiver, modification,
alteration or amendment shall be effective (i) which will change the time of
payment of the principal of or the interest on any Debenture or reduce the
principal amount thereof or change the rate of interest thereon, (ii) which will
change any of the provisions with respect to optional prepayments, or (iii)
which will change the percentage of holders of the Debentures required to
consent to any such amendment, modification or waiver of any of the provisions
of Section 9 or Section 10.
10.2 Solicitation of Debenture Holders . No Borrower shall, directly or
indirectly, pay or cause to be paid any remuneration, whether by way of
supplemental or additional interest, fee or otherwise, to any holder of the
Debentures as consideration for or as an inducement to the entering into by any
holder of the Debentures of any waiver or amendment of any of the terms and
provisions of this Agreement, unless such remuneration is concurrently offered,
on the same terms, ratably to the holders of all of the Debentures then
outstanding.
10.3 Effect of Amendment or Waiver . Any such amendment or waiver shall
apply equally to all of the holders of the Debentures and shall be binding upon
them, upon each future holder of any Debenture, and upon the Borrowers, whether
or not such Debenture shall have been marked to indicate such amendment or
waiver. No such amendment or waiver shall extend to or affect any obligation not
expressly amended or waived or impair any right consequent thereon.
11. Interpretation of Agreement; Definitions.
11.1 Definitions. As used herein,
"Affiliate" means any person (i) which directly or indirectly through
one or more intermediaries controls, or is controlled by, or is under common
control with, the Company, (ii) which beneficially owns or holds 10 % or more of
any class of the Voting Stock of the Company, or (iii) 10 % or more of the
Voting Stock (or in the case of a person which is not a corporation, 10% or more
of the equity interest) of which is beneficially owned or held by the Company or
a Subsidiary.
"Business Day" means any day other than a Saturday, Sunday, or other
day on which banks in Tennessee or Missouri are authorized to close.
"Change in Control" means (i) when any person or entity, including a
"group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934,
as amended, other than the Company or a wholly-owned subsidiary thereof or any
employee benefit plan of the Company or any of its subsidiaries, becomes the
beneficial owner of the Company's securities having 50% or more of the combined
voting power of the then outstanding securities of the Company that may be cast
for the election of directors of the Company (other than as a result of an
issuance of securities initiated by the Company in the ordinary course of
business), or (ii) two-thirds of the Company's Board of Directors is removed or
not re-elected.
The term "control" (including the terms "controlling," "controlled by"
and "under common control") means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of a
person, whether through the ownership of Voting Stock, by contract, or
otherwise.
"Default" means any event or condition, the occurrence of which would,
with the lapse of time or the giving of notice, or both, constitute an Event of
Default as defined in Section 9. 1.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended and any successor statute of similar import, together with the
regulations thereunder, in each case as in effect from time to time. References
to sections of ERISA shall be construed to also refer any successor sections.
"Exercise Price" means the Exercise Price per share of Common Stock
issuable upon exercise of the Warrants, as defined by the Initial Warrant, the
Additional Warrant, and the Contingent Warrants, as applicable.
"Fair Market Value" per share of common stock means (i) in the case of
a security listed or admitted to trading on any national securities exchange,
the last reported sale price, regular way (as determined in accordance with the
practices of such exchange), on each day, or if no sale takes place on any day,
the last reported sale price, regular way) as determined in accordance with the
practices of such exchange) on the immediately preceding trading day (and in the
case of a security traded on more than one national securities exchange, at such
price upon the exchange on which the volume of trading during the last calendar
year was the greatest), (ii) in the case of a security not then listed or
admitted to trading on any national securities exchange, the average closing bid
price of the security for the 20 trading days preceding such day, and (iii) in
the case of a security not then listed or admitted to trading on any securities
exchange and as to which no such reported sale price or bid and asked prices are
available, the average of the reported high bid and low asked prices on such
day, as reported by a reputable quotation service, or The Wall Street Journal,
or if there are no bids and asked prices on such day, the average of the high
bid and low asked prices, as so reported, on the most recent day (not more than
30 days prior to the date in question) for which prices have been so reported.
"Guaranties" by any person means all obligations (other than
endorsements in the ordinary course of business of negotiable instruments for
deposit or collection) of such person guaranteeing, or in effect guaranteeing,
any Indebtedness, dividend or other obligation of any other person (the "primary
obligor") in any manner, whether directly or indirectly, including, without
limitation, all obligations incurred through an agreement, contingent or
otherwise, by such person: (i) to purchase such Indebtedness or obligation or
any property or assets constituting security therefor, (ii) to advance or supply
funds (A) for the purchase or payment of such Indebtedness or obligation, (B) to
maintain working capital or other balance sheet condition or (C) otherwise to
advance or make available funds for the purchase or payment of such Indebtedness
or obligation, or (iii) to lease property or to purchase securities or other
property or services primarily for the purpose of assuring the owner of such
Indebtedness or obligation of the ability of the primary obligor to make payment
of the Indebtedness or obligation, or (iv) otherwise to assure the owner of the
Indebtedness or obligation of the primary obligor against loss in respect
thereof. For the purposes of all computations made under this Agreement, a
Guaranty in respect of any Indebtedness for borrowed money shall be deemed to be
Indebtedness equal to the principal amount of such Indebtedness for borrowed
money which has been guaranteed, and a Guaranty in respect of any other
obligation or liability or any dividend shall be deemed to be Indebtedness equal
to the maximum aggregate amount of such obligation, liability or dividend.
"Hazardous Substance" means any hazardous or toxic material, substance
or waste, pollutant or contaminant which is regulated under any statute, law,
ordinance, rule or regulation of any local, state, regional or Federal authority
having jurisdiction over the property of the Company and its Subsidiaries or its
use, including but not limited to any material, substance or waste which is: (i)
defined as a hazardous substance under Section 311 of the Federal Water
Pollution Control Act (33 U.S. C. SS 1317. 1) as amended; (ii) regulated as a
hazardous waste under Section 1004 or Section 3001 of the Federal Solid Waste
Disposal Act, as amended by the Resource Conservation and Recovery Act (42
U.S.C. SS 6901 et seq.) as amended; (iii) defined as a hazardous substance under
Section 101 of the Comprehensive Environmental Response, Compensation and
Liability Act (42 U.S.C. SS 9601 et seq.) as amended; or (iv) defined or
regulated as a hazardous substance or hazardous waste under any rules or
regulations promulgated under any of the foregoing statutes.
"Indebtedness" of any person means and includes all obligations of such
person which in accordance with GAAP shall be classified upon a balance sheet of
such person as liabilities of such person, and in any event shall include all
(i) obligations of such person for borrowed money or which have been incurred in
connection with the acquisition of property or assets, (ii) obligations secured
by any lien or other charge upon property or assets owned by such person, even
though such person has not assumed or become liable for the payment of such
obligations, (iii) obligations created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such
person, notwithstanding the fact that the rights and remedies of the seller,
lender or lessor under such agreement in the case of default are limited to
repossession or sale or property, (iv) capitalized rentals, and (v) Guaranties
of obligations of others of the character referred to in this definition.
"Investments" means all investments, in cash or by delivery of property
made, directly or indirectly in any person, whether by acquisition of shares of
capital stock, indebtedness or other obligations or securities or by loan,
advance, capital contribution or otherwise; provided, however that "Investments"
shall not mean or include routine investments in property to be used or consumed
in the ordinary course of business.
"Material Adverse Event" means any event or circumstance, or set of
events or circumstances, individually or collectively, that reasonably could be
expected to result in any (i) material adverse effect upon the validity or
enforceability of any of the Operative Documents, or (ii) material adverse
effect on the financial condition or results of operations of the Company and
its Subsidiaries, taken as a whole ( either a "Material Adverse Effect"), or
(iii) material default or potential material default under any of the Operative
Documents.
"Person" means an individual, partnership, corporation, limited
liability company, joint venture, sole proprietorship, trust or any other
unincorporated organization or business association, and a government or
government agency or political subdivision thereof.
"Plan" means a "pension plan," as such term is defined in ERISA,
established or maintained by the Company or any ERISA Affiliate or as to which
the Company or any ERISA Affiliate contributed or is a member or otherwise may
have any liability.
"Registration Rights Agreement" means the Registration Rights Agreement
between the Company and the Purchaser of even date herewith.
"Security" has the same meaning as in Section 2(1) of the Securities
Act of 1933, as amended.
"Senior Debt" means the indebtedness of the Borrowers to the Senior
Lender as defined by the Subordination Agreement.
"Senior Lender" means BankAmerica Business Credit, Inc.
"Subordination Agreement" means the Subordination Agreement between
Purchaser and BankAmerica Business Credit, Inc.
The term "subsidiary" means, as to any particular parent corporation,
any corporation of which more than 50% (by number of votes) of the Voting Stock
shall be owned by such parent corporation and/or one or more corporations which
are themselves subsidiaries of such parent corporation. The term "Subsidiary"
shall mean a subsidiary of the Company.
"Voting Stock" means securities of any class or classes the holders of
which are ordinarily, in the absence of contingencies, entitled to elect a
majority of the corporate directors (or persons performing similar functions).
"Warrants" means the Initial Warrant, the Additional Warrant, and the
Contingent Warrants.
"Wholly-owned" when used in connection with any Subsidiary shall mean a
Subsidiary of which all of the issued and outstanding shares of stock (except
shares required as directors' qualifying shares) shall be owned by the Company
and/or one or more of its Subsidiaries.
11.2 Accounting Principles . Where the character or amount of any asset
or liability or item of income or expense is required to be determined or any
consolidation or other accounting computation is required to be made for the
purposes of this Agreement, the same shall be done in accordance with GAAP, to
the extent applicable, except where such principles are inconsistent with the
requirements of this Agreement.
11.3 Directly or Indirectly . Where any provision in this Agreement
refers to action to be taken by any person, or which such person is prohibited
from taking such provision shall be applicable whether the action in question is
taken directly or indirectly by such person.
12. Miscellaneous.
12.1 Expenses, Stamp Tax Indemnity . Whether or not the transactions
herein contemplated shall be consummated, the Borrowers agree to pay to
Purchaser (i) Purchaser's out-of-pocket expenses in connection with the entering
into of this Agreement and the consummation of the transactions contemplated
hereby, including but not limited to the reasonable fees, expenses and
disbursements of Purchaser's counsel, up to a maximum of $40,000, and (ii) so
long as Purchaser holds any of the Debentures, all such expenses relating to any
amendment, waiver or consent pursuant to the provisions hereof (whether or not
the same are actually executed and delivered), including, without limitation,
any amendments, waivers or consents resulting from any work-out, restructuring
or similar proceedings relating to the performance by any Borrower of its
obligations under this Agreement and the Debentures. The Borrowers also agree to
pay and hold Purchaser harmless against any and all liability with respect to
stamp and other taxes, if any, which may be payable in connection with the
execution and delivery of this Agreement or the Debentures, whether or not any
Debentures are then outstanding. The Borrowers agree to protect and indemnify
Purchaser against any liability for any and all brokerage fees and commissions
payable or claimed to be payable to any person as a result of any actions of the
Borrowers or their agents in connection with the transactions contemplated by
this Agreement.
12.2 Powers and Rights Not Waived; Remedies Cumulative . No delay or
failure on the part of the holder of any Debenture in the exercise of any power
or right shall operate as a waiver thereof; nor shall any single or partial
exercise of the same preclude any other or further exercise thereof, or the
exercise of any other power or right. The rights and remedies of the holder of
any Debenture are cumulative to and are not exclusive of any rights or remedies
any such holder would otherwise have, and no waiver or consent, given or
extended hereunder, shall extend to or affect any obligation or right not
expressly waived or consented to.
12.3 Notices . All communications provided for hereunder shall be in
writing and shall be delivered personally, or mailed by registered mail, or by
prepaid overnight air courier, or by facsimile communication, in each case
addressed:
If to Purchaser: Tandem Capital, Inc.
500 Church Street, Suite 200
Nashville, Tennessee 37219
Attention: Craig Macnab
Facsimile No.: 615-726-1208
with a copy to: C. Christopher Trower, Esq.
3159 Rilman Road, N.W.
Atlanta, Georgia 30327-1503
Facsimile No.: 404-816-6854
If to the Borrowers:
The Great Train Store Company
14180 Dallas Parkway -- Suite 618
Dallas, Texas 75240
Attention: President
Facsimile No. 972-392-1698
with a copy to: Douglas J. Bates, Esq.
Gallop, Johnson & Neuman, L.C.
Interco Corporate Tower-- Suite 1600
101 South Hanley Road
St. Louis, Missouri 63105
Facsimile No.: 314-862-1219
or such other address as Purchaser or the subsequent holder of any Debenture
initially issued to Purchaser may designate to the Company in writing, or such
other address as the Company may in writing designate to Purchaser or to a
subsequent holder of the Debenture initially issued to Purchaser; provided,
however, that a notice sent by overnight air courier shall only be effective if
delivered at a street address designated for such purpose by such person and a
notice sent by facsimile communication shall only be effective if made by
confirmed transmission at a telephone number designated for such purpose by such
person or, in either case, as Purchaser or a subsequent holder of any Debentures
initially issued to Purchaser may designate to the Company in writing or at a
telephone number herein set forth.
12.4 Assignments . This Agreement, the Debentures and the other
Operative Documents may be endorsed, assigned and/or transferred in whole or in
part by Purchaser, and any such holder and/or assignee of the same shall succeed
to and be possessed of the rights and powers of Purchaser under all of the same
to the extent transferred and assigned; provided, however, that Purchaser shall
not make any such transfer to a competitor of the Company without the prior
written consent of the Company. No Borrower shall assign any of its rights or
delegate any of its duties under this Agreement or any of the other Operative
Documents by operation of law or otherwise without the prior express written
consent of Purchaser, which may be withheld in Purchaser's sole and unfettered
discretion, and if the Company obtains such consent, this Agreement and such
other Operative Documents shall be binding upon such assignee.
12.5 Survival of Covenants and Representations . All representations
and warranties made by the Borrowers or the Purchaser herein and in any
instruments or certificates delivered pursuant hereto shall survive for a period
of eighteen months following the respective Closing Date, except the
representations and warranties made in Sections 2.1, 2.2, 2.3, and 2.4 by the
Borrowers, and in Sections 3.1, 3.2, 3.3, and 3.4 by Purchaser, which shall
survive until payment in full of the principal amount of, all accrued but unpaid
interest under, and all expenses and other costs required to be paid by the
Borrowers under, the Debentures. All covenants made by the Borrowers and the
Purchaser herein and in any instruments or certificates delivered pursuant
hereto shall survive the closing and the delivery of this Agreement and the
Debentures, until the termination of this Agreement, which shall terminate and
be of no further force or effect upon the payment in full of the principal
amount of, all accrued but unpaid interest under, and all expenses and other
costs required to be paid by the Borrowers under, the Debentures.
12.6 Severability. Should any part of this Agreement for any reason be
declared invalid or unenforceable, such decision shall not affect the validity
of any remaining portion, which remaining portion shall remain in force and
effect as if this Agreement had been executed with the invalid or unenforceable
portion thereof eliminated and it is hereby declared the intention of the
parties hereto that they would have executed the remaining portion of this
Agreement without including therein any such part, parts or portion which may
for any reason, be hereafter declared invalid or unenforceable.
12.7 Governing Law; Jurisdiction and Venue. This Agreement and the
Debentures issued and sold hereunder shall be governed by and construed in
accordance with Missouri law, without regard to its conflicts of law rules. The
Borrowers hereby consent to jurisdiction, service of process, and venue in the
federal and state courts having jurisdiction in the State of Tennessee or in the
State of Texas, for the purpose of any action arising out of any obligations
under this Agreement, and expressly waive jury trial and any and all objections
as to jurisdiction, service of process, and venue in such courts.
12.8 Captions; Counterparts. The descriptive headings of the various
Sections or parts of this Agreement are for convenience only and shall not
affect the meaning or construction of any of the provisions hereof. This
Agreement may be executed in counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
12.9 Confidentiality. Each party hereto agrees that, except with the
prior written permission of the other party hereto, it shall at all times keep
confidential and not divulge, furnish or make accessible to anyone any
confidential information, knowledge or data concerning or relating to the
business or financial affairs of the other party to which such party has been or
shall become privy by reason of this Agreement, discussions or negotiations
relating to this Agreement, the performance of its obligations hereunder or the
ownership of the Debenture purchased hereunder, except as such disclosure may be
required by law, rule, or regulation, or by the rules of any securities exchange
or NASDAQ which may be applicable to the Company.
12.10 Publicity. The Company and Purchaser shall consult with each
other in issuing any press releases or otherwise making public statements with
respect to the transactions contemplated hereby. No party shall issue any press
release or otherwise make any public statement without the prior written consent
of the other, which consent shall not be unreasonably withheld or delayed,
except as such disclosure may be required by law.
[rest of page intentionally left blank]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Debenture
Purchase Agreement to be executed and delivered by their duly authorized
officers as of the date first written above.
THE GREAT TRAIN STORE COMPANY GTS PARTNER, INC.
By: _______________________________ By:___________________________________
Title: ____________________________ Title: _______________________________
THE GREAT TRAIN STORE GTS LIMITED PARTNER, INC.
PARTNERS, L.P.
By GTS Partner, Inc.
its General Partner
By: _______________________________ By:___________________________________
Title: ____________________________ Title: _______________________________
SIRROM CAPITAL CORPORATION
d/b/a TANDEM CAPITAL
By:___________________________________
Title: _______________________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheets at July 4, 1998 (unaudited) and the June
28, 1997 (unaudited) Condensed Statements of Income for the Twenty-six week
period ended July 4, 1998 (unaudited) and June 28, 1997 (restated) and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> DEC-28-1997
<PERIOD-END> JUL-04-1998
<CASH> 219,085
<SECURITIES> 0
<RECEIVABLES> 641,931
<ALLOWANCES> 0
<INVENTORY> 8,011,406
<CURRENT-ASSETS> 8,872,422
<PP&E> 8,506,868
<DEPRECIATION> (2,311,092)
<TOTAL-ASSETS> 17,304,286
<CURRENT-LIABILITIES> 1,844,655
<BONDS> 5,541,943
0
0
<COMMON> 44,158
<OTHER-SE> 9,873,530
<TOTAL-LIABILITY-AND-EQUITY> 17,304,286
<SALES> 10,498,921
<TOTAL-REVENUES> 0
<CGS> 6,428,006
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,272,748
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 261,776
<INCOME-PRETAX> (3,463,639)
<INCOME-TAX> 1,274,846
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,188,763)
<EPS-PRIMARY> (.50)
<EPS-DILUTED> (.50)
</TABLE>
Exhibit 99.1
Cautionary Statement Identifying Important Factors that Could Cause the
Company's Actual Results to Differ from those Projected in Forward Looking
Statements
The following factors could affect The Great Train Store Company's actual future
results, including its merchandise sales, expenses, cash flow and net income,
and could cause them to differ from any forward-looking statements made by or on
behalf of the Company:
Due to the importance of the Christmas selling season to many retailers,
including the Company, and the Company's efforts to open new stores late in the
year to capitalize on increased net sales during the Christmas season, net sales
in the fourth quarter of each year constitute a highly disproportionate amount
of net sales for the entire year and, historically, has represented all of the
Company's income from operations. As a result, the Company's annual earnings
have been and will continue to be heavily dependent on the results of operations
in the fourth quarter of each year.
Changes in consumer tastes, spending habits, national, regional or local
economic conditions, population and traffic patterns, all of which could
adversely affect Company sales, expenses and profitability. In particular, the
Company could be affected by an adverse change in the popularity of trains in
general or in the Shining Time Station television series, products related to
the Shining Time Station television series have represented a significant
portion of the Company's annual net sales in the past few years. There can be no
assurance that the Company will be able to successfully anticipate and respond
to changing conditions affecting consumer acceptance of its merchandise.
The results achieved to date by The Great Train Stores may not be indicative of
future operating results. Moreover, because of the relatively small number of
stores, poor operating results at any one store or any unsuccessful new store
opening could negatively impact the Company's results from operations to a
greater extent than would be the case in a larger chain.
The Company's continued success and expansion depends, in large part, on the
continued availability of its existing locations and on the Company's ability to
identify and secure suitable additional locations on acceptable terms in which
to construct new stores. The rate of new store openings is subject to various
contingencies, many which of are beyond the Company's control. These
contingencies include, among others, the availability of new retail space in
locations and on terms considered acceptable by the Company and the progress of
construction of the Company's new stores and of the shopping centers in which
they are to be located and the ability to find, successfully acquire, and
effectively operate existing stores. Moreover, store construction and opening
costs could be higher than expected, and the Company may reduce the rate at
which it opens new stores. While some of the Company's leases contain provisions
for renewal terms, there can be no assurance that such space will continue to be
available to the Company after the expiration of the renewal terms or, if
available, that such space could be obtained on terms considered acceptable by
the Company. Further, certain of the renewal terms provide for substantial
increases in occupancy costs. In addition, deterioration of shopping centers in
which The Great Train Stores are located or increased competition from newly
constructed centers could necessitate renovation of The Great Train Store or of
the center in which it is located or otherwise adversely impact the Company's
sales and/or expenses. The need for such renovations could involve unanticipated
capital expenditures or result in a decrease in customer traffic, either of
which could adversely affect the Company's operating results.
The Company faces substantial competition for consumer dollars, suitable retail
locations, management personnel and products from specialty retailers and mass
merchandisers, including toy stores and merchandisers of gifts alternative to
those offered by the Company. The Company also experiences significant
competition for customers from companies which market products primarily or
exclusively by mail order. Competition from such sources could increase in the
future. Certain of the Company's competitors have substantially greater
financial, marketing and other resources than the Company, and there can be no
assurance that the Company will be able to compete successfully with them in the
future.
The Company's business is dependent, in part, upon its ability to purchase and
take timely delivery of merchandise. Numerous factors, many of which are outside
the Company's control, could impair the Company's ability to purchase
merchandise or delay the delivery of merchandise to the Company's stores.
Significant deviations in the amount of merchandise delivered or in the delivery
schedule could result in lost sales due to inadequate inventory, especially
during the Christmas selling season, and have a material adverse effect on the
Company's operating results.
In order to successfully continue and manage its expansion strategy, the Company
will be dependent on its ability to retain existing personnel and to hire, train
and supervise additional personnel for the new stores to be opened while
maintaining satisfactory levels of customer service at existing stores.
The Company's quarterly operating results can be expected to fluctuate as a
result of seasonal fluctuations in consumer demand for the Company's products,
which is highest during the fourth quarter. A significant portion of the
Company's operating expenses are relatively fixed and there can be no assurance
that the Company will report income from operations in any particular quarter.
Accordingly, the market price of the common stock could be subject to wide
fluctuations in price and volume in response to actual or anticipated variations
in quarterly operating results and a variety of other factors.
To date, the Company has met its liquidity requirements through cash flows from
operating activities, the public sale of its equity securities and, to a lesser
extent, borrowings under existing credit facilities. In January 1998, the
Company entered into a $15,000,00 revolving line of credit with BankAmerica
Business Credit, Inc. In June 1998 the Company sold $3,000,000 aggregate
principal amount of 12% subordinated debentures due 2003 and warrants to
purchase 175,000 shares of the Company's common stock at an exercise price of
$3.75 per share.
The trading of the Company's common stock on the Nasdaq National Market is
conditioned upon the Company meeting certain asset, capital and surplus,
earnings and stock price tests. If the Company fails to satisfy any of these
tests, the common stock may be delisted from trading on Nasdaq National Market.
The effects of delisting include more limited news coverage of the Company.
Delisting may restrict investors interest in the Common Stock and materially
adversely affect the trading market and prices for the common stock and the
Company's ability to issue additional securities or to secure additional
financing.
