U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the thirteen week period ended April 3, 1999.
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)
Indicate by checkmark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 April 3, 1999
-------------- --------------------
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
April 3, 1999
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements Page
Unaudited Consolidated Balance Sheet as of January 2, 1999 and 3
April 3, 1999
Unaudited Consolidated Statements of Operations for the thirteen 4
weeks ended April 4, 1998 and April 3, 1999
Unaudited Consolidated Statements of Cash Flows for the
thirteen 5 weeks ended April 4, 1998 and April 3, 1999
Notes to Unaudited Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis 7
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 11
ITEM 6. Exhibits and Reports on Form 8-K 12
SIGNATURE PAGE 13
EXHIBIT INDEX 13
<PAGE>
<TABLE>
<CAPTION>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS
January 2, 1999 April 3, 1999
--------------- -------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 402,136 $ 279,807
Merchandise inventories 10,362,635 9,781,761
Accounts receivable and other current assets 897,837 652,499
Income taxes receivable 390,000 390,000
----------- ------------
Total current assets 12,052,608 11,104,067
Store construction and leasehold improvements 6,256,902 6,275,912
Furniture, fixtures and equipment 3,631,539 3,653,963
----------- ------------
9,888,441 9,929,875
Less accumulated depreciation and amortization 2,850,751 3,164,351
----------- ------------
Property and equipment, net 7,037,690 6,765,524
Other assets, net 544,428 466,980
============ ============
Total assets $ 19,634,726 $ 18,336,571
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Merchandise payable $ 4,655,543 $ 2,558,668
Accounts payable and accrued liabilities 1,148,711 717,085
Sales taxes payable 667,199 179,006
Current portion of capital lease obligations 184,495 186,782
------------ ------------
Total current liabilities 6,655,948 3,641,541
Capital lease obligations, net of current portion 277,400 219,172
Line of credit payable 407,747 3,933,593
Deferred rent and other liabilities 1,134,785 1,199,579
Subordinated debentures 2,901,569 2,901,569
----------- -----------
Total liabilities 11,377,449 11,895,454
----------- -----------
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 44,158
Additional paid-in capital 10,444,765 10,444,765
Warrants 76,006 76,006
Accumulated deficit (2,307,652) (4,123,812)
------------ -----------
Total stockholders' equity 8,257,277 6,441,117
------------ -----------
Total liabilities and stockholders'
equity $ 19,634,726 $ 18,336,571
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the First Quarter Ended
April 4, 1998 April 3, 1999
------------- -------------
<S> <C> <C>
NET SALES $ 5,366,886 $ 5,915,563
COST OF SALES 3,488,763 3,226,773
----------- -----------
Gross profit 1,878,123 2,688,790
----------- -----------
OPERATING EXPENSES:
Store opening expense 1,314,901 1,631,073
Occupancy expenses 1,151,834 1,532,979
Selling, general and administrative expenses 952,328 892,262
Depreciation and amortization expenses 235,745 320,144
---------- -----------
Total operating expenses 3,654,808 4,376,458
---------- -----------
OPERATING LOSS (1,776,685) (1,687,668)
---------- -----------
OTHER INCOME (EXPENSE):
Interest expense (135,582) (132,724)
Interest income 5,379 -
Other income 8,959 4,232
--------- -----------
Total other income (expense), net (121,244) (128,492)
--------- -----------
LOSS BEFORE INCOME TAX BENEFIT (1,897,929) (1,816,160)
PROVISION FOR INCOME TAX BENEFIT (702,233) -
============= =============
NET LOSS $ (1,195,696) $ (1,816,160)
============= =============
BASIC LOSS PER SHARE $ (0.27) $ (0.41)
============= =============
DILUTED LOSS PER SHARE $ (0.27) $ (0.41)
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the First Quarter Ended
April 4, 1998 April 3, 1999
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (1,195,696) $ (1,816,160)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 235,745 320,144
Deferred income taxes (52,668) -
Changes in assets and liabilities:
Merchandise inventories 1,364,780 580,874
Accounts receivable and other current
assets 617,090 245,338
Other assets (734,686) 70,905
Merchandise payable (4,481,022) (2,096,875)
Accounts payable and accrued liabilities (559,684) (431,626)
Sales taxes payable (512,565) (488,193)
Income taxes payable (241,716) -
Other long term liabilities 46,174 68,564
----------- -----------
Net cash used in operating activities (5,514,248) (3,547,029)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (478,756) (41,435)
---------- ----------
Net cash used in investing activities (478,756) (41,435)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit 2,947,685 3,525,846
Repayment of notes payable and capital leases (25,194) (59,711)
---------- ----------
Net cash provided by financing activities 2,922,491 3,466,135
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,070,513) (122,329)
CASH AND CASH EQUIVALENTS, beginning of period 3,490,721 402,136
============= ===========
CASH AND CASH EQUIVALENTS, end of period $ 420,208 $ 279,807
=============== ===========
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Interest paid $ 72,034 179,054
Income taxes paid $ 246,149 -
</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
1. GENERAL
The accompanying unaudited consolidated financial statements of The Great Train
Store Company and subsidiaries (the "Company") as of April 3, 1999 and for the
thirteen week periods ended April 4, 1998 and April 3, 1999 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 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 2, 1999 included in the
Company's 1998 Annual Report on Form 10-K as filed with the SEC.
Prior year balances include certain reclassifications to conform to the current
year presentation.
2. REVOLVING LINE OF CREDIT
In January 1998, the Company entered into a revolving line of credit with
BankAmerica Business Credit, Inc. ("BankAmerica"). The availability of the line,
which was based on the Company's inventory, was calculated at varying advance
rates throughout the year. As of January 2, 1999, the maximum loan was reduced
to $8,000,000 and the advance ratios were reduced. Under the amended agreement,
borrowings bore interest at BankAmerica's base lending rate plus 1.75% and a
commitment fee of 0.375% was charged on the unused portion. As of April 3, 1999,
there was approximately $3,934,000 outstanding on the revolving line of credit.
In April 1999, the Company entered into a $10,000,000 revolving line of credit
agreement with Paragon Capital LLC ("Paragon") to replace the BankAmerica credit
line. Borrowings under the Paragon line are based on an advance rate percentage
of the Company's inventory, which varies throughout the year. Borrowings under
the line at May 1, 1999, were $4,850,000, and unused capacity was $1,782,000.
Interest is charged at an initial rate of Norwest Bank of Minnesota's base
lending rate plus 1.25% with a right to reduce this rate by .5% if the Company
meets certain operating targets. The initial term of the facility is five years
and is secured by certain assets of the Company, primarily inventory.
3. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income or loss 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 April 4, 1998 or April 3, 1999.
4. AUTHORATATIVE PRONOUNCEMENTS
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 adopted SOP 98-5 which had no
effect on the Company's financial statements.
ITEM 2. Management's Discussion and Analysis
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:
<PAGE>
For the Thirteen Weeks Ended
April 4, 1998 April 3, 1999
------------- -------------
Net sales 100.0% 100.0%
Cost of sales 65.0 54.5
---- ----
Gross profit 35.0 45.5
Store operating expenses 24.5 27.6
Occupancy expenses 21.5 25.9
Selling, general and administrative
expenses 17.7 15.1
Depreciation and amortization 4.4 5.4
----- -----
Operating loss (33.1) (28.5)
Interest expense (2.6) (2.2)
Interest income .1 -
Other income .2 -
---- -----
Loss before income taxes (35.4) (30.7)
Income tax benefit 13.1 -
------ ----
Net loss (22.3)% (30.7)%
------- -------
Comparison of Thirteen Week Period Ended April 4, 1998 to the Thirteen Week
Period Ended April 3, 1999
Net sales increased approximately $549,000 or 10.2%, for the thirteen weeks
ended April 3, 1999 compared with the corresponding period last year. On a
comparable store basis, sales decreased by 15.4% in the first quarter.
Comparable store sales are calculated based on the stores open the entire period
for both fiscal years. At the beginning of the current year, the Company was
significantly cash-constrained due to the previously disclosed reductions in its
borrowing capacity resulting from changes in terms imposed by its prior
principal lender. As a result, the Company suffered significant stock-outs in
the earlier part of the quarter and, in turn, very poor comparable sales
results. As was previously announced, the Company recently was successful in
replacing its revolving line of credit with a new lender with considerably more
advantageous arrangements. The Company is now able to more appropriately
replenish its merchandise.
Gross profit increased approximately $811,000 or 43.2%, for the thirteen weeks
ended April 3, 1999 compared with the corresponding period last year. As a
percentage of net sales, gross profit increased to 45.5% for the thirteen weeks
ended April 3, 1999 compared with 35.0% for the corresponding period last year.
The increase in gross profit, as a percentage of sales, was due to various
factors including: improved terms with vendors, improved product mix, and a
reserve of $383,000 recorded in the first quarter of 1998 for inventory
markdowns, which significantly reduced the 1998 first quarter margin. During the
first quarter of 1999, the Company reversed approximately $51,000 of the reserve
recorded at January 2, 1999, related to markdowns taken on sales of product in
the first quarter. No additional increases to the reserve were necessary.
Store operating expenses increased approximately $316,000 or 24.0%, for the
thirteen weeks ended April 3, 1999, compared with the corresponding period last
year. An approximate $338,000 increase resulted from the operation of the stores
which were not open in the comparable period in 1998. This increase was
partially offset by a decrease in comparable store expense of approximately
$22,000. As a percentage of net sales, store operating expenses increased to
27.6% for the thirteen weeks ended April 3, 1999 compared with 24.5% 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 $381,000, or 33.1%, for the thirteen
weeks ended April 3, 1999, compared with the corresponding period last year.
Approximately $364,000 was attributable to stores which were not open for both
periods and approximately $17,000 of the increase in occupancy expenses was
attributable to comparable stores. As a percentage of net sales, overall
occupancy expenses increased to 25.9% for the thirteen weeks ended April 3,
1999, compared with 21.5% for the corresponding period last year. This increase
as a percentage of sales was primarily due to lower than anticipated sales.
Selling, general and administrative expenses decreased approximately $60,000, or
6.3%, for the thirteen weeks ended April 3, 1999, compared with the
corresponding period last year. The decrease in selling, general and
administrative expense was primarily due to the Company's ability to automate
processes and streamline functions. As a percentage of net sales, selling,
general and administrative expenses decreased to 15.1% for the first quarter of
1999, from 17.7% for the same period in 1998.
Depreciation and amortization expense increased approximately $84,000, or 35.8%,
for the thirteen weeks ended April 3, 1999, compared with the corresponding
period last year. Approximately $81,000 of this increase was the result of
depreciation of assets in new stores not open for both periods. As a percentage
of net sales, depreciation and amortization expense increased to 5.4% for the
thirteen weeks ended April 3, 1999, from 4.4% for the corresponding period in
1998. The increase was primarily due to depreciation of a greater number of
stores than in this same period the year before and the lower than anticipated
sales for the period.
Interest expense decreased approximately $3,000, for the thirteen weeks ended
April 3, 1999, compared with the corresponding period last year. This decrease
results from the elimination of the amortization of debt issuance costs related
to the revolver, as the Company wrote-off all remaining debt issuance costs
related to BankAmerica at year-end 1998, partially offset by increased interest
expense due to increased borrowings on the available line of credit and the
increased interest rate.
The Company's pretax loss, with fourteen additional stores open than in the
prior year, decreased approximately $82,000 to 30.7% of sales for the thirteen
weeks ended April 3, 1998 from 35.4% of sales for the corresponding period last
year. The Company did not record an expected income tax benefit for the quarter
ended April 3, 1999.
As a result of the foregoing, the Company recorded a net loss of approximately
$1,816,000 for the thirteen weeks ended April 3, 1999, compared with a net loss
of approximately $1,196,000 for the corresponding period last year. As a
percentage of net sales, net loss increased to 30.7% from 22.3% of sales for the
corresponding period last year.
Liquidity and Capital Resources
For the thirteen weeks ended April 3, 1999, net cash used in operating
activities was approximately $3,547,000 compared to approximately $5,514,000 for
the corresponding period last year. The Company's primary uses of cash during
the first quarter of 1999 have been for funding anticipated seasonal operating
losses and payment of merchandise vendors.
In January 1998, the Company entered into a revolving line of credit with
BankAmerica. The availability of the line, which was based on the Company's
inventory, was calculated at varying advance rates throughout the year. As of
year-end 1998, the maximum loan was reduced to $8,000,000 and the advance ratios
were reduced. Under the amended agreement, borrowings bore interest at
BankAmerica's base lending rate plus 1.75% and a commitment fee of 0.375% was
charged on the unused portion. As of April 3, 1999, there was approximately
$3,934,000 outstanding on the revolving line of credit.
In April 1999, the Company entered into a $10,000,000 revolving line of credit
agreement with Paragon Capital LLC ("Paragon") to replace the BankAmerica credit
line. Borrowings under the Paragon line are based on an advance rate percentage
of the Company's inventory, which varies throughout the year. Borrowings under
the line at May 1, 1999, were $4,850,000, and unused capacity was $1,782,000.
Interest is charged at an initial rate of Norwest Bank of Minnesota's base
lending rate plus 1.25% with a right to reduce this rate by .5% if the Company
meets certain operating targets. The initial term of the facility is five years
and is secured by certain assets of the Company, primarily inventory.
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 $2,757,000 and were used to support new store openings and for
general working capital purposes. The subordinated debentures are secured by
certain assets, primarily fixtures and equipment.
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.
Management believes that cash flow from operations with the availability under
the line, will be adequate to meet cash needs for the remainder of 1999.
Year 2000
General
The advent of the year 2000 poses certain technological challenges resulting
from a reliance in computer technologies on two digits rather than four digits
to represent the calendar year (e.g., "98" for "1998"). Computer technologies
programmed in this manner, if not corrected, could produce inaccurate or
unpredictable results or system failures in connection with the transition from
1999 to 2000, when dates will begin to have a lower two-digit number than dates
in the prior century. This problem, the so-called "Year 2000 Problem" or "Y2K
Problem," could have a material adverse effect on the Company's financial
condition, results of operations, business or business prospects because the
Company relies extensively on computer technology to manage its financial
information and serve its customers.
The Company's State of Readiness
The Company has developed a Year 2000 Action Plan (the "Plan"), specifying a
range of tasks and goals to be achieved at various dates before the year 2000.
To date, the Plan is on target and major deadlines have been met. Senior
management and the board of directors of the Company are regularly apprised of
the Company's progress, and both provide input and guidance on a regular basis.
The computer systems presently in use 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 system in use at the central office and all
store locations, so that the system should be capable of accurately processing
date related data through the transition from 1999 to 2000. The Company has
identified other systems that are in need of renovation or modification to
minimize disruptions or failures related to the Year 2000 Problem. Such systems
have either already been modified or replaced, or such upgrades or replacements
are scheduled to be completed by the third quarter of 1999.
Pursuant to the Plan, the Company has been attempting to actively monitored the
Y2K preparedness of its third party providers and servicers, utilizing various
methods for testing and verification. Due to the relatively limited number of
key suppliers, the Company could experience product delivery delays if these
vendors are not adequately prepared for the Year 2000 Problem. The Company is
discussing Year 2000 preparedness with these principal providers.
The Costs to Address the Company's Year 2000 Issues
The Company has projected remaining Y2K expenditures to be immaterial. The
Company does not anticipate that the Company's Year 2000 Action Plan will have
any material effect on its financial statements or results of operations. The
projection of the Company's Y2K costs does not include internal personnel costs,
which are not expected to be significantly greater as a result of the Year 2000
Problem, or external consulting or advisory fees, which have been and are
expected to be minimal. The Company's budget for Y2K expenditures consists
predominantly of expenditures for the upgrading or replacement of hardware and
software systems, divided approximately 50% for hardware and 50% for software.
The Company has funded, and plans to fund, its Year 2000 related expenditures
out of general operating cash flows and/or the Company's line of credit or
possible additional equipment financing.
Year 2000 Risks Facing the Company and the Company's Contingency Plans
The failure of the Company to substantially complete its Plan could result in an
interruption in or failure of certain normal business activities or operations.
Such failures could materially adversely affect the Company's results of
operations, liquidity and financial condition. Currently, the Plan is on
schedule and management believes that successful completion of the Plan should
significantly reduce the risks faced by the Company with respect to the Year
2000 Problem.
The Company believes that its most reasonably likely worst-case scenario with
respect to the Year 2000 Problem involves the potential failure of one or more
of its third party vendors to continue to provide uninterrupted service through
the changeover to the year 2000. The Company relies on a relatively small number
of critical providers; thus if any such provider fails adequately to prepare for
the changeover between 1999 and 2000, the Company could face product delivery
delays. While an evaluation of the Year 2000 preparedness of its third party
vendors has been part of the Company's Plan, the Company's ability to evaluate
is limited by the willingness of vendors to supply information and the ability
of vendors to verify the Y2K preparedness of their own systems or their
sub-providers. However, the Company does not currently anticipate that any of
its significant third party vendors will fail to provide continuing service due
to the Year 2000 Problem.
In order to reduce the risks enumerated above, the Company has begun to develop
contingency plans. In particular, if the Company receives information that any
of its critical suppliers will not be adequately prepared to meet the transition
from 1999 to 2000, the Company plans to take action to preserve the Company's
core business functions, such as purchasing merchandise earlier than it might
otherwise have done.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(A) See Exhibit Index.
(B) The Company filed a report on Form 8-K on January 13,
1999 which included a letter to stockholders of the
Company and a press release each discussing the
Company's 1998 Financial performance.
<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
May 18, 1999 By: /s/ Cheryl A. Taylor
- ------------------ ----------------------------------------
Date Cheryl A. Taylor
Vice President - Finance and Administration,
Principal Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
10.21 Loan and Security Agreement with Paragon Capital LLC
27.1 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
LOAN AND SECURITY AGREEMENT
BETWEEN
PARAGON CAPITAL LLC
AND
THE GREAT TRAIN STORE PARTNERS, L.P. ("BORROWER")
AND THE GREAT TRAIN STORE COMPANY, GTS PARTNER, INC.
AND GTS LIMITED PARTNER, INC. ("GTS CONSOLIDATED GROUP")
TABLE OF CONTENTS
ARTICLE 1 - THE REVOLVING CREDIT 2
1-1. Establishment of Revolving Credit 2
1-2. Advances in Excess of Maximum Loan Exposure 2
1-3. Risks of Value of Inventory 3
1-4. Procedures Under Revolving Credit 3
1-5. The Loan Account 6
1-6. The Master Note 7
1-7. Payment of Loan Account 7
1-8. Interest 7
1-9. Fees 8
1-10. Lender's Discretion. 10
1-11. Fees for L/C's. 11
1-12. Concerning L/C's 11
ARTICLE 2 - GRANT OF SECURITY INTEREST 14
2-1. Grant of Security Interest 14
2-2. Extent and Duration of Security Interest 14
ARTICLE 3 - DEFINITIONS 15
ARTICLE 4 - CONDITIONS PRECEDENT 15
4-1. Corporate Due Diligence. 15
4-2. Opinion 15
4-3. Additional Documents 15
4-4. Key Life Policies 15
4-5. Officers' Certificates 16
4-6. Representations and Warranties 16
4-7. Initial Minimum Excess Availability 16
4-8. No Event of Default 16
4-9. No Material Adverse Change 16
ARTICLE 5 - GENERAL REPRESENTATIONS. WARRANTIES AND COVENANTS 16
5-1. Payment and Performance of Liabilities 16
5-2. Due Organization - Corporate Authorization -
No Conflicts 16
5-3. Trade Names 18
5-4. Locations. Landlord's Consents, Waivers 18
5-5. Title to Assets 19
5-6. Indebtedness 20
5-7. Insurance Policies 20
5-8. Licenses 21
5-9. Leases 21
5-10. Requirements of Law 21
5-11. Maintain Properties 21
5-12. Pay Taxes 22
5-13. No Margin Stock 23
5-14. ERISA 23
5-15. Hazardous Materials 24
5-16. Litigation 24
5-17. Dividends or Investments 24
5-18. Loans 25
5-19. Protection of Assets 25
5-20. Line of Business 26
5-21. Affiliate Transactions 26
5-22. Executive Pay 26
5-23. Additional Assurances 27
5-24. Adequacy of Disclosure. 27
5-25. Minimum Excess Availability 28
5-26. No Material Adverse Change 28
5-27. 2000 Compliance 28
5-28. Other Covenants 28
5-29. Annual Clean Up. 28
ARTICLE 6 - USE AND COLLECTION OF COLLATERAL 28
6-1. Use of Inventory Collateral 28
6-2. Inventory Quality 29
6-3. Adjustments and Allowances 29
6-4. Validity of Accounts 29
6-5. Notification to Account Debtors 29
ARTICLE 7 - CASH MANAGEMENT 30
7-1. Depository Accounts 30
7-2. Credit Card Receipts 30
7-3. The Concentration and the Funding Accounts 31
7-4. Proceeds and Collection of Accounts 31
7-5. Payment of Liabilities 32
7-6. The Funding Account 32
ARTICLE 8 - LENDER AS BORROWER'S ATTORNEY-IN-FACT 33
8-1. Appointment as Attorney-In-Fact 33
8-2. No Obligation to Act 34
ARTICLE 9 - FINANCIAL AND OTHER REPORTING REQUIREMENTS/
FINANCIAL COVENANTS 34
9-1. Maintain Records 34
9-2. Access to Records 35
9-3. Immediate Notice to Lender 35
9-4. Borrowing Base Certificate 36
9-5. Weekly Reports 36
9-6. Monthly Reports 37
9-7. Quarterly Reports. 37
9-8. Annual Reports 37
9-9. Officers' Certificates 38
9-10. Inventories. Appraisals. and Audits 38
9-11. Additional Financial Information. 39
9-12. Financial Performance Covenants 40
9-13. Electronic Reporting 40
ARTICLE 10 - EVENTS OF DEFAULT 40
10-1. Failure to Pay Revolving Credit 40
10-2. Failure To Make Other Payments 40
10-3. Failure to Perform Covenant or Liability
(No Grace Period) 40
10-4. Failure to Perform Covenant or Liability
(Grace Period) 41
10-5. Misrepresentation 41
10-6. Acceleration of Other Debt. Breach of Lease 41
10-7. Default Under Other Agreements 41
10-8. Non-Ordinary Course Sales 41
10-9. Judgment. Restraint of Business 41
10-10. Business Failure 42
10-11. Bankruptcy 42
10-12. Insecurity 42
10-13. Default by Guarantor or Related Entity 42
10-14. Indictment - Forfeiture 42
10-15. Termination of Guaranty 43
10-16. Challenge to Loan Documents 43
10-17. Executive Management 43
10-18. Change in Control 43
10-19. Material Adverse Change 43
ARTICLE 11 - RIGHTS AND REMEDIES UPON DEFAULT 43
11-1. Rights of Enforcement 43
11-2. Sale of Collateral 44
11-3. Occupation of Business Location 45
11-4. Grant of Nonexclusive License 45
11-5. Assembly of Collateral 45
11-6. Rights and Remedies 45
ARTICLE 12 - NOTICES 46
12-1. Notice Addresses 46
12-2. Notice Given 47
ARTICLE 13 - TERM 47
13-1. Termination of Revolving Credit 47
13-2. Effect of Termination 48
13-3. Prepayment Premium 48
ARTICLE 14 - GENERAL 49
14-1. Protection of Collateral 49
14-2. Successors and Assigns 49
14-3. Severability 49
14-4. Amendments. Course of Dealing 49
14-5. Power of Attorney 50
14-6. Application of Proceeds 50
14-7. Lender's Costs and Expenses 50
14-8. Copies and Facsimiles 50
14-9. Massachusetts Law 51
14-10. Consent to Jurisdiction 51
14-11. Indemnification 51
14-12. Right of Set-Off 52
14-13. Maximum Interest Rate 52
14-14. Usury Savings Clause 52
14-15. Waivers 53
14-16. Confidentiality 54
14-17. Right to Publish Notice 54
14-18. Entities Related to Lender 54
14-19. Credit Inquiries 54
EXHIBITS
1-6 Master Note
3 Definitions
5-2 Related Entities
5-3 Trade Names.
5-4 Locations.
5-5 Encumbrances.
5-6 Indebtedness.
5-7 Insurance Policies.
5-12 Taxes
7-1 DDA's.
7-2 Credit Card Arrangements
9-4 Borrowing Base Certificate
9-12(a) Financial Performance Covenants
9-12(b) Business Plan.
<PAGE>
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT, dated as of March
___, 1999, by and between (hereinafter, "Paragon" or "Lender"), a Delaware
limited liability company with its principal executive offices at Hillsite
Office Building, 75 Second Avenue, Suite 400, Needham, Massachusetts 02494 and
THE GREAT TRAIN STORE PARTNERS, L.P., a Missouri limited partnership, with
offices at 14180 Dallas Parkway, Suite 618, Dallas, Texas, 75240 (hereinafter,
the "Borrower"), and THE GREAT TRAIN STORE COMPANY, GTS PARTNER, INC., and GTS
LIMITED PARTNER, INC., as members of the GTS Consolidated Group.
WITNESSETH:
WHEREAS, on June 7, 1996, BankOne, Texas, N.A. ("BankOne") entered into
a Loan and Security Agreement (the "BankOne Loan Agreement") with The Great
Train Store Partners, L.P. as "Borrower" and The Great Train Store Company, GTS
Partner, Inc., GTS Limited Partner, Inc., who along with Borrower, are members
of the "Debtor Group"; and
WHEREAS, the BankOne Loan Agreement as amended by the First Amendment
to Loan and Security Agreement dated as of March 19, 1997 and by the Second
Amendment to Loan and Security Agreement dated as of July 29, 1997 is referred
to herein as the "Original Loan Agreement" and all documents and agreements
executed in connection therewith are referred to as the "Original Loan
Documents"; and
WHEREAS, BankOne assigned its right, title and interest in and to the
Original Loan Agreement and the Original Loan Documents to Bank America Business
Credit, Inc. ("Bank America") by assignment dated on or about January 27, 1998,
and further amended the Original Loan Agreement by the Amended and Restated Loan
and Security Agreement dated as of January 27, 1998, Consent and Amendment No. 1
to Loan Agreement dated June 17, 1998, Consent and Amendment to Loan Agreement
No. 2 dated September 30, 1998 and Consent and Amendment to Loan Agreement No. 3
dated January 19, 1999; and
WHEREAS, Bank America has agreed to assign its right, title and
interest in and to the Original Loan Agreement and the Original Loan Documents,
as amended, and Lender has agreed to accept such assignment and continue to
provide Borrower with a working capital facility; and
WHEREAS, the provisions of this Amended and Restated Loan and Security
Agreement shall supercede the provisions of the Original Loan Documents and
conditions set forth herein; and
WHEREAS, the Borrower has requested the Lender to make available to the
Borrower a revolving line of credit for loans and letters of credit in an amount
not to exceed Ten Million ($10,000,000) Dollars, which extensions of credit the
Borrower will use for its working capital needs and general business purposes;
and
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth in this Agreement, and for good and valuable consideration,
the receipt of which is hereby acknowledged, the Borrower and the Lender hereby
agree as follows:
ARTICLE 1 - THE REVOLVING CREDIT
1-1. Establishment of Revolving Credit.
(a) The Lender hereby establishes a revolving line of credit (the
"Revolving Credit") in the Borrower's favor pursuant to which the Lender,
subject to, and in accordance with, this Agreement, shall make loans and
advances and otherwise provide financial accommodations to and for the account
of the Borrower as provided herein. The amount of the Revolving Credit shall be
determined by the Lender by reference to Availability, as determined by the
Lender in accordance with this Agreement from time to time hereafter. All loans
made by the Lender under this Agreement, and all of the Borrower's other
Liabilities to the Lender under or pursuant to this Agreement, are payable as
provided herein.
(b) The Lender hereby agrees, subject to the terms and conditions of
this Agreement, to make loans to the Borrower in an amount outstanding not to
exceed at any one time the lesser of (i) the Credit Limit, or (ii) the Borrowing
Base.
(c) Availability shall be based upon Borrowing Base Certificates
furnished as provided in Section 9-4, below.
(d) Anything to the contrary in Section 1-1(b) above notwithstanding,
Lender, in the exercise of its reasonable discretion, may reduce Advance Rates
or create Inventory Reserves, Availability Reserves or other reserves without
declaring an Event of Default if it reasonably determines that there has
occurred a Material Adverse Change.
(e) The proceeds of borrowings under the Revolving Credit shall be used
solely in accordance with the Business Plan for working capital purposes of the
Borrower and for its Capital Expenditures, all solely to the extent permitted by
this Agreement.
1-2. Advances in Excess of Maximum Loan Exposure. The Lender does not
have any obligation to make any loan or advance, or otherwise to provide any
credit for the benefit of the Borrower such that the outstanding principal
balance of the Loan Account exceeds Maximum Loan Exposure. The making of loans,
advances, and credits and the providing of financial accommodations in excess of
Maximum Loan Exposure is for the benefit of the Borrower and does not affect the
obligations of the Borrower hereunder; such loans, advances, credits, and
financial accommodations constitute Liabilities. The making of any such loans,
advances, and credits and the providing of financial accommodations, on any one
occasion such that Maximum Loan Exposure is exceeded shall not obligate the
Lender to make any such loans, credits, or advances or to provide any financial
accommodation on any other occasion nor to permit such loans, credits, or
advances to remain outstanding.
1-3. Risks of Value of Inventory. The Lender's reference to a given
asset in connection with the making of loans, credits, and advances and the
providing of financial accommodations under the Revolving Credit and/or the
monitoring of compliance with the provisions hereof shall not be deemed a
determination by the Lender relative to the actual value of the asset in
question. All risks concerning the saleability of the Borrower's Inventory are
and remain upon the Borrower. All Collateral secures the prompt, punctual, and
faithful performance of the Liabilities whether or not relied upon by the Lender
in connection with the making of loans, credits, and advances and the providing
of financial accommodations under the Revolving Credit.
1-4. Procedures Under Revolving Credit.
(a) The Borrower may request loans and advances under the Revolving
Credit, each in an amount of not less than Ten Thousand ($10,000) Dollars. Each
such request shall be in such manner as may from time to time be acceptable to
the Lender.
(b) (i) The Lender, subject to the terms and conditions of this
Agreement, will provide the Borrower with the loan so requested, if such request
is received by 1:00 P.M., Boston time on a Banking Day, by the end of business
on that Banking Day; otherwise, by the end of the then next Banking Day.
(ii) The Lender may revise the above schedule, by which loans
shall be made, from time to time by giving at least one days notice to
Borrower but shall not impose a deadline of earlier than 1:00 P.M..
(c) Provided that Maximum Loan Exposure will not be exceeded (but
subject, however, to Subsection 1-4(i), below (which deals with the effect of a
Suspension Event)), a loan or advance under the Revolving Credit so requested by
the Borrower shall be made by the transfer of the proceeds of such loan or
advance to the Funding Account or as otherwise instructed by the Borrower.
(d) A loan or advance shall be deemed to have been made under the
Revolving Credit upon:
(i) The Lender's initiation of the transfer of the proceeds of
such loan or advance in accordance with the Borrower's instructions (if
such loan or advance is of funds requested by the Borrower).
(ii) The charging of the amount of such loan to the Loan Account
(in all other circumstances).
(e) There shall not be any recourse to, nor liability of, the Lender on
account of:
(i) Any delay in the making of any loan or advance requested under
the Revolving Credit.
(ii) Any delay in the proceeds of any such loan or advance
constituting collected funds.
(iii) Any delay in the receipt, and/or any loss, of funds which
constitute a loan or advance under the Revolving Credit, the wire transfer
of which was properly initiated by the Lender in accordance with wire
instructions provided to the Lender by the Borrower.
provided however, nothing in this Section 1-4(e) excuses Lender from liability
arising from its own gross negligence or willful misconduct.
(f) The Lender may rely on any request for a loan or advance or
financial accommodation which the Lender, in good faith, believes to have been
made by a person duly authorized to act on behalf of the Borrower and may
decline to make any such requested loan or advance or to provide any such
financial accommodation pending the Lender's being furnished with such
documentation concerning that person's authority to act as may be satisfactory
to the Lender.
(g) A request by the Borrower for any financial accommodation under the
Revolving Credit or of the issuance of an L/C shall be irrevocable and shall
constitute certification by the Borrower that as of the date of such request,
each of the following is true and correct:
(i) There has been no Material Adverse Change.
(ii) The Borrower is in compliance with, and has not breached any
of, its covenants contained in this Agreement.
(iii) Each representation which is made herein or in any of the
Loan Documents is then true and complete as of and as if made on the date
of such request.
(iv) No Suspension Event is then extant.
(h) The Borrower shall immediately become indebted to the Lender for
the amount of each loan under or pursuant to this Agreement when such loan is
deemed to have been made.
(i) Upon the occurrence from time to time of any Suspension Event or an
Event of Default, the Lender may suspend the Revolving Credit immediately and
shall not be obligated, during such suspension, to make any loans or to provide
any financial accommodation hereunder.
(j) The Borrower may request that the Lender cause the issuance of
L/C's for the account of the Borrower.
(i) Each such request shall be in such manner as may from time to
time be acceptable to the Lender.
(ii) The Lender will endeavor to cause the issuance of any L/C so
requested by the Borrower, provided that the requested L/C is in form
satisfactory to the Lender and if so issued:
(A) The aggregate Stated Amount of all L/C's then
outstanding, does not exceed One Million Five Hundred Thousand
($1,500,000) Dollars.
(B) The expiry of the L/C is not later than the earlier of
thirty (30) days prior to the Maturity Date unless Borrower provides
back-up L/C from new Lender or Lender takes cash collateral to secure
L/C, and the following:
(I) Standby's: One (1) year from initial issuance.
(II) Documentary's: ninety (90) days from issuance.
(C) Maximum Loan Exposure would not be exceeded.
(iii) The Borrower shall execute such documentation to apply for
and support the issuance of an L/C as may be required by the Issuer.
(iv) There shall not be any recourse to, nor liability of, the
Lender on account of:
(A) Any delay or refusal by an Issuer to issue an L/C.
(B) Any action or inaction of an Issuer on account of or in
respect to, any L/C.
(v) The Borrower shall reimburse the Issuer, immediately upon the
drawing under any L/C, for the amount of such drawing. In the event that
the Borrower fails to so reimburse the Issuer, the Borrower immediately
shall reimburse the Lender for the amount of such drawing. To the extent
which the Borrower fails to so reimburse the Issuer or the Lender, the
Lender, without the request of the Borrower, may advance under the
Revolving Credit any amount which the Borrower is so obligated to pay to
the Lender or the Issuer, or for which the Borrower, the Issuer, or the
Lender becomes obligated on account of, or in respect to, any L/C. Such
advance shall be made whether or not a Suspension Event is then in
existence or such advance would result in Maximum Loan Exposure being
exceeded. Such action shall not constitute a waiver of the Lender's rights
under Section 1-7(b), below.
1-5. The Loan Account.
(a) An account ("Loan Account") shall be opened on the books of the
Lender in which Loan Account a record may be kept of all loans made under or
pursuant to this Agreement and of all payments thereon.
(b) The Lender may also keep a record (either in the Loan Account or
elsewhere, as the Lender may from time to time elect) of all interest, fees,
service charges, costs, expenses, and other debits owed the Lender on account of
the Liabilities and of all credits against such amounts so owed.
(c) All credits against the Liabilities shall be conditional upon final
payment to the Lender of the items giving rise to such credits. The amount of
any item credited against the Liabilities which is charged back against the
Lender for any reason or is not so paid shall be a Liability and shall be added
to the Loan Account, whether or not the item so charged back or not so paid is
returned.
(d) Except as otherwise provided herein, all fees, service charges,
costs, and expenses for which the Borrower is obligated hereunder are payable on
demand. In the determination of Availability, the Lender may deem fees, service
charges, accrued interest, and other payments or deposits as having been
advanced under the Revolving Credit if such amounts are then due and payable
inclusive of deposits for fees whether incurred at the time of deposit or as
duly accounted for in accordance with the terms set forth herein.
(e) The Lender, without the request of the Borrower, may advance under
the Revolving Credit any interest, fee, service charge, or other payment to
which the Lender is entitled from the Borrower pursuant hereto and may charge
the same to the Loan Account notwithstanding that such amount so advanced may
result in an Overadvance. Such action on the part of the Lender shall not
constitute a waiver of the Lender's rights under Section 1-7(b), below. Any
amount which is added to the principal balance of the Loan Account as provided
in this Section shall bear interest at the interest rate applicable from time to
time to the unpaid principal balance of the Loan Account.
(f) Any statement rendered by the Lender to the Borrower concerning the
Liabilities shall be considered correct and accepted by the Borrower and shall
be conclusively binding upon the Borrower unless the Borrower provides the
Lender with written objection thereto within forty (40) days from the mailing of
such statement, which written objection shall indicate, with particularity, the
reason for such objection. The Loan Account and the Lender's books and records
concerning the loan arrangement contemplated herein and the Liabilities shall be
prima facie evidence and proof of the items described therein.
1-6. The Master Note. The obligation to repay loans and advances under
the Revolving Credit, with interest as provided herein, shall be evidenced by a
note (the "Master Note") in the form of EXHIBIT 1-6, annexed hereto, executed by
the Borrower. Neither the original nor a copy of the Master Note shall be
required, however, to establish or prove any Liability. In the event that the
Master Note is ever lost, mutilated, or destroyed, the Borrower shall execute a
replacement thereof and deliver such replacement to the Lender.
1-7. Payment of Loan Account.
(a) The Borrower may repay all or any portion of the principal balance
of the Loan Account from time to time until the Termination Date.
(b) The Borrower, without notice or demand from the Lender, shall pay
the Lender that amount, from time to time, which is necessary so that the
balance of the Loan Account does not exceed Maximum Loan Exposure.
(c) The Borrower shall repay the then entire unpaid balance of the Loan
Account and all other Liabilities on the Termination Date.
1-8. Interest.
(a) The unpaid principal balance of the Loan Account shall bear
interest, until repaid (calculated based upon a 360-day year and actual days
elapsed), at the aggregate of Base plus one and one quarter (1.25%) percent per
annum, provided however, in the event that Borrower achieves for at least two
(2) consecutive quarters (commencing with the first full quarter beginning after
the date of initial funding hereunder) EBITDA which equals or exceeds eighty
five (85%) per cent of the EBITDA projected in the Business Plan, then the
unpaid principal balance of the Loan Account shall thereafter bear interest,
until repaid (calculated based upon a 360-day year and actual days elapsed), at
the aggregate of Base plus three quarters of one (.75%) percent, but in no event
shall interest be less than eight (8%) percent per annum or in excess of the
maximum rate permitted by applicable law. If at the close of any month, the
aggregate outstanding loans and Letters of Credit exceed one hundred ten (110%)
percent of the Borrower's projected loans and Letters of Credit as set forth in
Borrower's Business Plan, Borrower shall pay Lender for said month a fee of the
greater of Two Thousand ($2,000) Dollars or one and one half (1 1/2%) percent of
said excess.
(b) Following the occurrence of any Event of Default unless and until
such Event of Default is expressly waived in writing by Lender (and whether or
not the Lender exercises any of the Lender's rights on account of such Event of
Default), all loans and advances made under the Revolving Credit shall bear
interest, through the End Date, at a rate which is the aggregate of that
provided for in Section 1-8(a), above, plus three (3%) percent per annum.
(c) Accrued interest shall be payable:
(i) Monthly in arrears on the first day of the month next
following that during which such interest accrued.
(ii) On the Termination Date.
(iii) On the End Date.
1-9. Fees. Borrower shall pay to the Lender the following fees:
(a) Annual Facility Fee. On the first anniversary of the date of
execution hereof, a facility fee in an amount equal to one percent (1%) percent
of the Credit Limit, and on each subsequent anniversary a facility fee in an
amount equal to three quarters of one (.75%) percent (each of which shall be
fully earned on each anniversary of the date of execution hereof), payable in
two equal installments, the first of which shall be paid on the anniversary date
and the balance shall be paid each December 1st.
(b) Loan Maintenance Fee.
(i) On the date of execution hereof and on each anniversary of the
date of execution hereof, a loan maintenance fee equal to Sixty Seven
Thousand Five Hundred ($67,500). Such fee shall have been fully earned as
of the date hereof and as of each anniversary of the date of execution
hereof and shall be payable in twelve (12) monthly installments as follows:
1/12th of such fee shall be payable as of the date hereof and on each
anniversary of the date of execution hereof, and 1/12th of such fee shall
be payable on the same day of each month hereafter until paid in full.
(ii) During any month in which Special Purchase Advances are made
or, the Advance Rate for Standard Inventory Advances at any time exceeds
seventy (70%) percent of the Cost of Acceptable Inventory, the Loan
Maintenance Fee shall increase by an additional Five Thousand ($5,000)
Dollars per month.
(iii) During any month in which the aggregate of all advances on
any occasion exceeds One Hundred (100%) percent of the Net Retail
Liquidation Value, the Loan Maintenance Fee shall increase by an additional
Seven Thousand Five Hundred ($7,500), provided however, except as set forth
in subsection (iv) below, the Loan Maintenance Fee shall not exceed Fifteen
Thousand ($15,000) Dollars per month (iv) In any instance where reporting
as outlined in Sections 9-4 and 9-5 is received by Lender beyond the period
set forth therein, after two (2) Banking Days notice to Borrower, the
monthly loan maintenance fee for the then subject month shall be two times
the usual amount set forth herein. In the event of two (2) consecutive
months of late reporting, such month's loan maintenance fee shall increase
permanently thereafter by Five Thousand ($5,000) Dollars plus the doubled
usual amount until such time as the Borrower demonstrates two (2)
consecutive months of timely and complete reporting.
(c) Unused Line Fee. Intentionally deleted
(d) Commitment Fee. On the date of execution hereof, a commitment fee
of one and six tenths of one (1.6%) percent of the Credit Limit or one hundred
sixty thousand($160,000) Dollars, One Hundred Thousand ($100,000) Dollars of
which shall be paid on the date of initial funding hereof, and the balance of
Sixty Thousand ($60,000) Dollars shall be paid on the earlier of October 1, 1999
and the date on which the amount of advances hereunder first equals Five Million
($5,000,000) Dollars.
(e) Financial Examination, Legal Investigation, Documentation, and
Appraisal Fees. Subject to the provisions of Article 9-10, Lender's actual
charges paid or incurred for each financial analysis and examination (i.e.,
audits) of Borrower performed by personnel employed by Lender; Lender's actual
charges paid or incurred for each appraisal of the Collateral performed by
personnel employed by Lender; and, the actual charges paid or incurred by Lender
if it elects to employ the services of one or more third Persons to perform
legal investigation, documentation financial analysis and examinations (i.e.,
audits) of Borrower or to appraise the Collateral.
(f) In addition to any other right to which the Lender is then entitled
on account thereof, the Lender may assess an additional fee payable by the
Borrower on account of the accommodation, including accommodations made upon
Borrower's requests with less than seventy two (72) hours notice from time to
time, of Lender to the Borrower's request that the Lender depart or dispense
with one or more of the administrative provisions of this Agreement and/or the
Borrower's failure to comply with any of such provisions.
(i) By way of non-exclusive example, the Lender may assess a fee
on account of any of the following:
(A) The Borrower's failure to pay that amount which is
necessary so that the principal balance of the Loan Account does not
exceed Maximum Loan Exposure (as required under Section 1-7(b),
above).
(B) The providing of a loan or advance under the Revolving
Credit such that Maximum Loan Exposure would be exceeded.
(C) The providing of a same Banking Day loan requested after
the time set forth in Section 1-4(b)(i), above.
(D) The Borrower's failure to provide a financial statement
or report within the applicable time-frame provided for such report
under Article 9, below.
(ii) The inclusion of the foregoing right on the part of the
Lender to assess a fee does not constitute an obligation, on the part of
the Lender, to waive any provision of this Agreement under any
circumstances. The assessment of any such fee in any particular
circumstance shall not constitute the Lender's waiver of any breach of this
Agreement on account of which such fee was assessed nor a course of action
on which the Borrower may rely.
(g) The Borrower shall not be entitled to any credit, rebate or
repayment of any Annual Facility Fee, Loan Maintenance Fee, Commitment Fee or
other fee previously earned by the Lender pursuant to this Section
notwithstanding any termination of this Agreement or suspension or termination
of the Lender's obligation to make loans and advances hereunder.
1-10. Lender's Discretion.
(a) Each reference in the Loan Documents to the exercise of discretion
or the like by the Lender shall be to that Person's exercise of its judgment,
in good faith (which shall be rebuttably presumed), based upon that Person's
consideration of any such factor as the Lender, taking into account information
of which that Person then has actual knowledge, believes:
(i) Will or reasonably could be expected to materially affect the
value of the Collateral, the enforceability of the Lender's security and
collateral interests therein, or the amount which the Lender would likely
realize therefrom (taking into account delays which may possibly be
encountered in the Lender's realizing upon the Collateral and likely Costs
of Collection).
(ii) Indicates that any report or financial information delivered
to the Lender by or on behalf of the Borrower is incomplete, inaccurate, or
misleading in any material manner or was not prepared in accordance with
the requirements of this Agreement.
(iii) Suggests an increase in the likelihood that the Borrower
will become the subject of a bankruptcy or insolvency proceeding.
(iv) Constitutes a Suspension Event.
(b) In the exercise of such judgment, the Lender also may take into
account any of the following factors:
(i) Those included in, or tested by, the definitions of
"Acceptable Inventory", "Retail", and "Cost".
(ii) Material changes in or to the mix of the Borrower's
Inventory.
(iii) Seasonality with respect to the Borrower's Inventory and
pattern of the Borrower's retail sales versus that which was projected.
(iv) Material changes in Borrower's availability versus that which
was projected.
(v) Such other factors as the Lender reasonably determines as
having a material bearing on credit risks associated with the providing of
loans and financial accommodations to the Borrower.
(c) The burden of establishing the failure of the Lender to have acted
in a reasonable manner in such Person's exercise of discretion shall be the
Borrower's.
1-11. Fees for L/C's.
(a) Prior to the issuance of any L/C, the Borrower shall pay to the
Lender a fee for each L/C equal to the greater of (i) Four Hundred ($400)
Dollars, or (ii) fifteen (15) Basis Points per month times the Stated Amount of
that L/C.
(b) In addition to the fee to be paid as provided in Subsection
1-11(a), above, the Borrower shall pay to the Lender (or to the Issuer, if so
requested by the Lender), on demand, all issuance, processing, negotiation,
amendment, and administrative fees and other amounts charged by the Issuer on
account of, or in respect to, any L/C.
1-12. Concerning L/C's.
(a) None of the Issuer, the Issuer's correspondents, or any advising,
negotiating, or paying bank with respect to any L/C shall be responsible in any
way for:
(i) The performance by any beneficiary under any L/C of that
beneficiary's obligations to the Borrower.
(ii) The form, sufficiency, correctness, genuineness, authority of
any person signing; falsification; or the legal effect of; any documents
called for under any L/C if (with respect to the foregoing) such documents
on their face appear to be in order.
(b) The Issuer may honor, as complying with the terms of any L/C and of
any drawing thereunder, any drafts or other documents otherwise in order, but
signed or issued by an administrator, executor, conservator, trustee in
bankruptcy, debtor in possession, assignee for the benefit of creditors,
liquidator, receiver, or other legal representative of the party authorized
under such L/C to draw or issue such drafts or other documents.
(c) Unless otherwise agreed to, in the particular instance, the
Borrower hereby authorizes any Issuer to:
(i) Select an advising bank, if any.
(ii) Select a paying bank, if any.
(iii) Select a negotiating bank.
(d) All directions, correspondence, and funds transfers relating to any
L/C are at the risk of the Borrower except for losses resulting from Lender's
gross negligence or willful misconduct. The Issuer shall have discharged the
Issuer's obligations under any L/C which, or the drawing under which, includes
payment instructions, by the initiation of the method of payment called for in,
and in accordance with, such instructions (or by any other commercially
reasonable and comparable method). Neither the Lender nor the Issuer shall have
any responsibility for any inaccuracy, interruption, error, or delay in
transmission or delivery by post, telegraph or cable, or for any inaccuracy of
translation unless caused by Lender's gross negligence or willful misconduct.
(e) The Lender's and the Issuer's rights, powers, privileges and
immunities specified in or arising under this Agreement are in addition to any
heretofore or at any time hereafter otherwise created or arising, whether by
statute or rule of law or contract.
(f) Except to the extent otherwise expressly provided hereunder or
agreed to in writing by the Issuer and the Borrower, the L/C will be governed by
the Uniform Customs and Practice for Documentary Credits (1993 Revision),
International Chamber of Commerce, Publication No.500, and any subsequent
revisions thereof.
(g) If any change in any law, executive order or regulation, or any
directive of any administrative or governmental authority (whether or not having
the force of law), or in the interpretation thereof by any court or
administrative or governmental authority charged with the administration
thereof, shall either:
(i) Impose, modify or deem applicable any reserve, special deposit
or similar requirements against letters of credit heretofore or hereafter
issued by any Issuer or with respect to which the Lender or any Issuer has
an obligation to lend to fund drawings under any L/C.
(ii) Impose on any Issuer any other condition or requirements
relating to any such letters of credit; and the result of any event
referred to in Section 1-12(g)(i) or 1-12(g)(ii), above, shall be to
increase the cost to any Issuer of issuing or maintaining any L/C (which
increase in cost shall be the result of such Issuer's reasonable allocation
among that Issuer's letter of credit customers of the aggregate of such
cost increases resulting from such events), then, upon demand by the Lender
and delivery by the Lender to the Borrower of a certificate of an officer
of the subject Issuer describing such change in law, executive order,
regulation, directive, or interpretation thereof, its effect on such
Issuer, and the basis for determining such increased costs and their
allocation, the Borrower shall immediately pay to the Lender, from time to
time as specified by the Lender, such amounts as shall be sufficient to
compensate such Issuer for such increased cost. Any Issuer's determination
of costs incurred under Section 1-12(g)(i) or 1-12(g)(ii), above, and the
allocation, if any, of such costs among the Borrower and other letter of
credit customers of such Issuer, if done in good faith and made on an
equitable basis and in accordance with the officer's certificate, shall be
conclusive and binding on the Borrower.
(h) The obligations of the Borrower under this Agreement with respect
to L/C's are absolute, unconditional, and irrevocable and shall be performed
strictly in accordance with the terms hereof under all circumstances, whatsoever
including, without limitation, the following:
(i) Any lack of validity or enforceability or restriction,
restraint, or stay in the enforcement of this Agreement, any L/C, or any
other agreement or instrument relating thereto.
(ii) Any amendment or waiver of, or consent to the departure from,
any L/C.
(iii) The existence of any claim, set-off, defense, or other right
which the Borrower may have at any time against the beneficiary of any L/C.
(iv) Any honoring of a drawing under any L/C, which drawing
possibly could have been dishonored based upon a strict construction of the
terms of the L/C.
(i) The Borrower shall not present to Lender or cause the amendment of
an L/C without the certification and support of either of the following: (a)
change in delivery date; (b) Borrower's receipt of partial shipment; or (c)
change to original order reflected in OTB (open to Buy) or other information
which may be so reasonably requested by the Lender.
In no event, however, shall Lender honor any L/C presented for payment
after its expiration, as a result of discrepancies without an acceptable form of
amendment having been previously made. In all cases, in the event no payment has
been made and no cancellation previously amended, no L/C shall be removed from
the Borrower's availability until such time as thirty (30) business days beyond
expiration of said L/C.
ARTICLE 2 - GRANT OF SECURITY INTEREST
2-1. Grant of Security Interest. To secure the Borrower's prompt,
punctual, and faithful performance of all and each of the Borrower's
Liabilities, the Borrower and the GTS Consolidated Group hereby grant to the
Lender a continuing security interest in and to, and assigns to the Lender, the
following, and each item thereof, whether now owned or now due, or in which the
Borrower and each of the GTS Consolidated Group has an interest, or hereafter
acquired, arising, or to become due, or in which the Borrower and each of the
GTS Consolidated Group obtains an interest (all of which, together with any
other property in which the Lender may in the future be granted a security
interest, is referred to herein as the "Collateral"):
(a) All Inventory.
(b) All Accounts, accounts receivable, contracts, contract rights,
notes, bills, drafts, acceptances, General Intangibles, Instruments, Documents,
Document of Title, Chattel Paper, securities, security entitlements, security
accounts, Investment Property, choses in action, and all other debts,
obligations and liabilities in whatever form, owing to Borrower from any person,
firm or corporation or any other legal entity, whether now existing or hereafter
arising, now or hereafter received by or belonging or owing to Borrower, for
goods sold by it or for services rendered by it, or however otherwise same may
have been established or created, all guarantees and securities therefor, all
right, title and interest of Borrower in the merchandise or services which gave
rise thereto, including the rights of reclamation and stoppage in transit, all
rights to replevy goods, and all rights of an unpaid seller of merchandise or
services.
(c) All machinery, Equipment, Fixtures and other Goods whether now
owned or hereafter acquired by the Borrower and wherever located, all
replacements and substitutions therefor or accessions thereto and all proceeds
thereof.
(d) Leasehold Interests and rights of occupancy.
(e) Intentionally deleted.
(f) All proceeds, products, substitutions and accessions of or to all
of the foregoing in any form, including, without limitation, all proceeds,
refunds and premium rebates of credit, fire or other insurance, and also
including, without limitation, rents and profits resulting from the temporary
use of any of the foregoing.
2-2. Extent and Duration of Security Interest. This grant of a security
interest is in addition to, and supplemental of, any security interest
previously granted by the Borrower to the Lender and shall continue in full
force and effect applicable to all Liabilities until all Liabilities have been
paid and/or satisfied in full and the security interest granted herein is
specifically terminated in writing by a duly authorized officer of the Lender.
ARTICLE 3 - DEFINITIONS
All capitalized terms used in this agreement which are not otherwise
defined herein or in the UCC shall have the meanings assigned to them in EXHIBIT
3, annexed hereto.
ARTICLE 4 - CONDITIONS PRECEDENT
Precedent to the effectiveness of this Agreement, the establishment of
the Revolving Credit, and the making of the first loan under the Revolving
Credit, the documents respectively described in Sections 4-1 through and
including 4-5, each in form and substance satisfactory to the Lender shall have
been delivered to the Lender, and the conditions respectively described in
Sections 4-6 through and including 4-9, shall have been satisfied. No document
shall be deemed delivered to the Lender until received and accepted by the
Lender at its head offices in Needham, Massachusetts, and under no circumstances
will this Agreement take effect until executed and accepted by the Lender at
said head office. In the event that Lender agrees to make the initial advance or
any subsequent advance hereunder, prior to Borrower's delivery of any documents
required under this Article 4 or otherwise by this Agreement, as set forth in a
post closing items letter to identify the documents to be delivered and the due
dates for same, an additional fee, equal to the greater of one-half of one
(0.5%) percent of the then outstanding amount of the Loan Account or Five
Hundred ($500) Dollars shall be payable weekly on Thursday until such time as
all such documents are provided.
4-1. Corporate Due Diligence.
(a) A Certificate of corporate good standing issued by the Secretary of
State of Incorporation of the Borrower.
(b) Certificates of due qualification, in good standing, issued by the
Secretary(ies) of State of each State in which the nature of the Borrower's
business conducted or assets owned could require such qualification.
(c) A Certificate of the Borrower's secretary or clerk attesting to the
due adoption, continued effectiveness, and setting forth the texts of, each
corporate resolution adopted in connection with the establishment of the loan
arrangement contemplated by the Loan Documents and attesting to the true
signatures of each Person authorized as a signatory to any of the Loan
Documents.
4-2. Opinion. An opinion of counsel to the Borrower in form and
substance satisfactory to the Lender.
4-3. Additional Documents. Such additional instruments and documents as
the Lender or its counsel reasonably may require or request.
4-4. Key Life Policies. Intentionally deleted.
4-5. Officers' Certificates. Certificates executed by the President or
the Chief Financial Officer of the Borrower in his or her representative
capacity and stating that the representations and warranties made by the
Borrower to the Lender in the Loan Documents are true and complete as of the
date of such Certificate to the Knowledge of such person, and that no event has
occurred which is or which, solely with the giving of notice or passage of time
(or both) would be an Event of Default.
4-6. Representations and Warranties. Each of the representations made
by or on behalf of the Borrower in this Agreement or in any of the other Loan
Documents or in any other report, statement, document, or paper provided by and
or on behalf of the Borrower shall be true and complete in all material respects
as of the date as of which such representation or warranty was made.
4-7. Initial Minimum Excess Availability. Availability, after giving
effect to the first loans and advances to be made under the Revolving Credit;
any charges to the Loan Account made in connection with the establishment of the
credit facility contemplated hereby; and L/C's to be issued at, or immediately
subsequent to, the establishment of such Revolving Credit, is not less than
Seven Hundred Fifty Thousand ($750,000) Dollars.
4-8. No Event of Default. No event shall have occurred, or failed to
occur, which occurrence or which failure constitutes, or which, solely with the
passage of time or the giving of notice (or both) would constitute, an Event of
Default.
4-9. No Material Adverse Change. No Material Adverse Change has
occurred.
ARTICLE 5 - GENERAL REPRESENTATIONS. WARRANTIES AND COVENANTS
To induce the Lender to establish the loan arrangement contemplated
herein and to make loans and advances and to provide financial accommodations
under the Revolving Credit (each of which loans shall be deemed to have been
made in reliance thereupon) the Borrower and the GTS Consolidated Group, in
addition to all other representations, warranties, and covenants made by the
Borrower in any other Loan Document, makes those representations, warranties,
and covenants included in this Agreement.
5-1. Payment and Performance of Liabilities. The Borrower shall pay
each Liability due Lender when due (or when demanded if payable on demand) and
shall promptly, punctually, and faithfully perform each other Liability due
Lender and pay each Liability due others in accordance with its current custom
and practice. If Borrower has any dispute with any Person with respect to any
Liability, Borrower shall give Paragon notice of said dispute.
5-2. Due Organization - Corporate Authorization - No Conflicts.
(a) The Borrower and each member of the GTS Consolidated Group
presently are and shall hereafter remain in good standing as a limited
partnership or a corporation in the state in which it is organized or
incorporated and are and shall hereafter remain duly qualified and in good
standing in every other state in which, by reason of the nature or location of
the Borrower's assets or operation of the Borrower's business, such
qualification may be necessary.
(b) Each Related Entity is listed on EXHIBIT 5-2, annexed hereto. Each
Related Entity is and shall hereafter remain in good standing in the state in
which incorporated and is and shall hereafter remain duly qualified in which
other state in which, by reason of that entity's assets or the operation of such
entity's business, such qualification may be necessary. The Borrower shall
provide the Lender with prior written notice of any entity's becoming or ceasing
to be a Related Entity.
(c) The Borrower and each member of the GTS Consolidated Group have all
requisite corporate power and authority to execute and deliver all and singular
the Loan Documents to which the Borrower is a party and has and will hereafter
retain all requisite corporate power to perform all and singular the
Liabilities.
(d) The execution and delivery by the Borrower and each member of the
GTS Consolidated Group of each Loan Document to which it is a party; the
Borrower's and each member of the GTS Consolidated Group's consummation of the
transactions contemplated by such Loan Documents (including, without limitation,
the creation of security interests by the Borrower and each member of the GTS
Consolidated Group as contemplated hereby); the Borrower's performance under
those of the Loan Documents to which it is a party; the borrowings hereunder;
and the use of the proceeds thereof:
(i) Have been duly authorized by all necessary legal or corporate
action.
(ii) Do not, and will not, contravene in any material respect any
provision of any Requirement of Law or obligation of the Borrower or any
member of the GTS Consolidated Group.
(iii) Will not result in the creation or imposition of, or the
obligation to create or impose, any Encumbrance upon any assets of the
Borrower or of any of the GTS Consolidated Group pursuant to any
Requirement of Law or obligation, except pursuant to the Loan Documents.
(e) The Loan Documents have been duly executed and delivered by
Borrower and the GTS Consolidated Group and are the legal, valid and binding
obligations of the Borrower and each member of the GTS Consolidated Group,
enforceable against the Borrower and each member of the GTS Consolidated Group
in accordance with their respective terms.
5-3. Trade Names.
(a) EXHIBIT 5-3, annexed hereto, is a listing of:
(i) All names under which the Borrower ever conducted its
business.
(ii) All entities and/or persons with whom the Borrower or any
member of the GTS Consolidated Group ever consolidated or merged, or from
whom the Borrower ever acquired in a single transaction or in a series of
related transactions substantially all of such entity's or person's assets.
(b) Except (i) upon not less than twenty-one (21) days prior written
notice given the Lender, and (ii) in compliance with all other provisions of
this Agreement, the Borrower and the members of the GTS Consolidated Group will
not undertake or commit to undertake any action such that the results of that
action, if undertaken prior to the date of this Agreement, would have been
reflected on EXHIBIT 5-3.
(c) The Borrower owns and possesses, or has the right to use all
patents, industrial designs, trademarks, trade names, trade styles, brand names,
service marks, logos, copyrights, trade secrets, know-how, confidential
information, and other intellectual or proprietary property of any third Person
necessary for the Borrower's conduct of the Borrower's business.
(d) The conduct by the Borrower of the Borrower's business does not
infringe on the patents, industrial designs, trademarks, trade names, trade
styles, brand names, service marks, logos, copyrights, trade secrets, know-how,
confidential information, or other intellectual or proprietary property of any
third Person.
5-4. Locations. Landlord's Consents, Waivers.
(a) The Collateral, and the books, records, and papers of Borrower and
the members of the GTS Consolidated Group pertaining thereto, are kept and
maintained solely at the Borrower's chief executive offices as set forth in the
beginning of this Agreement and at those locations which are listed on EXHIBIT
5-4, annexed hereto, which EXHIBIT includes all service bureaus with which any
such records are maintained and the names and addresses of each of the
Borrower's landlords. Except (i) to accomplish sales of Inventory in the
ordinary course of business or (ii) to utilize such of the Collateral as is
removed from such locations in the ordinary course of business (such as motor
vehicles), the Borrower shall not remove any Collateral from said chief
executive offices or those locations listed on EXHIBIT 5-4.
(b) The Borrower shall use its best efforts to obtain and deliver to
the Lender a consent, waiver and subordination (reasonably satisfactory to the
Lender) by the landlord for:
(i) The two store locations for which Lender does not have a
consent/waiver by assignment, within ninety (90) days of the date of
execution hereof.
(c) The Lender may establish an Availability Reserve for up to sixty
(60) days rent for each of the Borrower's locations in a Landlord Lien State or
in a One Turn State.
(d) Without duplication of any Availability Reserve described above,
the Lender may establish an Availability Reserve for unpaid rent or accrued
liabilities under any lease.
(e) The Borrower will not:
(i) Execute, alter, modify, or amend any Lease, except for
Borrower's benefit and with ten (10) days' prior notice;
(ii) Commit to, or open or close any location at which the
Borrower maintains, offers for sales, or stores any of the Collateral,
provided however, Borrower may open up to one (1) new location on thirty
(30) days prior written notice to Lender, and further provided that any new
locations are approved by Borrower's Board of Directors and are consistent
with the Business Plan; and the Borrower may open more than one (1) new
location provided that such new locations are approved by Borrower's Board
of Directors, and further provided that a revised Business Plan providing
for any such new locations has been submitted to and approved by Lender.
(f) Except as otherwise disclosed on EXHIBIT 5-4, no tangible personal
property of the Borrower or any member of the GTS Consolidated Group is in the
care or custody of any third party or stored or entrusted with a bailee or other
third party and none shall hereafter be placed under such care, custody,
storage, or entrustment. Borrower shall obtain and deliver a consent, waiver and
subordination (in form reasonably satisfactory to the Lender) from each bailee
disclosed on EXHIBIT 5-4 on or prior to the date of execution hereof.
5-5. Title to Assets.
(a) The Borrower and the GTS Consolidated Group are, and shall
hereafter remain, the owners of the Collateral free and clear of all
Encumbrances with the exceptions of the following:
(i) The security interest created herein.
(ii) Those Encumbrances (if any) listed on EXHIBIT 5-5, annexed
hereto.
(b) The Borrower and the GTS Consolidated Group does not and shall not
have possession of any property on consignment to the Borrower, except as
provided in EXHIBIT 5-5(b) hereto, which Exhibit shall be updated periodically,
and any property will not be included in Acceptable Inventory, and shall be
subject to an appropriate consignment payable Reserves.
5-6. Indebtedness. The Borrower and the GTS Consolidated Group do not
and shall not hereafter have any Indebtedness with the exceptions of:
(a) Any Indebtedness to the Lender.
(b) The Indebtedness (if any) listed on EXHIBIT 5-6, annexed hereto.
(c) Capital Leases (other than those listed on EXHIBIT 5-6), provided
that Borrower's aggregate payment liability during any calendar year does not
exceed Fifty Thousand ($ 50,000) Dollars per year, provided Lender is given
prompt written notice of any Capital Lease and no lien on the Collateral arises
as a result thereof.
5-7. Insurance Policies.
(a) EXHIBIT 5-7, annexed hereto, is a schedule of all insurance
policies owned by the Borrower or under which the Borrower is the named insured.
Each of such policies is in full force and effect. Neither the issuer of any
such policy nor the Borrower is in default or violation of any such policy.
(b) The Borrower shall have and maintain at all times insurance
covering such risks, in such amounts, containing such terms, in such form, for
such periods, and written by such companies as may be reasonably satisfactory to
the Lender. The coverage reflected on EXHIBIT 5-7 presently satisfies the
foregoing requirements, it being recognized by the Borrower, however, that such
requirements may change hereafter to reflect changing circumstances. All
insurance carried by the Borrower shall provide for a minimum of twenty (20)
days' written notice of cancellation to the Lender and all such insurance which
covers the Collateral shall include an endorsement in favor of the Lender, which
endorsement shall provide that the insurance, to the extent of the Lender's
interest therein, shall not be impaired or invalidated, in whole or in part, by
reason of any act or neglect of the Borrower or by the failure of the Borrower
to comply with any warranty or condition of the policy. In the event of the
failure by the Borrower to maintain insurance as required herein, the Lender, at
its option, may obtain such insurance, provided, however, the Lender's obtaining
of such insurance shall not constitute a cure or waiver of any Event of Default
occasioned by the Borrower's failure to have maintained such insurance. The
Borrower shall furnish to the Lender certificates or other evidence satisfactory
to the Lender regarding compliance by the Borrower with the foregoing insurance
provisions.
(c) The Borrower shall advise the Lender of each claim in excess of
Fifty Thousand ($50,000) Dollars made by the Borrower under any policy of
insurance which covers the Collateral and will permit the Lender, following the
occurrence of an Event of Default and unless and until any such Event of Default
is waived in writing by Lender, at the Lender's option in each instance, to the
exclusion of the Borrower, to conduct the adjustment of each such claim (and of
all claims following the occurrence of any Suspension Event). Effective upon the
occurrence of an Event of Default, the Borrower hereby appoints the Lender as
the Borrower's attorney in fact to obtain, adjust, settle, and cancel any
insurance described in this section and to endorse in favor of the Lender any
and all drafts and other instruments with respect to such insurance. This
appointment, being coupled with an interest, is irrevocable until this Agreement
is terminated by a written instrument executed by a duly authorized officer of
the Lender. The Lender shall not be liable on account of any exercise pursuant
to said power except for any exercise in actual willful misconduct and bad
faith. The Lender may apply any proceeds of such insurance against the
Liabilities, whether or not such have matured, in such order of application as
the Lender may determine.
(d) Intentionally deleted.
5-8. Licenses. Each license, distributorship, franchise, and similar
agreement issued to, or to which the Borrower and each member of the GTS
Consolidated Group is a party is in full force and effect. No party to any such
license or agreement is in default or violation thereof. Neither Borrower nor
any member of the GTS Consolidated Group has received any notice or threat of
cancellation of any such license or agreement.
5-9. Leases. EXHIBIT 5-9, annexed hereto, is a schedule of all
presently effective Leases and Capital Leases. Each of such Leases and Capital
Leases is in full force and effect. No party to any such Lease or Capital Lease
is in default or violation of any such Lease or Capital Lease and the Borrower
has not received any notice or threat of cancellation of any such Lease or
Capital Lease. The Borrower hereby authorizes the Lender at any time and from
time to time to contact any of the Borrower's landlords in order to confirm the
Borrower's continued compliance with the terms and conditions of the Lease(s)
between the Borrower and that landlord and to discuss such issues, concerning
the Borrower's occupancy under such Lease(s), as the Lender may determine.
5-10. Requirements of Law. The Borrower and each member of the GTS
Consolidated Group are in compliance with, and shall hereafter comply with and
use its assets in compliance with, all Requirements of Law, except where
non-compliance would not have a material adverse effect. Neither the Borrower
nor the GTS Consolidated Group has received any notice of any violation of any
Requirement of Law (whether or not such violation is material), which violation
has not been cured or otherwise remedied.
5-11. Maintain Properties. The Borrower and the GTS Consolidated Group
shall:
(a) Keep the Collateral in good order and repair (ordinary reasonable
wear and tear and insured casualty excepted).
(b) Not suffer or cause the waste or destruction of any material part
of the Collateral.
(c) Not use any of the Collateral in violation of any policy of
insurance thereon.
(d) Not sell, lease, or otherwise dispose of any of the Collateral,
other than the following:
(i) The sale of Inventory in compliance with this Agreement.
(ii) The disposal of Equipment which is obsolete, worn out, or
damaged beyond repair or is determined not to be conducive to the operating
efficiency of the Borrower.
(iii) Except as otherwise provided for in this subsection (d),
subject to the turning over to the Lender of all Receipts with respect to
the same as provided herein.
5-12. Pay Taxes.
(a) The federal income tax returns of the Borrower and the GTS
Consolidated Group have not been audited by the Internal Revenue Service or are
being contested in good faith, provided that Borrower provides Lender with
notice and copies of all correspondence, pleadings and any other documents
referring to such contest, and no Encumbrance results from such contested
return. No agreement is extant which waives or extends any statute of
limitations applicable to the right of the Internal Revenue Service to assert a
deficiency or make any other claim for or in respect to federal income taxes. No
issue has been raised in any such examination which, by application of similar
principles, reasonably could be expected to result in the assertion of a
deficiency that could result in a Material Adverse Effect for any fiscal year
open for examination, assessment, or claim by the Internal Revenue Service.
(b) All returns of the Borrower and the GTS Consolidated Group for
state and local income, excise, sales, and other taxes have been audited from
time to time, and all deficiencies, assessments, and other amounts asserted as a
result of any such examinations have been fully paid or settled. No agreement is
in existence which waives or extends any statute of limitations applicable to
the right of any state taxing authority to assert a deficiency or make any other
claim for or in respect to any such state taxes. No issue has been raised in any
such examination which, by application of similar principles, reasonably could
be expected to result in the assertion of a deficiency for any fiscal year open
for examination, assessment, or claim by any state or local taxing authority.
(c) Except as disclosed on said EXHIBIT 5-12, there are no examinations
of or with respect to the Borrower and the GTS Consolidated Group presently
being conducted by the Internal Revenue Service or any state taxing authority.
(d) The Borrower and the GTS Consolidated Group have, and hereafter
shall: pay, as they become due and payable, all taxes and unemployment
contributions and other charges of any kind or nature levied, assessed or
claimed against the Borrower and the GTS Consolidated Group or the Collateral by
any person or entity whose claim could result in an Encumbrance upon any asset
of the Borrower or by any governmental authority or is contesting such taxes in
good faith so long as no Encumbrance results from such contested tax; properly
exercise any trust responsibilities imposed upon the Borrower and the GTS
Consolidated Group by reason of withholding from employees' pay; timely make all
contributions and other payments as may be required pursuant to any Employee
Benefit Plan now or hereafter established by the Borrower and the GTS
Consolidated Group; and timely file all tax and other returns and other reports
with each governmental authority to whom the Borrower and the GTS Consolidated
Group are obligated to so file.
(e) At its option, the Lender may, but shall not be obligated to, pay
any taxes, unemployment contributions, and any and all other charges levied or
assessed upon the Borrower and the GTS Consolidated Group or the Collateral by
any person or entity or governmental authority that are not being contested in
good faith by Borrower, and make any contributions or other payments on account
of the Borrower's Employee Benefit Plan as the Lender, in the Lender's
reasonable judgment, may deem necessary or desirable, to protect, maintain,
preserve, collect, or realize upon any or all of the Collateral or the value
thereof or any right or remedy pertaining thereto, provided, however, the
Lender's making of any such payment shall not constitute a cure or waiver of any
Event of Default occasioned by the Borrower's failure to have made such payment.
5-13. No Margin Stock. The Borrower and the GTS Consolidated Group are
not engaged in the business of extending credit for the purpose of purchasing or
carrying any margin stock (within the meaning of Regulations G, U, T, and X, of
the Board of Governors of the Federal Reserve System of the United States). No
part of the proceeds of any borrowing hereunder will be used at any time to
purchase or carry any such margin stock or to extend credit to others for the
purpose of purchasing or carrying any such margin stock.
5-14. ERISA. Neither the Borrower, any member of the GTS Consolidated
Group nor any ERISA Affiliate ever has or hereafter shall:
(a) Violate or fail to be in full compliance with the Borrower's
Employee Benefit Plan.
(b) Fail timely to file all reports and filings required by ERISA to be
filed by the Borrower, except Form 5500 regarding a "Premium Only Plan", which
is being replaced by a new, similar plan.
(c) Engage in any "prohibited transactions" or "reportable events"
(respectively as described in ERISA).
(d) Engage in, or commit, any act such that a tax or penalty could be
imposed on account thereof pursuant to ERISA.
(e) Accumulate any material funding deficiency within the meaning of
ERISA.
(f) Terminate any Employee Benefit Plan such that a lien could be
asserted of the Borrower on account thereof pursuant to ERISA.
(g) Be a member of, contribute to, or have any obligation under any
Employee Benefit Plan which is a multiemployer plan within the meaning of
Section 4001(a) of ERISA.
5-15. Hazardous Materials.
(a) The Borrower has never:
(i) Been legally responsible for any release or threat of release
of any Hazardous Material.
(ii) Received notification of any release or threat of release of
any Hazardous Material from any site or vessel occupied or operated by the
Borrower and/or of the incurrence of any expense or loss in connection with
the assessment, containment, or removal of any release or threat of release
of any Hazardous Material from any such site or vessel.
(b) The Borrower shall:
(i) Dispose of any Hazardous Material only in compliance with all
Environmental Laws.
(ii) Not store on any site or vessel occupied or operated by the
Borrower and not transport or arrange for the transport of any Hazardous
Material, except if such storage or transport is in the ordinary course of
the Borrower's business and is in compliance with all Environmental Laws.
(c) The Borrower shall provide the Lender with written notice upon the
Borrower's obtaining knowledge of any incurrence of any expense or loss by any
governmental authority or other Person in connection with the assessment,
containment, or removal of any Hazardous Material, for which expense or loss the
Borrower may be liable.
5-16. Litigation. Except as set forth on EXHIBIT 5-16, there is not
presently pending or threatened by or against the Borrower and the GTS
Consolidated Group any suit, action, proceeding, or investigation which, if
determined adversely to the Borrower and the GTS Consolidated Group, would
result in a Material Adverse Change upon the Borrower's financial condition or
ability to conduct its business as such business is presently conducted or is
contemplated to be conducted in the foreseeable future.
5-17. Dividends or Investments. The Borrower and the GTS Consolidated
Group shall not, without Lender's approval, which shall not be unreasonably
withheld, if any of the following is in accordance with the Business Plan:
(a) Pay any cash dividend or make any other distribution in respect of
any class of the Borrower's capital stock.
(b) Own, redeem, retire, purchase, or acquire any of the Borrower's
capital stock.
(c) Invest in or purchase any stock or securities or rights to purchase
any such stock or securities, of any corporation or other entity.
(d) Merge or consolidate or be merged or consolidated with or into any
other corporation or other entity.
(e) Consolidate any of the Borrower's operations with those of any
other corporation or other entity.
(f) Organize or create any Related Entity.
(g) Subordinate any debts or obligations owed to the Borrower by any
third party to any other debts owed by such third party to any other Person.
5-18. Loans. None of the Borrowers nor the GTS Consolidated Group shall
make any loans or advances to, nor acquire the Indebtedness of, any Person,
provided, however, the foregoing does not prohibit any of the following:
(a) Advance payments made to the Borrower's suppliers in the ordinary
course.
(b) Advances to the Borrower's officers, employees, and salespersons
with respect to reasonable expenses to be incurred by such officers, employees,
and salespersons for the benefit of the Borrower, which expenses are properly
substantiated by the person seeking such advance and properly reimbursable by
the Borrower.
5-19. Protection of Assets. The Lender, in the Lender's discretion, and
from time to time, may discharge any tax or Encumbrance on any of the
Collateral, or take any other action that the Lender may deem necessary or
desirable to repair, insure, maintain, preserve, collect, or realize upon any of
the Collateral. The Lender shall not have any obligation to undertake any of the
foregoing and shall have no liability on account of any action so undertaken
except where there is a specific finding in a judicial proceeding (in which the
Lender has had an opportunity to be heard), from which finding no further appeal
is available, that the Lender had acted in actual bad faith or in a grossly
negligent manner. The Borrower shall pay to the Lender, on demand, or the
Lender, in its discretion, may add to the Loan Account, all amounts paid or
incurred by the Lender pursuant to this section. The obligation of the Borrower
to pay such amounts is a Liability.
5-20. Line of Business. The Borrower and the GTS Consolidated Group
shall not engage in any business other than the business in which it is
currently engaged or a business reasonably related thereto.
5-21. Affiliate Transactions. The Borrower and the GTS Consolidated
Group shall not make any payment, nor give any value to any Related Entity
except for goods and services actually purchased by the Borrower from, or sold
by the Borrower to, such Related Entity for a price which shall:
(a) Be competitive and fully deductible as an "ordinary and necessary
business expense" and/or fully depreciable under the Internal Revenue Code of
1986 and the Treasury Regulations, each as amended.
(b) Not differ materially from that which would have been charged in an
arms length transaction.
except for transfers from Borrower to any of the members of the GTS Consolidated
Group which are consistent with historical practices, and are reflected in the
Business Plan.
5-22. Executive Pay.
(a) The only Executive Officers of the Borrower, at the execution of
this Agreement, are those individuals referenced in the definition of "Executive
Officers".
(b) Prior to the execution of this Agreement, the Borrower furnished
the Lender with copies of all written Executive Agreements and outlines of the
salient features of all unwritten Executive Agreements (as amended to date) then
extant. There are no unwritten agreements or understandings between the Borrower
and any Executive Officer which relate to Executive Pay, written disclosure of
which has not been made to the Lender.
(c) The Borrower will not:
(i) Enter into any Executive Agreement not existing at the
execution of this Agreement.
(ii) Alter, amend, supplement, or otherwise change any Executive
Agreement.
(iii) Pay, provide, or facilitate any Executive Pay other than as
provided in an Executive Agreement or, if not covered by an Executive
Agreement, as permitted pursuant to Section 5-21, above, provided however,
Borrower may give employees raises, stock options and other compensation in
the ordinary course, provided compensation raises are reasonably consistent
in the aggregate with the Business Plan and may increase James Levi's
salary by not more than twenty two (22%) percent per annum.
5-23. Additional Assurances.
(a) The Borrower and the GTS Consolidated Group are not the owners of,
nor have they any interest in, any property or asset which, immediately upon the
satisfaction of the conditions precedent to the effectiveness of the credit
facility contemplated hereby (Article 4) will not be subject to a perfected
security interest in favor of the Lender (subject only to those Encumbrances (if
any) described on EXHIBIT 5-5, annexed hereto) to secure the Liabilities.
(b) The Borrower and the GTS Consolidated Group shall not hereafter
acquire any asset or any interest in property which is not, immediately upon
such acquisition, subject to such a perfected security interest in favor of the
Lender to secure the Liabilities (subject only to Encumbrances (if any)
permitted pursuant to Section 5-5, above).
(c) The Borrower and the GTS Consolidated Group shall execute and
deliver to the Lender such instruments, documents, and papers, and shall do all
such things from time to time hereafter as the Lender may reasonably request to
carry into effect the provisions and intent of this Agreement; to protect and
perfect the Lender's security interests in the Collateral; and to comply with
all applicable statutes and laws, and facilitate the collection of the
Receivables Collateral. The Borrower and the GTS Consolidated Group shall
execute all such instruments as may be reasonably required by the Lender with
respect to the recordation and/or perfection of the security interests created
herein.
(d) A carbon, photographic, or other reproduction of this Agreement or
of any financing statement or other instrument executed pursuant to this Section
5-23 shall be sufficient for filing to perfect the security interests granted
herein.
5-24. Adequacy of Disclosure.
(a) All financial statements furnished to the Lender by the Borrower
and the GTS Consolidated Group have been prepared in accordance with GAAP
consistently applied and present fairly in all material respects the condition
of the Borrower at the date(s) thereof and the results of operations and cash
flows for the period(s) covered. There has been no Material Adverse Change in
the financial condition, results of operations, or cash flows of the Borrower
since the date(s) of such financial statements, other than changes in the
ordinary course of business, which changes have not been materially adverse,
either singularly or in the aggregate.
(b) The Borrower and the GTS Consolidated Group do not have any
contingent obligations or obligation under any Lease or Capital lease which is
not noted in the Borrower's and the GTS Consolidated Group's financial
statements furnished to the Lender prior to the execution of this Agreement. (c)
No document, instrument, agreement, or paper now or hereafter given the Lender
by or on behalf of the Borrower or any guarantor of the Liabilities in
connection with the execution of this Agreement by the Lender contains or will
contain any untrue statement of a material fact or omits or will omit to state a
material fact necessary in order to make the statements therein not misleading.
There is no fact known to the Borrower and the GTS Consolidated Group which has,
or which, in the foreseeable future is believed by Borrower that it could have,
a material adverse effect on the financial condition of the Borrower or any such
guarantor which has not been disclosed in writing to the Lender.
5-25. Minimum Excess Availability. The Borrower shall maintain excess
availability as set forth in the definition of Standard Inventory Advances set
forth in Exhibit 3.
5-26. No Material Adverse Change. There has not been a Material Adverse
Change.
5-27. 2000 Compliance.
(a) On the basis of an inventory, review and assessment currently being
undertaken by Borrower of Borrower's computer applications utilized by such
Borrower or contained in products produced or sold by Borrower, Borrower's
management is of the considered view that Borrower and its products, will be
Year 2000 Compliant before June 30, 1999.
(b) Borrower (i) is undertaking a detailed inventory, review and
assessment of all areas within its business and operations that could be
adversely affected by the failure of Borrower or its products to be Year 2000
Compliant on a timely basis; (ii) is developing a detail plan and timeline for
becoming Year 2000 Compliant on a timely basis; and (iii) to date, is
implementing that plan in accordance with that timetable in all respects, and
has appointed a Director of Information Services to oversee such implementation.
Borrower anticipates that it will be Year 2000 Compliant on a timely basis.
5-28. Other Covenants. The Borrower and the GTS Consolidated Group
shall not indirectly do or cause to be done any act which, if done directly by
the Borrower or any member of the GTS Consolidated Group, would breach any
covenant contained in this Agreement.
5-29. Annual Clean Up. The balance of the Loan Account shall be zero
($0) for at least five (5) consecutive days in December or January.
ARTICLE 6 - USE AND COLLECTION OF COLLATERAL
6-1. Use of Inventory Collateral.
(a) The Borrower shall not engage in any sale of the Inventory other
than for fair consideration in the conduct of the Borrower's business in the
ordinary course and shall not engage in sales or other dispositions to
creditors; sales or other dispositions in bulk except slow moving inventory sold
or exchanged in lots in the ordinary course of business for up to aggregate
consideration of Fifty Thousand ($50,000) Dollars per calendar year, sales in
excess of such aggregate, subject to Lender's prior written consent; or any use
of any of the Inventory in breach of any provision of this Agreement.
(b) No sale of Inventory shall be on consignment, approval, or under
any other circumstances such that, with the exception of the Borrower's
customary return policy applicable to the return of inventory purchased by the
Borrower's retail customers in the ordinary course, such Inventory may be
returned to the Borrower without the consent of the Lender.
6-2. Inventory Quality. All Acceptable Inventory now owned or hereafter
acquired by the Borrower is and will be of good and merchantable quality and
free from defects (other than defects within customary trade tolerances).
6-3. Adjustments and Allowances. The Borrower may grant such allowances
or other adjustments to the Borrower's Account Debtors (exclusive of extending
the time for payment of any Account or Account Receivable, which shall not be
done without first obtaining the Lender's prior written consent in each
instance) as the Borrower may reasonably deem to accord with sound business
practice, provided, however, the authority granted the Borrower pursuant to this
Section 6-3 may be limited or terminated by the Lender at any time in the
Lender's discretion.
6-4. Validity of Accounts.
(a) The amount of each Account shown on the books, records, and
invoices of the Borrower represented as owing by each Account Debtor is and will
be the correct amount actually owing by such Account Debtor and shall have been
fully earned by performance by the Borrower.
(b) The Borrower has no knowledge of any impairment of the validity or
collectibility of any of the Accounts and shall notify the Lender of any such
fact immediately after Borrower becomes aware of any such impairment.
(c) The Borrower shall not post any bond to secure the Borrower's
performance under any agreement to which the Borrower is a party nor cause any
surety, guarantor, or other third party obligee to become liable to perform any
obligation of the Borrower (other than to the Lender) in the event of the
Borrower's failure so to perform.
6-5. Notification to Account Debtors. The Lender shall have the right
at any time (upon the occurrence of and unless and until any such Event of
Default is named in writing by Lender), to notify any of the Borrower's Account
Debtors to make payment directly to the Lender and to collect all amounts due on
account of the Collateral.
ARTICLE 7 - CASH MANAGEMENT
7-1. Depository Accounts.
(a) Annexed hereto as EXHIBIT 7-1 is a Schedule of all present DDA's,
which Schedule includes, with respect to each depository (i) the name and
address of that depository; (ii) the account number(s) of the account(s)
maintained with such depository; (iii) a contact person at such depository; and
(iv) the telephone number of the contact person.
(b) The Borrower shall deliver to the Lender, as a condition to the
effectiveness of this Agreement:
(i) Proof of the mailing, to each depository institution with
which any DDA is maintained (other than the Funding Account or any Local
DDA) of notification (in form satisfactory to the Lender) of the Lender's
interest in such DDA.
(ii) An agreement (in form satisfactory to the Lender ) with any
depository institution at which a Central Account is maintained.
(c) The Borrower will not establish any DDA hereafter (other than a
Local DDA) unless the Borrower, contemporaneous with such establishment, the
Borrower delivers to the Lender an agreement (in form satisfactory to the
Lender) executed on behalf of the depository with which such DDA is being
established.
7-2. Credit Card Receipts.
(a) Annexed hereto as EXHIBIT 7-2, is a Schedule which describes all
Credit Card Processors and arrangements to which the Borrower is a party with
respect to the payment to the Borrower of the proceeds of all credit card
charges for sales by the Borrower.
(b) The Borrower shall deliver to the Lender, as a condition to the
effectiveness of this Agreement, proof of the mailing to each of the Credit Card
Processors in form satisfactory to the Lender, which notice provides that
payment of all credit card charges submitted by the Borrower to that Credit Card
Processor and any other amount payable to the Borrower by such Credit Card
Processor shall be directed to the Central Account. If requested by Lender,
Borrower shall obtain and deliver to Lender the acknowledgment and consent of
any Credit Card Processor to the terms of such notice. The Borrower shall not
change such direction or designation except upon and with the prior written
consent of the Lender.
7-3. The Concentration and the Funding Accounts.
(a) The following checking accounts have been or will be established
(and are so referred to herein):
(i) The Concentration Account: Established by the Lender with The
Chase Manhattan Bank, N.A.
(ii) The Funding Account: Established by the Borrower with Bank
One-Texas.
(iii) The Central Account: Established by the Borrower with Bank
One-Texas.
(b) The contents of the Central Account constitutes Collateral and
Proceeds of Collateral.
(c) The Borrower:
(i) Contemporaneous with the execution of this Agreement, shall
provide the Lender with such agreement of the depository with which the
Central Account is maintained as may be satisfactory to the Lender.
(ii) Shall not establish any Central Account hereafter except upon
not less than thirty (30) days prior written notice to the Lender and the
delivery to the Lender of a similar such agreement.
(d) The Borrower shall pay all fees and charges of, and maintain such
impressed balances as may be required by the Lender or by any bank in which any
account is opened as required hereby (even if such account is opened by the
Lender).
7-4. Proceeds and Collection of Accounts.
(a) All Receipts constitute Collateral and proceeds of Collateral and
shall be held in trust by the Borrower for the Lender; shall not be commingled
with any of the Borrower's other funds; and shall be deposited and/or
transferred only to the Central Account, provided however, the Borrower may
maintain a cash balance not to exceed one thousand ($1,000) dollars per store as
"till cash".
(b) The Borrower shall cause the ACH or wire transfer to the Central
Account, no less frequently than two (2) times per week on Monday and Thursday,
except after the occurrence of a Suspension Event in which case such transfer
shall be daily (and whether or not there is then an outstanding balance in the
Loan Account) of:
(i) The then contents of each DDA (other than (A) any Local DDA
and (B) the Funding Account), each such transfer to be net of any minimum
balance, not to exceed Seven Hundred Fifty ($750) Dollars, as may be
required to be maintained in the subject DDA by the bank at which such DDA
is maintained.
(ii) The proceeds of all credit card charges not otherwise
provided for pursuant hereto.
At the request of Lender, telephone advice (confirmed by written notice) shall
be provided to the Lender on each Banking Day on which any such transfer is
made.
(c) Whether or not any Liabilities are then outstanding, the Borrower
shall cause the ACH or wire transfer to the Concentration Account, no less
frequently, prior to the occurrence of an Event of Default, than twice per week,
otherwise daily, of the entire previous day's closing collected balance of the
Central Account.
(d) In the event that, notwithstanding the provisions of this Section
7-4, the Borrower receives or otherwise has dominion and control of any
Receipts, or any proceeds or collections of any Collateral, such Receipts,
proceeds, and collections shall be held in trust by the Borrower for the Lender
and shall not be commingled with any of the Borrower's other funds or deposited
in any account of the Borrower other than as instructed by the Lender.
7-5. Payment of Liabilities.
(a) On each Banking Day, the Lender shall apply upon receipt by Lender,
towards the Liabilities, the then collected balance of the Central Account (net
of fees charged, and of such impressed balances as may be required by the bank
at which the Central Account is maintained), provided, however, for purposes of
the calculation of interest on the unpaid principal balance of the Loan Account,
such payment shall be deemed to have been made one (1) Banking Day after such
transfer.
(b) The Lender shall transfer to the Funding Account any surplus in
excess of the Liabilities in the Concentration Account (attributable to
Borrower) remaining after the application towards the Liabilities referred to in
Section 7-5(a), above (less those amounts which are to be netted out, as
provided therein) provided, however, in the event that both (i) an Event of
Default has occurred and (ii) one or more L/C's are then outstanding, the Lender
may establish a funded reserve of up to one hundred ten (110%) percent of the
aggregate Stated Amounts of such L/C's.
7-6. The Funding Account. Except as otherwise specifically provided in,
or permitted by, this Agreement, all checks shall be drawn by the Borrower upon,
and other disbursements made by the Borrower solely from, the Funding Account.
ARTICLE 8 - LENDER AS BORROWER'S ATTORNEY-IN-FACT
8-1. Appointment as Attorney-In-Fact. The Borrower hereby irrevocably
constitutes and appoints the Lender, effective after the occurrence of an Event
of Default, unless and until any such Event of Default is expressly waived in
writing by Lender, except with respect to the power of attorney granted in
subsection 8-1(h) hereof which is effective as of the date hereof, as the
Borrower's true and lawful attorney, with full power of substitution, to convert
the Collateral into cash at the sole risk, cost, and expense of the Borrower,
but for the sole benefit of the Lender. The rights and powers granted the Lender
by this appointment include but are not limited to the right and power to:
(a) Prosecute, defend, compromise, or release any action relating to
the Collateral.
(b) Sign change of address forms to change the address to which the
Borrower's mail is to be sent to such address as the Lender shall designate;
receive and open the Borrower's mail; remove any Receivables Collateral and
Proceeds of Collateral therefrom and turn over the balance of such mail either
to the Borrower or to any trustee in bankruptcy, receiver, assignee for the
benefit of creditors of the Borrower, or other legal representative of the
Borrower whom the Lender determines to be the appropriate person to whom to so
turn over such mail.
(c) Endorse the name of the Borrower in favor of the Lender upon any
and all checks, drafts, notes, acceptances, or other items or instruments; sign
and endorse the name of the Borrower on, and receive as secured party, any of
the Collateral, any invoices, schedules of Collateral, freight or express
receipts, or bills of lading, storage receipts, warehouse receipts, or other
documents of title respectively relating to the Collateral.
(d) Sign the name of the Borrower on any notice to the Borrower's
Account Debtors or verification of the Receivables Collateral; sign the
Borrower's name on any Proof of Claim in Bankruptcy against Account Debtors, and
on notices of lien, claims of mechanic's liens, or assignments or releases of
mechanic's liens securing the Accounts.
(e) Take all such action as may be necessary to obtain the payment of
any letter of credit and/or banker's acceptance of which the Borrower is a
beneficiary.
(f) Repair, manufacture, assemble, complete, package, deliver, alter or
supply goods, if any, necessary to fulfill in whole or in part the purchase
order of any customer of the Borrower.
(g) Use, license or transfer any or all General Intangibles of the
Borrower.
(h) Sign and file or record any financing or other statements in order
to perfect or protect the Lender's security interest in the Collateral. 8-2. No
Obligation to Act. The Lender shall not be obligated to do any of the acts or to
exercise any of the powers authorized by Section 8-1 herein, but if the Lender
elects to do any such act or to exercise any of such powers, it shall not be
accountable for more than it actually receives as a result of such exercise of
power, and shall not be responsible to the Borrower for any act or omission to
act except for any act or omission to act as to which there is a final
determination made in a judicial proceeding (in which proceeding the Lender has
had an opportunity to be heard) which determination includes a specific finding
that the subject act or omission to act had been grossly negligent or in actual
bad faith.
ARTICLE 9 - FINANCIAL AND OTHER REPORTING REQUIREMENTS/FINANCIAL COVENANTS
9-1. Maintain Records. The Borrower shall:
(a) At all times, keep proper books of account, in which full, true,
and accurate entries shall be made of all of the Borrower's transactions, all in
accordance with GAAP applied consistently with prior periods to fairly reflect
the financial condition of the Borrower at the close of, and its results of
operations for, the periods in question.
(b) Timely provide the Lender with those financial reports, statements,
and schedules required by this Article 9 or otherwise, each of which reports,
statements and schedules shall be prepared, to the extent applicable, in
accordance with GAAP applied consistently with prior periods to fairly reflect
the financial condition of the Borrower at the close of, and its results of
operations for, the period(s) covered therein.
(c) At all times, keep accurate current records of the Collateral
including, without limitation, accurate current stock, cost, and sales records
of its Inventory, accurately and sufficiently itemizing and describing the
kinds, types, and quantities of Inventory and the cost and selling prices
thereof, consistent with Borrower's historical practices.
(d) At all times, retain independent certified public accountants who
are reasonably satisfactory to the Lender and instruct such accountants to fully
cooperate with, and be available to, the Lender to discuss the Borrower's
financial performance, financial condition, operating results, controls, and
such other matters, within the scope of the retention of such accountants, as
may be raised by the Lender.
(e) Not change the Borrower's fiscal year.
(f) Not change the Borrower's taxpayer identification number.
9-2. Access to Records.
(a) The Borrower shall accord the Lender and the Lender's
representatives with access from time to time as the Lender and such
representatives may reasonably require to all properties owned by or over which
the Borrower has control. The Lender and the Lender's representatives shall have
the right, and the Borrower will permit the Lender and such representatives from
time to time as the Lender and such representatives may request, to examine,
inspect, copy, and make extracts from any and all of the Borrower's books,
records, electronically stored data, papers, and files. The Borrower shall make
all of the Borrower's copying facilities available to the Lender.
(b) The Borrower hereby authorizes the Lender and the Lender's
representatives to:
(i) Inspect, copy, duplicate, review, cause to be reduced to hard
copy, run off, draw off, and otherwise use any and all computer or
electronically stored information or data which relates to the Borrower, or
any service bureau, contractor, accountant, or other person, and directs
any such service bureau, contractor, accountant, or other person fully to
cooperate with the Lender and the Lender's representatives with respect
thereto.
(ii) Verify at any time the Collateral or any portion thereof,
including verification with Account Debtors, and/or with the Borrower's
computer billing companies, collection agencies, and accountants and to
sign the name of the Borrower on any notice to the Borrower's Account
Debtors or verification of the Collateral.
9-3. Immediate Notice to Lender.
(a) The Borrower shall provide the Lender with written notice promptly,
but in no event more than one (1) Banking Day after obtaining knowledge of the
occurrence of any of the following events, which written notice shall be with
reasonable particularity as to the facts and circumstances in respect of which
such notice is being given:
(i) Any change in the Borrower's Executive Officers, officers,
directors, controllers or key employees.
(ii) The completion of any physical count of the Borrower's
Inventory.
(iii) Any ceasing of the Borrower's making of payment, in the
ordinary course, to any of its creditors (including the ceasing of the
making of such payments on account of a dispute with the subject creditor).
(iv) Any failure by the Borrower to pay rent at any of the
Borrower's locations, which failure continues for more than three (3) days
following the day on which such rent first came due. If Borrower has any
dispute with any Landlord with respect to rent payable or other matters,
Borrower shall give Lender written notice of said dispute.
(v) Any failure by Borrower to pay trade liabilities or other
expense liabilities in accordance with their past business practices.
(vi) Any material change in the business, operations, or financial
affairs of the Borrower.
(vii) The occurrence of any Suspension Event.
(viii) Any intention on the part of the Borrower to discharge the
Borrower's present independent accountants or any withdrawal or resignation
by such independent accountants from their acting in such capacity (as to
which, see Subsection 9-1(d)).
(viii) Any litigation which, if determined adversely to the
Borrower, might have a material adverse effect on the financial condition
of the Borrower.
(b) The Borrower shall:
(i) Provide the Lender, when so distributed, with copies of any
materials distributed to the shareholders of the Borrower (qua such
shareholders).
(ii) Add the Lender as an addressee on all mailing lists
maintained by or for the Borrower.
(iii) At the request of the Lender, from time to time, provide the
Lender with copies of all advertising (including copies of all print
advertising and duplicate tapes of all video and radio such advertising).
(iv) Provide the Lender, when received by the Borrower, with a
copy of any management letter or similar communications from any accountant
of the Borrower.
9-4. Borrowing Base Certificate. The Borrower shall provide the Lender,
daily, with a Borrowing Base Certificate (in the form of EXHIBIT 9-4 annexed
hereto, as such form may be revised from time to time by the Lender). Such
Certificate may be sent to the Lender by facsimile transmission, provided that
the original thereof is forwarded to the Lender on the date of such transmission
at their request. No adjustments to the Borrowing Base Certificate may be made
without support documentation and such other documentation as may be requested
by Lender from time to time.
9-5. Weekly Reports. Weekly, not later than Wednesday for the
immediately preceding fiscal week:
SEE EXHIBIT R
In the event that Availability equals Two Hundred Fifty Thousand
($250,000) Dollars or less for seven (7) consecutive days, then Borrower shall
provide Lender with weekly cash flow reports in form and content satisfactory to
Lender.
9-6. Monthly Reports.
(a) Monthly, the Borrower shall provide the Lender with original
counterparts of (each in such form as the Lender from time to time may specify):
(i) Within fifteen (15) days of the end of the previous month:
SEE EXHIBIT R
(ii) Within thirty (30) days of the end of the previous month:
SEE EXHIBIT R
(b) For purposes of Section 9-6(a)(i), above, the first "previous
month" in respect of which the items required by that Section shall be provided
shall be March, 1999 and for purposes of Section 9-6(a)(ii), above, the first
"previous month" in respect of which the items required by that Section shall be
provided shall be March, 1999. For purposes of this section, reports for the
months of December 1998, January 1999, and February 1999 shall be due no later
than thirty (30) days after the execution of this Agreement.
9-7. Quarterly Reports. Quarterly, within forty-five (45) days
following the end of each of the Borrower's first three fiscal quarters, the
Borrower shall provide the Lender with an original counterpart of a management
prepared financial statement of the Borrower for the period from the beginning
of the Borrower's then current fiscal year through the end of the subject
quarter, with comparative information for the same period of the previous fiscal
year, which statement shall include, at a minimum, a balance sheet, income
statement (on a store specific and on a "consolidated" basis), statement of
charges in shareholders' equity, and cash flows and comparisons for the
corresponding quarter of the then immediately previous year, as well as to the
Business Plan.
9-8. Annual Reports
(a) In addition to the monthly reports required under Article 9-6,
annually, within ninety (90) days following the end of the Borrower's fiscal
year, the Borrower shall furnish the Lender with an original signed counterpart
of the Borrower's annual financial statement, which statement shall have been
prepared by, and bearing the unqualified opinion of, the Borrower's independent
certified public accountants (i.e. said statement shall be "certified" by such
accountants). Such annual statement shall include, at a minimum (with
comparative information for the then prior fiscal year) a balance sheet, income
statement, statement of changes in shareholders' equity, and cash flows.
(b) If requested by Lender, each annual statement shall be accompanied
by such accountant's certificate indicating that to the best knowledge of such
accountant, no event has occurred which is or which, solely with the passage of
time or the giving of notice (or both) would be, an Event of Default.
(c) Borrower shall provide interim draft annual financial statements
within sixty (60) days of each year end.
9-9. Officers' Certificates. The Borrower shall cause the Borrower's
President or Chief Financial Officer respectively to provide such Person's
Certificate with those monthly, quarterly, and annual statements to be furnished
pursuant to this Agreement, which Certificate shall:
(a) Indicate, to the best of his or her knowledge, that the subject
statement was prepared in accordance with GAAP consistently applied, and
presents fairly the financial condition of the Borrower at the close of, and the
results of the Borrower's operations and cash flows for, the period(s) covered,
subject, however (with the exception of the Certificate which accompanies such
annual statement) to usual year end adjustments.
(b) Indicate, to the best of his or her knowledge, either that (i) no
Suspension Event has occurred or (ii) if such an event has occurred, its nature
(in reasonable detail) and the steps (if any) being taken or contemplated by the
Borrower to be taken on account thereof.
(c) Include, to the best of his or her knowledge, calculations
concerning the Borrower's compliance (or failure to comply) at the date of the
subject statement with each of the financial performance covenants included in
Section 9-12, below.
(d) Indicate, to the best of his or her Knowledge, that all taxes
(broken down by type and taxing authority to the extent not paid) have or have
not been paid.
(e) Indicate, to the best of his or her Knowledge, that all rent and
additional rent (broken down by store location to the extent not paid) due
pursuant to any store lease have or have not been paid.
9-10. Inventories. Appraisals. and Audits.
(a) The Lender, at the expense of the Borrower, may participate in
and/or observe each physical count and/or inventory of so much of the Collateral
as consists of Inventory which is undertaken on behalf of the Borrower, subject
to a maximum of Seven Hundred Fifty ($750) Dollars per day per person plus out
of pocket expenses.
(b) Upon the Lender's request from time to time, the Borrower shall
obtain, or shall permit the Lender to obtain (in all events, at the Borrower's
expense) financial or SKU based physical counts and/or inventories of the
Collateral, conducted by such inventory takers as are satisfactory to the Lender
and following such methodology as may be required by the Lender, each of which
physical counts and/or financial or SKU based inventories shall be observed by
the Borrower's accountants. The Lender may require the Borrower to conduct two
(2) such counts and/or inventories during each twelve (12) month period during
which this Agreement is in effect, but in its discretion, may undertake
additional such counts or inventories during such period. The draft or unaudited
results of all inventories or counts shall be furnished to Lender within five
(5) business days of the Borrower's receipt, but in no event less than ten (10)
days after the taking of such inventories or counts.
(c) Upon the Lender's request from time to time, the Borrower shall
permit the Lender to obtain appraisals (in all events, at the Borrower's
expense) conducted by such appraisers as are satisfactory to the Lender.
(d) The Lender contemplates conducting three (3) commercial finance
audits (in each event, at the Borrower's expense) of the Borrower's books and
records during any twelve (12) month period during which this Agreement is in
effect, but in its discretion, may undertake additional such audits during such
period, subject to a maximum of seven hundred fifty ($750) dollars per day per
person, plus out of pocket expenses.
(e) The Lender contemplates conducting on a quarterly basis, (in all
events, at the Borrower's expense) "mystery shopping" (so-called) visits, on
notice to Borrower, to all or any of the Borrower's business premises. The
Lender shall provide the Borrower with a copy of any non-company confidential
results of such mystery shopping upon Borrower's written request, subject to a
maximum of Fifty ($50) Dollars per day. In the event that Lender does not
conduct mystery shopping, upon request of Lender, Borrower shall have the
results of any "mystery shopping" conducted by Borrower.
9-11. Additional Financial Information.
(a) In addition to all other information required to be provided
pursuant to this Article 9, the Borrower promptly shall provide the Lender with
such other and additional information concerning the Borrower and any guarantor
of the Liabilities, the Collateral, the operation of the Borrower's business,
and the Borrower's financial condition, including original counterparts of
financial reports and statements, as the Lender may from time to time request
from the Borrower.
(b) The Borrower may provide the Lender, from time to time hereafter,
with updated Business Plans. In all events, the Borrower, not later than sixty
(60) days prior to the end of each of the Borrower's fiscal years, shall furnish
the Lender with an updated and extended Business Plan which shall go out at
least through the end of the then next fiscal year and the final Business Plan
within fifteen (15) days of the end of Borrower's fiscal year. In each event,
such updated and extended Business Plans shall be prepared pursuant to a
methodology and shall include such assumptions as are satisfactory to the
Lender. Routinely throughout the year, the Lender, following the receipt of any
of such revised forecast which reflects material adverse business performance,
may, but shall not be under any obligation to, revise the financial performance
covenants included on EXHIBIT 9-12, annexed hereto.
9-12. Financial Performance Covenants. The Borrower shall observe and
comply with those "Financial and Inventory" covenants and Composition and
Imbalance Guidelines set forth on EXHIBIT 9-12(a), annexed hereto, certain of
which covenants are based on the Business Plan set forth on EXHIBIT 9-12(b),
annexed hereto.
9-13. Electronic Reporting. Intentionally deleted.
ARTICLE 10 - EVENTS OF DEFAULT
The occurrence of any event described in this Article 10 respectively
shall constitute an "Event of Default" herein. Upon the occurrence of any Event
of Default described in Section 10-11, any and all Liabilities shall become due
and payable without any further act on the part of the Lender. Upon the
occurrence of any other Event of Default, which Event of Default is not
expressly waived in writing by Lender, any and all Liabilities shall become
immediately due and payable, at the option of the Lender and without notice or
demand. The occurrence of any Event of Default shall also constitute, without
notice or demand, a default under all other agreements between the Lender and
the Borrower and instruments and papers given the Lender by the Borrower,
whether such agreements, instruments, or papers now exist or hereafter arise.
10-1. Failure to Pay Revolving Credit. The failure by the Borrower to
pay any amount when due under the Revolving Credit.
10-2. Failure To Make Other Payments. The failure by the Borrower to
pay when due or within (One (1) Business Day, if payable on demand) any payment
Liability other than under the Revolving Credit.
10-3. Failure to Perform Covenant or Liability (No Grace Period). The
failure by the Borrower to promptly, punctually, faithfully and timely perform,
discharge, or comply with any covenant or Liability not otherwise described in
section 10-1 or section 10-2, above, and included in any of the following
provisions hereof:
Section Relates to:
5-4 Location of Collateral
5-5 Title to Assets
5-6 Indebtedness
5-7 Insurance Policies
5-12 Pay Taxes
5-21 Affiliate Transactions
Article 7 Cash Management
Article 9 Financial Reporting Requirements and Financial and Inventory
Covenants set forth in Exhibit 9-12(a)
10-4. Failure to Perform Covenant or Liability (Grace Period). The
failure by the Borrower to promptly, punctually and faithfully perform, or
observe any term, covenant or agreement on its part to be performed or observed
pursuant to any of the provisions of this Agreement, other than those described
in Sections 10-1, 10-2 or 10-3, or in any other agreement with Lender which is
not remedied within the earlier of ten (10) days after (i) notice thereof by
Lender to Borrower, or (ii) the date Borrower was required to give notice to
Lender pursuant to Section 9-3(a)(vi) hereof.
10-5. Misrepresentation. The determination by the Lender that any
representation or warranty at any time made by the Borrower to the Lender, was
not true or complete in all material respects when given.
10-6. Acceleration of Other Debt. Breach of Lease. The occurrence of
any event such that any Indebtedness of the Borrower to any creditor other than
the Lender could be accelerated such that a Material Adverse Change would occur,
or, without the consent of the Borrower, any Lease could be terminated (whether
or not the subject creditor or lessor takes any action on account of such
occurrence).
10-7. Default Under Other Agreements. The occurrence of any breach or
default under any agreement between the Lender and the Borrower or instrument or
paper given the Lender by the Borrower, whether such agreement, instrument, or
paper now exists or hereafter arises (notwithstanding that the Lender may not
have exercised its rights upon default under any such other agreement,
instrument or paper).
10-8. Non-Ordinary Course Sales. The occurrence of any (a) material
uninsured loss, theft, damage, or destruction of or to any material portion of
the Collateral, or (b) sale (other than sales in the ordinary course of
business) of any material portion of the Collateral, without the prior express
written consent of Lender.
10-9. Judgment. Restraint of Business.
(a) The service of process upon the Lender or any Participant seeking
to attach, by trustee, mesne, or other process, any of the Borrower's funds on
deposit with, or assets of the Borrower in the possession of, the Lender or such
Participant.
(b) The entry of any judgment against the Borrower in an amount equal
to or in excess of $50,000, which judgment is not satisfied (if a money
judgment) or appealed from (with execution or similar process stayed) within
fifteen (15) days of its entry.
(c) The entry of any order or the imposition of any other process
having the force of law, the effect of which is to restrain in any material way
the conduct by the Borrower of its business in the ordinary course.
10-10. Business Failure. Any act by, against, or relating to the
Borrower, or its property or assets, which act constitutes the application for,
consent to, or sufferance of the appointment of a receiver, trustee, or other
person, pursuant to court action or otherwise, over all, or any part of the
Borrower's property; the granting of any trust mortgage or execution of an
assignment for the benefit of the creditors of the Borrower, or the occurrence
of any other voluntary or involuntary liquidation or extension of debt agreement
for the Borrower; or the offering by or entering into by the Borrower of any
composition, extension, or any other arrangement seeking relief from or
extension of the debts of the Borrower, or the initiation of any other judicial
or non-judicial proceeding or agreement by, against, or including the Borrower
which seeks or intends to accomplish a reorganization or arrangement with
creditors.
10-11. Bankruptcy. The failure by the Borrower to generally pay the
debts of the Borrower as they mature; the filing of any complaint, application,
or petition by or against the Borrower initiating any matter in which the
Borrower is or may be granted any relief from the debts of the Borrower pursuant
to the Bankruptcy Code or any other insolvency statute or procedure, not
dismissed within forty-five (45) days, provided however, Lender shall have no
obligations to make advances hereunder prior to dismissal of such matter, nor
shall anything herein be deemed to constitute Lender's consent to use of its
Cash Collateral.
10-12. Insecurity. Intentionally deleted.
10-13. Default by Guarantor or Related Entity. The occurrence of any of
the foregoing Events of Default with respect to any guarantor of the
Liabilities, or the occurrence of any of the foregoing Events of Default with
respect to any parent (if the Borrower is a corporation), subsidiary, or Related
Entity, as if such guarantor, parent, or Related Entity were the "Borrower"
described therein.
10-14. Indictment - Forfeiture. The indictment of, or institution of
any legal process or proceeding against, the Borrower, any Executive Officer or
any guarantor of the Liabilities under any federal, state, municipal, and other
civil or criminal statute, rule, regulation, order, or other requirement having
the force of law where the relief, penalties, or remedies sought or available
include the forfeiture of any property of the Borrower and/or the imposition of
any stay or other order, the effect of which could be to restrain in any
material way the conduct by the Borrower of its business in the ordinary course.
10-15. Termination of Guaranty. The termination or attempted
termination of any guaranty by any guarantor of the Liabilities.
10-16. Challenge to Loan Documents.
(a) Any challenge by or on behalf of the Borrower or any guarantor of
the Liabilities to the validity of any Loan Document or the applicability or
enforceability of any Loan Document strictly in accordance with the subject Loan
Document's terms or which seeks to void, avoid, limit, or otherwise adversely
affect any security interest created by or in any Loan Document or any payment
made pursuant thereto.
(b) Any determination by any court or any other judicial or government
authority that any Loan Document is not enforceable strictly in accordance with
the subject Loan Document's terms or which voids, avoids, limits, or otherwise
adversely affects any security interest created by any Loan Document or any
payment made pursuant thereto.
10-17. Executive Management. The death, disability, or failure of any
Executive Officer at any time to exercise that authority and discharge those
management responsibilities with respect to the Borrower as are exercised and
discharged by such Person at the execution of this Agreement, except if such
Executive Officer is not replaced to Lender's reasonable satisfaction within
sixty (60) days.
10-18. Change in Control. Intentionally deleted.
10-19. Material Adverse Change. If there is a Material Adverse Change.
ARTICLE 11 - RIGHTS AND REMEDIES UPON DEFAULT
In addition to all of the rights, remedies, powers, privileges, and
discretions which the Lender is provided prior to the occurrence of an Event of
Default, the Lender shall have the following rights and remedies upon the
occurrence of any Event of Default and at any time thereafter. No stay which
otherwise might be imposed pursuant to the Bankruptcy Code or otherwise shall
stay, limit, prevent, hinder, delay, restrict, or otherwise prevent the Lender's
exercise of any of such rights and remedies.
11-1. Rights of Enforcement. The Lender shall have all of the rights
and remedies of a secured party upon default under the UCC, in addition to which
the Lender shall have all and each of the following rights and remedies:
(a) To collect the Receivables Collateral with or without the taking of
possession of any of the Collateral.
(b) To take possession of all or any portion of the Collateral.
(c) To sell, lease, or otherwise dispose of any or all of the
Collateral, in its then condition or following such preparation or processing as
the Lender deems advisable and with or without the taking of possession of any
of the Collateral.
(d) To conduct one or more going out of business sales which include
the sale or other disposition of the Collateral.
(e) To apply the Receivables Collateral or the proceeds of the
Collateral towards (but not necessarily in complete satisfaction of) the
Liabilities.
(f) To exercise all or any of the rights, remedies, powers, privileges,
and discretions under all or any of the Loan Documents.
11-2. Sale of Collateral.
(a) Any sale or other disposition of the Collateral may be at public or
private sale upon such terms and in such manner as the Lender deems advisable,
having due regard to compliance with any statute or regulation which might
affect, limit, or apply to the Lender's disposition of the Collateral.
(b) The Lender, in the exercise of the Lender's rights and remedies
upon default, may conduct one or more going out of business sales, in the
Lender's own right or by one or more agents and contractors. Such sale(s) may be
conducted upon any premises owned, leased, or occupied by the Borrower. The
Lender and any such agent or contractor, in conjunction with any such sale, may
augment the Inventory with other goods (all of which other goods shall remain
the sole property of the Lender or such agent or contractor). Any amounts
realized from the sale of such goods which constitute augmentations to the
Inventory (net of an allocable share of the costs and expenses incurred in their
disposition) shall be the sole property of the Lender or such agent or
contractor and neither the Borrower nor any Person claiming under or in right of
the Borrower shall have any interest therein.
(c) Unless the Collateral is perishable or threatens to decline
speedily in value, or is of a type customarily sold on a recognized market (in
which event the Lender shall provide the Borrower with such notice as may be
practicable under the circumstances), the Lender shall give the Borrower at
least five (5) days prior written notice of the date, time, and place of any
proposed public sale, and of the date after which any private sale or other
disposition of the Collateral may be made. The Borrower agrees that such written
notice shall satisfy all requirements for notice to the Borrower which are
imposed under the UCC or other applicable law with respect to the exercise of
the Lender's rights and remedies upon default.
(d) The Lender may purchase the Collateral, or any portion of it at any
sale held under this Article.
(e) The Lender shall apply the proceeds of any exercise of the Lender's
Rights and Remedies under this Article 11 towards the Liabilities in such
manner, and with such frequency, as the Lender determines.
11-3. Occupation of Business Location. In connection with the Lender's
exercise of the Lender's rights under this Article 11, the Lender may enter
upon, occupy, and use any premises owned or occupied by the Borrower, and may
exclude the Borrower from such premises or portion thereof as may have been so
entered upon, occupied, or used by the Lender. The Lender shall not be required
to remove any of the Collateral from any such premises upon the Lender's taking
possession thereof, and may render any Collateral unusable to the Borrower. In
no event shall the Lender be liable to the Borrower for use or occupancy by the
Lender of any premises pursuant to this Article 11, nor for any charge (such as
wages for the Borrower's employees and utilities) incurred in connection with
the Lender's exercise of the Lender's Rights and Remedies.
11-4. Grant of Nonexclusive License. The Borrower and each member of
the GTS Consolidated Group hereby grants to the Lender a royalty free
nonexclusive irrevocable license to use, apply, and affix any trademark,
tradename, logo, or the like in which the Borrower now or hereafter has rights,
such license being with respect to the Lender's exercise of the rights hereunder
including, without limitation, in connection with any completion of the
manufacture of Inventory or sale or other disposition of Inventory.
11-5. Assembly of Collateral. The Lender may require the Borrower to
assemble the Collateral and make it available to the Lender at the Borrower's
sole risk and expense at a place or places which are reasonably convenient to
both the Lender and Borrower.
11-6. Rights and Remedies. The rights, remedies, powers, privileges,
and discretions of the Lender hereunder (herein, the "Lender's Rights and
Remedies") shall be cumulative and not exclusive of any rights or remedies which
it would otherwise have. No delay or omission by the Lender in exercising or
enforcing any of the Lender's Rights and Remedies shall operate as, or
constitute, a waiver thereof. No waiver by the Lender of any Event of Default or
of any default under any other agreement shall operate as a waiver of any other
default hereunder or under any other agreement. No single or partial exercise of
any of the Lender's Rights or Remedies, and no express or implied agreement or
transaction of whatever nature entered into between the Lender and any person,
at any time, shall preclude the other or further exercise of the Lender's Rights
and Remedies. No waiver by the Lender of any of the Lender's Rights and Remedies
on any one occasion shall be deemed a waiver on any subsequent occasion, nor
shall it be deemed a continuing waiver. All of the Lender's Rights and Remedies
and all of the Lender's rights, remedies, powers, privileges, and discretions
under any other agreement or transaction are cumulative, and not alternative or
exclusive, and may be exercised by the Lender at such time or times and in such
order of preference as the Lender in its sole discretion may determine. The
Lender's Rights and Remedies may be exercised without resort or regard to any
other source of satisfaction of the Liabilities.
ARTICLE 12 - NOTICES
12-1. Notice Addresses. All notices, demands, and other communications
made in respect of this Agreement (other than a request for a loan or advance or
other financial accommodation under the Revolving Credit) shall be made to the
following addresses, each of which may be changed upon seven (7) days written
notice to all others given by certified mail, return receipt requested:
If to the Lender: Paragon Capital LLC
Hillsite Office Building
75 Second Avenue, Suite 400
Needham, Massachusetts 02494
Attention: Andrew H. Moser, President
Phone: (781) 707-2100
Fax: (781) 707-2107
With a copy to: Joel B. Rosenthal, Esq.
Shapiro, Israel & Weiner, P.C.
100 North Washington Street
Boston, Massachusetts 02114
Tel: (617) 742-4200
Fax: (617) 742-2355
If to the Borrower: Cheryl Taylor
Chief Financial Officer
The Great Train Store Partners, L.P.
14180 Dallas Parkway, Suite 618
Dallas, TX 75240
Tel: (972) 392-1599
Fax: (972) 392-1693
and
James Levi, President
The Great Train Store Partners, L.P.
85 Larchmont Avenue
Larchmont, NY 10538
Tel: (914) 834-5500
Fax: (914) 834-3166
With a copy to: Douglas G. Bates, Esq.
Gallop, Johnson & Neuman, L.C.
101 South Hanley Road
Interco Corporate Tower
St. Louis, MO 63105
Tel: (314) 862-1200
Fax: (314) 862-1219
12-2. Notice Given
(a) Except as otherwise specifically provided herein, notices shall be
deemed made and correspondence received, as follows (all times being local to
the place of delivery or receipt):
(i) By mail: the sooner of when actually received or three (3)
days following deposit in the United States mail, postage prepaid.
(ii) By recognized overnight express delivery: the Banking Day
following the day when sent.
(iii) By hand: If delivered on a Banking Day after 9:00 A.M. and
no later than three (3) hours prior to the close of customary business
hours of the recipient, when delivered. Otherwise, at the opening of the
then next Banking Day.
(iv) By facsimile transmission (which must include a header
indicating the party sending such transmission): If sent on a Banking Day
after 9:00 A.M. and no later than Three (3) hours prior to the close of
customary business hours of the recipient, one (1) hour after being sent.
Otherwise, at the opening of the then next Banking Day.
(b) Rejection or refusal to accept delivery and inability to deliver
because of a changed address or facsimile number for which no due notice was
given shall each be deemed receipt of the notice sent.
ARTICLE 13 - TERM
This Agreement is, and is intended to be, a continuing agreement and
shall remain in full force and effect for an initial term ending on the Maturity
Date, and thereafter for successive twelve-month periods, each beginning on the
1st day of April (commencing 2004) of each year and ending on March 31st of the
following year (each such twelve-month period is hereinafter referred to as a
"renewal term"); provided, however, that either party may terminate this
Agreement as of the end of the initial term or any subsequent renewal term by
giving the other party notice to terminate in writing at least ninety (90) days
prior to the end of any such period whereupon at the end of such period all
Liabilities shall be due and payable in full without presentation, demand, or
further notice of any kind, whether or not all or any part of the Liabilities is
otherwise due and payable pursuant to the agreement or instrument evidencing
same. Lender may terminate this Agreement immediately and without notice upon
the occurrence of an Event of Default. Notwithstanding the foregoing or anything
in this Agreement or elsewhere to the contrary, the security interest, Lender's
rights and remedies hereunder and Borrower's obligations and liabilities
hereunder shall survive any termination of this Agreement and shall remain in
full force and effect until all of the Liabilities outstanding, or contracted or
committed for (whether or not outstanding), before the receipt of such notice by
Lender, and any extensions or renewals thereof (whether made before or after
receipt of such notice), together with interest accruing thereon after such
notice, shall be finally and irrevocably paid in full. No Collateral shall be
released or financing statement terminated until such final and irrevocable
payment in full of the Liabilities, as described in the preceding sentence.
Upon the termination of Revolving Credit, the Borrower shall pay the
Lender (whether or not then due), in immediately available funds, all then
Liabilities including, without limitation: the entire balance of the Loan
Account; any then remaining installments of the Commitment Fee; any then
remaining balance of the Annual Facility Fee; Loan Maintenance Fee; any accrued
and unpaid Unused Line Fee; any Prepayment Premium and all unreimbursed costs
and expenses of the Lender for which the Borrower is responsible, and shall make
such arrangements concerning any L/C's then outstanding are reasonably
satisfactory to the Lender. Until such payment, all provisions of this
Agreement, other than those contained in Article 1 which place an obligation on
the Lender to make any loans or advances or to provide financial accommodations
under the Revolving Credit or otherwise, shall remain in full force and effect
until all Liabilities shall have been paid in full. The release by the Lender of
the security interests granted the Lender by the Borrower hereunder may be upon
such conditions and indemnifications as the Lender may require.
13-3. Prepayment Premium
(a) If Borrower pays in full all or substantially all of the
Liabilities prior to the end of the initial term of this Agreement (or any
renewal term), other than temporarily from funds internally generated in the
ordinary course of business or other than from funds generated by an Equity
Offering, at the time of such payment Borrower shall also pay to Lender a
prepayment premium in an amount equal to: (i) three (3%) percent of the Credit
Limit, if paid during the first year after the date of this Agreement, (ii) two
(2%) percent of the Credit Limit, if prepaid during the second year after the
date of this Agreement, (iii) one (1%) percent of the Credit Limit, if prepaid
after the second anniversary of this Agreement, and one half of one (.5%)
percent if prepaid thereafter. Any tender of payment in full of the Liabilities
following an acceleration by Lender of the Liabilities pursuant to Article 10
hereof, shall not be for purposes of this section deemed to be a prepayment
requiring Borrower to pay the aforementioned prepayment premium
(b) If Borrower pays in full all or substantially all of the
Liabilities prior to the end of the initial term of this Agreement (or any
renewal term), from funds generated by an Equity Offering, at the time of such
payment Borrower shall pay to Lender only a prepayment premium in an amount
limited to One Hundred Thousand ($100,000) Dollars.
(c) Such prepayment premium shall be paid to Lender as liquidated
damages for the loss of the bargain by Lender and not as a penalty.
ARTICLE 14 - GENERAL
The Lender has no duty as to the collection or protection of the
Collateral beyond the safe custody of such of the Collateral as may come into
the possession of the Lender and shall have no duty as to the preservation of
rights against prior parties or any other rights pertaining thereto. The Lender
may include reference to the Borrower (and may utilize any logo or other
distinctive symbol associated with the Borrower) in connection with any
advertising, promotion, or marketing undertaken by the Lender.
This Agreement shall be binding upon the Borrower and the Borrower's
representatives, successors, and assigns and shall enure to the benefit of the
Lender and the Lender's successors and assigns provided, however, no trustee or
other fiduciary appointed with respect to the Borrower shall have any rights
hereunder. In the event that the Lender assigns or transfers its rights under
this Agreement, the assignee shall thereupon succeed to and become vested with
all rights, powers, privileges, and duties of the Lender hereunder and the
Lender shall thereupon be discharged and relieved from its duties and
obligations hereunder.
Any determination that any provision of this Agreement or any
application thereof is invalid, illegal, or unenforceable in any respect in any
instance shall not affect the validity, legality, or enforceability of such
provision in any other instance, or the validity, legality, or enforceability of
any other provision of this Agreement.
14-4. Amendments. Course of Dealing
(a) This Agreement and the other Loan Documents incorporate all
discussions and negotiations between the Borrower, each member of the GTS
Consolidated Group and the Lender, either express or implied, concerning the
matters included herein and in such other instruments, any custom, usage, or
course of dealings to the contrary notwithstanding. No such discussions,
negotiations, custom, usage, or course of dealings shall limit, modify, or
otherwise affect the provisions thereof. No failure by the Lender to give notice
to the Borrower or any member of the GTS Consolidated Group of the Borrower's or
any member of the GTS Consolidated Group's having failed to observe and comply
with any warranty or covenant included in any Loan Document shall constitute a
waiver of such warranty or covenant or the amendment of the subject Loan
Document. No change made by the Lender in the manner by which Availability is
determined shall obligate the Lender to continue to determine Availability in
that manner.
(b) The Borrower may undertake any action otherwise prohibited hereby,
and may omit to take any action otherwise required hereby, upon and with the
express prior written consent of the Lender. No consent, modification,
amendment, or waiver of any provision of any Loan Document shall be effective
unless executed in writing by or on behalf of the party to be charged with such
modification, amendment, or waiver (and if such party is the Lender, then by a
duly authorized officer thereof). Any modification, amendment, or waiver
provided by the Lender shall be in reliance upon all representations and
warranties theretofore made to the Lender by or on behalf of the Borrower (and
any guarantor, endorser, or surety of the Liabilities) and consequently may be
rescinded in the event that any of such representations or warranties was not
true and complete in all material respects when given.
In connection with all powers of attorney included in this Agreement,
the Borrower hereby grants unto the Lender full power to do any and all things
necessary or appropriate in connection with the exercise of such powers as fully
and effectually as the Borrower might or could do, hereby ratifying all that
said attorney shall do or cause to be done by virtue of this Agreement. No power
of attorney set forth in this Agreement shall be affected by any disability or
incapacity suffered by the Borrower and each shall survive the same. All powers
conferred upon the Lender by this Agreement, being coupled with an interest,
shall be irrevocable until this Agreement is terminated by a written instrument
executed by a duly authorized officer of the Lender.
The proceeds of any collection, sale, or disposition of the Collateral,
or of any other payments received hereunder, shall be applied towards the
Liabilities in such order and manner as the Lender determines in its sole
discretion. The Borrower shall remain liable for any deficiency remaining
following such application.
The Borrower shall pay on demand all Costs of Collection and all
reasonable expenses of the Lender in connection with the preparation, execution,
and delivery of this Agreement and of any other Loan Documents, whether now
existing or hereafter arising, and all other reasonable expenses which may be
incurred by the Lender in monitoring compliance with this Agreement and in
preparing or amending this Agreement and all other agreements, instruments, and
documents related thereto, or otherwise incurred with respect to the
Liabilities, including, without limiting the generality of the foregoing, any
counsel fees or expenses incurred in any bankruptcy or insolvency proceedings,
provided however, Lender's legal fees for the preparation of this agreement and
all related documents and filings shall not exceed Seventeen Thousand Five
Hundred ($17,500) Dollars. The Borrower specifically authorizes the Lender to
pay all such fees and expenses and in the Lender's discretion, to add such fees
and expenses to the Loan Account. Borrower shall be obligated, from time to
time, to pay Lender's fees, including reasonable attorneys' fees and expenses
for the preparation, negotiation, amendment and interpretation of this Agreement
and related documents.
This Agreement and all documents which relate thereto, which have been
or may be hereinafter furnished the Lender may be reproduced by the Lender by
any photographic, microfilm, xerographic, digital imaging, or other process, and
the Lender may destroy any document so reproduced. Any such reproduction shall
be admissible in evidence as the original itself in any judicial or
administrative proceeding (whether or not the original is in existence and
whether or not such reproduction was made in the regular course of business).
Any facsimile which bears proof of transmission shall be binding on the party
which or on whose behalf such transmission was initiated and likewise shall be
so admissible in evidence as if the original of such facsimile had been
delivered to the party which or on whose behalf such transmission was received.
This Agreement and all rights and obligations hereunder, including
matters of construction, validity, and performance, shall be governed by the
laws of the Commonwealth of Massachusetts.
14-10. Consent to Jurisdiction
(a) The Borrower and each member of the GTS Consolidated Group agrees
that any legal action, proceeding, case, or controversy against the Borrower
with respect to any Loan Document may be brought in the Superior Court of
Middlesex County, Massachusetts or in the United States District Court, District
of Massachusetts, sitting in Boston, Massachusetts, as the Lender may elect in
the Lender's sole discretion. By execution and delivery of this Agreement, the
Borrower, for itself and in respect of its property, accepts, submits, and
consents generally and unconditionally, to the jurisdiction of the aforesaid
courts.
(b) Nothing herein shall affect the right of the Lender to bring legal
actions or proceedings in any other competent jurisdiction.
(c) The Borrower and each member of the GTS Consolidated Group agrees
that any action commenced by the Borrower asserting any claim or counterclaim
arising under or in connection with this Agreement or any other Loan Document
shall be brought solely in the Superior Court of Middlesex County, Massachusetts
or in the United States District Court, District of Massachusetts, sitting in
Boston, Massachusetts, and that such Courts shall have exclusive jurisdiction
with respect to any such action.
The Borrower shall indemnify, defend, and hold the Lender and any
employee, officer, or agent of the Lender (each, an "Indemnified Person")
harmless of and from any claim brought or threatened against any Indemnified
Person by the Borrower, any guarantor or endorser of the Liabilities, or any
other Person (as well as from attorneys' reasonable fees and expenses in
connection therewith) on account of the relationship of the Borrower or of any
guarantor or endorser of the Liabilities (each of which claims may be defended,
compromised, settled, or pursued by the Indemnified Person with counsel of the
Lender's selection, but at the expense of the Borrower) other than any claim as
to which a final determination is made in a judicial proceeding (in which the
Lender and any other Indemnified Person has had an opportunity to be heard),
which determination includes a specific finding that the Indemnified Person
seeking indemnification had acted in a grossly negligent manner or in actual bad
faith. This indemnification shall survive payment of the Liabilities and/or any
termination, release, or discharge executed by the Lender in favor of the
Borrower.
Any and all deposits or other sums at any time credited by or due to
the undersigned from the Lender or from any participant (a "Participant") with
the Lender in the credit facility contemplated hereby and any cash, securities,
instruments or other property of the undersigned in the possession of the Lender
or any Participant, whether for safekeeping or otherwise (regardless of the
reason such Person had received the same) shall at all times constitute security
for all Liabilities and for any and all obligations of the undersigned to the
Lender and any Participant, and may be applied or set off against the
Liabilities and against such obligations at any time, whether or not such are
then due and whether or not other collateral is then available to the Lender or
any Participant.
Regardless of any provision of any Loan Document, the Lender shall
never be entitled to contract for, charge, receive, collect, or apply as
interest on any Liability, any amount in excess of the maximum rate imposed by
applicable law. Any payment which is made which, if treated as interest on a
Liability would result in such interest's exceeding such maximum rate shall be
held, to the extent of such excess, as additional collateral for the Liabilities
as if such excess were "Collateral."
It is the intention of the parties hereto to comply strictly with
applicable usury laws, if any; accordingly, notwithstanding any provisions to
the contrary in this Agreement or any other Loan Documents, in no event shall
this Agreement or such Loan Document require or permit the payment, taking,
reserving, receiving, collecting or charging of any sums constituting interest
under applicable laws which exceed the maximum amount permitted by such laws. If
any such excess interest is called for, contracted for, charged, paid, taken,
reserved, collected or received in connection with the Liabilities or in any
communication by Lender or any other person to the Borrower or any other person,
or in the event all or part of the principal of the Liabilities or interest
thereon shall be prepaid or accelerated, so that under any of such circumstances
or under any other circumstance whatsoever the amount of interest contracted
for, charged, taken, collected, reserved, or received on the amount of principal
actually outstanding from time to time under this Agreement shall exceed the
maximum amount of interest permitted by applicable usury laws, if any, then in
any such event it is agreed as follows: (i) the provisions of this paragraph
shall govern and control, (ii) neither the Borrower nor any other person or
entity now or hereafter liable for the payment of the Liabilities shall be
obligated to pay the amount of such interest to the extent such interest is in
excess of the maximum amount of interest permitted by applicable usury laws, if
any, (iii) any such excess which is or has been received notwithstanding this
paragraph shall be credited against the then unpaid principal balance hereof or,
if the Liabilities have been or would be paid in full by such credit, refunded
to the Borrower, and (iv) the provisions of this Agreement and the other Loan
Documents, and any communication to the Borrower, shall immediately be deemed
reformed and such excess interest reduced, without the necessity of executing
any other document, to the maximum lawful rate allowed under applicable laws as
now or hereafter construed by courts having jurisdiction hereof or thereof.
Without limiting the foregoing, all calculations of the rate of interest
contracted for, charged, taken, collected, reserved, or received in connection
herewith which are made for the purpose of determining whether such rate exceeds
the maximum lawful rate shall be made to the extent permitted by applicable laws
by amortizing, prorating, allocating and spreading during the period of the full
term of the Liabilities, including all prior and subsequent renewals and
extensions, all interest at any time contracted for, charged, taken, collected,
reserved or received. The terms of this paragraph shall be deemed to be
incorporated in every Loan Document and communication relating to the
Liabilities.
14-15. Waivers
(a) The Borrower (and all guarantors, endorsers, and sureties of the
Liabilities) make each of the waivers included in Section 14-15(b), below,
knowingly, voluntarily, and intentionally, and understands that the Lender, in
entering into the financial arrangements contemplated hereby and in providing
loans and other financial accommodations to or for the account of the Borrower
as provided herein, whether not or in the future, is relying on such waivers.
(b) THE BORROWER, AND EACH SUCH GUARANTOR, ENDORSER, AND SURETY
RESPECTIVELY WAIVES THE FOLLOWING.
(i) Except as otherwise specifically required in this Agreement,
notice of non-payment, demand, presentment, protest and all forms of demand
and notice, both with respect to the Liabilities and the Collateral.
(ii) Except as otherwise specifically required in this Agreement,
the right to notice and/or hearing prior to the Lender's exercising of the
Lender's rights upon default.
(iii) THE RIGHT TO A JURY IN ANY TRIAL OF ANY CASE OR CONTROVERSY
IN WHICH THE LENDER IS OR BECOMES A PARTY (WHETHER SUCH CASE OR CONTROVERSY
IS INITIATED BY OR AGAINST THE LENDER OR IN WHICH THE LENDER IS JOINED AS A
PARTY LITIGANT), WHICH CASE OR CONTROVERSY ARISES OUT OF OR IS IN RESPECT
OF, ANY RELATIONSHIP AMONGST OR BETWEEN THE BORROWER OR ANY OTHER PERSON
AND THE LENDER (AND THE LENDER LIKEWISE WAIVES THE RIGHT TO A JURY IN ANY
TRIAL OF ANY SUCH CASE OR CONTROVERSY).
(iv) The benefits or availability of any stay, limitation,
hindrance, delay, or restriction (including, without limitation, any
automatic stay which otherwise might be imposed pursuant to Section 362 of
the Bankruptcy Code) with respect to any action which the Lender may or may
become entitled to take hereunder.
(v) Any defense, counterclaim, set-off, recoupment, or other basis
on which the amount of any Liability, as stated on the books and records of
the Lender, could be reduced or claimed to be paid otherwise than in
accordance with the tenor of and written terms of such Liability.
(vi) Any claim to consequential, special, or punitive damages.
This Agreement and the terms hereof are confidential, and neither the
contents of this Agreement or the details of this Agreement may be shown or
disclosed by the Borrower to any bank, finance company or other lender without
the prior written consent of the Lender, subject to disclosure obligations under
Federal Securities Laws.
Lender may, at Lender's discretion and expense, publicize or otherwise
advertise by so-called "tombstone" advertising or otherwise Lender's and any
Participant's financing transaction with the Borrower.
Borrower acknowledges notice that Lender is affiliated with The Ozer
Group, LLC ("Ozer") and Ozer Valuation Services, Inc. ("Ozer Valuation"). Ozer,
Ozer Valuation, and other entities related to Lender may, from time to time act
as a merchant consultant or provide other services to Lender with respect to
Borrower.
Borrower authorized Lender to (provided, however, Lender shall incur no
liability for the failure to) respond to credit inquiries concerning Borrower in
accordance with Lender's normal and customary practices. Borrower hereby
indemnifies and holds Lender harmless for any action taken by Lender in reliance
upon the foregoing authorization.
Executed as a sealed instrument this _____ day of___________ 1999.
THE GREAT TRAIN STORE PARTNERS, L.P.
(BORROWER)
BY GTS PARTNER, INC., Its General Partner
By:______________________________________
Cheryl A. Taylor
Its: Vice President
THE GREAT TRAIN STORE COMPANY
By:______________________________________
Cheryl A. Taylor
Its: Vice President
GTS PARTNER, INC.
By:______________________________________
Cheryl A. Taylor
Its: Vice President
GTS LIMITED PARTNER, INC.
By:______________________________________
Cheryl A. Taylor
Its: Vice President
PARAGON CAPITAL LLC
(LENDER)
By:______________________________________
Print Name:_______________________________
Title:____________________________________
<PAGE>
EXHIBIT 3
"Acceptable Inventory": Such of the Borrower's Inventory, at such
locations, and of such types, character, qualities and quantities, (net of
Inventory Reserves) as the Lender in its reasonable discretion from time to time
determines to be acceptable for borrowing, as to which Inventory, the Lender has
a perfected security interest which is prior and superior to all security
interests, claims, and Encumbrances.
"Account Debtor": Has the meaning given that term in the UCC.
"Accounts Receivable" include, without limitation, "accounts" as
defined in the UCC.
"ACH": Automated clearing house.
"Advance Rates": Means the percentage(s) of the Cost of Acceptable
Inventory or Net Retail Liquidation Value used to calculate the Standard
Inventory Advances and Special Purchase Advances under the Borrowing Base.
"Affiliate": With respect to any two Persons, a relationship in which
(a) one holds, directly or indirectly, not less than twenty-five (25%) percent
of the capital stock, beneficial interests, partnership interests, or other
equity interests of the other; or (b) one has, directly or indirectly, Control
of the other; or (c) not less than twenty-five (25%) percent of their respective
ownership is directly or indirectly held by the same third Person.
"Annual Facility Fee": Is defined in Section 1-9(a).
"Availability": Means that amount available for loans and advances as
calculated by the Lender based upon the lending formula set forth in Section
1-1(b).
"Availability Reserves": Such reserves as the Lender from time to time
determines in the Lender's reasonable discretion as being appropriate to reflect
the impediments to the Lender's ability to realize upon the Collateral. Without
limiting the generality of the foregoing, Availability Reserves may include (but
are not limited to) reserves based on the following:
(a) Rent (based upon past due rent and/or accrued rent liabilities
whether or not Landlord's Waivers, executed by landlords acceptable to the
Lender, have been received by Lender ).
(b) In store customer credits and gift certificates.
(c) Payables (based upon payables which are past due pursuant to
historical practices).
(d) Frequent Shopper Programs.
(e) Layaway and Customer Deposits.
(f) Taxes and other governmental charges, including, ad valorem,
personal property, and other taxes which may have priority over the
security interests of the Lender in the Collateral.
(g) Held or post-dated checks.
"Banking Day": Any day other than (a) a Saturday, Sunday; (b) any day
on which banks in Boston, Massachusetts generally are not open to the general
public for the purpose of conducting commercial banking business; or (c) a day
on which the Lender is not open to the general public to conduct business.
"Bankruptcy Code": Title 11, U.S.C., as amended from time to time.
"Base": The Base Rate announced from time to time by Norwest Bank
Minnesota, National Association (or any successor in interest to Norwest Bank
Minnesota, National Association). In the event that said bank (or any such
successor) ceases to announce such a rate, "Base" shall refer to that rate or
index announced or published from time to time as the Lender, in good faith,
designates as the functional equivalent to said Base Rate. Any change in "Base"
shall be effective, for purposes of the calculation of interest due hereunder,
when such change is made effective generally by the bank on whose rate or index
"Base" is being set.
"Basis Point(s)": An amount which is equal to 1/100th of one (1%)
percent. For example, one and one-half (1.5%) percent equals 150 basis points.
"Borrower": Is defined in the Preamble.
"Borrowing Base": Means amounts equal to the lesser of the (a) the
Credit Limit and (b) the aggregate of Standard Inventory Advances plus Special
Purchase Advances minus (i) the then unpaid balance of the Loan Account, minus
(ii) the then aggregate of such Reserves as may have been established by Lender,
and minus (iii) one hundred (100%) percent of the then outstanding Stated Amount
of all standing L/C's, and plus a percentage of the then outstanding stated
amount of all documentary L/C's equal to the difference between the then
applicable Advance Rate for Standard Inventory Advances and one hundred (100%)
percent.
"Business Plan": The Borrower's business plan annexed hereto as EXHIBIT
9-12(b) and any revision, amendment, or update of such business plan to which
the Lender has provided its written sign-off.
"Capital Expenditures": The expenditure of funds or the incurrence of
liabilities which may be capitalized in accordance with GAAP.
"Capital Lease": Any lease which may be capitalized in accordance with
GAAP.
"Central Account": Defined in Section 7-3.
"Chattel Paper": Has the meaning given that term in the UCC.
"Collateral": Is defined in Section 2-1.
"Concentration Account": Is defined in Section 7-3.
"Control": The direct or indirect power to direct or cause the
direction of the management and policies of another Person, whether through
ownership of voting securities, by contract, or otherwise. Included among such
powers, with respect to a corporation, are power to cause any of following: (a)
the election of a majority of its Board of Directors; (b) the issuance of
additional shares of its common stock; (c) the issuance and designation of
rights and shares of its preferred stock (if any); (d) the distribution and
timing of dividends; (e) the award of performance bonuses to its management; (f)
the termination or severance of officers or key employees; and (g) all or any
similar matters.
"Cost": The calculated cost of purchases, as determined from invoices
received by the Borrower, the Borrower's Purchase Journal or Stock Ledger, based
upon the Borrower's accounting practices, known to the Lender, which practices
are in effect on the date on which this Agreement was executed. "Cost" does not
include any inventory capitalization costs inclusive of advertising, but may
include other charges used in the Borrower's determination of cost of goods sold
and bringing goods to market, all within Lender's reasonable discretion and in
accordance with GAAP.
"Cost Factor": The result of 1 minus the Borrower's then cumulative
markup percent derived from the Borrower's purchase journal on a rolling twelve
(12) month basis.
"Costs of Collection" includes, without limitation, all attorneys'
reasonable fees and reasonable out-of-pocket expenses incurred by the Lender's
attorneys, and all reasonable costs incurred by the Lender in the administration
of the Liabilities and/or the Loan Documents, including, without limitation,
reasonable costs and expenses associated with travel on behalf of the Lender,
which costs and expenses are directly or indirectly related to or in respect of
the Lender's: administration and management of the Liabilities; negotiation,
documentation, and amendment of any Loan Document; or efforts to preserve,
protect, collect, or enforce the Collateral, the Liabilities, and/or the
Lender's Rights and Remedies and/or any of the Lender's rights and remedies
against or in respect of any guarantor or other person liable in respect of the
Liabilities (whether or not suit is instituted in connection with such efforts).
The Costs of Collection are Liabilities, and at the Lender's option may bear
interest at the highest post-default rate which the Lender may charge the
Borrower hereunder as if such had been lent, advanced, and credited by the
Lender to, or for the benefit of, the Borrower.
"Credit Card Processor": Means any Person which acts as a credit card
clearinghouse or processor of credit card payments accepted by Borrower.
"Credit Limit": Means Ten Million ($10,000,000) Dollars.
"DDA": Any checking or other demand daily depository account maintained
by the Borrower.
"Duly Authorized Person": Means any individual authorized by the
Borrower to request loans or financial accommodations and/or sign reports to
Lender.
"EBITDA": Means the Borrower's earnings from continuing operations
(excluding extraordinary items), before interest, taxes, depreciation and
amortization, each as determined in accordance with GAAP.
"Effective Advance Rate": Means an Advance Rate calculated by dividing
the amount of the then total balance of the Loan Account by the then total Cost
of Acceptable Inventory.
"Employee Benefit Plan": As defined in ERISA.
"Encumbrance": Each of the following:
(a) security interest, mortgage, pledge, hypothecation, lien,
attachment, or charge of any kind (including any agreement to give any of
the foregoing); the interest of a lessor under a Capital Lease; conditional
sale or other title retention agreement; sale of accounts receivable or
chattel paper; or other arrangement pursuant to which any Person is
entitled to any preference or priority with respect to the property or
assets of another Person or the income or profits of such other Person or
which constitutes an interest in property to secure an obligation; each of
the foregoing whether consensual or non-consensual and whether arising by
way of agreement, operation of law, legal process or otherwise.
(b) The filing of any financing statement under the UCC or
comparable law of any jurisdiction.
"End Date": The date upon which both (a) all Liabilities have been paid
in full and (b) all obligations of the Lender to make loans and advances and to
provide other financial accommodations to the Borrower hereunder shall have been
irrevocably terminated.
"Environmental Laws": (a) Any and all federal, state, local or
municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees
or requirements which regulates or relates to, or imposes any standard of
conduct or liability on account of or in respect to environmental protection
matters, including, without limitation, Hazardous Materials, as is now or
hereafter in effect; and (b) the common law relating to damage to Persons or
property from Hazardous Materials.
"Equity Offering": Means an offering of securities issued by the
Borrower in accordance with a registration or an exemption under the applicable
United States Securities laws and applicable State Securities Laws
"ERISA": The Employee Retirement Security Act of 1974, as amended.
"ERISA Affiliate": Any Person which is under common control with the
Borrower within the meaning of Section 4001 of ERISA or is part of a group which
includes the Borrower and which would be treated as a single employer under
Section 414 of the Internal Revenue Code of 1986, as amended.
"Events of Default": Is defined in Article 10.
"Executive Agreement": Any agreement or understanding (whether or not
written) to which the Borrower is a party or by which the Borrower may be bound,
which agreement or understanding relates to Executive Pay.
"Executive Officer": James Levi
"Executive Pay": All salary, bonuses, and other value directly or
indirectly provided by or on behalf of the Borrower to or for the benefit of any
Executive Officer or any Affiliate, spouse, parent, or child of any Executive
Officer.
"Funding Account": Is defined in Section 7-3.
"GAAP": Principles which are consistent with those promulgated or
adopted by the Financial Accounting Standards Board and its predecessors (or
successors) in effect and applicable to that accounting period in respect of
which reference to GAAP is being made.
"General Intangibles": Includes, without limitation, "general
intangibles" as defined in the UCC; and also all: rights to payment for credit
extended; deposits; amounts due to the Borrower; credit memoranda in favor of
the Borrower; warranty claims; tax refunds and abatements; insurance refunds and
premium rebates; all Investment Property and all means and vehicles of
investment or hedging, including, without limitation, options, warrants, and
futures contracts; records; customer lists; mailing lists; telephone numbers;
goodwill; causes of action; judgments; payments under any settlement or other
agreement; literary rights; rights to performance; royalties; license and/or
franchise fees; rights of admission; licenses; franchises; license agreements,
including all rights of the Borrower to enforce same; permits, certificates of
convenience and necessity, and similar rights granted by any governmental
authority; patents, patent applications, patents pending, and other intellectual
property; Internet addresses and domain names; developmental ideas and concepts;
proprietary processes; blueprints, drawings, designs, diagrams, plans, reports,
and charts; catalogs; manuals; technical data; computer software programs
(including the source and object codes therefor), computer records, computer
software, rights of access to computer record service bureaus, service bureau
computer contracts, and computer data; tapes, disks, semi-conductors chips and
printouts; trade secrets rights, copyrights, mask work rights and interests, and
derivative works and interests; user, technical reference, and other manuals and
materials; trade names, trademarks, service marks, and all good will relating
thereto; applications for registration of the foregoing; and all other general
intangible property of the Borrower in the nature of intellectual property;
proposals; cost estimates, and reproductions on paper, or otherwise, of any and
all concepts or ideas, and any matter related to, or connected with, the design,
development, manufacture, sale, marketing, leasing, or use of any or all
property produced, sold, or leased, by the Borrower or credit extended or
services performed, by the Borrower, whether intended for an individual customer
or the general business of the Borrower, or used or useful in connection with
research by the Borrower.
"Gross Margin": With respect to the subject accounting period for which
being calculated, the following (determined in accordance with the cost method
of accounting):
Sales (Minus) Cost of Goods Sold
Sales
"Hazardous Materials": Any (a) hazardous materials, hazardous waste,
hazardous or toxic substances, petroleum products, which (as to any of the
foregoing) are defined or regulated as a hazardous material in or under any
Environmental Law and (b) oil in any physical state.
"Indebtedness": All indebtedness and obligations of or assumed by any
Person on account of or in respect to any of the following:
(a) In respect of money borrowed (including any indebtedness which
is non-recourse to the credit of such Person but which is secured by an
Encumbrance on any asset of such Person) whether or not evidenced by a
promissory note, bond, debenture or other written obligation to pay money.
(b) For the payment of the purchase price of goods or services
deferred for more than thirty (30) days beyond then current trade terms
provided to such person by the supplier of such goods or services.
(c) In connection with any letter of credit or acceptance
transaction (including, without limitation, the face amount of all letters
of credit and acceptances issued for the account of such Person or
reimbursement on account of which such Person would be obligated).
(d) In connection with the sale or discount of accounts receivable
or chattel paper of such Person.
(e) On account of deposits or advances.
(f) As lessee under Capital Leases.
"Indebtedness" of any Person shall also include:
(a) Indebtedness of others secured by an Encumbrance on any asset
of such Person, whether or not such Indebtedness is assumed by such Person.
(b) Any guaranty, endorsement, suretyship or other undertaking
pursuant to which that Person may be liable on account of any obligation of
any third party.
(c) The Indebtedness of a partnership or joint venture in which
such Person is a general partner or joint venturer.
"Indemnified Person": Is defined in Section 14-11.
"Inventory": Includes, without limitation, "inventory" as defined in
the Uniform Commercial Code and including all goods, merchandise, raw materials,
goods and work in process, finished goods, and other tangible personal property
now owned or hereafter acquired and held for sale or lease or furnished or to be
furnished under contracts of service or used or consumed in Borrower's business.
"Inventory Reserves": Such reserves as may be established from time to
time by the Lender in the Lender's reasonable discretion with respect to the
determination of the saleability, at retail, of the Acceptable Inventory or
which reflect such other factors as affect the current Retail or market value of
the Acceptable Inventory. Without limiting the generality of the foregoing,
Inventory Reserves may include (but are not limited to) reserves based on the
following:
(a) Obsolescence (determined based upon Inventory on hand beyond a
given number of days).
(b) Seasonality.
(c) Shrinkage.
(d) Imbalance.
(e) Change in Inventory character, composition or mix.
(f) Markdowns (both permanent and point of sale).
(g) Retail markons or markups inconsistent with prior period
practice and performance; current business plans; or advertising calendar
and planned advertising events.
"Investment Property": Has the meaning given that term in the Uniform
Commercial Code.
"Issuer": The issuer of any L/C.
"Knowledge": Means actual knowledge of the Executive Officers and
Borrower's senior level management employees after diligent inquiry.
"L/C": Any letter of credit, the issuance of which is procured by the
Lender for the account of the Borrower and any acceptance made on account of
such letter.
"Landlord Lien State": Any state or other jurisdiction under whose
statutory or common law the rights of a landlord in assets of that landlord's
tenant, for unpaid rent, may be senior to a perfected security interest in such
assets.
"Lease": Any lease or other agreement, no matter how styled or
structured, which the Borrower is entitled to the use or occupancy of any space.
"Leasehold Interests": Shall mean the Borrower's leasehold estate or
interest in each of the properties at or upon which the Borrower conducts
business, offers any Inventory for sale, or maintains any of the Collateral,
whether or not for retail sale, together with Borrower's interest in any of the
improvements and fixtures located upon or appurtenant to each leasehold
interest.
"Lender's Rights and Remedies": Is defined in Section 11-6.
"Liabilities" (in the singular, "Liability"): Includes, without
limitation, all and each of the following, whether now existing or hereafter
arising:
(a) Any and all direct and indirect liabilities, debts, and
obligations of the Borrower to the Lender, each of every kind, nature, and
description.
(b) Each obligation to repay any loan, advance, indebtedness,
note, obligation, overdraft, or amount now or hereafter owing by the
Borrower to the Lender (including all future advances whether or not made
pursuant to a commitment by the Lender), whether or not any of such are
liquidated, unliquidated, primary, secondary, secured, unsecured, direct,
indirect, absolute, contingent, or of any other type, nature, or
description, or by reason of any cause of action which the Lender may hold
against the Borrower.
(c) All notes and other obligations of the Borrower now or
hereafter assigned to or held by the Lender, each of every kind, nature,
and description.
(d) All interest, fees, and charges and other amounts which may be
charged by the Lender to the Borrower and/or which may be due from the
Borrower to the Lender from time to time.
(e) All costs and expenses incurred or paid by the Lender in
respect of any agreement between the Borrower and the Lender or instrument
furnished by the Borrower to the Lender (including, without limitation,
Costs of Collection, attorneys' reasonable fees, and all court and
litigation costs and expenses).
(f) Any and all covenants of the Borrower to or with the Lender
and any and all obligations of the Borrower to act or to refrain from
acting in accordance with any agreement between the Borrower and the Lender
or instrument furnished by the Borrower to the Lender.
"Loan Account": Is defined in Section 1-5.
"Loan Documents": This Agreement, each instrument and document executed
and/or delivered as contemplated by Article 4, and each other instrument or
document from time to time executed and/or delivered in connection with the
arrangements contemplated hereby, as each may be amended from time to time.
"Local DDA": A depository account maintained by the Borrower, the only
contents of which may be transfers from the Funding Account and actually used
solely (i) for petty cash purposes; or (ii) for payroll.
"Loan Maintenance Fee": Is defined in Section 1-9(b).
"Master Note": Is defined in Section 1-6.
"Material Adverse Change": Means (a) a material adverse change in the
business, prospects, operations, results of operations, assets, liabilities or
condition (financial or otherwise) of Borrower, including, without limitation, a
material adverse change in the business, prospects, operations, results or
operations, assets, liabilities or condition since the date of the latest
financial information submitted to Lender on or before the Closing Date, and
since the date of the latest financial information supplied hereunder or at any
time as compared to the Business Plan attached hereto on the date of execution
hereof as EXHIBIT 9-12(b); (b) the material impairment of Borrower's ability to
perform its obligations under the Loan Documents to which it is a party or of
Lender to enforce the Liabilities or realize upon the Collateral, (c) a material
adverse effect on the value of the Collateral or the amount that Lender would be
likely to receive (after giving consideration to delays in payment and costs of
enforcement) in the liquidation of such Collateral, or (d) a material impairment
of the priority of Lender's liens with respect to the Collateral.
"Maturity Date": March 31, 2004
"Maximum Loan Exposure": The lesser, on any day, of the following, in
each instance determined net of the unpaid principal balance of the Loan Account
on that day: (a) the Borrowing Base, or (b) the Credit Limit.
"Net Retail Liquidation Value": Means the appraised liquidation value
of Acceptable Inventory less liquidation expenses as determined by Lender in its
reasonable discretion or its agents from time to time.
"One Turn State": Any state or other jurisdiction under whose statutory
or common law the relative priority of the rights of a landlord in assets of
that landlord's tenant, for unpaid rent, vis-a-vis the rights of the holder of a
perfected security interest therein is dependent upon whether such security
interest arose prior or subsequent to the subject asset's coming onto the
demised premises.
"Overadvance": Any amounts advanced hereunder which exceed Availa-
bility.
"Participant": Is defined in Section 14-12.
"Percentage Points": The number of whole (and, if indicated, fractions
(or decimal equivalents) of) integers of a percentage referred to in a financial
performance covenant which consists of a ratio. For example, if a projected
ratio were fifty (50%) percent and the actual ratio turned out to be fifty-five
and 6/10 (55.6%) percent, the variance would be 5.6 Percentage Points.
"Person": Any natural person, and any corporation, limited liability
company, trust, partnership, joint venture, or other enterprise or entity.
"Real Estate": Means any estates or interests in real property now
owned or hereafter acquired by Borrower.
"Receipts": All cash, cash equivalents, checks, and credit card slips
and receipts as arise out of the sale of the Collateral.
"Receivables Collateral": That portion of the Collateral which consists
of the Borrower's Accounts, Accounts Receivable, Contract Rights, General
Intangibles, Chattel Paper, Instruments, Investment Property, Documents of
Title, Documents, Securities, letters of credit for the benefit of the Borrower,
and bankers' acceptances held by the Borrower, and any rights to payment.
"Related Entity":
(a) Any corporation, limited liability company, trust,
partnership, joint venture, or other enterprise which: is a parent,
brother-sister, subsidiary, or affiliate, of the Borrower; could have such
enterprise's tax returns or financial statements consolidated with the
Borrower's; could be a member of the same controlled group of corporations
(within the meaning of Section 1563(a)(1), (2) and (3) of the Internal
Revenue Code of 1986, as amended from time to time) of which the Borrower
is a member; Controls or is Controlled by the Borrower or by any Affiliate
of the Borrower.
(b) Any Affiliate.
"Requirement of Law": As to any Person:
(a) (i) All statutes, rules, regulations, orders, or other
requirements having the force of law and (ii) all court orders and
injunctions, arbitrator's decisions, and/or similar rulings, in each
instance ((i) and (ii)) of or by any federal, state, municipal, and other
governmental authority, or court, tribunal, panel, or other body which has
or claims jurisdiction over such Person, or any property of such Person, or
of any other Person for whose conduct such Person would be responsible.
(b) That Person's charter, certificate of incorporation, articles
of organization, and/or other organizational documents, as applicable; and
(c) that Person's by-laws and/or other instruments which deal with
corporate or similar governance, as applicable.
"Reserves": All (if any) Availability Reserves, Inventory Reserves, and
any other reserves which may be established under the Loan Agreement.
"Retail": The Cost of Inventory divided by the Cost Factor.
"Revolving Credit": Is defined in Section 1-1.
"Stated Amount": The maximum amount for which an L/C may be honored.
"Special Purchase Advances": Means amounts in addition to Standard
Inventory Advances, up to an aggregate maximum equal to ten (10%) percent of the
Cost of all Acceptable Inventory purchased within the immediately preceding
forty-five (45) days, provided however, Special Purchase Advances shall not be
available at any time after the occurrence and during the continuance of a
Suspension Event or Event of Default, unless such Suspension Event or Event of
Default is expressly waived in writing by Lender.
"Standard Inventory Advances": Means amounts equal to an aggregate
equal to of the lesser of (x) as of the date of determination one hundred (100%)
percent of the Net Retail Liquidation Value and (y) the following percentages of
the Cost of all Acceptable Inventory as of such date:
January 50%
February to April 65%
May to July 75%(1)
August to November 19 80%
November 20 to December 60%
provided however, any Advance Rate in excess of seventy-five (75%) percent shall
be further conditioned upon Borrower's demonstration of excess availability of
no less than Five Hundred Thousand ($500,000) Dollars as of the last Banking Day
of July and thereafter from the period August 1 through November 19 maintains
excess availability of not less than Seven Hundred Fifty Thousand ($750,000)
Dollars.
"Suspension Event": Any occurrence, circumstance, or state of facts
which (a) is an Event of Default; or (b) would become an Event of Default if any
requisite notice were given and/or any requisite period of time were to run and
such occurrence, circumstance, or state of facts were not absolutely cured
within any applicable grace period.
"Termination Date": The earliest of (a) the Maturity Date; or (b) the
occurrence of any event described in Section 10-11; or (c) the Lender's notice
to the Borrower setting the Termination Date on account of the occurrence of any
Event of Default other than as described in Section 10-11.
"UCC": The Uniform Commercial Code as presently in effect in
Massachusetts (Mass. Gen. Laws, Ch. 106).
"Year 2000 Compliant": means that Borrower's computer software programs
(whether used in Borrower's business or licensed by or to Borrower to or from
third parties) effectively process data including data fields requiring
references to dates on and after January 1, 2000 and have been designed not to
experience or produce invalid or incorrect results or abnormal software
operation related to or as a result of the occurrence of such dates.
- --------
(1) Subject to Effective Advance Rate limitation set forth in Exhibit 9-12(a).
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> APR-03-1999
<CASH> 279,807
<SECURITIES> 0
<RECEIVABLES> 1,042,499
<ALLOWANCES> 0
<INVENTORY> 9,781,761
<CURRENT-ASSETS> 11,104,067
<PP&E> 9,929,875
<DEPRECIATION> (3,164,351)
<TOTAL-ASSETS> 18,336,571
<CURRENT-LIABILITIES> 3,461,541
<BONDS> 8,253,913
0
0
<COMMON> 44,158
<OTHER-SE> 6,396,959
<TOTAL-LIABILITY-AND-EQUITY> 18,336,571
<SALES> 5,915,563
<TOTAL-REVENUES> 0
<CGS> 3,226,773
<TOTAL-COSTS> 2,688,790
<OTHER-EXPENSES> 4,372,226
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 132,724
<INCOME-PRETAX> (1,816,160)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,816,160)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.41)
</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. In April 1999, the company replaced its previous revolving line
of credit with Bank America Business Credit, with an $8 million credit
facility with Paragon Capital, LLC.
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.
Because internet retailing is still in a relatively early stage of
development, there is no guarantee the use of the internet for retail
purposes will become widespread. Consumer concerns about privacy and
security may hinder the growth of internet retailing. Technology in the
online commerce industry changes rapidly. These changes and the
emergence of new industry standards and practices could render our
existing Website and technology obsolete.
The Company has a limited amount of experience marketing products
electronically. The Company may be unable to develop the methods and
means necessary to produce sufficient consumer interest in the
Company's Website, thus hindering its ability to increase revenues via
internet sales. In addition, the Company may not be able to establish
links with other web sites as planned which could adversely impact the
success of the site. The Company must also be able to effectively and
efficiently fulfill customer orders which is subject to various
internal and external factors
The Company' success and ability to facilitate product sales over the
internet depends on the efficient and uninterrupted operation of its
computer and communications hardware systems. In the case of frequent
or persistent system failures the Company's reputation and name brand
could be materially adversely affected. The Company's internet systems
and operations are vulnerable to damage or interruption from
earthquakes, floods, fires, power loss, telecommunications failures,
break-ins, sabotage, intentional acts of vandalism, and similar acts.
In addition, the Company's servers are vulnerable to computer viruses,
physical or electronic break-ins, and similar disruptions which could
lead to interruptions, delays, loss of data or the inability to
complete customer transactions. The Company does not presently have
fully redundant systems, a formal disaster recovery plan or alternative
service providers and does not carry sufficient business interruption
insurance to compensate the Company for losses that may occur.
