Declaration in Support Declaration of Lee Diercks

7/29/2019 Declaration in Support Declaration of Lee Diercks

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IN THE UNITED STATES BANKRUPTCY COURTFOR THE DISTRICT OF DELAWARE

In re:

NAMCO, LLC,1

Debtor.

))))))))

Chapter 11

Case No. 13-

DECLARATION OF LEE DIERCKSIN SUPPORT OF CHAPTER 11 PETITION AND FIRST DAY MOTIONS

I, Lee Diercks, do hereby declare, under penalty of perjury, that:

1. I serve as a Chief Restructuring Officer of Namco, LLC (NAMCO, or theDebtor), a limited liability company duly organized under the laws of the State of Delaware. I

have served in this capacity since March 15, 2013. I am also a partner of Clear Thinking Group,

Ltd. (Clear Thinking). Clear Thinking provides financial and restructuring advisory and

services for distressed and bankrupt entities. Clear Thinking was engaged by NAMCO on

March 6, 2013, the date I first began working closely with NAMCO.

2. Since March 7, 2013 and in my capacity as Chief Restructuring Officer, I havebeen extensively involved in the Debtors chapter 11 preparations and the events immediately

leading up to the Debtors chapter 11 filing.

3. On March 24, 2013 (the Petition Date), the Debtor filed a voluntary petition(the Petition) for relief under chapter 11 of title 11 of the United States Code (the Bankruptcy

Code), to preserve and maximize the value of the Debtors chapter 11 estate. I submit this

1 The Debtor in this case, along with the last four digits of its federal tax identification number, is Namco, LLC(5145).

Case 13-10610 Doc 3 Filed 03/24/13 Page 1 of 25


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declaration (the Declaration) in support of the Petition and the relief requested by the Debtor in

the various motions and applications (collectively, the First Day Motions) filed

contemporaneously herewith, and to provide an overview of NAMCO and its current

circumstances. I have reviewed the Petition and First Day Motions, or have otherwise had their

contents explained to me, and it is my belief that the relief sought therein is essential to ensure

the uninterrupted operation of the Debtors business and the success of its chapter 11 case.

4. Except as otherwise indicated, the facts set forth in this Declaration are basedupon my personal knowledge, my review of relevant documents, information provided to me by

employees with responsibility for the relevant business and corporate matters addressed in the

First Day Motions, or my opinion based upon experience, knowledge, and information

concerning the Debtor and the industry in which it operates. I am authorized to submit this

Declaration on behalf of the Debtor and if called upon to testify, I would testify competently to

the facts set forth herein. Any capitalized term not expressly defined herein shall have the

meaning ascribed to that term in the relevant First Day Motion.

I. Background

A. The Debtors Business5. NAMCO is headquartered in Manchester, Connecticut. NAMCO was founded in

1962 as a retailer of pools, pool accessories and other recreational equipment in the Northeast

and Mid-Atlantic United States. NAMCO also owns and operates a chemical repackaging

facility in Manchester, and sells chemicals in NAMCOs retail stores, sells product on a

wholesale basis to distributors (under a different label), and through its website;

www.namcopool.com. Due to its size and buying power, NAMCO is often able to offer the

lowest prices in the markets it serves without compromising its margins. Additionally, many of

NAMCOs competitors are single location, low-volume retailers that are not able to offer product



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selection and customer service on par with NAMCO. NAMCO currently operates thirty-seven

(37) full-line retail stores in ten states throughout the Northeast and Mid-Atlantic, with store

sizes ranging from 11,000 to 60,000 square feet. Additionally, NAMCO has approximately

190,000 square feet of office/distribution center space, and 40,000 square feet of space with

respect to a chemical re-packaging facility, located next to each other, in Manchester CT.

6. In December 2003, NAMCO was acquired by Whitney Equity Holdings Corp(Whitney) one of the countrys oldest private equity groups, from the Radocchia family. In

connection with the purchase, NAMCO was organized in 2003 as a Delaware limited liability

company. In the years following the transaction with Whitney, NAMCO has faced several

transactional, operational and technological challenges; as outlined in the following timeline:

2005: NAMCO completed the acquisition of Branch Brook Co., a New Jersey-based retailer of pool products and supplies for approximately $35M in January2005. The acquisition added six retail locations to the NAMCO platform andexpanded NAMCOs geographic coverage in the Mid-Atlantic. Significant timeand money was spent during 2005 to fully integrate the Branch Brook acquisition.

2006: Following the acquisition of Branch Brook and departure of NAMCOsCEO, Stephen Radocchia, NAMCO hired a new CEO in late 2005 who launcheda corporate reorganization to create a more operationally-focused Company,which included the hiring of numerous, higher-level executives. In addition,NAMCO replaced approximately 20 store managers with a new layer of highly-compensated, middle managers who were deemed to have stronger operationalskills. During the transition period, NAMCOs CEO also made the decision tobegin work on upgrading NAMCOs existing point-of-sale (POS) system. As aresult of NAMCOs cultural overhaul and the hiring of highly compensated seniorand middle management teams, NAMCOs operating expenses increasedsignificantly in 2006.

2007: Under the direction of the new NAMCO management team, the new POSsystem was unsuccessfully implemented in March 2007. Upon installation, it wasfound that the new system was not properly integrated and significant businessdisruptions were experienced as a result. The collapse of the POS system causedcustomer deliveries to be delayed or shipped incomplete; store replenishmentsystems to be disrupted; and customer relationships to be strained. Due to thetroubles encountered from the POS conversion, NAMCO lost significant revenueand incurred unnecessary additional expenses in 2007. Subsequently, an internal



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candidate, Mark Scott, EVP of Merchandise, was identified and promoted toPresident and CEO of NAMCO. Mark Scott remains President and CEO.

2008: After the POS implementation issues were resolved and additional controlswere put into place, NAMCO was able to return to the basics of running thebusiness in 2008. NAMCO decided to restore its sales-focused culture and beganfocusing on selling big ticket products and pushing aftermarket sales. NAMCOalso placed a renewed emphasis on operating clean stores; with good lighting andsignage to attract customers. During 2008, NAMCO successfully began theprocess of turning around the business - by immediately focusing on improvingmargins and reducing unnecessary operating expenses.

7. From January of 2008 through 2012, NAMCO cut $30.7M in expenses; and itsgross margin percentage grew from 41.0% to 51.3%. However, due to the combination of a very

difficult economy; erratic summer weather patterns; and a consistent lack of working capital,

NAMCOs top line sales dropped by 9.4% on a comparative store basis from 2008 to 2011.

8. Operationally, the Debtor has built a strong company with a valuable andcommendable reputation throughout the industry, primarily achieved by hiring a good, hard-

working team and timely fulfillment of orders. With spring, comes the beginning of NAMCOs

busy season, with approximately 64% of its sales revenues occurring in the April thru July time

period. In fact, notwithstanding NAMCOs current liquidity issues, NAMCO anticipates a

strong sales performance over the upcoming months.

9. As of the Petition Date, the Debtor operated thirty seven (37) stores and employed288 people. None of the employees are represented by a collective bargaining unit.

10. For the fiscal year ended December 30, 2012, the Debtors consolidated financialstatements showed net sales of approximately $82.8 million, compared with $92.2 million for the

fiscal year ended January 1, 2012. The decrease in net sales is attributable to a decline in overall

demand within the pool and patio industry sector due to a poor housing market, an overall weak

U.S. economy, complicated by unfavorable weather conditions (cool and wet) in the Debtors

operating markets.



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11. In fiscal 2013, J anuary net sales were below last year by $0.6 million or 48%,February sales were below last year by $1.5 million or 42%, and month-to-date sales through

March 20th were below last year by $1.2 million or 32%. Net sales were unfavorably impacted

by weak U.S. economic conditions within the Debtors demographic, tight liquidity conditions

negatively affecting the Debtors ability advertise and bring in merchandise, along with

unfavorable weather conditions within the Debtors operating markets. Additionally, in efforts

to minimize operating costs in January 2013, the Debtor temporarily closed a number of stores

and operated 21 fewer stores than it did in January 2012, thus affecting sales negatively.

12.

Operations. Customers can order products from the Debtors website seven days

per week. Approximately 1% of the Debtors business comes through the website. However,

the Debtors primary selling channel is its brick and mortar operations at its 37 stores. The

Debtor generally operates stores in the Northeast and mid-Atlantic region, as far north as New

Hampshire and as far south as Maryland.

13. Customer orders are generally processed immediately, whether at the store or viathe internet. Depending on what product a customer has purchased, customers may, from time to

time, receive a call from a customer service representative with the opportunity to purchase

further related accessories, warranties or service and installation (the latter two are outsourced).

14. The Debtors advertising and marketing vehicles consist of television and radiocommercials, newspaper flyer inserts, direct mail, along with email marketing. The various

forms of advertising are generally run seasonally between the months of January and September.

Promotions are geared toward moving certain products at certain times of the year and also to

drive traffic into the stores. From time to time, the Debtor engages in email marketing. As

mentioned above, the Debtor also does direct mail promotions primarily in the form of postcards.



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15. The Debtor carefully monitors sales and obtains other information reflectingtrends in the industry and changes in customer preferences. The Debtor also reviews industry

publications, attends trade shows and maintains close contact with suppliers to aid in identifying

trends and changes in the industry.

B. The Debtors Pre-Petition Indebtedness16. Secured Debt. The Debtor is highly leveraged, with a total of approximately

$18.6 million in prepetition principal secured financial debt as of the Petition Date, and as more

fully described below:

17. The Debtors Senior Secured Credit Facility. The Debtor is party to that certainCredit Agreement dated June 1, 2012 (as amended from time to time, the Senior Loan

Agreement) by and between the Debtor as Lead Borrower and Salus CLO 2012-I, Ltd. (as

assignee of Salus Capital Partners LLC) (Salus). The Senior Loan Agreement is secured by

substantially all of the Debtors assets. As of the Petition Date, the Debtor had drawn a principal

amount on the revolver of approximately $9.3 million.

18. The Debtors Secured Notes. The Debtor is also a borrower under certain securednotes (collectively, the Secured Notes) aggregating to a principal amount of approximately

$9.3 million. Of this amount, the Debtor owes approximately $6.2 million in principal to

GarMark Partners II, LP (Garmark). M Plus Capital Partners, LP and Westwind Investors, LP

are owed the balance. Garmark, which came in as a secured debt partner late 2007, is a 50%

equity holder of the Debtor and one the Debtors Board members is designated by Garmark. The

Secured Notes are secured by a second lien substantially on all of the Debtors assets. Pursuant

to their terms and/or an intercreditor agreement, the Secured Notes are junior in priority to

amounts owing under the Senior Loan Agreement



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19. Unsecured Debt. The Debtor has approximately $32.7 million in unsecured debt.Of this amount, most is owed to various trade creditors and landlords. In addition, the Debtor

owes approximately $1.3 million in principal amount pursuant to an unsecured promissory note

in favor of one of its former chief executive officers, John Froman. Also, as of the Petition

Date, the Debtor has trade debt payable of approximately $29.0 million owed to hundreds of

vendors, along with customer liabilities of approximately $2.5 million.

I I. Corporate History and Organizational Structure

20. The Debtor is a limited liability company and does not have any subsidiaries.Currently, the equity of the Debtor is owned approximately 50% by Whitney Equity Holdings

Corp and 50% by GarMark. In 2005, the Debtor acquired the Branch Brook Pool chain which

increased Namcos footprint to include mid-Atlantic markets. The acquisition was mildly

successful in that the Debtor was able to realize certain cost side synergies. However, enhanced

revenue expectations for this acquisition were not fully realized. In 2007, the Debtor had

experienced operating/selling issues related to the installation of a new POS system. Later in the

year (November), in an effort to address the operating issues the Company was infused with

approximately $10 million of cash in the form equity from Whitney, and approximately $15

million of cash in the form of senior secured debt from GarMark. In October 2008, Whitney

forgave $15 million of secured debt (originated in 2003) and was issued 800 units of preferred

stock (Series D) and GarMark forgave approximately $5.7 million of their secured notes and was

issued 2,000 units of preferred stock (series D). In late 2010 (December), after weak operating

performance due to challenging overall US economic conditions, the Debtor was infused with $3

million of cash in the form of preferred stock (Series G) by Whitney and $3 million of cash in



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the form of preferred stock (Series G) by GarMark. At this time GarMark forgave certain

interest on its secured note and was issued 1,500 units of preferred stock (Series F-1).

Events Leading to Chapter 11

A. Weather and Economic Factors Leading to Alleged Covenant Defaults

21. NAMCO entered into the Senior Loan Agreement with Salus in June 2012. Therevolver (the Revolver) under the Senior Loan Agreement includes high and low season

caps of $20 million and $10 million respectively. High season is defined as March 1st -

September 30th. The Revolver included a monthly minimum availability covenant; a cash-flow

based pay-down requirement; and a quarterly, cumulative EBITDA covenant, together with a

number of other financial and non-financial covenants. NAMCO successfully achieved all of the

monthly minimum availability covenants. In the fall of 2012, however, NAMCO had difficulties

satisfying the $2 million pay-down provision and required a two week extension to successfully

satisfy the provision.

22. A number of economic factors contributed to the difficulty in meeting thisrequirement, but most significantly was a winter pool cover season (which is accompanied by

70% gross margins) that fell about $2 million short of plan and significantly below historical

results. Industry sources have suggested that the pool cover season was soft throughout

NAMCOs footprint and that the softness was attributable to the historically mild 2011/2012

winter and lack of snow; which minimized pool and cover damage; which resulted in fewer

replacement cover sales.

23. NAMCO then allegedly defaulted on its December 2012 EBITDA covenant basedon a variety of weather and economic factors. Specifically, in addition to the poor winter pool

cover season, NAMCO was impacted by a cool, wet spring in 2012. The latter factor delayed



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pool openings--causing some customers to decide not to open their pools at all. Furthermore,

NAMCOs core customer, who makes $75,000 - $150,000 per year; has two to three children;

and a house worth approximately $250,000, while improving economically, continues to struggle

overall in this economy. As a result, NAMCO missed its sales plan for 2012 by approximately

$10 million and, despite significant expense and cost control measures, missed the year-end

EBITDA covenant.

24. In addition to the December 2012 EBITDA default, NAMCO is also alleged tohave defaulted on certain other covenants. Most of these alleged defaults related to lender

reporting requirements, including with regard to status of dispute and payment issues with

landlords. Others were cross-defaults, including those that allegedly arose in connection with

NAMCOs obligations to its subordinated lender.

B. Negotiations with Salus

25. In February, 2013 on account of the alleged default of the Senior LoanAgreement, NAMCO entered into a forbearance agreement with Salus. In connection therewith,

Salus retained Hilco Appraisal and SD Retail Consulting to perform an operational review and

new inventory valuation. Upon completion of the operational review, NAMCO was presented

with a report that took issue with NAMCOs 2013 business plan. NAMCO disputes almost all of

the conclusions contained in the report.

26. Since late January 2013, Salus had been working closely with management (MarkScott; a group of outside investors; and five other senior members of the management team) -

with the understanding that this group was considering the purchase of 50% of NAMCO

(Whitney's ownership interest) and would infuse a minimum of $1.5 million of working capital

into the business, junior in position to Salus. Pursuant to the forbearance agreement, the



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sale/purchase of Whitney's equity, the capital infusion and the continuing of Saluss financing

were all events that were to have happened simultaneously by the conclusion of the forbearance

period, March 8, 2013. Moreover, pursuant to the forbearance agreement, NAMCO would be

unable to access the relied upon high season cap of $20 million come March 1, 2013.

27. By the week of March 4, 2013, it was clear that more time was needed andNAMCO would not be able to obtain this capital infusion by March 8. Salus advised that it

would contemplate an additional one-week forbearance, but only on strict terms. These terms

contemplated NAMCO hiring restructuring advisors and a bankruptcy filing date of March 15,

2013 unless a capital infusion deal could be reached by that time. Clear Thinking was chosen by

NAMCOs management to act as restructuring advisor on March 6, 2013 and by March 7, I was

on the ground at NAMCOs headquarters. March 8th came and went with no additional

forbearance entered into at that time. In the meantime, NAMCO relied on daily negotiations

with Salus in order to fund its working capital needs. Finally, on March 15, NAMCO entered

into a second forbearance agreement, which contemplated a chapter 11 filing by March 22, 2013

and provided NAMCO the financing necessary to fund its legal obligations until that time.

C. Lease Negotiations

28. In connection with the forbearance agreement entered into in February 2013, andthe resulting lack of access to the original agreements $20 million high season cap, NAMCO

began to default more frequently on certain of its rent obligations, including the lease

renegotiations handled by Keen Realty Advisors (Keen). NAMCO engaged Keen to lead lease

renegotiation discussions with its landlords as occupancy costs were the one remaining aspect of

NAMCOs cost structure that it had not been able to reduce since 2008. During the four weeks

Keen Realty was engaged, NAMCO negotiated combined lease savings of over $7 million over



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remaining three-to-five year lease terms. Approximately, $1.5 million of that savings was

expected to be realized in 2013. However, due to the default on the Salus agreement, and

without access to the high season revolver cap from Salus, NAMCO did not have the available

liquidity to make certain negotiated lease reduction payments, thus, jeopardizing the concessions

negotiated by Keen Realty. The negotiated reductions were predicated upon a combination of

staying current on future (reduced) rent obligations and/or paying a portion of arrearages. As

mentioned above, given the Debtors limited access to liquidity, it was a challenge to conform to

the negotiated terms.

D. DIP Negotiations

29. Given the urgency to find an immediate comprehensive liquidity solution,including postpetition financing, over the course of the last few weeks, the Debtors management

team, together with Clear Thinking, has worked to address certain risks presented by a continued

deterioration of NAMCOs liquidity position, including, in particular, the possibility that a

liquidity shortfall would force the Debtor to liquidate. In connection with such efforts, Clear

Thinking contacted 12 financial parties, including banks and non-institutional investors resulting

in NAMCOs entry into 6 non-disclosure agreements.

30. A primary component of such efforts has been discussions with NAMCOs keystakeholders, including Salus and certain equity holders. This process involved extensive

negotiations between legal and financial advisors for each of these parties and NAMCOs

advisors, as well as a number of presentations and other meetings where members of NAMCOs

senior management team and Clear Thinking met. In the meantime, Clear Thinking continued to

have communications with a number of third-parties in connection with obtaining postpetition

financing.



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31. In connection with these efforts, NAMCO logically identified Salus as the mostlikely source of postpetition financing that could be obtained within the time period imposed by

the forbearance agreement and NAMCOs rapidly dwindling liquidity position, particularly

given Saluss liens on substantially all of NAMCOs assets, history with NAMCO, and

involvement over the past several months with NAMCOs restructuring efforts. Indeed, in light

of the substantially fully encumbered nature of NAMCOs assets, the prospect of obtaining

postpetition financing from a third party lender outside of Salus would have contemplated one of

four difficult alternatives: (a) to find a lender willing to extend postpetition financing on an

unsecured basis, (b) to find a lender willing to extend postpetition financing with priority junior

to that of the Prepetition Secured Parties, (c) to obtain postpetition financing that primed the liens

of the Prepetition Lenders without such parties consent, or (d) to arrange a refinancing of

NAMCOs Prepetition Debt. Nonetheless, NAMCO and its advisors approached third parties to

ascertain whether or not such third parties would be willing to provide postpetition financing.

32. Indeed, given the timing for a filing and the impending liquidity crisis, the Debtorwas not able to secure financing proposals from third parties that would provide the Debtor with

sufficient liquidity to fund the Chapter 11 Case, including on an unsecured or non-consensual

priming basis or on a priority junior to that of the Prepetition Lenders.

33. Accordingly, NAMCO determined in consultation with its advisors, includingClear Thinking, that under the circumstances, including NAMCOs liquidity position, the

upcoming forbearance deadline, the current debtor-in-possession financing market, and the

results of recent conversations with a variety of stakeholders and other parties, the proposed

Salus DIP Facility is the best option available to the Debtor to provide it with sufficient liquidity

to continue to operate its business operations and to conclude its restructuring.



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34. Accordingly, in light of the imminent liquidity needs, the Debtor determined thatit would not be prudent or productive to delay a chapter 11 filing and risk a lack of funding and

liquidity, coupled with potential precipitous action to be taken by Salus, nor would it be prudent

to incur further costs or devote additional resources to soliciting interest from potential third

party sources of postpetition financing. Rather, the Debtor and its advisors focused their efforts

on finalizing and documenting the Salus DIP Facility. Thus, throughout the weeks leading up to

the Petition Date, the Debtor and Salus engaged in extensive good faith and arms length

negotiations with respect to the terms and conditions of the postpetition financing. The result of

such good faith and arms length negotiations was the execution of the Salus DIP Facility

submitted to the Bankruptcy Court for approval.

II I . FIRST DAY MOTIONS

35. In furtherance of its objectives, the Debtor is filing a number of First Day Motionsand proposed orders substantially contemporaneously with this Declaration, and respectfully

requests that the Court enter the proposed orders granting such First Day Motions. I have

reviewed each of the First Day Motions and proposed orders (including the exhibits thereto), and

the facts set forth therein are true and correct to the best of my knowledge, information and

belief. Moreover, I believe that the relief sought in each of the First Day Motions (a) is vital to

enable the Debtor to make the transition to, and operate in, chapter 11 with a minimum

interruption or disruption to its business or loss of productivity or value and (b) constitutes a

critical element in achieving the Debtors successful reorganization.

36. DIP Motion: The Debtor seeks authority to enter into a DIP Agreement withSalus CLO 2012-I, Ltd to provide the Debtor with the following relief: (a) Authorizing the

Debtor to obtain up to $16,000,000.00 in post-petition financing, pursuant to the Salus DIP



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Facility which may be used for (i) funding the Debtors day-to-day operations and working

capital needs; (ii) repaying of all outstanding prepetition obligations under the Prepetition Credit

Agreement and (iii) such other obligations as the DIP Lender and the Court may approve,

including certain other costs and expenses of administering the Chapter 11 Case (including

professional fees) as specified in the Budget; (b) Approval of the Salus DIP Facility and all other

agreements, documents, notes, certificates, and instruments executed and/or delivered with, to, or

in favor of the DIP Lender, (c) Granting the DIP Lender first priority, priming, valid, perfected,

and enforceable Liens, subject only to the Carve Out (as defined in the DIP Motion) and the

Permitted Prior Liens (as defined in the DIP Motion, upon substantially all of the Debtors real

and personal property as provided in and as contemplated by this Interim Order and the Salus

DIP Agreement and superpriority administrative claim status in respect of all obligations under

the Salus DIP Facility, subject to the Carve Out as provided herein; (d) Authorizing the Debtors

use of cash collateral, as such term is defined in section 363 of the Bankruptcy Code (Cash

Collateral), in which the Prepetition Lenders have an interest; (e) Granting the Prepetition

Lenders certain adequate protection, including, among other things, Prepetition Replacement

Liens and Prepetition Superpriority Claims (each as defined in the DIP Motion) and certain other

adequate protection as described in this Interim Order, to the extent of any diminution in the

value of the Prepetition Lenders interest in the Prepetition Collateral having the priority set forth

in this Interim Order, as adequate protection for the granting of the DIP Liens to the DIP Lender,

the use of Cash Collateral; (f) Modifying the automatic stay imposed by section 362 of the

Bankruptcy Code to the extent necessary to implement and effectuate the terms and provisions of

the DIP Agreement and Interim Order and (g) scheduling a final hearing to grant the relief

requested on a final basis.



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37. For the reasons set forth in the DIP Motion below, the Courts approval of thisFirst Day Motion is absolutely critical. Approval of the Salus DIP Facility and the use of Cash

Collateral will enable the Debtor to pursue a sale or reorganization process, while simultaneously

permitting the Debtor to satisfy its current and ongoing operating expenses, including

postpetition wages and salaries, utilities, taxes, and vendor costs. Absent the required financing,

the Debtors operations would come to an immediate halt, resulting in irreparable harm to its

business, its going concern value, possible reorganization efforts, and ultimately, its ability to

pursue a sale of its assets - a course of action that the Debtor believes to be the most expeditious

and effective means of maximizing value for its stakeholders.

38. Furthermore, as evidenced by the Budget, the Salus DIP Facility, which is theDebtors only source of postpetition financing, is appropriately sized given the Debtors

projected liquidity pending completion of the reorganization or sale process. The Debtor

believes that the Budget is feasible, includes all expenses that the Debtor believes it will incur

after the Petition Date and will provide the Debtor with sufficient liquidity to support the

Debtors pursuit of the case and satisfy essential financial obligations during the Chapter 11

Case, all in order to maximize the value of the Debtors estate for the benefit of parties in

interest.

39. Unless this Court authorizes use of the Cash Collateral and the Salus DIP Facility,I do not believe that the Debtor will be able to pay for services and expenses necessary to

preserve and maximize the value of the Debtors estate. Moreover, I believe that such relief on

an interim basis is necessary to avoid immediate and irreparable harm to the Debtor pending a

final hearing.



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40. Cash Management: The Debtor seeks authority to maintain its cashmanagement system and to use its business forms. Prior to the commencement of this case, in

the ordinary course of business, the Debtor maintained seven bank accounts for purposes which

are set forth in the Cash Management Motion. Each of these accounts are essential to the

Debtors cash management system and its relationship with its vendors, customers and

employees, who rely on the proper operation of the Debtors cash management system. The

Debtor is seeking a waiver of the requirement in the U.S. Trustee Guidelines that the prepetition

bank accounts be closed and that new post-petition bank accounts be opened. If enforced in this

Chapter 11 Case, I believe that such requirements would cause significant disruption to the

Debtors business, and would impair the Debtors efforts to reorganize and pursue other

alternatives to maximize the value of its estate. Indeed, the Debtors bank accounts are part of a

carefully constructed and complex, integrated cash management system that ensures the Debtors

ability to efficiently monitor and control all profits, cash receipts and disbursements. I believe

that closing the existing Bank Accounts and opening new accounts inevitably would disrupt the

Debtors business and result in delays that would impede the Debtors ability to transition

smoothly into chapter 11, and would likewise jeopardize the Debtors efforts to successfully

reorganize or sell its assets in a timely and efficient manner.

41. To avoid disruption to its business and to minimize expenses, the Debtor alsoseeks authorization to continue to use existing check stock (collectively, the Business Forms),

substantially in the forms existing immediately before the Petition Date. The Debtor will

indicate its status as a debtor in possession by printing debtor in possession on any of its

Business Forms or in wire transfer instructions.



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42. Thus, through this First Day Motion, the Debtor will authority to (a) continue tomaintain its existing cash management system, as modified in the Cash Management Motion,

and (b) maintain existing bank accounts.

43. Wages: The Debtor employs approximately 288 employees (the Employees) asof the Petition Date. Approximately 134 employees are paid on salary basis and the remainder

are paid on an hourly basis. To minimize the personal hardships that the Employees will suffer if

their prepetition employee-related obligations are not paid, to maintain the morale of the

Employees during this critical time, and to minimize disruptions to the Debtors ongoing

business operations, the Debtor, by this Motion, seeks authority, in its sole discretion, to: (i) pay

unpaid prepetition claims for wages salaries, and commissions to the Employees; (ii) remit

applicable withholding obligations to the proper third parties; (iii) honor and maintain certain

benefits (as more fully set forth in the Wages Motion) offered by the Debtor; (iv) reimburse

certain unpaid business expenses incurred prepetition by the Employees; and (v) pay all costs

incident to the foregoing, as set forth in greater detail in the Wages Motion.

44. Specifically, Pursuant to sections 105(a), and 363(b)(1) and (c)(1) of theBankruptcy Code and the necessity of payment doctrine, the Debtor seeks authority to pay or

honor, in its sole discretion:

the Unpaid Wages, including any associated payroll processingobligations;

any Employer Tax Obligations (as defined below) attributable to theperiod prior to the Petition Date and to remit the same to applicable taxingauthorities or other appropriate third-parties;

the General Reimbursement Obligations (as defined below); all prepetition obligations under the Medical Plans (as defined below); all prepetition obligations under the Workers Compensation Policy,

including those obligations incurred prepetition and liquidated post-petition;



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all prepetition obligations regarding the Debtors employee life anddisability insurance plan;

honor vacation time earned prepetition by Employees; and any other prepetition claims or obligations described in this Motion for

which such authority is specifically requested herein45. The Debtor also seeks authority to continue, in its sole discretion, on a post-

petition basis:

the Medical Plans; the Workers Compensation Policy; payment of the Employer Tax Obligations; and any other benefit program described in this Motion for which authority is

specifically requested herein

46. The Debtor represents that (i) the Debtor will not distribute any amounts over the 507(a)(4) priority cap of $11,725 directly to any individual employee on account of aggregate

pre-Petition Date Unpaid Wages and Employee Programs, and (ii) the Debtor will not pay any

amounts in excess of the estimated outstanding amounts for each category of prepetition claim

identified herein without further order from this Court.

47. To enable the Debtor to accomplish the foregoing, the Debtor requests that theCourt authorize and direct the Debtors banks and other financial institutions to receive, process,

honor, and pay all checks presented for payment and electronic payment requests relating to the

foregoing.

48. Utilities: In the normal course of business, the Debtor has relationships withcertain utility companies for the provision of phone, internet, security, and other utility services

for each of its 37 stores and its warehouse. On average, the Debtor pays approximately $200,000

per month on account of Utility Services. Historically, the Debtor has had a very good payment

record with the Utility Providers. Moreover, to the best of the Debtors knowledge, there are



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few, if any, defaults or arrearages of any significance with respect to the Debtors undisputed

invoices for Utility Services, other than payment interruptions that may be caused by the

commencement of this Chapter 11 Case. The Debtor estimates that the cost for Utility Services

during the next thirty days (not taking into account any deposits to be paid) will be

approximately $196,416.

49. Because uninterrupted Utility Services are critical to the Debtors ongoingoperations, the Debtor, by this Motion and pursuant to sections 105(a) and 366 of the Bankruptcy

Code, seeks the entry of an order: (a) prohibiting the Utility Providers from altering, refusing or

discontinuing services; (b) deeming the Utility Providers adequately assured of payment; and (c)

establishing procedures for determining additional adequate assurance of future payment if

necessary.

50. Customer Programs: In the ordinary course of business and as is customary inthe retail industry, the Debtor instituted and engaged in certain activities to develop and sustain a

positive reputation and relationship with its customers. To that end, the Debtor implemented

various customer programs and policies (collectively, the Customer Programs) designed to

ensure customer satisfaction, develop and sustain customer relationships and loyalty, improve

profitability, and generate goodwill for the Debtor and its products and services. These Customer

Programs include the Debtors Staycation Reward Program, Refunds and Store Credits, Gift

Cards and Layaway Deposits. The Debtor seeks authorization to continue, replace, implement

new, and/or terminate the Customer Programs in the ordinary course of business and as the

Debtor deems appropriate in its business judgment, and to perform and honor, at the Debtors

sole discretion, its prepetition obligations thereunder.



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51. The Debtor also requests that the Court authorize the Banks to receive, honor,process, and pay any and all checks drawn, or electronic fund transfers requested or to be

requested, on the accounts to the extent that such checks or electronic fund transfers relate to any

Customer Programs.

52. Insurance: In connection with the operation of its businesses, the Debtormaintains insurance coverage for claims relating to, among other things, automobile losses and

liability, director and officer liability, and office insurance, through several different insurance

carriers (the Insurance Carriers), and property damage but not limited to, the Insurance

Programs and Insurance Carriers identified in Exhibit A to the Insurance Motion Continuation

of these policies is essential to the ongoing operation of the Debtors business.

53. The Debtor is required to pay premiums under the Insurance Programs basedupon fixed rates established by the applicable Insurance Carriers (the Insurance Premiums).

The annual premiums for these policies aggregate to approximately $550,000. In most

instances, the Debtor pays these premiums directly to the Insurance Carriers at the

commencement of the respective policies. In addition to annual premiums, pursuant to certain of

the Insurance Programs, the Debtor is required to pay various deductibles for claims asserted

under the policies. As of the Petition Date, the Debtor is not aware of any prepetition Insurance

Carrier claims for which any amounts owed not been paid. However, out of an abundance of

caution, the Debtor is seeking the Courts authorization to pay any such undisputed obligations,

in its discretion, as they come due, which includes $37,777 in installment payments due on

March 29, 2013.

54. Payment to Freight Forwarders: In the ordinary course of business, the Debtoruses and relies upon companies operated by certain third parties to arrange for shipping,



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transport and related support of freight of inventory sold by its vendors. The motion seeks

authority to pay two such freight forwarders (the Freight Forwarders). Specifically, the Debtor

seeks entry of an order authorizing, but not directing, it to pay, in its sole discretion the valid

prepetition claims of the Freight Forwarders relating to the overseas shipment and transport of

goods to the Debtor in the ordinary course of business, pursuant to section 105 of the Bankruptcy

Code that have accrued and been unpaid as of the Petition Date, up to an amount of $159,879.

The Debtor proposes to pay such claims, when, in the Debtors sole discretion, the Freight

Forwarders exercise of contractual or statutory self-help remedies would unduly disrupt the

Debtors business.

55. Nunc Pro TuncRejection of Executory Contracts and Unexpired Leases.TheDebtor is party to certain executory contracts and unexpired non-residential leases. In an effort

to maximize the value of its estate and reduce its administrative costs in this chapter 11 case, the

Debtor has reviewed its overall operations and has determined, in its business judgment, that

certain of these contracts and leases (the Rejection Contracts) are burdensome and provide no

economic value to its estate. Moreover, the Debtor, in the exercise of its business judgment, has

determined that the Rejection Contracts are unprofitable and are not necessary for the Debtors

restructuring efforts. The Debtor has already vacated the premises of the leases, or in some

instances of recently entered into real estate leases, has not yet occupied the properties.

Rejection of the leases and executory contract as set forth in the corresponding motion at this

time will eliminate under-performing assets and allow management to focus its limited resources

on maximizing the value of the Debtors remaining assets.

56. Epiq as Noticing Agent. The Debtor is also filing an application to appoint EpiqBankruptcy Solutions, LLC (Epiq) as claims and noticing agent (the Claims Agent) . Upon



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information and belief, Epiq is an experienced Claims Agent and is frequently used by debtors in

chapter 11 cases of this size. I believe Epiq is well qualified to serve as the Claims Agent in the

Debtors chapter 11 case. The employment of Epiq will provide the Clerk of the Court and the

Debtor with efficient management of the claims and noticing processes in this chapter 11 case,

which will allow the Debtors management and professionals to focus their attention more

closely on the Debtors overall chapter 11 efforts.

57. Enforcement of the Automatic Stay: As a result of the commencement of theDebtors chapter 11 case, and by operation of law pursuant to section 362 of the Bankruptcy

Code, the automatic stay enjoins all entities from, among other things: (a) commencing or

continuing any judicial, administrative, or other action or proceeding against the Debtor that was

or could have been initiated before the Petition Date; (b) recovering a claim against the Debtor

that arose before the Petition Date; (c) enforcing a judgment against the Debtor or property of its

estate that was obtained before the Petition Date; or (d) taking any action to assess, or recover a

claim against the Debtor that arose before the Petition Date. 11 U.S.C. 362.

58. Notwithstanding the self-executing nature of section 362, not all parties affectedor potentially affected by the commencement of a chapter 11 case are aware of the automatic

stay. Nor are all parties cognizant of its significance and impact. Therefore it is prudent to

advise third parties of the existence and effect of section 362 of the Bankruptcy Code through an

order of the Bankruptcy Court that restates this important provision. Historically, an

overwhelming majority of the Debtors revenues are generated via credit cards. The Debtor

cannot operate without them and any interruption would be devastating. This Motion informs

the processors and other parties of the essential obligations and restrictions imposed by the

Bankruptcy Code.



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59. Moreover, section 365 of the Bankruptcy Code prohibits any party to anexecutory contract or unexpired lease with the Debtor from, among other things, modifying or

terminating such contract or lease, or any right or obligations under such contract or leases, at

any time after the commencement of the case solely because of a provision in such contract or

lease that is conditioned on: (a) the insolvency or financial condition of the Debtor at any time

before the closing of the Debtors chapter 11 case, (b) the commencement of the Debtors

chapter 11 case, or (c) the appointment of a trustee in the Debtors chapter 11 case.

60. Notwithstanding the self-executing nature of section 365(e)(1), not all partiesaffected or potentially affected by the commencement of a chapter 11 case are aware of the

automatic stay. Nor are all parties cognizant of its significance and impact. Therefore it is

prudent to advise third parties of the existence and effect of section 365(e)(1) of the Bankruptcy

Code through an order of the Bankruptcy Court that restates this important provision.

61. Clear Thinking Retention: The Debtor seeks to retain (a) retain Clear Thinkingto provide the Debtor with financial restructuring services and (b) to designate myself as Chief

Restructuring Officer (CRO). As set forth above, on or about March 6, 2013, the Debtor

retained Clear Thinking to provide financial advisory and restructuring related advisory services

to the Debtor. On or about March 15, 2013, the Debtor appointed me as CRO, as set forth in the

Engagement Letter. The Engagement Letter further contemplates that Clear Thinking will

provide crisis management services and financial advisory services. The Debtor is familiar with

the professional standing and reputation of Clear Thinking and me, who the Debtor understands

and recognizes have a wealth of experience in providing consulting services in restructurings and

reorganizations and enjoys an excellent national reputation for turnaround services they have

rendered in bankruptcy cases on behalf of debtors and creditors throughout the United States.



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The Debtor has been advised by Clear Thinking that it will endeavor to coordinate with the other

professionals retained in these bankruptcy cases to eliminate unnecessary duplication or overlap

of work.

62. Clear Thinking will bill the Debtor on an hourly basis and invoice the Debtor on amonthly basis, and Clear Thinkings post-petition professional fees and expenses will be due and

payable as set forth in the Engagement Letter or at such time thereafter as directed by the Court,

without imposing a requirement on Clear Thinking to submit periodic fee applications pursuant

to sections 330 and 331 of the Bankruptcy Code.

63.

Entry into the Engagement Letter and retaining the CRO and upon the terms set

forth in the Engagement Letter, would enable the Debtor most efficiently to maximize value for

its estates. Thus, the Debtor believes that it would be in its best interests and in the best interests

of its estate, its creditors, and other parties-in-interest for the Court to approve the Engagement

Letter in accordance with the Engagement Letter, with such retention being deemed effective as

of the Petition Date.



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Declaration in Support Declaration of Lee Diercks

Documents

Transcript of Declaration in Support Declaration of Lee Diercks