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IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: NAMCO, LLC,1 Debtor. ) ) ) ) ) ) ) ) Chapter 11 Case No. 13-

DECLARATION OF LEE DIERCKS IN 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 the

Debtor), 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 have

been 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

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

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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 based

upon 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. 5. The Debtors Business 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 2
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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 Jerseybased retailer of pool products and supplies for approximately $35M in January 2005. The acquisition added six retail locations to the NAMCO platform and expanded NAMCOs geographic coverage in the Mid-Atlantic. Significant time and money was spent during 2005 to fully integrate the Branch Brook acquisition. 2006: Following the acquisition of Branch Brook and departure of NAMCOs CEO, Stephen Radocchia, NAMCO hired a new CEO in late 2005 who launched a 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 highlycompensated, middle managers who were deemed to have stronger operational skills. During the transition period, NAMCOs CEO also made the decision to begin work on upgrading NAMCOs existing point-of-sale (POS) system. As a result of NAMCOs cultural overhaul and the hiring of highly compensated senior and middle management teams, NAMCOs operating expenses increased significantly in 2006. 2007: Under the direction of the new NAMCO management team, the new POS system was unsuccessfully implemented in March 2007. Upon installation, it was found that the new system was not properly integrated and significant business disruptions were experienced as a result. The collapse of the POS system caused customer deliveries to be delayed or shipped incomplete; store replenishment systems to be disrupted; and customer relationships to be strained. Due to the troubles encountered from the POS conversion, NAMCO lost significant revenue and incurred unnecessary additional expenses in 2007. Subsequently, an internal 3
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candidate, Mark Scott, EVP of Merchandise, was identified and promoted to President and CEO of NAMCO. Mark Scott remains President and CEO. 2008: After the POS implementation issues were resolved and additional controls were put into place, NAMCO was able to return to the basics of running the business in 2008. NAMCO decided to restore its sales-focused culture and began focusing on selling big ticket products and pushing aftermarket sales. NAMCO also placed a renewed emphasis on operating clean stores; with good lighting and signage to attract customers. During 2008, NAMCO successfully began the process of turning around the business - by immediately focusing on improving margins and reducing unnecessary operating expenses. 7. From January of 2008 through 2012, NAMCO cut $30.7M in expenses; and its

gross 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 and

commendable reputation throughout the industry, primarily achieved by hiring a good, hardworking 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 employed

288 people. None of the employees are represented by a collective bargaining unit. 10. For the fiscal year ended December 30, 2012, the Debtors consolidated financial

statements 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. 4
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11.

In fiscal 2013, January 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 via

the 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 radio

commercials, 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. 5
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15.

The Debtor carefully monitors sales and obtains other information reflecting

trends 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. 16. The Debtors Pre-Petition Indebtedness 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 certain

Credit 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 secured

notes (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 6
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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. II. 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. The

revolver (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 this

requirement, 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 based

on 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 8
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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 to

have 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 Loan

Agreement, 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 (Mark

Scott; 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. 9
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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 and

NAMCO 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, and

the 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 10
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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 key This process involved extensive

stakeholders, including Salus and certain equity holders.

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. 11
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31.

In connection with these efforts, NAMCO logically identified Salus as the most

likely 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 Debtor

was 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, including

Clear 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. 12
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34.

Accordingly, in light of the imminent liquidity needs, the Debtor determined that

it 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. III. FIRST DAY MOTIONS 35. In furtherance of its objectives, the Debtor is filing a number of First Day Motions

and 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 with

Salus 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 13
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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. 14
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37.

For the reasons set forth in the DIP Motion below, the Courts approval of this

First 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 the

Debtors 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 cash

management 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 also

seeks 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 to

maintain 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) as

of 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 the

Bankruptcy 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 processing obligations; any Employer Tax Obligations (as defined below) attributable to the period prior to the Petition Date and to remit the same to applicable taxing authorities 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 postpetition; 17
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45. petition basis: 46.

all prepetition obligations regarding the Debtors employee life and disability 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 herein

The Debtor also seeks authority to continue, in its sole discretion, on a post-

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

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 the

Court 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 with

certain 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 18
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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 ongoing

operations, 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 in

the 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 Debtor

maintains 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 based

upon 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 Debtor

uses and relies upon companies operated by certain third parties to arrange for shipping, 20
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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 Tunc Rejection of Executory Contracts and Unexpired Leases. The

Debtor 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 Epiq

Bankruptcy Solutions, LLC (Epiq) as claims and noticing agent (the Claims Agent) . Upon 21
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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 the

Debtors 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 affected

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 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. 22
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59.

Moreover, section 365 of the Bankruptcy Code prohibits any party to an

executory 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 parties

affected 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 Thinking

to 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. 23
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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 a

monthly 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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