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By Mark Harrington
Dallas
NeoStar Retail Group, which last week acknowledged it is in technical default of one of its debtor-in-possession (DIP) financing terms, said company director and stockholder Leonard Riggio has proposed making an investment in the chain to help alleviate a credit crunch.
NeoStar, operating under Chapter 11 bankruptcy protection since earlier this fall, said the investment could come in the form of subordinated DIP financing or a "credit enhancement arrangement."
Riggio, who currently owns interest in about 13 percent of NeoStar, is said to be making the offer as an independent businessman and not in his role as chairman of Barnes & Noble, which in the past has had business ties to both NeoStar and its Software Etc. chain. A week before the agreement, widely circulated reports had Barnes & Noble buying NeoStar out of bankruptcyÑreports which the spokesman denied. Whether or not Riggio's offer of an investment is accepted will be decided within the next few weeks, said the spokesman. The covenant NeoStar violated required that the chain reach three prescribed plateaus of trade credit. A source said NeoStar reached its end-of-September $1 million credit requirement and its $6 million requirement by mid-October, but failed to win $20 million in trade credit by Nov. 2.
In a statement, NeoStar said it was in default of the $70 million DIP financing agreement because its suppliers "have not provided trade credit at levels high enough to ensure an adequate mix of inventory for the holiday selling season."
The NeoStar spokesman declined to specify how much Riggio sought to invest in the chain. His role at NeoStar appears to have been a large one even before its formation, when Software Etc. operated as an independent chain and he served as chairman of both Barnes & Noble and Software Etc. After the merger, when Riggio was named a director, he also took on the role of chairman of NeoStar's executive committee.
As NeoStar's problems began mounting earlier this year, however, Barnes & Noble appeared to take a step back. It pulled out lease agreements in which NeoStar operated some 135 software stores within or adjacent to Barnes & Noble bookstores, and Barnes & Noble assumed control of its software purchasing operations.
Under terms of the DIP agreement, the entire balance is due in the event of a default, according to a NeoStar filing last month.
The spokesman declined to speculate on NeoStar's fate in the event banks providing DIP financing rejected Riggio's proposals.
"The company is focusing on getting this done," he said. "It would be pure speculation to comment on any sort of outcome in the event the financing did not come together." Sources said NeoStar executives informed store managers at a convention here this week about Riggio's proposal.
The reports accompanied word that former NeoStar and Software Etc. president Dan DeMatteo may return to the chain to help spirit it back to health. The spokesman said he had heard of no such reports.
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