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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-22289
WHEREHOUSE ENTERTAINMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 95-4608339
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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19701 HAMILTON AVENUE
TORRANCE, CALIFORNIA 90502-1334
ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES INCLUDING ZIP CODE)
(310) 538-2314
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate book value of the estimated voting and non-voting stock held
by non-affiliates of the registrant is $18,276,093. (1)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
As of April 27, 1999, 10,729,710 shares of the registrant's common stock
were issued and outstanding and approximately 86,500 additional shares were
expected to be issued pursuant to a bankruptcy plan of reorganization (see Item
1 -- "Business -- Reorganization Under Chapter 11" below) and a related
anti-dilution provision of a stock subscription agreement with A&M Investment
Associates #3, LLC.
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(1) There is no established trading market for the voting stock of the
registrant. Accordingly, the registrant has utilized book value per share
for purposes of the foregoing calculations concerning voting and non-voting
stock held by non-affiliates. This calculation of book value per share is
not intended to represent the price at which those shares trade. As of April
27, 1999, 10,729,710 shares of the registrant's voting stock were issued and
outstanding. All but 1,079,236 of those shares were issued pursuant to a
bankruptcy plan of reorganization. See Item 1 -- "Business -- Reorganization
Under Chapter 11" below. At April 27, 1999, the registrant estimates that
approximately 86,500 additional shares of its voting stock may be issued
pursuant to the plan of reorganization and a related anti-dilution provision
of a stock subscription agreement with A&M Investment Associates #3, LLC,
after which a total of approximately 10,817,000 shares of the registrant's
voting stock will be issued and outstanding. The registrant estimates that
of the number of total outstanding shares, approximately 2,026,705 shares
will be held by non-affiliates of the registrant. The book value of voting
and non-voting stock held by non-affiliates of the registrant specified
above assumes the issuance of all 10,817,000 shares.
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes certain statements that may be
deemed to be "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The sections of this Annual Report on
Form 10-K containing such forward-looking statements include "Business --
Acquisition of Blockbuster Music", "Business -- Reorganization Under Chapter
11", "Business -- Merchandise Sale Products", "Business -- Video and Other
Product Rentals", and "Business -- Competition", "Holders" under Item 5 below,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operation" under Item 7 below. Statements in this Annual Report on Form 10-K
which address activities, events or developments that the registrant expects or
anticipates will or may occur in the future, including such things as future
issuances of shares, future capital expenditures (including the amount and
nature thereof), expansion and other developments and technological trends of
industry segments in which the registrant is active, business strategy,
expansion and growth of the registrant's and its competitors' business and
operations and other such matters are forward-looking statements. You can find
many of these statements by looking for words like "believes," "expects,"
"anticipates," or similar expressions in this Annual Report on Form 10-K.
Although the registrant believes the expectations expressed in such
forward-looking statements are based on reasonable assumptions within the bounds
of its knowledge of its business, a number of factors could cause actual results
to differ materially from those expressed in any forward-looking statements made
by or on behalf of the registrant.
The registrant's operations are subject to factors outside its control. Any
one, or a combination, of these factors could materially affect the results of
the registrant's operations. These factors include (a) possible delays and
difficulties in integrating the Blockbuster Music operations with Wherehouse's;
(b) the ability to retain Blockbuster Music's customers; (c) changes in levels
of competition from current competitors and potential new competition from both
retail stores and alternative methods or channels of distribution such as
Internet and telephone shopping services and mail order; (d) loss of a
significant vendor or prolonged disruption of product supply; (e) the presence
or absence of popular new releases and products in the product categories the
registrant represents; (f) changes in levels of consumer spending, especially
during seasonally significant periods; (g) changes in Federal and state income
tax rules and regulations or interpretations of existing legislation; (h)
changes in the general economic conditions in the United States including, but
not limited to, consumer sentiment about the economy in general; (i) regulatory
changes, including the investigation of minimum advertised pricing guidelines by
the FTC, which may adversely affect the business in which we are engaged; (j)
the ability to attract and retain key personnel; and (k) adverse results in
significant litigation matters.
The foregoing should not be construed as an exhaustive list of all factors
which could cause actual results to differ materially from those expressed in
forward-looking statements made by the registrant. You should consider the
cautionary statements contained in this section when evaluating any
forward-looking statements that we may make. We do not have any obligation to
publicly release any revisions to these forward-looking statements to reflect
events or circumstances after the date of this Annual Report or to reflect the
occurrence of unanticipated events.
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PART I
ITEM 1. BUSINESS
The registrant, Wherehouse Entertainment, Inc. ("New Wherehouse") was
incorporated under the laws of the State of Delaware on November 15, 1996 as WEI
Acquisition Co. On January 31, 1997, New Wherehouse acquired substantially all
the assets of Wherehouse Dissolution Co. ("Old Wherehouse"), a Delaware
corporation, and Old Wherehouse's parent Company, WEI Holdings, Inc., a Delaware
corporation ("WEI"), pursuant to a Chapter 11 plan of reorganization (as
described in "Reorganization Under Chapter 11" below). Prior to such
acquisition, Old Wherehouse was known as "Wherehouse Entertainment, Inc.", and,
after such acquisition, Old Wherehouse changed its name to "Wherehouse
Dissolution Co." After acquiring substantially all the assets of Old Wherehouse,
New Wherehouse changed its name to "Wherehouse Entertainment, Inc.", and as the
successor to Old Wherehouse, has undertaken to continue the obligations of Old
Wherehouse to file all reports under Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended. Except as expressly indicated or unless the
context otherwise requires, the "Company", "Wherehouse", "we", "our", or "us"
means Wherehouse Entertainment, Inc. and its subsidiaries and, where the
discussion relates to the continuing business operations of Old Wherehouse and
New Wherehouse and its subsidiaries, New Wherehouse and Old Wherehouse,
collectively.
The Company's fiscal year ends on January 31. References to "Fiscal 1999,"
"Fiscal 1998" and "Fiscal 1997" refer to the fiscal years ended January 31,
1999, January 31, 1998, and January 31, 1997, respectively.
ACQUISITION OF BLOCKBUSTER MUSIC
On October 26, 1998, pursuant to a Stock Purchase Agreement dated as of
August 10, 1998 (the "Purchase Agreement"), Wherehouse acquired (the
"Acquisition") from Viacom International Inc. ("Seller") all of the capital
stock of certain retail music subsidiaries of Seller (the "Acquired Business").
The Acquired Business operated under the name "Blockbuster Music" and is
referred to as "Blockbuster Music" throughout this Report on Form 10-K. The
Acquired Business consists of 378 Blockbuster Music stores in 33 states. Of the
378 stores acquired, 17 were closed prior to January 31, 1999, an additional 15
stores were closed between February 1, 1999 and April 30, 1999, and an
additional 19 stores are scheduled to be closed.
Pursuant to the Purchase Agreement, the base purchase price of $114.5
million is to be adjusted by the difference, if any, between the working capital
of the Acquired Business, as defined, as of March 31, 1998 (the "Reference
Working Capital"), and the working capital, as defined, as of October 26, 1998
(the "Closing Working Capital"). Based on Seller's preliminary estimate of the
Closing Working Capital, the Company paid to Seller a preliminary purchase price
of approximately $117.7 million on October 26, 1998.
On December 23, 1998, Seller delivered an adjusted statement of the Closing
Working Capital that states Seller's position that the adjusted purchase price
equals $126.5 million. Wherehouse recorded $8.8 million as a potential
additional amount due to Seller, subject to the final determination of the
Closing Working Capital. The Purchase Agreement provides that if Wherehouse
disagrees with Seller's position, it is to deliver a notice of disagreement
within a specified time. Wherehouse delivered to Seller such a notice of
disagreement on February 23, 1999, in which Wherehouse asserted that the
adjusted purchase price is approximately $101.3 million. Since then, Wherehouse
and Seller have been negotiating in an effort to resolve this dispute, but they
have not yet been able to reach agreement. No assurance can be given that a
consensual resolution will be reached between Seller and Wherehouse. If a
consensual resolution proves impossible, this dispute is to be resolved through
a dispute resolution mechanism set forth in the Purchase Agreement. Accordingly,
the purchase price paid to Seller is subject to potential adjustment and may
ultimately be significantly lower than $126.5 million.
The preliminary purchase price paid at the closing of the Acquisition was
funded with a combination of excess cash and the proceeds of a loan made
pursuant to an amended loan agreement entered into with
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Congress Financial Corporation (Western), the Company's lender. (See Item
7 -- "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources").
The Acquisition was accounted for under the purchase method of accounting.
The Company recorded the acquired assets and assumed liabilities at their fair
values at the date of acquisition based on certain valuations and other studies
and also based on Seller's Closing Working Capital statement (subject to
potential adjustment). The excess purchase price over the fair value of net
assets acquired is assigned to goodwill. The financial results of Blockbuster
Music have been consolidated with Wherehouse effective October 26, 1998.
The Company has closed or plans to close or renegotiate the leases on 51
Blockbuster Music stores and 19 Wherehouse stores that either serve overlapping
areas or are unprofitable.
BLOCKBUSTER MUSIC INTEGRATION AND SYSTEM CONVERSION
Pursuant to a Transition Services Agreement, the Company may continue to
utilize certain services and facilities of Seller for a transition period of up
to one year from the date of the Acquisition. In addition, pursuant to a
Transition License Agreement, the Company may continue to use certain trade
names, trademarks and service marks in the conduct of the Blockbuster Music
business for a limited time. Prior to the expiration of this license for a
region, the Company will change the name of the Blockbuster Music stores to the
Wherehouse name or a variation on Wherehouse, including Wherehouse Music.
A. Stores. The store integration process includes conversion of the
point-of-sale ("POS") system to the Wherehouse POS software and the name change
to Wherehouse or Wherehouse Music.
The Blockbuster Music POS system does not interface directly with the
Company's merchandising and distribution system. Prior to conversion of a
Blockbuster Music store to the Wherehouse POS system, merchandise orders are
processed through the Blockbuster Music ordering systems, and merchandise is
shipped to the stores directly from vendors. The Company is in the process of
converting the Blockbuster Music POS systems to the Wherehouse POS system. After
such conversion, purchases will be managed through Wherehouse's merchandising
systems, and stores will receive shipments from Wherehouse's centralized
distribution facility. As of April 30, 1999, the POS conversion has been
completed in approximately 220 Blockbuster Music stores. Conversion of the
remaining Blockbuster Music store POS systems is scheduled for completion in the
quarter ending July 31, 1999.
The Company is currently in the process of completing sign changes in each
of the Blockbuster Music stores to identify them as Wherehouse or Wherehouse
Music stores. In connection with the name change, in each major market, the
Company has initiated a three-week advertising campaign, which culminates with a
grand opening event in each store. Depending upon specific circumstances, the
advertising campaign includes cable TV, radio and print media supported by
in-store events (see "Advertising").
B. Distribution. Prior to the conversion of the POS system in each
Blockbuster Music store, merchandise is shipped to those stores directly from
the Company's suppliers rather than from the Company's distribution center. The
Company has an agreement with one of its suppliers, Valley Media, to perform
merchandise fulfillment until completion of the POS conversion in each
Blockbuster Music store. Approximately 50% of the music product shipped to these
Blockbuster Music stores prior to conversion of the Blockbuster Music POS
systems is being fulfilled by Valley Media.
C. Systems. The Company continues to utilize services provided by Seller
pursuant to the Transition Services Agreement to support the data communication
requirements of Blockbuster Music stores not yet converted to the Company's POS
system, and for electronic data interchange transactions with certain vendors.
GENERAL
With the Acquisition of the Blockbuster Music stores, Wherehouse has
expanded, in terms of both revenues and store count, to become one of the
largest retailers of prerecorded music in the United States.
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As of January 31, 1999, Wherehouse operated 579 stores in 33 states.
Between February 1, 1999 and April 30, 1999, the Company closed five Wherehouse
stores and 15 Blockbuster Music stores. Excluding the Blockbuster Music stores
that have not yet been converted to the Wherehouse name, all but 13 of
Wherehouse's stores operate under the name "The Wherehouse," "Wherehouse Music"
or "Wherehouse Entertainment." The remaining 13 stores operate under the names
"Tu Musica," "Rocky Mountain Records," "Fresh Cuts" and "Odyssey".
Wherehouse sells prerecorded music, videocassettes and DVDs, video games,
personal electronics (including personal stereos, portable stereos, headphones
and related merchandise), blank audiocassettes and videocassettes, and
accessories. As of January 31, 1999, approximately 21% of the Company's stores
also rented prerecorded videocassettes and video games, and approximately 9% of
the Company's stores rented DVDs.
In Fiscal 1999, on a consolidated basis, sales of prerecorded music,
videocassettes and DVDs, video games, and accessories accounted for 93.6% of the
Company's revenues, and rentals of videocassettes, DVDs, video games, and other
products (including revenue from the sale of previously viewed videocassettes)
accounted for 6.4% of revenues. Excluding the acquired Blockbuster Music stores,
sales of prerecorded music, videocassettes, DVDs, video games, and accessories
and other products represented 90.1% of revenues, and rentals (including revenue
from the sale of previously viewed videocassettes) represented 9.9% of revenues.
SALES AND RENTAL REVENUE
BY CATEGORY
(DOLLARS IN MILLIONS)
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FISCAL YEARS ENDED JANUARY 31,
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NEW OLD
WHEREHOUSE WHEREHOUSE
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1999* 1998 1997
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Sale Merchandise Revenue:
Music..................................................... $422.1 $239.2 $252.7
Other, principally sales of new videocassettes, DVDs,
video game software and hardware, general merchandise
and ticket commissions................................. 42.4 36.9 42.8
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Total sale merchandise revenue.................... 464.5 276.1 295.5
Videocassette and other rental revenues**................... 32.0 51.3 70.0
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Total Revenue..................................... $496.5 $327.4 $365.5
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* Includes revenue of the Acquired Business from and after October 26, 1998.
** Includes sales of previously viewed videocassettes
MERCHANDISE SALE PRODUCTS
Wherehouse's primary revenue source is the sale of merchandise. Wherehouse
stores generally sell a broad array of entertainment products, including
prerecorded music, videocassettes and DVDs, video game software, accessories and
personal electronics. The table above summarizes Wherehouse's dollar volume of
sale revenue by merchandise category for Fiscal 1997 through Fiscal 1999. The
percentage of total revenues contributed by merchandise sales has risen from
80.9% in 1997 to 93.6% in 1999. This increase results from the combined impact
of the additional sale merchandise revenue derived from the Acquired Business
and a decrease in the number of stores engaged in the rental business.
Wherehouse's most important product strategy is to ensure constant
availability of the most popular music and video titles while maximizing the
selection of catalog titles of lasting popularity. The number of different new
music titles per store ranges from approximately 6,000 to 50,000, representing a
range of 10,000 to 90,000 individual stock-keeping units in inventory per store.
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With input from store management and a product allocation team,
Wherehouse's inventory management systems are intended to tailor each store's
product selections and merchandise mix to local market demand and maximize the
availability of the most popular titles at each store, subject to store size
constraints. Wherehouse's stores have been designed to facilitate quick service
and to accommodate changes in industry trends and product offerings. Each
product line is monitored for profitability.
Prior to the Acquisition, Wherehouse sold used products, principally used
CDs, in the majority of its stores and continues to do so in these stores. Based
upon strong consumer acceptance, Wherehouse expanded upon its used CD business
significantly in Fiscal 1997 and Fiscal 1998. The Company feels that the
increases achieved in the used CD business in these years stabilized in Fiscal
1999 and that the used CD business in stores offering that product line prior to
the Acquisition will, in the future, perform at a more stable growth rate. Prior
to the Acquisition, the Blockbuster Music stores did not sell used CDs. The
Company intends to add the used CD product line to most of the non-mall
Blockbuster Music stores after their conversion to the Wherehouse name.
Prerecorded videocassettes and DVDs (feature films, music videos, and
self-improvement programming) represented, after music, Wherehouse's second
largest sale product category in Fiscal 1997, Fiscal 1998 and Fiscal 1999. As of
January 31, 1999, 469 of the Company's stores sold DVD. As box-office "hit"
motion pictures continue to be released to the videocassette and DVD
sell-through market at reduced prices, industry-wide sales of this category have
increased. Wherehouse's revenues from the sales of videocassettes increased in
Fiscal 1999 over the prior year.
Wherehouse sells video game hardware and software, blank audio and
videocassette tapes, music and video maintenance care products, carrying cases,
storage units, and personal electronics. Wherehouse also collects commissions on
event tickets sold under affiliations with Bay Area Seating Service (BASS) and
Ticketmaster.
VIDEO AND OTHER PRODUCT RENTALS
Wherehouse's other principal revenue source is the rental of prerecorded
videocassettes, DVDs and other products, chiefly feature films. Although most
videocassette rentals are feature films, approximately 30% of Wherehouse's
rentals in Fiscal 1999 were non-theatrical titles, such as children's videos,
fitness videos, music videos and educational videos. Audiocassette books and
video game players are also offered for rent in a few select stores. As of
January 31, 1999, 122 of Wherehouse's 579 stores offered videocassettes and
other products for rent, and approximately 50 stores offered DVDs for rent. On
average, stores that rent videocassettes and DVDs carry approximately 4,500
units, representing approximately 2,000 individual titles.
Wherehouse purchases prerecorded videocassettes and DVDs from a variety of
distributors and other suppliers. The Company also acquires prerecorded
videocassettes through revenue sharing arrangements with two suppliers. As with
recording companies, the film studios or their videocassette distribution
operations each control a certain portion of available titles and seek to
promote those titles. Wherehouse has not experienced, and does not anticipate
having in the future, any material problems obtaining its rental products.
The Company believes that an important element of efficient video rental
operations is the disposition of previously viewed videocassettes to maximize
the productivity of its inventory. Wherehouse's systems monitor the rental
efficiency of its inventory on an individual title and unit basis. As a title's
efficiency declines, previously viewed videocassettes are sold on a clearance
basis in Wherehouse's stores, and, where appropriate, the Company may sell
excess used video inventory to third-party distributors. The revenues from the
clearance of previously viewed videocassettes are included in the revenue from
video and other product rentals.
ADVERTISING AND PROMOTION
Wherehouse employs advertising, promotion, pricing, and presentation in a
coordinated manner to generate customer awareness of its breadth of product and
value pricing on selected items, and to induce trial and repeat purchases of its
products and video rental services. Wherehouse advertises on a regular and
frequent basis in a variety of broadcast and print media, including radio,
newspaper, direct mail and
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freestanding inserts. The advertising generally emphasizes immediate
availability of hit product at competitive prices, as well as access to a broad
array of catalog products. With its current operations covering 33 states, the
Company intends to expand its marketing relationships to pursue national
promotional opportunities.
Wherehouse also seeks to take advantage of cooperative advertising payments
from suppliers, which are generally available to the industry. Music and video
companies generally provide funds on a title-by-title basis and, occasionally,
on a label-wide basis to promote new releases. When Wherehouse runs
pre-authorized advertising that contains reference to a specific title or label,
the related supplier generally reimburses 100% of the pro rata cost of that
advertising.
TRADE CUSTOMS AND PRACTICES
Most of the Company's music purchases are protected by return policies
offered by major manufacturers. The return privilege generally exists for each
music title as long as that title remains in the current music catalog of a
manufacturer. Catalog changes are generally made only after advance notice,
allowing the Company to return excess inventory before a title is discontinued.
Most of the Company's major pre-recorded music suppliers provide unlimited
returns of unopened items, but generally charge return penalties of varying
amounts. The major suppliers do not accept returns of opened merchandise on the
same basis as unopened items, but do generally provide the Company with certain
additional return allowances. As of January 31, 1999, the Company enjoyed normal
return privileges with all of its vendors. Pricing and return policies of the
Company's major distributors are subject to change.
STORE AND SITE SELECTION
As of January 31, 1999, the Company operated 579 stores in 33 states.
Approximately 78% of the Company's stores were located in strip centers or
freestanding buildings, and the remaining 22% were located in malls.
The table below sets forth store openings, store acquisitions, store
closings and the total number of the Company's stores for the last three fiscal
years:
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FISCAL YEAR TOTAL STORES STORES
ENDED AT BEGINNING ---------------------------- STORES AT END
JANUARY 31, OF PERIOD OPENED ACQUIRED CLOSED OF PERIOD
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1999.................................... 223 8 378 30 579
1998.................................... 243 0 0 20 223
1997.................................... 297 9 0 63 243
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The Company evaluates growth opportunities within the context of its
strategies and evaluates future store closing decisions, principally at lease
expiration, based upon individual store performance.
As of January 31, 1999, the Company operated 579 stores comprising
approximately 4,321,800 square feet, an increase of approximately 2,960,860
square feet compared to January 31, 1998. The increase is principally the result
of the Acquisition of the Blockbuster Music stores.
STORE OPERATIONS AND DISTRIBUTION
STORE LOCATION. As of January 31, 1999, the Company had 450 stores located
in strip centers or freestanding buildings and 129 stores located in malls. The
average size of strip center and freestanding locations is approximately 8,500
square feet, with an approximate range of 1,800 to 20,000 square feet. Mall
stores range in size from 1,800 to 6,000 square feet.
RETAIL PRESENTATION. Prior to the Acquisition, the Company had updated its
retail presentation through the use of new in-store signage, expansion of
several product categories and, in certain stores, the introduction of new
product lines.
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Subsequent to the Acquisition, and as an integral part of the store
conversion process, the Company introduced a new logo, Wherehouse Music. This
change is a part of the Company's brand awareness program, which is being
introduced in all markets.
The Company plans to utilize the retail presentation components previously
introduced in its other stores as part of the conversion of the Blockbuster
Music stores to Wherehouse stores.
DISTRIBUTION. Central to Wherehouse's strategy of providing a broad
merchandise selection to its customers (e.g., multiple copies of hits, select
copies of catalog products, and high quality in-stock condition) is its ability
to distribute product quickly and cost-effectively to its stores. For the
traditional Wherehouse stores and for Blockbuster Music stores after their
conversion, approximately 30% of the Company's inventory is shipped to store
locations directly from manufacturers and distributors (primarily in the case of
new releases), while the remaining 70% is delivered from the Company's
distribution center. The Company generally uses common carriers for deliveries
from its distribution center. Generally, the Company's centralized distribution
system fills orders to all stores twice a week (other than for Blockbuster Music
stores prior to their conversion to the Wherehouse POS System). Inventory at the
Company's distribution center is automatically sorted based on individual store
demand data generated by the Company's store-level inventory systems. Such data
is captured by the Company's POS system and forwarded to the distribution center
for fulfillment.
Prior to their conversion to the Wherehouse POS system, the Company intends
to use the Blockbuster Music POS system to service the Blockbuster Music stores
acquired in the Acquisition. The Seller operates the Blockbuster Music POS
system for the Company's benefit pursuant to the Transition Services Agreement
(see "Acquisition of Blockbuster Music" above). The Blockbuster Music POS system
does not interface directly with the Company's merchandising and distribution
systems. Conversion of the Blockbuster Music POS system to the Wherehouse POS
system began in November 1998 and is continuing. As of April 30, 1999,
approximately 220 Blockbuster Music stores had been converted to the Wherehouse
POS system and were being fulfilled by the Company's distribution center. As
part of the Transition Services Agreement with Seller, until the remaining store
POS systems are converted, store ordering data will be captured by the
Blockbuster Music POS system and passed to the Blockbuster Music merchandise
ordering system, where orders will be created and communicated to vendors for
shipment direct to stores.
The Company has arranged with one of its suppliers to perform a
replenishment service for Blockbuster Music stores until each store has been
converted to the Wherehouse POS system. Conversion of the remaining Blockbuster
Music store POS systems to the Wherehouse POS system is scheduled for completion
by the fiscal quarter ending July 31, 1999.
The Company has completed the installation of additional merchandise
handling equipment at its distribution center, and is in the process of
completing the installation of a second automated sortation system to support
the processing requirements of the increased number of stores resulting from the
Acquisition. Installation of the sortation system is scheduled for completion by
the fiscal quarter ending July 31, 1999.
COMPETITION
Both the prerecorded music and the video rental markets are highly
competitive. In the prerecorded music market, the Company competes with other
chain retailers who specialize in prerecorded music (e.g., Trans World
Entertainment, Musicland Stores, and Tower Records), discounters, consumer
electronic superstores (e.g., Best Buy and Circuit City), mass merchandisers
(e.g., Wal-Mart, K-Mart, and Target), direct mail programs such as record clubs,
and local operators. The video rental market is a more fragmented industry, with
many small operators and two significant competitors (Blockbuster Entertainment
and Hollywood Video). Grocery and convenience stores also account for a portion
of the video rental market. In the Company's judgment, small operators may be
well located but usually have significant disadvantages in inventory selection
and cost relative to chain retailers. Additionally, the Company's combination
entertainment store format gives the Company cross-selling opportunities in
music and rental video.
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Internet-based retailing is rapidly expanding and evolving. Specialty
Internet retailers such as CDNow, and more general Internet retailers, such as
Amazon.com, have targeted the prerecorded music market. In response to this
growth in electronic commerce and the future potential for on-line sales of
prerecorded music and video product, the Company launched its own Internet
commerce site, "Wherehousemusic.com," on May 10, 1999.
In both the music and video rental markets, there has been a trend towards
consolidation, and several large regional retail chains, many similar to or
direct competitors of the Company, have been acquired by large national retail
chains. With the acquisition of Blockbuster Music, the Company has expanded from
a regional chain to a national chain and, as a result, faces expanded
competition. Several major video and music retail chains, including Blockbuster
Entertainment and Hollywood Video, continue to open stores or expand their
retail store presence in the Company's markets. Accordingly, it can be expected
that the Company will in future periods experience increased competition from
companies with greater financial resources than the Company, and that such
competition may result in continued pressure on revenues and gross profit
margins.
The Company also competes in the video business with cable television and
DSS ("Digital Satellite Systems"), including pay-per-view television. Currently,
pay-per-view television provides less viewing flexibility to the consumer than
videocassette and DVD rentals, and at a higher cost. Also, under current
entertainment industry distribution practices, movies are generally available on
videocassette and DVD prior to appearing on pay-per-view. However, pay-per-view
viewing flexibility may increase with improved technology, which could
negatively impact the retail store sales and rental of home video and,
consequently, the Company's business. Notwithstanding potential technological
advances, Wherehouse believes that video rental should, in the near future,
continue to be the first source of in-the-home filmed entertainment, before
pay-per-view, and a primary source of filmed entertainment for the consumer.
Several major companies have announced that they are developing other
technologies which, if successful, could constitute significant competition.
These include technologies which would provide music, movies or interactive
games for digital recording or play "on demand" over fiber optic telephone or
cable lines, provide other in-the-home entertainment over the Internet, or
provide on-site transcription of compact discs through in-store kiosks. Most of
these technologies are not yet generally available or may not yet have achieved
wide acceptance, and it appears that technical, economic, and other obstacles to
their introduction or acceptance remain to be resolved. However, as these or
other new technologies are introduced, if the Company is unable to predict or
participate in new product or distribution technologies that consumers accept
widely, the Company's business could be significantly impacted, and Wherehouse
may need to develop and implement new marketing strategies in order for its
business to remain competitive.
SEASONALITY
The Company's business is seasonal, and, as is typical for most retailers,
its revenues peak during the Christmas holiday season. Revenues in the fourth
quarter of Fiscal 1999, adjusted to reflect Blockbuster Music revenues for the
full twelve-month period, were approximately 32.4% of total annual revenues.
ORGANIZATION AND EMPLOYEES
As of January 31, 1999, Wherehouse employed approximately 8,038 persons.
Approximately 35% were full-time employees, and approximately 65% percent were
part-time employees. The Company's labor requirements vary based on seasonal
business fluctuations, with between 1,500 and 2,000 additional store and
distribution center employees added during the peak holiday season. Wherehouse's
corporate office staff, which consists of approximately 229 employees, is
responsible for executive and general operating management, buying,
merchandising, advertising, finance, accounting, information systems and real
estate. The corporate office staff is expected to increase as the Company
completes staffing requirements to support the additional Blockbuster Music
stores.
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TRADEMARKS
The Company owns and maintains registrations for "The Wherehouse" trademark
and variations thereof in the United States, Mexico, Taiwan, Thailand, Hong Kong
and Korea and has filed trademark applications in China. The Company also owns
and maintains registrations in the United States and Mexico for the name "Tu
Musica." Trademark applications have been filed in the United States for the
names "Wherehouse Music," "Wherehouse.com," Wherehousemusic.com," "Earmail,"
"Songmail" and "Bandography."
REORGANIZATION UNDER CHAPTER 11
On August 2, 1995, WEI and Old Wherehouse filed voluntary petitions for
relief under Chapter 11 of Title 11 of the United States Code ("Chapter 11") in
the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court"), seeking to reorganize under Chapter 11. Old Wherehouse and WEI
continued to manage their respective affairs and operate their businesses as
debtors-in-possession while they worked to develop a reorganization plan that
would restructure their businesses and allow their emergence from Chapter 11.
The Plan of Reorganization for the Company's predecessors (the
"Reorganization Plan") was confirmed by an order of the Bankruptcy Court entered
on January 7, 1997. The effective date of the Reorganization Plan occurred on
January 31, 1997 (the "Effective Date"). Since the Effective Date, the
Bankruptcy Court has retained jurisdiction over certain claims and other matters
relating to the bankruptcy estates of the Company's predecessors, but New
Wherehouse has been and is free to carry out its business without oversight by
the Bankruptcy Court.
On January 31, 1997, the Company implemented the accounting principles for
entities emerging from Chapter 11 set forth in the American Institute of
Certified Public Accountants' Statement of Position 90-7 "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code" (SOP 90-7). This resulted
in the use of "fresh start" reporting, since the reorganization value, as
defined, was less than the total of all post-petition liabilities and
pre-petition claims, and holders of voting shares immediately before
confirmation of the Reorganization Plan received less than fifty percent of the
voting shares of the emerging entity. All assets and liabilities were restated
to reflect the reorganization value of the reorganized entity, which
approximated its fair value at the Effective Date. In addition, the accumulated
deficit of the Company was eliminated and its capital structure was recast in
conformity with the Reorganization Plan.
ITEM 2. PROPERTIES
The Company's executive offices, which are located in Torrance, California,
are subject to a lease covering 66,775 square feet of space at a current annual
base rent of approximately $304,494, which is subject to periodic adjustment.
The executive office lease expires on January 31, 2004. The Company has the
right to terminate its executive office lease on June 30, 2001 by paying to its
landlord an early termination fee in accordance with certain conditions in the
lease. The Company also maintains regional offices for its field managers,
within existing store locations, or in separate office facilities.
The Company operates a 198,292 square-foot distribution center in Carson,
California. The lease for this property expires on April 30, 2002, subject to
two 5-year renewal options. The annual base rent for Fiscal 1999 was $809,028,
although the rent is subject to periodic adjustment.
As of January 31, 1999, the Company owned one of its stores and leased
space for the remaining 578 stores. Subsequent to January 31, 1999, the Company
closed 20 of these 579 stores and opened one Tu Musica store. Lease terms
generally range from month-to-month to 30 years, including renewal options. If
no leased stores' renewal options were exercised, 52 leases would expire on or
before January 31, 2000, 98 would expire between February 1, 2000 and January
31, 2001, 155 would expire between February 1, 2001 and January 31, 2003, and
the remainder would expire subsequent to February 1, 2003. The Company has the
right to terminate a number of its store leases prior to the lease termination
date, depending upon certain conditions, as defined in each lease. The Company
does not depend on the continued existence of any one or several of its lease
agreements or store locations for the operation of its business.
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<PAGE> 11
ITEM 3. LEGAL PROCEEDINGS
(i) Bankruptcy filing
See Item 1 -- "Business -- Reorganization Under Chapter 11" above for a
description of the bankruptcy filing of Old Wherehouse and WEI.
(ii) Other
The Company is a party to various other claims, legal actions and
complaints arising in the ordinary course of its business. In the opinion of
management, all such matters are without merit or involve such amounts that
unfavorable disposition will not have a material impact on the financial
position and results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company has one class of common equity outstanding, its Common Stock.
See Item 12 -- "Security Ownership of 5% Holders, Directors and Executive
Officers." There is no established public trading market for the Common Stock.
HOLDERS
As of January 31, 1997, after the effectiveness of the Reorganization Plan,
there were eight holders of Common Stock, seven of whom were senior lenders
under Old Wherehouse's bank credit agreement (the "Senior Lenders"), led by
Cerberus Partners, L.P. ("Cerberus") as the agent for the Senior Lenders. As of
April 27, 1999, the Company had issued 10,729,710 shares of Common Stock, and
there were 865 holders of record of the Common Stock. The Company estimates that
approximately 86,500 additional shares of Common Stock will be distributed among
A&M Investment Associates #3, LLC and approximately 50 holders of unsecured
claims as their claims are allowed by the Bankruptcy Court.
DIVIDENDS
No dividends have been paid to the holders of the Common Stock since its
issuance. The Company's amended loan agreement with Congress Financial
Corporation (Western) restricts the ability of Wherehouse to pay dividends. See
Item 7 -- "Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Liquidity and Capital Resources and Note 6 to the
financial statements." There are no plans by Wherehouse to pay cash dividends on
the Common Stock in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
Set forth below are selected financial data as of and for the periods
indicated below. The financial data are derived from financial statements of Old
Wherehouse and New Wherehouse. The selected financial data should be read in
conjunction with the discussion under Item 7 -- "Management's Discussion and
Analysis of Financial Condition and Results of Operation" and with the financial
statements, including the notes thereto, included elsewhere in this report.
<TABLE>
<CAPTION>
NEW WHEREHOUSE OLD WHEREHOUSE
-------------------------- ---------------------------
YEAR ENDED JANUARY 31, YEAR ENDED JANUARY 31,
-------------------------- ---------------------------
1999 1998 1997 1996 1995
----------- ----------- ------ ------ -------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenue:
Sales........................... $ 464.5 $ 276.1 $295.5 $350.3 $ 409.0
Rentals......................... 32.0 51.3 70.0 82.9 90.6
----------- ----------- ------ ------ -------
Total revenue........... $ 496.5 $ 327.4 $365.5 $433.2 $ 499.6
Costs and expenses:
Cost of sales(2)................ 309.7 176.1 195.5 230.3 262.6
Cost of rentals, including
amortization................. 16.0 27.4 34.0 40.4 35.4
Selling, general and
administrative expenses......... 140.1 104.7 134.0 149.6 168.8
Depreciation and amortization..... 11.8 7.1 11.4 17.2 19.5
Integration costs(3).............. 0.8
Store closure reserve -- existing
stores(4)....................... 2.8
Year 2000 remediation costs(5).... 1.8
Write-down of long-lived assets... 1.5 139.5
----------- ----------- ------ ------ -------
Income (loss) from operations... 13.3 12.0 (9.4) (5.8) (126.2)
Interest (income) expense, net.... 1.2 (1.1) 0.7 14.8 23.0
----------- ----------- ------ ------ -------
Income (loss) before
reorganization items, income
taxes and extraordinary
item......................... 12.1 13.1 (10.1) (20.6) (149.2)
Reorganization items.............. 19.9 23.2 --
----------- ----------- ------ ------ -------
Income (loss) before income
taxes........................ $ 12.1 $ 13.1 $(30.0) $(43.8) $(149.2)
Provision (benefit) for income
taxes........................... 5.0 5.4 -- -- 13.0
----------- ----------- ------ ------ -------
Income (loss) before
extraordinary item........... $ 7.1 $ 7.7 $(30.0) $(43.8) $(162.2)
Extraordinary item(6)............. -- -- 173.7 -- --
----------- ----------- ------ ------ -------
Net income (loss)............... $ 7.1 $ 7.7 $143.7 $(43.8) $(162.2)
=========== =========== ====== ====== =======
Net income per common share(1)
Basic........................... $ 0.66 $ 0.74
Diluted......................... $ 0.61 $ 0.71
Weighted average shares
outstanding
Basic........................... 10,689,580 10,420,557
Diluted......................... 11,551,798 10,894,862
Other Data
Adjusted EBITDA(9).............. $ 26.7 $ 24.3 $ 1.6
</TABLE>
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<PAGE> 13
<TABLE>
<CAPTION>
NEW WHEREHOUSE OLD WHEREHOUSE
-------------------------- ---------------------------
YEAR ENDED JANUARY 31, YEAR ENDED JANUARY 31,
-------------------------- ---------------------------
1999 1998 1997 1996 1995
----------- ----------- ------ ------ -------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital
(deficiency)/excess............. $ 70.8 $ 65.3 $ 59.4 $ 83.7 $ (13.2)
Total assets...................... 387.7 161.0 131.7 168.5 197.7
Liabilities subject to
compromise...................... -- -- -- 278.9 --
Line of credit.................... 37.3 -- -- -- --
Capital lease obligations and
long-term debt (including
current portion)(7)............. 31.6 4.5 5.4 4.2 167.4
Total shareholders'
equity/(deficit)(8)............. 98.2 91.5 84.1 (156.3) (112.4)
</TABLE>
- ---------------
(1) Net income per common share is omitted for the Company for the fiscal years
ended January 31, 1995, 1996, and 1997 because those years relate to Old
Wherehouse, which had a different capital structure.
(2) The Company incurred incremental cost of sales of approximately $2.7 million
relating to third-party distribution cost for music replenishment from one
of its suppliers. These incremental costs resulted from the Seller's
inability to support fulfillment of music product from its distribution
facility. These incremental costs are expected to discontinue by July 31,
1999, when all POS conversions and the expansion of the Company's
distribution facility are expected to be completed.
(3) Integration costs include systems integration, consulting and travel costs
related to the Acquisition.
(4) The charge for store closure reserve-existing stores in Fiscal 1999
represents costs related to the closure of 19 Wherehouse stores that
operated in the same trade area as acquired Blockbuster Music stores.
(5) The Company recorded charges of $1.8 million during Fiscal 1999 in
connection with the Year 2000 remediation of its computer systems (see "Item
7 -- "Management's Discussion of Financial Condition and Results of
Operations -- Impact of the Year 2000").
(6) The extraordinary item in Fiscal 1997 represents gain from the
extinguishment of debt pursuant to the Company's Reorganization Plan.
(7) Includes $27.6 million of capital lease obligations in Fiscal 1999,
principally real estate leases related to the Acquisition ($25.8 million)
and equipment leases ($1.8 million). Includes 6 3/4% Convertible
Subordinated Debentures for the fiscal year ended January 31, 1995. For the
fiscal year ended January 31, 1996, the 6 3/4% Convertible Subordinated
Debentures are included in liabilities subject to compromise. Liabilities
subject to compromise for the fiscal year ended January 31, 1996 are
excluded from working capital and long-term debt.
(8) There were no cash dividends declared during any of the periods presented
above, except for cash dividends in the amount of $0.2 million paid to WEI,
the Company's sole stockholder in the fiscal year ended January 31, 1995.
(9) EBITDA represents income from operations, plus depreciation and
amortization. Management believes that, due to the combined format of rental
product and sale merchandise, a more appropriate calculation of EBITDA
(hereafter referred to as "Adjusted EBITDA") should include the net
difference between rental amortization plus the book value of rental
dispositions, versus rental inventory purchased during the period. The
Company has included certain information concerning Adjusted EBITDA because
management believes it would be useful information for certain investors and
analysts to analyze operating performance and to determine the Company's
ability to service debt. The method of calculating Adjusted EBITDA set forth
above may be different from calculations of EBITDA employed by other
companies and, accordingly may not be directly comparable to such other
computations. Adjusted EBITDA should not be viewed as a substitute for
Generally Accepted Accounting Principles (GAAP) measurements such as net
income or cash flow from operations. Rather it is presented as supplementary
information.
Adjusted EBITDA for Fiscal 1998 includes a non-recurring cash benefit of
$1.7 million resulting from the impact of one-time credits received from
landlord concessions.
During Fiscal 1999, the Company incurred certain incremental costs related
to the Acquisition of Blockbuster Music, as well as costs associated with
the remediation of its computer systems to comply with Year 2000 readiness
requirements. Excluding the costs related to the closures of existing stores
($2.9 million), incremental distribution costs ($2.7 million), Year 2000
remediation costs ($1.8 million) and integration costs ($0.8 million),
Adjusted EBITDA would have been $34.9 million.
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<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operation, particularly in the paragraph
entitled "Liquidity and Capital Resources," and elsewhere in this Annual Report
on Form 10-K are forward-looking statements. These statements discuss, among
other things, expected growth, future revenues and future performance. You can
find many of these statements by looking for words like "believes," "expects,"
"anticipates," or similar expressions in this Annual Report on Form 10-K.
Although the registrant believes the expectations expressed in such
forward-looking statements are based on reasonable assumptions within the bounds
of its knowledge of its business, a number of factors could cause actual results
to differ materially from those expressed in any forward-looking statements,
whether oral or written, made by or on behalf of the registrant.
The registrant's operations are subject to factors outside its control. Any
one, or a combination, of these factors could materially affect the results of
the registrant's operations. These factors include (a) possible delays and
difficulties in integrating the Blockbuster Music operations with Wherehouse's;
(b) the ability to retain Blockbuster Music's customers; (c) changes in levels
of competition from current competitors and potential new competition from both
retail stores and alternative methods or channels of distribution such as
Internet and telephone shopping services and mail order; (d) loss of a
significant vendor or prolonged disruption of product supply; (e) the presence
or absence of popular new releases and products in the product categories the
registrant represents; (f) changes in levels of consumer spending, especially
during seasonally significant periods; (g) changes in Federal and state income
tax rules and regulations or interpretations of existing legislation; (h)
changes in the general economic conditions in the United States including, but
not limited to, consumer sentiment about the economy in general; (i) regulatory
changes, including the investigation of minimum advertised pricing guidelines by
the FTC, which may adversely affect the business in which we are engaged; (j)
the ability to attract and retain key personnel; and (k) adverse results in
significant litigation matters.
The foregoing should not be construed as an exhaustive list of all factors
which could cause actual results to differ materially from those expressed in
forward-looking statements made by the registrant. You should consider the
cautionary statements contained in this section when evaluating any
forward-looking statements that we may make. We do not have any obligation to
publicly release any revisions to these forward-looking statements to reflect
events or circumstances after the date of this Annual Report or to reflect the
occurrence of unanticipated events.
The following Management's Discussion and Analysis of Financial Condition
and Results of Operation include the operations of Old Wherehouse through
January 31, 1997 and New Wherehouse through January 31, 1999. The discussion of
financial conditions includes cash flow resulting from the operations of Old
Wherehouse and a liquidity analysis based on the balance sheet of New Wherehouse
after the reorganization, which reflects "fresh start" accounting adjustments.
See note 2 to the financial statements.
YEAR ENDED JANUARY 31, 1999 COMPARED TO YEAR ENDED JANUARY 31, 1998
Revenues
Net revenues, on a consolidated basis, were $496.5 million and $327.4
million for Fiscal 1999 and Fiscal 1998, respectively. The increase of $169.1
million, or 51.7%, is primarily attributable to the Acquisition of the
Blockbuster Music stores, which contributed $173.7 million in net revenues for
the period October 26, 1998 through January 31, 1999.
Excluding the acquired Blockbuster Music stores (the "Acquired Stores"),
net revenues decreased $4.7 million to $322.8 million. The decrease was
comprised of an increase in sale merchandise revenue of $14.7 million which was
more than offset by a decrease in rental revenues of $19.4 million.
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<PAGE> 15
Prerecorded music, new videocassettes, DVDs, video game software and
hardware and general merchandise (collectively referred to as "sale
merchandise") continue to represent the greatest portion of the Company's
revenues. For Fiscal 1999, sale merchandise revenue represented 93.6% of
aggregate revenues, versus 84.3% of aggregate revenues in the prior year, an
increase of 9.3%. Sale merchandise revenue was $464.5 million in Fiscal 1999
versus $276.1 million in Fiscal 1998, representing an overall increase of 68.2%.
(See Item 1 -- "Business -- Sale and Rental Revenue by Category"). As discussed
above, this increase is primarily attributable to the Acquisition of the
Blockbuster Music stores.
For the Acquired Stores, sale merchandise revenue for the period commencing
October 26, 1998 and ending January 31, 1999 was $173.7 million. Management
defines same-store sales as sales from stores that were open for the full period
in both periods of comparison. Management estimates that, on a same-store basis,
sale merchandise revenue for the Acquired Stores decreased by 0.7% for the
period commencing October 26, 1998 and ending January 31, 1999 as compared to
the same period in Fiscal 1998. This decrease is principally due to higher
revenue in Fiscal 1998 generated from the liquidation of book inventory, as
Blockbuster Music discontinued that product line.
Excluding the Acquired Stores, sale merchandise revenue for Fiscal 1999 was
$290.9 million, an increase of $14.7 million or 5.3% over the prior fiscal year.
On a same-store basis, sale merchandise revenue increased by 9.4% during Fiscal
1999 as compared to Fiscal 1998. Management believes that the increase in
same-store sale merchandise revenue was principally the result of improvements
in music catalog inventory management, new initiatives such as an expanded DVD
selection, re-merchandising activities which occurred in certain stores and the
favorable impact of store closures by competitors.
Rental revenue includes the rental of videocassettes, DVDs, video games and
game players, and audiocassette books, and sales of previously viewed
videocassettes and previously played video games. As of January 31, 1999, 122 of
the Company's stores offered rental products, with approximately 50 of those
stores offering DVDs for rental. Rental revenue was $32.0 million in Fiscal 1999
and $51.3 million in Fiscal 1998, representing a decrease of $19.3 million or
37.6%. On a same-store basis, rental revenue decreased approximately 28.4% as
compared to the prior fiscal year. The Company believes that this decrease in
same-store rental revenue was primarily attributable to an increasingly
competitive rental market.
Rental products offered at the Acquired Stores represented an immaterial
amount of total rental revenue in Fiscal 1999. The Acquired Stores generally are
not engaged in the rental business. Prior to the Acquisition, Seller often
rented videos out of these stores, but prior to closing the Acquisition, the
Seller removed all rental product from these stores. The Company's license of
the Blockbuster Music trademark from the Seller prohibits the Company from
renting videos in these stores during the time they operate under the
Blockbuster Music name. After the stores are changed to the Wherehouse name,
they may rent videos.
The Company believes that in the future its business and same-store
revenues may be impacted by various competitive and economic factors, including,
but not limited to, consumer tastes, new releases of music, videocassette and
video game titles available for sale or rental, the Internet, and technological
developments such as digital downloading, as well as general economic trends
impacting retailers and consumers. In addition, in recent years the Company's
sale merchandise and rental revenues have been impacted by increased competition
from other music and video specialty chains, discounters and mass merchandisers.
The Company's business is seasonal and, as is typical for most retailers,
its revenues tend to peak during the Christmas holiday season. See Item
1 -- "Business -- Seasonality" above.
Cost of Revenue
Cost of sale merchandise revenue, on a consolidated basis, increased $133.5
million to $309.7 million for Fiscal 1999, as compared with $176.1 million for
Fiscal 1998.
Excluding the Acquired Stores, cost of sale merchandise revenue increased
$8.8 million to $184.9 million for Fiscal 1999, versus $176.1 million for Fiscal
1998, representing an increase of 5.0%. As a percentage of sale merchandise
revenue, cost of sale merchandise revenue decreased 0.2% to 63.6% during Fiscal
1999 versus
15
<PAGE> 16
63.8% during Fiscal 1998. The 0.2% decrease was principally due to improved
inventory efficiencies and lower costs related to merchandise returns.
Cost of sale merchandise revenue for the Acquired Stores for Fiscal 1999
was $124.8 million or 71.9% of sale merchandise revenue. Such costs were
negatively impacted by approximately $2.7 million due to the incremental costs
associated with the use of a third-party distributor to handle music and sale
video replenishment and other transition-related costs. These incremental costs
resulted from the Seller's inability to support the fulfillment of music product
from its distribution facility. These incremental costs are expected to
discontinue by July 31, 1999, when all the Acquired Stores are converted to the
Company's POS system and the expansion of the Company's distribution facility is
expected to be completed.
Cost of rentals on a consolidated basis, including amortization, decreased
$11.4 million to $16.0 million for Fiscal 1999 as compared with $27.4 million
for Fiscal 1998. As a percentage of rental revenue, cost of rentals decreased to
50% for Fiscal 1999 from 53.4% for Fiscal 1998, a decrease of 3.4%. The 3.4%
decrease in cost of rentals was primarily due to the favorable impact of an
increase in revenue sharing programs and improved rental efficiencies.
Sale merchandise, including ticket commissions, as a percent of aggregate
net revenues increased to 93.6% for Fiscal 1999 from 84.3% in Fiscal 1998,
principally due to the reduction in the number of stores offering videocassettes
and other products for rent. Also contributing to the increase was the impact of
the acquisition of the Blockbuster Music stores, which generally do not offer
videocassette rentals. Historically, the margin on rentals has been higher than
the margin on sale merchandise. Should the product mix continue to shift to
lower margin sale merchandise from higher margin rental revenue, it can be
expected that this change in the mix of revenue contribution could have an
impact on profitability.
Operating Expenses
Selling general and administrative ("SG&A") expenses, on a consolidated
basis, for Fiscal 1999 were $140.1 million, compared to $104.7 million for
Fiscal 1998, an increase of $35.4 million. The increase is principally related
to the operating expenses of the Acquired Stores, partially offset by lower
store payroll and other store expenses in the Wherehouse stores.
Excluding the Acquired Stores, SG&A expenses were $100.9 million, or 31.3%
of revenue, in Fiscal 1999, compared to $104.7 million, or 32.0% of revenue, in
Fiscal 1998, a decrease of $3.8 million. This decrease in SG&A expenses is
principally related to lower store payroll and other store expenses.
SG&A expenses for the Acquired Stores were $39.2 million in Fiscal 1999,
representing 22.6% of the revenues from the Acquired Stores. As a percent of
revenue, the SG&A expenses of the Acquired Stores were favorably impacted by the
timing of the Acquisition, as a result of which only the fourth quarter of
operations (historically the highest revenue quarter) was included, as well as
the favorable impact of including only incremental corporate and distribution
costs that were incurred to support the Acquired Stores.
The Company incurred non-recurring integration costs of $0.8 million
related to the Acquisition. Such costs were principally related to information
systems integration and professional fees.
A charge for store closure reserve-existing stores of $2.9 million was
recorded during Fiscal 1999. This charge represents approximately $2.8 million
of lease termination costs and $0.1 million of other costs related to the
closure of 19 of the Company's existing stores that were located in the same
trade areas as Acquired Stores.
The Company incurred $1.8 million of costs related to the remediation of
its corporate merchandising systems as a contingency plan to meet Year 2000
readiness requirements (see "Impact of the Year 2000" below).
Depreciation and amortization expense was $11.8 million in Fiscal 1999
compared to $7.1 million in Fiscal 1998, an increase of $4.7 million. The
increase is principally related to costs for the Acquired Stores of $2.7 million
and the write-down of fixed assets of $0.8 million in connection with the
closure of 19 of the Company's existing stores that were located in the same
trade areas as Acquired Stores.
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<PAGE> 17
Income From Operations
Income from operations for Fiscal 1999, on a consolidated basis, was $13.3
million as compared to $12.0 million for Fiscal 1998, representing an
improvement of $1.3 million.
Excluding the Acquired Stores, income from operations in Fiscal 1999
decreased $5.5 million from the prior fiscal year. The decrease was principally
due to non-recurring costs totaling $6.3 million and the decrease in rental
revenue, all of which were partially offset by higher sale merchandise revenue
and a higher gross profit ratio on sale merchandise revenues. The non-recurring
costs of $6.3 million include the following: a charge for store closure
reserve-existing stores ($2.9 million), the Year 2000 remediation ($1.8
million), the integration costs related to the Acquisition ($0.8 million), and
the write-down of fixed assets related to the store closures ($0.8 million).
Excluding these non-recurring costs, income from operations would have increased
by $0.8 million versus the prior fiscal year.
Interest Expense
Interest expense for Fiscal 1999 was $3.5 million, versus $0.5 million for
Fiscal 1998, an increase of $3.0 million. The $3.0 million increase is partially
attributable to a one-time fee of $0.9 million that the Company paid to Cerberus
Capital Management, L.P. for a commitment to provide a bridge loan to finance
the acquisition of Blockbuster Music if the permanent financing was not in place
at the time of the Acquisition. Also contributing to the increase, the Company
incurred interest expense of $1.6 million under its revolving line of credit
with Congress Financial Corporation (Western) for Fiscal 1999.
Interest Income
Interest income for Fiscal 1999 was $2.3 million, an increase of $0.7
million from $1.6 million for Fiscal 1998. This was the result of interest
earned on short-term investments of excess cash.
Income Taxes
The Company recorded a tax provision of $5.0 million for Fiscal 1999 versus
a tax provision of $5.4 million for Fiscal 1998. The tax provision for Fiscal
1999 represents an effective rate of 41.6% compared to 41.1% for Fiscal 1998.
Priority Pre-Petition Tax Claims
Under the provisions of the Reorganization Plan, the Company assumed all
allowed tax claims entitled to priority under Bankruptcy Code Section 507(a)(8)
and is to pay such priority tax claims six years after the assessment of the
tax, plus interest. The Company had disputed one of the priority tax claims,
with the California Franchise Tax Board. The Company is currently in discussions
with the California Franchise Tax Board to resolve the remaining outstanding
issues. The Company believes that it has made adequate provisions in the
financial statements for this claim.
YEAR ENDED JANUARY 31, 1998 COMPARED TO YEAR ENDED JANUARY 31, 1997
Revenues
Net revenues were $327.4 million and $365.5 million for Fiscal 1998 and
Fiscal 1997, respectively. The decrease of $38.1 million or 10.4% was
principally due to the closing of 20 stores and the elimination of rental
activity in an additional 25 stores during Fiscal 1998. On a same-store basis,
overall revenues were approximately flat as increases in same-store merchandise
sales revenues were offset by decreases in same-store rental revenues.
Sale merchandise revenues were $276.1 million and $295.5 million during
Fiscal 1998 and Fiscal 1997, respectively, representing a decrease of 6.5%,
which was largely due to the closing of unprofitable stores. On a same-store
basis, there was a 4.5% increase in sales merchandise revenue. (See table in
Item 1 -- "Business -- Sale And Rental Revenue By Category"). The increase in
same-store sale merchandise revenue
17
<PAGE> 18
was principally due to better industry-wide new "hit" releases and the favorable
impact of competitor store closures in Fiscal 1998.
Rental revenue includes the rental of videocassettes, video games and game
players, DVDs and audiocassette books. At January 31, 1998, approximately 72% of
the Company's stores offered videocassettes and other products for rent versus
approximately 84% at January 31, 1997. Rental revenue for Fiscal 1998 was $51.3
million, a decrease of 26.8% from Fiscal 1997 and a decrease of 20.6% on a
same-store basis. The Company believes that these decreases are attributable to
a number of factors, including the reduction in the number of stores offering
rental products, lack of strength in "hit" releases in all rental categories,
continued competition, and a general softening in rental consumer spending
nationwide.
Cost of Revenue
Cost of sale merchandise revenue decreased $19.4 million to $176.1 million
for Fiscal 1998, as compared with $195.5 million for Fiscal 1997. As a
percentage of sale merchandise revenue, cost of sale merchandise revenue
decreased 2.4% to 63.8% for Fiscal 1998 versus 66.2% for Fiscal 1997. The gross
profit percentage for sale merchandise product was 36.2% and 33.8% for Fiscal
1998 and Fiscal 1997, respectively. The 2.4% decrease in cost of sale
merchandise revenue as a percentage of sale merchandise revenue was principally
due to lower obsolescence costs and higher prompt payment discounts on
merchandise inventory purchases.
Cost of rentals, including amortization, decreased $6.6 million to $27.4
million for Fiscal 1998 as compared with $34.0 million for Fiscal 1997. As a
percentage of rental revenue, cost of rentals increased to 53.4% for Fiscal 1998
from 48.5% for Fiscal 1997, an increase of 4.9%. The gross profit percentage for
rental revenue was 46.6% and 51.5% for Fiscal 1998 and Fiscal 1997,
respectively. The 4.9% increase in cost of rentals was primarily due to higher
amortization costs incurred due to the change in amortization policy adopted by
the Company as of January 31, 1997 and, to a lesser extent, the decline in
rental efficiency resulting from rental revenue decreases. New Wherehouse
amortizes rental inventory using the straight-line method over a three-month
period with a salvage value of $3.00 per videocassette, whereas Old Wherehouse
amortized rental inventory over three years for videocassettes and two years for
video games for Fiscal 1997. If Old Wherehouse had adopted the more accelerated
method of amortization as of January 31, 1996, amortization costs would have
been higher (and gross profit would have been lower) for Fiscal 1997.
Sale merchandise, including ticket commissions, as a percent of aggregate
net revenues increased to 84.3% in Fiscal 1998 from 80.8% in Fiscal 1997,
principally due to the reduction in the number of stores offering videocassettes
and other products for rent.
Operating Expenses
SG&A expenses were $111.9 million and $145.4 million for Fiscal 1998 and
Fiscal 1997, respectively, a decrease of $33.5 million, or 23.0%. As a
percentage of aggregate net revenues, SG&A expenses were 34.2% and 39.8% for
Fiscal 1998 and Fiscal 1997, respectively, a decrease of 5.6%. The change was
primarily due to decreases, as a percentage of revenue, in rent, payroll, other
occupancy costs, and other store and corporate expenses.
Income From Operations
Income from operations was $12.0 million for Fiscal 1998, as compared with
a loss of $9.4 million for Fiscal 1997. The increase in operating profit
resulted primarily from the decrease in SG&A expenses, combined with the
decrease in cost of sales, both of which were partially offset by a higher cost
of rentals as a percent of rental revenue.
Interest Expense
Interest expense decreased $0.5 million to $0.5 million for Fiscal 1998
versus $1.0 million for Fiscal 1997.
18
<PAGE> 19
Interest Income
Interest income for Fiscal 1998 was $1.6 million, an increase of $1.3
million from $0.3 million for Fiscal 1997 due to the improved operating profits
which generated sufficient cash flow to fund operations without utilizing the
Company's revolving line of credit.
Income Taxes
The Company recorded an income tax provision of $5.4 million for Fiscal
1998 but did not record a tax provision for Fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
During Fiscal 1999, the Company's net cash provided by operating activities
was $55.4 million, as compared to $59.9 million for the prior fiscal year, a
decrease of $4.5 million or 7.5%. The decrease in cash flow from operations was
primarily due to lower cash provided from net working capital changes.
Net cash used in investing activities was $128.7 million for Fiscal 1999.
The purchase of the Blockbuster Music Stores represented the primary use of cash
in investing activities during this period. Net of cash acquired, the Company
paid $116.5 million in connection with the Acquisition. In addition, the Company
made capital expenditures totaling $11.2 million for the acquisition of
property, equipment and improvements related to the opening of 8 new stores and
to support its new merchandising initiatives. Financing of capital expenditures
has generally been provided by cash from operations and borrowings under the
Congress Facility described below.
Net cash provided from financing activities was $33.6 million for Fiscal
1999, as compared to cash used for financing of $6.7 million for Fiscal 1998.
The increase of $40.3 million was primarily due to the loan used to finance the
Acquisition, partially offset by $1.2 million in payments on capital lease
obligations and long-term debt and $2.1 million related to the settlement of
certain pre-petition claims.
In connection with the Blockbuster Music Acquisition, the Company entered
into an amended loan agreement with Congress Financial Corporation (Western)
that provides a revolving credit line of up to $165.0 million including a letter
of credit subfacility of $10.0 million (the "Congress Facility"). The revolving
line of credit under the Congress Facility is divided into two tranches, Tranche
A and Tranche B. The Company may borrow up to $155.0 million under Tranche A.
Tranche A loans bear an interest rate of prime plus 0.5%, or at the Company's
election, an adjusted Eurodollar rate plus 1.75%. The Company's ability to make
Tranche A borrowings is subject to borrowing base limitations based upon, among
other things, the value of certain eligible merchandise inventory. If there is
no availability under the Tranche A line, the Company may borrow up to $10.0
million under the Tranche B line. Tranche B loans bear an interest rate (i) on
the first $5.0 million, of prime plus 3.75% or an adjusted Eurodollar rate plus
5.0%, and (ii) on the next $5.0 million, of prime plus 4.75% or an adjusted
Eurodollar rate plus 6.0%. In addition to the interest payable, the Company pays
an Unused Line Fee. The fee is 0.375% per annum calculated upon the amount by
which $120.0 million exceeds the average daily principal balance of the
outstanding Tranche A loans and letter of credit during the immediately
preceding month, along with 0.5% per annum calculated upon the amount by which
$10.0 million exceeds the average daily balance of the outstanding Tranche B
loans. The Congress Facility also requires the Company to pay various other
fees, including a closing fee ($775,000 for Tranche A and $100,000 for Tranche
B), a syndication fee ($387,000), an annual commitment fee on the Tranche B line
($50,000), and a loan servicing fee ($3,000 per month, plus reasonable
out-of-pocket costs and expenses). As of January 31, 1999, there was an
outstanding loan balance of $37.3 million and there were no outstanding letters
of credit under the Congress Facility.
Under the loan agreement, dividends may only be paid if, after dividend
payment, the sum of (i) the Company's cash and (ii) availability under the
Tranche A line, less outstanding and unpaid obligations and certain past due
trade payables, exceeds $20 million.
The Company is subject to risks resulting from interest rate fluctuations
as interest on the Company's borrowings under the Congress Facility are based on
variable rates. If the Eurodollar rate were to increase 1%
19
<PAGE> 20
in the fiscal year ended January 31, 2000 as compared to the rate at January 31,
1999, the Company's interest expense would increase $0.4 million based on the
outstanding balance of the Congress Facility at January 31, 1999.
The Company believes that the cash on hand, cash flow from operations, the
availability of lease financing, as well as borrowings available under its
revolving credit facility will be adequate to support the existing operations
and the planned capital expenditures of the Company and its subsidiaries for the
next twelve-month period.
The Company expects to make additional payments to creditors, professionals
and others of up to $2.1 million under the Reorganization Plan.
Subsequent to January 31, 1999, the Company has signed one new lease
commitment to open a store during the next twelve months.
SEASONALITY AND INFLATION
The Company's business is seasonal, and revenues and operating income are
highest during the fourth quarter. Working capital deficiencies and related bank
borrowings in prior years were usually lowest during the period commencing the
end of the Christmas holidays and ending with the close of the Company's fiscal
year. Beginning in February, working capital deficiencies and related bank
borrowings have historically trended upward during the year until the fourth
quarter. Borrowings have historically been highest in October and November due
to cumulative capital expenditures for new stores and the building of inventory
for the holiday season.
The Company believes that, except for changes in the minimum wage mandated
by the Federal government, inflation has not had a material effect on its
operations and its internal and external source of liquidity and working
capital.
IMPACT OF THE YEAR 2000
The Company has been actively addressing the internal system concerns
related to the Year 2000 ("Y2K") problem, and in January 1999 the Company
created a Y2K Project Committee. This committee established guidelines and
directs the Y2K efforts. The primary objective of this committee is to ensure
the Company's ability to operate with its internal systems in the Year 2000. The
secondary objective is to assess all non-Information Technology ("IT")
departments and external vendors' state-of-readiness and Y2K compliance.
1) The Company's State of Readiness
Internal IT Systems -- The Company has purchased new merchandising,
financial and distribution center management systems to replace all its major
corporate systems, except for POS systems. All the new systems purchased have
been confirmed to be Y2K compliant. The projects to implement these new systems
are underway. Implementation of these new systems will likely occur in the
second and third quarters of Fiscal 2000. The existing POS application software
has been remediated, installed at all the current Wherehouse stores and is now
Y2K compliant. The existing POS hardware operating system is not Y2K compliant.
The Company has approved project funds and identified potential vendors to
perform the POS hardware operating system upgrade, which it expects will be
completed in the third quarter of Fiscal 2000. The Company intends to convert
the Blockbuster Music stores to the Wherehouse POS system in the first half of
Fiscal 2000.
External Vendors -- The Company is aware of significant Y2K remediation
work being performed by its major vendors. The Y2K Project Committee initiated
communication with the Company's significant suppliers in the first three months
of Fiscal 1999 regarding their Y2K readiness. The Company intends to focus
extensively on the second tier suppliers in the second quarter of Fiscal 2000.
20
<PAGE> 21
2) The Costs to Address the Company's Year 2000 Issues
The Company does not consider the replacement of its corporate systems as a
Y2K expense because installation of the new major corporate systems is required
to address additional business functionality. The remediation of the existing
mainframe-based corporate system is a Y2K contingency measure. Costs relating to
the remediation performed as a contingency measure of approximately $1.8 million
have been expensed in Fiscal 1999. The Company's internal personnel and other
resources performed the POS software remediation. The Wherehouse POS hardware
operating system upgrade will cost between $1.5 million and $2.0 million,
principally for new POS related hardware. The Company's internal personnel will
handle all other projects.
3) The Risks of the Company's Year 2000 Issues
The Company has completed a detailed risk assessment of its major systems.
The Y2K Project Committee is scheduled to complete a detailed risk assessment,
which will address other Y2K concerns, in the quarter ending July 31, 1999.
4) The Company's Contingency Plans
The Company has developed contingency plans for the merchandising,
financial, distribution center management, and POS hardware operating systems.
New application software will replace the merchandising, financial, and
distribution center management systems, and remediation will be done on the POS
hardware operating system. As a contingency plan, the Company has contracted
with an outside firm to remediate the existing corporate merchandising system.
The Company has a contingency plan to remediate the current warehouse management
system software in the event that installation of the newly acquired warehouse
management system fails. The Company is in the process of preparing a
contingency plan in the event the installation of the new financial system,
which is widely used by retailers, is delayed.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to risks resulting from interest rate fluctuations
as interest on the Company's borrowings under the Congress Facility are based on
variable rates. If the Eurodollar rate were to increase 1% in Fiscal 2000 as
compared to the rate at January 31, 1999, the Company's interest expense would
increase $0.4 million based on the outstanding balance of the Congress Facility
at January 31, 1999.
The Company does not hold any derivative instruments and does not engage in
hedging activities. Information about the fair value of financial instruments is
included in note 1 of the Notes to Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Financial Statement Schedule
appearing on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
<PAGE> 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the persons
who were directors and executive officers of Wherehouse as of April 30, 1999:
<TABLE>
<CAPTION>
AGE AT
NAME POSITION APRIL 30, 1999
---- -------- --------------
<S> <C> <C>
Antonio C. Alvarez, II............. Chief Executive Officer, Chairman 50
of the Board and Director
Larry C. Gaines.................... Executive Vice President and Chief 51
Operating Officer
Hugh G. Hilton..................... Executive Vice President, Special 48
Projects and Development
Robert S. Kelleher................. Executive Vice President, Chief 49
Financial Officer and Assistant
Secretary
Barbara C. Brown................... Senior Vice President, Store 47
Operations
Robert C. Davenport................ Director 32
Jonathan Gallen.................... Director 39
Joseph B. Smith.................... Director 71
Joseph J. Radecki, Jr.............. Director 41
</TABLE>
ANTONIO C. ALVAREZ, II, Chief Executive Officer, Chairman of the Board and
Director of Wherehouse since January 30, 1997. Mr. Alvarez is a principal of
Alvarez & Marsal, Inc., a New York based management consulting company. Mr.
Alvarez's recent experience includes acting as adviser to the bank lenders to
Camelot Music, Inc., a mall-based music retailer with over 300 stores. Mr.
Alvarez served as Phar-Mor, Inc.'s President and Chief Operating Officer from
September 1992 through February 1993, as acting Chief Financial Officer from
August 1992 to December 1992, and as Chief Executive Officer from February 1993
through Phar-Mor's emergence from Chapter 11 bankruptcy in October 1995. Mr.
Alvarez serves as the Chief Executive Officer, Chairman of the Board and
Director of Wherehouse pursuant to a Management Services Agreement between
Wherehouse and Alvarez & Marsal, Inc. See Item 11 -- "Executive
Compensation -- Description of Employment Contracts, Termination of Employment
and Change in Control Arrangements" below.
LARRY C. GAINES, Executive Vice President and Chief Operating Officer. Mr.
Gaines joined Wherehouse in October 1998 with the Acquisition of Blockbuster
Music. He was appointed Executive Vice President and Chief Operating Officer of
Wherehouse in March 1999. From January 1998 through October 1998, Mr. Gaines
served as President of Blockbuster Music. From 1981 through 1997, Mr. Gaines was
with the Musicland Group, serving in several senior management positions, most
recently as President of Media Play, a 90-store, big box, full media chain.
Previously he was with Cole National Corporation. Mr. Gaines is a member of the
board of directors for the National Association of Recording Merchants (NARM).
HUGH G. HILTON, Executive Vice President, Special Projects and Development.
Mr. Hilton commenced serving as Chief Operating Officer in January 1998, and
since March 1999 has served as an Executive Vice President, overseeing the
Company's Special Projects and Development, including the Company's Internet
commerce site operated through Wherehouse.com, Inc. Mr. Hilton is a Managing
Director of Alvarez & Marsal, Inc., a New York based management consulting
company which he joined in June 1992. Mr. Hilton's most recent experience while
at Alvarez & Marsal, Inc. includes serving as Chief Executive Officer at Fedco
between April 1996 and April 1997. Prior to joining Alvarez & Marsal, Inc., Mr.
Hilton was President of Trinity Pacific Real Estate Services, a commercial real
estate consulting firm, which he founded in May 1988. Prior to founding Trinity
Pacific, he served as President of Karsten Institutional Realty Advisors (a
subsidiary of First Interstate Bancorp), a pension fund advisory firm with $1.2
billion in real estate assets under management.
22
<PAGE> 23
ROBERT S. KELLEHER, Executive Vice President, Chief Financial Officer and
Assistant Secretary. Mr. Kelleher joined Wherehouse in April 1997 as Senior Vice
President and Chief Financial Officer and was appointed Assistant Secretary in
September 1997 and Executive Vice President in March 1999. From July 1995 to
January 1997, Mr. Kelleher served as Chief Operating Officer and Chief Financial
Officer for Kids Mart, Inc., a 180-store chain of children's specialty apparel
stores. Kids Mart, Inc. filed for Chapter 11 bankruptcy on January 10, 1997.
Prior to that, from November 1980 to June 1995, Mr. Kelleher held various
executive positions, most recently President, Chief Operating Officer and Chief
Financial Officer with Contempo Casuals, Inc., a 340-store chain of specialty
women's apparel stores, then a subsidiary of the Neiman Marcus Group, Inc.
BARBARA C. BROWN, Senior Vice President, Store Operations. Ms. Brown joined
Old Wherehouse in 1973. She became Vice President, Sales and Operations in 1986,
was promoted to Senior Vice President in 1991. Prior to 1986, Ms. Brown served
in a variety of store operations positions including Store Manager, District
Manager, Assistant Vice President, Store Operations, and Associate Vice
President, Store Operations.
ROBERT C. DAVENPORT, Director since November 15, 1996. Mr. Davenport is a
Managing Director of Cerberus Capital Management, L.P., a New York based
investment fund management firm, a position he has held since February 1996.
From March 1994 until February 1996, he was a private investor. From 1990
through 1994, he was with Vestar Capital Partners, Inc. ("Vestar"), an
investment fund, where he served as a vice president. Prior to joining Vestar in
1990, Mr. Davenport was an analyst in the Mergers and Acquisitions Group at
Drexel Burnham Lambert in New York.
JONATHAN GALLEN, Director since January 30, 1997. Mr. Gallen is the sole
managing member of Pequod LLC, the general partner of Pequod Investments, L.P.
Pequod Investments, L.P. is a distressed securities fund which invests in
publicly traded debt, private debt, trade claims, large and middle-market bank
loans, distressed real estate and public and private equity. Mr. Gallen has
served as a member of the Board of Directors of Harvest Foods and Fruehauf
Trailer Corporation.
JOSEPH B. SMITH, Director since January 30, 1997. Mr. Smith is currently
the Chairman of Unison Productions, a consulting and production company, a
position he has held since April 1994. Mr. Smith served as President and Chief
Executive Officer of Capitol Industries-EMI Music, Inc. from 1987 until 1993.
Mr. Smith also serves as a director of Westwood One, Inc.
JOSEPH J. RADECKI Jr., Director since February 20, 1997. Mr. Radecki is a
Managing Director of CIBC Oppenheimer Corp., an investment bank. From 1990 to
1998, Mr. Radecki was an Executive Vice President and Director of Financial
Restructurings of Jefferies & Company, Inc. From 1983 until 1990, Mr. Radecki
was First Vice President in the International Capital Markets Group at Drexel
Burnham Lambert, Inc., where he specialized in financial restructurings and
recapitalizations. Mr. Radecki has served as a member of the Board of Directors
of Service America Corporation, Bucyrus International, Inc. and ECO-Net.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the Company's directors,
its executive officers, and persons holding more than 10% of the Common Stock
are required to report their initial ownership of Common Stock and any
subsequent changes in that ownership to the Securities and Exchange Commission
(the "Commission"). Specific due dates for these reports have been established
and the Company is required to disclose any failure to file by these dates. All
of these filing requirements were satisfied during Fiscal 1999, except that (i)
Antonio C. Alvarez, II and Bryan Marsal (an individual who may be deemed to
beneficially own more than 10% of the Common Stock because he is a principal of
A&M Investment Associates #3, LLC ("A&M #3"); see Item 12 -- "Security Ownership
of 5% Holders, Directors and Executive Officers" below) inadvertently were late
in filing one report each, relating to one transaction; (ii) Jonathan Gallen, a
director, was inadvertently late in filing two reports, each relating to one
transaction; and (iii) Stephen Feinberg was inadvertently late filing one report
relating to one transaction due to an inadvertent duplicate report of a prior
purchase.
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<PAGE> 24
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth, for Fiscal 1999, certain compensation paid
by Wherehouse or accrued for such fiscal year, to the Chief Executive Officer
("CEO") and the three next most highly compensated executive officers of the
Company (the "Named Executive Officers"). All cash compensation with respect to
Antonio C. Alvarez, II and Hugh G. Hilton was paid to Alvarez & Marsal, Inc., a
consulting firm of which Antonio C. Alvarez, II is a principal and of which Hugh
G. Hilton is Managing Director. All other compensation paid with respect to
Antonio C. Alvarez, II was paid to A&M #3, an affiliate of Alvarez & Marsal,
Inc.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
-------------------------------- SECURITIES
FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
YEAR ENDED SALARY BONUS COMPENSATION OPTIONS COMPENSATION
NAME & PRINCIPAL POSITION JANUARY 31, ($) ($) ($)(1) (#) ($)
------------------------- ----------- ------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Antonio C. Alvarez, II...... 1999 -- -- 600,000(2) -- --
Chairman, Chief 1998 -- -- 600,000(2) -- --
Executive Officer 1997 -- -- 389,452(3) 1,199,151(5) --
Hugh G. Hilton.............. 1999 -- -- (4) (5) --
Executive Vice President, 1998 -- -- (4) (5) --
Special Projects and 1997 -- -- -- -- --
Development
Robert S. Kelleher.......... 1999 175,000 40,000 -- 50,000 10,165(6)
Executive Vice President, 1998 141,346 122,000 -- -- 158(7)
Chief Financial Officer 1997 -- -- -- -- --
Barbara C. Brown............ 1999 175,000 30,000 -- 28,000 22,334(8)
Senior Vice President, 1998 175,000 75,000 -- -- 12,270(9)
Store Operations 1997 175,000 -- -- -- 3,598(10)
</TABLE>
- ---------------
(1) In accordance with Commission rules, the compensation described in this
table does not include medical, group life insurance or other benefits
received by the Named Executive Officers which are available generally to
all salaried employees of the Company, and certain perquisites and other
personal benefits received by the Named Executive Officers that do not in
the aggregate exceed the lesser of $50,000 or 10% of any such officer's
salary and bonus disclosed in this table.
(2) Mr. Alvarez commenced serving as Chairman of the Board and Chief Executive
Officer of Wherehouse pursuant to a Management Services Agreement dated as
of January 31, 1997. The Management Services Agreement was extended for one
year (to October 14, 2000) pursuant to an extension and amendment thereof
dated as of May 14, 1999.
(3) This amount represents consulting fees paid by the Senior Lenders to
Alvarez & Marsal, Inc. prior to January 31, 1997, which amount was
reimbursed by New Wherehouse to the Senior Lenders. See "Description of
Employment Contracts, Termination of Employment and Change in Control
Arrangements" under this Item 11 below.
(4) Mr. Hilton serves the Company under the Management Services Agreement with
Alvarez & Marsal, Inc. In January 1998, Mr. Hilton was appointed Chief
Operating Officer by the Board of Directors, and in March 1999, Mr. Hilton
was appointed Executive Vice President, Special Projects and Development.
The Company did not pay any separate compensation for Mr. Hilton to Alvarez
& Marsal, Inc. for Fiscal 1998. Effective February 1, 1998, the Company
agreed, pursuant to an amendment to the Management Services Agreement, to
compensate Alvarez & Marsal, Inc. separately for Mr. Hilton's services. See
Item 13 -- "Certain Relationships and Related Transactions."
24
<PAGE> 25
(5) In connection with the Management Services Agreement, Wherehouse issued
options to purchase 993,380 shares of Common Stock, subject to adjustment,
to A&M #3, (an affiliate of Alvarez & Marsal, Inc.) of which Mr. Alvarez is
a principal, pursuant to a Non-Transferable Stock Option Agreement dated as
of January 31, 1997, as amended. Mr. Hilton possesses a pecuniary interest
in A&M Investment Associates #3, LLC. On April 30, 1998, the Option
Agreement (defined below) was amended to conform the Agreement to the
intent of the parties. Pursuant to the Option Agreement, as amended, and
based upon distributions and cash settlements pursuant to the
Reorganization Plan, on December 10, 1998 the number of options granted to
A&M #3 was adjusted to 1,199,151. See "Stock Options" under this Item 11
below.
(6) Includes $693 paid on behalf of Mr. Kelleher and his family for medical
expenses not covered by the Company's group medical insurance plan. Also
included are a $7,200 automobile allowance, $252 of premiums paid for term
life insurance and $2,019 for matching contributions to the Company's
401(k) plan made on behalf of Mr. Kelleher.
(7) Includes $158 paid on behalf of Mr. Kelleher and his family for medical
expenses not covered by the Company's group medical insurance plans.
(8) Includes $4,415 paid on behalf of Ms. Brown and her family for medical
expenses not covered by the Company's group medical insurance plan. Also
included are a $7,200 automobile allowance, $7,405 of premiums paid for
term life insurance and $3,315 for matching contributions to the Company's
401(k) plan made on behalf of Ms. Brown.
(9) Includes $1,895 paid on behalf of Ms. Brown and her family for medical
expenses not covered by the Company's group medical insurance plan. Also
included are $7,153 of premiums paid for term life insurance and $3,222 for
matching contributions to the Company's 401(k) plan made on behalf of Ms.
Brown.
(10) Includes $1,538 paid on behalf of Ms. Brown and her family for medical
expenses not covered by the Company's group medical insurance plan. Also
included are $310 of premiums paid for term life insurance and $1,750 for
matching contributions to the Company's 401(k) plan made on behalf of Ms.
Brown.
STOCK OPTIONS
In connection with the Management Services Agreement and consummation of
the Reorganization Plan, Wherehouse entered into a Non-Transferable Stock Option
Agreement (amended on April 30, 1998 to conform the agreement to the intention
of the parties) (as so amended, the "Option Agreement") with A&M #3, an
affiliate of Alvarez & Marsal, Inc., of which Antonio C. Alvarez, II is a
principal. The Option Agreement provides for the grant to A&M #3 of options (the
"A&M #3 Options") representing in the aggregate the right to purchase 10% of (i)
the shares of Common Stock issued under the Reorganization Plan, (ii) certain
shares purchased by A&M #3, and (iii) the shares underlying these options. The
A&M #3 Options vested monthly in equal installments through October 31, 1998,
and all unexercised A&M #3 Options expire on January 31, 2003, subject to prior
termination as set forth in the Management Services Agreement. The exact number
of shares underlying these options and the exercise prices will depend on the
final resolution of claims under the Reorganization Plan. The Option Agreement
provides that such adjustments will be made periodically as deemed practicable.
An interim adjustment was made on December 10, 1998 to reflect the resolution of
claims as of September 30, 1998. After such adjustment, the A&M #3 Options
consist of (i) options to acquire 399,717 shares at an exercise price of $8.80,
(ii) options to acquire 399,717 shares at an exercise price of $10.66, and (iii)
options to acquire 399,717 shares at an exercise price of $12.97. The Company
presently estimates that after all adjustments, the A&M #3 Options will consist
of (i) options to acquire 407,667 shares at an exercise price of $8.63 per
share, (ii) options to acquire 407,667 shares at an exercise price of $10.45 per
share, and (iii) options to acquire 407,667 shares at an exercise price of
$12.72 per share.
On April 7, 1998 and on September 18 and 22, 1998, the Company's
Compensation Committee granted, and the entire Board of Directors approved,
subject to stockholder approval of the Wherehouse 1998 Stock
25
<PAGE> 26
Incentive Plan and qualification of the offering by the California Commissioner
of Corporations (which were obtained on October 21, 1998 and December 7, 1998,
respectively) grants of Nonqualified Stock Options for a total of 339,500 shares
of Common Stock. See "Option/SAR Grants in Last Fiscal Year" below.
FISCAL YEAR-END OPTION VALUES
No options were exercised by any of the Named Executive Officers during
Fiscal 1999. The following table sets forth certain information with respect to
the Named Executive Officers of the Company concerning the number of shares
covered by both exercisable and unexercisable stock options held as of January
31, 1999. None of the Named Executive Officers held any stock appreciation
rights at such time. No established trading market exists for the Common Stock.
As of January 31, 1999, the Company calculated the book value of each share of
Common Stock to be $9.02. This book value of $9.02 per share is utilized to
calculate the value of unexercised in-the-money options in the table below. The
value used is not intended to represent the price at which shares of the Common
Stock trade.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY-END(#) AT FY-END($)
------------------------- -------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------- -------------------------
<S> <C> <C>
Antonio Alvarez, II.......... 1,199,151/0(1) $87,934/0(2)
Hugh G. Hilton............... (3) 0/0
Robert S. Kelleher........... 0/50,000(4) 0/0
Barbara C. Brown............. 0/28,000(4) 0/0
</TABLE>
- ---------------
(1) Wherehouse entered into the Option Agreement with A&M #3, an affiliate of
Alvarez & Marsal, Inc., of which Antonio C. Alvarez, II is a principal.
Pursuant to the terms of the Option Agreement, on January 31, 1997,
Wherehouse granted to A&M #3 three tranches of options to acquire, in the
aggregate, 993,380 shares of Common Stock, subject to adjustment upon
certain events. On April 30, 1998, the Option Agreement was amended to
conform the agreement to the intent of the parties. Pursuant to the Option
Agreement, as amended, and based upon distributions and cash settlements
pursuant to the Reorganization Plan, on December 10, 1998, the number of
options granted to A&M #3 was adjusted such that the total shares subject to
such options was 1,199,151, comprised of: (i) options to acquire 399,717
shares at an exercise price of $8.80, (ii) options to acquire 399,717 shares
at an exercise price of $10.66, and (iii) options to acquire 399,717 shares
at an exercise price of $12.97. See "Certain Relationships and Related
Transactions" under Item 13 below.
(2) As noted above, book value was used to calculate the value of unexercised
in-the-money options. If a higher stock value were used to calculate the
value of unexercised options at fiscal year-end, the value of unexercised
options would be higher, as (i) more options would be "in-the-money," and
(ii) each in-the-money option would have a higher value.
(3) In connection with the Management Services Agreement, as amended, Wherehouse
issued options to purchase 993,380 shares, subject to adjustment and
subsequently increased to 1,199,151 shares as described in Note 1 above, of
Common Stock to A&M #3 pursuant to the Option Agreement. Mr. Hilton
possesses a pecuniary interest in A&M #3. See Item 13 -- "Certain
Relationships and Related Transactions."
(4) These ten year options vest, subject to acceleration in certain
circumstances, in five equal annual installments beginning on April 7, 1999
and have an exercise price of $12.00 per share.
26
<PAGE> 27
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
-------------------------------- AT ASSUMED ANNUAL
NUMBER OF PERCENT OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(1)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION --------------------------
NAME GRANTED(2)(3) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- ------------- ---------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert S. Kelleher........ 50,000 14.6% $12.00 4/7/2008 $367,563 $940,683
Barbara C. Brown.......... 28,000 8.2% $12.00 4/7/2008 $205,836 $526,782
</TABLE>
- ---------------
(1) The amounts under the columns labeled "5%" and "10%" are included pursuant
to certain rules promulgated by the Commission and are not intended to
forecast future appreciation, if any, in the price of the Company's Common
Stock. The amounts are calculated by using the fair market value of $11.88
per share of Common Stock on the April 7, 1998 grant date (as determined by
an appraisal obtained by the Company) and assume annual compounded stock
appreciation rates of 5% and 10% over the full 10-year term of the options.
The gains shown are net of the option exercise price, but do not include
deductions for taxes or other expenses associated with the exercise of the
options or the sale of the underlying shares. As set forth in note 2 below,
the option grants vest equally over a 5-year period and the reported amounts
are based on the assumption that the named persons hold the options granted
for their full 10-year term. The actual value of the options will vary in
accordance with the market price of the Company's Common Stock.
(2) Stock options were granted under the Wherehouse 1998 Stock Incentive Plan at
exercise prices deemed not to be less than the fair market value at the time
of the grant. All options described in this table were to vest in five equal
installments on the anniversary of the grant date over a 5-year period.
Vested but unexercised options expire 6 months after a termination of
employment due to retirement, death or total disability; immediately upon
any termination of the individual's employment "for cause"; and 30 days
after a termination of employment for any other reason. Generally, upon a
Change in Control Event, each option will become immediately exercisable. A
Change in Control Event under the Wherehouse 1998 Stock Incentive Plan
generally includes (subject to certain exceptions) (i) a more than 50%
change in ownership of the Company; (ii) certain changes in a majority of
the Board of Directors; (iii) certain mergers or consolidations approved by
the Company's stockholders; or (iv) stockholder approval of a liquidation of
the Company or sale of substantially all of the Company's assets. A Change
in Control Event could also be triggered if any new person acquires greater
than 30% ownership, and certain 5% owners (see Item 12 -- "Security
Ownership of 5% Holders, Directors and Executive Officers" below) do not
retain at least 30%.
(3) This table does not include the adjustment to the number of shares subject
to the options granted to A&M #3 pursuant to the adjustment provisions of
the Option Agreement, as amended. See "Item 13 -- Certain Relationships and
Related Transactions" below.
COMPENSATION OF DIRECTORS
Two non-employee members of the Board of Directors, Messrs. Radecki and
Smith, each received a fee of $5,000 per attended meeting for his services and
were reimbursed for reasonable expenses incurred in connection with their
attending Board meetings. Messrs. Alvarez, Gallen and Davenport were not paid
any additional compensation for their services as directors.
DESCRIPTION OF EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN
CONTROL ARRANGEMENTS
Antonio C. Alvarez, II serves as Chairman of the Board and Chief Executive
Officer, Hugh Hilton serves as Executive Vice President, Special Projects and
Development, Karen Marsal serves as Vice President, Purchasing and
Administrative Services, Mark Alvarez serves as Vice President, Latin
Merchandising and Sudhir Aggarwal serves as Director of Business Development,
all pursuant to a Management Services Agreement, dated as of January 31, 1997,
as amended February 1, 1998, April 30, 1998 and May 13, 1999, among Wherehouse,
Alvarez & Marsal, Inc. ("A&M"), Antonio C. Alvarez, II, the Support Employees
27
<PAGE> 28
described therein, A&M #3 and Cerberus Partners, L.P. (the "Management Services
Agreement"). Under the Management Services Agreement, A&M currently receives (i)
$600,000 annually as compensation for the services of Antonio C. Alvarez, II and
the services of other personnel supplied by A&M as needed, (ii) $200,000
annually as compensation for the services of Mr. Hilton, and (iii) an aggregate
of $375,000 annually as compensation for the services of Ms. Marsal, Mr. Mark
Alvarez and Mr. Aggarwal. A&M is also eligible to receive a discretionary
incentive bonus for the services of Mr. Hilton, not to exceed an annual amount
of $80,000, and discretionary bonuses up to an annual aggregate amount of
$150,000 for the services of Ms. Marsal, Mr. Mark Alvarez and Mr. Aggarwal. For
Fiscal 1999, the discretionary bonus paid to A&M for the services of Mr. Hilton,
was $52,444, and the discretionary bonus paid to A&M for the services of Ms.
Marsal and Mr. Mark Alvarez totaled $65,666. The Management Services Agreement,
as amended, now provides that it will expire on October 14, 2000, subject to
further extension or earlier termination under certain conditions. Mr. Mark
Alvarez is the son of Antonio C. Alvarez, II.
Prior to the effective date of the Reorganization Plan, Antonio C. Alvarez,
II served as a consultant to the Senior Lenders pursuant to a letter agreement
dated as of October 14, 1996 between A&M, Antonio C. Alvarez, II and the Senior
Lenders (the "Interim Agreement"). Pursuant to the Interim Agreement, the Senior
Lenders agreed to pay A&M a consulting fee of $50,000 per month plus the hourly
fees of those employees of A&M providing assistance to Antonio C. Alvarez, II in
the performance of his consulting responsibilities. The Senior Lenders paid
$389,452 to A&M pursuant to the Interim Agreement prior to January 31, 1997.
Under the Management Services Agreement, New Wherehouse agreed to reimburse, and
has reimbursed, the Senior Lenders for the amounts paid by the Senior Lenders to
A&M pursuant to the Interim Agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee consists of Messrs. Davenport,
Radecki, and Smith. None of the members of the Compensation Committee is or has
been an officer or employee of the Company. Mr. Radecki is currently Managing
Director of CIBC Oppenheimer Corp., an investment bank. CIBC Oppenheimer Corp.
acted as a financial advisor to the Company during 1998 with respect to the
Acquisition of Blockbuster Music, and, pursuant to an engagement letter dated
September 22, 1998, received a fee of $600,000, plus expenses, upon completion
of the Acquisition.
Mr. Davenport is a Managing Director of Cerberus Capital Management, L.P.
In 1998, the Company paid a onetime fee of $0.9 million to Cerberus Capital
Management, L.P., an affiliate of Cerberus Partners, L.P., for a commitment to
provide a bridge loan to finance the acquisition of Blockbuster Music in the
event that permanent financing was not in place at the time of the Acquisition.
ITEM 12. SECURITY OWNERSHIP OF 5% HOLDERS, DIRECTORS AND EXECUTIVE OFFICERS
The Common Stock is the only outstanding class of voting securities of the
Company. The following table sets forth, as of April 27, 1999, the number and
percentage of shares of Common Stock beneficially owned by (i) each person known
to Wherehouse to be the beneficial owner of more than 5% of the outstanding
shares of Common Stock, (ii) each director of Wherehouse, (iii) each Named
Executive Officer, and (iv) all directors and executive officers of Wherehouse
as a group. Unless otherwise indicated in a footnote, each person listed below
possesses sole voting and investment power with respect to the shares indicated
as beneficially owned by him or her, subject to community property laws where
applicable. The percentage of ownership in the
28
<PAGE> 29
following table does not include the additional estimated 86,500 shares that may
be issued pursuant to the Reorganization Plan after April 27, 1999.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES ALL
BENEFICIALLY OWNED COMMON STOCK
NAME (1)(2) OUTSTANDING(3)
---- ------------------ --------------
<S> <C> <C>
Stephen Feinberg.................................. 7,099,282(4) 55.6%
450 Park Avenue, 28th Floor
New York, New York 10022
Antonio C. Alvarez, II............................ (5)
c/o Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
AND
Bryan Marsal...................................... (6)
c/o Alvarez & Marsal, Inc.
599 Lexington Avenue, Suite #2700
New York, New York 10022-4802
A&M Investment Associates #3, LLC................. 2,278,387(7) 17.9%
c/o Alvarez & Marsal, Inc.
599 Lexington Avenue, Suite #2700
New York, New York 10022-4802
A&M Investment Associates #4, LLC................. 385,542(8) 3.0%
A&M Investment Associates #8, LLC................. 16,000(9) *
--------- -----
Total for Antonio C. Alvarez, II and
Bryan Marsal.......................... 2,679,929(5)(6) 21.0%
Robert C. Davenport............................... 0(10) 0
Jonathan Gallen................................... 435,195(11) 3.4%
Joseph B. Smith................................... 0 0
Joseph J. Radecki, Jr. ........................... 0 0
Hugh G. Hilton.................................... 0(7) 0
Robert S. Kelleher................................ 10,000(12) *
Barbara C. Brown.................................. 5,600(13) *
All Directors and Executive Officers, as a group
(9 persons)..................................... 3,130,724 24.5%
</TABLE>
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes sole or shared voting or investment power
with respect to securities. Except as otherwise noted below and subject to
community property laws where applicable, each person named reportedly has
sole voting and dispositive power with respect to all shares of Common
Stock shown as beneficially owned by such person. On April 27, 1999, there
were 10,729,710 shares of Common Stock outstanding.
(2) The number of shares listed as beneficially owned by each named person (and
the directors and executive officers as a group) includes shares of Common
Stock underlying options, warrants and rights (including conversion rights)
exercisable as of or within 60 days after April 27, 1999, as follows:
<TABLE>
<S> <C>
A&M Investment Associates #3, LLC........................... 1,199,151
Antonio C. Alvarez, II, Bryan Marsal
Jonathan Gallen............................................. 161,666
Stephen Feinberg............................................ 72,687
Robert S. Kelleher.......................................... 10,000
Barbara C. Brown............................................ 5,600
---------
All Directors and Executive Officers as a Group (9
persons).................................................. 1,376,417
</TABLE>
29
<PAGE> 30
(3) The percent of Common Stock outstanding is based upon (i) the 10,729,710
shares of Common Stock issued and outstanding at April 27, 1999, plus (ii)
the 776,000 warrants issued under the Reorganization Plan, plus (iii) the
1,199,151 shares underlying the A&M Options, plus (iv) all employee stock
options that are exercisable within 60 days of April 27, 1999. In
connection with the Reorganization Plan, holders of Old Wherehouse's Senior
Subordinated Notes received three tranches of warrants to purchase shares
of Common Stock (the "Warrants"). The Tranche A Warrants represent the
right to purchase 576,000 shares of Common Stock at an exercise price of
$2.38 per share and have a five year maturity. The Tranche B Warrants
represent the right to purchase 100,000 shares of Common Stock at an
exercise price of $9.00 per share and have a seven year maturity. The
Tranche C Warrants represent the right to purchase 100,000 shares of Common
Stock at an exercise price of $11.00 per share and have a seven year
maturity (each Warrant is exercisable for one share of the Common Stock).
(4) This information was obtained from a Schedule 13D-Amendment No. 2 filed
with the Commission regarding Mr. Feinberg's beneficial ownership as of
September 29, 1998. Ownership is described as follows: Cerberus Partners,
L.P., a Delaware limited partnership, owns 1,670,222 shares of Common Stock
and 4,959 Warrants; Cerberus International, Ltd., a corporation organized
under the laws of the Bahamas, owns 1,962,182 shares of Common Stock and
32,280 Warrants; Ultra Cerberus Fund, Ltd., a corporation organized under
the laws of the Bahamas, owns 156,583 shares of Common Stock and 7,291
Warrants, all over which Mr. Feinberg possesses sole voting and dispositive
power. Various other private investment funds for which Mr. Feinberg
possesses dispositive authority over the securities of the Company own in
the aggregate 3,237,608 shares of the Common Stock and 28,157 Warrants.
(5) As disclosed on a Schedule 13D -- Amendment No. 2 filed with the Commission
on April 13, 1999, and on a Form 5 filed with the Commission on March 17,
1999, Antonio C. Alvarez, II is a managing member of A&M #3, A&M #4 (as
defined below), and A&M #8 (as defined below), and therefore may be deemed
to be the beneficial owner of Common Stock held by any one or more of these
entities. Mr. Alvarez disclaims beneficial ownership of the shares held by
A&M #3, A&M #4, and A&M #8, except to the extent of his pecuniary interest
therein.
(6) As disclosed on a Schedule 13D -- Amendment No. 2 filed with the Commission
on April 13, 1999, and on a Form 5 filed with the Commission on March 17,
1999, Bryan Marsal is a managing member of A&M #3, A&M #4 (as defined
below), and A&M #8 (as defined below), and therefore may be deemed to be
the beneficial owner of Common Stock held by any one or more of these
entities. Mr. Marsal disclaims beneficial ownership of the shares held by
A&M #3, A&M #4, and A&M #8, except to the extent of his pecuniary interest
therein.
(7) A&M #3 is a Delaware limited liability Company. The share total includes
A&M #3 Options to purchase 1,199,151 shares of Common Stock, exercisable
within 60 days of April 27, 1999. The A&M #3 Options are subject to
adjustment. Pursuant to the adjustment provisions of the Option Agreement,
on December 10, 1998, an interim adjustment was made as is described in
Item 13 -- "Certain Relationships and Related Transactions" below. Mr.
Hilton possesses a pecuniary interest in A&M #3. Mr. Hilton disclaims
beneficial ownership of shares of Common Stock held by A&M #3, except to
the extent of his pecuniary interest therein.
(8) A&M Investment Associates #4, LLC is a Delaware limited liability Company
("A&M #4").
(9) A&M Investment Associates #8, LLC is a Delaware limited liability Company
("A&M #8").
(10) Mr. Davenport is a managing director of Cerberus Capital Management, L.P.,
an affiliate of Cerberus Partners, L.P. and may be deemed to be the
beneficial owner of all of the shares of Common Stock held by Cerberus
Partners, L.P. Mr. Davenport disclaims any beneficial ownership in the
shares of Common Stock held by Cerberus Partners, L.P.
(11) Mr. Gallen is the managing member of Pequod LLC, the general partner of
Pequod Investments, L.P., which beneficially owns 217,596 shares of Common
Stock, including 80,832 Warrants. Mr. Gallen is also President of Ahab
Capital Management, Inc., which is an investment advisor to Pequod
International, Ltd. Pequod International, Ltd. is the beneficial owner of
217,599 shares of Common Stock, which total includes 80,834 Warrants. As
such, Mr. Gallen may be deemed to be the beneficial owner of the shares of
Common Stock and Warrants held by Pequod Investments, L.P. and Pequod
30
<PAGE> 31
International, Ltd. Mr. Gallen has sole voting and investment power over
Common Stock owned by Pequod Investments, L.P. and Pequod International,
Ltd. Mr. Gallen disclaims beneficial ownership in the shares of Common
Stock held by Pequod Investments, L.P. and Pequod International, Ltd.,
except to the extent of his pecuniary interest therein.
(12) Mr. Kelleher has a right to acquire 10,000 shares of Common Stock pursuant
to stock options exercisable as of or within 60 days after April 27, 1999
that were issued pursuant to the Wherehouse Entertainment, Inc. 1998 Stock
Incentive Plan.
(13) Ms. Brown has a right to acquire 5,600 shares of Common Stock pursuant to
stock options exercisable as of or within 60 days after April 27, 1999 that
were issued pursuant to the Wherehouse Entertainment, Inc. 1998 Stock
Incentive Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Antonio C. Alvarez, II serves as Chairman of the Board and Chief Executive
Officer, Hugh Hilton serves as Executive Vice President, Special Projects and
Development, Karen Marsal serves as Vice President, Purchasing and
Administrative Services, Mark Alvarez serves as Vice President, Latin
Merchandising and Sudhir Aggarwal serves as Director of Business Development,
all pursuant to a Management Services Agreement, dated as of January 31, 1997,
as amended February 1, 1998, April 30, 1998 and May 13, 1999, among Wherehouse,
Alvarez & Marsal, Inc. ("A&M"), Antonio C. Alvarez, II, the Support Employees
described therein, A&M #3 and Cerberus Partners, L.P. (the "Management Services
Agreement"). Under the Management Services Agreement, A&M currently receives (i)
$600,000 annually as compensation for the services of Antonio C. Alvarez, II and
the services of other personnel supplied by A&M as needed, (ii) $200,000
annually as compensation for the services of Mr. Hilton, and (iii) an aggregate
of $375,000 annually as compensation for the services of Ms. Marsal, Mr. Mark
Alvarez and Mr. Aggarwal. A&M is also eligible to receive a discretionary
incentive bonus for the services of Mr. Hilton, not to exceed an annual amount
of $80,000, and discretionary bonuses up to an annual aggregate amount of
$150,000 for the services of Ms. Marsal, Mr. Mark Alvarez and Mr. Aggarwal. For
Fiscal 1999, the discretionary bonus paid to A&M for the services of Mr. Hilton,
was $52,444, and the discretionary bonus paid to A&M for the services of Ms.
Marsal and Mr. Mark Alvarez totaled $65,666. The Management Services Agreement,
as amended, now provides that it will expire on October 14, 2000, subject to
further extension or earlier termination under certain conditions. Mr. Mark
Alvarez is the son of Antonio C. Alvarez, II.
Pursuant to the Management Services Agreement and a Stock Subscription
Agreement dated as of January 31, 1997 (the "Stock Subscription Agreement"),
Wherehouse agreed to sell, and A&M #3 agreed to buy at a purchase price of
$6,340,000 ($1,000,000 in cash from A&M #3's funds, plus a secured recourse
promissory note in the principal amount of $335,000 and a secured non-recourse
promissory note in the amount of $5,005,000 (collectively, the "Promissory
Notes")) 1,100,000 shares of the Common Stock (the "A&M Shares") (subject to
adjustment upward or downward to represent 10% of the sum of (i) the shares of
Common Stock ultimately issued under the Reorganization Plan plus (ii) the
number of shares of Common Stock issued to A&M #3). The Management Services
Agreement provides that the number of A&M Shares are to be adjusted
periodically, as practicable, based on the shares issued under the
Reorganization Plan. An interim adjustment was made on December 10, 1998 to
reflect the issuance of shares under the Reorganization Plan based on the
resolution of claims as of September 30, 1998. Based on this interim adjustment,
the number of A&M Shares was reduced to 1,079,236. The Company estimates that
approximately 8,700 additional A&M Shares will be issued in the future based on
the adjustment formula. The Promissory Notes bear interest at 7% per annum
during the first four years and 11% per annum during the fifth through seventh
years, mature on January 31, 2004 and have no scheduled interest or principal
amortization until their maturity date. The Promissory Notes are secured by a
first priority pledge of the A&M Shares pursuant to a Stock Pledge Agreement
dated as of January 31, 1997.
In addition, in connection with the Management Services Agreement and
consummation of the Reorganization Plan, Wherehouse entered into the Option
Agreement, amended on April 30, 1998 (to conform the agreement to the intention
of the parties) with A&M #3, an affiliate of Alvarez & Marsal, Inc., of which
Antonio C. Alvarez, II is a principal. The Option Agreement provides for the
grant to A&M #3 of
31
<PAGE> 32
options representing in the aggregate the right to purchase 10% of (i) the
shares of Common Stock issued under the Reorganization Plan, (ii) the A&M #3
Shares, and (iii) the shares underlying these options. The A&M #3 Options vested
monthly in equal installments through October 31, 1998 and all unexercised A&M
#3 Options expire on January 31, 2003, subject to prior termination as set forth
in the Management Services Agreement. The exact number of shares underlying the
A&M Options and the exercise price will depend on the final resolution of claims
under the Reorganization Plan. The Option Agreement provides that such
adjustments will be made periodically as deemed practicable. An interim
adjustment was made on December 10, 1998 to reflect the resolution of claims as
of September 30, 1998. After such adjustment, the A&M #3 Options consist of (i)
options to acquire 399,717 shares at an exercise price of $8.80, (ii) options to
acquire 399,717 shares at an exercise price of $10.66, and (iii) options to
acquire 399,717 shares at an exercise price of $12.97. The Company presently
estimates that after all adjustments, the A&M #3 Options will consist of (i)
options to acquire 407,667 shares at an exercise price of $8.63 per share, (ii)
options to acquire 407,667 shares at an exercise price of $10.45 per share, and
(iii) options to acquire 407,667 shares at an exercise price of $12.72 per
share.
Wherehouse also granted certain registration rights to A&M #3 with respect
to the A&M Shares pursuant to a Registration Rights Agreement dated as of
January 31, 1997 (the "A&M Registration Rights Agreement"). Under the A&M
Registration Rights Agreement, A&M #3 has the right to make one demand
registration and two piggyback registrations in respect of the A&M Shares and
shares subject to the A&M Options.
Wherehouse also granted certain registration rights to the Senior Lenders
with respect to the Common Stock acquired by such Senior Lenders under the
Reorganization Plan, pursuant to a Registration Rights Agreement dated as of
January 31, 1997 (the "Senior Lenders Registration Rights Agreement"). Under the
Senior Lenders Registration Rights Agreement, the holders of a requisite number
of shares issued to the Senior Lenders have the right to make two demand
registrations and to participate in two piggyback registrations in respect of
such shares of Common Stock.
Jefferies & Company, Inc., of which Mr. Radecki was an Executive Vice
President and Director of Financial Restructurings, served as the financial
consultant to Old Wherehouse in its bankruptcy case, and, prior to Mr. Radecki
leaving Jefferies & Company, Inc., it also served as financial advisor to New
Wherehouse. Mr. Radecki is currently Managing Director of CIBC Oppenheimer
Corp., an investment bank. CIBC Oppenheimer Corp. acted as a financial advisor
to the Company during 1998 with respect to the Acquisition of Blockbuster Music,
and, pursuant to an engagement letter dated September 22, 1998, received a fee
of $600,000, plus expenses, upon completion of the Acquisition.
In 1998, the Company paid a onetime fee of $0.9 million to Cerberus Capital
Management, L.P. for a commitment to provide a bridge loan to finance the
acquisition of Blockbuster Music in the event that permanent financing was not
in place at the time of the Acquisition. Cerberus Capital Management, L.P. is a
limited partnership controlled by Mr. Feinberg, who is a beneficial owner of
greater than 5% of the Common Stock of Wherehouse. Mr. Davenport, a Managing
Director of Cerberus Capital Management, L.P., is a director of Wherehouse.
Madeleine LLC, a Delaware limited liability company ("Madeleine"), has
entered into a participation agreement with Congress, pursuant to which
Madeleine has agreed to purchase a 100% undivided interest in all of Congress's
right, title and interest in and to any Tranche B loans. On October 26, 1998,
Madeleine received $100,000 of the closing fee for the Congress Facility.
Madeleine will receive up to $100,000 annually from Congress as its portion of
the annual commitment fee and unused line fee for Tranche B. Stephen Feinberg is
the managing member of Madeleine and the general partner of Cerberus Partners,
L.P.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report.
32
<PAGE> 33
1.Financial statements.
See Index to Financial Statements and Financial Statement Schedule.
2.Financial statement schedule.
See Index to Financial Statements and Financial Statement Schedule.
All other schedules are omitted as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
3. Exhibits
<TABLE>
<S> <C>
2.1 Debtors' First Amended Chapter 11 Plan, as Revised for
Technical Corrections dated October 4, 1996 and Supplemental
Amendments on December 2, 1996 and December 13, 1996.
(Incorporated by reference to Exhibits A, B and C of Exhibit
3.1 of Old Wherehouse's Current Report on Form 8-K dated
January 22, 1997.)
2.2 Asset Purchase Agreement dated as of January 31, 1997 among
Old Wherehouse, WEI and New Wherehouse. (Incorporated by
reference to Exhibit 1.4 of Old Wherehouse's Current Report
on Form 8-K dated February 12, 1997.)
2.3 Stock Purchase Agreement dated as of August 10, 1998 by and
among New Wherehouse and Viacom International Inc.
(Incorporated herein by reference to Exhibit 2 of New
Wherehouse's Quarterly Report on Form 10-Q dated September
14, 1998).
3.1 Certificate of Incorporation of New Wherehouse filed with
the Delaware Secretary of State on November 15, 1997.
(Incorporated by reference to Exhibit C of Exhibit A of
Exhibit 3.1 of Old Wherehouse's Current Report on Form 8-K
dated January 22, 1997.)
3.2 Certificate of Amendment of Certificate of Incorporation of
New Wherehouse filed with the Delaware Secretary of State on
January 31, 1997. (Incorporated by reference to Exhibit 1.3
of Old Wherehouse's Current Report on Form 8-K dated
February 12, 1997.)
3.3 Certificate of Amendment of Certificate of Incorporation of
Old Wherehouse filed with the Delaware Secretary of State on
January 31, 1997. (Incorporated by reference to Exhibit 1.2
of Old Wherehouse's Current Report on Form 8-K dated
February 12, 1997.)
3.4 By-laws of New Wherehouse. (Incorporated by reference to
Exhibit B of Exhibit A of Exhibit 3.1 of Old Wherehouse's
Current Report on Form 8-K dated January 22, 1997.)
3.5 Amendment to By-laws of New Wherehouse adopted January 30,
1997, adopted by Unanimous Written Consent of the Sole
Director of New Wherehouse. (Incorporated by reference to
Exhibit 3.5 of New Wherehouse's Annual Report on Form 10-K
dated May 16, 1997.)
4.1 Tranche A Warrant Agreement dated as of January 31, 1997
between New Wherehouse and United States Trust Company of
New York, as the Warrant Agent. (Incorporated by reference
to Exhibit 4.1 of New Wherehouse's Annual Report on Form
10-K dated May 16, 1997.)
4.2 Tranche B Warrant Agreement dated as of January 31, 1997
between New Wherehouse and United States Trust Company of
New York, as the Warrant Agent. (Incorporated by reference
to Exhibit 4.2 of New Wherehouse's Annual Report on Form
10-K dated May 16, 1997.)
4.3 Tranche C Warrant Agreement dated as of January 31, 1997
between New Wherehouse and United States Trust Company of
New York, as the Warrant Agent. (Incorporated by reference
to Exhibit 4.3 of New Wherehouse's Annual Report on Form
10-K dated May 16, 1997.)
</TABLE>
33
<PAGE> 34
<TABLE>
<S> <C>
4.4 Registration Rights Agreement dated as of January 31, 1997
among New Wherehouse, Cerberus Partners, L.P., CS First
Boston Securities Corporation and Bank of America, Illinois.
(Incorporated by reference to Exhibit 1.14 of Old
Wherehouse's Current Report on Form 8-K dated February 12,
1997.)
10.1 Single Tenant Industrial Lease, dated November 5, 1991, by
and between Watson Land Company, as lessor, and Old
Wherehouse, as lessee. (Incorporated by reference to Exhibit
10.6 of the Old Wherehouse's Annual Report on Form 10-K for
the fiscal year ended January 31, 1992.)
10.2 Management Services Agreement dated as of January 31, 1997
among New Wherehouse Alvarez & Marsal, Inc., Antonio C.
Alvarez II, A&M #3, Cerberus Partners, L.P. and the Support
Employees. (Incorporated by reference to Exhibit 1.5 of Old
Wherehouse's Current Report on Form 8-K dated February 12,
1997.)
10.3 Extension and Amendment to Management Services Agreement
dated as of February 1, 1998 among New Wherehouse, Alvarez &
Marsal, Inc., Antonio C. Alvarez, II and A&M #3.
(Incorporated by reference to Exhibit 10.3 of New
Wherehouse's Annual Report on Form 10-K dated May 1, 1998.)
10.4 Second Amendment to Management Services Agreement dated as
of April 30, 1998 among New Wherehouse, Alvarez & Marsal,
Inc., Antonio C. Alvarez, II and A&M #3. (Incorporated by
reference to Exhibit 10.4 of New Wherehouse's Annual Report
on Form 10-K dated May 1, 1998.)
10.5 Secured Recourse Promissory Note dated January 31, 1997 by
A&M #3 in favor of New Wherehouse in the principal amount of
$335,000. (Incorporated by reference to Exhibit 1.6 of Old
Wherehouse's Current Report on Form 8-K dated February 12,
1997.)
10.6 Secured Non-Recourse Promissory Note dated January 31, 1997
by A&M #3 in favor of New Wherehouse in the principal amount
of $5,005,000. (Incorporated by reference to Exhibit 1.7 of
Old Wherehouse's Current Report on Form 8-K dated February
12, 1997.)
10.7 Stock Pledge Agreement dated as of January 31, 1997 between
A&M #3 and New Wherehouse. (Incorporated by reference to
Exhibit 1.8 of Old Wherehouse's Current Report on Form 8-K
dated February 12, 1997.)
10.8 Stock Subscription Agreement dated as of January 31, 1997
between New Wherehouse and A&M #3. (Incorporated by
reference to Exhibit 1.9 of Old Wherehouse's Current Report
on Form 8-K dated February 12, 1997.)
10.9 Non-Transferable Stock Option Agreement dated as of January
31, 1997 between New Wherehouse and A&M #3. (Incorporated by
reference to Exhibit 1.10 of Old Wherehouse's Current Report
on Form 8-K dated February 12, 1997.)
10.10 First Amendment to Non-Transferable Stock Option Agreement
dated as of April 30, 1998 between New Wherehouse and A&M
#3. (Incorporated by reference to Exhibit 10.10 of New
Wherehouse's Annual Report on Form 10-K dated May 1, 1998.)
10.11 Registration Rights Agreement dated as of January 31, 1997
between New Wherehouse and A&M #3. (Incorporated by
reference to Exhibit 1.12 of Old Wherehouse's Current Report
on Form 8-K dated February 12, 1997.)
10.12 Letter agreement dated as of October 14, 1996 among Cerberus
Partners, L.P., CS First Boston Securities Corporation and
Bank of America, Illinois regarding fees to be paid to
Alvarez & Marsal, Inc. (Incorporated by reference to Exhibit
1.13 of Old Wherehouse's Current Report on Form 8-K dated
February 12, 1997.
10.13 Letter agreement dated as of January 31, 1997 between New
Wherehouse and Cerberus Partners, L.P. regarding the
reimbursement of fees paid by Cerberus on behalf of the
senior lenders to Alvarez & Marsal, Inc. (Incorporated by
reference to Exhibit 1.11 of Old Wherehouse's Current Report
on Form 8-K dated February 12, 1997.)
</TABLE>
34
<PAGE> 35
<TABLE>
<S> <C>
10.14 Loan and Security Agreement dated as of January 31, 1997
between New Wherehouse and Congress Financial Corporation
(Western). (Incorporated by reference to Exhibit 1.15 of Old
Wherehouse's Current Report on Form 8-K dated February 12,
1997.)
10.15 Security Agreement dated as of January 31, 1997 between New
Wherehouse and United States Trust Company of New York, as
Collateral Agent for certain trade creditors. (Incorporated
by reference to Exhibit 1.16 of Old Wherehouse's Current
Report on Form 8-K dated February 12, 1997.)
10.16 Intercreditor and Collateral Agency Agreement dated as of
January 31, 1997 among New Wherehouse, the Trade Creditors
named therein and United States Trust Company of New York,
as Collateral Agent. (Incorporated by reference to Exhibit
1.17 of Old Wherehouse's Current Report on Form 8-K dated
February 12, 1997.)
10.17 Intercreditor and Subordination Agreement dated as of
January 31, 1997 among the Trade Creditors named therein,
United States Trust Company of New York, as Collateral Agent
for the Trade Creditors and Congress Financial Corporation
(Western). (Incorporated by reference to Exhibit 1.18 of Old
Wherehouse's Current Report on Form 8-K dated February 12,
1997.)
10.18 Security Agreement dated as of January 20, 1997, by and
between Mellon US Leasing, a division of Mellon Leasing
Corporation, successor to United States Leasing Corporation,
as Secured Party, and Reorganized Wherehouse. (Incorporated
by reference to Exhibit 10.15 of New Wherehouse's Annual
Report on Form 10-K dated May 16, 1997.)
10.19 Change of Control Agreements, dated as of July 10, 1995,
between Old Wherehouse and each of its executive officers,
with schedule required by instruction (2) to item 601(a) of
Regulation S-K identifying the parties thereto and certain
other details. (Incorporated by reference to Exhibit 10.1 of
Old Wherehouse's Quarterly Report on Form 10-Q for the
quarter ended July 31, 1995.)
10.20 Transition License Agreement dated as of October 26, 1998
between Wherehouse Entertainment, Inc., the Blockbuster
Music subsidiaries, and Blockbuster Entertainment Inc.
(Incorporated by reference to Exhibit 2.2 of New
Wherehouse's Current Report on Form 8-K dated November 10,
1998.)
10.21 Transition Services Agreement dated as of August 10, 1998
between Wherehouse Entertainment, Inc. and Viacom
International Inc. (Incorporated by reference to Exhibit 2.3
of New Wherehouse's Current Report on Form 8-K dated
November 10, 1998.)
10.22* Amended and Restated Loan and Security Agreement dated as of
October 26, 1998 between New Wherehouse and its subsidiaries
and Congress Financial Corporation (Western).
10.23* Intercreditor and Subordination Agreement dated as of
October 26, 1998 among the Trade Creditors named therein,
United States Trust Company of New York, as Collateral Agent
for the Trade Creditors, and Congress Financial Corporation
(Western).
10.24* Security Agreement dated as of October 26, 1998 between New
Wherehouse and United States Trust Company of New York, as
Collateral Agent for certain trade creditors.
10.25* Intercreditor and Collateral Agency Agreement dated as of
October 26, 1998 among certain subsidiaries of New
Wherehouse, the Trade Creditors named therein and United
States Trust Company of New York, as Collateral Agent.
10.26 Wherehouse Entertainment, Inc. 1998 Stock Incentive Plan.
(Incorporated by reference to Appendix A of the Company's
definitive proxy statement dated September 25, 1998.)
10.27* First Amendment to the Amended and Restated Loan and
Security Agreement dated as of November 30, 1998 between New
Wherehouse and its subsidiaries and Congress Financial
Corporation (Western).
</TABLE>
35
<PAGE> 36
<TABLE>
<S> <C>
10.28* Extension and Third Amendment to Management Services
Agreement dated as of May 13, 1999 among Wherehouse, Alvarez
& Marsal, Inc., Antonio C. Alvarez II and A&M #3.
10.29* Second Amendment to the Amended and Restated Loan and
Security Agreement dated as of May 14, 1999 between
Wherehouse and its subsidiaries and Congress Financial
Corporation (Western).
27.0* Financial Data Schedule.
</TABLE>
- ---------------
* Filed herewith
(b) Current Reports on Form 8-K.
The Company filed a report on Form 8-K on November 10, 1998, which was
amended on January 11, 1999, reporting the acquisition of Blockbuster Music. No
other reports on Form 8-K were filed during the fiscal quarter ended January 31,
1999.
36
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WHEREHOUSE ENTERTAINMENT, INC.
Date: May 17, 1999 By: /s/ ANTONIO C. ALVAREZ, II
------------------------------------
Antonio C. Alvarez, II
Chairman of the Board,
Chief Executive Officer and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ ANTONIO C. ALVAREZ, II Chairman of the Board, May 17, 1999
- ----------------------------------------------------- Chief Executive Officer
Antonio C. Alvarez, II
/s/ ROBERT S. KELLEHER Executive Vice President, May 17, 1999
- ----------------------------------------------------- Chief Financial Officer
Robert S. Kelleher
/s/ MEHDI MAHDAVI Vice President, May 17, 1999
- ----------------------------------------------------- Controller
Mehdi Mahdavi (Principal Accounting Officer)
/s/ ROBERT C. DAVENPORT Director May 17, 1999
- -----------------------------------------------------
Robert C. Davenport
/s/ JONATHAN GALLEN Director May 17, 1999
- -----------------------------------------------------
Jonathan Gallen
/s/ JOSEPH J. RADECKI Director May 17, 1999
- -----------------------------------------------------
Joseph J. Radecki
/s/ JOSEPH B. SMITH Director May 17, 1999
- -----------------------------------------------------
Joseph B. Smith
</TABLE>
37
<PAGE> 38
WHEREHOUSE ENTERTAINMENT, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Deloitte & Touche LLP, Independent Auditors....... F-2
Report of Ernst & Young LLP, Independent Auditors........... F-3
Financial Statements
Consolidated Balance Sheets at January 31, 1999 and
1998................................................... F-4
Consolidated Statements of Operations for the years ended
January 31, 1999 and 1998 (New Wherehouse) and for the
year ended January 31,1997 (Old Wherehouse)............ F-5
Consolidated Statements of Changes in Shareholders' Equity
(Deficit) for the years ended January 31, 1999, and
1998 (New Wherehouse) and for the year ended January
31, 1997 (Old Wherehouse).............................. F-6
Consolidated Statements of Cash Flows for the years ended
January 31, 1999 and 1998 (New Wherehouse) and for the
year ended January 31, 1997 (Old Wherehouse)........... F-7
Notes to Consolidated Financial Statements.................. F-8
Schedule II -- Valuation and Qualifying Accounts............ F-23
</TABLE>
All other schedules have been omitted because they are not required under the
related instructions or are inapplicable, or because the required information is
included elsewhere in the consolidated financial statements.
F-1
<PAGE> 39
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Wherehouse Entertainment, Inc.
We have audited the accompanying consolidated balance sheet of Wherehouse
Entertainment, Inc. and subsidiaries as of January 31, 1999, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. Our audit also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Wherehouse Entertainment, Inc.
and subsidiaries at January 31, 1999, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Los Angeles, California
May 14, 1999
F-2
<PAGE> 40
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Wherehouse Entertainment, Inc.
We have audited the accompanying balance sheet of Wherehouse Entertainment,
Inc. as of January 31, 1998 (New Wherehouse), and the related statements of
operations, shareholders' equity, and cash flows for the year ended January 31,
1998 (New Wherehouse) and the year ended January 31, 1997 (Old Wherehouse). Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Wherehouse Entertainment,
Inc. at January 31, 1998 (New Wherehouse), and the results of its operations and
its cash flows for the year ended January 31, 1998 (New Wherehouse) and the year
ended January 31, 1997 (Old Wherehouse), in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
Ernst & Young LLP
Los Angeles, California
April 17, 1998
F-3
<PAGE> 41
WHEREHOUSE ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JANUARY 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Current assets (Note 6):
Cash and cash equivalents................................. $ 15,009,000 $ 54,720,000
Receivables, net.......................................... 5,207,000 1,296,000
Inventories, net.......................................... 226,648,000 66,750,000
Other current assets...................................... 2,807,000 1,237,000
Deferred taxes (Note 7)................................... 14,003,000 1,799,000
------------ ------------
Total current assets................................... 263,674,000 125,802,000
Property, equipment, and improvements, net (Notes 4 and
6)........................................................ 68,531,000 17,627,000
Deferred taxes (Note 7)..................................... 12,409,000 2,952,000
Intangible assets, net (Notes 1, 2, 3 and 6)................ 41,282,000 14,358,000
Other assets, net........................................... 1,845,000 255,000
------------ ------------
Total assets........................................... $387,741,000 $160,994,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and bank overdraft....................... $114,480,000 $ 30,693,000
Accrued expenses (Note 5)................................. 29,679,000 13,458,000
Sales taxes payable....................................... 9,304,000 5,621,000
Store closure reserve -- Acquired stores (Note 1)......... 22,612,000 -
Store closure reserve -- Existing stores (Note 1)......... 2,593,000 -
Income taxes payable...................................... 4,607,000 6,312,000
Reorganization liabilities (Note 2)....................... 2,109,000 4,255,000
Current portion of leases in excess of fair market value
(Note 1)............................................... 3,271,000 -
Current portion of capital lease obligations and other
long-term debt......................................... 4,207,000 193,000
------------ ------------
Total current liabilities.............................. 192,862,000 60,532,000
Line of credit (Note 6)..................................... 37,349,000 -
Long-term debt (Note 2)..................................... 3,837,000 4,048,000
Capital lease obligations (Notes 4 and 9)................... 23,546,000 294,000
Leases in excess of fair market value (Note 1).............. 25,929,000 -
Deferred rent and other long-term liabilities (Note 3)...... 6,040,000 4,648,000
------------ ------------
Total liabilities...................................... 289,563,000 69,522,000
------------ ------------
Commitments and contingencies (Notes 9 and 10)
Shareholders' equity (Note 10):
Preferred stock............................................. - -
Common stock................................................ 108,000 106,000
Additional paid-in-capital.................................. 89,400,000 89,377,000
Retained earnings........................................... 14,758,000 7,702,000
Notes receivable............................................ (6,088,000) (5,713,000)
------------ ------------
Total shareholders' equity............................. 98,178,000 91,472,000
------------ ------------
Total liabilities and shareholders' equity............. $387,741,000 $160,994,000
============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 42
WHEREHOUSE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NEW WHEREHOUSE OLD WHEREHOUSE
--------------------------- --------------
YEAR ENDED YEAR ENDED
JANUARY 31, JANUARY 31,
--------------------------- --------------
1999 1998 1997
------------ ------------ --------------
<S> <C> <C> <C>
Sale merchandise revenue............................ $464,475,000 $276,147,000 $295,453,000
Rental revenue...................................... 31,984,000 51,278,000 70,051,000
------------ ------------ ------------
Total revenues.................................... 496,459,000 327,425,000 365,504,000
------------ ------------ ------------
Cost of sale merchandise revenue.................... 309,687,000 176,137,000 195,489,000
Cost of rentals, including amortization............. 16,000,000 27,397,000 33,955,000
------------ ------------ ------------
Total cost of revenues............................ 325,687,000 203,534,000 229,444,000
------------ ------------ ------------
Gross profit................................... 170,772,000 123,891,000 136,060,000
Selling, general and administrative expenses........ 140,135,000 104,738,000 133,719,000
Integration costs (Note 1).......................... 827,000 - -
Store closure costs -- Existing stores (Note 1)..... 2,869,000 - -
Year 2000 remediation costs (Note 12)............... 1,842,000 - -
Depreciation and amortization....................... 11,769,000 7,130,000 11,769,000
------------ ------------ ------------
Income (loss) from operations..................... 13,330,000 12,023,000 (9,428,000)
Interest expense.................................... 3,503,000 531,000 1,019,000
Interest income..................................... (2,258,000) (1,583,000) (338,000)
------------ ------------ ------------
Income (loss) before reorganization items, income
taxes and extraordinary item................... 12,085,000 13,075,000 (10,109,000)
------------ ------------ ------------
Reorganization items (Notes 2 and 3)
Professional fees.............................. - - 7,207,000
Provision for store closing costs.............. - - 6,969,000
Provision for rejected executory contracts..... - - 3,331,000
Provision for other reorganization costs....... - - 2,429,000
------------ ------------ ------------
Total reorganization items................ - - 19,936,000
------------ ------------ ------------
Income (loss) before income taxes and
extraordinary item............................. 12,085,000 13,075,000 (30,045,000)
Provision for income taxes.......................... 5,029,000 5,373,000 -
------------ ------------ ------------
Income (loss) before extraordinary item........... 7,056,000 7,702,000 (30,045,000)
Extraordinary item:
Gain on extinguishment of debt (Note 2)........... - - 173,765,000
------------ ------------ ------------
Net income........................................ $ 7,056,000 $ 7,702,000 $143,720,000
============ ============ ============
Net income per common share: (Note 8)
Basic............................................. $ 0.66 $ 0.74
============ ============
Diluted........................................... $ 0.61 $ 0.71
============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE> 43
WHEREHOUSE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS
--------------------- PAID-IN (ACCUMULATED NOTES
SHARES AMOUNT CAPITAL DEFICIT) RECEIVABLE TOTAL
---------- -------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, February 1, 1996...... 10 $ - $ 95,671,000 $(251,958,000) $ - $(156,287,000)
Net income..................... 143,720,000 143,720,000
Recapitalization and fresh
start adjustments(Notes 2 and
3):
Recapitalization
adjustment................ (10) (95,671,000) 108,238,000 12,567,000
Issuance of common stock..... 9,157,808 92,000 83,051,000 83,143,000
Sale of common stock........... 1,100,000 11,000 6,329,000 (5,340,000) 1,000,000
---------- -------- ------------ ------------- ----------- -------------
New Wherehouse balance, January
31, 1997..................... 10,257,808 103,000 89,380,000 - (5,340,000) 84,143,000
Issuance of common stock....... 361,393 3,000 (3,000) -
Interest on notes receivable... (373,000) (373,000)
Net income..................... 7,702,000 7,702,000
---------- -------- ------------ ------------- ----------- -------------
Balance, January 31, 1998...... 10,619,201 106,000 89,377,000 7,702,000 (5,713,000) 91,472,000
Adjustment of common stock
(Note 10).................... (20,764) -- -- -
Issuance of common stock....... 125,628 1,000 (1,000) -
Exercise of warrants........... 5,645 1,000 24,000 25,000
Interest on notes receivable... (375,000) (375,000)
Net income..................... 7,056,000 7,056,000
---------- -------- ------------ ------------- ----------- -------------
Balance, January 31, 1999...... 10,729,710 $108,000 $ 89,400,000 $ 14,758,000 $(6,088,000) $ 98,178,000
========== ======== ============ ============= =========== =============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE> 44
WHEREHOUSE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NEW WHEREHOUSE OLD WHEREHOUSE
----------------------------- --------------
YEAR ENDED YEAR ENDED
JANUARY 31, JANUARY 31,
----------------------------- --------------
1999 1998 1997
------------- ------------ --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.............................................. $ 7,056,000 $ 7,702,000 $ 143,720,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 11,769,000 7,130,000 11,769,000
Store closure reserves - Existing stores.............. 2,869,000
Rental amortization included in cost of rentals....... 11,190,000 21,113,000 23,535,000
Book value of rental inventory dispositions, included
in cost of rentals.................................. 2,044,000 4,886,000 9,454,000
Deferred taxes........................................ (2,327,000) (4,751,000) --
Gain on extinguishment of debt........................ -- -- (173,765,000)
Changes in operating assets and liabilities:
Receivables, net.................................... (3,911,000) 636,000 (349,000)
Prepaid inventory deposits.......................... -- 4,486,000 6,394,000
Inventories, net.................................... 21,742,000 11,841,000 10,730,000
Other current assets................................ 181,000 1,022,000 2,352,000
Accounts payable, accrued expenses and other
liabilities....................................... 19,905,000 23,894,000 2,401,000
Income taxes payable................................ (1,705,000) 6,312,000 --
Rental inventory purchases.......................... (11,502,000) (21,195,000) (33,367,000)
Other long-term liabilities......................... 617,000 2,648,000 --
Store closure reserve - Existing stores............. (276,000)
Store closure and FMV reserves - Acquired stores.... (2,295,000)
Changes due to reorganization activities:
Accrued professional fees........................... (3,079,000) 3,227,000
Provision for store closing costs................... (328,000) 3,767,000
Provision for rejected executory contracts.......... -- -- 3,331,000
Other reorganization items.......................... (2,460,000) 2,747,000
------------- ------------ -------------
Net cash provided by operating activities...... 55,357,000 59,857,000 15,946,000
------------- ------------ -------------
INVESTING ACTIVITIES:
Proceeds from sale of assets............................ 2,464,000
Purchase of property, equipment and improvements........ (11,241,000) (4,699,000) (3,785,000)
(Decrease) increase in other assets..................... (908,000) 85,000
Purchase of Blockbuster Music, net of cash acquired..... (116,535,000)
------------- ------------ -------------
Net cash used in investing activities.......... (128,684,000) (4,614,000) (1,321,000)
------------- ------------ -------------
FINANCING ACTIVITIES:
Net borrowings under line of credit..................... 37,349,000 --
Payments on capital lease obligations and long-term
debt.................................................. (1,237,000) (696,000) (2,702,000)
Sale of common stock.................................... -- -- 1,000,000
Exercise of warrants.................................... 25,000 -- --
Interest on notes receivable............................ (375,000) (373,000)
Settlement of pre-petition claims....................... (2,146,000) (5,632,000) (14,098,000)
------------- ------------ -------------
Net cash provided by (used in) financing
activities................................... 33,616,000 (6,701,000) (15,800,000)
------------- ------------ -------------
Net (decrease) increase in cash and cash equivalents.... (39,711,000) 48,542,000 (1,175,000)
Cash and cash equivalents, beginning of year............ $ 54,720,000 $ 6,178,000 $ 7,353,000
------------- ------------ -------------
Cash and cash equivalents, end of year.................. $ 15,009,000 $ 54,720,000 $ 6,178,000
============= ============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.............................................. $ 2,759,925 $ 991,000 $ 82,042
Income taxes.......................................... $ 9,089,119 $ $1,362,000 $ 1,710,000
NONCASH INVESTING AND FINANCING ACTIVITIES:
The Company incurred a capital lease obligation of
$1,863,000 for the purchase of certain equipment
during 1999.
</TABLE>
During 1999, the Company accrued $775,000 of deferred financing costs incurred
in connection with the Revolving Credit Facility (See Note 6).
See Accompanying Notes to Consolidated Financial Statements.
F-7
<PAGE> 45
WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND ACQUISITION
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Wherehouse
Entertainment, Inc. and its wholly owned subsidiaries. All material
inter-company balances and transactions have been eliminated. Wherehouse
Entertainment, Inc. and all of its subsidiaries are collectively referred to as
the Company.
ACQUISITION
On October 26, 1998, pursuant to a Stock Purchase Agreement dated as of
August 10, 1998 (the "Purchase Agreement"), the Company acquired (the
"Acquisition") from Viacom International Inc. (the "Seller"), all of the capital
stock of certain retail music subsidiaries of Seller (the "Acquired Business").
The Acquired Business consisted of 378 Blockbuster Music stores in 33 States.
The purchase price, which is subject to final adjustment as discussed below, was
$127,873,000, including direct acquisition costs. The Purchase Agreement
contains a purchase price adjustment mechanism based on working capital, as
defined. The Company has delivered to Seller its Notice of Disagreement as to
the Seller's calculation of the final purchase price and is currently
negotiating with Seller to resolve the difference. The ultimate purchase price
may be lower as a result.
The Acquisition was accounted for under the purchase method of accounting.
Accordingly, the purchase price has been allocated to the assets acquired and
liabilities assumed based upon their respective fair values at the Acquisition
date based on valuations and other studies. The following is a summary of the
acquired assets and liabilities:
<TABLE>
<S> <C>
Current assets................................ $ 194,748,000
Property, equipment & improvements............ 45,982,000
Deferred tax assets, net...................... 19,335,000
Goodwill...................................... 29,002,000
Accounts payable and accrued expenses......... (80,657,000)
Store closure and other reserves.............. (24,126,000)
Capital lease obligations..................... (26,430,000)
Leases in excess of fair market value......... (29,981,000)
-------------
Total consideration................. $ 127,873,000
=============
</TABLE>
The results of operations of the Acquisition are reflected in the
accompanying consolidated financial statements from October 26, 1998. Goodwill
arising out of the Acquisition is being amortized over 15 years.
As of the consummation of the Acquisition, senior management began
formulating its plan to close certain Blockbuster Music stores which competed in
the same trade areas as existing Wherehouse stores (the "Store Closure Plan").
The major action steps of the Store Closure Plan, which was finalized during
January 1999, include, among other things, (1) the identification of Blockbuster
Music stores for closure, (2) the immediate initiation of lease settlement
negotiations, and (3) the establishment of an exit plan for each of the stores.
The Store Closure Plan includes the closing of 51 Blockbuster Music stores
located in 17 states. The Company has closed 17 of these stores as of January
31, 1999, and 15 additional stores as of April 30, 1999. The Company is
negotiating with landlords to terminate the leases on the remaining 19 stores.
The Company finalized its plans to terminate or relocate 16 corporate
employees of the Acquired Business during December 1998. The Company has
recorded a provision for severance and relocation of $320,000 as part of
purchase price allocation.
F-8
<PAGE> 46
WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The plans noted above are not expected to have a material effect on the
Company's operations. The Company recorded accruals in the purchase price
allocation as follows:
<TABLE>
<CAPTION>
ACCRUAL AS OF CHARGES BALANCE AS OF
OCTOBER 26, AGAINST JANUARY 31,
1998 RESERVES 1999
------------- ---------- -------------
<S> <C> <C> <C>
Store closure reserve -- Acquired
stores(1).............................. $24,126,000 $1,514,000 $22,612,000
Leases in excess of fair market value.... 29,981,000 781,000 29,200,000
----------- ---------- -----------
Total.......................... $54,107,000 $2,295,000 $51,812,000
=========== ========== ===========
</TABLE>
- ---------------
(1) Consists substantially of lease termination costs.
In connection with the Acquisition, senior management also began
formulating a plan to close 19 Wherehouse stores that competed in the same trade
areas as existing Blockbuster Music stores, which was finalized during January
1999. The Company has closed 7 of these stores as of January 31, 1999, 5
additional stores as of April 30, 1999 and is negotiating with landlords to
terminate the leases on the remaining 7 stores. The Company recorded a provision
to write down the related property, equipment and improvements of $823,000,
which amount is included in depreciation and amortization expense in the 1999
consolidated statement of operations. The following is a rollforward of the
activity of the store closure reserve -- existing stores:
<TABLE>
<S> <C>
Store closure reserve -- Existing stores(1)...... $2,869,000
Charges against reserve.......................... 276,000
----------
Balance at January 31, 1999...................... $2,593,000
==========
</TABLE>
- ---------------
(1) Consists substantially of lease termination costs.
The following unaudited pro forma financial information for the Company
gives effect to certain adjustments, including depreciation expense,
amortization of goodwill, corporate overhead allocations, interest expense and
the related income tax effect of the foregoing adjustments as if the Acquisition
had occurred at the beginning of the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
JANUARY 31, JANUARY 31,
1999 1998
------------ ------------
<S> <C> <C>
Net revenues.................................... $857,504,000 $918,001,000
Net loss........................................ $(14,234,000 $(43,767,000)
Basic net loss per share........................ $ (1.33) $ (4.20)
Diluted net loss per share...................... $ (1.23)
</TABLE>
The unaudited pro forma results have been prepared for comparative purposes
only and do not purport to represent what the Company's actual results of
operations would have been had the Acquisition occurred as of the beginning of
the periods presented and are not intended to be a projection of future results
or trends.
In connection with the integration of the Acquired Business, the Company
incurred consulting and systems integration costs of $827,000 during 1999. These
amounts are included in integration costs in the 1999 consolidated statement of
operations.
2. REORGANIZATION UNDER CHAPTER 11
Wherehouse Entertainment, Inc. ("New Wherehouse" also the Company) was
incorporated under the laws of the state of Delaware on November 15, 1996, as
WEI Acquisition Co. On January 31, 1997, New
F-9
<PAGE> 47
WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Wherehouse acquired substantially all of the assets of Wherehouse Dissolution
Co. ("Old Wherehouse"), a Delaware corporation, and its parent company, WEI
Holdings, Inc., a Delaware corporation (WEI, and together with Old Wherehouse,
the "Debtor"), pursuant to a Chapter 11 plan of reorganization (the
"Reorganization").
On August 2, 1995 (the "Petition Date"), the Debtor filed voluntary
petitions for relief under Chapter 11 of Title 11 of the United States Code in
the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court"), seeking to reorganize under Chapter 11 (the "Bankruptcy Case"). Old
Wherehouse and WEI continued to manage their respective affairs and operate
their businesses as debtors-in-possession while they worked to develop a
reorganization plan that would restructure their businesses and allow their
emergence from Chapter 11.
The Plan of Reorganization for the Company's predecessors (the
"Reorganization Plan") was confirmed by an order of the Bankruptcy Court entered
on January 7, 1997. The effective date of the Reorganization Plan occurred on
January 31, 1997 (the "Effective Date"). Since the Effective Date, the
Bankruptcy Court has retained jurisdiction over certain claims and other matters
relating to the bankruptcy estates of the Company's predecessors, but New
Wherehouse has been and is free to carry out its business without oversight by
the Bankruptcy Court.
Several state and local taxing authorities received promissory notes for
their claims, due generally six years after the tax assessment date together
with interest at 5%. The promissory notes, which amounted to $3,868,000 at each
of January 31, 1999 and 1998, are included in long-term debt in the accompanying
consolidated balance sheets.
On January 31, 1997, the Company implemented the accounting principles for
entities emerging from Chapter 11 set forth in the American Institute of
Certified Public Accountants' Statement of Position 90-7 "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code". This resulted in the use
of fresh start reporting, since the reorganization value, as defined, was less
than the total of all post-petition liabilities and pre-petition claims, and
holders of voting shares immediately before confirmation of the Reorganization
Plan received less than fifty percent of the voting shares of the emerging
entity. Under this concept, all assets and liabilities were restated to reflect
the reorganization value of the reorganized entity, which approximated its fair
value at the date of reorganization. In addition, the accumulated deficit of the
Company was eliminated and its capital structure was recast in conformity with
the Reorganization Plan.
In connection with the consummation of the Reorganization Plan, the Company
recognized an extraordinary gain on extinguishment of pre-petition debt of
$173,765,000 during 1997.
During 1998, the Company revised the preliminary allocation of the fair
value of assets and liabilities recorded in the fresh start balance sheet at
January 31, 1997. Revisions to the fresh start balance sheet amounts included a
decrease to equipment and improvements of approximately $2.7 million, an
increase to the reorganization value in excess of amounts allocable to
identifiable assets of approximately $6.2 million and an increase of
approximately $3.5 million to the recorded amount of reorganization liabilities.
The decrease in the carrying amount of equipment and improvements resulted
primarily from final appraisals and additional analysis performed during 1998.
3. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company is a national specialty retailer of pre-recorded music, video
and other entertainment-related products. Certain of the Company's stores offer
video and other products for rental. At January 31, 1999, the Company operated
579 stores in 33 states. The Company is supported by centralized corporate
F-10
<PAGE> 48
WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
services and the stores have similar economic characteristics, products,
customers and retail distribution methods, and as such are reported as a single
segment.
FISCAL YEAR
The Company's fiscal year ends on January 31. References made to 1999,
1998, and 1997 are to the fiscal years ended January 31, 1999, 1998 and 1997,
respectively.
USE OF ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments with a
maturity of three months or less when purchased.
FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable, and
accounts payable approximate fair value because of the short-term maturities of
these instruments. The fair value of the Revolving Credit Facility is
$37,349,000 based on debt with similar terms.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially expose the Company to
concentration of credit risk, consist primarily of cash and cash equivalents. It
is the Company's practice to place its cash equivalents in high quality
securities with a financial institution.
INVENTORY
New Wherehouse carries inventory at the lower of cost or market using the
last-in, first-out (LIFO) method. Inventory consists primarily of resaleable
pre-recorded music, videocassettes, DVDs, video games and other products. At
January 31, 1999 and 1998, inventory valued using LIFO is $1,485,000 and
$201,000, respectively, less than the value of the inventory if valued using the
first-in, first-out method.
RENTAL INVENTORY
New Wherehouse amortizes video rental inventory using the straight-line
method over a three-month period with a $3 salvage value. Rental inventory has
been classified as a current asset in the accompanying consolidated balance
sheets as substantially all revenue and cash flow from rentals on hand is
expected to be derived within a one-year period. The sell-through of such rental
inventory in the year purchased results in additional amortization, which is
included in the cost of rentals. Prior to the Reorganization, Old Wherehouse
rental inventory was amortized over a period of two years for video games and
three years for videocassettes.
DEPRECIATION AND AMORTIZATION
Fixed assets are stated at cost less accumulated depreciation and
amortization, which includes the amortization of assets recorded under capital
leases. Fixed assets purchased under capital leases are amortized
F-11
<PAGE> 49
WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
on a straight-line basis over the lesser of the estimated useful life of the
asset or the lease term. Depreciation and amortization of equipment and
leasehold improvements is computed on the straight-line method over the
following periods:
<TABLE>
<CAPTION>
YEARS
-------
<S> <C>
Leasehold improvements............................. 2 - 10*
Data processing equipment and software............. 3 - 5
Store and office fixtures and equipment............ 1 - 10
Buildings and improvements......................... 5 - 30
</TABLE>
- ---------------
* Amortization over the lesser of related lease term or useful life of the
asset.
INTANGIBLE ASSETS
Goodwill of $29,002,000 resulting from the Acquisition (see Note 1) is
being amortized on a straight-line basis over 15 years. Accumulated amortization
was $482,000 at January 31, 1999. Reorganization value in excess of amounts
allocable to identifiable assets resulting from the Reorganization (see Note 2)
is being amortized on a straight-line basis over a period of 10 years.
Reorganization goodwill consisted of the following at January 31, 1999 and
January 31, 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Original value...................... $15,953,000 $15,953,000
Accumulated amortization............ (3,191,000) (1,595,000)
----------- -----------
Net................................. $12,762,000 $14,358,000
=========== ===========
</TABLE>
DEFERRED FINANCING COSTS
In connection with the Acquisition, the Company incurred $1,391,000 of
costs related to the Revolving Credit Facility (see Note 6). Such costs are
being amortized on a basis that approximates the interest method over the term
of the related debt. Accumulated amortization at January 31, 1999 was $133,000.
DEFERRED RENT
The Company recognizes rent expense on a straight-line basis over the life
of the leases. At January 31, 1999 and 1998, deferred rent of $3,265,000 and
$2,648,000, respectively, is included in the accompanying consolidated balance
sheets.
REORGANIZATION ITEMS
Reorganization items, recorded in the 1997 statement of operations,
include: (a) professional fees relating to legal, accounting and consulting
services provided in connection with the Chapter 11 proceedings, (b) costs and
expenses associated with the closing of locations, including an estimated
accrual for the expected allowed claims related to rejected executory contracts,
and estimated losses from the liquidation of inventory from closed stores, (c)
the write off of unamortized financing costs and debt discount in order to
record debt subject to the Chapter 11 proceedings at par value, (d) employee
severance costs and an estimated accrual for contractual obligations under
employee change of control agreements and (e) United States trustee fees and
other costs of the Chapter 11 proceedings.
F-12
<PAGE> 50
WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." Long-lived assets are reviewed for
impairment, based on undiscounted cash flows, whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable from cash flows.
STORE PRE-OPENING AND ADVERTISING COSTS
Store pre-opening and advertising costs are charged to expense as they are
incurred.
EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share," effective December 15, 1997, which specifies the
computation, presentation, and disclosure requirements for earnings per share.
The statement requires that the Company disclose both basic and diluted earnings
per share on the face of the statement of operations and reconcile the numerator
and denominator of the basic and diluted per share calculations in the notes to
the financial statements (see Note 8). Earnings per share for Old Wherehouse
have been omitted since it was a wholly owned subsidiary of WEI.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123
established a fair value-based method of accounting for compensation cost
related to stock options and other forms of stock-based compensation plans.
However, SFAS 123 allows an entity to continue to measure compensation costs
using the principles of APB 25 if certain pro forma disclosures are made. The
Company measures compensation expense in accordance with APB 25.
INCOME TAXES
The Company accounts for income taxes under an asset and liability approach
that requires the recognition of deferred income tax assets and liabilities for
the expected future consequences of events that have been recognized in the
Company's consolidated financial statements or income tax returns. Management
provides a valuation allowance for deferred income tax assets when it is more
likely than not that a portion of such deferred income tax assets will not be
realized.
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities and
will be effective for the Company's fiscal year ending January 31, 2001. The
Company, as of January 31, 1999, has not yet analyzed the impact of adopting the
statement.
F-13
<PAGE> 51
WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consist of the following at January
31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Land............................................. $ 141,000 $ 141,000
Buildings and improvements....................... 131,000 131,000
Leasehold improvements........................... 15,849,000 7,852,000
Store and office fixtures and equipment.......... 31,986,000 8,970,000
Data processing equipment and software........... 11,795,000 5,722,000
Capital leases................................... 22,021,000 0
------------ -----------
81,923,000 22,816,000
Less accumulated depreciation and amortization... 13,392,000 5,189,000
------------ -----------
Property and equipment, net...................... $ 68,531,000 $17,627,000
============ ===========
</TABLE>
Accumulated amortization related to capital lease assets amounted to $1,492,000
at January 31, 1999.
5. ACCRUED EXPENSES
Accrued expenses consists of the following at January 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Gift certificate and credit slips liability....... $12,273,000 $ 5,475,000
Payroll and related costs......................... 9,493,000 6,307,000
Accrued property taxes............................ 4,398,000 102,000
Other............................................. 3,515,000 1,574,000
----------- -----------
$29,679,000 $13,458,000
=========== ===========
</TABLE>
6. REVOLVING CREDIT FACILITY
In connection with the Acquisition (see Note 1), the Company, on October
26, 1998, entered into an amended loan agreement with Congress Financial
Corporation (Western) (as subsequently amended, the "Facility"). The Facility
provides for a revolving credit line of up to $165,000,000, including a letter
of credit subfacility of $10,000,000, for a term of three years, with a year to
year renewal thereafter. The revolving line of credit under the Facility is
divided into two tranches, Tranche A and Tranche B. The Company may borrow up to
$155,000,000 under Tranche A. Tranche A loans bear interest at the prime rate
(7.25% at January 31, 1999) plus 0.5%, or at the Company's election, an adjusted
Eurodollar rate (5% at January 31, 1999) plus 1.75%. The Company's ability to
make Tranche A borrowings is subject to borrowing base limitations based upon,
among other things, the value of certain eligible merchandise inventory. If
there is no availability under the Tranche A line, the Company may borrow up to
$10,000,000 under the Tranche B line. Tranche B loans bear interest (i) on the
first $5,000,000, at the prime rate plus 3.75% or an adjusted Eurodollar rate
plus 5.0%, and (ii) on the next $5,000,000, at the prime rate plus 4.75% or an
adjusted Eurodollar rate plus 6.0%. In addition, the Company pays an unused line
fee of 0.375% per annum calculated upon the amount by which $120,000,000 exceeds
the average daily principal balance of the outstanding Tranche A loans and
letters of credit outstanding during the immediately preceding month, along with
0.5% per annum calculated upon the amount by which $10,000,000 exceeds the
average daily principal balance of the outstanding Tranche B loans. As of
January 31, 1999, there was an outstanding loan balance of $37,349,000 and there
were no outstanding letters of credit.
The Company, incurred a closing and a syndication fees in connection with
the Facility. The closing fee on the Tranche A line was in the amount of
$775,000, which was fully earned as of October 26, 1998, but due
F-14
<PAGE> 52
WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
in three annual installments of $258,000 each starting on October 26, 1999. The
closing fee on the Tranche B line of $100,000 was paid on October 26, 1998 in
full. The syndication fee of $388,000, which was fully accrued as of October 26,
1998, is due in three annual installments of $129,000 each starting on October
26, 1998
In addition, the Company pays an annual commitment fee on the Tranche B
line of $50,000, payable in advance for each year during which the line is
available.
The Facility is collateralized by substantially all of the assets of the
Company.
Under the Facility, dividends may only be paid if, after the dividend
payment, the sum of (i) the Company's cash and (ii) availability under the
Tranche A line, less outstanding and unpaid obligations and certain trade
payables, exceeds $20,000,000.
7. INCOME TAXES
As a result of the purchase by New Wherehouse of substantially all of the
assets of Old Wherehouse (see Note 3), a new tax basis equivalent to the fair
value of net assets acquired was established. The net operating loss carryovers
and other deferred tax assets were used by Old Wherehouse to offset a portion of
the gain on the extinguishment of debt. Under the provisions of the Internal
Revenue Code, no provision for income taxes was recorded on the remaining gain
on the extinguishment of debt. The components of the provision for income taxes
are as follows:
<TABLE>
<CAPTION>
NEW OLD
WHEREHOUSE WHEREHOUSE
-------------------------- -----------
YEAR ENDED YEAR ENDED
JANUARY 31, JANUARY 31,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal........................... $ 5,667,000 $ 8,243,000 $ -
State............................. 1,689,000 1,881,000
----------- ----------- -----------
Total current............. 7,356,000 10,124,000 -
----------- ----------- -----------
Deferred:
Federal........................... (1,668,000) (3,920,000)
State............................. (659,000) (831,000)
----------- ----------- -----------
Total deferred............ (2,327,000) (4,751,000) -
----------- ----------- -----------
Total..................... $ 5,029,000 $ 5,373,000 $ -
=========== =========== ===========
</TABLE>
A reconciliation of the difference between the federal statutory tax rate
and the effective tax rate is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------
1999 1998 1997
----- ----- ------
<S> <C> <C> <C>
Statutory tax rate.................................... 35.0% 35.0% 34.0%
Permanent tax differences............................. 1.5 0.3 -
State taxes, net of federal benefit................... 5.8 5.2 -
Other................................................. (0.7) 0.6 -
Valuation allowance................................... - - (34.0)
---- ---- -----
41.6% 41.1% -
==== ==== =====
</TABLE>
F-15
<PAGE> 53
WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of net deferred income taxes at January 31, 1999 and 1998
are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net current deferred income tax assets
(liabilities):
Merchandise inventory........................... $ 2,843,000 $ 2,382,000
Vacation and bonus liabilities.................. 1,201,000 814,000
Other accrued liabilities....................... 833,000 164,000
Prepaid expenses................................ (293,000) (125,000)
Video rental inventory.......................... -- (1,022,000)
Reorganization expenses......................... (721,000) (568,000)
Cash discounts.................................. (426,000) (432,000)
State taxes..................................... 350,000 586,000
Business Acquisition............................ 10,216,000 --
----------- -----------
$14,003,000 $ 1,799,000
=========== ===========
Net long-term deferred income tax assets
(liabilities):
Reorganization value............................ 1,017,000 505,000
Deferred rent................................... 1,313,000 1,079,000
Property, equipment and improvements............ 106,000 1,368,000
Business Acquisition............................ 9,973,000 --
----------- -----------
12,409,000 2,952,000
----------- -----------
Total net deferred tax assets........... $26,412,000 $ 4,751,000
=========== ===========
</TABLE>
The Company is currently undergoing an audit by the state of California for
the years ended January 31, 1992, 1993 and 1994. Management believes that it has
made adequate provision in the accompanying consolidated financial statements
for these audits. In connection with the Chapter 11 case, the Company agreed to
pay certain priority tax claims, including amounts payable to the state of
California, and other state taxing authorities, six years from the assessment
date of the tax claim. These amounts are reflected in the accompanying
consolidated balance sheets as other long-term liabilities.
F-16
<PAGE> 54
WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EARNINGS PER SHARE
The following table is a reconciliation of the basic and diluted earnings
per share computations:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JANUARY 31, JANUARY 31,
1999 1998
----------- -----------
<S> <C> <C>
Basic EPS Computation:
Numerator....................................... $ 7,056,000 $ 7,702,000
Denominator:
Weighted average common shares outstanding... 10,690,000 10,421,000
----------- -----------
Total shares............................ 10,690,000 10,421,000
----------- -----------
Basic EPS......................................... $ 0.66 $ 0.74
=========== ===========
Diluted EPS Computation:
Numerator....................................... $ 7,056,000 $ 7,702,000
Denominator:
Weighted average common shares outstanding... 10,690,000 10,421,000
Incremental shares from assumed exercise of
warrants................................... 537,000 439,000
Incremental shares from assumed exercise of
options.................................... 325,000 35,000
----------- -----------
Total shares............................ 11,552,000 10,895,000
----------- -----------
Diluted EPS....................................... $ 0.61 $ 0.71
=========== ===========
</TABLE>
Options to purchase 86,000 and 393,300 shares of common stock outstanding
during January 31, 1999 and 1998 were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares and, therefore, the effect would be
antidilutive. Earnings per share for Old Wherehouse have been omitted since it
was a wholly owned subsidiary of WEI.
9. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases all of its retail stores and other facilities under
noncancellable lease agreements that expire on various dates through 2017 and
provide for renewal options. Certain of these leases have scheduled rent
increases or require rent escalations based on the consumer price index and/or
provide for payment of the real estate taxes and additional rents based on a
percentage of sales. Leases related to certain stores acquired (see Note 1) are
reflected as capital leases in the accompanying consolidated balance sheet at
January 31, 1999. In addition, the Company leases certain equipment under a
capital lease agreement.
F-17
<PAGE> 55
WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum annual lease payments under operating and capital leases at
January 31, 1999, including the modifications resulting from the Chapter 11
proceedings, are payable as follows:
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 31, OPERATING CAPITAL
----------- ------------ -----------
<S> <C> <C>
2000............................................. $ 61,975,000 $ 5,670,000
2001............................................. 55,437,000 5,566,000
2002............................................. 48,021,000 5,194,000
2003............................................. 40,374,000 4,378,000
2004............................................. 34,950,000 3,725,000
Thereafter....................................... 67,466,000 9,767,000
------------ -----------
Total minimum lease payments............. $308,223,000 34,300,000
============ -----------
Less amounts representing interest....... 6,980,000
-----------
Present value of minimum lease
payments............................... $27,320,000
===========
</TABLE>
Rental expense charged to operations was $35,961,000, $25,365,000, and
$33,159,000 during 1999, 1998 and 1997, respectively. In addition, real estate
taxes and additional rents based on percentage of sales were $4,388,000,
$2,392,000, and $2,434,000 during 1999, 1998, and 1997, respectively.
In connection with the Reorganization, the Company converted an equipment
lease, previously accounted for as a capital lease, to a note payable, with
monthly installments of $12,750 through September 1999.
OTHER
The Company is a party to various other claims, legal actions and
complaints arising in the ordinary course of its business. In the opinion of
management, all such matters are without merit or involve such amounts that
unfavorable disposition will not have a material impact on the financial
position or results of operations of the Company.
10. SHAREHOLDERS' EQUITY
The Company has the following classes of stock:
Preferred Stock -- $.01 par value; 3,000,000 shares authorized; none
issued.
Common Stock -- $.01 par value; 24,000,000 shares authorized; 10,729,710 and
10,619,201 issued and outstanding shares at January 31, 1999 and 1998,
respectively.
Pursuant to the Management Services Agreement dated as of January 31, 1997,
as amended on February 1, 1998, April 30, 1998 and May 13, 1999 (the "Management
Services Agreement") and a Stock Subscription Agreement dated as of January 31,
1997 (the "Stock Subscription Agreement"), the Company agreed to sell, and A&M
Investment Associates #3, LLC, an affiliate of Alvarez and Marsal, Inc. ("A&M
#3") agreed to buy at a purchase price of $6,340,000 ($1,000,000 in cash from
A&M #3's funds, plus a secured recourse promissory note in the principal amount
of $335,000 and a secured non-recourse promissory note in the amount of
$5,005,000 (collectively, the Promissory Notes), 1,100,000 shares of the common
stock (the A&M Shares) (subject to adjustment upward or downward to represent
10% of the sum of (i) the shares of common stock ultimately issued under the
Reorganization Plan plus (ii) the number of shares of common stock issued to A&M
#3). On December 10, 1998, the A&M Shares were adjusted downward by 20,764,
which reduced the total shares to A&M as of January 31, 1999 to 1,079,236. The
Promissory Notes bear interest at 7% per annum during the first four years and
11% per annum during the fifth through seventh years, mature on January 31,
2004, and have no scheduled interest and principal amortization
F-18
<PAGE> 56
WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
until their maturity date. The Promissory Notes are secured by a first priority
pledge of the A&M Shares pursuant to a Pledge Agreement dated as of January 31,
1997.
In addition, New Wherehouse and A&M #3 entered into a Non-Transferable
Stock Option Agreement dated as of January 31, 1997, (as amended, the Stock
Option Agreement), pursuant to which the Company issued to A&M #3 three tranches
of options to purchase shares of common stock (the A&M Options; and, together
with the A&M Shares, the A&M Securities) representing in the aggregate the right
to purchase an additional 10% of the shares of common stock issued under the
Reorganization Plan and the A&M Securities. The first tranche of options
represents the right to purchase 399,717 shares of common stock at an exercise
price of $8.80. The second tranche of options represents the right to purchase
399,717 shares of common stock at an exercise price of $10.66. The third tranche
of options represents the right to purchase 399,717 shares of common stock at an
exercise price of $12.97. The A&M Options vest monthly in equal installments
through October 31, 1998 and all unexercised A&M Options expire on January 31,
2003, subject to prior vesting or termination as set forth in the Management
Services Agreement. The A&M Options are subject to upward adjustment on a
quarterly basis as additional shares of common stock related to the
Reorganization are issued and are entitled to certain other anti-dilution
provisions as set forth in the Stock Option Agreement. The above option amounts
and exercise prices have been adjusted for anti-dilution effects through January
31, 1999.
Under the Reorganization Plan the Company issued three Tranches of warrants
to purchase shares of common stock (the "Warrants"). The Tranche A warrants
represent the right to purchase 576,000 shares of common stock at an exercise
price of $2.38 per share and have a five year maturity. The Tranche B warrants
represent the right to purchase 100,000 shares of common stock at an exercise
price of $9.00 per share and have a seven year maturity. The Tranche C warrants
represent the right to purchase 100,000 shares of common stock at an exercise
price of $11.00 per share and have a seven year maturity.
The Company granted certain registration rights to A&M #3 with respect to
the A&M Securities pursuant to a Registration Rights Agreement dated as of
January 31, 1997 (the A&M Registration Rights Agreement). Under the A&M
Registration Rights Agreement, A&M #3 has the right to make one demand
registration and two piggy-back registrations in respect of the A&M Securities.
The Company also granted certain registration rights to the former Senior
Lenders of Old Wherehouse (the "Senior Lenders") as of the Plan Effective Date
with respect to the New Common Stock acquired by such Senior Lenders, pursuant
to a registration rights agreement dated as of January 31, 1997 (the Senior
Lenders Registration Rights Agreement). Under the Senior Lenders Registration
Rights Agreement, the holders of a requisite number of shares acquired by the
Senior Lenders have the right to make two demand registrations and to
participate in two piggy-back registrations in respect of the such shares of New
Common Stock.
During April 1998, the Board of Directors adopted the Wherehouse 1998 Stock
Incentive Plan ("Stock Incentive Plan"), which was amended on September 22, 1998
to increase the number of shares available to 600,000. Under the provisions of
the plan, the Company may grant incentive and non-qualified stock options and
stock appreciation rights (SARs) to employees, officers and directors at the
discretion of the Board of Directors. Options granted under the plan vest
ratably over a five year period and expire ten years from the date of the grant.
Non-qualified options are granted at an exercise price of no less than 85%
of fair market value and greater than the par value at the date of the grant.
Incentive options are granted at no less than 100% (110% for holders of more
than 10% of the voting stock) of the fair market value at the date of the grant.
During 1999, the Company granted 339,500 options to officers and employees at
prices ranging from $12 to $18 per share,
F-19
<PAGE> 57
WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
amounts which exceeded the fair market value at the date of the grant. There
were no SARs granted during 1999. A summary of activity in the Stock Incentive
Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------- ----------------
<S> <C> <C>
Options outstanding at February 1, 1998............ -- --
Options granted at $12.00 - $18.00 per share....... 339,500 $13.60
Options cancelled.................................. -- --
------- ------
Options outstanding at January 31, 1999............ 339,500 $13.60
======= ======
</TABLE>
At January 31, 1999 there were no options exercisable under the Stock
Incentive Plan. All options granted in 1999 under the Stock Incentive Plan were
at prices greater than the fair value of the Company's stock at the date of
grant and, accordingly, no compensation expense has been recognized.
Had compensation expense for grants under the Stock Incentive Plan been
determined based on the fair value method of SFAS 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
presented below:
<TABLE>
<CAPTION>
1999
PRO FORMA
----------
<S> <C>
Net income............................................... $6,977,000
Net income per common share -- basic..................... $ 0.65
Net income per common share -- diluted................... $ 0.60
</TABLE>
The pro forma compensation expense related to the fair value of options
issued was estimated using the Black-Scholes model with the following
assumptions: expected volatility -- none (minimum value method); risk
free-interest rate -- 5.51%; average life -- 6 years and expected
dividends -- none. The weighted average fair value of options granted in 1999
was $2.45.
11. EMPLOYEE BENEFITS
Executive Officers' Retirement Plan: The Company provides life insurance
for certain executive officers of the Company with face values of $250,000. Upon
retirement at the normal retirement age of 65, covered executives are entitled
to receive annual payments equal to 10% of the face amount of their life
insurance policies for each of the 15 years following retirement. The Company
recognized expense of $9,000 in 1999, $52,000 in 1998, and $25,000 in 1997 under
this plan.
Employees' Savings Retirement Plan: In March 1992, the Company established
a tax qualified 401(k) Savings Retirement Plan (401(k) Plan). All employees who
have completed one year of service and at least 1,000 hours of service in that
year with the Company are eligible to join the 401(k) Plan on the first day of
each calendar quarter. All eligible employees may contribute from 1% to 10% of
their annual compensation on a pre-tax basis. The Company makes a matching
contribution in an amount equal to 50% of the employees' contributions of 1% to
3% of their annual compensation and 25% of the employees' contributions of 4% to
5% of their annual compensation. Matching contributions made by the Company vest
25% per year beginning with the employee's second year of employment. The
Company recognized expense of $223,000 in 1999, $235,000 in 1998, and $257,000
in 1997 for matching costs and administrative costs under the 401(k) Plan.
Severance Agreements: In order to retain certain key management employees
prior to and during the Chapter 11 proceedings, the Company established
severance agreements with such employees. The Company paid $928,000 in severance
payments 1998. Such agreements expired on January 31, 1998.
Employment Agreements: In connection with the Reorganization Plan, the
Company entered into a Management Services Agreement dated as of January 31,
1997 as amended with A&M, Antonio C. Alvarez,
F-20
<PAGE> 58
WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
II, the Support Employees described therein, A&M #3 and Cerberus Partners, L.P.
(the "Management Services Agreement"). Under the Management Services Agreement,
Antonio C. Alvarez, II serves as Chairman of the Board and Chief Executive
Officer of New Wherehouse with A&M receiving $600,000 annually as compensation
for Antonio C. Alvarez, II services and certain support employees' services. The
Management Services Agreement, which had an expiration date of October 14, 1998,
was extended for one year with an expiration date of October 14, 1999. The
amended agreement continued the $600,000 as annual compensation for Antonio C.
Alvarez, II and certain support employees. In addition, the amended agreement
was expanded to include four additional employees at an annual cost of $575,000.
The amended agreement also established incentive fees of up to $230,000 to be
paid to the additional support employees provided that certain financial targets
are reached, and commencing with the fiscal year ended January 31, 1999. During
1999, the Company recorded $180,000 in incentive fees for A&M.
Prior to the Plan Effective Date, Antonio C. Alvarez, II served as a
consultant to the Senior Lenders pursuant to a letter agreement dated as of
October 14, 1996, between A&M, Antonio C. Alvarez, II and the Senior Lenders
(the Interim Agreement). Pursuant to the Interim Agreement, the Senior Lenders
agreed to pay A&M a consulting fee of $50,000 per month plus the hourly fees of
those employees of A&M providing assistance to Antonio C. Alvarez, II in the
performance of his consulting responsibilities. The Senior Lenders paid $389,000
to A&M pursuant to the Interim Agreement prior to January 31, 1997. Under the
Management Services Agreement, New Wherehouse agreed to reimburse, and has
reimbursed, the Senior Lenders for the amounts paid by the Senior Lenders to A&M
pursuant to the Interim Agreement.
In the event that Antonio C. Alvarez, II is terminated other than for cause
(as defined in the Management Services Agreement), prior to October 14, 1999,
the Management Services Agreement provides that (i) A&M #3 will have the right
to require the Company to purchase the shares of common stock and options
(whether or not vested), owned by A&M #3, and (ii) the Company will pay A&M cash
in a lump sum amount equal to $50,000 multiplied by the number of months
remaining from the time of termination to October 14, 1999. The price to be paid
by the Company in purchasing the shares of common stock and options to acquire
common stock owned by A&M #3 will depend on the fair market value (as defined in
the Management Services Agreement) of the common stock at the time of purchase.
Any payments made to A&M #3 in purchasing the shares of common stock and options
to acquire common stock from A&M #3 are required to be applied to reduce the
outstanding amounts under the Promissory Notes.
The aggregate amount of fees and expenses recorded to A&M was $1,364,000
and $953,000 during 1999 and 1998, respectively.
12. YEAR 2000 REMEDIATION COSTS
Non-recurring costs of $1.8 million relating to the Company's remediation
of its computer systems to comply with Year 2000 readiness requirements were
recorded during 1999. Such costs relate to the Company's merchandise management
systems, which are being remediated as part of a contingency plan. Additional
costs related to the Company's Year 2000 remediation costs will be expensed as
incurred.
13. RELATED PARTIES
The Company paid a onetime fee of $938,000 to Cerberus Capital Management,
L.P., an entity controlled by Stephen Feinberg, the beneficial owner of
approximately 65% of the Company's common stock, for a commitment to provide a
bridge loan to finance the Acquisition (See Note 1) in the event that permanent
financing was not in place at the time of the Acquisition. This fee is included
in interest expense in the 1999 consolidated statement of operations. Robert C.
Davenport, a Director of the Company, is a Managing Director of Cerberus Capital
Management, L.P.
F-21
<PAGE> 59
WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Additionally, Madeleine LLC, a company of which Stephen Feinberg is the
managing member, owns a 100% undivided interest in Tranche B loans made under
the Revolving Credit Facility.
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended January 31, 1999 and 1998:
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------
APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
1999
Net revenues.................................... $70,532 $74,885 $77,538 $273,504
Gross profit.................................... 27,607 28,265 29,000 85,900
Operating income................................ 2,338 2,673 313 8,006
Net income (loss)............................... 1,727 1,888 (218) 3,659
Net income per common share:
Basic......................................... 0.16 0.18 (0.02) 0.27
Diluted....................................... 0.15 0.16 (0.02) 0.25
Weighted average shares outstanding:
Basic......................................... 10,625 10,651 10,744 10,690
Diluted....................................... 11,210 11,696 10,744 11,552
1998
Net sales....................................... $73,183 $77,884 $71,961 $104,397
Gross profit.................................... 27,071 28,522 28,050 40,248
Operating income (loss)......................... (524) 774 1,239 10,534
Net income (loss)............................... (286) 588 970 6,430
Net income per common share:
Basic......................................... (0.03) 0.06 0.09 0.61
Diluted....................................... (0.03) 0.05 0.09 0.58
Weighted average shares outstanding:
Basic......................................... 10,258 10,311 10,546 10,566
Diluted....................................... 10,258 10,829 10,972 11,115
</TABLE>
F-22
<PAGE> 60
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS(1)(2) END OF YEAR
----------- ----------- ----------- ---------------- -----------
<S> <C> <C> <C> <C>
Accumulated amortization deducted from
video rental inventory:
Company:
Year ended January 31, 1999(3).... $10,143,000 $11,190,000 $20,343,000 $ 990,000
Year ended January 31, 1998....... $ -- $21,113,000 $10,970,000 $10,143,000
Year ended January 31, 1997....... $38,906,000 $23,535,000 $62,441,000 $ --
</TABLE>
- ---------------
(1) Accumulated amortization on disposition of video rental tapes.
(2) The deduction in 1997 resulted from the elimination of the accumulated
amortization in conjunction with Fresh Start accounting adjustments.
(3) Cost and related accumulated amortization for fully amortized inventory is
written off to salvage value during 1999.
F-23
<PAGE> 61
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- ----------- -------------
<C> <S> <C>
10.22 Amended and Restated Loan and Security Agreement dated as of
October 26, 1998 between New Wherehouse and its subsidiaries
and Congress Financial Corporation (Western)................
10.23 Intercreditor and Subordination Agreement dated as of
October 26, 1998 among the Trade Creditors named therein,
United States Trust Company of New York, as Collateral Agent
for the Trade Creditors, and Congress Financial Corporation
(Western)...................................................
10.24 Security Agreement dated as of October 26, 1998 between New
Wherehouse and United States Trust Company of New York, as
Collateral Agent for certain trade creditors................
10.25 Intercreditor and Collateral Agency Agreement dated as of
October 26, 1998 among certain subsidiaries of New
Wherehouse, the Trade Creditors named therein and United
States Trust Company of New York, as Collateral Agent.......
10.27 First Amendment to the Amended and Restated Loan and
Security Agreement dated as of November 30, 1998 between New
Wherehouse and its subsidiaries and Congress Financial
Corporation (Western).......................................
10.28 Extension and Third Amendment to Management Services
Agreement dated as of May 13, 1999 among Wherehouse, Alvarez
& Marsal, Inc., Antonio C. Alvarez II and A&M #3............
10.29 Second Amendment to the Amended and Restated Loan and
Security Agreement dated as of May 14, 1999 between
Wherehouse and its subsidiaries and Congress Financial
Corporation (Western).......................................
27.0 Financial Data Schedule.....................................
</TABLE>
<PAGE> 1
EXHIBIT 10.22
Amended and Restated
Loan and Security Agreement
by and between
CONGRESS FINANCIAL CORPORATION (WESTERN)
as Lender
and
WHEREHOUSE ENTERTAINMENT, INC.,
WHEREHOUSE.COM, INC.,
WHEREHOUSE SUBSIDIARY I CO., INC.,
WHEREHOUSE SUBSIDIARY II CO., INC. AND
WHEREHOUSE SUBSIDIARY III CO., INC.
collectively, as Borrower
Dated: October 26, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
SECTION 1. DEFINITIONS .......................................................... 2
SECTION 2. CREDIT FACILITIES .................................................... 12
2.1 Revolving Loans ..................................................... 12
2.2 Letter of Credit Accommodations ..................................... 13
SECTION 3. INTEREST AND FEES .................................................... 16
3.1 Interest ............................................................ 16
3.2 Closing Fee ......................................................... 17
3.3 Syndication Fee ..................................................... 17
3.4 Loan Servicing Fee .................................................. 17
3.5 Unused Line Fee ..................................................... 18
3.6 Annual Commitment Fee ............................................... 18
3.7 Changes in Laws and Increased Costs of Loans ........................ 18
3.8 Compensation Adjustment ............................................. 19
SECTION 4. CONDITIONS PRECEDENT ................................................. 20
4.1 Conditions Precedent to Initial Loans and the Letter of Credit
Accommodations .................................................... 20
4.2 Conditions Precedent to All Loans and Letter of Credit Accommodations 22
4.3 Condition Subsequent To All Loans and Letter of Credit Accommodations 22
SECTION 5. GRANT OF SECURITY INTEREST ........................................... 23
SECTION 6. COLLECTION AND ADMINISTRATION ........................................ 24
6.1 Borrower's Loan Account ............................................. 24
6.2 Statements .......................................................... 24
6.3 Collection of Accounts .............................................. 24
6.4 Payments ............................................................ 26
6.5 Authorization to Make Loans ......................................... 26
6.6 Use of Proceeds ..................................................... 27
SECTION 7. COLLATERAL REPORTING AND COVENANTS ................................... 27
7.1 Collateral Reporting ................................................ 27
7.2 Accounts Covenants .................................................. 28
7.3 Inventory Covenants ................................................. 29
</TABLE>
-i-
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
Page
<S> <C> <C>
7.4 Equipment Covenants ..................................... 30
7.5 Power of Attorney ....................................... 30
7.6 Right to Cure ........................................... 30
7.7 Access to Premises ...................................... 31
SECTION 8. REPRESENTATIONS AND WARRANTIES ....................... 31
8.1 Corporate Existence, Power and Authority; Subsidiaries... 31
8.2 Financial Statements; No Material Adverse Change ........ 31
8.3 Chief Executive Office; Collateral Locations ............ 32
8.4 Priority of Liens; Title to Properties .................. 32
8.5 Tax Returns ............................................. 32
8.6 Litigation .............................................. 32
8.7 Compliance with Other Agreements and Applicable Laws .... 32
8.8 Environmental Compliance ................................ 33
8.9 Acquisition of Purchased Stock .......................... 33
8.10 Purchased Assets ....................................... 34
8.11 Capitalization ......................................... 34
8.12 Employee Benefits ...................................... 35
8.13 Accuracy and Completeness of Information ............... 35
8.14 Survival of Warranties; Cumulative ..................... 36
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS ................... 36
9.1 Maintenance of Existence ................................. 36
9.2 New Collateral Locations ................................. 36
9.3 Compliance with Laws, Regulations, Etc. .................. 36
9.4 Payment of Taxes and Claims .............................. 37
9.5 Insurance ................................................ 37
9.6 Financial Statements and Other Information ............... 38
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. . 39
9.8 Encumbrances ............................................. 40
9.9 Indebtedness ............................................. 40
9.10 Loans, Investments, Guarantees; Dividends and Redemptions 41
</TABLE>
-ii-
<PAGE> 4
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
Page
<S> <C> <C>
9.11 Transactions with Affiliates ......................................... 41
9.12 Compliance with ERISA ................................................ 41
9.13 Year 2000 Compliance ................................................. 42
9.14 Adjusted Net Worth ................................................... 42
9.15 Costs and Expenses ................................................... 42
9.16 Further Assurances ................................................... 43
9.17 Additional Covenant Pertaining to the Tranche B Loans ................ 43
SECTION 10. EVENTS OF DEFAULT AND REMEDIES ..................................... 44
10.1 Events of Default .................................................... 44
10.2 Remedies ............................................................. 45
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW ....... 47
11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver 47
11.2 Waiver of Notices ................................................... 48
11.3 Amendments and Waivers .............................................. 48
11.4 Indemnification ..................................................... 48
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS ................................... 49
12.1 Term ................................................................ 49
12.2 Notices ............................................................. 51
12.3 Partial Invalidity .................................................. 51
12.4 Successors .......................................................... 51
12.5 Entire Agreement .................................................... 51
12.6 Publicity ........................................................... 52
12.7 Confidentiality ..................................................... 52
SECTION 13. SURETYSHIP WAIVERS ................................................. 52
13.1 Independent Obligations; Subrogation ................................ 52
13.2 Authority to Modify Obligations and Security ........................ 53
13.3 Waiver of Defenses .................................................. 53
13.4 Right to Dispose of Security; Impairment of Rights .................. 53
13.5 Additional Waivers .................................................. 54
</TABLE>
-iii-
<PAGE> 5
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
13.6 Additional Indebtedness..................................................54
13.7 Notices, Demands, Etc....................................................55
13.8 Subordination............................................................55
13.9 Revival..................................................................55
13.10 Understanding of Waivers.................................................56
13.11 Unlimited Liability......................................................56
</TABLE>
-iv-
<PAGE> 6
INDEX TO
EXHIBITS AND SCHEDULES
<TABLE>
<S> <C>
Exhibit A Information Certificates
Exhibit B Application of Payments
Schedule 6.3 Deposit Accounts
Schedule 8.4 Permitted Liens
Schedule 8.8 Environmental Disclosures
</TABLE>
-i-
<PAGE> 7
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
This Amended and Restated Loan and Security Agreement dated October 26,
1998 is entered into by and between Congress Financial Corporation (Western), a
California corporation ("Lender"), on the one hand, and Wherehouse
Entertainment, Inc., a Delaware corporation, Wherehouse.com, Inc., a California
corporation, Wherehouse Subsidiary I Co., Inc., a Delaware corporation,
Wherehouse Subsidiary II Co., Inc., a California corporation, and Wherehouse
Subsidiary III Co., Inc., a Delaware corporation (collectively, "Borrower"), on
the other.
WITNESSETH:
WHEREAS, Wherehouse Entertainment, Inc. (as successor to WEI Acquisition
Co., referred to separately in this Agreement as "WEI") and Lender have
previously entered into a Loan and Security Agreement dated as of January 31,
1997 (the "Existing Loan Agreement"), pursuant to which Lender has made certain
loans and financial accommodations available to WEI; and
WHEREAS, WEI proposes to acquire all the capital stock of Wherehouse
Holding I Co., Inc. (formerly known as "Blockbuster Music Holding Corporation"),
a Delaware corporation, and Wherehouse Holding II Co., Inc. (formerly known as
"Blockbuster SC Holding Corporation"), a Delaware corporation (together, the
"Holding Subsidiaries"), which in turn own all the capital stock of Wherehouse
Subsidiary I Co., Inc. (formerly known as "Blockbuster Music Retail, Inc."), a
Delaware corporation, Wherehouse Subsidiary II Co., Inc. (formerly known as
"Show Industries, Inc."), a California corporation, and Wherehouse Subsidiary
III Co., Inc. (formerly known as "Blockbuster SC Music Corporation"), a Delaware
corporation (collectively, the "Operating Subsidiaries"); and
WHEREAS, WEI desires to amend and restate the Existing Loan Agreement to
add Wherehouse.com, Inc., a newly formed, wholly owned subsidiary of WEI, and
the Operating Subsidiaries as additional borrowers, to provide for additional
credit accommodations, and to change certain terms of the credit facility; and
WHEREAS, WEI, Wherehouse.com, Inc. and the Operating Subsidiaries, as
parent and direct and indirect wholly owned subsidiaries, will be interrelated
entities which, collectively, will constitute an integrated music and
entertainment product retail sales operation, with WEI providing certain
administrative services for Wherehouse.com, Inc. and the Operating Subsidiaries
and operating Wherehouse.com, Inc. and the Operating Subsidiaries in
coordination with its own operations; and
WHEREAS, the directors of WEI, Wherehouse.com, Inc. and the Operating
Subsidiaries view the entities as sufficiently dependent upon each other and so
interrelated that any advances made by Lender hereunder to any of the
constituent entities would benefit all of the constituent entities as a result
of their consolidated operations and identity of interests; and
1
<PAGE> 8
WHEREAS, WEI, Wherehouse.com, Inc. and the Operating Subsidiaries have
each requested that Lender treat them as co-Borrowers hereunder, as a single,
consolidated business enterprise, jointly and severally responsible for the
Obligations hereunder, so as to permit advances to be allocated among the
constituent entities as may be, from time to time, in the best interest of the
combined group; and
WHEREAS, Lender is willing to proceed on the basis of treating all of
the borrowing entities as a single, consolidated business enterprise, and view
their operations on a consolidated basis as requested by them; and
WHEREAS, Lender is willing to amend and restate the Existing Loan
Agreement to make loans and provide financial accommodations on the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual conditions and agreements
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Existing Loan Agreement is
amended and restated to read as follows, and the Lender and Borrower (the
entities comprising Borrower acting jointly and severally), agree as follows:
SECTION 1. DEFINITIONS
All terms used herein which are defined in Article 1 or Article 9 of the
California Uniform Commercial Code shall have the respective meanings given
therein unless otherwise defined in this Agreement. All references to the
plural herein shall also mean the singular and to the singular shall also mean
the plural. All references to Borrower and Lender pursuant to the definitions
set forth in the recitals hereto, or to any other person herein, shall include
their respective successors and assigns. The words "hereof", "herein",
"hereunder", "this Agreement" and words of similar import when used in this
Agreement shall refer to this Agreement as a whole and not any particular
provision of this Agreement and as this Agreement now exists or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced. Any
accounting term used herein unless otherwise defined in this Agreement shall
have the meaning customarily given to such term in accordance with GAAP. For
purposes of this Agreement, the following terms shall have the respective
meanings given to them below:
1.1 "Accounts" shall mean all present and future rights of Borrower to
payment for goods sold or leased or for services rendered, which are not
evidenced by instruments or chattel paper, and whether or not earned by
performance.
1.2 "Adjusted Eurodollar Rate" shall mean, with respect to each
Interest Period for any Eurodollar Rate Loan, the rate per annum (rounded
upwards, if necessary, to the next one-sixteenth (1/16) of one percent (1%)),
determined by dividing (a) the Eurodollar Rate for such Interest Period by (b) a
percentage equal to: (i) one (1) minus (ii) the Reserve Percentage. For purposes
hereof, "Reserve Percentage" shall mean the reserve percentage, expressed as a
decimal, prescribed by any United States or foreign banking authority for
determining the reserve requirement which is or would be applicable to deposits
of United States dollars in a non-United States or an international banking
office of Reference Bank used to provide funding for a Eurodollar Rate Loan or
any Eurodollar Rate Loan made with the proceeds of such deposit,
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whether or not the Reference Bank actually holds or has made any such deposits
or loans. The Adjusted Eurodollar Rate shall be adjusted on and as of the
effective day of any change in the Reserve Percentage.
1.3 "Adjusted Net Worth" shall mean as to any Person, at any time, in
accordance with GAAP (except as otherwise specifically set forth below), on a
consolidated basis for such Person and its subsidiaries (if any), the amount
equal to the difference between: (i) the aggregate net book value of all assets
of such Person and its subsidiaries, calculating the book value of inventory for
this purpose on a weighted average cost basis, at the lower of weighted average
cost or market, after deducting from such book values all appropriate reserves
in accordance with GAAP (including all reserves for doubtful receivables,
obsolescence, depreciation and amortization) and (ii) the aggregate amount of
the indebtedness and other liabilities of such Person and its subsidiaries
(including tax and other proper accruals).
1.4 "Availability Reserves" shall mean, as of any date of determination,
such amounts as Lender may from time to time establish and revise in good faith
and in a commercially reasonable manner reducing the amount of Tranche A Loans
and Letter of Credit Accommodations which would otherwise be available to
Borrower under the lending formula(s) provided for herein: (a) to reflect
events, conditions, contingencies or risks which, as determined by Lender in
good faith and in a commercially reasonable manner, do or may affect either (i)
the value of the Collateral or any other property which is security for the
Obligations, or (ii) the security interests and other rights of Lender in the
Collateral (including the enforceability, perfection and priority thereof), or
(b) to reflect Lender's good faith belief that any collateral report or
financial information furnished by or on behalf of Borrower or any Obligor to
Lender is or may have been incomplete, inaccurate or misleading in any material
respect, or (c) to reflect any state of facts which Lender determines in good
faith constitutes an Event of Default or may, with notice or passage of time or
both, constitute an Event of Default. Without limiting the generality of the
foregoing, Lender (i) shall establish on the date hereof and maintain throughout
the term of this Agreement and throughout any renewal term an Availability
Reserve equal to the Shrinkage Reserve, (ii) may establish an Availability
Reserve for an amount equal to the amount of any past due lease or rental
payments for premises where Collateral is located, and (iii) may establish an
Availability Reserve equal to sixty percent (60%) of the amount of liabilities
for gift certificates. Notwithstanding the foregoing, Lender agrees that, to the
extent that a particular item of Inventory is excluded from Eligible Inventory,
no Availability Reserve shall be established with respect to such item of
Inventory.
1.5 "Bass" shall mean Bay Area Seating Service, Inc. dba Bass Tickets.
1.6 "Bass Agreement" shall mean that certain Ticket Center Operators
Agreement dated October 1, 1996 between WEI and Bass.
1.7 "Blocked Account" shall have the meaning set forth in Section 6.3
hereof.
1.8 "Business" shall mean the pre-recorded music retail business
(including related accessories) as conducted by the Operating Subsidiaries.
1.9 "Business Day" shall mean (a) for the Prime Rate Loans, any day (1)
other than a Saturday, Sunday, or other day on which commercial banks are
authorized or required to close
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under the laws of the State of New York or the State of North Carolina, and a
day on which the Reference Bank and Lender are open for the transaction of
business, and (b) for all Eurodollar Rate Loans, any such day as described in
(a) above in this definition of Business Day, excluding any day on which banks
are closed for dealings in dollar deposits in the London interbank market or
other applicable Eurodollar Rate market.
1.10 "Cerberus" means Cerberus Partners, L.P., a Delaware limited
partnership.
1.11 "Code" shall mean the Internal Revenue Code of 1986, as the same
now exists or may from time to time hereafter be amended, modified, recodified
or supplemented, together with all rules, regulations and interpretations
thereunder or related thereto.
1.12 "Collateral" shall have the meaning set forth in Section 5 hereof.
1.13 "Credit Card Agreements" shall mean all agreements now or hereafter
entered into by Borrower with any Credit Card Issuer or Credit Card Processor as
the same may now exist or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced.
1.14 "Credit Card Issuer" shall mean any person who issues or whose
members issue credit cards used by customers of the Borrower to purchase goods,
including, without limitation, MasterCard or VISA bank credit or debit cards or
other bank credit or debit cards, and American Express, Discover, Diners Club,
Carte Blanche, and other non-bank credit or debit cards.
1.15 "Credit Card Processor" shall mean any servicing or processing
agent or any factor or financial intermediary who facilitates, services,
processes or manages the credit authorization, billing transfer and/or payment
from a Credit Card Issuer or Credit Card Processor and other procedures with
respect to any sales transactions of the Borrower involving credit card or debit
card purchases by customers using credit cards or debit cards issued by any
Credit Card Issuer.
1.16 "EBITDA" shall mean, as of the end of any fiscal quarter of
Borrower, the net income of Borrower for the four fiscal quarters ending at the
end of such fiscal quarter, plus interest expense, depreciation and amortization
and provision for income taxes for the four fiscal quarters, and excluding
extraordinary one-time gains and extraordinary one-time expenses and losses
during the four fiscal quarters, all calculated in accordance with GAAP.
1.17 "Credit Card Receivables" shall mean all Accounts consisting of the
present and future rights of Borrower to payment by Credit Card Issuers or
Credit Card Processors for merchandise sold and delivered to customers of
Borrower who have purchased such goods using a credit card or a debit card
issued by a Credit Card Issuer.
1.18 "Distributions" shall have the meaning set forth in Section 9.10
hereof.
1.19 "Eligible Assignee" means a commercial bank or other financial
institution having total assets in excess of One Billion Dollars
($1,000,000,000).
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1.20 "Eligible Inventory" shall mean Inventory consisting of finished
merchandise held for sale in the ordinary course of the business of Borrower
that is located at one of Borrower's retail stores, its distribution centers in
the United States, a third party return processing facility, or in transit
between any such location of Borrower, provided that, in any case, such location
is in a jurisdiction where Lender has a first priority security interest in the
Collateral, and is acceptable to Lender based on the criteria set forth below.
In general, Eligible Inventory shall not include (without duplication in the
following exclusions for the effect of any Availability Reserves) (a) spare
parts for equipment; (b) packaging and shipping materials; (c) supplies used or
consumed in Borrower's business; (d) Inventory at premises that are not owned by
Borrower, unless, with respect to leased premises (other than a retail store),
Lender has received a landlord waiver and, with respect to locations where
Inventory is held by third parties, Lender has received a bailee waiver, in each
case acknowledging the priority of Lender's liens and allowing Lender access to
the premises for purposes of dealing with the Collateral, provided that,
Borrower shall not be required to provide a landlord waiver with respect to the
distribution center subject to that certain Transition Services Agreement dated
as of August 10, 1998, until September 30, 1999; (e) Inventory in transit (other
than Inventory in transit from one location of Borrower to another location
satisfying the requirements set forth in this Section 1.20); (f) Inventory
subject to a security interest or lien in favor of any person other than Lender
except those permitted in this Agreement; (g) Inventory that is not subject to
the first priority, valid and perfected security interest of Lender; (h) damaged
and/or defective Inventory; (i) Inventory consisting of demos; (j) used
Inventory; (k) Rental Merchandise; (l) Inventory purchased or sold on
consignment; and (m) Inventory that is not actively held by Borrower for sale to
retail customers, except for WEI Eligible Return Inventory and Operating
Subsidiary Eligible Return Inventory. General criteria for Eligible Inventory
may be established and revised from time to time by Lender in its reasonable
credit judgment. Any Inventory that is not Eligible Inventory shall nevertheless
be part of the Collateral.
1.21 "Environmental Laws" shall mean all federal, state, district, local
and foreign laws, rules, regulations, ordinances, and consent decrees relating
to health, safety, hazardous substances, pollution and environmental matters, as
now or at any time hereafter in effect, applicable to Borrower's business and
facilities (whether or not owned by it), including laws relating to emissions,
discharges, releases or threatened releases of pollutants, contamination,
chemicals, or hazardous, toxic or dangerous substances, materials or wastes into
the environment (including, without limitation, ambient air, surface water,
ground water, land surface or subsurface strata) or otherwise relating to the
generation, manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of pollutants, contaminants, chemicals, or
hazardous, toxic or dangerous substances, materials or wastes.
1.22 "Equipment" shall mean all of Borrower's now owned and hereafter
acquired equipment, machinery, computers and computer hardware and software
(whether owned or licensed), vehicles, tools, furniture, fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used in
connection therewith, and substitutions and replacements thereof, wherever
located and used by Borrower or useful in connection with the sale of the
Inventory to customers (including, without limitation, shelving, display racks
and computer and cash register equipment).
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1.23 "ERISA" shall mean the United States Employee Retirement Income
Security Act of 1974, as the same now exists or may hereafter from time to time
be amended, modified, recodified or supplemented, together with all rules,
regulations and interpretations thereunder or related thereto.
1.24 "ERISA Affiliate" shall mean any person required to be aggregated
with Borrower or any of its affiliates under Sections 414(b), 414(c), 414(m) or
414(o) of the Code.
1.25 "Eurodollar Rate Loans" shall mean any Loans or portion thereof on
which interest is payable based on the Adjusted Eurodollar Rate in accordance
with the terms hereof.
1.26 "Eurodollar Rate" shall mean with respect to the Interest Period
for a Eurodollar Rate Loan, the interest rate per annum equal to the rate of
interest per annum (rounded upwards, if necessary, to the next one-sixteenth
(1/16) of one percent (1%)) at which Reference Bank offers deposits of United
States dollars in the London interbank market (or other Eurodollar Rate market
selected by Borrower and approved by Lender) on or about 9:00 a.m. (New York
time) two (2) Business Days prior to the commencement of such Interest Period
(whether such rate is higher or lower than any rate previously quoted to
Borrower) in amounts substantially equal to the principal amount of the
Eurodollar Rate Loans requested by and available to Borrower in accordance with
this Agreement, with a maturity of comparable duration to the Interest Period
selected by Borrower.
1.27 "Event of Default" shall mean the occurrence or existence of any
event or condition described in Section 10.1 hereof.
1.28 "Excess Availability" shall mean the amount, as determined by
Lender, calculated at any time, equal to:
(a) the lesser of (i) the amount of the Tranche A Loans
available to Borrower as of such time (based on the applicable
advance rate set forth in Section 2.1 (a)(1) hereof multiplied
by the Value of Eligible Inventory, as applicable, as determined
by Lender and without deducting outstanding Obligations) plus
cash or deposit accounts which are Collateral (other than cash
in Borrower's cash registers) and in which Lender has a
perfected and first priority security interest, subject to the
sublimits and Availability Reserves from time to time
established by Lender hereunder and (ii) the Maximum Credit,
minus (b) the sum of: (i) the liquidated and non-contingent
amount of all then outstanding and unpaid Obligations arising
under the Tranche A Loans and Letter of Credit Accommodations,
and (ii) the aggregate amount of all trade payables of Borrower
which are more than forty-five (45) days past due as of such
time.
1.29 "Financing Agreements" shall mean, collectively, this Agreement and
all notes, guarantees, security agreements and other agreements, documents and
instruments now or at any time hereafter executed and/or delivered by Borrower
or any Obligor in connection with this
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Agreement, as the same now exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
1.30 "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Boards which are applicable to the
circumstances as of the date of determination consistently applied, except that,
for purposes of Section 9.14 hereof, GAAP shall be determined on the basis of
such principles in effect on the date hereof and consistent with those used in
the preparation of the audited financial statements delivered to Lender prior to
the date hereof.
1.31 "Hazardous Materials" shall mean any hazardous, toxic or dangerous
substances, materials and wastes, including, without limitation, hydrocarbons
(including naturally occurring or man-made petroleum and hydrocarbons),
flammable explosives, asbestos, urea formaldehyde insulation, radioactive
materials, biological substances, polychlorinated biphenyls, pesticides,
herbicides and any other kind and/or type of pollutants or contaminants
(including, without limitation, materials which include hazardous constituents),
sewage, sludge, industrial slag, solvents and/or any other similar substances,
materials, or wastes and including any other substances, materials or wastes
that are or become regulated under any Environmental Law (including, without
limitation any that are or become classified as hazardous or toxic under any
Environmental Law); provided, however, that Hazardous Materials shall not
include any materials in a non-hazardous form such as asphalt contained in
road-surfacing materials or hazardous materials customarily used in the
operation of retail businesses and properly stored and maintained or hazardous
materials customarily used in the maintenance and cleaning (including janitorial
services) of commercial facilities and properly stored and maintained.
1.32 "Holding Subsidiaries" shall have the meaning set forth in the
Recitals of this Agreement.
1.33 "Indebtedness," as applied to any Person, means (i) all
indebtedness for borrowed money, (ii) that portion of obligations with respect
to capital leases that is properly classified as a liability on a balance sheet
in conformity with GAAP, (iii) notes payable and drafts accepted representing
extensions of credit whether or not representing obligations for borrowed money,
(iv) any obligation owed for all or any part of the deferred purchase price of
property or services (excluding any such obligations incurred under ERISA),
which purchase price is (a) due more than six months from the date of incurrence
of the obligation in respect thereof or (b) evidenced by a note or similar
written instrument, and (v) all indebtedness secured by any lien on any property
or asset owned or held by that Person regardless of whether the indebtedness
secured thereby shall have been assumed by that Person or is nonrecourse to the
credit of that Person.
1.34 "Information Certificate" shall mean the Information Certificate of
Borrower constituting Exhibit A hereto containing material information with
respect to Borrower, its business and assets provided by or on behalf of
Borrower to Lender in connection with the preparation of this Agreement and the
other Financing Agreements and the financing arrangements provided for herein.
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1.35 "Interest Period" shall mean for any Eurodollar Rate Loan, a
period of approximately one (1), two (2) or three (3) months duration as
Borrower may elect, the exact duration to be determined in accordance with the
customary practice in the applicable Eurodollar Rate market; provided, that,
Borrower may not elect an Interest Period which will end after the last day of
the then-current term of this Agreement.
1.36 "Interest Rate" shall mean, as to Tranche A Loans that are Prime
Rate Loans, a rate of one-half (.50) percentage point in excess of the Prime
Rate, as to Tranche A Loans that are Eurodollar Rate Loans, a rate of one and
three-fourths (1.75) percentage points per annum in excess of the Adjusted
Eurodollar Rate, as to Tranche B Loans that are Prime Rate Loans, a rate of
three and three-fourths (3.75) percentage points in excess of the Prime Rate
with respect to any Tranche B Prime Rate Loans that are part of the first Five
Million Dollars ($5,000,000) Tranche B Loans outstanding and a rate of four and
three-fourths (4.75) percentage points per annum in excess of the Prime Rate
with respect to any Tranche B Prime Rate Loans that are part of Tranche B Loans
in excess of Five Million Dollars ($5,000,000), and as to Tranche B Eurodollar
Rate Loans, a rate of five (5.0) percentage points per annum in excess of the
Adjusted Eurodollar Rate with respect to any Tranche B Eurodollar Rate Loans
that are part of the first Five Million Dollars ($5,000,000) of Tranche B Loans
outstanding and a rate of six (6.0) percentage points per annum in excess of the
Adjusted Eurodollar Rate with respect to any Tranche B Eurodollar Rate Loans
that are part of Tranche B Loans in excess of Five Million Dollars ($5,000,000);
provided, however, the Interest Rate shall mean, at Lender's option, without
notice, (a) for the period on and after the date of termination or non-renewal
hereof, until such time as all Obligations are indefeasibly paid in full
(notwithstanding entry of any judgment against Borrower) or during the period in
which an Event of Default has occurred and is continuing and (b) on the
Revolving Loans at any time outstanding in excess of the amounts available to
Borrower under Section 2 (whether or not such excess(es) arise or are made with
or without Lender's knowledge or consent and whether made before or after an
Event of Default), a rate which is two (2.0) percentage points per annum in
excess of the interest rate that would otherwise be applicable to any Loan.
1.37 "Inventory" shall mean all of Borrower's now owned and hereafter
existing or acquired raw materials, work in process, finished goods and all
other inventory of whatsoever kind or nature, wherever located, but shall not
include Rental Merchandise.
1.38 "Inventory Advance Rate" shall mean the advance rate applicable to
Eligible Inventory as determined in accordance with subsections 2.1(a)(1).
1.39 "Investments" shall have the meaning set forth in Section 9.10
hereof.
1.40 "Letter of Credit Accommodations" shall mean the letters of credit,
merchandise purchase or other guaranties which are from time to time either (a)
issued or opened or provided by Lender for the account of Borrower or any
Obligor or (b) with respect to which Lender has agreed to indemnify the issuer
or guaranteed to the issuer the performance by Borrower of its obligations to
such issuer.
1.41 "Loans" shall mean the Revolving Loans.
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1.42 "Maximum Credit" shall mean, with reference to the Revolving Loans
and the Letter of Credit Accommodations, the amount of One Hundred Sixty-five
Million Dollars ($165,000,000).
1.43 "Net Recovery Cost Percentage" shall mean the fraction, expressed
as a percentage, (a) the numerator of which is the amount equal to the median
net recovery on the aggregate amount of the Inventory at any time other than the
Seasonal Period or the amount equal to the peak period median net recovery on
the aggregate amount of Inventory at any time during the Seasonal Period, in
each case on a "going out of business sale" basis as set forth in the most
recent acceptable appraisal of Inventory received by Lender in accordance with
Section 7.3, net of operating expenses, liquidation expenses and commissions,
and (b) the denominator of which is the original cost of the aggregate amount of
the Inventory subject to appraisal.
1.44 "Obligations" shall mean any and all Revolving Loans, the Letter of
Credit Accommodations and all other obligations, liabilities and indebtedness of
every kind, nature and description owing by Borrower to Lender and/or its
affiliates, including principal, interest, charges, fees, costs and expenses
(including charges, fees, costs and expenses of any Participant), however
evidenced, whether as principal, surety, endorser, guarantor or otherwise,
whether arising under this Agreement or otherwise, whether now existing or
hereafter arising, whether arising before, during or after the initial or any
renewal term of this Agreement or after the commencement of any case with
respect to Borrower under the United States Bankruptcy Code or any similar
statute (including, without limitation, the payment of interest and other
amounts that would accrue and become due but for the commencement of such case),
whether direct or indirect, absolute or contingent, joint or several, due or not
due, primary or secondary, liquidated or unliquidated, secured or unsecured, and
however acquired by Lender, all of which shall be the joint and several
obligations of Borrower.
1.45 "Operating Subsidiaries" shall have the meaning set forth in the
Recitals of this Agreement.
1.46 "Operating Subsidiary Eligible Active Inventory" shall mean all
Eligible Inventory held by the Operating Subsidiaries, other than Operating
Subsidiary Eligible Return Inventory.
1.47 "Operating Subsidiary Eligible Inventory" shall mean all Eligible
Inventory owned by the Operating Subsidiaries.
1.48 "Operating Subsidiary Eligible Return Inventory" shall mean items
of Operating Subsidiary Eligible Inventory that have been identified for return
to a vendor for cash refund or a credit on standard terms against new Inventory
and that, but for the intention to return such items to a vendor (rather than
holding them for sale in the ordinary course of business), would qualify as
Operating Subsidiary Eligible Active Inventory.
1.49 "Obligor" shall mean any guarantor, endorser, acceptor, surety or
other person liable on or with respect to the Obligations or who is the owner of
any property which is security for the Obligations, other than Borrower.
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1.50 "Participant" shall mean any person which at any time buys a
participation in the Loans, Letter of Credit Accommodations or other Obligations
or otherwise participates with Lender in respect of the Loans, the Letter of
Credit Accommodations or other Obligations or any portion thereof.
1.51 "Payment Account" shall have the meaning set forth in Section 6.3
hereof.
1.52 "Person" or "person" shall mean any individual, sole
proprietorship, partnership, corporation (including, without limitation, any
corporation which elects subchapter S status under the Internal Revenue Code of
1986, as amended), business trust, unincorporated association, joint stock
corporation, trust, joint venture or other entity or any government or any
agency or instrumentality or political subdivision thereof.
1.53 "Purchase Agreements" shall mean, individually and collectively,
the Stock Purchase Agreement, dated as of August 10, 1998, between WEI and
Seller, together with such other instruments of transfer as are referred to
therein and all side letters with respect thereto, and all agreements, documents
and instruments executed and/or delivered in connection therewith, as all of the
foregoing now exist or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced.
1.54 "Purchased Assets" shall mean all of the assets, properties and
rights of every type and description, real, personal and mixed, tangible and
intangible, that are owned, leased or licensed by the Operating Subsidiaries and
used or held for use primarily in the conduct of the Business, other than
Excluded Assets, as defined in the Purchase Agreements.
1.55 "Purchased Stock" shall mean all of the capital stock of the
Holding Subsidiaries acquired by WEI from Seller pursuant to the Purchase
Agreements.
1.56 "Prime Rate" shall mean the rate from time to time publicly
announced by First Union National Bank, or its successors, as its prime rate,
whether or not such announced rate is the best rate available at such bank.
1.57 "Prime Rate Loans" shall mean any Loans or portion thereof on which
interest is payable based on the Prime Rate in accordance with the terms
thereof.
1.58 "Records" shall mean all of Borrower's present and future books of
account of every kind or nature, purchase and sale agreements, invoices, ledger
cards, bills of lading and other shipping evidence, statements, correspondence,
memoranda, credit files and other data relating to the Collateral or any account
debtor, together with the tapes, disks, diskettes and other data and software
storage media and devices, file cabinets or containers in or on which the
foregoing are stored (including any rights of Borrower with respect to the
foregoing maintained with or by any other person).
1.59 "Reference Bank" shall mean First Union National Bank, or such
other bank as Lender may from time to time designate.
1.60 "Renewal Date" shall have the meaning set forth in Section 12.1
(a) hereof.
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1.61 "Rental Merchandise" means all finished merchandise of Borrower
held for rental to retail customers.
1.62 "Revolving Loans" shall mean the loans now or hereafter made by
Lender to or for the benefit of Borrower on a revolving basis (involving
advances, repayments and readvances), as either Tranche A Loans or Tranche B
Loans, as set forth in Section 2.1 hereof.
1.63 "Seasonal Period" shall mean the period from October 1 through
December 24 of each calendar year.
1.64 "Seller" shall mean Viacom International Inc., a Delaware
corporation.
1.65 "Shrinkage Reserve" shall mean an amount equal to Borrower's
historical average shrinkage rate based upon results of physical Inventory
counts, audits, adjustments made by Borrower and other matters which Lender
reasonably deems necessary in order to calculate the potential shrinkage of
Inventory, multiplied by the year-to-date net sales for the period since the
last physical Inventory count.
1.66 "Ticketmaster" shall mean Ticketmaster Ticketing Co., Inc., a
Delaware corporation.
1.67 "Ticketmaster Agreement" shall mean that certain Ticket Outlet
Agreement dated as of February 2, 1989, between WEI and Ticketmaster et al., as
amended.
1.68 "Tranche A Line" shall mean the line of credit made available by
Lender to Borrower on a revolving basis (involving advances, repayments and
readvances), as set forth in Section 2.1(a) hereof.
1.69 "Tranche B Line" shall mean the line of credit made available by
Lender to Borrower on a revolving basis (involving advances, repayments and
readvances), as set forth in Section 2.1(b) hereof.
1.70 "Tranche A Loans" shall mean the loans now or hereafter made by
Lender to or for the benefit of Borrower under the Tranche A Line.
1.71 "Tranche B Debt Service Coverage Ratio" shall mean for any period,
the quotient obtained by dividing (a) EBITDA, plus or minus the changes in
working capital for such period, minus capital expenditures during such period,
by (b) interest due with respect to any Indebtedness for such period.
1.72 "Tranche B Loans" shall mean the loans now or hereafter made by
Lender to or for the benefit of Borrower under the Tranche B Line.
1.73 "Value" shall mean, as determined by Lender in good faith, with
respect to Inventory, the lower of (a) weighted average cost or (b) market
value.
1.74 "WEI" shall mean Wherehouse Entertainment, Inc., a Delaware
corporation.
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1.75 "WEI Eligible Active Inventory" shall mean all WEI Eligible
Inventory other than WEI Eligible Return Inventory.
1.76 "WEI Eligible Inventory" shall mean all Eligible Inventory owned by
WEI or Wherehouse.com, Inc., provided that WEI Eligible Return Inventory shall
not constitute WEI Eligible Inventory to the extent that the value of such WEI
Eligible Return Inventory exceeds seven percent (7%) of the sum of the Value of
WEI Eligible Active Inventory plus the Value of WEI Eligible Return Inventory.
1.77 "WEI Eligible Return Inventory" shall mean items of WEI Eligible
Inventory that have been identified for return to a vendor for cash refund or a
credit on standard terms against new Inventory and that, but for the intention
to return such items to a vendor (rather than holding them for sale in the
ordinary course of business), would qualify as WEI Eligible Active Inventory.
SECTION 2. CREDIT FACILITIES
2.1 Revolving Loans.
(a) Subject to, and upon the terms and conditions contained
herein, Lender agrees to make Revolving Loans (the "Tranche A Line") to Borrower
from time to time in amounts requested by Borrower up to the lesser of One
Hundred Fifty-five Million Dollars ($155,000,000) or an amount equal to:
(1) The lesser of: (A) the sum of (i) sixty-two percent
(62%) (sixty-five percent (65%) during the Seasonal Period) of the Value of WEI
Eligible Inventory, plus (ii) fifty-seven percent (57%) (sixty percent (60%)
during the Seasonal Period) of the Value of Operating Subsidiary Eligible Active
Inventory, plus (iii) ten percent (10%) of the Value of Operating Subsidiary
Eligible Return Inventory up to a maximum of Two Million Dollars ($2,000,000),
or (B) ninety percent (90%) of the Net Recovery Cost Percentage multiplied by
the cost of the Eligible Inventory, minus
(2) the then undrawn amounts of outstanding Letter of
Credit Accommodations, minus
(3) any Availability Reserves.
The Revolving Loans made under Section 2.1(a) shall together be referred to as
the "Tranche A Loans".
(b) Subject to, and upon the terms and conditions contained
herein, Lender agrees to make Revolving Loans (the "Tranche B Line") to Borrower
from time to time upon two (2) days prior written notice by Borrower in amounts
requested by Borrower, but no more often than two (2) times per week, in a
minimum amount of One Million Dollars ($1,000,000) and in increments of Five
Hundred Thousand Dollars ($500,000), up to Ten Million Dollars ($10,000,000)
(the "Tranche B Loans") if and only if there is no availability to borrow under
the Tranche A Line. Notwithstanding the foregoing, if Lender sells a
participation in the Tranche B
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Line, Lender shall not be required to make any Tranche B Loans at any time that
the Tranche B Participant has failed to make any payment required to be made to
Lender under the Participation Agreement between Lender and such Tranche B
Participant or has otherwise not purchased any participation in connection with
any Tranche B Loan. In the event that there are any Tranche B Loans outstanding
at any time, and there is any default by Participant under such Participation
Agreement or Participant otherwise has failed to make any payment to Lender
thereunder, without limiting any rights or remedies of Lender, Borrowers shall,
upon demand by Lender, which may be made at any time or from time to time, repay
to Lender the entire amount of the Tranche B Loans for which payment is
demanded.
(c) Lender may, in its good faith determination, from time to
time, upon not less than seven (7) Business Days prior notice to Borrower,
reduce the lending formula(s) with respect to Eligible Inventory to the extent
that Lender determines that: (A) the number of days of the turnover of such
Inventory for any period has changed in any materially adverse respect or (B)
the nature and quality or mix of the Inventory has deteriorated in any material
respect. In determining whether to reduce the lending formula(s), Lender may
consider events, conditions, contingencies or risks that are also considered in
determining Eligible Inventory or in establishing Availability Reserves.
(d) Except in Lender's discretion, the aggregate amount of the
Loans, the Letter of Credit Accommodations and other Obligations outstanding at
any time shall not exceed the Maximum Credit. In the event that (i) the
outstanding amount of any component of the Tranche A Loans and Letter of Credit
Accommodations or the aggregate amount of the outstanding Tranche A Loans and
Letter of Credit Accommodations and other Obligations, other than Tranche B
Loans, exceeds the amounts available under the lending formulas set forth in
Section 2.l(a) hereof, the sublimits in Section 2.l(a) hereof, the sublimits
for Letter of Credit Accommodations set forth in Section 2.2(c), (ii) the
outstanding amount of Tranche B Loans exceeds the amounts available under
Section 2.1(b) hereof, or (iii) the aggregate Obligations exceed the Maximum
Credit, as applicable, such event shall not limit, waive or otherwise affect any
rights of Lender in that circumstance or on any future occasions and Borrower
shall, upon demand by Lender, which may be made at any time or from time to
time, immediately repay to Lender the entire amount of any such excess for which
payment is demanded.
2.2 Letter of Credit Accommodations.
(a) Subject to, and upon the terms and conditions contained
herein, at the request of Borrower, Lender agrees to provide or arrange for
Letter of Credit Accommodations with the Reference Bank or an issuer reasonably
acceptable to Borrower and Lender, for the account of Borrower containing terms
and conditions acceptable to Lender and the issuer thereof. Any payments made by
Lender to any issuer thereof and/or related parties in connection with the
Letter of Credit Accommodations shall constitute additional Tranche A Loans to
Borrower pursuant to this Section 2.
(b) In addition to any charges, fees or expenses charged by any
bank or issuer in connection with the Letter of Credit Accommodations, Borrower
shall pay to Lender a letter of credit fee at a rate equal to one and
three-fourths percent (1.75%) per annum on the daily outstanding balance of the
Letter of Credit Accommodations for the immediately preceding
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month (or part thereof), payable in arrears as of the first day of each
succeeding month, provided, however, that such letter of credit fee shall be
increased, at Lender's option without notice, to three and three-fourths percent
(3.75%) per annum for the period on or after the date of termination or
non-renewal of this Agreement, or upon the occurrence and during the
continuation of an Event of Default. Such letter of credit fee shall be
calculated on the basis of a three hundred sixty (360) day year and actual days
elapsed and the obligation of Borrower to pay such fee shall survive the
termination or non-renewal of this Agreement.
(c) No Letter of Credit Accommodations shall be available unless
on the date of the proposed issuance of any Letter of Credit Accommodations, the
Tranche A Loans available to Borrower (subject to the Maximum Credit and any
Availability Reserves) are equal to or greater than:
(i) if the proposed Letter of Credit Accommodation is
for the purpose of purchasing Eligible Inventory, the sum of:
(1) the product of the face amount of the Letter
of Credit Accommodation multiplied by one minus the Inventory Advance Rate under
Sections 2.1(a) hereof, as applicable; plus
(2) freight, taxes, duty and other amounts which
Lender estimates must be paid in connection with such Inventory upon arrival and
for delivery to one of Borrower's locations for Eligible Inventory within the
United States of America; and
(ii) if the proposed Letter of Credit Accommodation is
for any other purpose, an amount equal to one hundred percent (100%) of the
face amount thereof and all other commitments and obligations made or incurred
by Lender with respect thereto.
Effective on the issuance of each Letter of Credit Accommodation, the
amount of Tranche A Loans that might otherwise be available to Borrower shall be
reduced by the applicable amount set forth in Section (i) or Section (ii).
(d) Except in Lender's discretion, the amount of all outstanding
Letter of Credit Accommodations and all other commitments and obligations made
or incurred by Lender in connection therewith shall not at any time exceed Ten
Million Dollars ($10,000,000). At any time an Event of Default exists or has
occurred and is continuing, upon Lender's request, Borrower will either furnish
cash collateral to secure the reimbursement obligations to the issuer in
connection with any Letter of Credit Accommodations or furnish cash collateral
to Lender for the Letter of Credit Accommodations, and in either case, the
Revolving Loans otherwise available to Borrower shall not be reduced as provided
in Section 2.2(c) to the extent of such cash collateral.
(e) Borrower shall indemnify and hold Lender harmless from and
against any and all losses, claims, damages, liabilities, costs and expenses
which Lender may suffer or incur in connection with any Letter of Credit
Accommodations and any documents, drafts or acceptances relating thereto,
including, but not limited to, any losses, claims, damages, liabilities, costs
and expenses due to any action taken by any issuer or correspondent with respect
to any
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Letter of Credit Accommodation unless caused by the gross negligence or willful
misconduct of such issuer or correspondent. Borrower assumes all risks with
respect to the acts or omissions of the drawer under or beneficiary of any
Letter of Credit Accommodation and for such purposes the drawer or beneficiary
shall be deemed Borrower's agent. Borrower assumes all risks for, and agrees to
pay, all foreign, Federal, State and local taxes, duties and levies relating to
any goods subject to any Letter of Credit Accommodations or any documents,
drafts or acceptances thereunder. Borrower hereby releases and holds Lender
harmless from and against any acts, waivers, errors, delays or omissions,
whether caused by Borrower, by any issuer or correspondent or otherwise, unless
caused by the gross negligence or willful misconduct of Lender, with respect to
or relating to any Letter of Credit Accommodation. The provisions of this
Section 2.2(e) shall survive the payment of Obligations and the termination or
non-renewal of this Agreement.
(f) Nothing contained herein shall be deemed or construed to
grant Borrower any right or authority to pledge the credit of Lender in any
manner. Lender shall have no liability of any kind with respect to any Letter of
Credit Accommodation provided by an issuer other than Lender unless Lender has
duly executed and delivered to such issuer the application or a guarantee or
indemnification in writing with respect to such Letter of Credit Accommodation.
Borrower shall be bound by any interpretation made in good faith by Lender, or
any other issuer or correspondent under or in connection with any Letter of
Credit Accommodation or any documents, drafts or acceptances thereunder,
notwithstanding that such interpretation may be inconsistent with any
instructions of Borrower. Lender shall have the sole and exclusive right and
authority to, and Borrower shall not: (i) at any time an Event of Default exists
or has occurred and is continuing, (A) approve or resolve any questions of
non-compliance of documents, (B) give any instructions as to acceptance or
rejection of any documents or goods or (C) execute any and all applications for
steamship or airway guaranties, indemnities or delivery orders, and (ii) at all
times, (A) grant any extensions of the maturity of, time of payment for, or time
of presentation of, any drafts, acceptances, or documents, and (B) agree to any
amendments, renewals, extensions, modifications, changes or cancellations of any
of the terms or conditions of any of the applications, Letter of Credit
Accommodations, or documents, drafts or acceptances thereunder or any letters of
credit included in the Collateral. Lender may take such actions either in its
own name or in Borrower's name.
(g) Any rights, remedies, duties or obligations granted or
undertaken by Borrower to any issuer or correspondent in any application for any
Letter of Credit Accommodation, or any other agreement in favor of any issuer or
correspondent relating to any Letter of Credit Accommodation, shall be deemed
to have been granted or undertaken by Borrower to Lender. Any duties or
obligations undertaken by Lender to any issuer or correspondent in any
application for any Letter of Credit Accommodation, or any other agreement by
Lender in favor of any issuer or correspondent relating to any Letter of Credit
Accommodation, in each case in good faith and in accordance with this Agreement,
shall be deemed to have been undertaken by Borrower to Lender and to apply in
all respects to Borrower.
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SECTION 3. INTEREST AND FEES
3.1 Interest.
(a) Borrower shall pay to Lender interest on the outstanding
principal amount of the non-contingent Obligations at the Interest Rate. All
interest accruing hereunder on and after the date of any Event of Default or
termination or non-renewal hereof shall be payable on demand.
(b) Borrower may from time to time request that Tranche A Prime
Rate Loans be converted to Tranche A Eurodollar Rate Loans that Tranche B Prime
Rate Loans be converted to Tranche B Eurodollar Rate Loans, or that any existing
Eurodollar Rate Loans continue for an additional Interest Period. Such request
from Borrower shall specify the amount of the Tranche A or Tranche B Prime Rate
Loans which will constitute Tranche A or Tranche B Eurodollar Rate Loans
(subject to the limits set forth below), as the case may be, and the Interest
Period to be applicable to each Eurodollar Rate Loan. Subject to the terms and
conditions contained herein, three (3) Business Days (or such later date as
specified in such request) after receipt by Lender of such a request from
Borrower, such Prime Rate Loans shall be converted to Eurodollar Rate Loans or
such Eurodollar Rate Loans shall continue, as the case may be, provided, that
(i) no Event of Default, or event of which with notice or passage of time or
both would constitute an Event of Default exists or has occurred and is
continuing, (ii) no party hereto shall have sent any notice of termination or
non-renewal of this Agreement, (iii) Borrower shall have complied with such
customary procedures as are established by Lender and specified by Lender to
Borrower from time to time for requests by Borrower for Eurodollar Rate Loans,
(iv) no more than four (4) Interest Periods may be in effect at any one time,
(v) the amount of the Tranche A Eurodollar Rate Loans must be in an amount not
less than $5,000,000 or an integral multiple of $1,000,000 in excess thereof,
(vi) the amount of the Tranche B Eurodollar Rate Loans must be in an amount not
less than $ 1,000,000 or an integral multiple of $500,000 in excess thereof,
(vii) the maximum amount of the Tranche A Eurodollar Rate Loans at any time
requested by Borrower shall not exceed the amount equal to ninety percent (90%)
of the principal amount of the outstanding Tranche A Loans, and (viii) Lender
shall have determined that the Interest Period or Adjusted Eurodollar Rate is
available to Lender through the Reference Bank and can be readily determined as
of the date of the request for such Eurodollar Rate Loan by Borrower. Any
request by Borrower to convert Prime Rate Loans to Eurodollar Rate Loans or to
continue any existing Eurodollar Rate Loans shall be irrevocable.
Notwithstanding anything to the contrary contained herein, Lender and Reference
Bank shall not be required to purchase United States Dollar deposits in the
London interbank market or other applicable Eurodollar Rate market to fund any
Eurodollar Rate Loans, but the provisions hereof shall be deemed to apply as if
Lender and Reference Bank had purchased such deposits to fund the Eurodollar
Rate Loans.
(c) Any Eurodollar Rate Loans shall automatically convert to
Prime Rate Loans upon the last day of the applicable Interest Period, unless
Lender has received a request that satisfies the conditions of Section 3.1 (b)
to continue such Eurodollar Rate Loan at least three (3) Business Days prior to
such last day in accordance with the terms hereof. Any Eurodollar Rate Loans
shall, at Lender's option, upon notice by Lender to Borrower, convert to Prime
Rate Loans in the event that (i) an Event of Default or event which with the
notice or passage of time or both would constitute an Event of Default, shall
exist, (ii) this Agreement shall terminate or
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not be renewed, or (iii) the aggregate principal amount of the Prime Rate Loans
which have previously been converted to Eurodollar Rate Loans or existing
Eurodollar Rate Loans continued, as the case may be, at the beginning of an
Interest Period shall at any time during such Interest Period exceed the
Revolving Loans then available to Borrower under Section 2 hereof. Borrower
shall pay to Lender, upon demand by Lender (or Lender may, at its option, charge
any loan account of Borrower) any amounts required to compensate Lender, the
Reference Bank or any participant with Lender for any loss (other than loss of
anticipated profits), cost or expense incurred by such person, as a result of
the conversion of Eurodollar Rate Loans to Prime Rate Loans pursuant to any of
the foregoing, other than any loss incurred by Lender related to its purchase of
funds (or similar funding activity) for periods longer than the Interest Period
for the Loans converted.
(d) Interest shall be payable by Borrower to Lender monthly in
arrears not later than the first day of each calendar month and shall be
calculated on the basis of a three hundred sixty (360) day year and actual days
elapsed. Such interest shall be charged against Borrower's loan account. The
interest rate on non-contingent Obligations (other than Eurodollar Rate Loans)
shall increase or decrease by an amount equal to each increase or decrease in
the Prime Rate effective on the first day of the month after any change in such
Prime Rate is announced based on the Prime Rate in effect on the last day of the
month in which any such change occurs. In no event shall charges constituting
interest payable by Borrower to Lender exceed the maximum amount or the rate
permitted under any applicable law or regulation, and if any such part or
provision of this Agreement is in contravention of any such law or regulation,
such part or provision shall be deemed amended to conform thereto.
3.2 Closing Fee. Borrower shall pay to Lender as a closing fee on the
Tranche A Line the amount of Seven Hundred Seventy-five Thousand Dollars
($775,000), which fee shall be fully earned as of the date hereof, and which
shall be paid in three installments of Two Hundred Fifty-eight Thousand Three
Hundred Thirty-three and thirty-four hundredths Dollars ($258,333.34) on the
date hereof and Two Hundred Fifty-eight Thousand Three Hundred Thirty-three and
thirty-three hundredths Dollars ($258,333.33) on each of the first and second
anniversaries of this Agreement. In addition, Borrower shall pay to Lender on
the date hereof, as a closing fee on the Tranche B Line, the amount of One
Hundred Thousand ($100,000).
3.3 Syndication Fee. Borrower shall pay to Lender as a syndication fee
the amount of Three Hundred Eighty-seven Thousand Five Hundred Dollars
($387,500), which fee shall be fully earned as of the date hereof, and which
shall be paid in three installments of One Hundred Twenty-nine Thousand One
Hundred Sixty-six and sixty-seven hundredths Dollars ($129,166.67) on the date
hereof and One Hundred Twenty-nine Thousand One Hundred Sixty-six and sixty-six
hundredths Dollars ($129,166.66) on each of the first and second anniversaries
of this Agreement.
3.4 Loan Servicing Fee. Borrower shall pay to Lender monthly, in
advance, a loan servicing fee in an amount equal to Three Thousand Dollars
($3,000), plus reasonable out-of-pocket costs and expenses, in respect of
Lender's services for each month (or part thereof) while this Agreement remains
in effect and for so long thereafter as any of the Obligations are outstanding,
which fee shall be fully earned as of and payable in advance on the date hereof
and on the first day of each month hereafter.
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3.5 Unused Line Fee. Borrower shall pay to Lender monthly an unused line
fee at a rate equal to three-eighths percent (.375%) per annum calculated upon
the amount by which One Hundred Twenty Million Dollars ($120,000,000) exceeds
the average daily principal balance of the outstanding Tranche A Loans and
Letter of Credit Accommodations during the immediately preceding month (or part
thereof) while this Agreement is in effect and for so long thereafter as any of
the Obligations is outstanding, which fee shall be payable on the first day of
each month in arrears. In addition, Borrower shall pay Lender monthly an unused
line fee at a rate equal to one-half percent (1/2%) per annum calculated upon
the amount by which Ten Million Dollars ($10,000,000) exceeds the average daily
principal balance of the outstanding Tranche B Loans during the immediately
preceding month (or part thereof) while this Agreement is in effect and for so
long thereafter as any of the Tranche B Loans is outstanding, which fee shall be
payable on the first day of each month in arrears.
3.6 Annual Commitment Fee. Borrower shall pay to Lender annually a
commitment fee equal to Fifty Thousand Dollars ($50,000), payable in advance for
each year during which the Tranche B Line is available.
3.7 Changes in Laws and Increased Costs of Loans.
(a) Notwithstanding anything to the contrary contained herein,
all Eurodollar Rate Loans shall, upon notice by Lender to Borrower, convert to
Prime Rate Loans in the event that (i) any change in applicable law or
regulation (or the interpretation or administration thereof) shall either (A)
make it unlawful for Lender or Reference Bank to make or maintain Eurodollar
Rate Loans or to comply with the terms hereof in connection with the Eurodollar
Rate Loans, by an amount deemed by Lender to be material, or (B) shall result in
the increase in the costs to Lender or Reference Bank of making or maintaining
any Eurodollar Rate Loans or (C) reduce the amounts received or receivable by
Lender in respect thereof, by an amount deemed by Lender to be material or (ii)
the cost to Lender or Reference Bank of making or maintaining any Eurodollar
Rate Loans shall otherwise increase by an amount deemed by Lender to be
material. Borrower shall pay to Lender, upon demand by Lender (or Lender may, at
its option, charge any loan account of Borrower) any amounts required to
compensate Lender or the Reference Bank for any loss (including loss of
anticipated profits), cost or expense incurred by such person as a result of the
foregoing, including, without limitation, any such loss, cost or expense
incurred by reason of the liquidation or reemployment of deposits or other funds
acquired by such person to make or maintain the Eurodollar Rate Loans or any
portion thereof. A certificate of Lender setting forth the basis for the
determination of such amount necessary to compensate Lender as aforesaid shall
be delivered to Borrower and shall be conclusive, absent manifest error.
(b) If any payments (other than regularly scheduled payments of
interest) or prepayments in respect of the Eurodollar Rate Loans are received by
Lender other than on the last day of the applicable Interest Period (whether
pursuant to acceleration, upon maturity or otherwise), including any payments
pursuant to the application of collections under Section 6.3 or any other
payments made with the proceeds of Collateral, Borrower shall pay to Lender upon
demand by Lender (or Lender may, at its option, charge any loan account of
Borrower) any amounts required to compensate Lender or the Reference Bank for
any additional loss (including loss of anticipated profits), cost or expense
incurred by such person as a result of such prepayment or payment, including,
without limitation, any loss, cost or expense incurred by
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reason of the liquidation or reemployment of deposits or other funds acquired by
such person to make or maintain such Eurodollar Rate Loans or any portion
thereof.
3.8 Compensation Adjustment.
(a) If after the date of this Agreement the introduction of, or
any change in, any law or any governmental rule, regulation, policy, guideline
or directive (whether or not having the force of law), or any interpretation
thereof, or compliance by Lender or any Participant therewith:
(i) subjects Lender to any tax, duty, charge or
withholding on or from payments due from Borrower (excluding franchise taxes
imposed upon, and taxation of the overall net income of, Lender or any
Participant), or changes the basis of taxation of payments, in either case in
respect of amounts due it hereunder, or
(ii) imposes or increases or deems applicable any
reserve requirement or other reserve, assessment, insurance charge, special
deposit or similar requirement against assets of, deposits with or for the
account of, or credit extended by Lender or any Participant, or
(iii) imposes any other condition the result of which is
to increase the cost to Lender or any Participant of making, funding or
maintaining the Revolving Loans or Letter of Credit Accommodations or reduces
any amount receivable by Lender or any Participant in connection with the Loans
or Letter of Credit Accommodations, or requires Lender or any Participant to
make payment calculated by references to the amount of loans held or interest
received by it, by an amount deemed material by Lender or any Participant, or
(iv) imposes or increases any capital requirement or
affects the amount of capital required or expected to be maintained by Lender or
any Participant or any corporation controlling Lender or any Participant, and
Lender or any Participant determines that such imposition or increase in capital
requirements or increase in the amount of capital expected to be maintained is
based upon the existence of this Agreement or the Loans or Letter of Credit
Accommodations hereunder, all of which may be determined by Lender's reasonable
allocation of the aggregate of its impositions or increases in capital required
or expected to be maintained, and the result of any of the foregoing is to
increase the cost to Lender or any Participant of making, renewing or
maintaining the Loans or Letter of Credit Accommodations, or to reduce the rate
of return to Lender or any Participant on the Loans or Letter of Credit
Accommodations, then, to the extent consistent with Lender's treatment of other
similarly situated customers, upon demand by Lender, Borrower shall pay to
Lender, and continue to make periodic payments to Lender or any Participant,
such additional amounts as may be necessary to compensate Lender or any
Participant for any such additional cost incurred or reduced rate of return
realized.
(b) A certificate of Lender claiming entitlement to compensation
as set forth above will be conclusive in the absence of manifest error. Such
certificate will set forth the nature of the occurrence giving rise to such
compensation, the additional amount or amounts to be paid and the compensation
and the method by which such amounts were determined. In determining any
additional amounts due from Borrower under this Section 3.7, Lender shall act
reasonably and in good faith and will, to the extent that the increased costs,
reductions, or amounts received or receivable relate to the Lender's or a
Participant's loans or commitments
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generally and are not specifically attributable to the Loans and commitments
hereunder, use averaging and attribution methods which are reasonable and
equitable and which cover all loans and commitments under this Agreement by the
Lender or such Participant, as the case may be, whether or not the loan
documentation for such other loans and commitments permits the Lender or such
Participant to receive compensation costs of the type described in this
Section 3.7.
SECTION 4. CONDITIONS PRECEDENT
4.1 Conditions Precedent to Initial Loans and the Letter of Credit
Accommodations. Each of the following is a condition precedent to Lender making
the initial Loans and the initial Letter of Credit Accommodations hereunder:
(a) Lender shall have received, in form and substance
satisfactory to Lender, all releases, terminations and such other documents as
Lender may request to evidence and effectuate the termination of any interest in
and to any Collateral (including assets and property sold by Seller constituting
part of the Collateral), duly authorized, executed and delivered by it or each
of them, including, but not limited to, UCC termination statements for all UCC
financing statements, and Lender shall have satisfied itself that it has valid,
perfected, fully enforceable (including, without limitation, no contractual or
other restrictions or limitations held by third parties with respect to Lender's
rights to take a security interest in or dispose of the Collateral) and first
priority security interests in and liens upon the Collateral and any other
property which is intended as security for the Obligations, subject only to the
security interests and liens permitted herein or in the other Financing
Agreements;
(b) Lender shall have received, in form and substance
satisfactory to Lender, evidence that the Purchase Agreements have been duly
executed and delivered by and to the appropriate parties thereto and the
transactions contemplated under the terms of the Purchase Agreements have been
or will be consummated prior to or contemporaneously with the execution of this
Agreement;
(c) Lender shall have received, in form and substance
satisfactory to Lender, a pro-forma balance sheet of Borrower reflecting the
initial transactions contemplated hereunder, including, but not limited to (i)
the consummation of the acquisition of the Purchased Stock by WEI from Seller
and the other transactions contemplated by the Purchase Agreements and (ii) the
Loans and Letter of Credit Accommodations provided by Lender to Borrower on the
date hereof and the use of the proceeds of the initial Loans as provided herein,
accompanied by a certificate, dated of even date herewith, of the chief
financial officer of Borrower stating that such pro-forma balance sheet
represents the reasonable, good faith opinion of such officer as to the subject
matter thereof as of the date of such certificate;
(d) all requisite corporate actions and proceedings in
connection with this Agreement and the other Financing Agreements shall be
satisfactory in form and substance to Lender, and Lender shall have received all
information and copies of all documents, including, without limitation, records
of requisite corporate actions and proceedings which Lender may have requested
in connection therewith, such documents where requested by Lender or its counsel
to be certified by appropriate corporate officers or governmental authorities;
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(e) no material adverse change shall have occurred in the
assets, business or prospects of Borrower or Operating Subsidiaries and no
change or event shall have occurred which would impair the ability of Borrower
to perform its obligations hereunder or under any of the other Financing
Agreements to which it is a party or of Lender to enforce the Obligations or
realize upon the Collateral;
(f) Not more than five (5) Business Days prior thereto, Lender
shall have completed a field review of the Records and such other information
with respect to the Collateral as Lender may require to determine the amount of
Revolving Loans available to Borrower, the results of which shall be
satisfactory to Lender (including, without limitation, approval of the results
of such field review by Lender's senior credit committee in its sole
discretion); and Lender shall have received current perpetual Inventory records
and/or rollforwards of Inventory through the date thereof, together with all
supporting documentation and such other documents and information as Lender
shall request in its sole discretion to enable Lender to accurately identify and
verify the Eligible Inventory at or before the date thereof in a manner
satisfactory to Lender, including, but not limited to, Inventory in transit, and
goods in bonded warehouses or at third party locations.
(g) Lender shall have received, in form and substance
satisfactory to Lender, all consents, waivers, acknowledgments and other
agreements from third persons which Lender reasonably may deem necessary or
desirable in order to permit, protect and perfect its security interests in and
liens upon the Collateral or to effectuate the provisions or purposes of this
Agreement and the other Financing Agreements, including, without limitation,
acknowledgements by the lessor of Borrower's California distribution center and
any third party processors of Lender's security interests in the Collateral,
waivers by such persons of any security interests, liens or other claims by such
persons to the Collateral, and agreements permitting Lender access to, and the
right to remain on, the premises to exercise its rights and remedies and
otherwise deal with the Collateral;
(h) Lender shall have received, in form and substance
satisfactory to Lender, executed copies of Blocked Account agreements, pursuant
to Section 6.3(a)(ii) hereof, among Lender, Borrower and each of Bank of America
and NationsBank;
(i) all Credit Card Issuers and Credit Card Processors shall
have been irrevocably directed by the parties to Credit Card Agreements, and
such Credit Card Companies and Credit Card Processors shall agree, that all
proceeds of Credit Card Receivables shall be remitted to a Blocked Account;
(j) Lender shall have received evidence of insurance and loss
payee endorsements required hereunder and under the other Financing Agreements,
in form and substance satisfactory to Lender, and certificates of insurance
policies and/or endorsements naming Lender as loss payee, in each case, in
respect of the Collateral;
(k) Lender shall have received, in form and substance
satisfactory to Lender, such opinion letters of counsel to Borrower with respect
to the Financing Agreements, the Purchase Agreements and such other matters as
Lender may reasonably request;
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(l) the other Financing Agreements and all instruments and
documents hereunder and thereunder shall have been duly executed and delivered
to Lender, in form and substance satisfactory to Lender;
(m) any holders of a security interest in any portion of the
Collateral, including, without limitation, vendors of Inventory to Borrower,
shall have executed intercreditor and subordination agreements in form and
substance satisfactory to Lender;
(n) each of the Holding Subsidiaries shall have executed and
delivered a guaranty of the Obligations in form and substance satisfactory to
Lender; and
(o) the closing of the transactions under this Agreement and the
Purchase Agreements must occur on or before October 26, 1998.
4.2 Conditions Precedent to All Loans and Letter of Credit
Accommodations. Each of the following is an additional condition precedent to
Lender's making Loans and/or providing Letter of Credit Accommodations to
Borrower, including the initial Loans and Letter of Credit Accommodations and
any future Loans and Letter of Credit Accommodations:
(a) all representations and warranties contained herein and in
the other Financing Agreements shall be true and correct in all material
respects with the same effect as though such representations and warranties had
been made on and as of the date of the making of each such Loan or providing
each such Letter of Credit Accommodation and after giving effect thereto; and
(b) no Event of Default and no event or condition which, with
notice or passage of time or both, would constitute an Event of Default, shall
exist or have occurred and be continuing on and as of the date of the making of
each such Loan or providing each such Letter of Credit Accommodation and after
giving effect thereto; and
(c) if such Loan is a Tranche B Loan, there is no availability
to borrow under the Tranche A Line and Borrower is, and will be upon making the
Tranche B Loan, in compliance with all requirements of Section 9.17.
4.3 Condition Subsequent To All Loans and Letter of Credit
Accommodations.
Each of the following requirements is an additional condition subsequent
to Lender's making Loans and/or providing Letter of Credit Accommodations to
Borrower, including the initial Loans and Letter of Credit Accommodations and
any future Loans and Letter of Credit Accommodations. Failure to satisfy any of
the conditions subsequent within the stated time period shall constitute an
Event of Default under this Agreement:
(a) Within thirty (30) days of the date of this Agreement,
Lender shall have received certified UCC searches that reflect Lender's first
priority position in every jurisdiction in which Lender filed a financing
statement.
(b) Within ten (10) days of the date of this Agreement, Borrower
shall file amendments to the UCC-1 financing statements previously filed
reflecting Lender's security
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interests in the assets of the Operating Subsidiaries to change the names shown
on the financing statements to the current names of the Operating Subsidiaries.
SECTION 5. GRANT OF SECURITY INTEREST
To secure payment and performance of all Obligations, Borrower hereby
grants to Lender a continuing security interest in, a lien upon, and a right of
set off against, and hereby assigns to Lender as security, the following
property and interests in property, whether now owned or hereafter acquired or
existing, and wherever located (collectively, the "Collateral"):
5.1 Accounts, Credit Card Receivables and other indebtedness owed to the
Borrower;
5.2 all present and future contract rights, general intangibles
(including, but not limited to, registered and unregistered patents, trademarks,
service marks, copyrights, trade names, applications for the foregoing, trade
secrets, goodwill, processes, drawings, blueprints, customer lists, licenses,
whether as licensor or licensee, chooses in action and other claims and existing
and future leasehold interests in equipment, real estate and fixtures), but
which in no case shall include the trademarks "Blockbuster", "Blockbuster Music"
and other derivations thereof, chattel paper, documents, instruments,
investments, investment property, letters of credit, proceeds of letters of
credit, bankers' acceptances and guaranties.
5.3 all present and future monies, securities, investment property,
credit balances, deposits, deposit accounts and other property of Borrower now
or hereafter held or received by or in transit to Lender or its affiliates or at
any other depository or other institution from or for the account of Borrower,
whether for safekeeping, pledge, custody, transmission, collection or otherwise,
and all present and future liens, security interests, rights, remedies, title
and interest in, to and in respect of Accounts, Credit Card Receivables, and
other Collateral, including, without limitation, (a) rights and remedies under
or relating to guaranties, contracts of suretyship, letters of credit and credit
and other insurance related to the Collateral, (b) rights of stoppage in
transit, replevin, repossession, reclamation and other rights and remedies of an
unpaid vendor, lienor or secured party, (c) goods described in invoices,
documents, contracts or instruments with respect to, or otherwise representing
or evidencing, Accounts, Credit Card Receivables, or other Collateral,
including, without limitation, returned, repossessed and reclaimed goods, and
(d) deposits by and property of account debtors or other persons securing the
obligations of account debtors;
5.4 Inventory (including without limitation used merchandise and
inventory held for return to vendors);
5.5 Rental Merchandise;
5.6 Equipment;
5.7 Records;
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5.8 All products and proceeds of the foregoing, in any form, including,
without limitation, insurance proceeds and all claims against third parties for
loss or damage to or destruction of any or all of the foregoing.
SECTION 6. COLLECTION AND ADMINISTRATION
6.1 Borrower's Loan Account. Lender shall maintain one or more loan
account(s) on its books in which shall be recorded (a) all Loans, all Letter of
Credit Accommodations and all other Obligations and the Collateral, (b) all
payments made by or on behalf of Borrower and (c) all other appropriate debits
and credits as provided in this Agreement, including, without limitation, fees,
charges, costs, expenses and interest. All entries in the loan account(s) shall
be made in accordance with Lender's customary practices as in effect from time
to time.
6.2 Statements. Lender shall render to Borrower each month a statement
setting forth the balance in the Borrower's loan account(s) maintained by Lender
for Borrower pursuant to the provisions of this Agreement, including principal,
interest, fees, costs and expenses. Each such statement shall be subject to
subsequent adjustment by Lender but shall, absent manifest errors or omissions,
be considered correct and deemed accepted by Borrower and conclusively binding
upon Borrower as an account stated except to the extent that Lender receives a
written notice from Borrower of any specific exceptions of Borrower thereto
within thirty (30) days after the date such statement has been mailed by Lender.
Until such time as Lender shall have rendered to Borrower a written statement as
provided above, the balance in Borrower's loan account(s) shall be presumptive
evidence of the amounts due and owing to Lender by Borrower.
6.3 Collection of Accounts.
(a) Borrower shall establish and maintain, at its expense,
deposit account arrangements and merchant payment arrangements with the banks
set forth on Schedule 6.3 and after prior written notice to Lender, such other
banks as Borrower may hereafter select as are acceptable to Lender. The banks
set forth on Schedule 6.3 constitute all of the banks with whom Borrower has
deposit account arrangements and merchant payment arrangements as of the date
hereof and identifies each of the deposit accounts at such banks to a retail
store location of Borrower or otherwise describes the nature of the use of such
deposit account by Borrower.
(i) Borrower shall deposit all proceeds from sales of
Inventory and rentals of Rental Merchandise in every form (including, without
limitation, cash, checks, credit card sales drafts, credit card sales or charge
slip or receipts and other forms of daily store receipts), from each retail
store location of Borrower, and all other proceeds of Collateral, on each
business day into the deposit accounts of Borrower used solely for such purpose
and identified to each retail store location as set forth on Schedule 6.3.
Borrower shall irrevocably authorize and direct in writing, in form and
substance satisfactory to Lender, each of the banks into which proceeds from
sales of Inventory and rentals of Rental Merchandise from each retail store
location of Borrower and any and all other proceeds of Collateral are at any
time deposited as provided above to send by wire transfer on a daily basis all
funds deposited in such account, and shall irrevocably authorize and direct in
writing its account debtors, Credit Card Issuers and Credit Card Processors to
directly remit payments on its Accounts, Credit Card Receivables and all other
payments constituting proceeds of Inventory and rentals of Rental Merchandise to
the
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Blocked Accounts described in Section 6.3(a)(ii) below; provided, that at any
time when Excess Availability is less than or equal to Three Million Dollars
($3,000,000) or when an Event of Default, or an event that with notice or
passage of time or both would be an Event of Default, has occurred, Borrower
shall segregate into separate depository accounts any monies that are held or
received by Borrower as trust fund taxes, or for the benefit of Ticketmaster
pursuant to the Ticketmaster Agreement or for the benefit of Bass pursuant to
the Bass Agreement and shall direct account debtors, Credit Card Issuers and
Credit Card Processors to remit payments, to the extent they constitute such
trust fund taxes or monies held for the benefit of Ticketmaster or Bass, to such
separate depository accounts. Such authorizations and directions shall not be
rescinded, revoked or modified without the prior written consent of Lender.
(ii) Borrower shall establish and maintain, at its
expense, pursuant to an agreement described in the following sentence, one or
more blocked accounts with such bank or banks as are acceptable to Lender (each
a "Blocked Account" and collectively the "Blocked Accounts"). Each bank at which
a Blocked Account is established shall enter into an agreement, in form and
substance satisfactory to Lender, providing (unless otherwise agreed to by
Lender) that all items received or deposited in such Blocked Account are the
Collateral of Lender, that the depository bank has no lien upon, or right to
setoff against, the Blocked Accounts, the items received for deposit therein,
or the funds from time to time on deposit therein, other than liens or rights of
set-off with respect to returned checks and customary service charges, and that
the depository bank will wire, or otherwise transfer, in immediately available
funds, on a daily basis, all funds received or deposited into such Blocked
Account to such bank account of Lender as Lender may from time to time designate
for such purpose (the "Payment Account"); provided, however, if there has
occurred no Event of Default or event that with notice or passage of time or
both would be an Event of Default, and, at such time, Borrower has Excess
Availability of at least Fifteen Million Dollars ($15,000,000), Borrower may
receive such funds directly from the Blocked Accounts (rather than remittance to
the Payment Account) so long as Borrower is in compliance with the conditions of
this sentence. If at any time Borrower fails to meet the requirements of this
paragraph, Lender may withdraw its consent and take all steps in order that all
funds are immediately remitted to the Payment Account. Borrower agrees that all
amounts deposited in the Blocked Account(s) or other funds received and
collected by Lender, whether as proceeds of Inventory, the collection of
Accounts or other Collateral or otherwise shall be the Collateral of Lender.
(b) For purposes of calculating interest on the Obligations,
such payments or other funds received will be applied (conditional upon final
collection) to the Obligations on the Business Day of receipt of immediately
available funds by Lender in the Payment Account if such funds are received by
Lender by 10:00 a.m. California time. For purposes of calculating the amount of
the Revolving Loans available to Borrower such payments will be applied
(conditional upon final collection) to the Obligations on the Business Day of
receipt by Lender in the Payment Account, if such payments are received by 10:00
a.m. California time.
(c) Borrower and all of its affiliates, subsidiaries,
shareholders, directors, employees or agents shall, acting as trustee for
Lender, receive, as the property of Lender, any monies, cash, checks, credit
card sales drafts, credit card sales or charge slips or receipts, notes, drafts
and all forms of daily store receipts or any other payment relating to and/or
proceeds from sales of Inventory or other Collateral which come into their
possession or under their control and
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immediately upon receipt thereof, shall deposit or cause the same to be
deposited in the Blocked Accounts. Except as otherwise permitted hereunder, in
no event shall any such monies, checks, credit card sales drafts, credit card
sales or charge slips or receipts, notes, drafts or other payments be commingled
with Borrower's own funds. Borrower agrees to reimburse Lender on demand for any
amounts owed or paid to any bank at which a Blocked Account is established or
any other bank or person involved in the transfer of funds to or from the
Blocked Accounts arising out of Lender's payments to or indemnification of such
bank or person, unless such payment or indemnification obligation of Lender was
a result of Lender's gross negligence or willful misconduct. The obligation of
Borrower to reimburse Lender for such amounts pursuant to this Section 6.3 shall
survive the termination or non-renewal of this Agreement.
6.4 Payments. All Obligations shall be payable to the Payment Account as
provided in Section 6.3 or such other place as Lender may designate from time to
time. Lender shall apply payments received or collected from Borrower or for the
account of Borrower (including, without limitation, the monetary proceeds of
collections or of realization upon any Collateral) to the Tranche A Loans and
Tranche B Loans as set forth on Exhibit B attached to this Agreement. At
Lender's option, all principal, interest, fees, costs, expenses and other
charges provided for in this Agreement or the other Financing Agreements may be
charged directly to the loan account(s) of Borrower. Borrower shall make all
payments to Lender on the Obligations free and clear of, and without deduction
or withholding for or on account of, any setoff, counterclaim, defense, duties,
taxes, levies, imposts, fees, deductions, withholding, restrictions or
conditions of any kind. If after receipt of any payment of, or proceeds of
Collateral applied to the payment of, any of the Obligations, Lender is required
to surrender or return such payment or proceeds to any Person for any reason,
then the Obligations intended to be satisfied by such payment or proceeds shall
be reinstated and continue and this Agreement shall continue in full force and
effect as if such payment or proceeds had not been received by Lender. Borrower
shall be liable to pay to Lender, and does hereby indemnify and hold Lender
harmless for the amount of any payments or proceeds surrendered or returned.
This Section 6.4 shall remain effective notwithstanding any contrary action that
may be taken by Lender in reliance upon such payment or proceeds. This Section
6.4 shall survive the payment of the Obligations and the termination or
non-renewal of this Agreement.
6.5 Authorization to Make Loans. Lender is authorized to make the Loans
and provide Letter of Credit Accommodations based upon telephonic or other
instructions received from anyone purporting to be an officer of Borrower or
other authorized person or, at the discretion of Lender, if such Loans are
necessary to satisfy any Obligations. All requests for Loans or Letter of Credit
Accommodations hereunder shall specify the date on which the requested advance
is to be made or Letter of Credit Accommodations established (which day shall be
a Business Day) and the amount of the requested Loan. Requests received after
10:30 a.m. California time on any day shall be deemed to have been made as of
the opening of business on the immediately following Business Day. All Loans and
Letter of Credit Accommodations under this Agreement shall be conclusively
presumed to have been made to, and at the request of and for the benefit of,
Borrower when deposited to the credit of Borrower or otherwise disbursed or
established in accordance with the instructions of Borrower or in accordance
with the terms and conditions of this Agreement.
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6.6 Use of Proceeds. Borrower shall use the initial proceeds of the
Loans provided by Lender to Borrower hereunder only for: (a) payments to each of
the persons listed in the disbursement direction letter furnished by Borrower to
Lender on or about the date hereof and (b) costs, expenses and fees in
connection with the preparation, negotiation, execution and delivery of this
Agreement and the other Financing Agreements. All other Loans made or Letter of
Credit Accommodations provided by Lender to Borrower pursuant to the provisions
hereof shall be used by Borrower only for general operating, working capital and
other proper corporate purposes of Borrower not otherwise prohibited by the
terms hereof. None of the proceeds will be used, directly or indirectly, for the
purpose of purchasing or carrying any margin security or for the purposes of
reducing or retiring any indebtedness which was originally incurred to purchase
or carry any margin security or for any other purpose which might cause any of
the Loans to be considered a "purpose credit" within the meaning of Regulation U
of the Board of Governors of the Federal Reserve System, as amended.
SECTION 7. COLLATERAL REPORTING AND COVENANTS
7.1 Collateral Reporting. Borrower shall provide Lender with the
following documents in a form satisfactory to Lender: (a) on Tuesday of each
week as of the close of business of the immediately preceding Saturday or
Sunday, as applicable, or more frequently as Lender may request, a schedule of
Operating Subsidiary Eligible Inventory, Operating Subsidiary Eligible Active
Inventory, Operating Subsidiary Eligible Return Inventory, WEI Eligible
Inventory, WEI Eligible Active Inventory, and WEI Eligible Return Inventory,
setting forth the location thereof and the aggregate cost of each such category
of Inventory (currently reported on the "STAR" system) (including vendor
discounts), and designating Inventory in transit and Inventory to be purchased
under outstanding Letter of Credit Accommodations; (b), once each month, on or
before the fifteenth (15th) Business Day of such month for the immediately
preceding month, or more frequently as Lender may request, (i) reports of sales,
collections, deposits in each of Borrower's depository accounts and in the
Blocked Account and amounts retained by Borrower, credits issued, and Inventory
purchases, and (ii) an aging of accounts payable; and (c) upon Lender's
reasonable request, (i) a schedule of Accounts, Credit Card Receivables, and
other indebtedness owed to Borrower, (ii) a certificate from an authorized
officer of Borrower representing that Borrower has made payment of sales and use
taxes during such period as Lender may designate, or, at Lender's request, other
evidence of such payment, (iii) a certificate from an authorized officer of
Borrower representing that all rents are current or are subject to a bona fide
dispute, (iv) perpetual inventory reports, (v) copies of deposit slips and bank
statements, (vi) copies of shipping and delivery documents, (vii) copies of
purchase orders and invoices for Inventory acquired by Borrower; and (viii)
reports of Inventory test counts and book to physical count adjustments and
Inventory shrinkage; and (d) such other reports as to the Collateral and other
property which is security for the Obligations as Lender shall reasonably
request from time to time. If any of Borrower's records or reports of the
Collateral or other property which is security for the Obligations are prepared
or maintained by an accounting service, contractor, shipper or other agent,
Borrower hereby irrevocably authorizes such service, contractor, shipper or
agent to deliver such records, reports, and related documents to Lender and to
follow Lender's instructions with respect to further services at any time that
an Event of Default exists or has occurred and is continuing.
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7.2 Accounts Covenants.
(a) So long as no Event of Default exists or has occurred and is
continuing, Borrower shall settle, adjust or compromise any claim, offset,
counterclaim or dispute with any account debtor. At anytime that an Event of
Default exists or has occurred and is continuing, Lender shall, at its option,
have the exclusive right to settle, adjust or compromise any claim, offset,
counterclaim or dispute with account debtors or grant any credits, discounts or
allowances.
(b) In the event any customer returns Inventory when an Event of
Default exists or has occurred and is continuing, Borrower shall, upon Lender's
request, (i) dispose of the returned Inventory in accordance with Borrower's
historical practices, and (ii) not issue any credits, discounts or allowances
not in accordance with Borrower's historical practices with respect thereto
without Lender's prior written consent.
(c) With respect to each Account and Credit Card Receivable: (i)
the amounts shown on any invoice delivered to Lender or schedule thereof
delivered to Lender shall be true and complete, (ii) no payments shall be made
thereon except payments made pursuant to the terms of this Agreement, (iii) none
of the transactions giving rise thereto will violate any applicable State or
Federal laws or regulations and all documentation will be legally enforceable in
accordance with its terms; and (iv) there shall be compliance with the
provisions of Section 4.1(f) hereof as to each Credit Card Issuer obligated on
any Credit Card Receivables.
(d) Lender shall have the right at any time or times, in
Lender's name or in the name of a nominee of Lender, to verify the validity,
amount or any other matter relating to any Account, Credit Card Receivable, or
other Collateral or property which is security for the Obligations, by mail,
telephone, facsimile transmission or otherwise.
(e) Borrower shall deliver or cause to be delivered to Lender,
with appropriate endorsement and assignment, with full recourse to Borrower, all
chattel paper and instruments which Borrower now owns or may at any time acquire
immediately upon Borrower's receipt thereof in respect of any proceeds of
Collateral except as Lender may otherwise agree.
(f) Lender may, at any time or times that an Event of Default
exists or has occurred and is continuing, (i) notify any or all account debtors
that the Accounts, Credit Card Receivables and other obligations included in the
Collateral have been assigned to Lender and that Lender has a security interest
therein and Lender may direct any or all accounts debtors to make payment of
Accounts directly to Lender, (ii) extend the time of payment of, compromise,
settle or adjust for cash, credit, return of merchandise or otherwise, and upon
any terms or conditions, any and all Accounts, Credit Card Receivables or other
obligations included in the Collateral and thereby discharge or release the
account debtor or any other party or parties in any way liable for payment
thereof without affecting any of the Obligations, (iii) demand, collect or
enforce payment of any Accounts, Credit Card Receivables or such other
obligations, but without any duty to do so, and Lender shall not be liable for
its failure to collect or enforce the payment thereof and (iv) take whatever
other action Lender may deem necessary or desirable for the protection of its
interests. At any time that an Event of Default exists or has occurred and is
continuing, at Lender's request, all invoices and statements sent to any account
debtor shall state that the Accounts, Credit Card Receivables and such other
obligations have been assigned to
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Lender and are payable directly and only to Lender and Borrower shall deliver to
Lender such originals of documents evidencing the sale and delivery of goods or
the performance of services giving rise to any Accounts as Lender may require.
7.3 Inventory Covenants. With respect to the Inventory: (a) Borrower
shall at all times maintain inventory records reasonably satisfactory to Lender,
keeping correct and accurate records itemizing and describing the kind, type,
quality and quantity of Inventory, Borrower's cost for such Inventory and daily
withdrawals from and additions to Inventory; (b) Borrower shall cause, at
Borrower's expense, RGIS or such other third party firm acceptable to Lender to
conduct a complete physical count of the Inventory at a minimum of once every
twelve (12) months but at any time as Lender may request upon the occurrence of
an Event of Default, and promptly following such physical count such firm shall
supply Lender with a report in the form and with such specificity as may be
reasonably satisfactory to Lender concerning such physical count; (c) Borrower
shall not remove any Inventory from the locations set forth or permitted herein,
without the prior written consent of Lender, except for sales of Inventory in
the ordinary course of Borrower's business and returns authorized pursuant to
Subsection 7.3(j) of this Agreement, and except to move Inventory directly from
one location set forth or permitted herein to another such location, including
without limitation, a third party return processing facility with respect to
which Lender has received a bailee waiver in form and substance satisfactory to
Lender, (d) upon Lender's request, Borrower shall deliver or cause to be
delivered to Lender written reports or appraisals as to the Inventory in form
and scope acceptable to Lender by an appraiser acceptable to Lender, and
conducted on a basis consistent with the appraisal of the BGA Consulting, a
division of the Buxbaum Group dated September 8, 1998, addressed to Lender or
upon which Lender is expressly permitted to rely, provided that Borrower shall
be required to provide such reports or appraisals at Borrower's own expense no
more than twice in any twelve (12) month period so long as no Event of Default
has occurred, or at any time or times as Lender may request upon the occurrence
of an Event of Default, and at any time as Lender may request at Lender's
expense; (e) Borrower shall produce, use, store and maintain the Inventory, with
all reasonable care and caution and in accordance with applicable standards of
any insurance and in conformity with applicable laws (including, but not limited
to, the requirements of the Federal Fair Labor Standards Act of 1938, as amended
and all rules, regulations and orders related thereto); (f) Borrower assumes all
responsibility and liability arising from or relating to the production, use,
sale or other disposition of the Inventory; (g) Borrower shall not sell
Inventory to any customer on approval, or any other basis which entities the
customer to return or may obligate Borrower to repurchase such Inventory with
the exception of Inventory sold in the ordinary course of Borrower's business
subject to Borrower's normal and customary return policy; (h) Borrower shall
keep the Inventory in good and marketable condition; (i) Borrower shall not,
without prior written notice to Lender, acquire or accept any Inventory on
consignment or approval with an aggregate value in excess of Five Million
Dollars ($5,000,000) Borrower shall not report any Inventory held on consignment
or approval as Eligible Inventory, and Borrower shall maintain sufficient
records and provide sufficient information to Lender and any appraiser acting
pursuant to Section 7.3(d) so that goods held on consignment or approval will be
excluded from any appraisal or physical audit of Inventory; (j) Borrower may
return Inventory to vendors of such Inventory pursuant to normal returns
policies free and clear of Lender's lien; provided, however that upon an Event
of Default, Borrower shall not return any Inventory to vendors of such Inventory
without Lender's prior written consent; and (k) Borrower shall not convert more
than Five Thousand Dollars ($5,000) of
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Inventory in any month to Rental Merchandise without five (5) Business Days'
prior written notice to Lender in order that Lender may exclude such Inventory
from Eligible Inventory in calculating the amount of Revolving Loans available
to Borrower hereunder.
7.4 Equipment Covenants. With respect to the Equipment: (a) Borrower
shall keep the Equipment in good order, repair, running and marketable condition
(ordinary wear and tear excepted), in conformance with Borrower's historical
practices; (b) Borrower shall continue to maintain Equipment which is adequate
to sell the Inventory to customers in the ordinary course of Borrower's
business; and (c) after the occurrence of an Event of Default, Borrower shall
not take any action with respect to the Equipment that would impair the
salability of the Inventory at the highest retail price available in Lender's
sole discretion.
7.5 Power of Attorney. Borrower hereby irrevocably designates and
appoints Lender (and all persons designated by Lender) as Borrower's true and
lawful attorney-in-fact, and authorizes Lender, in Borrower's or Lender's name,
to: (a) at any time an Event of Default exists (i) demand payment on Accounts or
other proceeds of Inventory or other Collateral, (ii) enforce payment of
Accounts, Credit Card Receivables or other obligations that in each case are
included in the Collateral by legal proceedings or otherwise, (iii) exercise all
of Borrower's rights and remedies to collect any Account, Credit Card
Receivables or other proceeds of Inventory or other Collateral, (iv) sell or
assign any Account upon such terms, for such amount and at such time or times as
the Lender deems advisable, (v) settle, adjust, compromise, extend or renew an
Account, (vi) discharge and release any Account, Credit Card Receivables or
other obligations included in the Collateral, (vii) prepare, file and sign
Borrower's name on any proof of claim in bankruptcy or other similar document
against an account debtor, and (viii) do all acts and things which are
necessary, in Lender's determination, to fulfill Borrower's obligations under
this Agreement and the other Financing Agreements and (b) at any time, subject
to the terms of the agreement(s) relating to the Blocked Account(s), to (i) take
control in any manner of any item of payment or proceeds thereof, (ii) endorse
Borrower's name upon any items of payment or proceeds thereof and deposit the
same in the Lender's account for application to the Obligations, (iii) endorse
Borrower's name upon any chattel paper, document, instrument, invoice, or
similar document or agreement relating to any Account or Credit Card Receivables
or any goods pertaining thereto or any other Collateral, (iv) sign Borrower's
name on any verification of Accounts or Credit Card Receivables and notices
thereof to account debtors and (v) execute in Borrower's name and file any UCC
financing statements or amendments thereto. Notwithstanding anything to the
contrary contained in this Section 7.5, the power granted to Lender in this
Section 7.5 shall apply only in respect of the Collateral. Borrower hereby
releases Lender and its officers, employees and designees from any liabilities
arising from any act or acts under this power of attorney and in
furtherance thereof, whether of omission or commission, except as a result of
Lender's own gross negligence or willful misconduct.
7.6 Right to Cure. Lender may, as its option (a) cure any default by
Borrower under any agreement with a third party or pay or bond on appeal any
judgment entered against Borrower, (b) discharge taxes, liens, security
interests or other encumbrances at any time levied on or existing with respect
to the Collateral and (c) pay any amount, incur any expense or perform any act
which, in Lender's reasonable judgment, is necessary or appropriate to preserve,
protect, insure or maintain the Collateral and the rights of Lender with respect
thereto. Lender may add any amounts so expended to the Obligations and charge
Borrower's account therefor,
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such amounts to be repayable by Borrower on demand. Lender shall be under no
obligation to effect such cure, payment or bonding and shall not, by doing so,
be deemed to have assumed any obligation or liability of Borrower. Any payment
made or other action taken by Lender under this Section shall be without
prejudice to any right to assert an Event of Default hereunder and to proceed
accordingly.
7.7 Access to Premises. From time to time as requested by Lender, at the
cost and expense of Borrower, (a) Lender or its designee shall have complete
access to all of Borrower's premises during normal business hours and after
notice to Borrower, or at any time and without notice to Borrower if an Event of
Default exists or has occurred and is continuing, for the purposes of
inspecting, verifying and auditing the Collateral and all of Borrower's books
and records, including, without limitation, the Records, and (b) Borrower shall
promptly furnish to Lender such copies of such books and records or extracts
therefrom as Lender may request, and (c) Lender shall have the use during normal
business hours such of Borrower's personnel, equipment, supplies and premises as
may be reasonably necessary for the foregoing and if an Event of Default exists
or has occurred and is continuing for the collection of Accounts and realization
of other Collateral.
SECTION 8. REPRESENTATIONS AND WARRANTIES
Borrower (jointly and severally) hereby represents and warrants to
Lender the following (which shall survive the execution and delivery of this
Agreement), the truth and accuracy of which are (except for the representations
and warranties that relate to a particular date) a continuing condition of the
making of Loans and the providing of Letter of Credit Accommodations by Lender
to Borrower:
8.1 Corporate Existence, Power and Authority, Subsidiaries. Each
Borrower is a corporation duly organized and in good standing under the laws of
its state of incorporation and is duly qualified as a foreign corporation and in
good standing in all states or other jurisdictions where the nature and extent
of the business transacted by it or the ownership of assets makes such
qualification necessary, except for those jurisdictions in which the failure to
so qualify would not have a material adverse effect on Borrower's financial
condition, results of operation or business or the rights of Lender in or to any
of the Collateral. The execution, delivery and performance of this Agreement,
the other Financing Agreements and the transactions contemplated hereunder and
thereunder are all within each Borrower's corporate powers, have been duly
authorized and are not in contravention of law or the terms of any Borrower's
certificate of incorporation, by-laws, or other organizational documentation, or
any indenture, agreement or undertaking to which Borrower is a party or by which
Borrower or its property are bound. This Agreement and the other Financing
Agreements constitute legal, valid and binding obligations of Borrower
enforceable in accordance with their respective terms. Borrower does not have
any subsidiaries except as set forth on the Information Certificate.
8.2 Financial Statements; No Material Adverse Change. All financial
statements relating to Borrower which have been or may hereafter be delivered by
Borrower to Lender have been prepared in accordance with GAAP and fairly present
in all material respects the financial condition and the results of operations
of Borrower as at the dates and for the periods set forth therein. Except as
disclosed in any interim financial statements furnished by Borrower to Lender
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prior to the date of this Agreement, there has been no material adverse change
in the assets, liabilities, properties and condition, financial or otherwise, of
Borrower, since the date of the most recent audited financial statements
furnished by Borrower to Lender prior to the date of this Agreement.
8.3 Chief Executive Office; Collateral Locations. The chief executive
office of Borrower and Borrower's Records concerning Accounts are located only
at the address set forth below and its only other places of business and the
only other locations of Collateral, if any, are the addresses set forth in the
Information Certificate, subject to the right of Borrower to establish new
locations in accordance with Section 9.2 below. The Information Certificate
correctly identifies any of such locations that are not owned by Borrower and
sets forth the owners and/or operators thereof.
8.4 Priority of Liens; Title to Properties. The security interests and
liens granted to Lender under this Agreement and the other Financing Agreements
constitute valid and perfected first priority liens and security interests in
and upon the Collateral subject only to the liens indicated on Schedule 8.4
hereto and the other liens permitted under Section 9.8 hereof. Borrower has good
and marketable title to all of its properties and assets subject to no liens,
mortgages, pledges, security interests, encumbrances or charges of any kind,
except those granted to Lender and such others as are specifically listed on
Schedule 8.4 hereto or permitted under Section 9.8 hereof.
8.5 Tax Returns. Borrower has filed, or caused to be filed, in a timely
manner all tax returns, reports and declarations which are required to be filed
by it (without requests for extension except as previously disclosed in writing
to Lender). All information in such tax returns, reports and declarations is
complete and accurate in all material respects. Borrower has paid or caused to
be paid all taxes due and payable or claimed due and payable in any assessment
received by it, except taxes the validity of which are being contested in good
faith by appropriate proceedings diligently pursued and available to Borrower
and with respect to which adequate reserves have been set aside on its books.
Adequate provision has been made for the payment of all accrued and unpaid
Federal, State, county, local, foreign and other taxes whether or not yet due
and payable and whether or not disputed.
8.6 Litigation. Except as set forth on the Information Certificate,
there is no present investigation by any governmental agency pending, or to the
best of Borrower's knowledge threatened, against or affecting Borrower, its
assets or business and there is no action, suit, proceeding or claim by any
Person pending, or to the best of Borrower's knowledge threatened, against
Borrower or its assets or goodwill, or against or affecting any transactions
contemplated by this Agreement, which if adversely determined against Borrower
would result in any material adverse change in the assets, business or prospects
of Borrower or would impair the ability of Borrower to perform its obligations
hereunder or under any of the other Financing Agreements to which it is a party
or of Lender to enforce any Obligations or realize upon any Collateral.
8.7 Compliance with Other Agreements and Applicable Laws. Borrower is
not in default in any material respect under, or in violation in any material
respect of any of the terms of, any material agreement, contract, instrument,
lease or other commitment to which it is a party or by which it or any of its
assets are bound and Borrower is in compliance in all material
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respects with all applicable provisions of laws, rules, regulations, licenses,
permits, approvals and orders of any foreign, Federal, State or local
governmental authority.
8.8 Environmental Compliance.
(a) Except as set forth on Schedule 8.8 hereto, Borrower has not
generated, used, stored, treated, transported, manufactured, handled, produced
or disposed of any Hazardous Materials, on or off its premises (whether or not
owned by it) in any manner which at any time violates any applicable
Environmental Law or any license, permit, certificate, approval or similar
authorization thereunder which would have a material adverse effect on Borrower
or its business, operations or assets and the operations of Borrower comply in
all material respects with all Environmental Laws applicable thereto and all
licenses, permits, certificates, approvals and similar authorizations
thereunder.
(b) Except as set forth on Schedule 8.8 hereto, Borrower has
received no notice of any past or pending investigation, proceeding, complaint,
order, directive, claim, citation or notice by any governmental authority or any
other person nor to the best of Borrower's knowledge is any threatened, with
respect to any non-compliance with or violation of the requirements of any
Environmental Law by Borrower or the release, spill or discharge, threatened or
actual, of any Hazardous Material or the generation, use, storage, treatment,
transportation, manufacture, handling, production or disposal of any Hazardous
Materials or any other environmental, health or safety matter, which affects
Borrower or its business, operations or assets or any properties at which
Borrower has transported, stored or disposed of any Hazardous Materials.
(c) To the best of Borrower's knowledge, Borrower has no
material liability (contingent or otherwise) in connection with a release, spill
or discharge, threatened or actual, of any Hazardous Materials or the
generation, use, storage, treatment, transportation, manufacture, handling,
production or disposal of any Hazardous Materials.
(d) Borrower has all licenses, permits, certificates, approvals
or similar authorizations required to be obtained or filed in connection with
the operations of Borrower under any Environmental Law and all of such licenses,
permits, certificates, approvals or similar authorizations are valid and in full
force and effect.
8.9 Acquisition of Purchased Stock.
(a) Prior to or as of the date hereof, the Purchase Agreements
and the transactions contemplated thereunder have been duly executed, delivered
and performed in accordance with their terms by the respective parties thereto
in all respects, including the fulfillment (not merely the waiver, except as may
be disclosed to Lender and consented to in writing by Lender) of all conditions
precedent set forth therein and giving effect to the terms of the Purchase
Agreements and the assignments to be executed and delivered by Seller (or any of
its affiliates or subsidiaries) thereunder, Borrower has acquired and has good
and marketable title to the Purchased Stock, free and clear of all claims,
liens, pledges and encumbrances of any kind.
(b) All actions and proceedings, required by the Purchase
Agreements, applicable law or regulation (including, but not limited to,
compliance with the Hart-Scott-
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Rodino Anti-Trust Improvements Act of 1976, as amended) have been taken and the
transactions required thereunder have been or contemporaneously herewith will be
duly and validly taken and consummated.
(c) No court of competent jurisdiction has issued any
injunction, restraining order or other order which prohibits consummation of the
transactions described in the Purchase Agreements and no governmental or other
action or proceeding has been threatened or commenced, seeking any injunction,
restraining order or other order which seeks to void or otherwise modify the
transactions described in the Purchase Agreements.
(d) The Holding Subsidiaries do not own or hold any assets other
than the capital stock of the Operating Subsidiaries.
(e) Borrower has delivered, or caused to be delivered, to
Lender, true, correct and complete copies of the Purchase Agreements.
8.10 Purchased Assets. All of the Purchased Assets are owned by the
Operating Subsidiaries or the Holding Subsidiaries. The Purchased Assets
constitute all of the assets necessary and used to conduct to the Business in
all material respects as conducted on the date of this Agreement, other than
assets retained by Seller and used to provide support services to Borrower as
set forth in the Transition Services Agreement dated as of August 10, 1998
between Seller and Borrower. The Operating Subsidiaries have good and marketable
title to all of the Purchase Assets, free and clear of all liens, claims,
pledges and encumbrances of any kind, except as permitted under this Agreement.
8.11 Capitalization.
(a) As of the date of hereof, at least fifty-one percent (51%)
of the issued and outstanding shares of voting stock of WEI (excluding
unexercised options and warrants) as of the date hereof are directly and
beneficially owned and held by Cerberus and/or its affiliates, participants and
accounts for which Cerberus is the investment manager with sole investment
discretion and all of such shares have been duly authorized and are fully paid
and non-assessable, free and clear of all claims, liens, pledges and
encumbrances of any kind, except as disclosed in writing to Lender.
(b) The Purchased Stock constitutes all the authorized, issued
and outstanding shares of capital stock of each of the Holding Subsidiaries. The
Holdings Subsidiaries own all of the authorized, issued and outstanding shares
of capital stock of each of the Operating Subsidiaries. All of the shares of the
Purchased Stock and the shares of capital stock of the Operating Subsidiaries
have been duly authorized and validly issued and are fully paid and
nonassessable and were not issued in violation of any pre-emptive rights. There
are no options, warrants or rights of conversion or other rights, agreements,
arrangements or commitments relating to the capital stock of any of the Holding
Subsidiaries or the Operating Subsidiaries obligating such person to issue or
sell any of it shares of capital stock. There are no voting trusts, stockholder
agreements, proxies or other agreements in effect with respect to the voting or
transfer of the shares of Purchased stock or the shares of Stock of the
Operating Subsidiaries.
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(c) Borrower is solvent and will continue to be solvent after
the creation of the Obligations, the security interests of Lender and the other
transactions contemplated hereunder, is able to pay its debts as they mature and
has (and has reason to believe it will continue to have) sufficient capital (and
not unreasonably small capital) to carry on its business and all businesses in
which it is about to engage. The assets and properties of Borrower at a fair
valuation and at their present fair salable value are, and will be, greater than
the Indebtedness of Borrower, and including subordinated and contingent
liabilities computed at the amount which, to the best of Borrower's knowledge,
represents an amount which can reasonably be expected to become an actual or
matured liability.
8.12 Employee Benefits.
(a) Borrower has not engaged in any transaction in connection
with which Borrower or any of its ERISA Affiliates could be subject to either a
civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by
Section 4975 of the Code, including any accumulated funding deficiency described
in Section 8.12(c) hereof and any deficiency with respect to vested accrued
benefits described in Section 8.12(d) hereof
(b) No liability to the Pension Benefit Guaranty Corporation has
been or is expected by Borrower to be incurred with respect to any employee
pension benefit plan of Borrower or any of its ERISA Affiliates. There has been
no reportable event (within the meaning of Section 4043(b) of ERISA) or any
other event or condition with respect to any employee pension benefit plan of
Borrower or any of its ERISA Affiliates which presents a risk of termination of
any such plan by the Pension Benefit Guaranty Corporation.
(c) Full payment has been made of all amounts which Borrower or
any of its ERISA Affiliates is required under Section 302 of ERISA and Section
412 of the Code to have paid under the terms of each employee pension benefit
plan as contributions to such plan as of the last day of the most recent fiscal
year of such plan ended prior to the date hereof, and no accumulated funding
deficiency (as defined in Section 302 of ERISA and Section 412 of the Code),
whether or not waived, exists with respect to any employee pension benefit plan,
including any penalty or tax described in Section 8.12(a) hereof and any
deficiency with respect to vested accrued benefits described in Section 8.12(d)
hereof.
(d) The current value of all vested accrued benefits under all
employee pension benefit plans maintained by Borrower that are subject to Title
IV of ERISA does not exceed the current value of the assets of such plans
allocable to such vested accrued benefits, including any penalty or tax
described in Section 8.12(a) hereof and any accumulated funding deficiency
described in Section 8.12(c) hereof The terms "current value" and "accrued
benefit" have the meanings specified in ERISA.
(e) Neither Borrower nor any of its ERISA Affiliates is or has
ever been obligated to contribute to any "multiemployer plan" (as such term is
defined in Section 4001(a)(3) of ERISA) that is subject to Title IV of ERISA.
8.13 Accuracy and Completeness of Information. All information furnished
by or on behalf of Borrower in writing to Lender in connection with this
Agreement or any of the other Financing Agreements or any transaction
contemplated hereby or thereby, including, without
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limitation, all information on the Information Certificate is true and correct
in all material respects on the date as of which such information is dated or
certified and does not omit any material fact necessary in order to make such
information not misleading. No event or circumstance has occurred which has had
or could reasonably be expected to have a material adverse affect on the
business, assets or prospects of Borrower, which has not been fully and
accurately disclosed to Lender in writing.
8.14 Survival of Warranties; Cumulative. All representations and
warranties contained in this Agreement or any of the other Financing Agreements
shall survive the execution and delivery of this Agreement and shall be deemed
to have been made again to Lender on the date of each additional borrowing or
other credit accommodation hereunder and shall be conclusively presumed to have
been relied on by Lender regardless of any investigation made or information
possessed by Lender. The representations and warranties set forth herein shall
be cumulative and in addition to any other representations or warranties which
Borrower shall now or hereafter give, or cause to be given, to Lender.
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS
9.1 Maintenance of Existence. Borrower shall at all times preserve,
renew and keep in full force and effect its corporate existence and rights and
franchises with respect thereto and maintain in full force and effect all
permits, licenses, trademarks, trade names, approvals, authorizations, leases
and contracts necessary to carry on the business as presently or proposed to be
conducted, other than licenses, trademarks and trade names licensed to Borrower
pursuant to the Transition License Agreement dated as of October 26, 1998
between Seller and Borrower. Borrower shall give Lender thirty (30) days prior
written notice of any proposed change in its corporate name which notice shall
set forth the new name and Borrower shall deliver to Lender a copy of the
amendment to the Certificate of Incorporation or Articles of Incorporation, as
the case may be, of Borrower providing for the name change certified by the
Secretary of State of the jurisdiction of incorporation of Borrower as soon as
it is available.
9.2 New Collateral Locations. Borrower may open any new location within
the continental United States provided Borrower gives Lender thirty (30) days
prior written notice of the intended opening of any such new location and
delivers to Lender such certified UCC searches, UCC-1 financing statements and
other documents as Lender may reasonably request in order to establish and
evidence Lender's perfected first priority security interest in any Collateral
at such location.
9.3 Compliance with Laws, Regulations, Etc.
(a) Borrower shall, at all times, comply in all material
respects with all laws, rules, regulations, licenses, permits, approvals and
orders applicable to it and duly observe all requirements of any Federal, State
or local governmental authority, including, without limitation, the Employee
Retirement Income Security Act of 1974, as amended, the Occupational Safety and
Hazard Act of 1970, as amended, the Fair Labor Standards Act of 1938, as
amended, and all statutes, rules, regulations, orders, permits and stipulations
relating to environmental pollution and employee health and safety, including,
without limitation, all of the Environmental Laws.
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(b) Borrower shall take prompt and appropriate action to respond
to any noncompliance with any of the Environmental Laws and shall report to
Lender on such response.
(c) Borrower shall give both oral and written notice to Lender
immediately upon Borrower's receipt of any notice of, or Borrower's otherwise
obtaining knowledge of, (i) the occurrence of any event involving the release,
spill or discharge, threatened or actual, of any Hazardous Material or (ii) any
investigation, proceeding, complaint, order, directive, claim, citation or
notice with respect to: (A) any non-compliance with or violation of any
Environmental Law by Borrower or (B) the release, spill or discharge, threatened
or actual, of any Hazardous Material or (C) the generation, use, storage,
treatment, transportation, manufacture, handling, production or disposal of any
Hazardous Materials or (D) any other environmental, health or safety matter,
which affects Borrower or its business, operations or assets or any properties
at which Borrower transported, stored or disposed of any Hazardous Materials.
(d) Borrower shall indemnify and hold harmless Lender, its
directors, officers, employees, agents, invitees, representatives, successors
and assigns, from and against any and all losses, claims, damages, liabilities,
costs, and expenses (including reasonable attorneys' fees and legal expenses)
directly or indirectly arising out of or attributable to the use, generation,
manufacture, reproduction, storage, release, threatened release, spill,
discharge, disposal or presence of a Hazardous Material (including, without
limitation, the costs of any required or necessary repair, cleanup or other
remedial work), with respect to any property of Borrower and the preparation and
implementation of any closure, remedial or other required plans in connection
with such property. All representations, warranties, covenants and
indemnifications in this Section 9.3 shall survive the payment of the
Obligations and the termination or nonrenewal of this Agreement.
9.4 Payment of Taxes and Claims, Borrower shall duly pay and discharge
all taxes, assessments, contributions and governmental charges upon or against
it or its properties or assets, except for taxes the validity of which are being
contested in good faith by appropriate proceedings diligently pursued and
available to Borrower and with respect to which adequate reserves have been set
aside on its books. Borrower shall be liable for any tax or penalties imposed on
Lender as a result of the financing arrangements provided for herein and
Borrower agrees to indemnify and hold Lender harmless with respect to the
foregoing, and to repay to Lender on demand the amount thereof, and until paid
by Borrower such amount shall be added and deemed part of the Loans, provided,
that, nothing contained herein shall be construed to require Borrower to pay any
income or franchise taxes attributable to the income of Lender from any amounts
charged or paid hereunder to Lender. The foregoing indemnity shall survive the
payment of the Obligations and the termination or non-renewal of this Agreement.
9.5 Insurance. Borrower shall, at all times, maintain with financially
sound and reputable insurers insurance with respect to the Collateral against
loss or damage and all other insurance of the kinds and in the amounts
customarily insured against or carried by corporations of established reputation
engaged in the same or similar businesses and similarly situated. Said policies
of insurance shall be satisfactory to Lender as to form, amount and insurer.
Borrower shall furnish certificates, policies or endorsements to Lender as
Lender shall require as proof of such insurance, and, if Borrower fails to do
so, Lender is authorized, but not required, to obtain
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such insurance at the expense of Borrower. All policies shall provide for at
least thirty (30) days prior written notice to Lender of any cancellation or
reduction of coverage and that Lender may act as attorney for Borrower in
obtaining, and at any time an Event of Default exists or has occurred and is
continuing, adjusting, settling, amending and canceling such insurance. Borrower
shall cause Lender to be named as a loss payee and an additional insured (but
without any liability for any premiums) under such insurance policies and
Borrower shall obtain non-contributory lender's loss payable endorsements to all
insurance policies in form and substance satisfactory to Lender. Such lender's
loss payable endorsements shall specify that the proceeds of such insurance
shall be payable to Lender as its interests may appear and further specify that
Lender shall be paid regardless of any act or omission by Borrower or any of its
affiliates. At its option, Lender may apply any insurance proceeds received by
Lender at any time to the cost of repairs or replacement of Collateral and/or to
payment of the Obligations, whether or not then due, in any order and in such
manner as Lender may determine or hold such proceeds as cash collateral for the
Obligations.
9.6 Financial Statements and Other Information.
(a) Borrower shall keep proper books and records in which true
and complete entries shall be made of all dealings or transactions of or in
relation to the Collateral and the business of Borrower and its subsidiaries (if
any) in accordance with GAAP and Borrower shall furnish or cause to be
furnished to Lender: (i) within thirty (30) days after the end of each fiscal
month, monthly unaudited consolidated financial statements, and, if Borrower has
any subsidiaries, unaudited consolidating financial statements (including in
each case balance sheets, statements of income and loss and statements of
shareholders' equity), all in reasonable detail, fairly presenting the financial
position and the results of the operations of Borrower and its subsidiaries as
of the end of and through such fiscal month, (ii) within forty-five (45) days
after the end of each fiscal quarter, a store-by-store profitability report for
each of Borrower's retail locations, and (iii) simultaneously with the delivery
of the same to the Securities and Exchange Commission (or, if Borrower is not
then required to deliver such financial statements to the Securities and
Exchange Commission, within ninety (90) days after the end of each fiscal year),
audited consolidated financial statements and, if Borrower has any subsidiaries,
audited consolidating financial statements of Borrower and its subsidiaries
(including in each case balance sheets, statements of income and loss,
statements of cash flow and statements of shareholders' equity), and the
accompanying notes thereto, all in reasonable detail, fairly presenting the
financial position and the results of the operations of Borrower and its
subsidiaries as of the end of and for such fiscal year, together with the
opinion of independent certified public accountants, which accountants shall be
an independent accounting firm selected by Borrower and reasonably acceptable to
Lender, that such financial statements have been prepared in accordance with
GAAP, and present fairly the results of operations and financial condition of
Borrower and its subsidiaries as of the end of and for the fiscal year then
ended.
(b) Borrower shall promptly notify Lender in writing of the
details of (i) any loss not reserved for by Borrower or claim relating to the
Collateral having a Value of $50,000 or more or any other property which is
security for the Obligations or which would result in any material adverse
change in Borrower's business, properties, assets, goodwill or condition,
financial or otherwise and (ii) the occurrence of any Event of Default or event
which, with the passage of time or giving of notice or both, would constitute an
Event of Default.
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(c) Borrower shall promptly after the sending or filing thereof
furnish or cause to be furnished to Lender copies of all financial reports which
Borrower sends to its stockholders generally and copies of all reports and
registration statements which Borrower files with the Securities and Exchange
Commission, any national securities exchange or the National Association of
Securities Dealers, Inc.
(d) Borrower shall furnish or cause to be furnished to Lender
such budgets, forecasts, projections and other information in respect of the
Collateral and the business of Borrower, as Lender may, from time to time,
reasonably request. Lender is hereby authorized to deliver a copy of any
financial statement or any other information relating to the business of
Borrower to any court or other government agency or to any participant or
assignee or prospective participant or assignee. Borrower hereby irrevocably
authorizes and directs all accountants or auditors to deliver to Lender, at
Borrower's expense, copies of the financial statements of Borrower and any
reports or management letters prepared by such accountants or auditors on behalf
of Borrower and to disclose to Lender such information as they may have
regarding the business of Borrower. Any documents, schedules, invoices or other
papers delivered to Lender may be destroyed or otherwise disposed of by Lender
one (1) year after the same are delivered to Lender, except as otherwise
designated by Borrower to Lender in writing.
(e) Borrower shall deliver, or cause to be delivered, to Lender,
within one hundred twenty (120) days from the date hereof, opening balance
sheets prepared by independent certified public accountants, which accountants
shall be a nationally recognized independent accounting firm selected by
Borrower and reasonably acceptable to Lender, and certified by such accountants
to the effect that such opening balance sheets have been prepared in accordance
with GAAP and present fairly the financial condition of Borrower as of such
date.
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. Borrower
shall not, directly or indirectly (other than as permitted by Section 9.10),
(a) merge into or with or consolidate with any other Person or permit any other
Person to merge into or with or a consolidate with it, or (b) sell, assign,
lease, transfer, abandon or otherwise dispose of any stock or indebtedness to
any other Person or any of its assets to any other Person (except for (i) sales
or returns of Inventory in the ordinary course of business, (ii) the sale or
other disposition of Equipment in the event of a store closure, (iii) the
disposition of worn-out or obsolete Equipment or Equipment no longer used in the
business of Borrower, (iv) the transfer of Excluded Assets, as defined in the
Purchase Agreements) to Seller in accordance with the requirements of the
Purchase Agreements, and (v) transfers of assets and liabilities between or
among the entities comprising Borrower in a transaction with a reasonable
business purpose, or (c) form or acquire any subsidiaries, provided, however,
that Borrower may form subsidiaries so long as (i) any such subsidiary provides
to Lender an unlimited continuing guaranty in form and substance satisfactory to
Lender, (ii) Lender obtains a first-priority perfected security interest in all
assets of any such subsidiary which are of the type included within the
definition of "Collateral" hereunder in order to secure subsidiary's obligations
under such guaranty and (iii) the creation of any such subsidiary and the
transfer by Borrower of any assets of Borrower to such subsidiary would not
cause a material adverse change in the business, assets or prospects of
Borrower; or (d) wind up, liquidate or dissolve or (e) agree to do any of the
foregoing or (f) following an Event of Default, return any Inventory to vendors.
Any sale, assignment, transfer, abandonment or other disposition permitted by
this Section 9.7 (other than transfers among the entities
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comprising the Borrower) shall be free and clear of any lien favor of Lender
pursuant to this Agreement; provided that the Borrower shall concurrently
deposit the proceeds of any such disposition, if any, into the Blocked Account
in accordance with Section 6.3(a).
9.8 Encumbrances. Borrower shall not create, incur, assume or suffer to
exist any security interest, mortgage, pledge, lien, charge or other encumbrance
of any nature whatsoever on any of the Collateral, except: (1) the liens and
security interests of Lender; (2) liens junior in priority to the liens of
Lender hereunder securing the payment of taxes, either not yet overdue or the
validity of which are being contested in good faith by appropriate proceedings
diligently pursued and available to Borrower and with respect to which adequate
reserves have been set aside on its books; (3) security and other deposits
(including customs and revenue deposits) in the ordinary course of business; (4)
non-consensual statutory liens (other than liens securing the payment of taxes)
arising in the ordinary course of Borrower's business; (5) liens in favor of
credit card processors with respect to Credit Card Receivables processed by
them; (6) the liens and security interests of the trade creditors (the "Trade
Creditors"), which liens and security interests are, in all respects, subject
and subordinate in priority to the liens and security interests of Lender who
are signatories to that certain Intercreditor Agreement and Subordination
Agreement among Lender, said Trade Creditors and United States Trust Company of
New York, as Collateral Agent for said Trade Creditors; and (7) the security
interests and liens set forth on Schedule 8.4 hereto.
9.9 Indebtedness. Borrower shall not incur, create, assume, become or be
liable in any manner with respect to, or permit to exist, any Indebtedness,
except:
(a) the Obligations;
(b) trade obligations and normal accruals in the ordinary course
of business not yet due and payable (including, without limitation, Indebtedness
in respect of liens permitted under Section 9.8), or with respect to which
Borrower is contesting in good faith the amount or validity thereof by
appropriate proceedings diligently pursued and available to Borrower and with
respect to which adequate reserves have been set aside on its books;
(c) purchase money indebtedness (including capital leases) to
the extent not incurred or secured by liens (including capital leases) in
violation of any other provision of this Agreement;
(d) unsecured indebtedness not to exceed an aggregate of Ten
Million Dollars ($10,000,000), the terms of which are satisfactory to Lender,
and which is fully subordinated to the Obligations pursuant to a subordination
agreement, in form and substance satisfactory to Lender; and
(e) intercompany indebtedness between any of the entities
comprising Borrower, incurred in a transaction with a reasonable business
purpose; and
(f) obligations or indebtedness set forth on the Information
Certificate, loan to Antonio C. Alvarez II and A&M Investment Associates #3, LLC
provided for in that certain Management Services Agreement dated as of January
31, 1997 by and among Borrower, Alvarez & Marsal, Inc., A&M Investment
Associates #3, LLC, Antonio C. Alvarez II and Cerberus in the
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aggregate amount of approximately $5,340,000; provided, that, except with
respect to capital leases (which Borrower may modify provided no Event of
Default has occurred), Borrower shall not, directly or indirectly, (i) amend,
modify, alter or change the terms of such indebtedness or any agreement,
document or instrument related thereto as in effect on the date hereof, or (ii)
except as otherwise permitted under this Agreement, redeem, retire, defease,
purchase or otherwise acquire such indebtedness, or set aside or otherwise
deposit or invest any sums for such purposes, and (iii) Borrower shall furnish
to Lender all notices or demands in connection with such indebtedness either
received by Borrower or on its behalf, promptly after the receipt thereof or
sent by Borrower or on its behalf, concurrently with the sending thereof, as the
case may be.
9.10 Loans, Investments, Guarantees; Dividends and Redemptions. Borrower
shall not (i) directly or indirectly, make any loans or advance money or
property to any person, or invest in (by capital contribution, dividend or
otherwise) or purchase or repurchase the stock or indebtedness or all or a
substantial part of the assets or property of any person, or guarantee, assume,
endorse, or otherwise become responsible for (directly or indirectly) the
indebtedness, performance, obligations or dividends of any Person or agree to do
any of the foregoing (collectively, "Investments"); or (ii) directly or
indirectly, declare or pay any dividends on account of any shares of any class
of capital stock of Borrower now or hereafter outstanding, or set aside or
otherwise deposit or invest any sums for such purpose, or redeem, retire,
defease, purchase or otherwise acquire any shares of any class of capital stock
(or set aside or otherwise deposit or invest any sums for such purpose) for any
consideration other than common stock or apply or set apart any sum, or make any
other distribution (by reduction of capital or otherwise) in respect of any such
shares or agree to do any of the foregoing (collectively, "Distributions"),
except: (a) the endorsement of instruments for collection or deposit in the
ordinary course of business; (b) Investments in: (i) short-term direct
obligations of the United States Government, (ii) negotiable certificates of
deposit issued by any bank satisfactory to Lender, payable to the order of the
Borrower, and (iii) commercial paper rated A1 or P1; (c) the guarantees set
forth in the Information Certificate; (d) the loan to Antonio C. Alvarez II and
A&M Investment Associates permitted by Section 9.9(f); (e) guarantees to
landlords of the Operating Subsidiaries by WEI; (f) Distributions such that,
after giving effect to such Distribution, Borrower has Excess Availability of at
least Twenty Million Dollars ($20,000,000) under the Tranche A Line, provided
that, at the time of such Distribution there is no Event of Default and no event
that with notice or passage of time or both would be an Event of Default; and
(g) intercompany loans and capital contributions between any of the entities
comprising Borrower made in connection with transactions that have a reasonable
business purpose.
9.11 Transactions with Affiliates. Except for intercompany loans,
capital contributions and transfers of assets and liabilities between or among
the entities comprising Borrower as permitted by Sections 9.7(a)(v), 9.9(e) and
9.10(g), Borrower shall not enter into any transaction for the purchase, sale
or exchange of property or the rendering of any service to or by any affiliate,
except in the ordinary course of and pursuant to the reasonable requirements of
Borrower's business and upon fair and reasonable terms no less favorable to the
Borrower than Borrower would obtain in a comparable arm's length transaction
with an unaffiliated person.
9.12 Compliance with ERISA. Borrower shall not with respect to any
"employee pension benefit plans" maintained by Borrower or any of its ERISA
Affiliates:
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(i) terminate any of such employee pension benefit plans so as to
incur any liability to the Pension Benefit Guaranty Corporation established
pursuant to ERISA, (ii) allow or suffer to exist any prohibited transaction
involving any of such employee pension benefit plans or any trust created
thereunder which would subject Borrower or such ERISA Affiliate to a tax or
penalty or other liability on prohibited transactions imposed under Section 4975
of the Code or ERISA, (iii) fail to pay to any such employee pension benefit
plan any contribution which it is obligated to pay under Section 302 of ERISA,
Section 412 of the Code or the terms of such plan, (iv) allow or suffer to exist
any accumulated funding deficiency, whether or not waived, with respect to any
such employee pension benefit plan, (v) allow or suffer to exist any occurrence
of a reportable event or any other event or condition which presents a material
risk of termination by the Pension Benefit Guaranty Corporation of any such
employee pension benefit plan that is a single employer plan, which termination
could result in any liability to the Pension Benefit Guaranty Corporation or
(vi) incur any withdrawal liability with respect to any multiemployer pension
plan.
As used in this Section 9.12, the term "employee pension benefit plans,"
"employee benefit plans", "accumulated funding deficiency" and "reportable
event" shall have the respective meanings assigned to them in ERISA, and the
term "prohibited transaction" shall have the meaning assigned to it in Section
4975 of the Code and Section 406 of ERISA.
9.13 Year 2000 compliance. Borrower agrees to perform all acts
reasonably necessary to ensure that: (a) Borrower and any business in which
Borrower holds a substantial interest; and (b) all customers, suppliers and
vendors that are material to Borrower's business, become Year 2000 Compliant in
a timely manner. Such acts shall include, without limitation, performing a
comprehensive review and assessment of all of Borrower's systems and adopting a
detailed plan, with itemized budget, for the remediation, monitoring and testing
of such systems. As used herein, "Year 2000 Compliant" shall mean, in regard to
any entity, that all software, hardware, firmware, equipment, goods or systems
utilized by or material to the business operations or financial condition of
such entity, will properly perform date sensitive functions before, during and
after the year 2000. Borrower shall, immediately upon request, provide to Lender
such certifications or other evidence of Borrower's compliance with the terms
hereof as Lender may from time to time require.
9.14 Adjusted Net Worth. Borrower shall, at all times, maintain Adjusted
Net Worth of not less than Seventy-Five Million Dollars ($75,000,000), computed
on a consolidated basis for all entities comprising the Borrower, provided, this
covenant shall not apply if no Event of Default has occurred and during the
period when Excess Availability equals or exceeds Fifteen Million Dollars
($15,000,000).
9.15 Costs and Expenses. Borrower shall pay to Lender on demand all
costs, expenses, filing fees and taxes paid or payable in connection with the
preparation, negotiation, execution, delivery, recording, administration,
collection, liquidation, enforcement and defense of the Obligations, Lender's
rights in the Collateral, this Agreement, the other Financing Agreements and all
other documents related hereto or thereto, including any amendments, supplements
or consents which may hereafter be contemplated (whether or not executed) or
entered into in respect hereof and thereof, including, but not limited to: (a)
all costs and expenses of filing or recording (including Uniform Commercial Code
financing statement filing taxes and fees,
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documentary taxes, intangibles taxes and mortgage recording taxes and fees,
applicable); (b) costs and expenses and fees for title insurance and other
insurance premiums, environmental audits, surveys, assessments, engineering
reports and inspections, appraisal fees and search fees; (c) costs and expenses
of remitting loan proceeds, collecting checks and other items of payment, and
establishing and maintaining the Blocked Accounts, together with Lender's
customary charges and fees with respect thereto; (d) charges, fees or expenses
charged by any bank or issuer in connection with the Letter of Credit
Accommodations; (e) costs and expenses of preserving and protecting the
Collateral; (f) costs and expenses paid or incurred in connection with obtaining
payment of the Obligations, enforcing the security interests and liens of
Lender, selling or otherwise realizing upon the Collateral, and otherwise
enforcing the provisions of this Agreement and the other Financing Agreements or
defending any claims made or threatened against Lender arising out of the
transactions contemplated hereby and thereby (including, without limitation,
preparations for and consultations concerning any such matters); (g) all
out-of-pocket expenses and costs incurred by Lender's examiners in the conduct
of their periodic field examinations of the Collateral and Borrower's
operations, plus a per diem charge at the rate of $600 per person per day for
Lender's examiners in the field and office; (h) the fees and disbursements of
counsel (including legal assistants) to Lender in connection with any of the
foregoing; and (i) fees and disbursements of counsel (including legal
assistants) to any Participant in the Tranche B Line in connection with the
foregoing and the preparation of the Participation Agreement between Lender and
the Tranche B Line Participant.
9.16 Further Assurances. At the request of Lender at any time and from
time to time, Borrower shall, at its expense, duly execute and deliver, or cause
to be duly executed and delivered, such further agreements, documents and
instruments, and do or cause to be done such further acts as may be necessary or
proper to evidence, perfect, maintain and enforce the security interests and the
priority thereof in the Collateral and to otherwise effectuate the provisions or
purposes of this Agreement or any of the other Financing Agreements. Without
limiting the generality of the foregoing, Borrower shall notify Lender of the
existence and amount of any tax refund claim included in the Collateral and
shall make such additional filings and take such additional actions as Lender
may request in order to insure further the perfection and first priority of
Lenders liens on and security interest in such claim. Lender may at any time and
from time to time reasonably request a certificate from an officer of Borrower
representing on behalf of the Borrower that all conditions precedent to the
making of Loans and providing Letter of Credit Accommodations contained herein
are satisfied. In the event of such request by Lender, Lender may, at its
option, cease to make any further Loans or provide any further Letter of Credit
Accommodations until Lender has received such certificate and, in addition,
Lender has determined that such conditions are satisfied. Where permitted by
law, Borrower hereby authorizes Lender to execute and file one or more UCC
financing statements signed only by Lender.
9.17 Additional Covenant Pertaining to the Tranche B Loans. So long as
the Tranche B Line remains available, Borrower shall maintain a Tranche B Debt
Service Coverage Ratio of at least 1.3:1.0, measured as of the end of each
fiscal quarter, computed on a consolidated basis for all entities comprising the
Borrower.
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SECTION 10. EVENTS OF DEFAULT AND REMEDIES
10.1 Events of Default. The occurrence or existence of any one or more
of the following events are referred to herein individually as an "Event of
Default", and collectively as "Events of Default":
(a) Borrower fails to pay within three (3) Business Days of the
due date any of the Obligations or falls to perform any of the other terms,
covenants, conditions or provisions contained in this Agreement, other than the
requirements contained in Section 9.17, within three (3) Business Days after the
date such performance is required pursuant to the terms of this Agreement,
unless such non-performance relates to a non-monetary covenant which has not
been breached during the immediately preceding six (6) months, which covenant is
still capable of being performed by Borrower, in which case Borrower shall have
ten (10) Business Days in which to cure;
(b) any Obligor revokes, terminates or fails to perform any of
the terms, covenants, conditions or provisions of any guarantee, endorsement or
other agreement of such party in favor of Lender;
(c) any Obligor (being a natural person or a general partner of
an Obligor which is a partnership) dies or Borrower or any Obligor, which is a
partnership, limited liability company, or corporation, dissolves or suspends or
discontinues doing business;
(d) any representation, warranty or statement of fact made by
Borrower to Lender in this Agreement, the other Financing Agreements or any
other agreement, schedule, confirmatory assignment or otherwise shall when made
or deemed made be false or misleading in any material respect;
(e) any judgment for the payment of money is rendered against
Borrower in excess of One Million Dollars ($1,000,000) in any one case or in
excess of Three Million Dollars ($3,000,000) in the aggregate and shall remain
undischarged, unpaid or unvacated for a period in excess of sixty (60) days or
execution shall at any time not be effectively stayed, or any material judgment
other than for the payment of money, or injunction, attachment, garnishment or
execution is rendered against Borrower or any of its assets;
(f) Borrower or any Obligor becomes insolvent (however defined
or evidenced), makes an assignment for the benefit of creditors or makes or
sends notice of a bulk transfer;
(g) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at law or
in equity) is filed against Borrower or any Obligor or for all or any part of
its properties and such petition or application is not dismissed within thirty
(30) days after the date of its filing or Borrower or any Obligor shall file any
answer admitting or not contesting such petition or application or indicates its
consent to, acquiescence in or approval of, any such action or proceeding or the
relief requested is granted sooner;
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(h) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at a law
or equity) is filed by Borrower or any Obligor or for all or any part of its
property; or
(i) any default by Borrower or any Obligor under any agreement,
document or instrument relating to any indebtedness for borrowed money owing to
any person other than Lender, or any capitalized lease obligations, contingent
indebtedness in connection with any guarantee, letter of credit, indemnity or
similar type of instrument in favor of any person other than Lender, in any case
in an amount in excess of Five Hundred Thousand Dollars ($500,000), which
default continues for more than the applicable cure period, if any, with respect
thereto, or any default by Borrower or any Obligor under any material contract,
lease, license or other obligation to any person other than Lender, which
default continues for more than the applicable cure period, if any, with respect
thereto, except, in either case, excluding defaults as to which Borrower has
contested in good faith and as to which Lender, in its sole discretion, has
established adequate Availability Reserves;
(j) a change in the control of Borrower as follows: (i)
Cerberus, its partners, affiliates and accounts for which it is the investment
manager with sole investment discretion shall cease to hold at least 35% of the
voting stock of the Borrower; or (ii) Cerberus, its partners, affiliates and
accounts for which it is the investment manager with sole investment discretion
shall hold less than 45% of the voting stock of the Borrower and another Person
shall acquire ownership of at least 30% or more of the voting stock of the
Borrower, in each case excluding unexercised options and warrants;
(k) the indictment or threatened indictment of Borrower or any
Obligor under any criminal statute, or the commencement or threatened
commencement of criminal or civil proceedings against Borrower or any Obligor,
pursuant to which statute or proceedings the penalties or remedies sought or
available include forfeiture of any of the property of Borrower or such Obligor;
(1) there shall be a material adverse change in the business,
assets or prospects of Borrower after the date hereof;
(m) there shall be an event of default under any of the other
Financing Agreements.
An Event of Default shall exist or continue or be continuing
until such Event of Default is waived in accordance with Section 11.3.
10.2 Remedies.
(a) At any time an Event of Default exists or has occurred and
is continuing, Lender shall have all rights and remedies provided in this
Agreement, the other Financing Agreements, the Uniform Commercial Code and other
applicable law, all of which rights and remedies may be exercised without notice
to or consent by Borrower or any Obligor, except as such notice or consent is
expressly provided for hereunder or required by applicable law. All
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rights, remedies and powers granted to Lender hereunder, under any of the other
Financing Agreements, the Uniform Commercial Code or other applicable law, are
cumulative, not exclusive and enforceable, in Lender's discretion,
alternatively, successively, or concurrently on any one or more occasions, and
shall include, without limitation, the right to apply to a court of equity for
an injunction to restrain a breach or threatened breach by Borrower of this
Agreement or any of the other Financing Agreements. Lender may, at any time or
times, proceed directly against Borrower or any Obligor to collect the
Obligations without prior recourse to the Collateral.
(b) Without limiting the foregoing, at any time an Event of
Default exists or has occurred and is continuing, Lender may, in its discretion
and without limitation, (i) accelerate the payment of all Obligations and demand
immediate payment thereof to Lender (provided, that, upon the occurrence of any
Event of Default described in Sections 10.1(g) and 10.1(h), all Obligations
shall automatically become immediately due and payable), (ii) with or without
judicial process or the aid or assistance of others, enter upon any premises on
or in which any of the Collateral may be located and take possession of the
Collateral or complete processing, manufacturing and repair of all or any
portion of the Collateral, (iii) require Borrower, at Borrower's expense, to
assemble and make available to Lender any part or all of the Collateral at any
place and time designated by Lender, (iv) collect, foreclose, receive,
appropriate, setoff and realize upon any and all Collateral, (v) remove any or
all of the Collateral from any premises on or in which the same may be located
for the purpose of effecting the sale, foreclosure or other disposition thereof
or for any other purpose, (vi) sell, lease, transfer, assign, deliver or
otherwise dispose of any and all Collateral (including, without limitation,
entering into contracts with respect thereto, public or private sales at any
exchange, broker's board, at any office of Lender or elsewhere) at such prices
or terms as Lender may deem reasonable, for cash, upon credit or for future
delivery, with the Lender having the right to purchase the whole or any part of
the Collateral at any such public sale, all of the foregoing being free from any
right or equity of redemption of Borrower, which right or equity of redemption
is hereby expressly waived and released by Borrower and/or (vii) terminate this
Agreement. If any of the Collateral is sold or leased by Lender upon credit
terms or for future delivery, the Obligations shall not be reduced as a result
thereof until payment therefor is finally collected by Lender. If notice of
disposition of Collateral is required by law, ten (10) days prior notice by
Lender to Borrower designating the time and place of any public sale or the time
after which any private sale or other intended disposition of Collateral is to
be made, shall be deemed to be reasonable notice thereof and Borrower waives any
other notice. In the event Lender institutes an action to recover any Collateral
or seeks recovery of any Collateral by way of prejudgment remedy, Borrower
waives the posting of any bond which might otherwise be required.
(c) Lender may apply the cash proceeds of Collateral actually
received by Lender from any sale, lease, foreclosure or other disposition of the
Collateral to payment of the Obligations, in whole or in part and in such order
as Lender may elect, whether or not then due. Borrower shall remain liable to
Lender for the payment of any deficiency with interest at the highest rate
provided for herein and all costs and expenses of collection or enforcement,
including attorneys' fees and legal expenses.
(d) Without limiting the foregoing, upon the occurrence of an
Event of Default or an event which with notice or passage of time or both would
constitute an Event of
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Default, Lender may, at its option, without notice, (i) cease making Loans or
arranging Letter of Credit Accommodations or reduce the lending formulas or
amounts of Loans and Letter of Credit Accommodations available to Borrower
and/or (ii) terminate any provision of this Agreement providing for any future
Loans or Letter of Credit Accommodations to be made by Lender to Borrower.
(e) Borrower hereby grants Lender a license to utilize any and
all of Borrower's trademarks, service marks, trade names, packaging, labeling,
logos and trade dress to the extent they are not Collateral (collectively, the
"Trademarks") following the occurrence and during the continuance of an Event of
Default for the limited purposes of completing production of, selling, disposing
or otherwise realizing upon the Collateral; provided, that such license shall
terminate upon such sale or disposition.
(f) At any time that Borrower has failed to comply with the
requirements of Section 9.17, Borrower shall not be entitled to make any further
borrowings under the Tranche B Line, and Lender shall not be obligated to make
any further advances of Tranche B Loans.
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW
11.1 Governing Law, Choice of Forum; Service of Process; Jury Trial
Waiver.
(a) The validity, interpretation and enforcement of this
Agreement and the other Financing Agreements and any dispute arising out of the
relationship between the parties hereto, whether in contract, tort, equity or
otherwise, shall be governed by the internal laws of the State of California
(without giving effect to principles of conflicts of law).
(b) Borrower and Lender irrevocably consent and submit to the
non-exclusive jurisdiction of the state courts of the County of Los Angeles,
State of California and of the United States District Court for the Central
District of California and waive any objection based on venue or forum non
conveniens with respect to any action instituted therein arising under this
Agreement or any of the other Financing Agreements or in any way connected with
or related or incidental to the dealings of the parties hereto in respect of
this Agreement or any of the other Financing Agreements or the transactions
related hereto or thereto, in each case whether now existing or hereafter
arising, and whether in contract, tort, equity or otherwise, and agree that any
dispute with respect to any such matters shall be heard only in the courts
described above (except that Lender shall have the right to bring any action or
proceeding against Borrower or its property in the courts of any other
jurisdiction which Lender deems necessary or appropriate in order to realize on
the Collateral or to otherwise enforce its rights against Borrower or its
property).
(c) Borrower hereby waives personal service of any and all
process upon it and consents that all such service of process may be made by
certified mail (return receipt requested) directed to its address set forth on
the signature pages hereof and service so made shall be deemed to be completed
five (5) days after the same shall have been so deposited in the U.S. mails, or,
at Lender's option, by service upon Borrower in any other manner provided under
the rules of any such courts.
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(d) BORROWER AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY
JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS
AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED
WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT
OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS
RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWER AND LENDER
EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT BORROWER OR
LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY
COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF
THEIR RIGHT TO TRIAL BY JURY.
(e) Lender shall not have any liability to Borrower (whether in
tort, contract, equity or otherwise) for losses suffered by Borrower in
connection with, arising out of, or in any way related to the transactions or
relationships contemplated by this Agreement, or any act, omission or event
occurring in connection herewith, unless it is determined by a final and
nonappealable judgment or court order binding on Lender, that the losses were
the result of acts or omissions constituting gross negligence or willful
misconduct.
11.2 Waiver of Notices. Borrower hereby expressly waives demand,
presentment, protest and notice of protest and notice of dishonor with respect
to any and all instruments and commercial paper, included in or evidencing any
of the Obligations or the Collateral, and any and all other demands and notices
of any kind or nature whatsoever with respect to the Obligations, the Collateral
and this Agreement, except such as are expressly provided for herein. No notice
to or demand on Borrower which Lender may elect to give shall entitle Borrower
to any other or further notice or demand in the same, similar or other
circumstances.
11.3 Amendments and Waivers. Neither this Agreement nor any provision
hereof shall be amended, modified, waived or discharged orally or by course of
conduct, but only by a written agreement signed by an authorized officer of
Lender. Lender shall not, by any act, delay, omission or otherwise be deemed to
have expressly or impliedly waived any of its rights, powers and/or remedies
unless such waiver shall be in writing and signed by an authorized officer of
Lender. Any such waiver shall be enforceable only to the extent specifically set
forth therein. A waiver by Lender of any right, power and/or remedy on any one
occasion shall not be construed as a bar to or waiver of any such right, power
and/or remedy which Lender would otherwise have on any future occasion, whether
similar in kind or otherwise.
11.4 Indemnification. Borrower shall indemnify and hold Lender, and its
directors, agents, employees and counsel, harmless from and against any and all
losses, claims, damages, liabilities, costs or expenses imposed on, incurred by
or asserted against any of them in connection with any litigation,
investigation, claim or proceeding commenced or threatened related to the
negotiation, preparation, execution, delivery, enforcement, performance or
administration of this Agreement, any other Financing Agreements, or any
undertaking or proceeding related to any of the transactions contemplated hereby
or any act, omission, event or
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transaction related or attendant thereto, including, without limitation, amounts
paid in settlement, court costs, and the fees and expenses of counsel. To the
extent that the undertaking to indemnify, pay and hold harmless set forth in
this Section may be unenforceable because it violates any law or public policy,
Borrower shall pay the maximum portion which it is permitted to pay under
applicable law to Lender in satisfaction of indemnified matters under this
Section. The foregoing indemnity shall survive the payment of the Obligations
and the termination or non-renewal of this Agreement.
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS
12.1 Term.
(a) This Agreement and the other Financing Agreements shall
become effective as of the date set forth on the first page hereof and shall
continue in full force and effect for a term ending on the date three (3) years
from the date hereof (the "Renewal Date"), and from year to year thereafter,
unless sooner terminated pursuant to the terms hereof. Lender or Borrower
(subject to Lender's right to extend the Renewal Date as provided above) may
terminate this Agreement and the other Financing Agreements effective on the
Renewal Date or on the anniversary of the Renewal Date in any year by giving to
the other party at least sixty (60) days prior written notice; provided, that,
this Agreement and all other Financing Agreements must be terminated
simultaneously. Upon the effective date of termination or non-renewal of the
Financing Agreements, Borrower shall pay to Lender, in full, all outstanding and
unpaid Obligations and shall furnish cash collateral to Lender in such amounts
as Lender reasonably determines are reasonably necessary to secure Lender from
loss (including attorneys' fees and legal expenses) arising out of any claims
then asserted by third parties in connection with any contingent Obligations,
including issued and outstanding Letter of Credit Accommodations and checks or
other payments provisionally credited to the Obligations and/or as to which
Lender has not yet received final and indefeasible payment. Such cash collateral
shall be remitted by wire transfer in Federal funds to such bank account of
Lender, as Lender may, in its discretion, designate in writing to Borrower for
such purpose. Interest shall be due until and including the next business day,
if the amounts so paid by Borrower to the bank account designated by Lender are
received in such bank account later than 10:30 a.m., California time.
(b) No termination of this Agreement or the other Financing
Agreements shall relieve or discharge Borrower of its respective duties,
obligations and covenants under this Agreement or the other Financing Agreements
until all Obligations have been fully and finally discharged and paid, and
Lender's continuing security interest in the Collateral and the rights and
remedies of Lender hereunder, under the other Financing Agreements and
applicable law, shall continue to secure Lender against all loss arising out of
any claims then asserted by Lender in connection with the Obligations until all
such claims have been fully and finally discharged and paid.
(c) Borrower may terminate this Agreement at any time prior to
the Renewal Date or the end of any renewal term upon thirty (30) days prior
written notice, if Borrower pays the early termination fee provided for herein.
If for any reason this Agreement is terminated prior to the end of the then
current term or a renewal term of this Agreement, in view of the impracticality
and extreme difficulty of ascertaining actual damages and by mutual agreement of
49
<PAGE> 56
the parties as to a reasonable calculation of Lender's lost profits as a result
thereof, Borrower agrees to pay to Lender, upon the effective date of such
termination, an early termination fee in the amount set forth below if such
termination is effective in the period indicated:
<TABLE>
<CAPTION>
Amount Period
------ ------
<S> <C>
(i) 2% of the maximum amount of the from the date of this Agreement to and
Tranche A Line including the day preceding the first
anniversary of this Agreement
(ii) 1% of the maximum amount of the from the first anniversary of this
Tranche A Line Agreement to and including the day
preceding the second anniversary of
this Agreement
(iii) 0.5% of the maximum amount of the from the second anniversary of this
Tranche A Line Agreement to and including the
Renewal Date, and if the Renewal Date
is extended as provided in Section 12.1 (a),
at any time during a renewal term, if any.
</TABLE>
Notwithstanding the above, provided there has occurred no Event of Default or
event that with notice or passage of time or both would become an Event of
Default:
(A) Borrower shall not be obligated to pay an early termination
fee if Borrower merges with or acquires substantially all of the capital stock
or the assets of an entity, pursuant to an arms-length, bona fide transaction
and Borrower prepays all the Obligations simultaneously with such merger or
acquisition, provided that (1) Borrower first seeks to obtain financing for such
merger or acquisition Lender, specifying the terms on which such additional
financing is sought and giving Lender sufficient time and information to
consider the financing, (2) Lender declines to provide (either directly or
through First Union National Bank or any affiliate of Lender or First Union
National Bank) such financing on the terms sought, and (3) Borrower obtains such
financing from another lender on terms no more advantageous to the new lender
than the terms offered to Lender; and if Borrower sells substantially all of
its assets or capital stock or is not the surviving entity in any such merger,
Borrower shall be obligated to pay an early termination fee equal to one-quarter
percent (1/4%) of the maximum amount of the Tranche A Line; and
(B) Borrower shall not be obligated to pay an early termination
fee if Lender, acting pursuant to Section 2.1(c), in the absence of an
appraisal (whether pursuant to Section 7.3(d) or otherwise) showing a decline in
Net Recovery Cost Percentage, reduces the percentages specified in the lending
formulas set forth in Section 2.1(a)(i) from the percentages established on the
basis of the last such appraisal, and Borrower, at any time during a period one
hundred twenty (120) days following the date of such action taken by Lender,
fully refinances the Obligations hereunder with another lender willing to
provide Borrower with Inventory financing
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<PAGE> 57
at lending formulas better than those in effect hereunder immediately after the
reduction and on other terms (other than interest rates, loan fees and financial
covenants), conditions and funding levels substantially similar to or better
than those provided by Lender, and Borrower fully repays the Obligations by the
end of such one hundred twenty (120) day period and terminates this Agreement
as provided in Section 12.1(a) hereof
Such early termination fee shall be presumed to be the amount of damages
sustained by Lender as a result of such early termination and Borrower agrees
that it is reasonable under the circumstances currently existing. The early
termination fee provided for in this Section 12.1 shall be deemed included in
the Obligations.
12.2 Notices. All notices, requests and demands hereunder shall be in
writing and (a) made to Lender at its address set forth below and to Borrower at
its chief executive office set forth below, or to such other address as either
party may designate by written notice to the other in accordance with this
provision, and (b) deemed to have been given or made: if delivered in person,
immediately upon delivery; if by telex, telegram or facsimile transmission,
immediately upon sending and upon confirmation of receipt; if by nationally
recognized overnight courier service with instructions to deliver the next
Business Day, one (1) Business Day after sending; and if by certified mail,
return receipt requested, five (5) days after mailing.
12.3 Partial Invalidity. If any provision of this Agreement is held to
be invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Agreement as a whole, but this Agreement shall be construed as
though it did not contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by applicable law.
12.4 Successors. This Agreement, the other Financing Agreements and any
other document referred to herein or therein shall be binding upon and inure to
the benefit of and be enforceable by Lender, Borrower and their respective
successors and assigns, except that Borrower may not assign its rights under
this Agreement, the other Financing Agreements and any other document referred
to herein or therein without the prior written consent of Lender. Lender may,
after notice to Borrower, assign its rights and delegate its obligations under
this Agreement and the other Financing Agreements and further may assign to any
Eligible Assignee, or sell participations in, all or any part of the Loans, the
Letter of Credit Accommodations or any other interest herein, in which event,
the assignee or participant shall have, to the extent of such assignment or
participation, the same rights and benefits as it would have if it were the
Lender hereunder, except as otherwise provided by the terms of such assignment
or participation; provided that no participation or assignment shall require
Borrower to file a registration statement with the Securities and Exchange
Commission or apply to qualify the Loans under any state laws regulating the
issuance of securities, and provided, further, that no participation or
assignment will be made with respect to the Tranche B Line without Borrower's
prior written consent.
12.5 Entire Agreement. This Agreement, the other Financing Agreements,
any supplements hereto or thereto, and any instruments or documents delivered or
to be delivered in connection herewith or therewith represents the entire
agreement and understanding concerning the subject matter hereof and thereof
between the parties hereto, and supersede all other prior
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<PAGE> 58
agreements, understandings, negotiations and discussions, representations,
warranties, commitments, proposals, offers and contracts concerning the subject
matter hereof whether oral or written.
12.6 Publicity. Borrower consents to Lender publishing a tombstone or
similar advertising material relating to the financing transaction contemplated
by this Agreement.
12.7 Confidentiality. Lender hereby agrees that all written or oral
information disseminated by Borrower to Lender concerning Borrower, now or
hereafter, is confidential (the "Information"). Such Information: (i) shall be
kept confidential by Lender and will not be disclosed, divulged or provided to
any Person without Borrower's prior written consent; provided, however, that
such Information may be disclosed: (A) to the smallest practicable number of
Lender's officers and employees or any of Lender's affiliated companies'
officers and employees, independent attorneys, accountants, loan participants
and appraisers who need to know such Information for the sole purpose of
evaluating the financing of Borrower hereunder, and who have been advised by
Lender that such Information shall be treated as confidential; or (B) if such
disclosure is required by operation of law; (ii) shall not knowingly be used by
Lender in a manner or for a purpose detrimental to Borrower, and (iii) shall not
be deemed to include information which: (A) is public knowledge or becomes
generally available to the public; (B) becomes available to Lender, on a
non-confidential basis, from a source (other than Borrower or its agents) who is
not bound by a confidentiality agreement with Borrower; or (c) is in Lender's
possession prior to disclosure by Borrower. Lender agrees that, unless required
by law, Lender will not disclose any of the Information for a period of two (2)
years after the date of the completion of a financing hereunder.
SECTION 13. SURETYSHIP WAIVERS.
13.1 Independent Obligations; Subrogation. The Obligations of each of
WEI and each Operating Subsidiary (for the purposes of this Section 13 only,
each a "Borrower" and collectively, "Borrowers") hereunder are joint and
several, except as any payment reduces the amount of the Obligations, and shall
not be reduced by, but shall survive as if the same had not been made, any and
all payments by the other Borrower and/or the application of any proceeds from
any Collateral until the Obligations are fully paid and finally discharged.
To the maximum extent permitted by law, each Borrower hereby
waives any claim, right or remedy which either may now have or hereafter acquire
against the other Borrower that arises hereunder including, without limitation,
any claim, remedy or right of subrogation, reimbursement, exoneration,
contribution, indemnification, or participation in any claim, right or remedy of
Lender against any Borrower or any Collateral which Lender now has or hereafter
acquires, whether or not such claim, right or remedy arises in equity, under
contract, by statute, under common law or otherwise until the Obligations are
fully paid and finally discharged. In addition, each Borrower hereby waives any
right to proceed against the other Borrower, now or hereafter, for contribution,
indemnity, reimbursement, and any other suretyship rights and claims, whether
direct or indirect, liquidated or contingent, whether arising under express or
implied contract or by operation of law, which any Borrower may now have or
hereafter have as against the other Borrower with respect to the Obligations
until the Obligations are fully paid and finally discharged. Each Borrower also
hereby waives any rights of recourse
52
<PAGE> 59
to or with respect to any asset of the other Borrower until the Obligations are
fully paid and finally discharged.
13.2 Authority to Modify Obligations and Security. Each Borrower
authorizes Lender, without notice or demand and without affecting any Borrower's
liability hereunder, from time to time, whether before or after any notice of
termination hereof or before or after any default in respect of the Obligations,
to: (i) renew, extend, accelerate, or otherwise change the time for payment of,
or otherwise change any other term or condition of, any document or agreement
evidencing or relating to any Obligations as such Obligations relate to the
other Borrower, including, without limitation, to increase or decrease the rate
of interest thereon; (ii) accept, substitute, waive, defease, increase,
release, exchange or otherwise alter any Collateral, in whole or in part,
securing the other Borrower's Obligations; (iii) apply any and all such
Collateral and direct the order or manner of sale thereof as Lender, in its sole
discretion, may determine; (iv) deal with the other Borrower as Lender may
elect; (v) in Lender's sole discretion, settle, release on terms satisfactory to
Lender, or by operation of law or otherwise, compound, compromise, collect or
otherwise liquidate any of the other Borrower's Obligations and/or any of the
Collateral in any manner, and bid and purchase any of the collateral at any sale
thereof; (vi) apply any and all payments or recoveries from the other Borrower
as Lender, in its sole discretion, may determine, whether or not such
indebtedness relates to the Obligations; all whether such Obligations are
secured or unsecured or guaranteed or not guaranteed by others; and (vii) apply
any sums realized from Collateral furnished by the other Borrower upon any of
its indebtedness or obligations to Lender as Lender, in its sole discretion, may
determine, whether or not such indebtedness relates to the Obligations; all
without in any way diminishing, releasing or discharging the liability of any
Borrower hereunder.
13.3 Waiver of Defenses. Upon an Event of Default by any Borrower in
respect of any Obligations, Lender may, at its option and without notice to the
Borrowers, proceed directly against any Borrower to collect and recover the full
amount of the liability hereunder, or any portion thereof, and each Borrower
waives any right to require Lender to: (i) proceed against the other Borrower or
any other person whomsoever; (ii) proceed against or exhaust any Collateral
given to or held by Lender in connection with the Obligations; (iii) give notice
of the terms, time and place of any public or private sale of any of the
Collateral except as otherwise provided herein; or (iv) pursue any other remedy
in Lender's power whatsoever. A separate action or actions may be brought and
prosecuted against any Borrower whether or not action is brought against the
other Borrower and whether the other Borrower be joined in any such action or
actions; and each Borrower waives the benefit of any statute of limitations
affecting the liability hereunder or the enforcement hereof, and agrees that any
payment of any Obligations or other act which shall toll any statute of
limitations applicable thereto shall similarly operate to toll such statute of
limitations applicable to the liability hereunder.
13.4 Right to Dispose of Security; Impairment of Rights. Each Borrower
hereby authorizes and empowers Lender in its sole discretion, without any notice
or demand to such Borrower whatsoever and without affecting the liability of
such Borrower hereunder, to exercise any right or remedy which Lender may have
available to it against the other Borrower, including, but not limited to,
judicial foreclosure, exercise of rights of power of sale without judicial
action, or taking a deed or an assignment in lieu of foreclosure as to any
Collateral, and such Borrower hereby waives any defense to the recovery by
Lender against such Borrower of any deficiency
53
<PAGE> 60
after such action notwithstanding any impairment or loss of any right of
reimbursement or subrogation or other right or remedy against the other Borrower
or against any Collateral for the Obligations. Each Borrower expressly waives
any defense or benefits that may be available from California Code of Civil
Procedure, Section 580 and its subdivisions or Section 726, or comparable
provisions of the laws of any other jurisdiction, as well as all suretyship
defenses such Borrower would otherwise have under California law or the laws of
any other jurisdiction. Without limiting the foregoing, such Borrower
specifically agrees that action maintained by Lender for the appointment of any
receiver, trustee or custodian to collect rents, issues or profits or to obtain
possession of any property shall not constitute an "action" within the meaning
of Section 726 of the California Code of Civil Procedure or comparable
provisions of the laws of any other jurisdiction.
13.5 Additional Waivers. Each Borrower waives any defense arising by
reason of any disability or other defense of the other Borrower or by reason of
the cessation from any cause whatsoever of the liability of the other Borrower
or by reason of any act or omission of Lender or others which directly or
indirectly results in or aids the discharge or release of the other Borrower or
any Obligations or any Collateral by operation of law or otherwise. The
Obligations shall be enforceable against each Borrower without regard to the
validity, regularity or enforceability of any of the Obligations with respect to
any of the other Borrower or any of the documents related thereto or any
collateral security documents securing any of the Obligations. No exercise by
Lender of, and no omission of Lender to exercise, any power or authority
recognized herein and no impairment or suspension of any right or remedy of
Lender against any Borrower or any Collateral shall in any way suspend,
discharge, release, exonerate or otherwise affect any of the Obligations or any
Collateral furnished by the Borrowers or give to the Borrowers any right of
recourse against Lender. The Borrowers specifically agree that the failure of
Lender: (i) to perfect any lien on or security interest in any property
heretofore or hereafter given by Borrowers to secure payment of the Obligations,
or to record or file any document relating thereto or (ii) to file or enforce a
claim against the estate (either in administration, bankruptcy or other
proceeding) of any Borrower shall not in any manner whatsoever terminate,
diminish, exonerate or otherwise affect the liability of any Borrower hereunder.
13.6 Additional Indebtedness. Additional Obligations may be created from
time to time at the request of any Borrower and without further authorization
from or notice to any other Borrower even though the borrowing Borrower's
financial condition may deteriorate since the date hereof Each Borrower waives
the right, if any, to require Lender to disclose to such Borrower any
information it may now have or hereafter acquire concerning the other Borrower's
character, credit, Collateral, financial condition or other matters. Each
Borrower has established adequate means to obtain from the other Borrower on a
continuing basis financial and other information pertaining to such Borrower's
business and affairs, and assumes the responsibility for being and keeping
informed of the financial and other conditions of the other Borrower and of all
circumstances bearing upon the risk of nonpayment of the Obligations which
diligent inquiry would reveal. Lender need not inquire into the powers of any of
the Borrowers or the authority of any of their respective officers, directors,
partners or agents acting or purporting to act in their behalf, and any
obligations created in reliance upon the purported exercise of such power or
authority is hereby guaranteed. All obligations of Borrowers to Lender
heretofore, now
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<PAGE> 61
or hereafter created shall be deemed to have been granted at Borrowers' special
insistence request and in consideration of and in reliance upon this Agreement.
13.7 Notices, Demands, Etc. Except as expressly provided by this
Agreement, Lender shall be under no obligation whatsoever to make or give to any
Borrower, and each Borrower hereby waives diligence, all rights of setoff and
counterclaim against Lender, all demands, presentments, protests, notices of
protests, notices of protests, notices of nonperformance, notices of dishonor,
and all other notices of every kind or nature, including notice of the
existence, creation or incurring of any new or additional Obligations.
13.8 Subordination. Except as otherwise provided in this Section 13.8,
any indebtedness of any Borrower now or hereafter owing to any other Borrower is
hereby subordinated to the Obligations, whether heretofore, now or hereafter
created, and whether before or after notice of termination hereof, and,
following the occurrence and during the continuation of an Event of Default, no
Borrower shall, without the prior consent of Lender, pay in whole or in part any
of such indebtedness nor will any such Borrower accept any payment of or on
account of any such indebtedness at any time while such Borrower remains liable
hereunder. At the request of Lender, after the occurrence and during the
continuance of an Event of Default, each Borrower shall pay to Lender all or any
part of such subordinated indebtedness and any amount so paid to Lender at its
request shall be applied to payment of the Obligations. Each payment on the
indebtedness of any Borrower to the other Borrower received in violation of any
of the provisions hereof shall be deemed to have been received by any other
Borrower as trustee for Lender and shall be paid over to Lender immediately on
account of the Obligations, but without otherwise affecting in any manner any
such Borrower's liability under any of the provisions of this Agreement. Each
Borrower agrees to file all claims against the other Borrower in any bankruptcy
or other proceeding in which the filing of claims is required by law in respect
of any indebtedness of the other Borrower to such Borrower, and Lender shall be
entitled to all of any such Borrower's rights thereunder. If for any reason any
such Borrower fails to file such claim at least thirty (30) days prior to the
last date on which such claim should be filed, Lender, as such Borrower's
attorney-in-fact, is hereby authorized to do so in Borrowers' name or, in
Lender's discretion, to assign such claim to, and cause a proof of claim to be
filed in the name of, Lender's nominee. In all such cases, whether in
administration, bankruptcy or otherwise, the person or persons authorized to pay
such claim shall pay to Lender the full amount payable on the claim in the
proceeding, and to the full extent necessary for that purpose any such Borrower
hereby assigns to Lender all such Borrower's rights to any payments or
distributions to which such Borrower otherwise would be entitled. If the amount
so paid is greater than any such Borrower's liability hereunder, Lender will pay
the excess amount to the party entitled thereto.
13.9 Revival. If any payments of money or transfers of property made to
Lender by any Borrower should for any reason subsequently be declared to be, or
in Lender's counsel's good faith opinion be determined to be, fraudulent (within
the meaning of any state or federal law relating to fraudulent conveyances),
preferential or otherwise voidable or recoverable in whole or in part for any
reason (hereinafter collectively called "voidable transfers") under the
Bankruptcy Code or any other federal or state law and Lender is required to
repay or restore, or in Lender's counsel's opinion may be so liable to repay or
restore, any such voidable transfer, or the amount or any portion thereof, then
as to any such voidable transfer or the amount repaid or restored and all costs
and expenses (including attorneys' fees) of Lender related thereto, such
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<PAGE> 62
Borrower's liability hereunder shall automatically be revived, reinstated and
restored and shall exist as though such voidable transfer had never been made to
Lender.
13.10 Understanding of Waivers. Each Borrower warrants and agrees that
the waivers set forth in this Section 13 are made with full knowledge of their
significance and consequences. If any of such waivers are determined to be
contrary to any applicable law or public policy, such waivers shall be effective
only to the maximum extent permitted by law.
13.11 Unlimited Liability. The Obligations of the Borrowers hereunder
shall be in addition to any obligations of Borrowers to Lender heretofore given
or hereafter to be given to Lender unless such other obligations are expressly
modified or terminated in writing. The liability of Borrowers to Lender shall at
all times be deemed to be the aggregate liability of Borrowers under the terms
of this Agreement and of any other obligations heretofore or hereafter incurred
by Borrowers to Lender and not expressly terminated or modified in writing.
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<PAGE> 63
IN WITNESS WHEREOF, Lender and Borrower have caused these presents to be duly
executed as of the day and year first above written.
LENDER:
CONGRESS FINANCIAL CORPORATION
(WESTERN)
By: /s/ KENNETH SANDS
---------------------------------
Title: SVP
------------------------------
Address:
225 South Lake Avenue
Suite 1000
Pasadena, California 91101
BORROWER:
WHEREHOUSE ENTERTAINMENT, INC.
By: /s/ ANTONIO C. ALVAREZ
---------------------------------
ANTONIO C. ALVAREZ II
Title: Chairman of the Board
and Chief Executive Officer
Chief Executive Office:
19701 Hamilton Way
Torrance, California 90502-1334
WHEREHOUSE.COM, INC.
By: /s/ ANTONIO C. ALVAREZ
---------------------------------
ANTONIO C. ALVAREZ II
Title: Chairman of the Board
and Chief Executive Officer
Chief Executive Office:
19701 Hamilton Way
Torrance, California 90502-1334
[Loan and Security Agreement] S1
<PAGE> 64
WHEREHOUSE SUBSIDIARY I CO., INC.
By: /s/ ANTONIO C. ALVAREZ
---------------------------------
ANTONIO C. ALVAREZ II
Title: Chairman of the Board
and Chief Executive Officer
Chief Executive Office:
19701 Hamilton Way
Torrance, California 90502-1334
WHEREHOUSE SUBSIDIARY II CO., INC.
By: /s/ ANTONIO C. ALVAREZ
---------------------------------
ANTONIO C. ALVAREZ II
Title: Chairman of the Board
and Chief Executive Officer
Chief Executive Office:
19701 Hamilton Way
Torrance, California 90502-1334
WHEREHOUSE SUBSIDIARY III CO., INC.
By: /s/ ANTONIO C. ALVAREZ
---------------------------------
ANTONIO C. ALVAREZ II
Title: Chairman of the Board
and Chief Executive Officer
Chief Executive Office:
19701 Hamilton Way
Torrance, California 90502-1334
[LOAN AND SECURITY AGREEMENT] S2
<PAGE> 1
EXHIBIT 10.23
================================================================================
INTERCREDITOR AND SUBORDINATION AGREEMENT
Dated as of October 26, 1998
Among
THE TRADE CREDITORS NAMED HEREIN,
UNITED STATES TRUST COMPANY OF NEW YORK,
as COLLATERAL AGENT FOR THE TRADE CREDITORS
And
CONGRESS FINANCIAL CORPORATION (WESTERN)
================================================================================
<PAGE> 2
INTERCREDITOR AND SUBORDINATION AGREEMENT ("Agreement") dated as of
October 26, 1998, by and among BMG MUSIC aka BMG DISTRIBUTION ("BMG"), EMI MUSIC
DISTRIBUTION, a Division of Capitol Records, Inc., ("EMI") POLYGRAM GROUP
DISTRIBUTION, INC. ("Polygram"), RELATIVITY ENTERTAINMENT DISTRIBUTORS, INC.
("RED"), SONY MUSIC ENTERTAINMENT, INC. ("Sony"), UNIVERSAL MUSIC AND VIDEO
DISTRIBUTION, INC. ("Universal"), and WARNER/ELEKTRA/ATLANTIC CORP. ("WEA")
(BMG, EMI, Polygram, RED, Sony, Universal, WEA and such other trade creditors
that execute an Agreement Regarding Additional Trade Creditor pursuant to
Section 3.13 are hereafter referred to collectively as the "Trade Creditors"),
UNITED STATES TRUST COMPANY OF NEW YORK, a New York banking corporation, as
collateral agent (in such capacity, the "Collateral Agent") for the Trade
Creditors and CONGRESS FINANCIAL CORPORATION (WESTERN), a California corporation
("Congress").
A. Wherehouse Entertainment, Inc. ("Wherehouse") has acquired all
the outstanding capital stock of Wherehouse Holding I Co., Inc. (formerly known
as Blockbuster Music Holding Corporation) and Wherehouse Holding II Co., Inc.
(formerly known as Blockbuster SC Holding Corporation) (collectively the
"Subsidiary Holding Companies"); and
B. The Subsidiary Holding Companies own all of the capital stock
of Wherehouse Subsidiary I Co., Inc., Wherehouse Subsidiary II Co., Inc., and
Wherehouse Subsidiary III Co., Inc. (each a "Borrower" and collectively
"Borrowers"); and
C. Borrowers were formerly known as Blockbuster Music Retail,
Inc., Show Industries, Inc., and Blockbuster SC Music Corporation, respectively,
and did business under the name Blockbuster Music; and
D. Borrowers, the Trade Creditors and the Collateral Agent have
entered into that certain Security Agreement and other agreements, documents and
instruments dated as of even date herewith, as amended or modified from time to
time (collectively, the "Trade Financing Agreement"), pursuant to which the
Trade Creditors have agreed to extend certain trade financing to Borrowers on
the terms and conditions set forth therein.
E. Pursuant to the terms of the Trade Financing Agreement, the
Borrowers have granted security interests in the Trade Collateral (as
hereinafter defined) to the Collateral Agent for the benefit of the Trade
Creditors.
F. Borrowers and Wherehouse have requested that Congress enter
into various agreements, including that certain Amended and Restated Loan and
Security Agreement and other agreements, documents and instruments, of even date
herewith, as amended or modified from time to time (collectively, the "Senior
Loan Agreement"), pursuant to which Congress would extend certain loans and
financial accommodations to Borrowers and to Wherehouse. Pursuant to the terms
of the Senior Loan Agreement, Congress would take a security interest in the
Congress Collateral (as hereinafter defined).
G. Congress in unwilling to enter into the Senior Loan Agreement
with Borrowers and Wherehouse and to extend to Borrowers and Wherehouse the
loans contemplated thereunder unless the Trade Creditors and the Collateral
Agent enter into this Agreement.
1
<PAGE> 3
H. The Trade Creditors and the Collateral Agent are interested in
the financial success of Borrowers and will benefit by the loans which Congress
proposes to extend to Borrowers and Wherehouse under the Senior Loan Agreement.
I. Accordingly, to induce Congress to enter into the Senior Loan
Agreement with Borrowers and Wherehouse and to extend to Borrowers the loans
contemplated thereunder, the Trade Creditors and the Collateral Agent are
willing to enter into this Agreement with Congress.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I.
DEFINITIONS
SECTION 1.01. Defined Terms. As used in this Agreement, the following
terms have the meanings specified below.
"Advances" means Revolving Loans as defined in the Senior Loan
Agreement.
"Agreement" has the meaning set forth in the preamble of this Agreement.
"Blockage Commencement Date" has the meaning set forth in Section 2.02
of this Agreement.
"Blockage Period" has the meaning set forth in Section 2.02 of this
Agreement.
"Borrower" or "Borrowers" has the meaning set forth in the recitals of
this Agreement.
"Compliance Period" has the meaning set forth in Section 2.03 of this
Agreement.
"Congress Collateral" means the "Collateral" as defined in the Senior
Loan Agreement.
"Congress Obligations" means the "Obligations" as defined in the Senior
Loan Agreement; provided, the Obligations shall not include any Advances to the
extent such Advances would, at the time made, cause the Obligations to exceed by
more than $4,000,000 the maximum amount Borrower may be entitled to borrow or be
obligated to repay under the formulas set forth in the Senior Loan Agreement and
Congress has actual knowledge that such Advances exceed such amount.
"Defaulting Borrower" has the meaning set forth in Section 2.02 of this
Agreement.
"Default Notice" has the meaning set forth in Section 2.02 of this
Agreement.
"Enforcement Action" has the meaning set forth in Section 2.02 of this
Agreement.
"Expired Blockage Days" has the meaning set forth in Section 2.03
hereof.
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"Majority Trade Creditors" means the holders of at least 66-2/3% in
dollar amount of the Trade Obligations existing at a point in time when
measured.
"Person" means any individual, corporation, partnership, limited
liability company, limited liability partnership, joint venture, association,
joint-stock company, trust, unincorporated organization or government or any
agency or political subdivision thereof.
"Senior Loan Agreement" has the meaning set forth in the recitals of
this Agreement.
"Subsidiary" means any person at least a majority of the outstanding
voting securities or other voting interests of which is at the time owned or
controlled directly or indirectly by any of the Company, Seller, or one or more
Subsidiaries.
"Subsidiary Holding Companies" has the meaning set forth in the recitals
to this Agreement.
"Trade Collateral" means the collateral the Collateral Agent was granted
a security interest in for the benefit of the Trade Creditors as set forth in
Exhibit A hereto.
"Trade Default" has the meaning set forth in Section 2.02 of this
Agreement.
"Trade Obligations" means all obligations of Borrower to the Trade
Creditors pursuant to the terms of the Trade Financing Agreement.
SECTION 1.02. Terms Generally. The definitions in Section 1.01 shall
apply equally to both the singular and plural forms of the terms defined.
Whenever the context may require, any pronoun shall include the corresponding
masculine, feminine and neuter forms. The words "include", "includes" and
"including" shall be deemed to be followed by the phrase "without limitation".
All references herein to Articles and Sections shall be deemed references to
Articles and Sections of this Agreement unless the context shall otherwise
require. Capitalized terms used herein and not otherwise defined herein shall
have the meanings set forth in the Senior Loan Agreement.
ARTICLE II.
INTERCREDITOR ARRANGEMENTS
SECTION 2.01. Priority of Security Interests. Each of the Trade
Creditors and the Collateral Agent hereby agrees that any security interest,
lien, or other right or interest in the Congress Collateral acquired by any of
them at any time, present or future, shall at all times prior to the
indefeasible payment and satisfaction in full of the Congress Obligations be
junior, subordinate and subject to any present or future security interest, lien
or other right or interest Congress now has or may hereafter acquire in the
Congress Collateral. The subordination provided in this Section 2.01 shall apply
irrespective of the time or order of attachment or perfection of any security
interest, irrespective of the time or order of filing or recording of any
financing statement or other document, and irrespective of any statute, rule,
law, or court decision to the contrary.
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SECTION 2.02. Standstill of Enforcement Remedies Upon Default Under
Trade Obligations. Except as provided below, upon the occurrence of any default
with respect to any Trade Obligations or any other secured obligation owing to
any Trade Creditor, none of the Trade Creditors or the Collateral Agent may
institute an Enforcement Action (as hereinafter defined). Upon the occurrence
and during the continuance of a payment default by a Borrower (a "Defaulting
Borrower") with respect to 25% or more of the then outstanding dollar amount of
the Trade Obligations owed by such Defaulting Borrower, measured on a daily
basis (a "Trade Default"), the Collateral Agent may initiate an Enforcement
Action on behalf of the Trade Creditors against the Defaulting Borrower or with
respect to the Congress Collateral (i) provided that the Majority Trade
Creditors of such Defaulting Borrower or the Collateral Agent on behalf of the
Majority Trade Creditors of such Defaulting Borrower shall have first given
Congress and Borrowers written notice of such default and their or its intention
to exercise such Enforcement Action (a "Default Notice"), and (ii) only after
the expiration of a period (a "Blockage Period"), commencing upon the date of
the receipt by Congress of said Default Notice (the "Blockage Commencement
Date") and ending on that date which is one hundred fifty (150) days after the
Blockage Commencement Date, minus the cumulative number (up to a maximum of
sixty (60)) Expired Blockage Days (as hereinafter defined) for such Defaulting
Borrower, if any, incurred as of the Blockage Commencement Date within the
relevant Compliance Period (as hereinafter defined) for such Defaulting
Borrower. For purposes of this Agreement, an "Enforcement Action" means any
action to: (i) exercise any right, remedy or power with respect to, or otherwise
take any action to enforce, any lien on or security interest in, or realize upon
any Trade Collateral or Congress Collateral; (ii) seek to have a trustee,
receiver, liquidator or similar official appointed for or over any Trade
Collateral or Congress Collateral; or (iii) pursue any judicial action or
otherwise enforce any rights or remedies in or to any Trade Collateral or
Congress Collateral. Upon the expiration of the Blockage Period, the Majority
Trade Creditors of the Defaulting Borrower (or the Collateral Agent on behalf
and upon the direction of the Majority Trade Creditors) may institute an action
against the Defaulting Borrower to enforce the Trade Obligations of the
Defaulting Borrower; provided, however, that in no event shall the Trade
Creditors or the Collateral Agent take any action described in clauses (i)
through (iii) of the immediately preceding sentence if Congress has commenced or
given notice of the intention to commence an action with respect to the Congress
Collateral or the exercise of any right or remedy under this Agreement, the
Senior Loan Agreement or applicable law and the Trade Creditors or the
Collateral Agent have notice of such action, unless such Trade Creditors or the
Collateral Agent have obtained Congress' prior written consent.
SECTION 2.03. (a) Calculation of Blockage Period. In the event a Trade
Default giving rise to a Default Notice is cured or waived (including, for
example, if a Defaulting Borrower has made payments to Trade Creditors such that
the amounts then due by the Defaulting Borrower and remaining unpaid do not
equal at least 25% of the dollar amount of the Trade Obligations owed by such
Borrower then outstanding) after the Blockage Commencement Date with respect to
such Trade Default, but prior to the expiration of the applicable Blockage
Period with respect to such Trade Default, then the Defaulting Borrower shall
promptly notify Congress in writing of such cure or waiver, and upon Congress'
receipt of said notice, the Blockage Period with respect to said Trade Default
shall cease to run (and consequently, the conditions to the initiation of an
Enforcement Action by the Collateral Agent which are set forth in the second
sentence of Section 2.02 shall not be deemed to have been satisfied). The
number of days having elapsed between the Blockage Commencement Date and
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the date of Congress' receipt of notice of said cure or waiver (referred to as
the "Expired Blockage Days"), up to a maximum of sixty (60) Expired Blockage
Days, shall be subtracted from the one hundred fifty (150) day period in
calculating such Defaulting Borrower's Blockage Period with respect to any
subsequent Trade Default by such Defaulting Borrower, if any, during the
relevant Compliance Period for such Defaulting Borrower, as set forth in clause
(ii) of the second sentence of Section 2.02. By way of example, if on January 1
of a given Compliance Period of a Borrower, Congress receives a Default Notice
in accordance with Section 2.02, and on February 1 of that same Compliance
Period, Congress receives a notice from the Defaulting Borrower that the Trade
Default giving rise to such Default Notice has been cured or waived, the
Blockage Period with respect to such Trade Default shall cease to run as of
February 1 and thirty-one (31) Expired Blockage Days shall have elapsed. If on
March 1 of that same Compliance Period, Congress receives a second Default
Notice (with respect to a subsequent Trade Default by the same Defaulting
Borrower) in accordance with Section 2.02, the Blockage Period in respect of
said subsequent Trade Default shall commence on the date of the receipt by
Congress of said second Default Notice (the second Blockage Commencement Date)
and shall expire one hundred and nineteen (119) days thereafter (representing
a period of one hundred fifty (150) days minus the thirty-one (31) Expired
Blockage Days incurred as of the second Blockage Commencement Date). The method
of calculating the applicable Blockage Period with respect to any one Borrower
shall be repeated in like manner, cumulating and then subtracting such
Borrower's Expired Blockage Days for such subsequent Trade Default occurring
during a given Compliance Period for such Borrower, subject, however, to the
provisions of paragraph (b) of this Section 2.03.
(b) Expired Blockage Days for any one Borrower shall be cumulated and
subtracted from the initial one hundred fifty (150) day maximum blockage period
in calculating the Blockage Period with respect to any specific Trade Default by
such Borrower in accordance with Section 2.03(a) only within the applicable
Compliance Period, and upon the expiration date of such Compliance Period,
Expired Blockage Days accumulated prior to such expiration date shall no longer
be subtracted in calculating any Blockage Period commencing after such
expiration date. For purposes of this Agreement, "Compliance Period" means
initially with respect to any Borrower, the period commencing on the date of
receipt by Congress of the first Default Notice with respect to a Trade Default
by such Borrower in accordance with Section 2.02, and expiring (i) on that date
which is 364 days later, provided that no Trade Default by such Borrower is
continuing as of such later date, or (ii) in the event a Trade Default is
continuing as of such date, on such later date on which said Trade Default is
cured or waived. After the expiration of an initial Compliance Period for any
Borrower, the next (and each subsequent) Compliance Period for such Borrower
shall commence on the date of the receipt by Congress of a subsequent Default
Notice with respect to a Trade Default by such Borrower and shall continue until
the later to occur of (i) that date which is 364 days after the commencement of
such Compliance Period provided that no Trade Default is continuing on such
date, or (ii) the date on which such continuing Trade Default is either cured or
waived.
SECTION 2.04. Election of Remedies by Trade Creditors. To the extent
that any Trade Creditor elects to pursue its default remedies it may otherwise
have against the Trade Collateral or the Congress Collateral, in violation of
the terms of this Agreement and the result is a material impairment of Congress'
ability to exercise its rights with respect to the Congress Collateral, then
regardless of the outcome of such action with respect to the Congress
Collateral, such action
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shall constitute an irrevocable relinquishment by such Trade Creditor of any and
all lien rights it may have against the Trade Collateral and such Trade
Creditor's actions thereafter shall be limited to those of a general unsecured
creditor.
SECTION 2.05. Remittance of Proceeds to Congress. If any Trade Creditor,
the Collateral Agent, any agent of any Trade Creditor or the Collateral Agent,
or any Person engaged by any Trade Creditor or the Collateral Agent to sell or
otherwise dispose of the Trade Collateral or the Congress Collateral, receives
any proceeds from the sale or disposition of Congress Collateral (regardless of
whether or not such sale is made in accordance with the terms of this Agreement)
as a result of or arising in any way from any Enforcement Action by any Person,
such Trade Creditor or Trade Creditors or Collateral Agent, as the case may be,
shall be deemed to hold any such payment or distribution in trust for Congress'
benefit. In such case, such Trade Creditor or Collateral Agent shall immediately
remit such payment or distribution to Congress in satisfaction of the Congress
Obligations.
SECTION 2.06. Remedies of Congress. If any Trade Creditor or the
Collateral Agent attempts to violate this Agreement (i) Congress (in Congress'
or any Borrower's name) or any Borrower may seek injunctive or other equitable
relief to prevent or stop such Trade Creditor's or the Collateral Agent's
actions, it being agreed that legal remedies may be inadequate and/or (ii) any
Borrower may interpose as a defense or plea the making of this Agreement, and
Congress may intervene and interpose such defense or plea in its own or any
Borrower's name. The remedies provided in this Section 2.06 are not exclusive;
Congress shall be entitled to all other remedies available at law or in equity.
SECTION 2.07. Sale of Licensed Inventory by Congress; Waiver of Rights
by Trade Creditors. The parties acknowledge that the Congress Collateral may
consist of, in part, of licensed inventory sold to a Borrower by the Trade
Creditors. The Trade Creditors hereby irrevocably grant Congress the right to
sell or otherwise dispose of such licensed inventory pursuant to the terms of
the Senior Loan Agreement.
SECTION 2.08. Acknowledgement. Each of the parties hereto hereby
acknowledges and agrees that, except as otherwise provided in this Agreement,
any other party hereto may, without notice or demand and without affecting or
impairing the obligations of such party under this Agreement, from time to time
(i) waive any default under this Agreement, the Senior Loan Agreement or the
Trade Financing Agreement, and (ii) exercise or refrain from exercising any
rights against any Borrower or other Person under this Agreement, the Senior
Loan Agreement, or the Trade Financing Agreement.
SECTION 2.09. Obligations Hereunder Not Affected. All rights,
obligations, agreements and interests of the parties hereto under this Agreement
shall remain in full force and effect irrespective of:
(a) any lack of validity or enforceability of the Senior Loan Agreement
or the Trade Financing Agreement;
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(b) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Congress Obligations or any other amendment or
waiver of, or consent to departure from, the Senior Loan Agreement;
(c) any exchange, release or non-perfection of any security interest in
any Congress Collateral or Trade Collateral, or any release or amendment or
waiver of, or consent or departure from, any guaranty of all or any of the
Congress Obligations or the Trade Obligations;
(d) any other circumstance that might otherwise constitute a defense
available to, or a discharge of, any Borrower or other Person in respect of the
Congress Obligations or the Trade Obligations; or
(e) any filing of a voluntary or involuntary bankruptcy petition in
respect of Borrower.
If a voluntary or involuntary bankruptcy petition shall be filed
respecting Borrower none of the Trade Creditors shall take any action themselves
or shall direct the Collateral Agent to take any action on their behalf in the
bankruptcy proceeding which might adversely affect Congress' rights and
interests respecting the Congress Obligations without the prior written consent
of Congress.
SECTION 2.10. Amendment of Trade Financing Agreement. The Trade
Financing Agreement may not be amended without the prior written consent of
Congress, if, in Congress' reasonable determination, such amendment may impair
the discretion or ability of Congress to take any action or refrain from taking
any action permitted or contemplated by this Agreement or the Senior Loan
Agreement with respect to the Congress Collateral.
SECTION 2.11. No Action to Violate Senior Loan Agreement. None of the
Trade Creditors shall take any action or shall direct the Collateral Agent to
take any action on their behalf which might cause any Borrower to violate the
Senior Loan Agreement or any other agreement between a Borrower and Congress
without the prior written consent of Congress. Nothing contained in this Section
2.11 shall prevent the Trade Creditors or the Collateral Agent from taking any
action otherwise permitted under this Agreement.
SECTION 2.12. Extensions, Compromises, etc. Without having to obtain the
consent of any Trade Creditor or the Collateral Agent, Congress may grant to any
Borrower extensions of the time of payment or performance, and may enter into
compromises (including releases of Congress Collateral and settlements) with any
Borrower with respect to the Congress Obligations.
SECTION 2.13. Waiver. Each of the Trade Creditors and the Collateral
Agent waives any fight it may now or hereafter have to require Congress to
marshall assets, to exercise rights or remedies in a particular manner, or to
forbear from exercising such rights and remedies in any particular manner or
order.
SECTION 2.14. No Constraint on Congress. Nothing contained in this
Agreement shall preclude Congress from discontinuing its extension of credit to
any Borrower (whether under the Senior Loan Agreement or otherwise) or from
taking (without notice to the Trade Creditors, Collateral Agent, any Borrower,
or any other Person) any other action in respect of the Congress
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Obligations or the Congress Collateral which Congress is otherwise entitled to
take with respect to the Congress Obligations or the Congress Collateral. Among
the actions which Congress may take in accordance with this Section 2.14 are:
(a) renewing, extending, and increasing the amount of the Congress Obligations;
(b) otherwise changing the terms of the Congress Obligations; (c) settling,
releasing, compromising, and collecting on the Congress Obligations; (d) making
(and refraining from making) other secured and unsecured loans and advances to
any Borrower; (e) amending any present or future agreement between Congress and
any Borrower; and (f) all other actions which Congress deems advisable.
SECTION 2.15. No Constraint on Trade Creditors and Collateral Agent.
Nothing contained in this Agreement shall preclude any Trade Creditor from
discontinuing its extension of trade financing to any Borrower (whether under
the Trade Financing Agreement or otherwise) or from taking (without notice to
Congress or any Borrower or other Person) any other action in respect of the
Trade Obligations which such Trade Creditor is otherwise entitled to take as an
unsecured creditor or, from taking any action which such Trade Creditor or the
Collateral Agent, subject to this Agreement, may take with respect to the Trade
Collateral. Among the actions which any Trade Creditor may take in accordance
with this Section 2.15 are: (a) renewing, extending, and increasing and
decreasing the amount of the Trade Obligations, (b) otherwise changing the terms
of the Trade Obligations; (c) settling, raising, compromising and collecting on
the Trade Obligations, subject to this Agreement; (d) making (and refraining
from making) other secured and unsecured credit extensions to any Borrower; (e)
amending any present or future agreement between any Trade Creditor and any
Borrower; and (f) all other actions which any Trade Creditor deems advisable,
subject to this Agreement.
ARTICLE III.
MISCELLANEOUS
SECTION 3.01. Notices. All notices and other communications provided for
in this Agreement shall be in writing and shall be delivered by hand or sent by
registered or certified mail, postage prepaid, return receipt requested, or by
prepaid telex, facsimile, telecopy, telegram (with messenger delivery
specified), or other method of electronic communication as follows:
(i) if to Congress, to it at: Congress Financial Corporation
(Western), 225 South Lake Avenue, Suite 1000, Pasadena, California 91101,
Attention of Vicky Balmot (Telecopy No. (818) 304-4949; Confirmation Tel. No.
(818) 304-4900);
with a copy to: Kelley Drye & Warren LLP, 777 South Figueroa Street, Suite 2700,
Los Angeles, California 90071, Attention of Marshall C. Stoddard, Jr., Esq.
(Telecopy No. (213) 688-8150; Confirmation Tel. No. (213) 689-1300);
(ii) if to any of the Trade Creditors or the Collateral Agent, as
follows: United States Trust Company of New York, 114 West 47th Street, New
York, New York 10036, Attention of Louis Young, Corporate Trust Department
(Telecopy No. (212) 852-1626; Confirmation Tel. No. (212) 852-1671);
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with a copy, in the case of any notice pursuant to this clause (ii), to:
Larry I. Glick, P.C., 1305 Franklin Avenue, Garden City, New York 11530,
Attention of Larry I. Glick, Esq. (Telecopy No. (516) 739-0896; Confirmation
Telephone No. (516) 739-1111); and
Morgan, Lewis & Bockius LLP, 2000 One Logan Square, Philadelphia, Pennsylvania
19103-6993, Attention of Michael Pedrick, Esq., (Telecopy No. (215) 963-5299;
Confirmation Telephone No. (215) 963-5000)); and
(iii) if to Borrowers at: Wherehouse Entertainment, Inc., 19701
Hamilton Avenue, Torrance, California 90502-1334, Attention: Chief Financial
Officer (Telecopy No. (310) 538-8757; Confirmation Tel. No. (310) 538-2314 ext.
2350);
with a copy, in the case of any notice pursuant to this clause (iii), to:
Ben H. Logan, O'Melveny & Myers LLP, 400 South Hope Street, Los Angeles,
California 90071-2899 (Telecopy No. (213) 430-6407; Confirmation Tel. No. (213)
430-7704).
All notices and other communications given to any party hereto in accordance
with the provisions of this Agreement shall be deemed to have been given on the
date of receipt if delivered by hand or overnight courier service or sent by
telex, telecopy or other telegraphic communications equipment of the sender, or
on the date five Business Days after dispatch by certified or registered mail if
mailed, in each case delivered, sent or mailed (properly addressed) to such
party as provided in this Section 3.01 or in accordance with the latest
unrevoked direction from such party.
SECTION 3.02. Survival of Agreement. All covenants, agreements,
representations and warranties made by the parties in this Agreement shall be
considered to have been relied upon by the other parties hereto and shall
survive the execution and delivery of this Agreement, and shall continue in full
force and effect as long as any Congress Obligation is outstanding and unpaid.
SECTION 3.03. Authority of Collateral Agent; Binding Effect: Successors
and Assigns. Each Trade Creditor hereby represents and warrants to Congress that
(i) such Trade Creditor has duly authorized the execution and delivery of this
Agreement; (ii) the Collateral Agent is duly authorized to act for such Trade
Creditor as provided herein, (iii) the execution, delivery and performance of
this Agreement and the transactions contemplated hereunder are all within the
corporate powers of such Trade Creditor, and are not in contravention of law or
the terms of the certificate of incorporation, by-laws or other organizational
documentation of such Trade Creditor, or any indenture, agreement or undertaking
to which such Trade Creditor is a party or by which such Trade Creditor or any
of its property is bound and (iv) this Agreement constitutes the legal, valid
and binding obligation of such Trade Creditor, enforceable in accordance with
its terms. The Collateral Agent hereby represents and warrants to Congress that
(i) the Collateral Agent has duly authorized the execution and delivery of this
Agreement, and (ii) the execution, delivery and performance of this Agreement
and the transactions contemplated hereunder are all within the corporate powers
of the Collateral Agent, and are not in contravention of law or the terms of the
certificate of incorporation, by-laws or other organizational documentation of
Collateral Agent, or any indenture, agreement or undertaking to which Collateral
Agent is a party
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or by which Collateral Agent or any of its property is bound. This Agreement
shall become effective when it shall have been executed by each of the parties
hereto, and thereafter shall be binding upon and inure to the benefit of such
parties and their respective successors and permitted assigns, except that none
of the parties hereto shall have the right to assign or delegate its rights or
duties hereunder, without the prior written consent of all the other parties;
provided, however, that each of the Trade Creditors shall be permitted to
consolidate with, or merge with or into, any person if (i) such consolidation or
merger is bona fide, in good faith and not agreed to or consummated to avoid the
prohibition on assignments contained in this Section 3.03 and (ii) in the case
of a consolidation or a merger where such Trade Creditor is not the surviving
corporation, the consolidated corporation or the surviving corporation, as the
case may be, shall expressly assume in writing all of such Trade Creditors
rights and duties under this Agreement, in form and substance satisfactory to
the Company. Whenever in this Agreement any of the parties hereto is referred
to, such reference shall be deemed to include the successors and permitted
assigns of such party.
SECTION 3.04. Applicable Law. THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF CALIFORNIA
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE,
WITHOUT REGARD TO THE CONFLICTS OF LAWS PROVISIONS AND PRINCIPLES OF SUCH STATE.
SECTION 3.05. Waivers; Amendments (a) No failure or delay of any of the
parties hereto in exercising, any power or right hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right or
power, or any abandonment or discontinuation of steps to enforce such a right or
power, preclude any other or further exercise thereof or the exercise of any
other right or power. The rights and remedies of the parties hereunder are
cumulative and are not exclusive of any rights or remedies that they would
otherwise have. No waiver of any provision of this Agreement or consent to any
departure by any party therefrom shall in any event be effective unless the same
shall be in writing and signed by each of the parties hereto, and then such
waiver or consent shall be effective only in the specific instance and for the
purpose for which given. No notice or demand on any party hereto in any case
shall entitle such party to any other or further notice or demand in similar or
other circumstances. No failure to exercise nor any delay in exercising on the
part of any party hereto, any right, power or privilege under this Agreement,
shall operate as a waiver thereof; further, no single or partial exercise of any
right, power or privilege under this Agreement shall preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
(b) Neither this Agreement nor any provision hereof may be waived,
amended or modified except pursuant to an agreement or agreements in writing
entered into by each of the parties hereto. Each of the parties hereto shall be
bound by any waiver, amendment or modification authorized by this Section 3.05.
SECTION 3.06. Entire Agreement. This Agreement constitutes the entire
contract among the parties relative to the subject matter hereof. Any previous
agreement among the parties with respect to the subject matter hereof is
superseded by this Agreement.
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SECTION 3.07. Waiver of Jury Trial. EACH PARTY HERETO HEREBY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL
BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF,
UNDER OR IN CONNECTION WITH THIS AGREEMENT. EACH PARTY HERETO (I) CERTIFIES THAT
NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (II) ACKNOWLEDGES THAT IT
AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY,
AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 3.07.
SECTION 3.08. Severability. In the event any one or more of the
provisions contained in this Agreement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and therein shall not in any way be
affected or impaired thereby. To the extent permissible, the parties waive any
law that renders this Agreement prohibited or unenforceable.
SECTION 3.09. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall constitute an original but all of which
when taken together shall constitute but one contract.
SECTION 3.10. Headings. Article and Section headings and the Table of
Contents used in this Agreement are for convenience of reference only, are not
part of this Agreement and are not to affect the construction of, or to be taken
into consideration in interpreting, this Agreement.
SECTION 3.11. Jurisdiction: Consent to Service of Process. (a) Each of
the parties hereto irrevocably submits to the nonexclusive jurisdiction of the
United States District Court for the Central District of California in any
action or proceeding arising out of or relating to this Agreement, or for
recognition or enforcement of any judgment, and each of the parties hereto
hereby irrevocably and unconditionally agrees that all claims in respect of any
such action or proceeding may be heard and determined in such Federal court
(except that Congress shall have the right to bring any action or proceeding
against Borrower or its property in the courts of any other jurisdiction which
Congress deems necessary or appropriate in order to realize on the Congress
Collateral). Each of the parties hereto agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
(b) Each of the parties hereto irrevocably and unconditionally waives,
to the fullest extent it may legally and effectively do so, any objection it may
now or hereafter have to the laying of venue of any suit, action or proceeding
pursuant to this Agreement. Each of the parties hereto hereby irrevocably
waives, to the fullest extent permitted by law, the defense of an inconvenient
forum to the maintenance of such action or proceeding in any such court.
(c) Each of the parties hereto irrevocably consents to service of
process in the manner provided for notices in Section 3.01. Nothing in this
Agreement will affect the right of any party hereto to serve process in any
other manner permitted by law.
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SECTION 3.12. Termination of Agreement. This Agreement shall terminate
upon the indefeasible payment in full of the Congress Obligations.
SECTION 3.13. Additional Trade Creditors. Borrowers may add additional
entities as Trade Creditors under this Agreement in its discretion so long as
any such additional Trade Creditor has agreed to provide Borrowers with credit
of $1,000,000.00 or more in the aggregate for Borrowers on terms acceptable to
Borrowers. Such additional Trade Creditor shall be added as a Trade Creditor
under this Agreement effective upon the delivery by Borrowers to the Collateral
Agent and Congress of an Agreement Regarding Additional Trade Creditor in the
form attached hereto as Exhibit B, executed by each Borrower and such additional
Trade Creditor. Upon delivery of such Agreement Regarding Additional Trade
Creditor, the entity designated therein as an Additional Trade Creditor shall be
deemed a Trade Creditor for all purposes under this Agreement, entitled to all
benefits and subject to all obligations set forth in this Agreement.
Notwithstanding anything herein. to the contrary, this Section 3.13 may not be
amended without the prior written consent of each Borrower.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers hereunto duly authorized, as of the date
first above written.
UNITED STATES TRUST COMPANY OF
NEW YORK, AS COLLATERAL AGENT
By: /s/ LOU YOUNG
----------------------------------------
Its: Vice President
----------------------------------------
TRADE CREDITORS:
BMG MUSIC AKA BMG DISTRIBUTION
By: /s/ ROBERT A. NOYES
----------------------------------------
Its: Vice President, Credit
----------------------------------------
EMI MUSIC DISTRIBUTION, A DIVISION OF
CAPITOL RECORDS, INC.
By: /s/ R.A. COTTRELL
----------------------------------------
Its: President
----------------------------------------
POLYGRAM GROUP DISTRIBUTION, INC.
By: /s/ ROBERT M. BAKER, Jr.
----------------------------------------
Its: Vice President, Credit
----------------------------------------
12
<PAGE> 14
ACKNOWLEDGMENT OF BORROWER AND SUBSIDIARY HOLDING
COMPANIES
Each of the undersigned Borrowers and the Subsidiary Holding Companies
hereby approves of, and agrees and consents to, the foregoing Intercreditor and
Subordination Agreement, dated as of October 26, 1998 as the same may be
amended, modified or supplemented from time to time (the "Intercreditor
Agreement") among United States Trust Company of New York, a New York banking
corporation, as collateral agent for the Trade Creditors named therein (the
"Collateral Agent"), the Trade Creditors, and Congress Financial Corporation
(Western). Unless otherwise defined in this Acknowledgment, terms defined in the
Intercreditor Agreement have the same meanings when used in this Acknowledgment.
Each of the Borrowers and the Subsidiary Holding Companies agrees to be
bound by the Intercreditor Agreement and any amendments, modifications or
supplements. Each of the Borrowers and the Subsidiary Holding Companies further
agrees that the Intercreditor Agreement may be amended by Congress, the
Collateral Agent and/or the Trade Creditors without notice to, or the consent
of, the Borrowers, or the Subsidiary Holding Companies except as provided in
Section 3.13 of the Intercreditor Agreement.
BORROWERS
WHEREHOUSE SUBSIDIARY I CO., INC.,
a Delaware corporation
By: /s/ R. S. KELLEHER
---------------------------------------
ROBERT S. KELLEHER
Senior Vice President-
Chief Financial Officer
WHEREHOUSE SUBSIDIARY II CO., INC.,
a California corporation
By: /s/ R. S. KELLEHER
---------------------------------------
ROBERT S. KELLEHER
Senior Vice President-
Chief Financial Officer
WHEREHOUSE SUBSIDIARY III CO., INC.,
a Delaware corporation
By: /s/ R. S. KELLEHER
----------------------------------------
ROBERT S. KELLEHER
Senior Vice President-
Chief Financial Officer
[Intercreditor and Subordination Agreement]
<PAGE> 15
WHEREHOUSE HOLDING I CO., INC.,
a Delaware corporation
By: /s/ R. S. KELLEHER
--------------------------------------
WHEREHOUSE HOLDING II CO., INC.,
a Delaware corporation
By: /s/ R. S. KELLEHER
--------------------------------------
ROBERT S. KELLEHER
Senior Vice President-
Chief Financial Office
[Intercreditor and Subordination Agreement]
<PAGE> 16
EXHIBIT A
Description of Trade Collateral
All of Borrowers' now owned or hereafter existing Inventory (as defined
below) and all products and proceeds of Inventory, in any form, including,
without limitation, insurance proceeds and all claims against third parties for
loss or damage to or destruction of any or all of the Inventory.
For purposes of this description: (i) "Inventory" shall mean tangible
personal property held for sale and raw materials, work in process and materials
used, produced or consumed in business, and shall include tangible personal
property sold on a sale or return basis, tangible personal property returned by
the purchaser following a sale thereof and tangible personal property
represented by Documents of Title, but shall not include Rental Inventory; and
(ii) "Documents of Title" shall mean a bill of lading, dock warrant, dock
receipt, warehouse receipt or order for the delivery of goods, and also any
other document which in the regular course of business or financing is treated
as adequately evidencing that the person in possession of it is entitled to
receive, hold and dispose of the document and the goods it covers, and (iii)
"Rental Inventory" shall mean all finished merchandise of Borrowers held for
rental to retail customers, provided that such merchandise has not previously
been reported to the Collateral Agent as comprising part of Borrowers'
Inventory.
<PAGE> 17
EXHIBIT B
Agreement Regarding Additional Trade Creditor
This Agreement Regarding Additional Trade Creditor ("Agreement") is dated as of
_________________,_____ by and between _____________________ ("Additional Trade
Creditor") and [insert one or more of Borrowers as appropriate] ("Borrower"), as
successor to WEI Acquisition Co.
A. Certain of Borrower's trade creditors have entered into that
certain Intercreditor and Subordination Agreement (the "Intercreditor
Agreement") dated as of October 26, 1998, by and among United Trust Company of
New York, as Collateral Agent for the trade creditors named therein ("Collateral
Agent") and Congress Financial Corporation (Western), a California corporation
("Congress").
B. Pursuant to that certain Security Agreement dated as of
October 26, 1998, by and between Borrower and Collateral Agent (the "Trade
Security Agreement"), Borrower granted to Collateral Agent, for the benefit of
Trade Creditors (as defined therein), a lien in its sale inventory and proceeds
thereof. Section _____ of the Trade Security Agreement provides that Borrower
may designate additional entities as Trade Creditors entitled to the benefits of
such lien granted pursuant to the Trade Security Agreement.
C. The Trade Creditors who are parties to the Intercreditor
Agreement and the Trade Security Agreement have entered into that certain
[Collateral Agent Agreement] dated as of _____________, 1998 pursuant to which
Collateral Agent has been appointed by such Trade Creditors. Section _______
of the Collateral Agent Agreement provides that Borrower may designate
additional entities as Trade Creditors for purposes of the Collateral Agent
Agreement.
2
<PAGE> 18
D. Borrower and Additional Trade Creditor desire to add
Additional Trade Creditor as a Trade Creditor for purposes of the Intercreditor
Agreement, the Trade Security Agreement and the Collateral Agent Agreement.
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
Section 1. Additional Trade Creditor acknowledges that it has
committed to extend an open line of credit to Borrower equal to $1,000,000.00 or
more and Borrower acknowledges that the terms and conditions of this line of
credit are acceptable to it; provided, however, that nothing herein shall
obligate Additional Trade Creditor to maintain this open line of credit for any
period of time and the parties acknowledge that the Additional Trade Creditor is
free to adjust the terms and conditions (or eliminate) this line of credit at
any time.
Section 2. Additional Trade Creditor acknowledges that it has
received copies of and agrees to be bound by the terms of the Intercreditor
Agreement, the Trade Security Agreement and the Collateral Agent Agreement and
appoints Collateral Agent pursuant to the terms of the Collateral Agent
Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers hereunder to duly authorize, as of the
date first above written.
[BORROWER]
By:
-------------------------------------
Its:
-------------------------------------
[ADDITIONAL TRADE CREDITOR)
By:
-------------------------------------
Its:
-------------------------------------
3
<PAGE> 1
Exhibit 10.24
SECURITY AGREEMENT
THIS SECURITY AGREEMENT, dated as of October 26, 1998, is between and
among Wherehouse Subsidiary I Co., Inc., Wherehouse Subsidiary II Co., Inc., and
Wherehouse Subsidiary III Co., Inc., (each a "Borrower," and collectively, the
"Borrowers"), and United States Trust Company of New York, a New York banking
corporation, as collateral agent ("Collateral Agent") for BMG Distribution a/k/a
BMG Music, EMI Music Distribution, a division of Capitol Records, Polygram Group
Distribution, Inc., Relativity Entertainment Distribution, Inc., Sony Music
Entertainment, Inc., Universal Music and Video Distribution, Inc. and
Warner/Elektra/Atlantic Corporation and such other entities that are added
hereto pursuant to paragraph 15 (collectively "Trade Creditors").
WHEREAS, Wherehouse Entertainment, Inc. ("Wherehouse") has acquired all
the outstanding capital stock of Wherehouse Holding Corporation I (formerly
known as Blockbuster Music Holding Corporation) and Wherehouse Holding
Corporation II (formerly known as Blockbuster SC Holding Corporation)
(collectively the "Subsidiary Holding Companies"); and
WHEREAS, the Subsidiary Holding Companies own all of the capital stock
of the Borrowers; and
WHEREAS, Borrowers are obligated to Trade Creditors for the repayment of
certain indebtedness created by the extension of credit by each of the Trade
Creditors; and
WHEREAS, the parties hereto desire to secure the obligations of
Borrowers to Trade Creditors.
NOW, THEREFORE, intending to be legally bound, Borrowers, Trade
Creditors and Collateral Agent agree as follows:
1. Definitions.
Whenever used herein the following terms shall, unless the context
otherwise requires, have the following respective meanings:
(a) "Account" means any right to payment for goods sold or leased or for
services rendered which is not evidenced by an instrument or chattel paper.
(b) "Account Debtor" means the Person who is obligated on an Account or
Contract Right.
<PAGE> 2
(c) "Collateral" means for each Borrower, all of its now owned or
hereafter existing Inventory and all products and proceeds of Inventory, in any
form, including, without limitation, insurance proceeds and all claims against
third parties for loss or damage to or destruction of any or all of the
Inventory.
(d) "Contract Right" means any right to payment under a contract
(including, but not limited to, contracts for the sale or leasing of goods or
for the rendering of services) not yet earned by performance and not evidenced
by an instrument or chattel paper.
(e) "Document of Title" means a bill of lading, dock warrant, dock
receipt, warehouse receipt or order for the delivery of goods, and also any
other document which in the regular course of business or financing is treated
as adequately evidencing that the Person in possession of it is entitled to
receive, hold and dispose of the document and the goods it covers.
(f) "Interest Rate" means the prime rate as publicly announced from time
to time by First Union National Bank, or its successors, at its office in
Philadelphia, Pennsylvania, plus two (2) percent.
(g) "Inventory" means any and all of the following property in the
possession of the Borrowers: tangible personal property held for sale and raw
materials, work in process and materials used, produced or consumed in business,
and shall include tangible personal property sold on a sale or return basis,
tangible personal property returned by the purchaser following a sale thereof
and tangible personal property represented by Documents of Title, but shall not
include Rental Inventory.
(h) "Event of Default" shall have the meaning set forth in Section 12.
(i) "Liabilities" means all existing and future liabilities, whether
absolute or contingent, of each Borrower to Trade Creditors of any nature
whatsoever arising under the then existing and outstanding extension of credit.
(j) "Permitted Encumbrances" means (1) liens securing the payment of
taxes, either not yet overdue or the validity of which are being contested in
good faith by appropriate proceedings diligently pursued and available to each
Borrower and with respect to which adequate reserves have been set aside on its
books, (2) security and other deposits (including customs and revenue deposits)
in the ordinary course of any Borrower's business, (3) liens in favor of credit
card processors with respect to credit card receivables processed by them, and
(4) non-consensual statutory liens (other than liens securing the payment of
taxes) arising in the ordinary course of any Borrower's business.
(k) "Person" means an individual, a corporation, a government or
governmental subdivision or agency or instrumentality, a business trust, an
estate, a trust, a partnership,
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<PAGE> 3
a cooperative, an association, two or more Persons having a joint or common
interest, or any other legal or commercial entity.
(l) "Proceeds" means whatever is received when Collateral or Proceeds of
Collateral is sold, exchanged, collected or otherwise disposed of and also
includes payments and rights to payment under any policies of insurance with
respect to any Collateral. The term includes the Account arising when the right
to payment is earned under a Contract Right representing such Proceeds and,
without limitation, any accounts receivable representing such Proceeds.
(m) "Rental Inventory" means all finished merchandise of Borrowers held
for rental to retail customers, provided that such merchandise has not been
reported previously to Collateral Agent as comprising part of Borrowers'
Inventory.
(n) "Required Trade Creditors" shall mean Trade Creditors that have
extended trade credit in a principal amount at least equal to 66.6% in principal
amount of the aggregate trade credit then extended by all Trade Creditors to a
Borrower or Borrowers, as applicable.
2. Grant of Security Interest.
To secure the payment, promptly when due, and the punctual performance
of all of its Liabilities, each Borrower hereby grants to Collateral Agent, for
the benefit of Trade Creditors, a continuing lien upon and security interest in
all of such Borrower's Collateral, subject only to the terms of that certain
Intercreditor and Subordination Agreement, dated as of October 26, 1998 (the
"Congress Intercreditor Agreement"), between and among Collateral Agent, Trade
Creditors and Congress Financial Corporation (Western), a California corporation
("Congress"). Each Borrower, at its expense, shall take such actions (including,
without limitation, the filing of Uniform Commercial Code financing statements)
as shall be necessary or appropriate to perfect, and maintain the perfection of,
the security granted hereby.
3. Records and Certifications.
Each Borrower shall faithfully keep complete and accurate books, records
and lists and make all necessary entries therein to reflect the quantities,
costs, current values and locations of its Inventory and the transactions and
facts giving rise to its Accounts and Contract Rights constituting Proceeds of
the Collateral, and each Borrower shall keep the Collateral Agent fully and
accurately informed as to the locations of all such books, lists and records.
Each Borrower shall permit Collateral Agent's agents to have access during
normal business hours to such books, lists and records on such Borrower's
premises for the purpose of examining, auditing and copying them. If a Borrower
refuses Collateral Agent access in accordance with this provision, then
Collateral Agent shall have the right to take
-3-
<PAGE> 4
possession of such books, lists and records, which right shall be enforceable by
an action of replevin or by any other appropriate remedy at law or in equity.
4. Title, etc.
Each Borrower has acquired absolute and exclusive title to each and
every item or unit of the Collateral free and clear of all liens, claims,
security interests and other encumbrances, except (x) the security interest
granted by such Borrower to Congress, (y) the security interest created hereby
in favor of Collateral Agent, for the benefit of Trade Creditors, and (z)
Permitted Encumbrances. Each Borrower will warrant and defend its title to the
Collateral, subject to the rights of Collateral Agent and Congress, against the
claims and demands of all other persons whomsoever. Without limiting the
generality of the foregoing, each Borrower will not pledge, assign or otherwise
encumber, or permit any liens or security interests to attach to, any of the
Collateral, nor permit any of the Collateral to be levied upon under any legal
process, other than those liens described above. Upon any breach of the
foregoing covenant against encumbrances, Collateral Agent may, at its sole
election but without obligation to do so, discharge the encumbrance for the
account of and without notice to such Borrower, and all expenses incurred by
Collateral Agent in so doing, together with interest thereon at the Interest
Rate, shall be added to the Liabilities and shall be payable by such Borrower on
demand. Without the prior written consent of Collateral Agent in each case, each
Borrower will not sell, exchange, lease, lend, salvage, replace or otherwise
dispose of any item or unit of the Collateral or any of Borrower's rights
therein, except that so long as such Borrower is not in default hereunder, such
Borrower shall have the right in the ordinary course of its business to process
and sell its Inventory and collect payment therefor in the ordinary course of
business and to return Inventory to the suppliers thereof in the ordinary course
of its business, in each case free and clear of the security interest in favor
of Collateral Agent granted herein.
5. Taxes and Liens.
Each Borrower will immediately notify Collateral Agent in the event
there ever arises against any of the Collateral any lien, assessment or tax or
other liability other than the lien of Congress, the lien created hereby in
favor of Collateral Agent or Permitted Encumbrances, whether or not entitled to
priority over Collateral Agent's security interest hereunder. In any such event,
whether or not such notice is given, Collateral Agent shall (unless such lien,
assessment, tax or other liability is the subject of an appeal by such Borrower
and an appropriate bond has been posted to stay the effect of any resulting
lien) have the right (but shall be under no obligation) to pay any tax or other
liability of such Borrower deemed by Collateral Agent in good faith to affect
Collateral Agent's interests hereunder. Each Borrower shall repay to Collateral
Agent on demand all sums which Collateral Agent shall have paid under this
section in respect of taxes or other liabilities of such Borrower, with interest
thereon at the Interest Rate, and such Borrower's liability to Collateral Agent
for such repayment with interest shall be included in the Liabilities.
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<PAGE> 5
Collateral Agent shall be subrogated to the extent of any such payment by it to
all the rights and liens of the payee against such Borrower's assets.
6. Insurance.
Each Borrower shall bear all risk of loss, destruction and damage to any
and all of the Inventory from any cause whatsoever at any time during the term
of this Agreement, and shall at its own cost and expense obtain and keep in full
force and effect, with insurers of recognized standing in the financial
community or otherwise approved by Collateral Agent, all risk of physical loss
or damage insurance covering the Inventory wherever the same may be, insuring
against the risks of fire, explosion, theft and such other risks as are
customarily insured against by corporations engaged in the same business and
similarly situated with such Borrower (and specifically including vandalism and
malicious mischief coverage), in an amount or amounts usually carried by
corporations engaged in the same business and similarly situated with such
Borrower. All policies of such insurance shall be written for the benefit of
Borrower, Congress and Collateral Agent as the insured, shall bear an
endorsement naming Collateral Agent, Congress and Borrower as loss payees, as
their respective interests may appear, and shall provide for at least ten (10)
days' advance written notice to Collateral Agent of any cancellation. Collateral
Agent and each Borrower agree that all insurance proceeds shall be payable to
such Borrower if at the time of such payment no Event of Default then exists. A
copy of all such policies (or certificates therefor) shall be delivered to
Collateral Agent. If any Borrower fails to pay any premium on any such
insurance, Collateral Agent shall have the right, but shall be under no
obligation, to pay such premium for such Borrower's account. Each Borrower shall
repay to Collateral Agent on demand all sums which Collateral Agent shall have
paid under this section in respect of insurance premiums, with interest thereon
at the Interest Rate, and such Borrower's liability to Collateral Agent for such
repayment with interest shall be included in the Liabilities. Each Borrower
hereby assigns to Collateral Agent and Congress, as their interests may appear,
any return or unearned premium which may be due upon the cancellation for any
reason whatsoever of any policy of insurance maintained in respect of the
Collateral and hereby directs the insurer to pay Collateral Agent and Congress,
as their interests may appear, any amount so due, except that Collateral Agent
shall have no right to any such amount unless and until there exists an Event of
Default. Each Borrower's right to receive payment of any such return or unearned
premium and the proceeds of any such insurance shall constitute a part of the
Collateral to the extent allocable to Inventory that constitutes Collateral for
all purposes hereof.
7. Control of and Access to Inventory
Each Borrower shall maintain control of its Inventory at all times,
provided that upon the occurrence of an Event of Default, Collateral Agent shall
have the right to take possession of such Inventory as constitutes Collateral or
any portion thereof, subject only to the provisions of the Congress
Intercreditor Agreement, and for the purpose of taking custody of such
Inventory, each Borrower agrees that upon request of Collateral Agent it
-5-
<PAGE> 6
will lease warehousing space in such Borrower's own premises to Collateral Agent
and will erect such structures and post such signs as Collateral Agent may
require in order to place such Inventory under the exclusive control of
Collateral Agent. Notwithstanding any taking of possession by Collateral Agent
of any Inventory, the same shall remain at all times at such Borrower's sole
risk, and to the full extent permitted by law Collateral Agent shall not be
responsible for any loss, damage or diminution in the value thereof. If any of a
Borrower's Inventory constituting Collateral is or becomes evidenced by a
Document of Title, Collateral Agent may require such Borrower to promptly
deliver the same to Collateral Agent appropriately endorsed to the order of
Collateral Agent subject only to the provisions of the Congress Intercreditor
Agreement. All costs of transportation, packaging, custody, processing, storage,
insurance and salvage of any unit or item of any Borrower's Inventory which may
be incurred by Collateral Agent shall be promptly repaid to Collateral Agent by
such Borrower together with interest thereon at the Interest Rate, and such
Borrower's liability to Collateral Agent for such repayment with interest shall
be included in the Liabilities. Each Borrower will afford Collateral Agent's
agents reasonable access during normal business hours to such Borrower's
Inventory from time to time upon request for purposes of examination, inspection
and appraisal and to verify such Borrower's records pertaining thereto.
8. Notices of Loss, etc.
Borrowers will immediately notify Collateral Agent of any event causing
any material deterioration, loss or depreciation in value of such of any
Borrower's Inventory as constitutes the Collateral.
9. Accounts and Contract Rights.
(a) Collateral Agent hereby authorizes each Borrower to collect all
Accounts constituting Proceeds of Collateral from the Account Debtors. Upon the
occurrence of an Event of Default, Collateral Agent shall have the right, acting
if it so chooses in each Borrower's name, acting in a commercially reasonable
manner, to collect such Borrower's Accounts constituting Proceeds of the
Collateral itself, to sell, assign, compromise, discharge or extend the time for
payment of any Account, to institute legal action for the collection of any
Account, and to do all reasonable acts and things necessary or incidental
thereto; provided, however, that such rights shall be subject to the provisions
of the Congress Intercreditor Agreement. Each Borrower hereby ratifies all that
Collateral Agent shall do in accordance with the terms hereof. Collateral Agent
may at any time, after the occurrence of an Event of Default and subject to the
provisions of the Congress Intercreditor Agreement, notify any Account Debtor
that the Account constituting Proceeds of Collateral payable by such Account
Debtor has been assigned to Collateral Agent and is to be paid directly to
Collateral Agent. At Collateral Agent's request, after the occurrence of an
Event of Default and subject to the provisions of the Congress Intercreditor
Agreement, the applicable Borrower shall so notify Account Debtors and shall
indicate on all billings to Account Debtors that payments thereon are to be made
to Collateral Agent.
-6-
<PAGE> 7
10. Significant Locations.
Borrowers represent and warrant to Collateral Agent as follows: (i) the
chief executive office of each of the Borrowers is located in Los Angeles
County, California, and such chief executive office is the sole location where
Borrowers maintain the records with respect to the Collateral; (ii) the
locations set forth in Schedule A hereto are the only locations where Borrowers
store or process Inventory. Borrowers will notify Collateral Agent in writing
prior to any change in the locations specified above and will reimburse
Collateral Agent for the costs of any additional Uniform Commercial Code filings
requested by Collateral Agent as a result thereof. Each Borrower agrees to
notify Collateral Agent promptly in the event of a change in the location of any
place of business or the establishment of any additional place of business of
such Borrower.
11. Further Assurances; Information.
Without limiting any Borrower's obligations under paragraph 2 hereof,
each Borrower will execute and deliver to Collateral Agent from time to time all
such other agreements, instruments and other documents (including without
limitation all requested financing and continuation statements) and do all such
other further acts and things as Collateral Agent may reasonably request in
order to further evidence or carry out the intent of this Agreement or to
perfect the lien and security interest created hereby or intended so to be.
Borrowers will provide to Collateral Agent and each of Trade Creditors all
reports and appraisals relating to the Collateral required by Congress at the
same time such reports are delivered to Congress.
12. Default and Remedies.
Each and every Borrower shall be in default of this Agreement upon the
occurrence of any one or more of the following events (each an "Event of
Default"):
(1) the failure by a Borrower to observe any material provision
of this Agreement, which failure shall continue fifteen days
after written notice thereof provided by Collateral Agent; or
(2) notice to Collateral Agent by Required Trade Creditors for
any Borrower of the failure by such Borrower to observe any
material provision of any currently existing credit agreements
or arrangements between such Borrower and Required Trade
Creditors.
(3) notice to Collateral Agent by Required Trade Creditors for
any Borrower of the failure by Wherehouse to observe any
material provision of any currently existing credit agreements
or arrangements between Wherehouse and Required Trade Creditors.
-7-
<PAGE> 8
Upon the occurrence of any Event of Default which shall be continuing,
(i) upon notice by Collateral Agent to Borrowers, the entire unpaid amount of
such of the Liabilities as are not then otherwise due and payable shall become
immediately due and payable without notice to or demand on Borrowers or any
guarantor of any of the Liabilities (Borrowers and all such guarantors,
collectively, the "Obligors") and (ii) subject to the provisions of the Congress
Intercreditor Agreement, Collateral Agent may at its option exercise from time
to time any and all rights and remedies available to it under the Uniform
Commercial Code or otherwise, including the right to collect, assemble, receipt
for or foreclose or otherwise realize upon any of the Collateral and to dispose
of any of the Collateral at one or more public or private sales or other
proceedings, and each Borrower agrees that Collateral Agent or its nominee may
become the purchaser at any such sale or sales. Each Borrower agrees that ten
(10) days shall be reasonable prior notice of the date of any public sale or
other disposition of all or any part of the Collateral, or of the date on or
after which any private sale or other disposition of the same may be made.
Subject to the provisions of the Congress Intercreditor Agreement, all
rights and remedies granted Collateral Agent hereunder or under any other
agreement between Collateral Agent and Borrowers shall be deemed concurrent and
cumulative and not alternative, and Collateral Agent may proceed with any number
of remedies at the same time or at different times until all the Liabilities are
fully satisfied. The exercise of any one right or remedy shall not be deemed a
waiver or release of or an election against any other right or remedy, and
Collateral Agent may proceed against any one or more of the Obligors and the
Collateral and any other Collateral granted by each Borrower to Collateral Agent
under any other agreement, all in any order and through any available remedies.
A waiver on any one occasion shall not be construed as a waiver or bar on any
future occasion. All property of any kind held at any time by Collateral Agent
as Collateral shall stand as one general continuing collateral security for all
the Liabilities and may be retained by Collateral Agent as security until all
the Liabilities are fully satisfied.
13. Payment of Expenses
Borrowers will pay to Collateral Agent on demand any and all expenses
(including reasonable attorneys' fees and legal expenses) which may have been
incurred by Collateral Agent with interest at the Interest Rate (i) in
connection with the interpretation or enforcement of this Agreement, (ii) in the
prosecution or defense of any action growing out of or connected with the
subject matter of this Agreement, the Liabilities, the Collateral or any of
Collateral Agent's rights therein or thereto; or (iii) in connection with the
custody, preservation, use, operation, preparation for sale or sale of any of
the Collateral, the incurring of all of which are hereby authorized to the
extent Collateral Agent in good faith deems the same advisable or is directed to
do so by Trade Creditors. Borrowers' liability to Collateral Agent for any such
payment with interest shall be included in the Liabilities. The enumeration of
specific Events of Default shall not compromise the demand character of any
Liability which by its terms is payable on demand and demand may be made thereon
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<PAGE> 9
at any time irrespective of the non-occurrence of any such Event of Default, any
provision hereof to the contrary notwithstanding. The Proceeds of any Collateral
received by Collateral Agent at any time before or after default, whether from a
sale or other disposition of Collateral or otherwise, or the Collateral itself,
may be applied with reasonable promptness to the payment in full or in part of
such of the Liabilities and in such order and manner as Collateral Agent may
elect or shall be directed by Trade Creditors. Each Borrower to the extent of
its rights in the Collateral waives and releases any right to require Collateral
Agent to collect any of the Liabilities from any other of the Collateral or any
other Collateral then held by Collateral Agent under any theory of marshaling of
assets or otherwise, provided, however, that Collateral Agent be subject to the
obligations of a Collateral Agent under the Uniform Commercial Code to act in a
commercially reasonable manner.
14. Power of Attorney.
Each Borrower hereby irrevocably appoints any officer, employee or agent
of Collateral Agent as such Borrower's true and lawful attorney-in-fact with
power, upon the occurrence of an Event of Default, to (i) endorse such
Borrower's name upon any notes, checks, drafts, money orders, or other
instruments of payment that may come into Collateral Agent's possession and
which constitute proceeds of any Collateral; (ii) sign and endorse such
Borrower's name upon any documents of title, invoices, freight or express bills,
assignments, verifications and notices in connection with any of the Collateral,
and any instruments or documents relating thereto or to such Borrower's rights
therein; and (iii) execute in such Borrower's name and file one or more
financing statements covering the Collateral. Any such attorney of such Borrower
shall have full power to do any and all things necessary to be done with respect
to the above transactions as fully and effectually as such Borrower might do,
and each Borrower hereby ratifies all that said attorney shall lawfully do or
cause to be done by virtue hereof.
15. Additional Trade Creditors
Each Borrower may add additional entities as Trade Creditors under this
Agreement in its discretion so long as any such additional Trade Creditor has
agreed to provide to the Borrowers in the aggregate, as of the date it is added,
with credit of $1,000,000 or more on terms acceptable to such Borrower. Such
additional Trade Creditor shall be added as a Trade Creditor under this Security
Agreement effective upon the delivery by such Borrower to Collateral Agent and
Congress of an (Agreement Regarding Additional Trade Creditor) - in the form
attached hereto as Exhibit A, executed by such Borrower and such additional
Trade Creditor. Upon delivery of such Agreement Regarding Additional Trade
Creditor, the entity designated therein as an Additional Trade Creditor shall be
deemed a Trade Creditor for all purposes under this Security Agreement, entitled
to all benefits and subject to all obligations set forth in this Security
Agreement. Notwithstanding anything herein to the contrary, this Section 15 may
not be amended without the consent of each Borrower.
-9
<PAGE> 10
16. Miscellaneous.
(a) At no time during the past five years has any Borrower been known by
or used any name, including any trade or fictitious name, other than Blockbuster
Music Retail, Inc., Show Industries, Inc., Blockbuster SC Music Corporation, or
as set forth in the premises of this Agreement. A Borrower will give Collateral
Agent notice prior to any change in its name.
(b) This Agreement shall commence on the date hereof and shall continue
in full force and effect so long as any of the Liabilities shall exist from time
to time. If after the discharge of all Liabilities, any Borrower should
subsequently incur additional Liabilities, this Agreement shall automatically be
revived and thereafter continue in full force and effect until such time as such
Borrower, having no Liabilities then outstanding and not then being entitled to
incur any additional Liabilities, shall give written notice to Collateral Agent
of its election to terminate this Agreement.
(c) Absent manifest error, statements of account rendered to any
Borrower by Collateral Agent hereunder shall become final and be effective
unless objection thereto is made within thirty (30) days of receipt by such
Borrower.
(d) No modification or waiver of any provision hereof shall be effective
unless the same is in writing and signed by the party against whom its
enforcement is sought.
(e) This Agreement may be signed in any number of counterparts and by
different parties in separate counterparts, all with the same effect as if the
signatures were on the same counterpart, and all counterparts hereof, taken
together, shall constitute but one and the same Agreement.
(f) Words of any gender shall include any other gender, and singular
words shall include the plural and vice versa, whenever the same is necessary to
produce a fair and meaningful construction.
(g) All the rights and remedies of Collateral Agent hereunder shall be
cumulative with and not alternative to or in lieu of Collateral Agent's rights
and remedies under any other agreement or agreements.
(h) This Agreement shall bind and inure to the benefit of the parties
and their respective successors and assigns, except that a Borrower shall not
assign any of its respective rights hereunder without the prior written consent
of the other party hereto, which shall not be unreasonably withheld.
(i) Captions in this Agreement are included for convenience of reference
only and shall not constitute a part of this Agreement for any other purpose.
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<PAGE> 11
(j) Any provision hereof which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without affecting the validity or
enforceability of the remainder of this Agreement or the validity or
enforceability of such provision in any other jurisdiction.
(k) This Agreement and all issues arising hereunder shall be governed by
the laws of the State of California.
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<PAGE> 12
IN WITNESS WHEREOF, this Agreement has been duly executed under due
authorization on the day and year first set forth above.
Wherehouse Subsidiary I Co., Inc. United States Trust Company of New
York, Collateral Agent
By: /s/ R.S. KELLEHER By: /s/ LOU YOUNG
------------------------------- --------------------------
Title: S.V.P. - Chief Financial Title: Vice President
Officer
Wherehouse Subsidiary II Co., Inc.
By: /s/ R.S. KELLEHER
-------------------------------
Title: S.V.P. - Chief Financial
Officer
Wherehouse Subsidiary III Co., Inc.
By: /s/ R.S. KELLEHER
-------------------------------
Title: S.V.P. - Chief Financial
Officer
-12-
<PAGE> 1
EXHIBIT 10.25
- --------------------------------------------------------------------------------
WHEREHOUSE SUBSIDIARY I CO., INC.
WHEREHOUSE SUBSIDIARY II CO., INC.
WHEREHOUSE SUBSIDIARY III CO., INC.
Trade Creditors
--------------------------------------
INTERCREDITOR AND COLLATERAL AGENCY AGREEMENT
--------------------------------------
Dated as of October 26, 1998
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
SECTION 1 - DEFINITIONS ............................................ 2
1.1 Defined Terms ................................................ 2
1.2 Other Definitional Provisions ................................ 3
SECTION 2 - THE COLLATERAL AGENT ................................... 4
2.1 Appointment .................................................. 4
2.2 Control by the Collateral Agent and Required Trade Creditors . 4
SECTION 3 - NEW TRADE CREDITORS .................................... 5
SECTION 4 - MANNER OF DISTRIBUTIONS ................................ 5
4.1 Distributions of Proceeds Upon Exercise of Remedies .......... 5
4.2 Address for Distributions .................................... 6
4.3 Outstanding Trade Credit ..................................... 6
SECTION 5 - RELEASE OF COLLATERAL; TERMINATION OF SECURITY AGREEMENT 7
SECTION 6 - CONCERNING THE COLLATERAL AGENT ........................ 7
6.1 Absence of Duties Not Specified, etc. ........................ 8
6.2 Reliance by Collateral Agent ................................. 8
6.3 Default Notices .............................................. 9
6.4 Rights to Conduct Ordinary Business .......................... 9
6.5 Failure to Act ............................................... 9
6.6 Resignation or Removal of Collateral Agent ................... 9
6.7 Additional or Separate Agents ................................ 10
6.8 Authorization ................................................ 10
SECTION 7 - COVENANTS OF THE COMPANIES ............................. 10
7.1 Payment of Expenses and Taxes ................................ 10
7.2 Indemnity .................................................... 11
7.3 Additional Secured Obligations ............................... 11
7.4 Survival ..................................................... 12
SECTION 8 - MISCELLANEOUS .......................................... 12
8.1 Indemnification .............................................. 12
8.2 Expenses as Obligations ...................................... 12
8.3 Governing Law ................................................ 13
8.4 Survival of Representations, Warranties and Covenants ........ 13
8.5 Counterparts ................................................. 13
8.6 Successors and Assigns ....................................... 13
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
8.7 Table of Contents and Headings ............................... 13
8.8 Waiver of Jury Trial ......................................... 13
8.9 Severability ................................................. 13
8.10 Entire Agreement ............................................ 13
8.11 Amendments, Etc. ............................................ 13
8.12 Waiver ...................................................... 14
8.13 Notices and Distribution .................................... 14
8.14 Benefit of Covenants ........................................ 14
</TABLE>
-ii-
<PAGE> 4
INTERCREDITOR AND COLLATERAL AGENCY AGREEMENT
INTERCREDITOR AND COLLATERAL AGENCY AGREEMENT (the "Agreement"), dated
as of October 26, 1998, between and among WHEREHOUSE SUBSIDIARY I Co., INC.
(formerly known as BLOCKBUSTER MUSIC RETAIL, INC.), a Delaware corporation,
WHEREHOUSE SUBSIDIARY II CO., INC. (formerly known as SHOW INDUSTRIES, INC.), a
California corporation, and WHEREHOUSE SUBSIDIARY III CO., INC. (formerly known
as BLOCKBUSTER SC MUSIC CORPORATION), a Delaware corporation (each a "Company,"
and collectively the "Companies"), each of the TRADE CREDITORS listed on the
signature pages hereof (the "Trade Creditors"), and UNITED STATES TRUST COMPANY
OF NEW YORK, a New York banking corporation, in its capacity as Collateral Agent
for the Trade Creditors. Capitalized terms used herein without other definition
have the respective meanings assigned or referred to in Section 1.
W I T N E S S E T H :
WHEREAS, Wherehouse Entertainment, Inc. ("Wherehouse") has acquired all
the outstanding capital stock of Wherehouse Holding Corporation I (formerly
known as Blockbuster Music Holding Corporation) and Wherehouse Holding
Corporation II (formerly known as Blockbuster SC Holding Corporation)
(collectively the "Subsidiary Holding Companies"); and
WHEREAS, the Subsidiary Holding Companies own all of the capital stock
of the Companies; and
WHEREAS, Companies and the Trade Creditors have entered into certain
agreements, documents and instruments pursuant to which the Trade Creditors have
agreed to extend certain trade financing to the Companies on the terms and
conditions set forth therein and, as a condition to such trade financing,
Companies have granted security interests in certain Collateral to the
Collateral Agent for the benefit of the Trade Creditors pursuant to that certain
Security Agreement of even date herewith (the "Security Agreement"); and
WHEREAS, Congress Financial Corporation (Western) ("Congress") and
Companies have entered into various agreements, including that certain Loan and
Security Agreement and other agreements, documents and instruments, of even date
herewith, as amended or modified from time to time (collectively, the "Senior
Loan Agreement"), pursuant to which Congress has agreed to extend certain loans
and financial accommodations to Companies, and, as a condition to such facility,
Companies have granted security interests in certain Collateral to Congress; and
<PAGE> 5
WHEREAS, the Collateral Agent, the Trade Creditors and Congress have
entered into that certain Intercreditor and Subordination Agreement, of even
date herewith (the "Congress Intercreditor Agreement") relating to the parties'
respective interests in Collateral of Borrowers; and
WHEREAS, the Trade Creditors desire to approve the Collateral Agent and
agree upon the parties' respective rights in and to the Collateral, subject to
the security interest of the Collateral Agent.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION 1
DEFINITIONS
1.1 Defined Terms. All capitalized terms used herein and not otherwise
defined herein shall have the meaning assigned to such terms in the Security
Agreement. For purposes of this Agreement, the following terms shall have the
following respective meanings:
"Accelerated Secured Principal" shall mean any Secured Principal which
shall have been declared or become due and payable prior to its scheduled
maturity because of an Event of Default.
"Affiliate" of any Person shall mean such Person, any subsidiary of such
Person, and any entity directly or indirectly controlled by or under common
control with such Person, including without limitation any entity in which such
Person holds, directly or indirectly, 20% or more of the voting securities or
other equity interests.
"Agreement" shall mean this Intercreditor and Collateral Agency
Agreement, including all and any amendments hereto and modifications hereof and
all schedules and exhibits hereto and thereto.
"Acceptance Instrument" shall mean an agreement entered into by a
prospective Trade Creditor substantially in the form of Exhibit A hereto.
"Business Day" shall mean each day other than Saturdays, Sundays and
each day on which national banking institutions in California are permitted or
required to be closed.
"Collateral Agent" shall mean United States Trust Company of New York, a
New York banking corporation, solely in its role as collateral agent for the
Trade Creditors under this Agreement, or any successor collateral agent
hereunder.
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<PAGE> 6
"Company" shall have the meaning set forth in the introductory paragraph
of this Agreement.
"Congress Intercreditor Agreement" shall have the meaning set forth in the
recitals.
"Event of Default" shall mean any event or condition which, under the
terms of any agreement with a Trade Creditor, allows such Trade Creditor to
accelerate the obligations of any of the Companies thereunder.
"Indemnified Liabilities" shall have the meaning set forth in Section 7.2
hereof.
"Lien" shall mean any mortgage, lien, pledge, charge, lease, claim,
security interest or encumbrance of any kind, including, without limitation,
the interest of a vendor or lessor under any conditional sale agreement,
capital lease or other title retention agreement.
"Obligations" shall mean all obligations and liabilities of the Companies,
the payment or performance of which is secured or is purported to be secured
under the Security Agreement.
"Person" shall mean any individual, corporation, partnership, trust, joint
venture, unincorporated association or other enterprise or any government or
any agency, instrumentality or political subdivision thereof.
"Required Trade Creditors" shall mean Trade Creditors that have extended
trade credit in a principal amount at least equal to 66.6% in dollar amount of
the aggregate trade credit then extended by all Trade Creditors to the Company
or Companies, as applicable.
"Security Agreement" shall have the meaning set forth in the recitals.
"Secured Principal" shall mean at any time the principal amount of trade
credit extended by the Trade Creditors.
1.2 Other Definitional Provisions.
(a) Definitions hereunder shall be equally applicable to the singular and
plural forms of the terms defined.
(b) The words "include," "includes" and "including" shall be deemed to be
followed by the words "without limitation" unless the context otherwise
requires.
(c) References to any Person shall include a reference to such Person's
permitted successors and assigns.
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<PAGE> 7
SECTION 2
THE COLLATERAL AGENT
2.1 Appointment. The Trade Creditors appoint and authorize United States
Trust Company of New York, a New York banking corporation, (or its successor as
appointed hereunder) to act as Collateral Agent hereunder with such powers as
are specifically granted to the Collateral Agent by the terms of this Agreement
or by the Security Agreement. The Collateral Agent accepts the appointment
contained in the preceding sentence and agrees to serve as "Collateral Agent"
hereunder and as "Secured Party" under the Security Agreement. The Collateral
Agent shall be entitled to all of the benefits and immunities set forth herein.
2.2 Control by the Collateral Agent and Required Trade Creditors.
(a) Subject to the provisions of this Section 2.2 and of Section 6.5
hereof and the Congress Intercreditor Agreement, the Collateral Agent shall take
only those actions (i) which it is expressly required to take by the terms of
this Agreement; or (ii) as it may from time to time be directed in writing by
the Required Trade Creditors for the Company or Companies, as applicable, such
direction to be evidenced by an instrument or instruments in writing executed by
the Required Trade Creditors and delivered to the Collateral Agent.
Notwithstanding the provisions of clause (ii) above, the Collateral Agent may in
its discretion refrain from acting pursuant to any directions from the Required
Trade Creditors unless and until it shall have received an opinion of counsel,
reasonably satisfactory to it, to the effect that such direction is not in
conflict with the terms of this Agreement, the Security Agreement, the Congress
Intercreditor Agreement or other applicable law. The Collateral Agent shall be
under no obligation to request or obtain such an opinion of counsel and shall be
fully protected if it acts or refrains from acting as instructed by the Required
Trade Creditors. Any action taken by or failure to act of the Collateral Agent
pursuant to directions given to the Collateral Agent in accordance with this
Section 2.2(a) shall be binding on all Trade Creditors.
(b) The Collateral Agent shall maintain a list of the names and
addresses for notices of all Trade Creditors and shall provide such list on
request to any Trade Creditor.
(c) Any direction by the Required Trade Creditors shall state the
principal amount of trade credit extended by each such Trade Creditor providing
such direction. Each Company will supply to the Collateral Agent upon request a
schedule of the Trade Credit then extended by each Trade Creditor and the
aggregate Trade Credit then extended by all Trade Creditors, upon which the
Collateral Agent shall be entitled to rely except to the extent any Trade
Creditor states that its Trade Credit differs from such schedule.
-4-
<PAGE> 8
SECTION 3
NEW TRADE CREDITORS
Each Company may, from time to time, request that additional trade
creditors of such Company be added as Trade Creditors hereunder and be entitled
to the benefits of this Agreement. Such request shall be in writing delivered to
the Collateral Agent and each Trade Creditor, and shall include a representation
that the proposed Trade Creditor has extended to the Companies in the aggregate
open trade credit in an amount not less than $ 1,000,000. Upon receipt of such
notice, and upon execution by the proposed Trade Creditor of an Acceptance
Instrument and delivery thereof to the Collateral Agent, such Person shall be
deemed to be a Trade Creditor for all purposes of this Agreement and the
Security Agreement, and shall have all of the rights and shall be bound by all
of the obligations of a Trade Creditor hereunder and a Secured Party under the
Security Agreement.
SECTION 4
MANNER OF DISTRIBUTIONS
4.1 Distributions of Proceeds Upon Exercise of Remedies. The proceeds of
any collection, sale or other realization of all or any part of the Collateral,
and of all proceeds of the enforcement of any Lien created under the Security
Agreement, shall be applied in the following order of priority:
FIRST: To the Collateral Agent in an amount equal to the fees,
indemnities, costs and expenses incurred by the Collateral Agent in the
taking of any actions required by or pursuant to this Agreement, the
Security Agreement, or the Congress Intercreditor Agreement including,
without limitation, reasonable compensation for and expenses of the
Collateral Agent's representatives and counsel, and all charges,
expenses, liabilities and advances incurred or made by the Collateral
Agent whether provided for under the Security Agreement, this Agreement
or otherwise;
SECOND: To the Trade Creditors in an aggregate amount equal to
the sum of the unpaid interest incurred through the date of such
distribution, with respect to obligations owed by the Company that owned
the Collateral, provided that if such proceeds (after distribution of a
portion thereof as provided in paragraph FIRST of this Section 4.1)
shall be insufficient to pay in full such aggregate amount owed to the
Trade Creditors, then such payment shall be made to each Trade Creditor
on a pro rata basis in the proportion the respective amounts of such
interest owed to each Trade Creditor on such date bear to the total
amount of such interest then owed;
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<PAGE> 9
THIRD: To the Trade Creditors in an aggregate amount equal to
the sum of the then unpaid principal amount of trade credit then
extended as of the date of such distribution to the Company that owned
the Collateral, provided that if such proceeds (after distribution of a
portion thereof as provided in paragraphs FIRST and SECOND of this
Section 4.1) shall be insufficient to pay in full such aggregate amount
owed to the Trade Creditors, then such payment shall be made to each
Trade Creditor on a pro rata basis in the proportion the outstanding
principal amount of its trade credit extended on such date to the
Company that owned the Collateral bear to the total outstanding
principal amount of trade credit then owed to the Trade Creditors; and
FOURTH: Any surplus then remaining to the applicable Company or
Companies or the Person who may be lawfully entitled to receive the same
or as a court of competent jurisdiction may direct.
4.2 Address for Distributions. All distributions under Section 4.1 to be
made by the Collateral Agent to any Trade Creditor shall be made to it at its
address for payments set forth on the signature page hereto or in the applicable
Acceptance Instrument, or as otherwise provided in writing by such Trade
Creditor to the Collateral Agent.
4.3 Outstanding Trade Credit. Prior to making any distribution under
Section 4.1 or at such other time or times as is deemed advisable in its sole
discretion by the Collateral Agent, the Collateral Agent may request an
officer's certificate from each Trade Creditor setting forth the aggregate
amount owed to such Trade Creditor, and may request from each Company an
officer's certificate setting forth the amount owed to each Trade Creditor. The
Collateral Agent shall be entitled to conclusively rely on the amount provided
by each Trade Creditor. If any Trade Creditor fails to provide such officer's
certificate within 10 days of the request therefor, the Collateral Agent shall
be entitled to rely upon the officer's certificate of each Company with respect
to such Trade Creditor.
SECTION 5
RELEASE OF COLLATERAL;
TERMINATION OF SECURITY AGREEMENT
Except as expressly provided herein, without the prior written consent
of all of the Trade Creditors, the Collateral Agent shall not consent to or
permit the termination of the Lien of the Security Agreement or the release of
any of the Collateral from any such Lien except for sales or returns of
Collateral in the ordinary course of business. The Collateral Agent shall
release its Lien on all or any portion of the Collateral (i) upon the written
request of the Company or Companies, which request will be provided
simultaneously by the applicable Company or Companies to each Trade Creditor;
(ii) receipt by the Collateral Agent of a direction in writing by the Trade
Creditors holding 66.6% of the trade credit to the Company
-6-
<PAGE> 10
or Companies, as the case may be, extended by the Trade Creditors to release
said Lien; and (iii) if the Collateral Agent has not received written notice
from any Trade Creditor that an Event of Default has occurred and is continuing
or would exist as a result of such release. In such case the Collateral Agent
shall execute for recordation in public offices, at the expense of the
applicable Company or Companies, such instrument or instruments in writing as
reasonably shall be requested by the Company in order to release the Lien of the
Security Agreement as to, and to make clear upon public records such Company's
title to, all or such portion of the Collateral under the law of any
jurisdiction. After the conditions set forth in this Section 5 have been
satisfied as to all of the Collateral, title to all Collateral shall vest in the
applicable Company or Companies, free and clear of any Lien of the Collateral
Agent. Any direction by the Trade Creditors under this Section 5 shall comply
with Section 2.2(c) hereof.
SECTION 6
CONCERNING THE COLLATERAL AGENT
The Collateral Agent shall be entitled to the rights and privileges set
forth in this Section 6.
6.1 Absence of Duties Not Specified, etc.
(a) The Collateral Agent (which term as used in this sentence and in
Section 6.4 hereof shall include reference to its officers, directors,
employees, agents, Affiliates and its Affiliates' officers, directors, employees
and agent(s)) (i) shall have no duties or responsibilities except those
expressly set forth in this Agreement, in the Security Agreement, and the
Congress Intercreditor Agreement and shall not by reason of this Agreement, the
Security Agreement or the Congress Intercreditor Agreement, be a trustee for any
Trade Creditor; (ii) shall not be responsible to any Trade Creditor for any
recitals, statements, representations or warranties contained in this Agreement,
the Security Agreement or the Congress Intercreditor Agreement or for the value,
validity, effectiveness, genuineness, enforceability or sufficiency of this
Agreement, or the Security Agreement or the Collateral thereunder (other than
the due authorization of the Collateral Agent to execute this Agreement or the
Security Agreement) or for any failure by any Company or any Person other than
the Collateral Agent to perform any of its obligations hereunder or thereunder;
and (iii) shall not be responsible for any action taken or omitted to be taken
by it hereunder, except for its own gross negligence or willful misconduct.
(b) The Collateral Agent may consult with counsel, accountants and other
skilled Persons selected by it in good faith prior to taking any act or
refraining to act under this Agreement, the Security Agreement and the Congress
Intercreditor Agreement, and shall not be liable for anything done, suffered or
omitted in good faith by it in accordance with the advice or opinion of any such
counsel, accountant or other skilled Person so long as such advice or opinion is
within the scope of such Person's professional competence.
-7-
<PAGE> 11
(c) The Collateral Agent may employ agents and attorneys-in-fact and
shall not be responsible for the negligence or misconduct of any such agents or
attorneys-in-fact selected by the Collateral Agent except to the extent such
selection is the result of gross negligence or willful misconduct of the
Collateral Agent.
(d) The obligations of the Collateral Agent hereunder are only those
expressly set forth herein, in the Security Agreement and in the Congress
Intercreditor Agreement. Without limiting the generality of the foregoing and
subject to the provisions of Section 2.2, the Collateral Agent shall not be
required to take any action with respect to any Event of Default unless it
receives a written direction from the Required Trade Creditors.
6.2 Reliance by Collateral Agent. The Collateral Agent shall be entitled
to rely conclusively upon any certification, notice or other communication
(including any thereof by telephone, telecopy, telex, telegram or cable)
believed by it in good faith to be genuine and correct and to have been signed
or sent by or on behalf of the proper Person or Persons, and upon advice and
statements of legal counsel, independent accountants and other experts selected
by the Collateral Agent. The Collateral Agent shall in all cases be fully
protected in acting, or in refraining from acting, hereunder in accordance with
written instructions signed by the Required Trade Creditors and such
instructions and any action taken or failure to act pursuant thereto shall be
binding on all of the Trade Creditors. The Collateral Agent shall be entitled to
rely conclusively upon an officer's certificate of a Trade Creditor as to the
principal amount of trade credit then outstanding to that Trade Creditor and, in
the absence of such certificate, shall be entitled to rely upon a certificate of
an officer of each Company as to the principal amount of any such trade credit
then outstanding.
6.3 Default Notices. The Collateral Agent shall not be deemed to have
knowledge of the occurrence of an Event of Default unless the Collateral Agent
has received a written notice of such Event of Default from a Trade Creditor or
a Company. If the Collateral Agent receives such a written notice of such Event
of Default, the Collateral Agent shall give prompt notice thereof to the Trade
Creditors.
6.4 Rights to Conduct Ordinary Business. The Collateral Agent and its
Affiliates may (without having to account therefor to any Trade Creditor) accept
deposits from, lend money to, act as warrant, stock exchange or distribution
agent for and generally engage in any kind of banking, trust or other business
with any Company and any of its Affiliates as if it were not acting as the
Collateral Agent.
6.5 Failure to Act. The Collateral Agent shall in all cases be fully
justified in failing or refusing to act under this Agreement, the Security
Agreement and the Congress Intercreditor Agreement unless it shall have received
assurances to its satisfaction from the Trade Creditors of their indemnification
obligations under Section 8.1 hereof in respect of any liability and expense
which may be incurred by the Collateral Agent by reason of taking or continuing
to take any such action.
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<PAGE> 12
6.6 Resignation or Removal of Collateral Agent. Subject to the
appointment and acceptance of a successor Collateral Agent as provided below,
the Collateral Agent may resign at any time by giving at least 30 days' written
notice thereof to the Trade Creditors and each Company, such resignation to be
effective upon the acceptance of the position of Collateral Agent by a successor
Collateral Agent. The Collateral Agent may be removed at any time with or
without cause by written notice from the Required Trade Creditors (measured for
all Companies combined), and shall be so removed at any time the Collateral
Agent ceases to be the Secured Party under the Security Agreement. Upon any such
resignation or removal, the Required Trade Creditors (measured for all Companies
combined) shall have the right to appoint a successor Collateral Agent which
shall be a bank or trust company selected by the Required Trade Creditors
(measured for all Companies combined) and, so long as no Default shall have
occurred and be continuing, reasonably acceptable to the Companies, if there be
such an institution willing, able and legally qualified to perform the duties of
the Collateral Agent hereunder upon reasonable or customary terms. If, within 90
days of notice of resignation of the Collateral Agent, a successor Collateral
Agent shall not have been appointed, the Collateral Agent may petition a court
of competent jurisdiction for the appointment of a successor Collateral Agent.
Upon the acceptance of any appointment as Collateral Agent hereunder by a
successor Collateral Agent, such successor Collateral Agent shall thereupon
succeed to and become vested with all the rights, powers, privileges and duties
of the resigning or removed Collateral Agent, and the resigning or removed
Collateral Agent shall be discharged from its duties and obligations hereunder.
After any resigning or removed Collateral Agent's resignation or removal
hereunder as Collateral Agent, the provisions of this Section 6 shall continue
in effect for its benefit in respect of any actions taken or omitted to be taken
by it while it was acting as the Collateral Agent. Any successor Collateral
Agent shall also be appointed as successor Secured Party under the Security
Agreement.
6.7 Additional or Separate Agents. At any time or times, in order to
comply with any legal requirement in any jurisdiction, the Collateral Agent may
appoint another bank or trust company or one or more other persons, either to
act as co-agent or co-agents, jointly with the Collateral Agent, or to act as
separate agent or agents on behalf of the Trade Creditors, or subclasses
thereof, with such power and authority as may be necessary for the effectual
operation of the provisions hereof and may be specified in the instrument of
appointment (which may, in the discretion of the Collateral Agent, include
provisions for the protection of such co-agent or separate agent similar to the
provisions of this Section 6).
6.8 Authorization. The Collateral Agent is duly authorized to (a) act on
behalf of the Trade Creditors in accordance with the terms of this Agreement,
(b) execute and deliver the Security Agreement and the Congress Intercreditor
Agreement and (c) perform in accordance with the terms of this Agreement, the
Security Agreement and the Congress Intercreditor Agreement.
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<PAGE> 13
SECTION 7
COVENANTS OF THE COMPANIES
7.1 Payment of Expenses and Taxes. The Companies will:
(a) pay or reimburse the Collateral Agent for all of its reasonable
out-of-pocket costs and expenses incurred in connection with the preparation,
execution and delivery of, and any amendment, consent or waiver, supplement or
modification to, this Agreement, the Security Agreement, and the Congress
Intercreditor Agreement and other documents prepared in connection with this
Agreement, the Security Agreement, and the Congress Intercreditor Agreement and
the consummation of the transactions contemplated by this Agreement, the
Security Agreement, and the Congress Intercreditor Agreement, including the fees
and disbursements of counsel to the Collateral Agent, such payments or
reimbursements to be made, to the extent due and payable on the date hereof and,
thereafter, from time to time upon demand;
(b) pay or reimburse the Collateral Agent on demand for all of its
reasonable costs and expenses incurred in connection with the interpretation,
enforcement or preservation of, or any waiver of or consent with respect to, any
rights under this Agreement, the Security Agreement, and the Congress
Intercreditor Agreement, including, without limitation, the fees and
disbursements of counsel of the Collateral Agent;
(c) pay, indemnify, and hold the Collateral Agent harmless on demand
from any and all recording and filing fees and any and all liabilities with
respect to, or resulting from, any stamp, excise and other similar taxes, if
any, which may be payable or determined to be payable in connection with the
execution and delivery of, or consummation of any of the transactions
contemplated by, or any amendment, supplement or modification of, or any waiver
or consent under or in respect of, this Agreement, the Security Agreement and
the Congress Intercreditor Agreement; and
(d) pay to the Collateral Agent a fee for its services provided
hereunder and under the Security Agreement as set forth on the Schedule 1
attached hereto.
7.2 Indemnity. Each Company shall indemnify the Collateral Agent, the
Trade Creditors, their Affiliates, and any such party's officers, directors,
employees, agents, attorneys-in-fact, against any and all claims, suits, losses,
penalties, demands, causes of action and judgments of any nature whatsoever and
all liabilities and indebtedness of any and every kind and nature now or
hereafter owing, arising, due or payable, including all costs and expenses
(including, without limitation, attorneys' fees and expenses) (all of the
foregoing being herein collectively called "Indemnified Liabilities"), which may
be imposed on, incurred by or asserted against any of them and that in any way
relate to or arise out of this Agreement, the Security Agreement and the
Congress Intercreditor Agreement or the enforcement of any of the terms hereof
or thereof including without limitation all amounts payable by any Trade
-10-
<PAGE> 14
Creditor under Section 8.1 hereof; provided, however, that no Company shall be
liable for any of the foregoing to the extent that the liability incurred by the
indemnitee has been determined by a court of competent jurisdiction to be the
result of gross negligence or willful misconduct of the party to be indemnified.
7.3 Additional Secured Obligations. All amounts payable by the Companies
to the Collateral Agent under this Section 7 shall constitute additional
Obligations of each of the Companies secured under the Security Agreement and
payable on demand.
7.4 Survival. The obligations of each of the Companies under this
Section 7 shall survive the termination of this Agreement.
SECTION 8
MISCELLANEOUS
8.1 Indemnification. Each Trade Creditor will indemnify the Collateral
Agent, its Affiliates, their respective officers, directors, employees, agents,
attorneys-in-fact (to the extent not reimbursed by any Company within 10 days of
demand therefor) in the proportion that the then outstanding principal amount of
Trade Credit extended by such Trade Creditor bears to the total outstanding
principal amount of all Trade Credit for any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind and nature whatsoever which may be imposed on,
incurred by or asserted against the Collateral Agent in any way relating to or
arising out of this Agreement or the Security Agreement (including, without
limitation, the costs and expenses which each Company is obligated to pay to the
Collateral Agent hereunder or under the Security Agreement for the enforcement
of any of the terms hereof or thereof); provided, however, that no Trade
Creditor shall be liable for any of the foregoing to the extent that the
liability incurred by such indemnitee has been determined by a court of
competent jurisdiction to be the result of gross negligence or willful
misconduct of the party to be indemnified.
8.2 Expenses as Obligations. If at any time or times hereafter the
Collateral Agent incurs expenses pursuant to action taken pursuant to the
provisions of this Agreement, the Security Agreement, or the Congress
Intercreditor Agreement, or to intervene, file a petition, answer, complaint,
motion or other pleading in any suit or proceeding relating to this Agreement,
the Security Agreement, or the Congress Intercreditor Agreement or relating to
any Collateral, or to protect, take possession of, or liquidate any Collateral,
or to attempt to enforce any security interest in or lien on any Collateral, or
to enforce any rights of the Collateral Agent against any other person, firm or
corporation which may be obligated to the Collateral Agent by virtue of this
Agreement, the Security Agreement, or the Congress Intercreditor Agreement, or
any other agreements, instruments or documents contemplated hereby by the
Security Agreement now or hereafter delivered to the Collateral Agent by or for
the benefit of the Debtor, then in any of such events, all of the expenses
including, without
-11-
<PAGE> 15
limitation, reasonable attorneys' fees arising from such services and any
expenses, costs and charges (including costs and expenses of servicing agents)
relating to any such actions, and interest on such sums at the prevailing
Interest Rate, shall become additional Obligations secured under the Security
Agreement by the Collateral, payable on demand.
8.3 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California.
8.4 Survival of Representations, Warranties and Covenants. The
representations, warranties and covenants of each of the Companies contained in
this Agreement and in any of the Security Agreement shall survive the date
hereof.
8.5 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties thereto may execute this Agreement by signing
any such counterpart.
8.6 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto, each party that is or shall
hereafter become a Trade Creditor hereunder and their respective successors and
permitted assigns; provided, however, that the no Company may assign its rights
or obligations under this Agreement or the Security Agreement to any Person
without the consent of the Collateral Agent and each Trade Creditor.
8.7 Table of Contents and Headings. The table of contents to this
Agreement and the headings of the various sections herein are for convenience of
reference only and shall not define or limit any of the terms or provisions
hereof.
8.8 WAIVER OF JURY TRIAL. EACH OF THE COMPANIES, THE COLLATERAL AGENT
AND THE TRADE CREDITORS HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN
ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE SECURITY AGREEMENT OR TRANSACTIONS CONTEMPLATED THEREBY.
8.9 Severability. If any term, provision, covenant or condition of this
Agreement, or the application thereof to any person, place or circumstance,
shall be held by a court of competent jurisdiction to be invalid, unenforceable
or void, the remainder of this Agreement, or such term, provision, covenant or
condition as applied to other persons, places and circumstances, as applicable,
shall remain in full force and effect.
8.10 Entire Agreement. This Agreement, the Security Agreement, and the
Congress Intercreditor Agreement set forth the entire understanding among the
parties with respect to the subject matter hereof and all prior agreements,
contracts, promises, representations and statements between them, if any,
whether written or oral, with respect thereto are merged into this Agreement.
-12-
<PAGE> 16
8.11 Amendments, Etc. Except as expressly provided in this Agreement or
the Security Agreement, any provision of this Agreement may be amended only by
an instrument in writing signed by each of the Companies, the Collateral Agent
and the Required Trade Creditors (calculated for all Companies combined), and
any provision of this Agreement may be waived by the Collateral Agent and the
Required Trade Creditors (calculated for all Companies combined), acting
together; provided, however, that any amendment hereof that does not adversely
affect the rights, privileges, immunities, duties or obligations of any of the
Companies, shall not require the consent of the Companies.
8.12 Waiver. No failure on the part of the Collateral Agent or any Trade
Creditor to exercise and no delay in exercising, and no course of dealing with
respect to, any right, power or privilege under this Agreement, the Security
Agreement, the Congress Intercreditor Agreement, any loan or any note shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, power or privilege under this Agreement, the Security Agreement, the
Congress Intercreditor Agreement, any loan or any note preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
The remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
8.13 Notices and Distribution. All notices, directions and other
communications provided for herein (including, without limitation, any waivers
or consents under this Agreement) shall be in writing, shall be sent by
telecopy, telex, personal delivery, courier or registered or certified mail,
return receipt requested, addressed to the party or parties for which intended,
at the address specified below its name on the signature pages hereto (or such
other address as any party may designate in a notice to each other party hereto
and shall be deemed to have been given when transmission is verified (if
telecopied), answered back (if telexed), so delivered (if by personal delivery
or courier) or five Business Days after deposit thereof, postage prepaid, in a
United States Postal depository or with an authorized employee of the United
States Postal Service (if by registered or certified mail, return receipt
requested), in each case given or addressed as aforesaid; provided that a notice
of a change of address shall not be deemed to have been given until actually
received by the party hereto distributing such communication.
8.14 Benefit of Covenants. The covenants of each of the Companies and
the Collateral Agent set forth herein are solely for the benefit of the Trade
Creditors.
-13-
<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the date first above written.
WHEREHOUSE SUBSIDIARY I EMI MUSIC DISTRIBUTION, a
CO., INC. Division of Capitol Records, Inc.
By: /s/ R.S. KELLEHER
-------------------------------
Title: S.V.P. - Chief Financial By: /s/ R.A. Cottrell
Officer --------------------------------
Title: President & CEO
WHEREHOUSE SUBSIDIARY II
CO., INC. POLYGRAM GROUP DISTRIBUTION, INC.
By: /s/ R.S. KELLEHER
-------------------------------
Title: S.V.P. - Chief Financial By: /s/ Robert M. Baker, Jr.
Officer --------------------------------
Title: Vice President, Credit
WHEREHOUSE SUBSIDIARY III
CO., INC.
RELATIVITY ENTERTAINMENT
DISTRIBUTORS, INC.
By: /s/ R.S. KELLEHER
-------------------------------
Title: S.V.P. - Chief Financial By: /s/ Carl A. Schnock
Officer --------------------------------
Title: V.P. - Customer Financial
Relations
BMG MUSIC aka BMG
DISTRIBUTION
SONY MUSIC ENTERTAINMENT, INC.
By: /s/ ROBERT A. NOYES
-------------------------------
Title: Vice President, Credit By: /s/ Carl A. Schnock
--------------------------------
Title: V.P. - Customer Financial
Relations
-14-
<PAGE> 18
UNIVERSAL MUSIC & VIDEO
DISTRIBUTION, INC.
By: /s/ David Durchin
--------------------------
Title: VP NR Credit
WARNER/ELEKTRA/ATLANTIC
CORP.
By: /s/ Gregory B. Askey
--------------------------
Title: Sr. V.P. Credit
UNITED STATES TRUST COMPANY
OF NEW YORK, as Collateral Agent
By: /s/ Lou Young
--------------------------
Title: Vice President
-15-
<PAGE> 19
SCHEDULE 1
U.S. Trust Company of New York
Fees For Acting as Collateral Agent
Re: Wherehouse Subsidiaries Formerly Doing Business as Blockbuster Music
<TABLE>
<S> <C>
Initial Acceptance Fee: $5,000.00
Annual Fee, payable in advance: $5,000.00
</TABLE>
-16-
<PAGE> 1
EXHIBIT 10.27
FIRST AMENDMENT TO
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
(this "Amendment"), dated as of November 30, 1998, is entered into between
CONGRESS FINANCIAL CORPORATION (WESTERN), a California corporation ("Lender"),
on the one hand, and WHEREHOUSE ENTERTAINMENT, INC., a Delaware corporation,
WHEREHOUSE.COM, INC., a California corporation, WHEREHOUSE SUBSIDIARY I CO.,
INC., a Delaware corporation, WHEREHOUSE SUBSIDIARY II CO., INC., a California
corporation, and WHEREHOUSE SUBSIDIARY III CO., INC., a Delaware corporation
(collectively, "Borrower"), on the other.
RECITAL
A. Borrower and Lender have previously entered into that certain Amended
and Restated Loan and Security Agreement dated as of October 26, 1998 (the
"Loan Agreement"), pursuant to which Lender has made certain loans and
financial accommodations available to Borrower. Terms used herein without
definition shall have the meanings ascribed to them in the Loan Agreement.
B. Borrower and Lender wish to amend the Loan Agreement on the terms and
conditions set forth in this Amendment. Borrower is entering into this
Amendment with the understanding and agreement that, except as specifically
provided herein, none of Lender's rights or remedies as set forth in the Loan
Agreement is being waived or modified by the terms of this Amendment.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
herein contained, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Amendment to Credit Facilities Provision. Section 2.1(a) of the Loan
Agreement is hereby amended in its entirety to read as follows:
"(a) Subject to, and upon the terms and conditions contained herein,
Lender agrees to make Revolving Loans (the "Tranche A Line") to Borrower from
time to time in amounts requested by Borrower up to the lesser of One Hundred
Fifty-five Million Dollars ($155,000,000) or an amount equal to:
(1) The lesser of: (A) the sum of (i) sixty-two percent (62%)
(sixty-five percent (65%) during the Seasonal Period) of the Value of WEI
Eligible Inventory, plus (ii) fifty-seven percent (57%) (sixty percent (60%)
during the Seasonal Period) of the Value of Operating Subsidiary Eligible
Active Inventory, plus (iii) ten percent (10%) of the Value of Operating
Subsidiary Eligible Return Inventory up to a maximum of Two Million Dollars
($2,000,000), or (B) the product of ninety percent (90%) of the Net Recovery
Cost Percentage multiplied by the cost of Eligible Inventory,
<PAGE> 2
provided that the amount advanced with respect to Operating Subsidiary Eligible
Return Inventory shall not exceed Two Million Dollars ($2,000,000), minus
(2) the then undrawn amounts of outstanding Letter of Credit
Accommodations, minus
(3) any Availability Reserves.
The Revolving Loans made under Section 2.1(a) shall together be referred to as
the "Tranche A Loans"."
2. Effectiveness of this Amendment. Lender must have received the
following items, in form and content acceptable to Lender, before this
Amendment is effective and before Lender is required to extend any credit to
Borrower as provided for by this Amendment.
(a) Amendment. This Amendment fully executed in a sufficient number
of counterparts for distribution to Lender and Borrower;
(b) Authorizations. Evidence that the execution, delivery and
performance by Borrower and each guarantor or subordinating creditor of
this Amendment and any instrument or agreement required under this
Amendment have been duly authorized;
(c) Representations and Warranties. The representations and
warranties set forth in the Loan Agreement must be true and correct; and
(d) Consents. Counterparts of the Consent appended hereto (the
"Consent") executed on behalf of each of Wherehouse Holding I Co., Inc., a
Delaware corporation and Wherehouse Holding II Co., Inc., a Delaware
corporation ("Guarantors", and together with Borrower, each a "Loan Party"
and collectively the "Loan Parties").
3. Representations and Warranties. Borrower represents and warrants as
follows:
(a) Authority. Each Loan Party has the requisite corporate power and
authority to execute and deliver this Amendment or the Consent, as
applicable, and to perform its obligations hereunder and under the
Financing Agreements (as amended or modified hereby) to which it is a
party. The execution, delivery and performance by Borrower of this
Amendment and by each other Loan Party of the Consent, and the performance
by each Loan Party of each Financing Agreement (as amended or modified
hereby) to which it is a party have been duly approved by all necessary
corporate action of such Loan Party and no other corporate proceedings on
the part of such Loan Party are necessary to consummate such transactions.
(b) Enforceability. This Amendment has been duly executed and
delivered by Borrower. The Consent has been duly executed and delivered by
each Guarantor. This Amendment and each Financing Agreement (as amended or
modified hereby) is the legal, valid and binding obligation of each Loan
Party hereto or thereto, enforceable against such Loan Party in accordance
with its terms, and is in full force and effect.
<PAGE> 3
(c) Representations and Warranties. The representations and
warranties contained in each Financing Agreement (other than any such
representations or warranties that, by their terms, are specifically made
as of a date other than the date hereof) are correct on and as of the date
hereof as though made on and as of the date hereof.
(d) No Default. No event has occurred and is continuing that
constitutes an Event of Default.
4. Choice of Law. The validity of this Amendment, its construction,
interpretation and enforcement, the rights of the parties hereunder, shall be
determined under, governed by, and construed in accordance with the internal
laws of the State of California governing contracts only to be performed in
that State.
5. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties and separate counterparts, each of which
when so executed and delivered, shall be deemed an original, and all of which,
when taken together, shall constitute one and the same instrument. Delivery of
an executed counterpart of a signature page to this Amendment or the Consent by
telefacsimile shall be effective as delivery of a manually executed counterpart
of this Amendment or the Consent.
6. Reference to and Effect on the Financing Agreements.
(a) Upon and after the effectiveness of this Amendment, each
reference in the Loan Agreement to "this Agreement", "hereunder", "hereof"
or words of like import referring to the Loan Agreement, and each
reference in the other Financing Agreements to "the Loan Agreement",
"thereof" or words of like import referring to the Loan Agreement, shall
mean and be a reference to the Loan Agreement as modified and amended
hereby.
(b) Except as specifically amended above, the Loan Agreement and all
other Financing Agreements, are and shall continue to be in full force and
effect and are hereby in all respects ratified and confirmed and
shall constitute the legal, valid, binding and enforceable obligations of
Borrower to Lender.
(c) The execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of Lender under any of the Financing Agreements,
nor constitute a waiver of any provision of any of the Financing
Agreements.
<PAGE> 4
IN WITNESS WHEREOF, the parties have entered into this Amendment as of the
date first above written.
"LENDER"
CONGRESS FINANCIAL CORPORATION
(WESTERN)
By: /s/ KELLY WU
--------------------------------
Name: Kelly Wu
Title: Assistant Vice President
"BORROWER"
WHEREHOUSE ENTERTAINMENT, INC.
By: /s/ R.S. KELLEHER
--------------------------------
Name: R.S. Kelleher
Title: Chief Financial Officer
WHEREHOUSE.COM, INC.
By: /s/ R.S. KELLEHER
--------------------------------
Name: R.S. Kelleher
Title: Chief Financial Officer
WHEREHOUSE SUBSIDIARY I CO., INC.
By: /s/ R.S. KELLEHER
--------------------------------
Name: R.S. Kelleher
Title: Chief Financial Officer
<PAGE> 5
WHEREHOUSE SUBSIDIARY II CO., INC.
By: /s/ R. S. Kelleher
------------------------------
Name: R. S. Kelleher
Title: Chief Financial Officer
WHEREHOUSE SUBSIDIARY III CO., INC.
By: /s/ R. S. Kelleher
------------------------------
Name: R. S. Kelleher
Title: Chief Financial Officer
<PAGE> 6
CONSENT
Dated as of November 30, 1998
The undersigned, as Guarantors under their respective Guarantee, each
dated as of October 26, 1998 (as such terms are defined in and under the Loan
Agreement referred to in the foregoing Amendment), each hereby consents and
agrees to said Amendment and hereby confirms and agrees that its respective
Guarantee is, and shall continue to be in, in full force and effect and is
hereby ratified and confirmed in all respects except that, upon the
effectiveness of, and on and after the date of said Amendment, each reference
in each such Guarantor's Guarantee to the "Loan Agreement", "thereunder",
"thereof" or words of like import referring to the Loan Agreement, shall mean
and be a reference to the Loan Agreement as amended or modified by the said
Amendment.
WHEREHOUSE HOLDING I CO., INC.
By: /s/ R.S. KELLEHER
--------------------------------
Name: R.S. Kelleher
Title: Chief Financial Officer
WHEREHOUSE HOLDING II CO., INC.
By: /s/ R.S. KELLEHER
--------------------------------
Name: R.S. Kelleher
Title: Chief Financial Officer
<PAGE> 1
EXHIBIT 10.28
EXTENSION OF AND THIRD AMENDMENT TO
THE MANAGEMENT SERVICES AGREEMENT
This EXTENSION OF AND THIRD AMENDMENT TO THE MANAGEMENT SERVICES
AGREEMENT (this "AMENDMENT") is dated as of April 28, 1999, and entered into
among WHEREHOUSE ENTERTAINMENT, INC., a Delaware corporation (the "COMPANY"),
ALVAREZ & MARSAL, INC., a New York corporation ("A&M"), A&M INVESTMENT
ASSOCIATES #3, LLC, a Delaware limited liability company (the "AFFILIATE") and
ANTONIO C. ALVAREZ II, an individual ("ALVAREZ"). Reference is made to that
certain Management Service Agreement (the "MANAGEMENT SERVICES AGREEMENT", and
as extended and amended hereby, the "EXTENDED AND AMENDED AGREEMENT") dated as
of January 31, 1997, amended by an Extension and Amendment dated as of February
1, 1998, and amended further by a Second Amendment dated as of April 30, 1998,
among the Company, A&M, the Affiliate, Alvarez and, with respect to Section 2(c)
and 8 thereof only, Cerberus, and binding upon the Support Employees. All
capitalized terms used herein and not otherwise defined shall have the meaning
given to such terms in the Management Services Agreement.
RECITALS
WHEREAS, A&M and the Company desire to extend the term of the
Management Services Agreement; and
WHEREAS, A&M, Alvarez, the Affiliate and the Company desire to
amend certain terms and provisions of the Management Services Agreement as
provided herein;
NOW, THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, the parties hereto agree
as follows:
1. EXTENSION OF THE MANAGEMENT SERVICES AGREEMENT
Pursuant to Section 2(b) of the Management Services Agreement,
the Company and A&M hereby agree to extend the term of the Management Services
Agreement such that the Extended and Amended Agreement shall terminate on
October 14, 2000, subject to earlier termination pursuant to Section 7 of the
Extended and Amended Agreement (such extended term the "SECOND EXTENDED TERM") ;
provided, however, that at least six months prior to the expiration of the
Second Extended Term, A&M and the Company shall notify the other as to whether
it desires to extend the Second Extended Term. If both A&M and the Company
desire to extend the Second Extended Term, they will promptly commence and
pursue good faith negotiations regarding the terms and conditions of such
extension. If either A&M or the Company does not desire to extend the Second
Extended Term, or if the parties are unable to reach agreement on the terms and
conditions under which the Second Extended Term shall be extended, the Extended
and Amended Agreement shall terminate on October 14, 2000, except that each of
A&M and the Company shall use its best efforts and shall provide full
cooperation to the other in making a smooth transition in the management of the
Company to the new management selected by the Company. If so terminated by
expiration of the Second Extended
<PAGE> 2
Term, except as provided in Section 6(d) of the Extended and Amended Agreement
and except for accrued but unpaid fees due to A&M pursuant to Section 4(a) of
the Extended and Amended Agreement and amounts due pursuant to Section 5 of the
Extended and Amended Agreement, neither party shall have any further obligation
to the other either hereunder or under the Extended and Amended Agreement.
2. AMENDMENT TO SECTION 4(a)(1) OF THE MANAGEMENT SERVICES
AGREEMENT
Section 4(a)(1)(i) of the Management Services Agreement is
amended to read in full as follows:
(1) Base Fees.
(i) Alvarez and Support Employees. In
consideration for the services of A&M, Alvarez and the
Support Employees, except for the Support Employees named
in paragraphs (ii), (iii), (iv) and (v) of this Section
4(a)(1) (the "NAMED SUPPORT EMPLOYEES"), for the account,
and on behalf of A&M hereunder, the Company shall pay A&M
during the term of this Agreement a management fee of
$50,000 (or a pro-rated portion thereof) per month
irrespective of the number of Support Employees provided by
A&M to the Company.
New Section 4(a)(1)(v) is added to the end of Section 4(a)(1) to
read in full as follows:
(v) Sudhir Aggarwal. Effective February 1,
1999 and continuing until the earlier of the termination of
this Agreement or the date on which Sudhir Aggarwal ceases
to serve full-time for the Company, the Company shall pay
A&M $10,416.67 per month in consideration for the full-time
services of Sudhir Aggarwal.
3. GENERAL
(a) Reference to and Effect on the Management Services
Agreement.
(i) On and after the effective date of this
Extension and Amendment, each reference in the Management Services
Agreement to "this Agreement", "hereunder", "hereof", "herein" or
words of like import referring to the Management Services
Agreement shall mean and be a reference to the Extended and
Amended Agreement; and
(ii) The execution, delivery and performance of this
Extension and Amendment shall not, except as expressly provided
herein or therein,
<PAGE> 3
constitute a waiver of any provision of, or operate as a waiver
of any right, power or remedy of the Company under, the
Management Services Agreement.
(b) Amendment. No modification or amendment of, or waiver
under, this Extension and Amendment shall be valid unless in writing and
signed by each of the parties hereto.
(c) Binding Agreement. This Extension and Amendment and the
Extended and Amended Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors and
assigns.
(d) Authorization. Each of the Company and the A&M Parties
represents and warrants that its execution, delivery and performance of
this Extension and Amendment has been duly authorized by all necessary
corporate action.
(e) Governing Law. This Extension and Amendment shall be
governed by and construed in accordance with the internal laws of the
State of New York without regard to conflict of law principles.
(f) Severability. If any term, provision, covenant or
restriction herein is held by a court of competent jurisdiction to be
invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions of this Extension and Amendment shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated thereby.
(g) Tax Indemnification. A&M, Alvarez and each Support
Employee agree jointly and severally to indemnify and hold the Company
harmless against and reimburse the Company on demand for any federal,
state or local taxes, workers compensation, health or disability
benefits, and any penalties and interest thereon, payable by or on behalf
of the Company in respect of the services of A&M, Alvarez and the Support
Employees furnished to the Company pursuant to this Extension and
Amendment or the Extended and Amended Agreement.
(h) Entire Agreement. This Extension and Amendment and the
Extended and Amended Agreement contain the entire understanding of the
parties hereto respecting the subject matter hereof and supersedes all
prior discussions and understandings.
(i) Headings. Section and subsection headings in this
Extension and Amendment are included herein for convenience of reference
only and shall not constitute a part of this Extension and Amendment for
any other purpose or be given any substantive effect.
(j) Counterparts; Effectiveness. This Extension and
Amendment may be executed in any number of counterparts and by different
parties hereto in separate counterparts, each of which when so executed
and delivered shall be deemed an original,
<PAGE> 4
but all such counterparts together shall constitute but one and the same
instrument; signature pages may be detached from multiple separate
counterparts and attached to a single counterpart so that all signature
pages are physically attached to the same document. This Extension and
Amendment shall become effective upon the execution of a counterpart
hereof by the Company, A&M, the Affiliate and Alvarez and receipt by the
Company of written or telephonic notification of such execution and
authorization of delivery thereof.
IN WITNESS THEREOF, the parties have executed this Amendment as
of the day and year first above written.
ALVAREZ & MARSAL, INC.
By: /s/ Antonio C. Alvarez, II
-----------------------------
Its: Principal
----------------------------
A&M INVESTMENT ASSOCIATES #3, LLC
By: /s/ Antonio C. Alvarez, II
-----------------------------
Its: Managing Member
----------------------------
ANTONIO C. ALVAREZ II
/s/ Antonio C. Alvarez, II
----------------------------------
WHEREHOUSE ENTERTAINMENT, INC.
By: /s/ Robert S. Kelleher
-----------------------------
Its: Executive Vice President,
Chief Financial Officer
----------------------------
<PAGE> 1
EXHIBIT 10.29
SECOND AMENDMENT TO
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY
AGREEMENT (this "Amendment"), dated as of May 14, 1999, is entered into between
CONGRESS FINANCIAL CORPORATION (WESTERN), a California corporation ("Lender"),
on the one hand, and WHEREHOUSE ENTERTAINMENT, INC., a Delaware corporation,
WHEREHOUSE.COM, INC., a California corporation, WHEREHOUSE SUBSIDIARY I CO.,
INC., a Delaware corporation, WHEREHOUSE SUBSIDIARY II CO., INC., a California
corporation, and WHEREHOUSE SUBSIDIARY III CO., INC., a Delaware corporation
(collectively, "Borrower"), on the other.
RECITAL
A. Borrower and Lender have previously entered into an Amended and
Restated Loan and Security Agreement dated as of October 26, 1998, as amended by
a First Amendment dated as of November 30, 1998 (the "Loan Agreement"), pursuant
to which Lender has made certain loans and financial accommodations available to
Borrower. Terms used herein without definition shall have the meanings ascribed
to them in the Loan Agreement.
B. Borrower and Lender wish to amend the Loan Agreement on the
terms and conditions set forth in this Amendment. Borrower is entering into this
Amendment with the understanding and agreement that, except as specifically
provided herein, none of Lender's rights or remedies as set forth in the Loan
Agreement is being waived or modified by the terms of this Amendment.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. Amendment to Covenant Regarding Encumbrances. Section 9.8 of the
Loan Agreement is amended by renumbering clause (7) as clause (8) and adding,
immediately after the semi-colon at the end of clause (6), a new clause (7) to
read in its entirety as follows:
"(7) liens on purchase money indebtedness (including capital
leases) in an amount not to exceed $25,000,000 of aggregate original
indebtedness or obligations;".
2. Amendment to Covenant Regarding Indebtedness. Section 9.9 of the
Loan Agreement is amended by deleting the word "and" at the end of clause (e),
replacing the period at the end of clause (f) with "; and" and adding a new
clause (g) to
<PAGE> 2
read in its entirety as follows:
"(g) capitalized leases in an amount not to exceed $31,900,000
for retail store locations, as reflected on Borrower's consolidated
balance sheet as of October 31, 1998."
3. Amendment Regarding Annual Financial Statements. Clause (iii) of
Section 9.6(a) of the Loan Agreement is amended to read in its entirety as
follows:
"(iii) simultaneously with the delivery of the same to the
Securities and Exchange Commission, audited consolidated financial
statements and, if Borrower has any subsidiaries, audited consolidating
financial statements of Borrower and its subsidiaries (including in each
case balance sheets, statements of income and loss, statements of cash
flow and statements of shareholders' equity), and the accompanying notes
thereto, all in reasonable detail, fairly presenting the financial
position and the results of the operations of Borrower and its
subsidiaries as of the end of and for such fiscal year, together with
the opinion of independent certified public accountants, which
accountants shall be an independent accounting firm selected by Borrower
and reasonably acceptable to Lender, that such financial statements have
been prepared in accordance with GAAP, and present fairly the financial
condition and results of operations of Borrower and its subsidiaries as
of the end of and for the fiscal year then ended, provided that if
Borrower is not required to file such financial statements and opinions
with the Securities and Exchange Commission, Borrower shall provide all
such financial statements and opinions within ninety (90) days after the
end of the fiscal year."
4. Effectiveness of this Amendment. Lender must have received the
following items, in form and content acceptable to Lender, before this Amendment
is effective and before Lender is required to extend any credit to Borrower as
provided for by this Amendment:
(a) Amendment. This Amendment fully executed in a sufficient
number of counterparts for distribution to Lender and Borrower;
(b) Authorizations. Evidence that the execution, delivery
and performance by Borrower and each guarantor or subordinating creditor of this
Amendment and any instrument or agreement required under this Amendment have
been duly authorized;
(c) Representations and Warranties. The representations and
warranties set forth in the Loan Agreement must be true and correct; and
(d) Consents. Counterparts of the Consent appended hereto
(the "Consent") executed on behalf of each of Wherehouse Holding I Co., Inc., a
Delaware
2
<PAGE> 3
corporation and Wherehouse Holding II Co., Inc., a Delaware corporation
("Guarantors", and together with Borrower, each a "Loan Party" and collectively
the "Loan Parties").
5. Representations and Warranties. Borrower represents and warrants
as follows:
(a) Authority. Each Loan Party has the requisite corporate
power and authority to execute and deliver this Amendment or the Consent, as
applicable, and to perform its obligations hereunder and under the Financing
Agreements (as amended or modified hereby) to which it is a party. The
execution, delivery and performance by Borrower of this Amendment and by each
other Loan Party of the Consent, and the performance by each Loan Party of each
Financing Agreement (as amended or modified hereby) to which it is a party have
been duly approved by all necessary corporate action of such Loan Party and no
other corporate proceedings on the part of such Loan Party are necessary to
consummate such transactions.
(b) Enforceability. This Amendment has been duly executed
and delivered by Borrower. The Consent has been duly executed and delivered by
each Guarantor. This Amendment and each Financing Agreement (as amended or
modified hereby) is the legal, valid and binding obligation of each Loan Party
hereto or thereto, enforceable against such Loan Party in accordance with its
terms, and is in full force and effect.
(c) Representations and Warranties. The representations and
warranties contained in each Financing Agreement (other than any such
representations or warranties that, by their terms, are specifically made as of
a date other than the date hereof) are correct on and as of the date hereof as
though made on and as of the date hereof.
(d) No Default. Except as set forth on Schedule 1 attached
to and incorporated into this Amendment, no event has occurred and is continuing
that constitutes an Event of Default.
6. Choice of Law. The validity of this Amendment, its construction,
interpretation and enforcement, the rights of the parties hereunder, shall be
determined under, governed by, and construed in accordance with the internal
laws of the State of California governing contracts only to be performed in that
State.
7. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties and separate counterparts, each of which
when so executed and delivered, shall be deemed an original, and all of which,
when taken together, shall constitute one and the same instrument. Delivery of
an executed counterpart of a signature page to this Amendment or the Consent by
telefacsimile shall be effective as delivery of a manually executed counterpart
of this Amendment or the Consent.
8. Reference to and Effect on the Financing Agreements.
(a) Upon and after the effectiveness of this Amendment, each
3
<PAGE> 4
reference in the Loan Agreement to "this Agreement", "hereunder", "hereof" or
words of like import referring to the Loan Agreement, and each reference in the
other Financing Agreements to "the Loan Agreement", "thereof" or words of like
import referring to the Loan Agreement, shall mean and be a reference to the
Loan Agreement as modified and amended hereby.
(b) Except as specifically amended above, the Loan Agreement
and all other Financing Agreements, are and shall continue to be in full force
and effect and are hereby in all respects ratified and confirmed and shall
constitute the legal, valid, binding and enforceable obligations of Borrower to
Lender.
(c) The execution, delivery and effectiveness of this
Amendment shall not, except as expressly provided herein, operate as a waiver of
any right, power or remedy of Lender under any of the Financing Agreements, nor
constitute a waiver of any provision of any of the Financing Agreements.
IN WITNESS WHEREOF, the parties have entered into this Amendment as of
the date first above written.
CONGRESS FINANCIAL CORPORATION
(WESTERN)
By: /s/ D.B. Laughton
Name: D.B. Laughton
Title: SVP
WHEREHOUSE ENTERTAINMENT, INC.
By: /s/ R.S. Kelleher
Name: R.S. Kelleher
Title: Executive VP, Chief Financial Officer
WHEREHOUSE.COM, INC.
By: /s/ R.S. Kelleher
Name: R.S. Kelleher
Title:
4
<PAGE> 5
WHEREHOUSE SUBSIDIARY I CO., INC.
By: /s/ R.S. Kelleher
Name: R.S. Kelleher
Title: Exec. V.P., Chief Financial Officer
WHEREHOUSE SUBSIDIARY II CO., INC.
By: /s/ R.S. Kelleher
Name: R.S. Kelleher
Title: Exec. V.P., Chief Financial Officer
WHEREHOUSE SUBSIDIARY III CO., INC.
By: /s/ R.S. Kelleher
Name: R.S. Kelleher
Title: Exec. V.P., Chief Financial Officer
5
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 15,009
<SECURITIES> 0
<RECEIVABLES> 5,207
<ALLOWANCES> 0
<INVENTORY> 226,648
<CURRENT-ASSETS> 263,674
<PP&E> 81,923
<DEPRECIATION> 13,392
<TOTAL-ASSETS> 387,741
<CURRENT-LIABILITIES> 192,862
<BONDS> 0
0
0
<COMMON> 108
<OTHER-SE> 89,400
<TOTAL-LIABILITY-AND-EQUITY> 387,741
<SALES> 464,475
<TOTAL-REVENUES> 496,459
<CGS> 325,687
<TOTAL-COSTS> 157,442
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,245
<INCOME-PRETAX> 12,085
<INCOME-TAX> 5,029
<INCOME-CONTINUING> 7,056
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,056
<EPS-PRIMARY> .66
<EPS-DILUTED> .61
</TABLE>
