SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] JOINT ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended January 31, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number 33-51266-01 Commission File Number 1-8281
WEI Holdings, Inc. Wherehouse Entertainment, Inc.
(Exact name of registrant as (Exact name of registrant as
specified in its charter) specified in its charter)
Delaware Delaware
(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
95-2647555 13-3439558
(I.R.S. Employer Identification (I.R.S. Employer Identification
Number) Number)
c/o Wherehouse Entertainment, Inc.
19701 Hamilton Avenue 19701 Hamilton Avenue
Torrance, California 90502-1334 Torrance, California 90502-1334
(Address of principal executive (Address of principal executive
offices including ZIP code) offices including ZIP code)
(310) 538-2314 (310) 538-2314
(Registrant's telephone number, (Registrant's telephone number,
including area code) including area code)
Securities registered pursuant to Section 12(b) of the Act:
6 1/4% Convertible Subordinated
None Debentures Due July 1, 2006
(Title of class) (Title of class)
None American Stock Exchange
(Name of Exchange) (Name of Exchange)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrants (1) have
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 registrants were
required to file such reports), and (2) have 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 registrants' 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. [ X ]
All of the voting stock of Wherehouse Entertainment, Inc. is
held by WEI Holdings, Inc. All of the voting stock of WEI
Holdings, Inc. is held by affiliates. All officers, directors
and more than 5% stockholders of WEI Holdings, Inc. are deemed
"affiliates" of WEI Holdings, Inc. for the purpose of determining
the foregoing. The registrants, however, do not represent that
such persons, or any of them, would be deemed "affiliates" of the
registrants for any other purpose under the Securities Exchange
Act of 1934 or the Securities Act of 1933.
As of April 30, 1994, 2,366,113 shares of WEI Holdings,
Inc.'s common stock and 10 shares of Wherehouse Entertainment,
Inc.'s common stock were issued and outstanding.
<PAGE>
PART I
Item 1. BUSINESS
Wherehouse Entertainment, Inc. (the "Company" or "Where-
house") is a wholly-owned subsidiary of WEI Holdings, Inc.
("WEI"). The Company believes that, in terms of both revenues
and store count, it is the largest retailer of prerecorded music
in the western U.S. and the second largest renter of videocas-
settes in the western U.S. The Company believes that it sells
more prerecorded music in the state of California than any other
specialty retailer. Founded in 1970 as a music retailer, Where-
house has evolved into a diversified entertainment retailer with
a broad range of prerecorded music, videocassettes and other
products. As the Company has grown, its product lines and
product mix have been adapted to changes in electronics techno-
logy and consumer tastes.
Wherehouse operated 347 stores at April 1, 1994 in eleven
states under the names "The Wherehouse", "Wherehouse Entertain-
ment", "Record Shop", "Paradise Music", "Pegasus", "Rocky Moun-
tain Records", "Leopolds" and "Odyssey". All but forty-six of
the Company's stores operate under "The Wherehouse" name. The
"Record Shop," "Paradise Music", "Pegasus", and "Rocky Mountain
Records" names were acquired with the recent acquisitions of
those stores, and the stores continue to operate under those
names at this time.
The Company sells prerecorded music and videocassettes,
video games, personal electronics (including personal stereos,
portable stereos, headphones and related merchandise), blank
audiocassettes and videocassettes, and accessories. Approxi-
mately 75% of the Company's stores also rent both videocassettes
and video games. The Company believes that this combination
entertainment store format offers competitive advantages relative
to those competitors that operate stores offering only merchan-
dise products for sale or products for rent. The merchandise
sale and video rental lines complement one another and offer
cross-selling opportunities. A video rental customer visits a
store at least once, and possibly twice, for each transaction and
is presented each time with the Company's merchandise offerings.
In fiscal 1994, sales of prerecorded music, videocassettes,
video games, and accessories accounted for 81% of revenues, and
rentals of videocassettes, video games, and other products
accounted for 19% of revenues.
The Company expanded its retail operations significantly
from fiscal 1990 to the present. At February 1, 1989, Wherehouse
operated 221 stores. Since then, 157 stores have been opened, 48
as a result of the Company's store acquisition program and 109 as
internally developed locations, while 31 have been closed, expand-
ing the Company's operations to a net total of 347 stores in
eleven states as of January 31, 1994 (see "Store Additions and
Site Selection" below), including one store temporarily closed
due to the Southern California earthquake. No new stores were
opened from February 1, 1994 to April 1, 1994. Of the 347 stores
operating as of April 1, 1994, 273 stores were located in strip
centers or freestanding buildings and 74 were located in malls.
Approximately 91% of the Company's stores are concentrated in ten
major marketing areas (Los Angeles, San Francisco, San Diego,
Sacramento, Seattle, Phoenix, Fresno, Las Vegas, Denver and Salt
Lake City) and approximately 78% of the stores are located in
California. The Company has focused its operations on its ten
major marketing areas in order to create competitive advantages
in operations, advertising and marketing, and distribution.
During the 1994 fiscal year, the Company expanded its
presence in several western states and entered new markets in the
west and mid-west through the acquisition of 39 specialty music
stores from The Record Shop, Inc. and Pegasus Music and Video,
Inc. Four other Record Shop stores, which were operated under
management agreements during the latter half of the 1994 fiscal
year, have subsequently been purchased or may be purchased in
fiscal 1995. These acquisitions expanded the Company's opera-
tions into five additional states (Utah, Montana, Iowa, Minnesota
and North Dakota) and established Salt Lake City as a major
marketing area.
The Company expects in the current fiscal year to focus its
efforts towards improvement of its existing stores, rather than
acquisitions and new store openings (see Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of
Operations"). Nevertheless, the Company will opportunistically
evaluate potential acquisitions which could provide additional
geographic diversification while still accomplishing the strategy
of clustering stores in order to concentrate on selected market-
ing areas and achieve the economies which clustering provides.
If it determines the same to be appropriate, the Company may,
subject to its ability to source additional capital, make addi-
tional acquisitions. On a longer-term basis, the Company intends
to continue its growth, both by opening new stores in selected
locations, and by additional acquisitions.
The Company was acquired in June 1992 through the acquisi-
tion (the "Acquisition") by Grammy Corp. of all the outstanding
capital stock and related equity securities of WEI through the
merger (the "Merger") of Grammy Corp. with and into WEI, with WEI
surviving the Merger. Grammy Corp. was formed by Merrill Lynch
Capital Partners, Inc. ("MLCP") in February 1992 solely to effect
the Acquisition.
Currently, WEI conducts no independent operations and has no
significant assets other than the capital stock of the Company.
In January 1994, WEI raised $30 million through the sale of
common stock to certain of its existing stockholders. All of
these funds were contributed by WEI to the capital of the
Company, and provided permanent financing for the acquisition of
stores from the Record Shops, Inc. and Pegasus Music and Video,
Inc., as previously discussed. Contemporaneously with this
financing, the Company's bank credit agreement was amended to,
among other things, revise certain financial covenants to provide
the Company with additional operating flexibility. See Item 7 -
"Management's Discussion and Analysis of Financial Condition and
Results of Operations".
MERCHANDISE PRODUCTS AND SUPPLY
Wherehouse stores generally sell a broad array of entertain-
ment products, including prerecorded music and videocassettes,
video game software, accessories and personal electronics. The
table at the end of this section summarizes the Company's dollar
volume of sale revenue by merchandise category from fiscal 1990
through fiscal 1994. The percentage of total revenues contri-
buted by merchandise sales has risen from 76% in 1990 to 81% in
1994. The number of different music titles per store ranges from
6,000 to 70,000, representing approximately 12,000 to 140,000
individual units in inventory per store.
The Company'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. With input from store management and a product
allocation team, Wherehouse's inventory management systems tailor
each store's product selections and merchandise mix to local
market demand and maximize the availability of the most popular
items at each store, subject to store size constraints. The
Company's stores have been designed to facilitate quick service
and to accommodate changes in industry trends and product
offerings.
The Company purchases its prerecorded music from all major
suppliers, including WEA (Warner/Elektra/Atlantic Corporation),
Sony Music Entertainment, Inc., CEMA Distribution, Polygram
Distribution, UNI Distribution, and BMG Distribution. The
Company has not experienced, and does not anticipate having in
the future, any material problems obtaining its products.
The Company also buys and sells used CDs in the majority of
its stores. The sale of used CDs was first tested in certain of
the Company's stores in fiscal 1993. Based upon strong consumer
acceptance, the Company began buying used CDs from customers and
expanded upon this business significantly in fiscal 1994.
Prerecorded videocassettes (feature films, music videos, and
self-improvement programming) represented, after music, the
Company's second largest sale product category in fiscal 1994.
As box-office hit motion pictures continue to be released to the
videocassette sell-through market at decreased prices, industry-
wide sales of this category have increased. The Company's
revenues from the sales of videocassettes have, however,
decreased with the proliferation of competitors' outlets selling
videocassettes and the highly competitive pricing of the product,
particularly from discounters and mass merchandisers. The
Company has implemented new pricing and merchandising strategies
designed to counter this trend. No assurances can be given that
the Company's new strategies will be successful.
During fiscal 1994, the Company significantly expanded its
presence in the video game business, carrying both software and
hardware. The Company's other sale merchandise items include
blank audio and videocassette tapes, music and tape care
products, carrying cases, storage units, and personal electron-
ics. The Company also collects commissions on event tickets sold
under affiliations with Bay Area Seating Service (BASS) and
Ticketmaster.
It is the Company's objective to keep as much of its inven-
tory as possible in its stores rather than at its distribution
center. Substantially all of each store's inventory is on
display and available for sale, with little or no merchandise in
back room storage.
<TABLE>
Sales and Rental Revenue By
Merchandise Category
(dollars in millions)
<CAPTION>
Fiscal Years Ended January 31,
---------------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Merchandise Sales
Compact discs
(including
used CDs) $203.7 $174.3 $161.0 $135.8 $ 93.6
Cassettes and
other music 101.9 112.7 124.5 133.8 131.7
------ ------ ------ ------ ------
Total music 305.6 287.0 285.5 269.6 225.3
New videocassettes 24.3 26.9 33.4 37.0 26.9
Video game software
and hardware,
general merchandise
accessories,
ticket commissions,
and other 50.3 40.6 39.7 45.7 44.6
------ ------ ------ ------ ------
Total merchandise
sales $380.2 $354.5 $358.6 $352.2 $296.8
====== ====== ====== ====== ======
Video and other
product rentals 91.6 94.0 98.8 99.9 91.5
------ ------ ------ ------ ------
TOTAL REVENUE $471.8 $448.5 $457.4 $452.1 $388.3
====== ====== ====== ====== ======
</TABLE>
VIDEO AND OTHER PRODUCT RENTALS
The Company's other principal revenue source is the rental
of prerecorded videocassettes and other products, chiefly feature
films. Although most videocassette rentals are feature films,
approximately 15% of Wherehouse's rentals in fiscal 1993 were
nontheatrical titles, such as children's videos, adult videos,
workout videos, music videos, educational videos, and do-it-
yourself videos. Wherehouse also rents audiocassette books.
Video game players and laser discs are also offered for rent in a
few select stores. As of April 1, 1994, 260 of Wherehouse's 347
stores offered videocassettes and other products for rent. On
average, stores that rent videocassettes carry approximately
7,000 units, and can range from as few as 3,000 to as many as
14,000 units, representing from 2,000 to 9,000 individual
titles.
Wherehouse purchases prerecorded videocassettes from a
variety of distributors and other suppliers. As with recording
companies, the film studios, or their videocassette distribution
operations, each controls a certain portion of available titles
and seeks to promote those titles. The Company's leading
suppliers of prerecorded videocassettes are Ingram Entertainment,
Warner Home Video, Columbia TriStar Home Video, MCA/Universal
Home Video, Paramount Home Video, Baker & Taylor Video and Fox
Video. The Company has not experienced, and does not anticipate
having in the future, any material problems obtaining its
products.
The Company believes that an important element of efficient
video operations is the disposition of used rental videocassettes
to maximize the productivity of its inventory. Wherehouse's
systems enable the Company to effectively monitor the rental
efficiency of its inventory on an individual title and unit
basis. As a hit title's efficiency declines, used rental video-
cassettes are sold on a clearance basis in the Company's stores,
and, where appropriate, the Company may sell excess used video
inventory to third-party distributors.
During fiscal 1994, the Company expanded its video game
rental business, including the sale and rental of related video
game hardware, and intends to continue this expansion in fiscal
1995. With the retail price of most video games exceeding $50,
the opportunity for customers to try the games for a minimal
nightly rental fee is compelling. Further, younger consumers,
generally ages 8 to 16, find the daily rental of a video game to
be an attractive entertainment alternative.
ADVERTISING AND PROMOTION
The Company 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 purchase 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, freestanding inserts,
magazines, and cable television. Advertising generally
emphasizes immediate availability of hit product at reduced
prices, as well as access to a broad array of catalog product.
The Company believes its strategy of clustering its stores in
major markets allows it to optimize the use of its advertising
expenditures.
Wherehouse seeks to maximize 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 to promote new releases and, occasionally,
on a label-wide basis. When the Company runs pre-authorized
advertising that contains reference to a specific title or label,
the related supplier will generally reimburse 100% of the pro
rata cost of that advertising.
The Company believes that Wherehouse is among the most
effective among entertainment retailers at securing cooperative
advertising funds. Because of its strong market position in
western markets, suppliers seek the Company's support for their
product. Furthermore, the Company's concentration of stores in
major markets provides economies when purchasing broad scale
media and makes the supplier's own advertising expenditures more
effective when allocated to Wherehouse.
TRADE CUSTOMS AND PRACTICES
Substantially all of the Company's music purchases are
protected by return policies offered by major manufacturers. The
return privilege generally exists for a particular 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. None of the Company's major
pre-recorded music suppliers limit returns of unopened items, but
they generally charge return penalties of varying amounts. Most
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 allowances. Over the past few
years, several of the major manufacturers have effected material
changes in their pricing and return policies. Most recently, one
of the major manufacturers changed its pricing policies to
lengthen the period of front-end promotional prices, while at the
same time substantially increasing its return penalty rates. The
Company has not yet been able to determine whether the effect of
these changes will be beneficial to its operating results. Addi-
tional changes in these policies could have an adverse effect on
the Company.
STORE ADDITIONS AND SITE SELECTION
Wherehouse added a total of 126 stores from fiscal 1990
through fiscal 1994, net of store closings. The table below sets
forth store openings, closings, total number of stores, and
aggregate square footage under lease for the last five fiscal
years:
<TABLE>
<CAPTION>
Total Stores Stores Total Stores Aggregate
Fiscal at Beginning _____________ at End Square Footage
Year of Period Opened Closed of Period of Period
______ ____________ ______ ______ ___________ ______________
<S> <C> <C> <C> <C> <C>
1994 313 49 15 347 2,117,000
1993 301 15 3 313 2,011,000
1992 283 21 3 301 1,932,000
1991 263 24 4 283 1,811,000
1990 221 48 6 263 1,640,000
</TABLE>
During the fiscal year ended January 31, 1994, the Company's
new store openings ranged in size from 1,350 to 14,300 square
feet. Initial cash investment in leasehold improvements,
fixtures and equipment for these new stores generally ranged from
$90,000 to $900,000. As previously mentioned, new store openings
in fiscal 1994 included 43 stores acquired from, or managed by
the Company for its own benefit under contract with, The Record
Shop, Inc. and Pegasus Music and Video, Inc.
The Company's strategy of clustering stores in marketing
areas has led to the achievement of important economies of scale
and scope in several business functions, including advertising,
personnel, management and distribution. In recent years, the
Company has pursued growth opportunities in existing marketing
areas and has selectively grown through acquisition if such
growth was consistent with the Company's strategies. The Company
will continue to take advantage of opportunities to consolidate
or close stores in areas where the market has become less
favorable.
SITE SELECTION. In its new store location decisions,
Wherehouse takes into consideration the following factors, among
others: demographics (population density and level of household
income), psychographics (propensity of the population to buy
entertainment-related products), site access and visibility,
traffic patterns, parking and the particular terms of a proposed
lease. The Company has not experienced any overall difficulties
with site selection to date.
STORE OPERATIONS AND DISTRIBUTION
STORE LOCATION. As of April 1, 1994, the Company had 273
stores located in strip centers or freestanding buildings and 74
stores located in malls. The standard size of strip center or
freestanding location is approximately 6,500 square feet, with a
range of 1,100 to 28,000 square feet. Mall stores on average
utilize from 1,350 to 6,600 square feet of space, and most do not
offer video rental service due to the importance of convenience
in the video rental business.
RETAIL PRESENTATION. The Company has developed a contempo-
rary store design approach that employs light interior colors,
attractive lighting, modified exterior signage and a minimum of
fixed interior walls. The design maximizes flexibility in
lighting and use of floor space (e.g., to accommodate changes in
product format) and focuses customer attention primarily on
products. The Company, which maintains an active store remodel-
ing program to keep older stores up to date, has remodelled
approximately 310 stores in the past five years, including recent
remodels of substantially all of the stores acquired from The
Record Shop, Inc. and Pegasus Music and Video, Inc.
DISTRIBUTION. Central to Wherehouse's strategy of providing
broad merchandise selection to its customers (i.e. multiple
copies of hits, select copies of catalog product, and high
quality in-stock condition) is its ability to distribute product
quickly and cost-effectively to its stores. The Company's
central distribution system achieves this result by filling
orders to all stores twice a week. Inventory at the Company's
distribution center (located in Carson, California) is automa-
tically sorted based on individual store demand data generated by
its store-level inventory systems.
Approximately 30% of the Company's inventory is shipped to
store locations directly from manufacturers and distributors
(chiefly in the case of new releases), and the remainder is
shipped from the distribution center. The Company uses common
carriers for deliveries from its distribution center.
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, discounters and other mass merchandisers,
direct mail programs such as record clubs, and local operators.
The video rental market is a more fragmented industry, with many
small operators and one significant competitor, Blockbuster
Entertainment Corporation, whose estimated nationwide marketshare
is currently approximately 20%. 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 which most of its
competition does not have.
Nevertheless, in both the music and rental markets, there
has been a recent 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. In addition, several major retail chains, including Best
Buy, Blockbuster Entertainment and Virgin Megastores, have
announced plans to increase their retail music store presence in
California. It can thus be expected that the Company will in
future periods experience increased competition from companies
with greater financial resources than the Company, and that
competitive pressures may result in a tightening of gross profit
margins.
The Company also competes with cable television, which
includes pay-per-view television. Currently, pay-per-view
provides less viewing flexibility to the consumer than video-
cassette rentals, and at a higher cost. Also, under current
entertainment industry distribution practices, movies are
generally available on videocassette prior to appearing on pay-
per-view. However, viewing flexibility may increase with
improved technology which could negatively impact the retail
store delivery of home video and the Company's business. Notwith-
standing potential technological advances, the Company believes
that video rental should, in the near future, continue to be the
first source of filmed in-the-home 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 movies or interactive games "on demand" over
fiber optic telephone or cable lines, other in-the-home enter-
tainment which may some day be provided over the "information
superhighway", and in-store kiosks that would provide on-site
transcription of compact discs. While none of these technologies
is yet commercially available, and it appears that significant
technical, economic, and other obstacles to their introduction
remain to be resolved, if and when these or other new technolo-
gies are introduced, it can be anticipated that the Company's
business could be significantly impacted; and the Company may
need to develop and implement new marketing strategies in order
for its business to remain viable.
The Company believes that, in terms of both revenues and
store count, it currently is the largest retailer of prerecorded
music in the western U.S. and the second largest renter of
videocassettes in the western U.S. The Company believes that its
major competitive advantages lie in its convenient store loca-
tions and in its ability to offer a wider and more up-to-date
selection of inventory and to provide better customer service.
The Company believes that factors such as significant economies
of scale in marketing, purchasing and distribution currently
favor the Company over most of its competitors. Wherehouse's
combination entertainment store format provides cross-selling
opportunities and provides one convenient source of prerecorded
music and videocassettes for the consumer.
ORGANIZATION AND EMPLOYEES
The Company's corporate offices are located in Torrance,
California. The Company maintains one regional operations
office within the corporate offices and the other two regional
operations offices in Redwood City and San Diego. The Company's
distribution center is in Carson, California.
As of April 1, 1994, the Company employed approximately
7,700 persons. Approximately 32% were full-time employees and
approximately 68% were part-time employees. The Company's labor
complement depends on seasonal requirements, with up to 1,200
additional store and distribution center employees added during
the peak holiday season. The Company's headquarters staff, which
numbers approximately 223, is responsible for executive and
general operating management, buying, merchandising, advertising,
finance, accounting, information systems and real estate.
TRADEMARKS
All but 46 of the Company's stores operate under the name
"The Wherehouse." The Company owns and maintains registrations
for "The Wherehouse" trademark and variations thereof in the
United States and the United Kingdom, and monitors the status of
its trademark registrations to maintain them in force and to
renew them as required.
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 1994 were
slightly more than 32% of total annual revenues.
Item 2. PROPERTIES
The Company's executive offices, which are located in
Torrance, California, are governed by a lease covering 72,670
square feet of space at an annual base rent for fiscal 1994 of
approximately $1,100,000; base rental is subject to periodic
consumer price index adjustments. The lease expires in June 1996
and is subject to a renewal option for an additional term of five
years.
The Company owns a 110,000 square foot warehouse in Gardena,
California, which is subject to a mortgage in the original princi-
pal amount of $2,800,000 which matures in 1996. The majority of
the space in this facility is sub-leased until April 1997 for an
annual rental of $192,000.
The Company operates a 200,000 square foot distribution
center in Carson, California. The lease for this property
expires on April 30, 2002, subject to two five-year renewal
options. The base rent for fiscal 1994 was $792,792; rent is
subject to periodic adjustment.
All 49 stores opened through internal development or acqui-
sition during fiscal 1994 were located in leased properties. No
new stores were opened from February 1, 1994 to April 1, 1994.
As of April 1, 1994, the Company had signed lease commitments to
open two new stores and may open additional stores over the next
twelve months. See Item 1 - "Business".
As of January 31, 1994, the Company owned one of its retail
locations and leased space for the remaining 346 stores. Lease
terms generally range from 10 to 25 years including renewal
options. If all leased stores' renewal options were exercised,
18 leases would expire on or before January 31, 1995, 64 would
expire between February 1, 1995 and January 31, 2000, and the
remainder would expire between February 1, 2000 and March 31,
2025. 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.
Item 3. LEGAL PROCEEDINGS
In January 1988, holders (the "Debentureholders") of approx-
imately $17 million in principal amount of the Company's 6 1/4%
Convertible Subordinated Debentures (the "Debentures") commenced
the action McMahan & Company, et al. v. Wherehouse Entertainment,
Inc., et al., 88 Civ. 0321 (S.D.N.Y.). An Amended Complaint was
filed in January 1988 and a Revised Amended Complaint was filed
in June 1988. Defendants are the Company, six of its former
directors, Furman Selz, Adler & Shaykin, the former controlling
shareholder of the Company ("A&S"), WEI Acquisition Corp.
("WAC"), a corporation formed by A&S for the purpose of acquiring
the Company, and WEI.
An indenture between the Company and Bank of America Nation-
al Trust and Savings Association (the "Debenture Indenture"),
which sets forth the contractual rights of the Debentureholders,
provides that under certain circumstances (defined as "triggering
events") the Debentureholders will have the right to have their
Debentures redeemed by the Company at a specified redemption
price. One of the triggering events is a merger of the Company
with another company that is not approved by a majority of the
"Independent Directors" (as defined in the Debenture Indenture).
The claims in this action arose from the 1988 Acquisition of the
Company by A&S, pursuant to a merger agreement (the "1988 Acqui-
sition Agreement") that was approved by the board of directors of
the Company, including a majority of the Independent Directors.
At that time, there were approximately $48.3 million in aggregate
principal amount of Debentures outstanding.
The Amended Complaint contains seven causes of action.
Count I alleges that the Independent Directors' approval of the
1988 Acquisition Agreement violated the Debenture Indenture
because of the alleged implicit requirement in the Debenture
Indenture that the Independent Directors would not approve any
merger agreement unless the approval was in the best interests of
the Debentureholders. Count II alleges that the board of
directors' approval of the 1988 Acquisition Agreement violated
the directors' contractual duty of good faith and fair dealing to
the Debentureholders. Count III alleges that the prospectus
issued by the Company and Furman Selz in connection with the
offering of the Debentures violated Section 11 of the Securities
Act of 1933 (the "Securities Act") by failing to disclose that
the Independent Directors retained the right to approve any
merger proposal, and thereby prevent any right to redemption from
arising, whether or not such proposal was in the best interests
of the Debentureholders. Count IV, brought solely on behalf of
Froley, Revy Investment Co. ("Froley Revy"), alleges that
representatives of Furman Selz violated Section 12(2) of the
Securities Act by making material misstatements to Froley Revy to
the effect that the optional redemption provision was a "special
protection" and a "protective covenant" for Debentureholders,
without disclosing that the directors retained the power, in
their discretion, to approve a transaction and thereby prevent
any right to redemption from arising. Count V alleges that the
prospectus issued by the Company and Furman Selz in connection
with the offering of the Debentures, as well as the oral state-
ments specified in Count IV, violated Section 10(b) of the
Securities Exchange Act of 1934 (the "Exchange Act") for the
reasons specified in the descriptions of Counts III and IV.
Count VI alleges that A&S, WAC and WEI interfered with plain-
tiffs' alleged contractual rights. Count VII alleges that the
1988 Acquisition was a fraudulent conveyance in violation of New
York law.
The Revised Amended Complaint seeks (a) to invalidate any
obligation of the Company to Chemical Bank, which provided
financing in connection with the 1988 Acquisition, (b) to set
aside any security interest in the Company's assets in favor of
Chemical Bank, (c) a declaration that the debt held by Chemical
Bank is secured only by the securities which the debt was
provided to purchase and (d) damages in an unspecified amount,
together with the costs of the action. Although the Revised
Amended Complaint also purported to seek an injunction barring
the 1988 Acquisition, plaintiffs never applied for such relief
and the 1988 Acquisition was consummated.
By opinion dated April 10, 1990, the United States Court of
Appeals for the Second Circuit (the "Second Circuit") reversed
the judgment of the United States District Court for the Southern
District of New York (the "District Court") dismissing the
federal securities law claims pursuant to Rule 56 of the Federal
Rules of Civil Procedure and dismissing the state law claims for
lack of subject matter jurisdiction. The Second Circuit, by a
vote of two to one, concluded that plaintiffs had presented
sufficient evidence to create a question of fact as to whether
the offering materials at issue and certain alleged oral communi-
cations from Furman Selz to Froley, Revy could have misled a
reasonable investor in violation of Section 10(b) of the Exchange
Act and Sections 11 and 12(2) of the Securities Act. The Second
Circuit also reinstated the pendent state law claims, and
remanded the case to the District Court. Discovery has
concluded, and defendants moved for summary judgment dismissing
plaintiffs' complaint in its entirety. Plaintiffs also moved for
partial summary judgment on their contract claims. On March 11,
1994, the United States Magistrate Judge issued a Report and
Recommendation which recommended that defendants' motion for
summary judgment be granted and that the complaints in these
action be dismissed. The final decision on the motion is to be
made by the Second Circuit Judge. Plaintiffs' objections to the
Report and Recommendation were filed with the Court in April
1994. Defendants' response to such objections is to be filed by
May 27, 1994. Based on proceedings to date and the Company's
discussions with its trial lawyers, the Company believes that
this action is without merit and is vigorously defending it.
$5.7 million principal amount of the Debentures remained
outstanding as of January 31, 1994.
In January 1989, the purported class action Don Thompson v.
Wherehouse Entertainment, Inc., et al., 88 Civ. 9040 (S.D.N.Y.)
was commenced by Don Thompson, the owner of $71,000 in principal
amount of Debentures. The Company is named as a defendant along
with six of its former directors and Furman Selz. This action
has been consolidated with the McMahan action described above.
The Complaint contains five causes of action. Count I
alleges that the prospectus issued by the Company and Furman Selz
in connection with the offering of the Debentures violated
Sections 11 and 15 of the Securities Act by failing to disclose
that the Independent Directors retained the right to approve any
merger proposal, and thereby retained the power to prevent any
right of redemption from arising, whether or not such merger
proposal was in the best interests of the Debentureholders.
Count II alleges that the prospectus violated Section 10(b) of
the Exchange Act for the same reason. Count III alleges that the
Independent Directors' approval of the 1988 Acquisition Agreement
violated the Debenture Indenture due to the alleged implicit
requirement in the Debenture Indenture that the Independent
Directors would not approve any merger agreement unless such
approval was in the best interests of the Debentureholders.
Count IV alleges that the Independent Directors' approval of the
1988 Acquisition Agreement, at the direction of the Company and
the management directors, violated the contractual duty of good
faith and fair dealing that the Company and the former directors
owed to the Debentureholders. Count V alleges that the 1988
Acquisition is a fraudulent conveyance in violation of New York
law. The Complaint seeks certification of the action as a class
action and certification of plaintiff as an appropriate represen-
tative of the class. The Complaint also seeks damages in an
unspecified amount together with the costs of the action.
On April 24, 1992, the District Court granted the plaintiff
class certification. Discovery has concluded, and defendants
moved for summary judgment dismissing plaintiffs' complaint in
its entirety. Plaintiffs also moved for partial summary judgment
on their contract claims. On March 11, 1994, the United States
Magistrate Judge issued a Report and Recommendation which recom-
mended that defendants' motion for summary judgment be granted
and that the complaints in these actions be dismissed. The final
decision on the motion is to be made by the Second Circuit Judge.
Plaintiffs' objections to the Report and Recommendation were filed
with the Court in April 1994. Defendants' response to such
objections is to be filed by May 27, 1994. Based on proceedings
to date and the Company's discussions with its trial lawyers,
the Company believes that this action is without merit and is
vigorously defending it.
Silverman, et al. v. Wherehouse Entertainment, Inc., et al.,
Del. Ch. Civ. No. 935. In October 1987, stockholders of the
Company filed a class action suit in the Delaware Chancery Court
for New Castle County, seeking an injunction to force the Company
to negotiate with Shamrock Holdings, Inc. ("Shamrock"). In
addition, former stockholders Shaul Shaulson and Harold Kramer
brought claims against the Company in Delaware Chancery Court and
in the Superior Court for the State of California for the County
of Los Angeles, respectively. The California action has been
discontinued. In January 1988, Barry Silverman, Philip Frank,
Shaul Shaulson and Harold Kramer, each a former stockholder of
the Company, filed a Motion for Leave to File a Consolidated and
Amended Complaint (for the purpose of the discussion of this
litigation, the "Amended Complaint") in Delaware Chancery Court
with respect to the Delaware class action, the Shaulson action
and the Kramer action. In the Amended Complaint, these former
stockholders abandoned their previous claim seeking to force the
Company to negotiate with Shamrock, and alleged instead, inter
alia, that the board of directors of the Company breached
fiduciary duties owed to the stockholders of the Company by
virtue of their approval of the offer of WAC to acquire the
Company (the "WAC Offer"). They also alleged in the Amended
Complaint that because the Board rejected a proposal by Shamrock
on October 13, 1987 to negotiate for a purchase by Shamrock of
all outstanding shares of common stock of the Company at a price
of $14.25 per share, subject to Shamrock's ability to obtain
financing and to complete satisfactory due diligence, and
subsequently rejected the Shamrock tender offer of $12.00 per
share, the board of directors of the Company should not then have
accepted the WAC offer for $14.00 per share. Such former stock-
holders further alleged that in deposition testimony given by
various members of the board of directors of the Company such
members of the board of directors of the Company had stated that
they believed at the time of the initial proposal by Shamrock
that the shares were worth in excess of $18.00 per share.
Plaintiffs received permission to file and serve the Amended
Complaint, and in May 1988, the Company filed its answer denying
the material allegations in the Amended Complaint and raising
affirmative defenses thereto.
In August 1993, the parties reached an agreement in
principle to settle the action, subject to Court approval. The
settlement agreement in principle provides for no consideration
to be paid to any former shareholders of Wherehouse, but for
plaintiffs' counsel to apply for an award of legal fees and costs
not to exceed $350,000.
As part of the Acquisition described in Item 1 of this
Annual Report, approximately $18.75 million of the merger
consideration in connection with the Acquisition was deferred and
is subject to offset, to the extent the Company incurs certain
litigation costs, including costs and expenses relating to the
cases entitled McMahan & Company, et al. v. Wherehouse Entertain-
ment, Inc., et al.; Don Thompson v. Wherehouse Entertainment,
Inc., et al.; and Silverman, et al. v. Wherehouse Entertainment,
Inc., et al., as described in the merger agreement with respect
to that Acquisition.
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 disposi-
tion will not have a material impact on the financial position of
the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company has only one class of common equity outstanding,
all of which is owned by WEI. WEI has only one class of common
equity outstanding, which is owned exclusively by affiliates of
MLCP and certain members of management of the Company. See Item
12 - "Security Ownership of Certain Beneficial Owners and Manage-
ment". There is no established public trading market for the
common equity of WEI.
HOLDERS
As of April 30, 1994, there was one holder of the Company's
common stock and there were 17 holders of common stock, par value
$.10 per share of WEI.
DIVIDENDS
WEI has paid no dividends to its stockholders in either of
the last two fiscal years. Dividends in the amount of $490,339
were paid by the Company to WEI in fiscal year 1994 solely for
the purpose of providing funds to enable WEI to purchase shares
from former members of management pursuant to the Stockholder's
Agreement described in Item 13. No dividends were paid to WEI in
fiscal year 1993. The Company's Bank Credit Agreement among
Wherehouse, as borrower, WEI as guarantor, Bankers Trust Company,
as Agent, and Heller Financial, Inc. as Co-Agent and the
Indenture relating to the Company's 13% Senior Subordinated Notes
Due 2002, Series B, restrict the ability of WEI and the Company
to pay dividends. See Item 7 - "Management's Discussion and
Analysis of Financial Condition and Results of Operation."
Neither the Company nor WEI has any intention of paying cash
dividends on its common stock in the foreseeable future, other
than as may be made in connection with repurchases of restricted
stock in accordance with the Bank Credit Agreement and the
Indenture.
<PAGE>
Item 6. SELECTED FINANCIAL DATA
Set forth below are selected consolidated financial data as
of and for the periods indicated below. The financial data was
derived from financial statements of the Predecessor (see Note
(1) below) and Wherehouse. Separate selected financial data for
WEI is not included in this report. Currently, WEI conducts no
independent operations and has no significant assets other than
the capital stock of 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 Operations" and with the financial statements,
including the notes thereto, included elsewhere in this report.
<TABLE>
<CAPTION>
(Dollar amounts in millions)
----------------------------------------------------------------
Company Predecessor(1)
------------------------ --------------------------------------
8 Months 4 Months
Year Ended Ended Ended
January 31, January 31, May 30, Year Ended January 31,
1994 1993 1992 1992 1991 1990
----------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Income statement data
- ---------------------
Revenue:
Sales $380.2 $249.1 $105.3 $358.6 $352.2 $296.8
Rental revenue 91.6 64.3 29.8 98.9 99.9 91.5
----------- ----------- -------- -------- ------- ---------
471.8 313.4 135.1 457.4 452.1 388.3
Cost and expenses:
Cost of sales 248.0 155.2 66.9 225.5 223.0 189.7
Cost of video
rentals including
amortization 50.8 24.8 7.3 30.9 43.2 41.2
Selling, general
administrative
expenses 196.6 122.9 59.9 179.1 170.1 148.5
Restructuring charges(2) 14.3 --- --- --- --- ---
Interest expense 23.5 15.7 4.9 18.0 20.0 20.9
Other income (0.3) (0.1) (0.1) (0.1) (0.3) (1.3)
----------- ----------- --------- ------- ------- ---------
532.9 318.5 138.9 453.4 456.0 398.9
----------- ----------- --------- ------- ------- ---------
(Loss) income before
income taxes (61.1) (5.1) (3.8) 3.9 (4.0) (10.6)
(Benefit) provision
for income taxes (19.1) (1.3) (1.9) 1.0 (2.8) (5.1)
----------- ----------- --------- ------- ------- ---------
(Loss) income before
extraordinary item(3) (42.1) (3.8) (2.0) 2.9 (1.2) (5.5)
Extraordinary item(4) --- --- (4.5) --- --- ---
----------- ----------- --------- ------- ------- ---------
Net (loss) income(3) ($42.1) ($3.8) ($6.5) $2.9 ($1.2) ($5.5)
Balance sheet data
- ------------------
Working capital
deficiency(5) ($0.5) ($0.5) ($30.7) ($20.5) ($30.5)
Total assets(5) 351.4 374.4 225.7 227.2 235.7
Long-term debt
(including current
portion)(5)(6) 175.1 185.1 110.0 120.5 140.2
Total shareholder's
equity(7) 50.0 62.5 3.7 1.2 2.4
Other information
- -----------------
Ratio of earnings to
fixed charges(8) (9) (9) (9) 1.11x (9) (9)
</TABLE>
(1) The Company was acquired in June 1992 by the purchase of all
of WEI's ownership interest in the Company through a merger
transaction in which Grammy Corp. was merged with and into
WEI. The transaction was accounted for using the purchase
method and the term "Predecessor" refers to the predecessor
to the Company for the period from fiscal year 1989 through
May 31, 1992. The transaction caused changes in the basis
of accounting thereby making periods of the Predecessor not
comparable to those of the Company.
(2) See Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Results of
Operations."
(3) Earnings per share are omitted for the Company since it is a
wholly-owned subsidiary of WEI.
(4) The extraordinary item represents the write-off of unamor-
tized financing costs and prepayment penalties paid related
to the debt of the Predecessor that was refinanced at the
time of the Acquisition. The loss was $4.5 million, net of
an income tax benefit of $3.0 million.
(5) Certain prior year balances have been restated to conform to
current classifications.
(6) Includes $3.6 million of convertible subordinated deben-
tures.
(7) There were no cash dividends declared during any of the
periods presented above, except for cash dividends in the
amount of $.5 million, $.3 million and $.1 million paid to
WEI, the Company's sole stockholder, in fiscal years 1994,
1992 and 1989, respectively.
(8) For the purpose of computing the ratios of earnings to fixed
charges, earnings consists of income (loss) before income
taxes and fixed charges. "Fixed charges" consists of
interest expense, amortization of debt expenses and the
portion of rental expenses deemed representative of the
interest factor.
(9) Fixed charges exceeded earnings by $10.6, $4.0, $3.8, $5.1,
and $61.1 for fiscal 1990, fiscal 1991, the four months
ended May 31, 1992, the eight months ended January 31, 1993,
and fiscal 1994, respectively.
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Year Ended January 31, 1994 Compared to Year Ended January 31,
1993
Aggregate net revenues were $471.8 million and $448.5
million for the fiscal years ended January 31, 1994 and January
31, 1993, respectively. This increase of $23.3 million was
principally due to an increase in number of stores from 313 at
January 31, 1993 to 347 (including 4 stores managed by the
Company, for its benefit, under contracts with the owners
thereof) at January 31, 1994, and a 0.14% increase in same-store
revenues (stores open for at least 13 months). During fiscal
1994, in order to achieve additional geographic diversification,
the Company expanded its presence in several western states and
entered new markets in additional western and various mid-western
states through its acquisitions of an aggregate of 39 specialty
music stores from The Record Shop, Inc. and from Pegasus Music
and Video, Inc. Furthermore, during the fiscal year ended
January 31, 1994, the Company opened 6 new stores, managed 4
stores for its own benefit under contract with The Record Shop,
Inc., expanded or remodeled 69 stores and closed 15 stores.
Because the Company expects in the current fiscal year to
focus its efforts towards the improvement of its existing stores
and operations, rather than acquisitions or new store openings,
it can be expected that growth in aggregate net revenues in the
fiscal year ending January 31, 1995 will be dependent primarily
upon increases, if any, in same-store revenues; and thus the
fiscal 1994 increase in aggregate net revenues is not necessarily
indicative of increases to be expected in the current fiscal
year.
The Company will continue to opportunistically evaluate
potential acquisitions which could meet its strategic objectives,
and, if it determines the same to be appropriate, the Company
may, subject to its ability to source additional capital (the
availability of which is currently uncertain), make additional
acquisitions. On a longer-term basis, the Company intends to
continue its growth, both by opening new stores in selected
locations, and by additional acquisitions.
Merchandise sales were $380.2 million and $354.4 million
during the fiscal year ended January 31, 1994 and 1993, respec-
tively, representing an aggregate increase of 7.3% and an
increase of 1.1% on a same-store basis. (See table in Item 1 --
"Business - Merchandise Products and Supply.") The increase in
same-store merchandise sales resulted principally from increased
sales of video games and used compact disc products, which were
newer product lines for the Company, as well as from promotional
markdowns used to generate incremental sales. The Company's
sales of music cassettes continued to decline from the previous
fiscal year due to a continuing shift in consumer demand to
compact discs.
The Company's revenues from the sales of videocassettes have
decreased with the proliferation of competitors' outlets selling
videocassettes and the highly competitive pricing of the product,
particularly from discounters and mass merchandisers. The
Company has implemented new pricing and merchandising strategies
designed to counter this trend. No assurances can be given that
the Company's new strategies will be successful.
Rental revenue includes the rental of videocassettes, video
games and game players, audiocassette books and laser discs.
Approximately 75% of the Company's stores currently offer video-
cassettes and other products for rent. Rental revenue for the
fiscal year ended January 31, 1994 was $91.6 million, a decrease
of 2.6% from the previous fiscal year and a decrease of 3.3% on
a same-store basis.
In spite of the overall increase in the Company's aggregate
net revenues from fiscal 1993 to fiscal 1994, and a slight
increase in the number of stores carrying rental products from
fiscal 1993 to fiscal 1994, the Company continued to experience
declining rental revenues, primarily due to competitive factors
and, to a lesser extent, to the continued maturing of videocas-
settes in the Company's predominant markets, offset to some
extent by the growth in game rental products. It is the
Company's belief that, as a result of the large installed base of
videocassette recorders ("VCRs") in California and its other
major markets, future growth in rental revenue will be primarily
as a result of marketing and other competitive factors, as well
as additional store openings, rather than as a result of
increases in the size of the videocassette rental user market.
In connection with its 1994 Re-Engineering Plan, described below,
the Company has recently implemented new pricing and merchan-
dising strategies designed to increase rental revenue. Nonethe-
less, the Company anticipates that it will continue to experience
strong competition in this area, and no assurance can be given
that the Company's new strategies will be successful.
The Company's business and same-store revenues may be
impacted by various competitive and economic factors, including,
but not limited to, consumer tastes, acquisitions made by the
Company, marketing programs, weather, special events, the quality
of new releases of music, video and game titles available for
sale or rental, and general economic trends impacting retailers
and consumers. In addition, in recent years the Company's
merchandise sales and rental revenue have been impacted by
increased competition from other music and video specialty retail
chains, as well as discounters and mass merchandisers.
During the fiscal year ended January 31, 1994, in response
to various competitive factors and less than favorable economic
conditions, the Company developed, adopted and continued to
refine a multi-faceted re-engineering plan (the "1994 Re-Engin-
eering Plan"), which is designed to improve operating profit by
lowering costs associated with its inventory supply chain and
retail store operations, and to tailor its stores to better
accommodate local consumer tastes and entertainment needs. As
part of this strategic plan, the Company has delegated more power
to its on-site store managers to customize their inventory of
merchandise and rental products, and has further refined its
"value pricing" strategy for videocassette rentals to enable the
store manager to select from a matrix of rental prices those
which best fit the demographics and competitive conditions of his
or her market. The objectives of this strategy are both to
improve profitability and to enable each of the Company's stores
to become "the best store in the neighborhood."
The Company has also, as part of the 1994 Re-Engineering
Plan, developed a video rental remerchandising program, which is
currently scheduled to be implemented during the first half of
the current fiscal year. Under the video rental remerchandising
program, the Company will provide a greater number of "hit" movie
titles at its stores, as well as install new store signage and
fixtures designed specifically to support the program.
The Company believes that its planned marketing and merchan-
dising strategies and its expansion in markets outside of Cali-
fornia should improve its ability to respond to competition from
other retailers. However, the Company can give no assurances
that its marketing and merchandising strategies will be
effective.
The Company's business is seasonal, and, as is typical for
most retailers, its revenues tend to peak during the Christmas
holiday season. See "Seasonality", below.
Cost of sales increased $25.9 million to $248.0 million for
the fiscal year ended January 31, 1994, as compared with $222.1
million for the fiscal year ended January 31, 1993. As a percen-
tage of merchandise sales revenues, cost of sales increased 2.5%
to 65.2% for the fiscal year ended January 31, 1994 versus 62.7%
for the fiscal year ended January 31, 1993. The gross profit
percentage for merchandise sale product was 34.8% and 37.3% for
the fiscal years ended January 31, 1994 and 1993, respectively.
The increase in cost of sales as a percentage of merchandise
sales revenues resulted from increased costs associated with
inventory shrinkage, changes in the product sales mix, higher
return penalties, the utilization by the Company of promotional
markdowns to generate incremental sales, and lower prompt payment
discounts from suppliers. The changes in product sales mix
include an increase in the Company's video game sales business,
which carries lower margins than the Company's other product
lines, along with the continuing shift in consumer demand from
music cassettes to lower-margin compact discs. Additionally,
margins from sales of compact discs and from video games each
declined somewhat from the prior year. Video game sales margins
declined as excess supply necessitated higher promotional mark-
downs. The decreased gross margins were offset, in part, by
improved gross margins for used compact discs, accessories and
personal electronics.
Cost of rentals, including amortization, increased $18.7
million to $50.8 million for the fiscal year ended January 31,
1994, as compared with $32.1 million for the fiscal year ended
January 31, 1993. As a percentage of rental revenue, cost of
rentals increased to 55.5% for the fiscal year ended January 31,
1994 from 34.1% for the fiscal year ended January 31, 1993. The
gross profit percentage for rental revenue was 44.5% and 65.9%
for the fiscal years ended January 31, 1994 and 1993, respective-
ly. The increased cost of rental revenue, including amortiza-
tion, was principally due to a change in accounting estimate for
amortizing the cost of video rental inventory that resulted in a
$20.3 million charge to reduce the carrying value of existing
rental inventory. In prior years, the Company amortized the cost
of video rental inventory under an accelerated method to its
estimated salvage value. During the fiscal year ended January
31, 1994, the Company changed its amortization estimation method
by eliminating its utilization of the half year convention and
salvage value, and by further accelerating the amortization
calculation. The Company believes that the revised amortization
estimate will result in better matching of rental revenue with
the cost of such rental inventory.
For the fiscal year ended January 31, 1994, the change in
the estimate for amortization of video rental inventory resulted
in an increase of $20.3 million (40% of cost of rentals) over
what the cost of rentals would have been if the change had not
been effected. It can be expected that, in future periods, cost
of rentals as a percentage of rental revenue will be somewhat
lower than that experienced in the fiscal year ended January 31,
1994.
Merchandise sales, as a percentage of aggregate net
revenues, increased from 79.0% in the fiscal year ended January
31, 1993 to 80.6% in the fiscal year ended January 31, 1994.
Should the shift in product mix from higher margin rental revenue
to lower margin merchandise sales continue, it can be expected
that the change in the mix of revenue contribution could have an
impact on profitability.
In both the music and rental markets, there has been a
recent 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.
In addition, several major retail chains, including Best Buy,
Blockbuster Entertainment and Virgin Megastores, have announced
plans to increase their retail music store presence in
California. It can thus be expected that the Company will in
future periods experience increased competition from companies
with greater financial resources than the Company, and that
competitive pressures may result in a tightening of gross profit
margins.
Selling, general and administrative expenses, excluding $8.9
million and $7.7 million for the amortization of purchase price
adjustments resulting from acquisitions, were $187.7 million and
$175.0 million for the fiscal years ended January 31, 1994 and
1993, respectively, an increase of $12.7 million, or 7.3%. As a
percentage of aggregate net revenues, selling, general and admini-
strative expenses, excluding amortization of purchase price
adjustments, were 39.8% and 39.0% for the fiscal years ended
January 31, 1994 and 1993, respectively. The increase is
principally due to (i) increased rent and occupancy expenses
resulting from contractual escalations in base rent for existing
stores, leases for new stores and stores acquired during the
year, expenses resulting from lease renewals and increases for
the straight-line effect of scheduled future rent increases, and
(ii) increased semi-variable and payroll expenses attributable to
new stores and acquisitions, a revised corporate salary program,
and a higher administrative headcount than during the previous
fiscal year. The increases in selling, general and administra-
tive expenses were offset, in part, by decreased advertising
expenditures during the fiscal year ended January 31, 1994 as the
Company changed its media strategy from more expensive, image-
building television to greater product emphasis utilizing less
expensive media such as radio, billboards and newspaper. Addi-
tionally, the Company changed the gift structure of its rental
customer loyalty program, which resulted in lower expenses.
Selling, general and administrative expenses include non-cash
provisions for the straight-line effect of scheduled future rent
increases of $4.9 million and $3.5 million for the fiscal years
ended January 31, 1994 and 1993, respectively. Absolute dollar
increases in rent and occupancy expenses are expected to
continue.
As part of the 1994 Re-Engineering Plan, the Company
indentified required changes in systems and operations and,
therefore, assessed the realizable value of certain assets and
the costs of the restructuring measures. As a result, during the
fiscal year ended January 31, 1994, the Company incurred a total
of $14.3 million for restructuring charges (all of which have
resulted from, or were related to, the 1994 Re-Engineering Plan)
as follows (in millions of dollars):
Write-off of property, plant and equipment $ 8.2
Write-off of beneficial leasehold interests
and other assets 4.2
Severance costs 1.4
Consulting fees and other .5
------
$14.3
======
The loss from operations was $37.9 million for the fiscal
year ended January 31, 1994, as compared with income from
operations of $11.6 million for the fiscal year ended January 31,
1993. The decreased operating results principally resulted from
(i) the decreased gross profit for video rental due to the change
in accounting estimate referred to above, and (ii) the restruc-
turing charges discussed above. Excluding the effects of
purchase accounting in both fiscal periods, and excluding both
the change in estimate for amortizing video rental inventory and
the restructuring charges, in the fiscal year ended January 31,
1994, income from operations would have been $8.4 million for the
fiscal year ended January 31, 1994 compared to $22.7 million for
the fiscal year ended January 31, 1993.
Interest expense (net) increased $2.6 million to $23.2
million, as compared with $20.6 million, for the fiscal years
ended January 31, 1994 and January 31, 1993, respectively. The
increase principally resulted from higher overall debt levels
required for the previously-described store acquisitions and the
Acquisition, somewhat offset by lower interest rates on floating
rate debt. Included in interest expense are $1.7 million and
$2.3 million attributable to the amortization of acquisition
financing costs during the fiscal years ended January 31, 1994
and 1993, respectively.
At January 31, 1994, $56.0 million of the Company's long-
term debt (33% of total long-term debt then outstanding) and the
Company's revolving line of credit provided for interest which
varies with changes in the prime rate or other similar interest
rate indexes. A material increase in the prime rate, or other
applicable index rates, could significantly increase the
Company's interest expense. The impact of any such increase is
partially mitigated by an interest rate protection agreement with
a major financial institution covering approximately 40% of the
outstanding balance of the Company's senior term loan. See
"Inflation", below.
The effective tax benefit recorded by the Company on its
loss before income taxes was 31.2% versus 35.2% during the fiscal
years ended January 31, 1994 and January 31, 1993, respectively.
The decrease was principally due to increased goodwill amortiza-
tion resulting from the Acquisition and non-deductible reserve
allowances. The Company's tax benefit for the fiscal year ended
January 31, 1994 and 1993 differed from the statutory rate of 34%
principally due to non-deductible purchase accounting adjust-
ments, reserve allowances, state taxes and job tax credits. As a
result of net operating loss carrybacks, the Company expects to
receive an approximate $5.0 million federal income tax refund
during the second quarter of its current fiscal year. Based upon
the current operations of the Company, and other factors, it is
currently anticipated that net pre-tax losses, if any, realized
during the fiscal year ending January 31, 1995 will not result in
the recording of any additional effective tax benefit by the
Company although such tax benefits would be available to reduce
any future taxes payable if the Company generated future taxable
income.
Year Ended January 31, 1993 Compared to Year Ended January 31,
1992
The following discussion of results of operations for the
fiscal year ended January 31, 1993 includes results of the
Predecessor (see Note (1) to Notes to Consolidated Financial
Statements) for the four months ended May 31, 1992, and the
results of the Company for the eight months ended January 31,
1993.
Aggregate net revenues for the year ended January 31, 1993
were $448.5 million compared to $457.4 million for the year ended
January 31, 1992. This decrease was due to a 4.9% decrease in
same store revenues (stores open for at least 13 months),
partially offset by an increase in the number of stores from 301
at the end of fiscal 1992 to 313 at the end of fiscal 1993. The
decline in same store revenues was largely attributable to
difficult economic conditions, particularly in the state of
California, resulting in reduced revenue volume while unit prices
were generally maintained. Also, civil disturbances in the Los
Angeles market had a temporary negative effect on performance
during the year. Additionally, the introduction in February 1992
of a "value pricing" strategy for videocassette rentals in Los
Angeles, the Company's largest marketing area, and in other
markets, adversely impacted revenues during most of the fiscal
year. The demand for compact discs continued to positively
affect revenues, with CD sales representing $174.3 million or 49%
of merchandise sales for fiscal 1993, compared to $161.0 million
or 45% of merchandise sales for fiscal 1992. The Company does
not believe that the "value pricing" strategy for videocassette
rentals should have a further materially negative impact on
revenues.
Gross profit as a percentage of merchandise sales was 37.3%
in fiscal 1993 compared to 37.1% in fiscal 1992. The increase is
primarily attributable to an increase in supplier's purchase
discounts earned and a reduction in sale inventory shrinkage
partially offset by an increase in promotional markdowns. While
the shift in product mix from higher margin music cassettes to
lower margin compact discs had a negative impact on gross
margins, this was offset by improvement in gross profit margins
on new videocassettes, blank video tape, blank audio tape,
accessories, personal electronics, and concessions.
Gross profit as a percentage of rental revenue was 65.9% for
fiscal 1993 compared to 68.7% for fiscal 1992. The decrease is
primarily attributable to: (i) amortization of purchase
accounting adjustments resulting from the Acquisition, which
represented 3.6% of rental revenue and (ii) a decline in rental
revenue from the Los Angeles "value pricing" strategy, which
lowered the per night rental price. This decrease was partially
offset by (i) a decrease in the book value of rental dispositions
resulting primarily from the sale of older rental inventory
during fiscal 1993 compared to the prior year and (ii) a
reduction in rental inventory shrinkage.
Selling, general, and administrative expenses were 40.7% of
total revenues in fiscal 1993 compared to 39.2% in fiscal 1992.
The increase is primarily due to (i) an increase in rent and
occupancy expense per store resulting from lease renewals,
consumer price index escalations for existing stores, and new
leases for larger stores, (ii) an increase in advertising expendi-
tures, and (iii) the amortization of goodwill and depreciation of
property and equipment resulting from the Acquisition, totalling
1.3% of total revenue. These increases were partially offset by
a reduction in historical depreciation expense and an increase in
other operating income, including financial remuneration from
suppliers to help defray the cost of introducing smaller CD
packaging.
Income from operations decreased to $11.6 million in fiscal
1993, compared to $21.9 million in fiscal 1992, primarily due to
the declines in revenue as explained above, the decrease in
rental gross profit rate related to purchase accounting amortiza-
tion, and the increase in rent and occupancy costs. Excluding
the effects of purchase accounting adjustments in both years,
operating income was $22.7 million in fiscal 1993 compared to
$26.8 million in fiscal 1992.
Net interest expense and other income was $20.6 million or
4.6% of total revenues in fiscal 1993 compared to $17.9 million
or 3.9% of total revenues in fiscal 1992. This increase was
attributable to increased levels of subordinated debt, which was
partially offset by lower interest rates on lower term loan
borrowings and by lower interest rates on comparable revolving
line of credit borrowings.
The Company recorded an effective income tax benefit of
35.2% on its loss before taxes in fiscal 1993, compared to an
effective income tax provision of 26.0% on its income before
taxes in fiscal 1992. The Company's tax benefit in fiscal 1993
and its tax provision in fiscal 1992 differed from the statutory
rate of 34%, primarily as a result of non-deductible purchase
accounting adjustments, state taxes and job tax credits.
As part of the Acquisition, the Company reported a $4.5
million loss as an extraordinary item, net of tax, which
represented the non-cash write-off of unamortized acquisition
financing costs associated with the Adler & Shaykin acquisition
in fiscal 1988 and prepayment penalties associated with the
repayment of debt of the Predecessor that was refinanced at the
time of the Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended January 31, 1994, the Company's
operations generated net cash of $7.1 million compared to $1.3
million during the fiscal year ended January 31, 1993. Operating
cash flows in both fiscal years were primarily used for the
purchase of merchandise and rental video inventory and the
payment of service and supply providers. The increase in cash
flow generated by operations was primarily a result of lower
increases in inventory levels offset by higher operating losses
and the resulting increase in tax refunds receivable for the
carryback of such operating losses.
Cash used in investing activities totaled $24.8 million as
compared to $136.1 million for the fiscal years ended January 31,
1994 and January 31, 1993, respectively. Cash used in investing
activities during the fiscal year ended January 31, 1994 included
approximately $12.2 million for the acquisitions of 39 specialty
music stores from The Record Shop, Inc. and Pegasus Music and
Video, Inc. and $11.8 million for acquisitions of property, plant
and equipment. Acquisitions of property, plant and equipment
increased $2.5 million during the fiscal year ended January 31,
1994 as compared to the prior fiscal year. Property, plant and
equipment acquisitions in both periods were used primarily for
the opening of new stores and the remodeling of existing stores,
and in fiscal 1993, funds were also used for the acquisition of
new equipment for the Company's new distribution center. During
the fiscal year ended January 31, 1993, $125.8 million of the
$136.1 million used for investing activities was due to the
Acquisition of the Company.
Cash provided by financing activities was $16.4 million as
compared to $143.5 million during fiscal years ended January 31,
1994 and 1993, respectively. On January 31, 1994, WEI raised
$30.0 million through the sale of common stock to certain of its
existing stockholders. All of these funds were contributed by
WEI to the capital of the Company and provided permanent
financing for the acquisition of stores from The Record Shop,
Inc. and Pegasus Music and Video, Inc. and for expenses
associated with those acquisitions. In addition, during fiscal
1994, borrowings were reduced by approximately $13.2 million.
During the fiscal year ended January 31, 1993, the $143.5 million
of cash provided by financing activities consisted principally of
a $70.3 million capital contribution and a net increase in
borrowings, principally for new senior subordinated debt, both of
which are attributable to the Acquisition.
The Company's operations used net cash of $1.3 million for
the year ended January 31, 1993 compared to the generation of
$29.5 million for the year ended January 31, 1992. The decrease
was primarily a result of an increase in merchandise inventory
due to the introduction of new product lines and the expansion of
certain existing product lines, the introduction of a value
pricing strategy for videocassette rentals, and the extended
economic recession in California. In addition to the changes in
inventory, other factors affecting working capital were: (i) an
increase in receivables partially related to insurance receiv-
ables, the timing of credit card receipts at year-end, and
reimbursement from landlords, and (ii) an increase in accounts
payable and accrued expenses related primarily to increases in
interest and sales taxes payable, offset by slight decreases in
accounts payable and other accrued expenses. The increase in
interest payable was attributable to higher debt levels and a
change in the timing of the due date for interest on subordinated
debt. The sales taxes payable increase was also attributable to
timing differences on the due date. Video rental purchases were
less during fiscal 1993 than in the prior year due to more
efficient utilization by the Company of the videocassette rental
inventory.
Cash used in investing activities totalled $136.1 million
compared to $14.2 million in the 1993 and 1992 fiscal years,
respectively. The $136.1 million included $125.8 million to
complete the Acquisition of the Company. The remainder was used
primarily for opening new stores, remodeling existing stores, and
acquiring fixtures and equipment for the new distribution center.
Capital expenditures, including equipment under capital leases,
totalled $12.9 million in fiscal 1993, up $1.2 million from
fiscal 1992.
Cash provided by financing activities was $143.5 million
compared to $16.9 million of cash used in financing activities in
the 1993 and 1992 fiscal years, respectively. The $143.5 million
consisted primarily of a $70.3 million capital contribution and a
net increase in borrowings, principally for new senior
subordinated debt, both of which were related to the Acquisition.
The Company's institutional indebtedness currently includes
the following:
i) a senior term loan in the original principal amount of
$65.0 Million. As of January 31, 1994, the outstanding indebted-
ness was $56.0 million. This facility matures in January 1998,
with principal payments made in installments of varying amounts,
and with interest payments due quarterly on prime-based
borrowings and upon maturity for Eurodollar-based borrowings.
Borrowings under the term loan bear interest at Prime plus 1.5%
or Eurodollar plus 3.0%.
ii) $110 Million in Senior Notes (the "Notes"). The Notes
mature in August, 2002 and bear interest at 13% per annum,
payable semi-annually. The Company is required to make sinking
fund payments in August 2000 and August 2001 of $27.5 million
each to allow for the redemption of a maximum of 50% in principal
amount of the Notes at a price equal to 100% of the principal
amount redeemed plus accrued interest thereon.
iii) revolving line of credit in the amount of $45.0
million. Borrowings under the facility bear interest at the same
rates as the term loan. As of January 31, 1994, the outstanding
indebtedness on this facility was $4.0 million. Within the
capacity of the revolving line of credit, the Company has a $10.0
million swingline facility to accommodate daily fluctuations in
its working capital. Borrowings under the swingline bear
interest at the rate of prime plus 1.0%. Both of these facili-
ties mature in January 1998.
These debt agreements require the Company to meet certain
restrictive covenant tests at periodic intervals, and, as is
customary for such borrowings, include such factors as mainte-
nance of financial ratios and limitations on dividends, capital
expenditures, transactions with affiliates, and other indebted-
ness, and, under the revolving line of credit and swingline
facility, a thirty day "clean-down", during which borrowings
thereunder are not permitted. As of January 31, 1994, the
Company was in compliance with all such covenants. The Company
did not satisfy the entire "clean-down" period during the year
ended January 31, 1994 and obtained a waiver with respect thereto
from its lenders.
As of January 31, 1994, the Company had outstanding, net of
unamortized discount, $3.6 million of its 6 1/4% convertible
subordinated debentures, issued July 1986, representing $5.7
million in principal amount. These debentures mature in July
2006; all sinking fund payment obligations of the Company, for
the balance of the term of the debentures, have been satisfied.
The Company is highly leveraged, and results of operations
have been, and will continue to be, affected by the increased
interest expense and amortization of goodwill recorded in
connection with the Acquisition.
As of April 1, 1994, the Company has signed lease commit-
ments to open two new stores and may open additional stores over
the next twelve months. While the Company can reasonably esti-
mate the cost to open a new store, the actual number and types of
stores opened will depend upon the Company's ability to locate
and obtain appropriate sites and upon its financial position.
See "Results of Operations", above. The Company may, subject to
its ability to source additional capital, make additional acqui-
sitions if it determines such acquisitions to be appropriate.
While certain expenditures during the next twelve months
will be higher than in prior periods, management believes that
current cash flows from operations and borrowings under the
revolving credit facility will be adequate to meet the Company's
liquidity requirements. Debt service requirements are expected
to be funded through internal cash flow or through refinancing in
outlying years.
SEASONALITY
The Company's business is seasonal, and revenues and
operating income are highest during the fourth quarter. Working
capital deficiencies and related bank borrowings are lowest
during the period commencing with 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. Bank borrowings have historically been
highest in October and November due to cumulative capital expen-
ditures for new stores and the building of inventory for the
holiday season.
INFLATION
Inflation has not had a material effect on the Company, its
operations and its internal and external sources of liquidity and
working capital. However, interest rate increases, beyond
current levels, could have an impact on the Company's operations.
The impact on the Company of interest rate fluctuations is
partially mitigated by an interest rate protection agreement with
a major financial institution covering approximately 40.0% of the
outstanding balance of the senior term loan at January 31, 1994.
Such agreement limits the net interest cost to the Company out-
side a specified range on the amounts covered by the agreement.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Financial Statements and Financial State-
ment Schedules appearing on page F-0 of this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information concern-
ing the persons who are directors and executive officers of the
Company and, where indicated, WEI:
Age at
April 1,
Name Position 1994
- ----------------- --------------------------------- -----
Scott Young Chief Executive Officer, 47
Chairman of the Board and
Director of the Company and WEI
Jerry E. Goldress President and Chief Operating 63
Officer
Cathy L. Wood Senior Vice President, Chief 46
Financial Officer and Secretary
of the Company and WEI
Barbara C. Brown Senior Vice President, Sales and 42
Operations
Kathy J. Ford Vice President, Controller of the 46
Company and WEI
Anne E. McLaughlin Vice President, Treasurer and 37
Assistant Secretary of the
Company and WEI
James J. Burke, Jr. Director of the Company and WEI 42
Gerald S. Armstrong Director of the Company and WEI 50
Rupinder S. Sidhu Director of the Company and WEI 37
Bradley J. Hoecker Director of the Company and WEI 32
Scott Young, Chief Executive Officer, Chairman of the Board
and Director of the Company and WEI. Mr. Young joined Wherehouse
in March 1987 as Senior Vice President, Marketing and became
Executive Vice President and Chief Operating Officer later that
year and President in 1988. Mr. Young was named Chief Executive
Officer of the Company in March 1990, and Chairman of the Board
of the Company and WEI in June 1992. Mr. Young has been a member
of the Board of Directors of the Company and WEI since March
1990. From 1984 to 1987, Mr. Young served as a consultant to the
music industry and as Senior Vice President, Marketing during the
start-up phase of Personics, Inc. From 1980 to 1984, Mr. Young
owned Franklin Music, an eight-store chain based in Atlanta.
From 1977 to 1980, he served as General Manager, Executive Vice
President of Musicland. Mr. Young currently serves as President
on the board of the National Association of Recording
Merchandisers.
Jerry E. Goldress, President and Chief Operating Officer.
Mr. Goldress originally joined the Company in February 1988. Mr.
Goldress was Chairman of the Board of the Company from February
1988 to June 1992 and Chief Executive Officer of the Company from
February 1988 to March 1990. Mr. Goldress was a Director of the
Company from January 1988 to June 1992. Mr. Goldress returned to
the Company in August 1993 as President and Chief Operating
Officer. Mr. Goldress is currently Chairman of Grisanti, Galef &
Goldress, Inc. (a management consulting firm) and has been
employed by that company since 1973. All positions with the
Company which have been, and which currently are, held by Mr.
Goldress have been pursuant to consulting agreements with
Grisanti, Galef & Goldress. Mr. Goldress has been a general
partner of A&S since 1987. Mr. Goldress has served in the office
of the Chairman of the Board of Best Products Co., Inc. since
June 1991. He is a Director of Dreco Energy Services Ltd. As a
management consultant, Mr. Goldress provides assistance to
businesses in financial difficulty and, in the course of
providing such assistance, is frequently appointed a director and
an executive officer of such businesses. Often such businesses
are involved in bankruptcy or other reorganization proceedings.
Cathy L. Wood, Senior Vice President, Chief Financial
Officer and Secretary of the Company and WEI. Ms. Wood joined
the Company in 1989, with responsibilities including real estate,
store design and construction. In 1991, Ms. Wood assumed respon-
sibility for strategic planning and was appointed Senior Vice
President, Planning and Development. In April 1993, Ms. Wood was
named acting Chief Financial Officer and in August 1993, Ms. Wood
was appointed Senior Vice President and Chief Financial Officer
of the Company and WEI. From 1973 to 1989, she was employed by
Mellon Bank N.A.
Barbara C. Brown, Senior Vice President, Sales and Opera-
tions of the Company. Ms. Brown joined the Company in 1973.
She became Vice President, Sales and Operations in 1986 and 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.
Kathy J. Ford, Vice President, Controller of the Companyand
WEI. Ms. Ford has been with the Company since February 1988.
She became Vice President, Controller in June 1990 and prior to
that served as Assistant Vice President, Assistant Controller.
From 1985 to 1987, Ms. Ford was Controller of Ryan-McFarland
Corporation. Ms. Ford was employed by Deloitte Haskins & Sells
from 1979 to 1985, most recently serving as Manager of Audit
Services. She is a member of the American Institute of Certified
Public Accountants and the California Society of Certified Public
Accountants.
Anne E. McLaughlin, Vice President, Treasurer and Assistant
Secretary of the Company and WEI. Ms. McLaughlin has been with
the Company since August 1991. She became Vice President,
Treasurer in September 1992 and prior to that served as
Treasurer. From 1987 to 1991, Ms. McLaughlin was a Vice
President in the Corporate Banking Division of HomeFed Bank.
James J. Burke, Jr., Director of the Company and WEI since
June 1992. Mr. Burke has been a Director of MLCP since 1985 and
President and Chief Executive Officer of MLCP since 1987. Mr.
Burke was a Vice President of Merrill Lynch Pierce Fenner & Smith
Incorporated ("MLPF&S") from 1983 until 1988 and has been a First
Vice President since 1988 and a Managing Director of MLPF&S since
1985. Mr. Burke is a director of Amstar Corporation, Borg-Warner
Corporation, Supermarkets General Holdings Corporation, AnnTaylor
Stores Corporation, Londontown Holdings Corp., Oscar I Corpora-
tion and United Artists Theatre Circuit, Inc.
Gerald S. Armstrong, Director of the Company and WEI since
April 1993. Mr. Armstrong has been a Director of MLCP since
1988, an Executive Vice President of MLCP from 1988 until 1993,
and a Partner of MLCP since 1993. Mr. Armstrong has been a
Managing Director of the Investment Banking Division of MLPF&S
since November 1988. From January to November 1988, he was
President and Chief Executive Officer of Printing Finance
Company, Inc., a printing company, and from March 1985 to January
1988, he was Executive Vice President and Chief Operating Officer
of PACE Industries, Inc., a manufacturing and printing company.
Mr. Armstrong is also a Director of AnnTaylor Stores Corporation,
London Fog Corporation, Beatrice Foods, Inc., First USA, Inc.,
Blue Bird Corporation, and World Color Press, Inc.
Rupinder S. Sidhu, Director of the Company and WEI. Mr.
Sidhu has been a Director of MLCP since 1988, was a Senior Vice
President from 1988 until 1993 and has been a Partner of MLCP
since 1993. Mr. Sidhu has been a Managing Director of MLPF&S
since 1989, and was a Vice President of MLPF&S 1984 until 1988.
Mr. Sidhu is a Director of Eckerd Corporation, Clinton Mills,
Inc., John Alden Financial Corporation and First USA, Inc.
Bradley J. Hoecker, Director of the Company and WEI. Mr.
Hoecker has been a Principal of MLCP since 1993. Mr. Hoecker was
an Associate of MLCP from 1989 to 1993 and MLPF&S since 1989.
From 1984 to 1987, Mr. Hoecker was employed by Bankers Trust
Company.
Each director of the Company and WEI is elected annually and
serves until the next annual meeting or until his successor is
duly elected and qualified. Messrs. Armstrong, Sidhu, and
Hoecker serve as members of the audit committees and Messrs.
Burke, Armstrong and Sidhu serve as members of the compensation
committees of the board of directors of the Company and WEI.
Each executive officer of the Company and WEI serves at the
discretion of the board of directors of the Company and WEI,
respectively.
Under the Stockholders' Agreement (See Item 13 of this
Annual Report), if any of Scott Young, James J. Burke, Jr.,
Rupinder S. Sidhu, Warner A. Fite and Bradley J. Hoecker are
unwilling or unable to serve, or otherwise cease to serve, as
directors of WEI, then the shareholders of the Company controlled
by or affiliated with MLCP or one of its affiliates (the "ML
Investors") will be entitled to fill the resulting vacancies on
the board. In addition, the Stockholders' Agreement provides
that the ML Investors are entitled to nominate successors to all
WEI directors and that the stockholders of WEI will cooperate in
any removal of directors proposed by the ML Investors. On April
29, 1993, Warner A. Fite resigned as director of WEI and the
Company and on April 30, 1993 was replaced by Gerald S. Armstrong
in accordance with the Stockholders' Agreement.
<PAGE>
Item 11. EXECUTIVE COMPENSATION.
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth, for the fiscal years ended
January 31, 1994, January 31, 1993, and January 31, 1992, the
cash compensation paid by WEI and its subsidiaries, as well as
certain other compensation paid or accrued for each such fiscal
year, to each of the five most highly compensated executive
officers of WEI (considering Mdms. Wood and Brown, Senior Vice
Presidents of the Company, and Mdm. Ford, Vice President of the
Company to be executive officers of WEI) who were officers on
January 31, 1994, and to Scott A. Hessler, former Senior Vice
President, Marketing and Merchandising of the Company, who ceased
to be an executive officer on January 18, 1994, (collectively,
the "named executive officers") in all capacities in which they
served. All compensation with respect to Mr. Goldress was paid
to Grisanti, Galef & Goldress, a management consulting firm in
which Mr. Goldress is a principal.
<TABLE>
<CAPTION> SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
--------------------------------- ------------
Other Annual No. of Sec. All Other
Name and Fiscal Salary Bonus Compensation Underlying Compensation
Principal Position Year ($)(b) ($) ($) Options ($)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Scott Young 1994 421,155 --- 45,962(c) --- 39,484(j)
Chairman, Chief 1993 357,040 13,425 243,839(d) 67,000 25,121(k)
Executive Officer 1992 320,959 95,360 --- --- ---
Scott A. Hessler(a) 1994 260,673 --- --- --- 289,963(l)
Senior Vice President, 1993 177,981 20,143 --- 5,700 9,401(m)
Marketing and 1992 --- --- --- --- ---
Merchandising
Cathy L. Wood 1994 187,849 --- --- --- 39,799(n)
Senior Vice President, 1993 102,440 8,322 16,925(e) 5,600 39,899(o)
Chief Financial 1992 105,286 34,670 --- --- ---
Officer and Secretary
of the Company and WEI
Barbara C. Brown 1994 155,625 --- 18,457(f) --- 24,819(p)
Senior Vice President, 1993 131,348 6,022 20,009(g) 13,500 11,877(q)
Sales and Operations 1992 133,470 69,193 --- --- ---
Kathy J. Ford 1994 104,310 --- 14,707(h) --- 11,045(r)
Vice President, 1993 89,040 10,452 15,663(i) 5,205 4,269(s)
Controller 1992 83,716 31,789 --- --- ---
Jerry E. Goldress 1994 100,000 --- --- --- 150,000(t)
President, Chief 1993 105,931 --- --- --- 135,000(u)
Operating Officer 1992 275,000 --- --- --- ---
</TABLE>
(a) On January 18, 1994, Mr. Hessler ceased to be an executive
officer of the Company.
(b) Includes amounts deferred at the election of the named
executive officer pursuant to the Company's 401(k) plan.
Employees may contribute to the 401(k) plan on a pre-tax
basis, not to exceed $8,994 in fiscal 1994.
(c) Includes a $38,762 bonus to cover interest expense on Mr.
Young's Management Note (see Item 13, below), with a "gross-
up" to cover income taxes related to the bonus.
(d) Includes a $215,140 bonus to cover interest expense on loans
made by WEI to Mr. Young in connection with prior purchases
of common stock of WEI, with a "gross-up" to cover income
taxes related to the bonus.
(e) Includes a $7,128 bonus to cover interest expense on loans
made by WEI to Ms. Wood in connection with prior purchases
of common stock of WEI, with a "gross-up" to cover income
taxes as related to the bonus. Also included is a $7,200
annual automobile allowance.
(f) Includes an $11,257 bonus to cover interest expense on Ms.
Brown's Management Note (see Item 13, below), with a "gross-
up" to cover income taxes related to the bonus. Also
included is a $7,200 automobile allowance.
(g) Includes a $6,565 bonus to cover interest expense on loans
made by WEI to Ms. Brown in connection with the prior
purchases of common stock of WEI, with a "gross-up" to cover
income taxes related to the bonus. Also includes a $6,244
bonus to cover interest expense on Ms. Brown's Management
Note (see Item 13, below), with a "gross-up" to cover income
taxes related to the bonus. Also included is a $7,200
annual automobile allowance.
(h) Includes a $7,507 bonus to cover interest expense on Ms.
Ford's Management Note (see Item 13, below), with a "gross-
up" to cover income taxes related to the bonus. Also
included is a $7,200 annual automobile allowance.
(i) Includes a $7,200 annual automobile allowance. Also
included is a $4,299 bonus to cover interest expense on
loans made by WEI to Ms. Ford in connection with the prior
purchases of common stock of WEI, with a "gross-up" to cover
income taxes related to the bonus. Also included is a
$4,164 bonus to cover interest expense on Ms. Ford's
Management Note (see Item 13, below), with a "gross-up" to
cover income taxes related to the bonus.
(j) The amount shown includes $16,865 paid on behalf of Mr.
Young and his family for medical expenses not covered by the
Company's group medical insurance plan. Also included are
$14,352 of premiums paid for term life insurance and $8,268
for matching contributions to the Company's 401(k) plan made
on behalf of Mr. Young.
(k) Includes $14,352 of premiums paid for term life insurance.
Also included are $9,693 paid on behalf of Mr. Young and his
family for medical expenses not covered by the Company's
group medical insurance plan and $1,076 for matching contri-
butions to the Company's 401(k) plan made on behalf of Mr.
Young.
(l) Includes $265,000 accrued in fiscal 1994 for severance
payable to Mr. Hessler. Also included are $14,796 paid on
behalf of Mr. Hessler and his family for medical expenses
not covered by the Company's group medical insurance plan,
$7,091 of premiums paid for term life insurance and $3,076
for matching contributions to the Company's 401(k) plan made
on behalf of Mr. Hessler.
(m) Includes $8,799 paid on behalf of Mr. Hessler and his family
for medical expenses not covered by the Company's group
medical insurance plan. Also included are $602 of premiums
paid for term life insurance.
(n) Includes $21,876 paid on behalf of Ms. Wood and her family
for medical expenses not covered by the Company's group
medical insurance plan. Also included are $14,481 for
reimbursement of moving expenses and $3,442 of premiums
paid for term life insurance.
(o) Includes $36,457 paid on behalf of Ms. Wood and her family
for medical expenses not covered by the Company's group
medical insurance plan. Also included are $3,442 of
premiums paid for term life insurance.
(p) Includes $19,685 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 $1,828 of
premiums paid for term life insurance and $3,306 for
matching contributions to the Company's 401(k) plan made on
behalf of Ms. Brown.
(q) Includes $9,090 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 $1,828 of
premiums paid for term life insurance and $959 for matching
contributions to the Company's 401(k) plan made on behalf of
Ms. Brown.
(r) Includes $5,322 paid on behalf of Ms. Ford and her family
for medical expenses not covered by the Company's group
medical insurance plan. Also included are $3,482 of
premiums paid for term life insurance and $2,241 for
matching contributions to the Company's 401(k) plan made on
behalf of Ms. Ford.
(s) Includes $2,611 of premiums paid for term life insurance.
Also included are $991 paid on behalf of Ms. Ford and her
family for medical expenses and $666 for matching contribu-
tions to the Company's 401(k) plan made on behalf of Ms.
Ford.
(t) Includes payments made to Mr. Goldress's consulting company
for services related to the 1994 Re-engineering Plan.
(u) Includes a $135,000 payment made to Mr. Goldress in connec-
tion with the Acquisition.
<PAGE>
FISCAL YEAR-END OPTION VALUES
No options were exercised by any of the named executive
officers during the last fiscal year. The following table sets
forth certain information with respect to the named executive
officers concerning the number of shares covered by both
exercisable and unexercisable stock options held as of January
31, 1994. Based upon the Board's determination of the fair
market value of WEI's Common Stock as of January 31, 1994 ($44
per share), none of these options were "in-the-money options."
<TABLE>
FISCAL YEAR-END OPTION VALUES
<CAPTION>
Number of Securities
Underlying
Unexercised Options
at Fiscal Year End
Name Exercisable Unexercisable
- --------------------------------------------------
<S> <C> <C>
Scott Young 51,700 15,300
Scott A. Hessler 3,270 2,430
Cathy L. Wood 3,260 2,340
Barbara C. Brown 9,900 3,600
Kathy J. Ford 3,639 1,566
Jerry E. Goldress --- ---
</TABLE>
COMPENSATION OF DIRECTORS
The directors of the Company and WEI do not receive compen-
sation for their services as directors or as members of the
committees of the boards of directors of the Company and WEI.
EMPLOYMENT AGREEMENTS
Mr. Young's employment is currently governed by an employ-
ment agreement, the initial term of which will expire in June
1995, between the Company and Mr. Young. Pursuant to the
agreement, Mr. Young's employment will automatically extend for
periods of one year for up to a maximum of four additional
one-year periods, unless the Company gives Mr. Young written
notice of its intention not to renew the employment term at least
365 days prior to the then current expiration of the term. The
agreement provides for, among other things, a base salary of
$300,000 (which may be increased, but not decreased, at the
discretion of the Board of Directors of the Company, and which
shall be adjusted to account for the effects of inflation) and
annual bonuses at the discretion of the Board of Directors of the
Company. If Mr. Young is terminated for "Cause" (as defined in
the employment agreement) or Mr. Young resigns without "Good
Reason" (as defined in the employment agreement), Mr. Young is
entitled to receive unpaid "Base Salary" (as defined in the
employment agreement) and vested benefits with respect to periods
prior to the date of termination or resignation. If Mr. Young is
terminated without "Cause" or resigns with "Good Reason," he is
entitled to receive (a) twice his Base Salary; (b) a pro rata
portion of his bonus or incentive compensation for the fiscal
year during which such termination occurs; and (c) continued
coverage through the expiration date of the employment agreement
under all life, disability, medical, health and accident
insurance at the same coverage level maintained for his benefit
immediately prior to his termination or resignation. Additional-
ly, if he is terminated without "Cause," Mr. Young is entitled to
receive unpaid base salary and vested benefits with respect to
periods prior to the date of termination. The employment
agreement further provides for severance payments equal to the
sum of (x) twice Mr. Young's base salary, (y) unpaid base salary
with respect to periods prior to the date of termination and (z)
a pro rata portion of Mr. Young's bonus compensation for the
fiscal year during which such termination occurs, and benefits in
the event that Mr. Young's employment is terminated without Cause
or that Mr. Young resigns with Good Reason.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the compensation committees of the Company's
and WEI's boards of directors during fiscal year 1994 were
Messrs. Burke, Sidhu, and Hoecker. The members of the compensa-
tion committees of the Company's and WEI's boards of directors
are currently Messrs. Burke, Armstrong, and Sidhu.
Messrs. Burke and Sidhu are each executive officers of MLCP
and Managing Directors of Merrill Lynch & Co., Inc., and Mr.
Hoecker is a Principal of MLCP and an Associate of Merrill Lynch
& Co., Inc. Grammy Corp., WEI and MLCP are affiliates of MLPF&S.
In connection with the sale of the Company's 13% Senior Subordi-
nated Notes due 2002, Series A (the "Old Notes"), which were
exchanged by the holders thereof for Notes on December 4, 1992,
MLPF&S received a fee of $3,850,000 with respect to its activi-
ties as placement agent for the Old Notes. In addition, in
connection with the Acquisition, MLCP received a fee of $2.5
million from, and was reimbursed for the prior payment of
approximately $135,000 by, the Company, and WEI issued 1,590,909
shares of WEI Common Stock (or approximately 93% of the WEI
Common Stock outstanding as of the effective time of the Merger)
to certain limited partnerships of which MLCP or one of its
affiliates is the general partner and a wholly owned subsidiary
of Merrill Lynch & Co., Inc. (collectively, the "ML Investors").
On January 31, 1994, WEI raised $30 million through the
sales of shares of its Common Stock to certain of its share-
holders, all of which are funds managed by MLCP. In connection
with the sale and the concurrent restructuring of the Company's
bank credit agreement, MLCP received a fee of $300,000.
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
THE COMPANY
The common stock of the Company is the only outstanding
class of its voting securities. WEI owns 10 shares, which
represent 100% of the issued and outstanding shares of the
Company's common stock. WEI's only business interest is its
ownership of the Company. WEI's principal executive offices are
located at c/o Wherehouse Entertainment, Inc., 19701 Hamilton
Avenue, Torrance, California 90502-1334.
WEI
The Common Stock, par value $0.01 per share of WEI (the "WEI
Common Stock") is the only outstanding class of its voting secu-
rities. The following table sets forth, as of April 1, 1994, the
number and percentage of shares of WEI Common Stock beneficially
owned by (i) each person known to WEI to be the beneficial owner
of more than 5% of the outstanding shares of WEI Common Stock,
(ii) each director of the Company and WEI, (iii) each named
executive officer, and (iv) all directors and executive officers
of the Company and WEI 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 benefi-
cially owned by them, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
Number of
Shares Percentage of
Name and Address Beneficially Outstanding WEI
of Beneficial Owner Owned Common Stock
- ----------------------------------------------------------------------------------
<S> <C> <C>
Merrill Lynch Capital Partners, Inc.(1)(2) 1,820,458 76.9%
767 Fifth Avenue
New York, New York 10153
Merrill Lynch & Co., Inc.(1)(3) 452,269 19.1%
250 Vesey Street
North Tower - World Financial Center
New York, New York 10281
Scott Young(4) 117,986 4.9%
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
Scott A. Hessler(5) 4,974 0.2%
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
Cathy L. Wood(6) 6,244 0.3%
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
Barbara C. Brown(7) 21,147 0.9%
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
Kathy J. Ford(8) 6,138 0.3%
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
Jerry E. Goldress --- 0.0%
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
James J. Burke, Jr.(9) --- 0.0%
Merrill Lynch Capital Partners, Inc.
767 Fifth Avenue
New York, New York 10153
Gerald S. Armstrong(9) --- 0.0%
Merrill Lynch & Co., Inc.
250 Vesey Street
North Tower - World Financial Center
New York, New York 10281
Rupinder S. Sidhu(9) --- 0.0%
Merrill Lynch Capital Partners, Inc.
767 Fifth Avenue
New York, New York 10153
Bradley J. Hoecker(9) --- 0.0%
Merrill Lynch Capital Partners, Inc.
767 Fifth Avenue
New York, New York 10153
All directors and executive officers
as a group(10) (7 persons) 157,630 6.5%
</TABLE>
(1) Entities affiliated with Merrill Lynch & Co., Inc.,
including MLCP, beneficially own an aggregate of 2,272,727
shares, which represents approximately 96% of the outstand-
ing WEI Common Stock.
(2) MLCP is a subsidiary of Merrill Lynch & Co., Inc. and an
affiliate of MLPF&S. Shares of WEI Common Stock benefi-
cially owned by MLCP are owned of record as follows:
1,103,219 (46.6% of outstanding WEI Common Stock) by Merrill
Lynch Capital Appreciation Partnership No. B-XXI, L.P.;
699,062 (29%) by ML Offshore LBO Partnership No. B-XXI; and
18,177 (0.8%) by MLCP Associates L.P. No. II. MLCP is the
indirect managing general partner of Merrill Lynch Capital
Appreciation Partnership No. B-XXI, L.P. and ML Offshore LBO
Partnership No. B-XXI and the general partner of MLCP
Associates L.P. No. II. The address for Merrill Lynch
Capital Appreciation Partnership No. B-XXI, L.P. and MLCP
Associates L.P. No. II is c/o MLCP, 767 Fifth Avenue, New
York, New York 10153. The address for ML Offshore LBO
Partnership No. B-XXI is P. O. Box 25, Roseneath, The
Grange, St. Peter Port, Guernsey Channel Island, British
Isles.
(3) Shares of WEI Common Stock beneficially owned by Merrill
Lynch & Co., Inc., excluding shares beneficially owned by
MLCP as set forth in note (2) above, are owned of record as
follows: 429,542 (18.2% of outstanding WEI Common Stock) by
ML IBK Positions, Inc.; and 22,727 (1%) by Merrill Lynch
KECALP L.P. 1991. The address for each such record holder
is 250 Vesey Street, North Tower - World Financial Center,
New York, New York 10281.
(4) Includes 51,700 shares subject to vested options under the
WEI Management Stock Option Plan which are currently
exercisable. Includes 11,226 shares of WEI Common Stock
owned by Mr. Young which are referred to as "Unvested WEI
Common Stock" in Item 13 of this Annual Report. Includes
7,728 shares pledged to WEI as security for Mr. Young's
Management Note (see Item 13 of this Annual Report).
(5) Includes 3,270 shares subject to vested options under the
WEI Management Stock Option Plan which are currently
exercisable.
(6) Includes 3,260 shares subject to vested options under the
WEI Management Stock Option Plan which are currently
exercisable. Includes 610 shares which are referred to as
"Unvested WEI Common Stock" in Item 13 of this Annual
Report. Includes 947 shares pledged to WEI as security for
Ms. Wood's Management Note (see Item 13 of this Annual
Report).
(7) Includes 9,900 shares subject to vested options under the
WEI Management Stock Option Plan which are currently
exercisable. Includes 1,990 shares which are referred to as
"Unvested WEI Common Stock" in Item 13 of this Annual
Report. Includes 2,274 shares pledged to WEI as security
for Ms. Brown's Management Note (see Item 13 of this Annual
Report).
(8) Includes 3,639 shares subject to vested options under the
WEI Management Stock Option Plan which are currently
exercisable. Includes 515 shares which are referred to as
"Unvested WEI Common Stock" in Item 13 of this Annual
Report. Includes 1,516 shares pledged to WEI as security
for Ms. Ford's Management Note (see Item 13 of this Annual
Report).
(9) Messrs. Burke, Armstrong, Sidhu and Hoecker are directors of
the Company and WEI and officers of MLCP and Merrill Lynch &
Co., Inc., and may be deemed to beneficially own all of the
2,272,727 shares of Common Stock beneficially owned by
Merrill Lynch & Co., Inc. and MLCP. Messrs. Burke,
Armstrong, Sidhu and Hoecker each disclaim beneficial
ownership of these shares.
(10) Includes 72,569 shares subject to vested options under the
WEI Management Stock Option Plan which are currently
exercisable. Includes 14,341 shares which are referred to
as "Unvested WEI Common Stock" in Item 13 of this Annual
Report. Includes 12,465 shares pledged to WEI as security
for Management Notes.
PLEDGE OF COMMON STOCK OF THE COMPANY
As security for the term facility and the revolving credit
facility under the Bank Credit Agreement (see Item 7 of this
Annual Report), the lenders thereunder have been granted (i) a
first priority pledge by WEI of the capital stock of the Company
and (ii) a first priority lien on all or substantially all of
WEI's and the Company's assets other than sale inventory, except
that mortgages on the real property and leaseholds owned,
directly or indirectly, by the Company have not been granted and
will be granted by the Company only as requested by Agent and
Requisite Lenders (as defined in the Bank Credit Agreement). In
addition, the Company is prohibited from granting a security
interest on any of its unencumbered assets.
If the Company fails to repay any of its outstanding indebt-
edness to the lenders under the Bank Credit Agreement or if any
other event of default should occur under the Bank Credit Agree-
ment, the Banks may, among other things, foreclose on their
security interest in the Company's capital stock and acquire
control of the Company.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On January 31, 1994, certain existing stockholders of the
Company (all of which were affiliated with Merrill Lynch & Co.,
Inc.) acquired 681,818 shares of WEI Common Stock from WEI for
$30 million. In connection with the transaction and the restruc-
turing of the Company's bank credit agreement, MLCP received a
fee of $300,000. Four of the directors of the Company and WEI
are executive officers of MLCP and Merrill Lynch & Co., Inc.
In connection with the Acquisition described in Item 1 of
this Annual Report, certain members of management (the "Manage-
ment Investors") executed new non-recourse notes in exchange for
notes originally executed by them in connection with their
purchases of shares of WEI prior to the Acquisition. The
following table sets forth the outstanding principal balance of
the notes of each of the named executive officers (the "Manage-
ment Notes"), which amounts have remained unchanged since the
beginning of the last fiscal year. The Management Notes bear
interest at the rate of 7% per annum:
Name Principal Balance
Scott Young $340,000
Scott A. Hessler 0
Cathy L. Wood 41,533
Barbara C. Brown 99,867
Kathy J. Ford 66,600
Jerry E. Goldress 0
To secure repayment of the Management Notes, each maker
pledged to WEI the number of shares of WEI Common Stock purchased
by such maker with an original purchase price greater than or
equal to 100% of the original principal amount of such maker's
Management Note.
Under a Stockholders' Agreement among WEI, certain Manage-
ment Investors and certain other shareholders of the Company, a
portion of the WEI Common Stock owned by the Management Investors
is deemed to be "unvested" (the "Unvested WEI Common Stock"), and
is currently held by WEI in trust for the benefit of the Manage-
ment Investors.
In connection with the Acquisition, approximately $18.75
million of the Merger consideration was deferred, and is subject
to reduction to the extent that the Company incurs certain liti-
gation costs, including costs relating to the McMahan, Thompson
and Silverman actions described in Item 3 of this Annual Report.
Currently, the balance of this deferred account (including
interest thereon), net of costs incurred to date, approximates
$19.3 million. Under the Stockholders' Agreement, "vesting" of
the Unvested WEI Common stock will be based upon the percentage
of such deferred amount which is actually paid to the selling
parties in the Merger.
The Stockholders' Agreement provides that any shares of
Unvested WEI Common Stock remaining after the remaining deferred
amounts have been fully distributed will be cancelled, and each
Management Investor who would otherwise be entitled to such
shares of Unvested WEI Common Stock (assuming they had vested)
will have the right, exercisable within 90 days after the date of
such cancellation, to purchase a number of shares of WEI Common
Stock equal to the number of shares of Unvested WEI Common Stock
so canceled, at a cash purchase price of $44 per share.
Pursuant to the terms of the Stockholders' Agreement, all
shares of WEI Common Stock purchased in connection with the
Acquisition by the Management Investors or issued upon exercise
of options are subject to certain restrictions on transfer and
certain put and call arrangements in the event that the holder of
such shares terminates his or her employment with WEI or any of
its subsidiaries.
Management Investors have the right to put their shares and
options to WEI in the event of death, disability, retirement or
termination without cause for a "fair value price" determined in
good faith by the board of directors of WEI, less the applicable
per share exercise price, in the case of options. WEI has the
right to call shares and options held by a Management Investor if
such Management Investor's employment terminates. In the event
of termination without cause, death, disability or retirement,
such call shall be exercisable at a price equal to the fair value
price of the stock or options determined in good faith by the
board of directors of WEI, less the applicable per share exercise
price, in the case of options. In the event of termination for
cause or voluntary resignation, such call shall be exercisable at
a price equal to the lower of (i) the fair value price of the
stock or options determined in good faith by the board of
directors of WEI and (ii) $44 per share (the initial cost of such
shares) plus interest thereon at 6.5% per annum, provided that
the board of directors of WEI will consider increasing such call
price (but not in excess of the fair value price of such stock or
options, determined in good faith by the board of directors of
WEI) in the case of voluntary resignation, depending on the
circumstances. Payments under the puts and calls are limited
under the Bank Credit Agreement and the Indenture, as applicable.
Under certain circumstances, WEI may issue junior subordinated
notes in payment for all or a portion of the shares acquired
under exercise of a put or call.
Pursuant to the Stockholders Agreement, and in connection
with the termination of Mr. Hessler's employment with WEI and the
Company, WEI will repurchase all of Mr. Hessler's shares and
vested options for an aggregate purchase price of $74,976 (based
on a $44 per share fair value price).
As part of the 1994 Re-engineering Plan, the Company entered
into a management consulting agreement with Grisanti, Galef &
Goldress whose chairman, Mr. Goldress, provided services first by
leading the re-engineering project and then as an officer of the
Company. The current agreement specifies monthly payments of
$25,000. During fiscal 1994, $250,000 was paid under this
agreement.
The Company receives credit card processing services from
First USA, Inc. under a three year agreement ending April 1996.
Affiliates of MLCP held a controlling interest in First USA, Inc.
until February 1993. During fiscal 1994, $1,742,000 was paid
under this agreement.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
(a) Documents filed as part of this report.
1. Financial statements.
See Index to Financial Statements and Financial Statement
Schedules which appears on page F-0 hereof.
2. Financial statement schedules.
See Index to Financial Statements and Financial Statement
Schedules which appears on page F-0 hereof.
All other schedules are omitted as the required information
is inapplicable or the information is presented in the consoli-
dated financial statements or related notes.
3. Exhibits
2.1 Merger Agreement, dated as of May 5, 1992, by
and among Grammy Corp., WEI, the Company and
A&S. Incorporated by reference to Exhibit 1
of the Company's Current Report on Form 8-K
dated May 6, 1992.
3.1 Restated Certificate of Incorporation of the
Company. Incorporated be reference to
Exhibit 3.1 of the Company's Annual Report on
Form 10-K for the year ended January 31, 1988
(the "1988 Report").
3.2 By-laws of the Company. Incorporated by
reference to Exhibit 3.2 of the 1988 Report.
3.3 Restated Certificate of Incorporation of WEI.
Incorporated by reference to Exhibit 2.2 of
the Company's Registration statement on Form
S-1, Registration No. 335166 (the "Registra-
tion Statement").
3.4 By-laws of WEI. Incorporated by reference to
Exhibit 3.4 of the Registration Statement.
4.1 Indenture, dated as of June 15, 1986, between
the Company and Bank of America National
Trust and Savings Association. Incorporated
by reference to Exhibit 4(a) of the Company's
Registration Statement on Form S-2, Registra-
tion No. 33-6485.
4.2 First Supplemental Indenture, dated as of
February 11, 1988, between the Company and
Bank of America National Trust and Savings
Association. Incorporated by reference to
Exhibit 4.2 of the 1988 Report.
4.3 Specimen of 13% Senior Subordinated Notes due
2002, Series B. Incorporated by reference to
Exhibit 4.3 of the Registration Statement.
4.4 Indenture, dated as of June 11, 1992, among
Grammy Corp., the Company and the Trustee
relating to the Notes. Incorporated by
reference to Exhibit 4(e) of the Company's
Quarterly Report on Form 10-Q for the quarter
ended April 30, 1992 (the "1992 10-Q").
4.5 Supplemental Indenture, dated as of June 11,
1992, among the Company, WEI and the Trustee
relating to the Notes. Incorporated by
reference to Exhibit 4.5 of the Registration
Statement.
4.6 Securities Purchase Agreement, dated as of
June 11, 1992, among Grammy Corp., the
Company and the purchasers of the Old Notes.
Incorporated by reference to Exhibit 4(f) of
the 1992 10-Q.
4.7 Securities Purchase Assumption Agreement,
dated as of June 11, 1992, executed by the
Company and WEI. Incorporated by reference
to Exhibit 4.7 of the Registration Statement.
4.8 Registration Rights Agreement, dated as of
June 11, 1992, among Grammy Corp., the
Company and the purchasers of the Old Notes.
Incorporated by reference to Exhibit 4(g) of
the 1992 10-Q.
4.9 Registration Rights Assumption Agreement,
dated as of June 11, 1992, executed by the
Company and WEI relating to the Old Notes.
Incorporated by reference to Exhibit 4.9 of
the Registration Statement.
10.1* Employment Agreement, dated as of June 11,
1992, between the Company and Scott Young.
10.2* Fiscal 1991 Corporate Incentive Compensation
Plan. Incorporated by reference to Exhibit
10.4 of the Company's Annual Report for the
year ended January 31, 1991 (the "1991
Report").
10.3* Fiscal 1992 Corporate Incentive Compensation
Plan. Incorporated by reference to Exhibit
10.3 of the Company's Annual Report for the
year ended January 31, 1992 (the "1992
Report").
10.5 Office lease dated as of October 23, 1985, by
and between the Company, as lessee, and
Patrician Associates, Inc. and OMA Harbor
Tech H. Associates, as lessors. Incorporated
by reference to the Company's Report on Form
10-K for the seven months ended January 31,
1986.
10.6 Single Tenant Industrial Lease, dated
November 5, 1991, by and between Watson Land
Company, as lessor, and the Company, as
lessee. Incorporated by reference to Exhibit
10.6 of the 1992 Report.
10.10* WEI Holdings, Inc. 1988 Employee Stock
Purchase and Option Plan. Incorporated by
reference to Exhibit 10.33 of the Annual
Report on Form 10-K for the year ended
January 31, 1989.
10.11* WEI Holdings, Inc. 1990 Employee Stock
Purchase and Option Plan. Incorporated by
reference to Exhibit 10.37 of the 1991
Report.
10.12* Escrow Agreement, dated June 11, 1992, among
A&S, as Representative, WEI and Chase Manhat-
tan Bank, N.A., as Escrow Agent. Incorporated
by reference to Exhibit 10.24 of the
Registration Statement.
10.13 ML Stock Subscription Agreement, dated as of
June 11, 1992, among Grammy Corp. and the ML
Investors listed in Schedule I thereto.
Incorporated by reference to Exhibit 10.25 of
the Registration Statement.
10.14* Management Stock Subscription Agreement,
dated as of June 11, 1992, among Grammy Corp.
and the Management Investors listed on the
signature pages thereto. Incorporated by
reference to Exhibit 10.26 of the Registra-
tion Statement.
10.15 Form of Management Note. Incorporated by
reference to Exhibit 10.27 of the Registra-
tion Statement.
10.16 Form of Stock Pledge Agreement. Incorporated
by reference to Exhibit 10.28 of the Regis-
tration Statement.
10.17* Stockholders' Agreement, dated as of June 11,
1992, among WEI, the Management Investors
listed in Schedule I thereto and the ML
Investors listed in Schedule II thereto.
Incorporated by reference to Exhibit 10.29 of
the Registration Statement.
10.18* WEI Management Stock Option Plan, effective
June 11, 1992. Incorporated by reference to
Exhibit 10.30 of the Registration Statement.
10.19* Form of Incentive Option Agreement. Incorpo-
rated by reference to Exhibit 10.31 of the
Registration Statement.
10.20* Form of Performance Option Agreement. Incor-
porated by reference to Exhibit 10.32 of the
Registration Statement.
10.21 Bank Credit Agreement, dated as of June 11,
1992, among the Company, WEI and Bankers
Trust Company, as Agent and Heller Financial,
Inc. as Co-Agent, including all exhibits
thereto. Incorporated by reference to
Exhibit 4(a) of the 1992 10-Q.
10.22 Borrower Security Agreement, dated as of June
11, 1992, by and between the Company and
Bankers Trust Company, as collateral agent
for and representative of the Lenders. Incor-
porated by reference to Exhibit 4(b) of the
1992 10-Q.
10.23 Holdings Security Agreement, dated as of June
11, 1992, by and between WEI and Bankers
Trust Company, as collateral agent for and
representative of the Lenders. Incorporated
by reference to Exhibit 4(c) of the 1992
10-Q.
10.24 Holdings Pledge Agreement, dated as of June
11, 1992, by and between WEI and Bankers
Trust Company, as collateral agent for a
representative of the Lenders. Incorporated
by reference to Exhibit 4(d) of the 1992
10-Q.
10.25 First Amendment to Credit Agreement dated
November 17, 1992, between the Company, WEI,
Bankers Trust Company, Individually and as
Agent, Heller Financial, Inc., United States
National Bank of Oregon, and Allstate Prime
Income Trust. Incorporated by reference to
Exhibit 10.40 of the Company's Annual Report
on Form 10-K for the year ended January 31,
1993 (the "1993 Report").
10.26 Second Amendment to Credit Agreement dated
August 17, 1993, between the Company, WEI,
Bankers Trust Company, Individually and as
Agent, Heller Financial, Inc., United States
National Bank of Oregon, and Allstate Prime
Income Trust. Incorporated by reference to
Exhibit 10.44 of the Company's Quarterly
Report on Form 10-Q for the quarter ended
July 31, 1993 (the "1993 10-Q").
10.27** Third Amendment to Credit Agreement dated
January 27, 1994, between the Company, WEI,
Bankers Trust Company, Individually and as
Agent, Heller Financial, Inc., United States
National Bank of Oregon, and Allstate Prime
Income Trust.
10.28* Employment Agreement, dated as of September
1, 1992, between the Company and Scott
Hessler. Incorporated by reference to
Exhibit 10.37 of the 1993 Report.
10.29* Fiscal 1993 Corporate Incentive Compensation
Plan. Incorporated by reference to Exhibit
10.41 of the 1993 Report.
10.30 Master Lease Agreement dated October 13,
1992, between United States Leasing Corpora-
tion, as Lessor, and the Company, as Lessee.
Incorporated by reference to Exhibit 10.42 of
the 1993 Report.
10.31 Equipment Lease Agreement dated December 21,
1992, between General Electric Capital
Corporation, as Lessor, and the Company, as
Lessee. Incorporated by reference to Exhibit
10.43 of the 1993 Report.
10.32** Agreement of Purchase and Sale, dated as of
May 10, 1993, between the Company and The
Record Shop, Inc.
10.33** First Amendment to Agreement of Purchase and
Sale, dated as of May 28, 1993, between the
Company and The Record Shop, Inc.
10.34** Second Amendment to Agreement of Purchase and
Sale, dated as of June 18, 1993, between the
Company and The Record Shop, Inc.
10.35** Third Amendment to Agreement of Purchase and
Sale, dated as of June 21, 1993, between the
Company and The Record Shop, Inc.
10.36** Agreement of Purchase and Sale, dated as of
November 19, 1993, between the Company and
Pegasus Music and Video, Inc. and Kevin S.
Garn.
10.37** First Amendment to Agreement of Purchase and
Sale, dated as of January 14, 1994, between
the Company and Pegasus Music and Video, Inc.
and Kevin S. Garn.
10.38** Separation from Employment Agreement and
Mutual General Release, dated April 28, 1994,
between the Company and Scott A. Hessler.
10.39* Fiscal 1994 Corporate Incentive Compensation
** Plan.
12.1** Computation of ratio of earnings to fixed
charges.
21.1** Subsidiaries of the Company and WEI.
_______________
* Management contract or compensatory plan or arrangement
** Filed herewith
(b) Current Reports on Form 8-K.
A current report on Form 8-K, dated June 24, 1993, was
filed by the Company with the Securities and Exchange Commission
on July 6, 1993 to report under "Item 5 - Other Events" the
Company's acquisition of certain assets.
A current report on Form 8-K, dated January 14, 1994,
was filed by the Company with the Securities and Exchange Commis-
sion on January 28, 1994 to report under "Item 5 - Other Events"
the Company's acquisition of certain assets.
A current report on Form 8-K, dated January 31, 1994,
was filed by the Company with the Securities and Exchange
Commission on February 8, 1994 to report the contribution of
$30,000,000 of equity capital and the impact of an earthquake in
the Company's markets.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrants have duly caused
this report to be signed on its behalf by the undersigned, there-
unto duly authorized.
WEI HOLDINGS, INC.
Date: May 16, 1994 By: /s/ Scott Young
-----------------------------
Scott Young
Chairman of the Board,
Chief Executive Officer
and Director
(Principal Executive
Officer)
WHEREHOUSE ENTERTAINMENT, INC.
Date: May 16, 1994 By: /s/ Scott Young
------------------------------
Scott Young
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 Registrants and in the capacities and on
the dates indicated:
WEI HOLDINGS, INC.
Signature Title Date
- --------- ----- ----
/s/ Scott Young Chairman of the Board, May 16, 1994
- ------------------------ Chief Executive Officer
Scott Young and Director
(Principal Executive
(Officer)
/s/ Cathy L. Wood Senior Vice President, May 16, 1994
- ------------------------ Chief Financial Officer
Cathy L. Wood and Secretary
(Principal Financial
Officer)
/s/ Kathy J. Ford Vice President, Controller May 16, 1994
- ------------------------ (Principal Accounting
Kathy J. Ford Officer)
/s/ James J. Burke, Jr. Director May 16, 1994
- ------------------------
James J. Burke, Jr.
/s/ Gerald S. Armstrong Director May 16, 1994
- ------------------------
Gerald S. Armstrong
/s/ Rupinder S. Sidhu Director May 16, 1994
- ------------------------
Rupinder S. Sidhu
/s/ Bradley J. Hoecker Director May 16, 1994
- ------------------------
Bradley J. Hoecker
WHEREHOUSE ENTERTAINMENT, INC.
Signature Title Date
- --------- ----- ----
/s/ Scott Young Chairman of the Board, May 16, 1994
- ------------------------ Chief Executive Officer
Scott Young and Director
(Principal Executive
(Officer)
/s/ Cathy L. Wood Senior Vice President, May 16, 1994
- ------------------------ Chief Financial Officer
Cathy L. Wood and Secretary
(Principal Financial
Officer)
/s/ Kathy J. Ford Vice President, Controller May 16, 1994
- ------------------------ (Principal Accounting
Kathy J. Ford Officer
/s/ James J. Burke, Jr. Director May 16, 1994
- ------------------------
James J. Burke, Jr.
/s/ Gerald S. Armstrong Director May 16, 1994
- ------------------------
Gerald S. Armstrong
/s/ Rupinder S. Sidhu Director May 16, 1994
- ------------------------
Rupinder S. Sidhu
/s/ Bradley J. Hoecker Director May 16, 1994
- ------------------------
Bradley J. Hoecker
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE
NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
No annual report or proxy material has been sent to the
security holders of either of the registrants.
<page-F-0>
WHEREHOUSE ENTERTAINMENT, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
January 31, 1994
CONTENTS
Report of Independent Auditors...............................F-1
Financial Statements
Balance Sheets at January 31, 1994 and 1993 (Company)........F-2
Statements of Operations for the year ended
January 31, 1994 (Company) and the Eight (Company)
and Four Month (Predecessor) Periods ended
January 31, 1993 and May 31, 1992, respectively,
and for the year ended January 31, 1992 (Predecessor)......F-4
Statements of Changes in Shareholder's Equity for the
year ended January 31, 1994 (Company) and the Eight
(Company) and Four Month (Predecessor) Periods ended
January 31, 1993 and May 31, 1992, respectively, and
for the year ended January 31, 1992 (Predecessor)..........F-5
Statements of Cash Flows for the year ended January 31,
1994 (Company) and the Eight (Company) and Four Month
(Predecessor) Periods ended January 31, 1993 and
May 31, 1992, respectively, and for the year ended
January 31, 1992 (Predecessor).............................F-6
Notes to Financial Statements ...............................F-8
Financial Statements Schedules for the year ended January 31,
1994 (Company) the Eight (Company) and Four Month (Predecessor)
Periods ended January 31, 1993 and May 31, 1992, respectively,
and for the year ended January 31, 1992 (Predecessor)
V Property, Plant and Equipment........................F-24
VI Accumulated Depreciation and Amortization
of Property, Plant and Equipment...................F-26
VIII Valuation and Qualifying Accounts....................F-28
IX Short-term Borrowings................................F-29
X Supplementary Income Statement Information...........F-30
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
financial statements.
F-0
<page-F-1>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Wherehouse Entertainment, Inc.
We have audited the accompanying balance sheets of Wherehouse
Entertainment, Inc. as of January 31, 1994 and 1993 (Company) and
the related statements of operations, shareholder's equity, and
cash flows for the year ended January 31, 1994 and the eight
months ended January 31, 1993 (Company), the four months ended
May 31, 1992 and the year ended January 31, 1992 (Predecessor).
Our audits also included the financial statement schedules listed
in the index at item 14(a). These financial statements and
schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements 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, 1994 and 1993
(Company), and the results of its operations and its cash flows
for the year ended January 31, 1994, the eight months ended
January 31, 1993 (Company), the four months ended May 31, 1992
and for the year ended January 31, 1992 (Predecessor) in
conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken as
a whole, present fairly in all material respects the information
set forth therein.
April 22, 1994
F-1
<page-F-2>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
BALANCE SHEETS
<CAPTION>
January 31
1994 1993
----------------------------
<S> <C> <C>
Assets (Note 5)
Current assets:
Cash $ 3,120,000 $ 4,462,000
Receivables 2,802,000 3,889,000
Taxes receivable 5,000,000 445,000
Merchandise inventory 113,592,000 110,457,000
Deferred income taxes (Note 7) 4,402,000 4,517,000
Other current assets 2,573,000 2,453,000
----------------------------
Total current assets 131,489,000 126,223,000
Rental inventory, net of
accumulated amortization of
$38,966,000 (1994) and
$14,703,000 (1993) 11,689,000 32,305,000
Equipment and improvements,
at cost (Note 5):
Leasehold improvements 25,136,000 21,469,000
Data processing equipment and
software 19,813,000 25,788,000
Store and office fixtures and
equipment 20,273,000 23,402,000
Buildings and improvements 1,495,000 2,641,000
Land 683,000 2,801,000
----------------------------
67,400,000 76,101,000
Accumulated depreciation and
amortization 20,239,000 13,257,000
----------------------------
47,161,000 62,844,000
Intangible assets:
Excess of cost over fair value
of net assets acquired, net
of accumulated amortization
of $5,873,000 (1994) and
$2,315,000 (1993) 142,932,000 137,212,000
Financing costs and leasehold
interests, net of accumulated
amortization of $1,226,000 (1994)
and $1,813,000 (1993) 9,905,000 14,613,000
----------------------------
152,837,000 151,825,000
Deferred income taxes (Note 7) 6,774,000 -
Other assets 1,425,000 1,183,000
----------------------------
Total assets $351,375,000 $374,380,000
============================
See accompanying notes.
</TABLE>
F-2
<page-F-3>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
BALANCE SHEETS
<CAPTION>
January 31
1994 1993
----------------------------
<S> <C> <C>
Liabilities and shareholder's
equity
Current liabilities:
Short-term borrowings (Note 4) $ 4,000,000 $ 6,550,000
Accounts payable and bank
overdraft 80,935,000 70,180,000
Interest payable 8,122,000 8,530,000
Sales taxes payable 3,025,000 8,103,000
Other accrued expenses 22,781,000 22,825,000
Current portion of capital
lease obligations and
long-term debt (Note 5) 7,772,000 10,562,000
----------------------------
Total current liabilities 126,635,000 126,750,000
Long-term debt (Note 5) 163,699,000 171,006,000
Other long-term liabilities 7,426,000 2,523,000
Convertible subordinated
debentures (Note 6) 3,635,000 3,563,000
Deferred income taxes (Note 7) - 8,008,000
Commitments and contingencies
(Notes 8, 9 and 10)
Shareholder's equity:
Common stock, $.01 par value,
1,000 shares authorized,
10 issued and outstanding - -
Additional paid-in capital 95,855,000 66,346,000
Accumulated deficit (45,875,000) (3,816,000)
----------------------------
Total shareholder's equity 49,980,000 62,530,000
----------------------------
Total liabilities and
shareholder's equity $351,375,000 $374,380,000
============================
</TABLE>
F-3
<page-F-4>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
STATEMENTS OF OPERATIONS
<CAPTION>
Company Predecessor
---------------------------- --------------------------
Eight Months Four Months
Year Ended Ended Ended Year Ended
January 31, January 31, May 31, January 31,
1994 1993 1992 1992
---------------------------- --------------------------
<S> <C> <C> <C> <C>
Sales $380,202,000 $249,113,000 $105,349,000 $358,598,000
Rental Revenue 91,584,000 64,293,000 29,762,000 98,765,000
---------------------------- --------------------------
471,786,000 313,406,000 135,111,000 457,363,000
Cost of sales 247,997,000 155,172,000 66,904,000 225,527,000
Cost of rentals, including
amortization 50,837,000 24,805,000 7,272,000 30,913,000
---------------------------- --------------------------
298,834,000 179,977,000 74,176,000 256,440,000
Selling, general and
administrative expenses 196,622,000 122,877,000 59,851,000 179,061,000
Restructuring charges
(Note 2) 14,259,000 - - -
---------------------------- --------------------------
(Loss) income from
operations (37,929,000) 10,552,000 1,084,000 21,862,000
Interest expense 23,525,000 15,703,000 4,928,000 18,052,000
Other income (318,000) (44,000) (9,000) (138,000)
---------------------------- --------------------------
23,207,000 15,659,000 4,919,000 17,914,000
---------------------------- ------------ -----------
(Loss) income before
income taxes (61,136,000) (5,107,000) (3,835,000) 3,948,000
---------------------------- --------------------------
(Benefit) provision for
income taxes (Note 7) (19,077,000) (1,291,000) (1,859,000) 1,025,000
---------------------------- --------------------------
(Loss) income before
extraordinary item (42,059,000) (3,816,000) (1,976,000) 2,923,000
Extraordinary item less
income taxes (Note 1) - - 4,526,000 -
---------------------------- --------------------------
Net (loss) income $(42,059,000) $ (3,816,000) $ (6,502,000) $ 2,923,000
============================ ==========================
See accompanying notes.
</TABLE>
F-4
<page-F-5>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
<CAPTION>
Common Stock Additional
.01 Par Value Paid-In Accumulated
Shares Amount Capital Deficit Total
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Predecessor:
Balance, January 31, 1991 10 $ - $ 22,500,000 $(21,266,000) $ 1,234,000
Capital contribution - - 1,147,000 - 1,147,000
Accretion of
redeemable stock
purchase warrants - - - (1,296,000) (1,296,000)
Dividend - - - (272,000) (272,000)
Net income - - - 2,923,000 2,923,000
-----------------------------------------------------------------
Balance, January 31, 1992 10 - 23,647,000 (19,911,000) 3,736,000
Accretion of
redeemable stock
purchase warrants - - - (324,000) (324,000)
Net loss - - - (6,502,000) (6,502,000)
-----------------------------------------------------------------
Balance, May 31, 1992 10 $ - $ 23,647,000 $(26,737,000) $(3,090,000)
=================================================================
Company:
Balance, June 1, 1992 - $ - $ - $ - $ -
Issuance of common
stock 10 - 65,966,000 - 65,966,000
Capital contribution - - 380,000 - 380,000
Net loss - - - (3,816,000) (3,816,000)
-----------------------------------------------------------------
Balance, January 31, 1993 10 - 66,346,000 (3,816,000) 62,530,000
Capital contribution - - 30,000,000 - 30,000,000
Dividend - - (491,000) - (491,000)
Net loss - - - (42,059,000) (42,059,000)
-----------------------------------------------------------------
Balance, January 31, 1994 10 $ - $95,855,000 $(45,875,000) $49,980,000
=================================================================
See accompanying notes.
</TABLE>
F-5
<page-F-6>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS
<CAPTION>
Company Predecessor
--------------------------- --------------------------
Eight Months Four Months
Year Ended Ended Ended Year Ended
January 31, January 31, May 31, January 31,
1994 1993 1992 1992
---------------------------- --------------------------
<S> <C> <C> <C> <C>
Operating activities
Net (loss) income $ (42,059,000) $ (3,816,000) $ (6,502,000) $ 2,923,000
Adjustments to reconcile net
(loss) income to net cash
provided by (used in)
operating activities:
Depreciation and
amortization 70,530,000 33,197,000 11,911,000 41,082,000
Extraordinary item -
write-off of unamortized
acquisition financing costs - - 5,430,000 -
Book value of rental
inventory dispositions 6,983,000 8,251,000 2,669,000 13,104,000
Noncash portion of
restructuring charges 13,590,000 - - -
Other 32,000 62,000 9,000 99,000
Deferred taxes (14,667,000) (3,395,000) (1,738,000) (6,091,000)
Changes in operating assets
and liabilities:
Receivables 1,087,000 206,000 (2,400,000) (491,000)
Taxes receivable (4,555,000) - - (190,000)
Merchandise inventory (3,135,000) (23,423,000) (224,000) (2,966,000)
Other current assets (750,000) 394,000 (458,000) (524,000)
Accounts payable, accrued
expenses and other
liabilities 10,279,000 37,259,000 (27,896,000) 13,610,000
Rental inventory
purchases (30,222,000) (20,294,000) (7,917,000) (31,044,000)
---------------------------- --------------------------
Net cash provided by (used in)
operating activities 7,113,000 28,441,000 (27,116,000) 29,512,000
Investing activities
Payment for purchase of Company,
net of cash acquired - (125,796,000) - -
Proceeds from sale of assets 1,042,000 - - -
Acquisition of property,
equipment and improvements (11,784,000) (6,374,000) (2,935,000) (11,717,000)
Purchase of certain assets of
The Record Shop, Inc. (6,745,000) - - -
Purchase of certain assets of
Pegasus Music and Video, Inc. (5,502,000) - - -
(Increase) decrease in other
assets and intangibles (1,844,000) (1,028,000) 39,000 (2,507,000)
---------------------------- --------------------------
Net cash used in investing
activities (24,833,000) (133,198,000) (2,896,000) (14,224,000)
</TABLE>
F-6
<page-F-7>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS
(continued)
<CAPTION>
Company Predecessor
--------------------------- --------------------------
Eight Months Four Months
Year Ended Ended Ended Year Ended
January 31, January 31, May 31, January 31,
1994 1993 1992 1992
---------------------------- --------------------------
<S> <C> <C> <C> <C>
Financing activities
Short-term borrowings
(payments), net $ (2,550,000) $ (19,527,000) $ 37,700,000 $ (3,900,000)
Long-term debt - 175,000,000 - -
Principal payments on
capital lease obligations
and long-term debt (10,582,000) (116,907,000) (3,462,000) (13,315,000)
Subordinated debenture
redemptions - - - (550,000)
Equity contribution 30,000,000 70,273,000
Capital contribution - 380,000 - 1,147,000
Dividend paid to WEI
Holdings, Inc. (490,000) - - (272,000)
---------------------------- --------------------------
Net cash provided by (used
in) financing activities 16,378,000 109,219,000 34,238,000 (16,890,000)
---------------------------- --------------------------
Net increase (decrease) in
cash (1,342,000) 4,462,000 4,226,000 (1,602,000)
Cash at beginning of period 4,462,000 - 171,000 1,773,000
---------------------------- --------------------------
Cash at end of period $ 3,120,000 $ 4,462,000 $ 4,397,000 $ 171,000
============================ ==========================
Supplemental disclosure of
cash flow information:
Cash paid during the
period for:
Interest $ 22,448,000 $ 5,643,000 $ 4,271,000 $ 16,648,000
Income taxes 164,000 (63,000) 4,762,000 4,209,000
Supplemental disclosure of noncash investing and financing activities:
Capital lease obligations of $483,000 in the twelve months ended January 31, 1994,
$3,545,000 in the eight months ended January 31, 1993 and $3,323,000 in fiscal 1992
were incurred when the Company entered into leases for equipment.
The Company recorded accretion of redeemable stock purchase warrants in the amounts
of $324,000 during the four months ended May 31, 1992 and $1,296,000 in fiscal 1992.
See accompanying notes.
</TABLE>
F-7
<page-F-8>
WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
(January 31, 1994)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
On June 11, 1992, the Company was acquired by the purchase of all
of WEI Holdings, Inc.'s (WEI) ownership interest in the Predeces-
sor by certain affiliates of Merrill Lynch Capital Partners, Inc.
(MLCP) (the Acquisition). The consideration paid to acquire the
Company, net of cash acquired, consisted of $70.3 million in
equity cash contributions and $55.5 million in incremental
borrowings. WEI accounted for the transaction under the purchase
method of accounting, following the accounting treatment in
accordance with push-down accounting, whereby the Company
recorded the purchase price allocation in its financial state-
ments. For financial reporting purposes, the Company accounted
for the transaction effective June 1, 1992. Certain members of
management had ownership in WEI. Therefore, according to EITF
Issue No. 88-16, "Basis in Leveraged Buyout Transactions", the
net assets acquired were recorded at the reinvesting share-
holders' carryover basis. The purchase price, net of the
carryover basis equity adjustment of $7,367,000, was allocated to
assets and liabilities based on their respective fair values at
June 1, 1992, as adjusted, resulting in an opening shareholder's
equity of $65,966,000. WEI holds all of the capital stock of the
Company and, in turn, is owned by affiliates of MLCP (92.4%) and
certain members of management (7.6%) on a fully diluted basis.
Currently, WEI conducts no independent operations and has no
significant assets other than the capital stock of the Company.
Financial statements of the Company prior to the Acquisition are
designated as "Predecessor".
Unaudited pro-forma consolidated revenues for the year ended
January 31, 1993, assuming the Acquisition occurred on February
1, 1992, would have been $448,517,000. Pro forma net loss before
extraordinary item for the year ended January 31, 1993, including
adjustments for amortization of asset value changes based on fair
value adjustments, amortization of the excess cost over fair
value of assets acquired, and interest expense related to acqui-
sition indebtedness and the elimination of nonrecurring expenses
related to the Acquisition, would have been $5,978,000.
<page-F-9>
Extraordinary Item
The extraordinary item in the four month period ended May 31,
1992 represents the write-off of unamortized financing costs and
prepayment penalties associated with the repayment of debt of the
Predecessor that was refinanced at the time of the Acquisition.
The loss was $4,526,000, net of an income tax benefit of
$3,035,000.
Principles of Consolidation
The consolidated financial statements of the Predecessor include
the accounts of the Company and its subsidiaries, all of which
are wholly owned. All significant intercompany accounts and
transactions have been eliminated.
Inventory
Inventories are carried at the lower of cost or market using the
first-in, first-out (FIFO) method. Inventory consists primarily
of resaleable prerecorded music, videocassettes, video games and
other products.
Rental Inventory
In the fourth quarter of fiscal 1994, the Company accelerated the
amortization of rental inventory by switching to a more
accelerated method which eliminated the use of the half-year
convention and salvage values. Rental inventory continues to be
amortized over a period of two years for video games and three
years for video cassettes. In adopting the more accelerated
amortization, the Company recorded a charge of $20,268,000 to
reduce the carrying value of existing rental inventory. The
charge was accounted for as a change in estimate and was recorded
as additional amortization expense included in "cost of rentals"
on the accompanying statement of operations. In addition, the
Company sells rental cassettes and games in excess of ongoing
needs after the initial rental period at prices which are often
less than net book value. The sell-through of such rental
inventory in the year purchased results in additional amortiza-
tion, which is included in the cost of rentals. Although rental
inventory generates a portion of the Company's current revenue
and cash flow, the rental inventory is classified as a noncurrent
asset because not all inventory is expected to be realized as
cash or sold in the normal business cycle.
F-9
<page-F-10>
Depreciation and Amortization
Depreciation and amortization of equipment and leasehold improve-
ments is computed on the straight-line method over the following
periods:
Years
---------
Leasehold improvements 2 - 12 *
Data processing equipment and software 5
Store and office fixtures and equipment 5 - 10
Buildings and improvements 5 - 10
* Amortization over related lease periods
Leasehold Interests
Leasehold interests and over-market leasehold liabilities are
amortized on the straight-line method over the estimated remain-
ing lease terms of the related store operating leases which vary
from 2 to 12 years.
Excess of Cost Over Fair Value of Net Assets Acquired
Excess cost over the fair value of net assets acquired (or good-
will) generally is amortized on a straight-line basis over 40
years. The carrying value of goodwill is reviewed if the facts
and circumstances suggest that it may be impaired. If this
review indicates that goodwill will not be recoverable, as
determined based on the undiscounted cash flows of the Company
over the remaining amortization period, the carrying value of the
goodwill is reduced by the estimated shortfall of cash flows.
Financing Costs
Financing costs are amortized using the effective interest rate
method over the terms of the related financing which varies with
the terms of the related agreement.
F-10
<page-F-11>
Income Taxes
The Company utilizes the liability method of accounting for
income taxes. Under the liability method, deferred taxes are
determined based on the difference between the financial
statement and tax basis of assets and liabilities and are
measured at the enacted tax rates that will be in effect when
these differences reverse.
Earnings per Share
Earnings per share are omitted for the Company since it is a
wholly-owned subsidiary of WEI.
Reclassifications
Certain reclassifications of balances have been made to the 1993
amounts to conform to the 1994 presentation.
2. RESTRUCTURING CHARGES
In response to an increasingly competitive retail environment,
the Company began a "re-engineering" project during fiscal 1994
in order to lower costs and provide greater value at lower prices
to customers. As part of this project, the Company identified
required changes in systems and operations and, therefore,
assessed the realizable value of certain assets and the cost of
restructuring measures. As a result, in the fourth quarter of
fiscal 1994, $14,259,000 in restructuring charges were recorded
that included the write off of $8,167,000 in equipment, property
and improvements, $3,472,000 in beneficial leasehold interests
and $721,000 in other assets as well as the recognition of
$1,899,000 for severance payments for employees terminated before
January 31, 1994, consultants fees and other costs related to re-
engineering. Other accrued expenses at January 31, 1994 includes
$1,230,000 related to the restructuring charges which is expected
to be disbursed in the next year.
F-11
<page-F-12>
3. ACQUISITIONS
During June 1993 and January 1994, the Company agreed to acquire
up to 31 store locations (17 at the initial closing) and related
assets of The Record Shop, Inc. (Record Shop) and 15 from Pegasus
Music & Video, Inc. (Pegasus), respectively. The aggregate
consideration for transferred assets, without inventory, was
approximately $6,745,000 for Record Shop and $5,502,000 for
Pegasus. The Company accounted for the transactions using the
purchase method of accounting. Included in the statement of
operations for the Company are the results of all Record Shop
stores and Pegasus stores acquired, effective June 24, 1993 and
January 14, 1994, respectively, as well as additional stores
operated under management contract for the benefit of the
Company. The purchase price of each acquisition was allocated to
property and equipment, beneficial leaseholds, and store trade
name, with the remainder ($4,722,000 - Record Shop and $4,532,000
- - Pegasus) recorded as excess cost of over fair value of net
assets acquired. Aggregate revenues of the acquired companies
from the date of acquisition was $11,768,000. The net effect of
the consolidated operations was not significant.
4. NOTES PAYABLE AND CREDIT ARRANGEMENTS WITH FINANCIAL
INSTITUTIONS
As of January 31, 1994, the Company had a $45,000,000 revolving
line of credit, under a credit agreement, with the same lenders
that provided the variable rate term note (Note 5).
The revolving line of credit expires January 31, 1998, is subject
to the same covenants as the term note and is collateralized by
all of the Company's assets except merchandise inventory and by a
pledge by WEI of all the Company's capital stock. Borrowings
bear interest at the rates and terms described for the term note.
In addition, the credit agreement provides for a "clean down"
period during each fiscal year, whereby all borrowings must be
repaid. The Company did not satisfy the "clean down" period
during the year ended January 31, 1994 and obtained a waiver with
respect thereto from its lenders.
The Company also has a letter of credit facility which provides
up to $5,000,000 of letters of credit to be outstanding.
Issuance of the letters of credit serves to reduce the total
available borrowings under the revolving line of credit. At
January 31, 1994, the Company had $400,000 of letters of credit
outstanding.
F-12
<page-F-13>
5. LONG-TERM DEBT
Long-term debt is summarized as follows:
Descriptions 1994 1993
- ----------------------------------------------------------------
10-5/8% promissory note $ 1,927,000 $ 1,962,000
Variable rate term note 56,000,000 65,000,000
13% senior subordinated notes 110,000,000 110,000,000
Other 224,000 250,000
Capital lease obligations (Note 8) 3,320,000 4,356,000
---------------------------
171,471,000 181,568,000
Less current portion (7,772,000) (10,562,000)
---------------------------
$163,699,000 $171,006,000
---------------------------
Long-term debt matures as follows:
1995 $ 7,772,000
1996 9,811,000
1997 19,645,000
1998 23,748,000
1999 253,000
Thereafter 110,242,000
-------------
Total $171,471,000
=============
Required payments on capital lease obligations are disclosed in
Note 8.
10-5/8% Promissory Note: The original amount of $2,800,000 is
payable in monthly installments of $20,000 (including principal
and interest) through December 1, 1996, at which time the remain-
ing principal balance is due. The note is collateralized by a
deed of trust on land and building with a net book value of
approximately $3,527,000 at January 31, 1994.
F-13
<page-F-14>
Variable Rate Term Note: The Company's credit agreement, result-
ing from the Acquisition, provides for a variable rate term note
which bears interest at prime rate plus 1-1/2% or Eurodollar Rate
plus 3%. These interest rates are subject to a discount based on
the Company's ability to maintain certain leverage ratios. At
January 31, 1994, the Company's borrowing rates ranged from 6.13%
to 7.5%. Interest on the term note is payable quarterly. The
Company has an interest rate protection agreement with a major
financial institution covering 40% of the outstanding balance of
the term note at January 31, 1994. The agreement limits net
interest costs to the Company to a ceiling of 9-1/8% with respect
to the balances covered by the agreement. The Company is exposed
to credit loss in the event of nonperformance by other parties to
the interest rate protection agreement. However, the Company
does not anticipate nonperformance by the counterparties.
The credit agreement was amended on January 27, 1994 to revise
certain financial covenants and provide the Company with
additional flexibility. In connection with this amendment, MLCP
received a fee of $300,000.
This note is collateralized by all of the Company's assets except
merchandise inventory and by a pledge by WEI of all the Company's
capital stock. Principal payments are due in quarterly install-
ments and in the following aggregate annual amounts: $7,000,000
in fiscal 1995, $9,000,000 in fiscal 1996, $17,000,000 in fiscal
1997 and $23,000,000 in fiscal 1998.
13% Senior Subordinated Notes: The notes are due August 2002
with interest payable semi-annually. The notes are noncallable
prior to August 1, 1997 and require sinking fund payments of
$27,500,000 in August 2000 and 2001.
WEI and MLCP are affiliates of Merrill Lynch, Pierce, Fenner &
Smith Incorporated (MLPF&S). In connection with the original
sale of the senior subordinated notes as part of the Acquisition,
MLPF&S received a fee of $3,850,000 with respect to its
activities as placement agent. In addition, in connection with
the Acquisition, MLCP received a fee of $2,500,000 plus
reimbursement of expenses of $135,000 from the Company.
F-14
<page-F-15>
Financial Covenants
The variable rate term note, as amended, and the 13% senior
subordinated notes agreements include various restrictive
covenants, including covenants requiring the maintenance of
certain financial ratios such as minimum consolidated adjusted
EBITDAV, maximum leverage, and minimum fixed charge coverage.
The Company also must comply with limitations on dividends,
capital expenditures, transactions with affiliates, capital lease
borrowings and other indebtedness. The restrictive covenants
were amended January 27, 1994 and the Third Amendment and Limited
Waiver to Credit Agreement. At January 31, 1994, the Company was
in compliance with all such amended covenants.
The fair values of the Company's capital lease obligations, long-
term debt, short-term borrowings, convertible subordinated
debentures and related interest rate protection agreement as of
January 31, 1994 are estimated to be the same as the amounts
reported for such debt in the Company's balance sheet at that
date. The Company's debt was primarily entered into in conjunc-
tion with the Acquisition; the short-term borrowings and variable
rate term note are subject to repricing under variable interest
rate provisions.
6. CONVERTIBLE SUBORDINATED DEBENTURES
In 1986, the Predecessor issued $50,000,000 of 6-1/4% convertible
subordinated debentures due in 2006.
In conjunction with a prior acquisition of the Predecessor in
1988, the Predecessor and its Trustee for the convertible
subordinated debentures entered into a First Supplemental
Indenture, which provides that convertible subordinated debenture
holders may convert their debentures into cash and have no other
rights under the indenture to convert their debentures into
common stock of the Company. As a result of the 1988 Acquisi-
tion, the subordinated debentures were discounted to fair value.
No adjustment was made to the carrying value as a result of the
June 1992 Acquisition. The remaining discount is amortized by
the interest method over the term of the debentures. When the
debentures are redeemed, the discount is considered a reduction
in the payment amount and is included in current earnings in the
year of redemption. There were no redemptions in fiscal years
1994 or 1993. At January 31, 1994, the principal amount of
subordinated debentures was $3,635,000, net of discount of
$2,031,000.
F-15
<page-F-16>
Refer to Note 9 for a discussion of litigation associated with
these convertible subordinated debentures.
7. INCOME TAXES
The benefit (provision) for income taxes includes:
<TABLE>
<CAPTION>
Company Predecessor
------------------------- -------------------------
Eight Four
Months Months
Ended Ended
January 31, May 31,
1994 1993 1992 1992
------------------------- -------------------------
<S> <C> <C> <C> <C>
Current:
Federal $ (4,390,000) $ 1,659,000 $ 40,000 $ 5,256,000
State (20,000) 445,000 (161,000) 1,880,000
------------------------- ------------------------
(4,410,000) 2,104,000 (121,000) 7,136,000
Deferred:
Federal (14,164,000) (2,694,000) $(1,327,000) (4,774,000)
State (4,114,000) (701,000) (411,000) (1,337,000)
Valuation
Allowance 3,611,000 - - -
------------------------- -------------------------
(14,667,000) (3,395,000) (1,738,000) (6,111,000)
------------------------- -------------------------
$(19,077,000) $(1,291,000) $(1,859,000) $ 1,025,000
========================= =========================
</TABLE>
F-16
<page-F-17>
The credit for deferred income taxes consists of the following:
<TABLE>
<CAPTION>
Company Predecessor
--------------------------- --------------------------
Eight Months Four Months
Ended Ended
January 31, May 31,
1994 1993 1992 1992
---------------------------- --------------------------
<S> <C> <C> <C> <C>
Depreciation $ (8,595,000) $(2,389,000) $ (405,000) $(4,539,000)
State taxes (117,000) 129,000 242,000 156,000
Merchandise and video inventory (4,636,000) (1,257,000) (81,000) (1,334,000)
Debt discount (29,000) (15,000) (8,000) (201,000)
Leases (2,168,000) (559,000) (830,000) (1,182,000)
Employee benefits (175,000) (6,000) (49,000) (221,000)
Tax credit carryovers (3,260,000) (309,000) (600,000) 1,295,000
Prepaid expense (54,000) 633,000 - -
Expenses associated with early
extinguishment of debt - 403,000 - -
Accrued liabilities 1,563,000 - - -
Operating loss carryover (816,000) - - -
Other 9,000 (25,000) (7,000) (85,000)
Valuation allowance 3,611,000 - - -
---------------------------- --------------------------
$(14,667,000) $(3,395,000) $(1,738,000) $(6,111,000)
============================ ==========================
</TABLE>
F-17
<page-F-18>
A reconciliation of the difference between the federal statutory rate
and the effective rate is summarized as follows:
<TABLE>
<CAPTION>
Company Predecessor
--------------------------- --------------------------
Eight Months Four Months
Ended Ended
January 31, May 31,
1994 1993 1992 1992
---------------------------- --------------------------
<S> <C> <C> <C> <C>
Statutory tax rate (34.0)% (34.0)% (34.0)% 34.0%
Permanent tax differences for
deductions (primarily amorti-
zation of excess of cost over
fair value of net assets
acquired) 2.5 16.9 7.0 5.0
Job tax credits (1.5) (5.5) (15.7) (23.0)
State taxes, net of federal
benefit (4.0) (3.2) (5.8) 9.0
Other (0.1) 0.5 - 1.0
Valuation allowance 5.9 - - -
---------------------------- --------------------------
(31.2)% (25.3)% (48.5)% 26.0%
============================ ==========================
<\table)
The components of net deferred income tax assets at January 31,
1994 are as follows:
Net current deferred income tax assets:
Merchandise inventory $ 3,309,000
Vacation liability 1,135,000
Other accrued liabilities 270,000
Prepaid expenses (312,000)
------------
4,402,000
F-18
<page-F-19>
Net long-term deferred income tax assets:
Convertible subordinated debenture discount $ (689,000)
Video rental inventory 3,520,000
Equipment and improvements 1,424,000
Leasehold interests 528,000
Store closure liability 243,000
Average rent liability 2,981,000
State operating loss carryover 842,000
Credit carryovers 5,158,000
Deferred compensation 108,000
Other accrued liabilities (4,147,000)
Capital leases 417,000
------------
10,385,000
Valuation allowance for deferred tax assets (3,611,000)
------------
6,774,000
------------
Net deferred income tax asset $11,176,000
============
The Company has a carryover benefit for job tax and alternative
minimum tax credits of $5,074,000 which will expire by 2008. For
financial reporting purposes, the benefit has been included as a
deferred tax asset at January 31, 1994.
8. COMMITMENTS
Leases
The Company leases substantially all of its data processing
equipment, retail stores and other facilities. The capital and
operating lease agreements expire on various dates through 2012
with renewal options for certain leases. Certain leases provide
for payment of real estate taxes and additional rents based on a
percentage of sales.
F-19
<page-F-20>
Future minimum annual lease payments under capital and operating
leases at January 31, 1994 are payable as follows:
Capital Operating
Leases Leases
-------------------------------
1995 $ 894,000 $ 40,654,000
1996 880,000 40,337,000
1997 879,000 36,287,000
1998 776,000 33,847,000
1999 250,000 32,028,000
Thereafter 123,000 179,500,000
-------------------------------
Total future minimum lease
payments 3,802,000 $362,653,000
================
Less amounts representing
interest 482,000
------------
Present value of future
minimum lease payments 3,320,000
Less current portion 706,000
------------
Long-term obligations under
capital leases $2,614,000
============
Rental expense charged to operations was approximately
$42,285,000 in fiscal 1994, $25,056,000 in the eight month period
ended January 31, 1993, $11,733,000 in the four month period
ended May 31, 1992 and $32,668,000 in fiscal 1992. In addition,
real estate taxes and additional rents based on percentage of
sales were approximately $2,881,000 in fiscal 1994, $1,548,000 in
the eight month period ended January 31, 1993, $708,000 in the
four month period ended May 31, 1992, and $2,082,000 in fiscal
1992. The Company subleases a portion of its warehouse in
Gardena, California for an annual rent of $192,000 through April,
1997.
Included in equipment and improvements are assets held under
capital leases with a cost to the Company of $4,067,000 and
$6,263,000 at January 31, 1994 and 1993, respectively.
Management Consulting Agreements
As part of the re-engineering project begun in June 1993, the
Company entered into a management consulting agreement with a
company whose chairman provided services first by leading the re-
engineering project and then as an officer of the Company. The
current agreement specifies monthly payments of $25,000. During
fiscal 1994, $250,000 was paid under this agreement.
F-20
<page-F-21>
Prior to the Acquisition, the Company had another agreement with
this same company which specified monthly payments of
approximately $23,000 and was terminated at the Acquisition.
Expenses pursuant to this agreement were $83,000 in the four
month period ended May 31, 1992 and $292,000 in fiscal 1992. An
additional $135,000 was paid in connection with the Acquisition.
Also, prior to the Acquisition, the Company had a management
consulting agreement with Adler & Shaykin, then an affiliate of
the Predecessor, which specified quarterly financial advisory
fees of $87,500. In 1993, payments of $146,000 were paid under
this agreement, which expired on the date of the transaction.
Payments of $350,000 were paid in fiscal 1992.
Other Agreements
The Company receives credit card services from First USA, Inc.
under a three year agreement ending April 1996. Affiliates of
MLCP held a controlling interest in First USA, Inc. until
February 1993. During fiscal 1994, $1,742,000 was paid under
this agreement.
9. CONTINGENCIES
The Company (as a successor to the Predecessor), certain of its
former directors, WEI and its investment bankers are defendants
in three class action lawsuits; two lawsuits relate to the
subordinated debentures outstanding at the time of the 1988
Acquisition of the Predecessor and one relates to a pre-1988
potential acquisition of the Predecessor. The lawsuits, among
other claims, request unspecified damages. Based upon discovery
proceedings to date and the Company's discussions with its trial
lawyers, the Company believes that these actions are without
merit and they are vigorously defending them.
As part of the Acquisition, approximately $18,750,000 of the
merger consideration was deferred and is subject to reduction to
the extent the Company incurs certain litigation costs related to
the aforementioned class action lawsuits.
F-21
<page-F-22>
Based on management's discussions with its trial lawyers, the
Company does not currently believe that any of the foregoing
litigation matters will have a material adverse effect on the
Company. However, if any of these matters were to be determined
adversely by a court of law, such determination could have a
material adverse effect on the Company.
The Company is a party to various 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 of the Company.
10. EMPLOYEE BENEFITS
Executive Officer's Retirement Plan: The Company provides life
insurance for the executive officers of the Company, with face
values of such policies ranging from $250,000 to $1,000,000.
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
$20,000 of expense in 1994 and $70,000 in fiscal 1993 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 year. 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 $477,000 in 1994 and
$293,000 in 1993 for matching costs and administrative costs
under the 401(k) Plan.
F-22
<page-F-23>
11. QUARTERLY FINANCIAL INFORMATION (Unaudited)
Quarterly financial information is as follows (in thousands):
</TABLE>
<TABLE>
<CAPTION>
Net Income
Net Revenue Gross Profit (Loss)
--------------------------------------------------
<S> <C> <C> <C>
1994 - Quarter Ended
Company:
April 30 $102,510 $44,727 $ (5,395)
July 31 108,620 46,429 (7,869)
October 31 107,899 44,574 (2,544)
January 31 152,757 37,222 (26,251)
1993 - Period Ended
Predecessor:
Quarter ended April 30 100,778 45,753 (1,967)
Month ended May 31 34,333 15,182 (4,535)
Company:
As reported:
Two months ended
July 31 70,508 28,570 (3,878)
Quarter ended
October 31 98,485 42,260 (4,585)
Quarter ended
January 31 144,413 62,599 4,647
</TABLE>
F-23
<page-F-24>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
<CAPTION>
Balance at Balance
Beginning Additions Retirements at End
Classification of Period at Cost(c) or Sales(b) of Period
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Company:
Year ended January 31, 1994:
Leasehold improvements $ 21,469,000 $ 7,260,000 $ 3,593,000 $ 25,136,000
Data processing equipment
and software 25,788,000 1,954,000 7,929,000 19,813,000
Store and office fixtures
and equipment 23,402,000 5,884,000 9,013,000 20,273,000
Buildings and building
improvements 2,641,000 - 1,146,000 1,495,000
Land 2,801,000 - 2,118,000 683,000
-----------------------------------------------------------
$ 76,101,000 $15,098,000 $23,799,000 $ 67,400,000
===========================================================
Eight months ended January
31, 1993:
Leasehold improvements(a) $ 18,197,000 $ 3,331,000 $ 59,000 $ 21,469,000
Data processing equipment
and software(a) 22,718,000 3,070,000 - 25,788,000
Store and office fixtures
and equipment(a) 19,895,000 3,518,000 11,000 23,402,000
Buildings and building
improvements(a) 2,641,000 - - 2,641,000
Land(a) 2,801,000 - - 2,801,000
-----------------------------------------------------------
$ 66,252,000 $ 9,919,000 $ 70,000 $ 76,101,000
===========================================================
</TABLE>
F-24
<page-F-25>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
<CAPTION>
Balance at Balance
Beginning Additions Retirements at End
Classification of Period at Cost(c) or Sales(b) of Period
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Predecessor:
Four months ended May 31,
1992:
Leasehold improvements $ 39,688,000 $ 327,000 $ - $ 40,015,000
Data processing equipment
and software 45,088,000 1,461,000 - 46,549,000
Store and office fixtures
and equipment 37,482,000 1,147,000 19,000 38,610,000
Buildings and building
improvements 4,387,000 - - 4,387,000
Land 1,900,000 - - 1,900,000
-----------------------------------------------------------
$128,545,000 $ 2,935,000 $ 19,000 $131,461,000
===========================================================
Twelve months ended
January, 31, 1992:
Leasehold improvements $ 35,335,000 $ 4,838,000 $ 485,000 $ 39,688,000
Data processing equipment
and software 38,987,000 6,101,000 - 45,088,000
Store and office fixtures
and equipment 33,651,000 4,111,000 280,000 37,482,000
Buildings and building
improvements 4,383,000 4,000 - 4,387,000
Land 1,900,000 - - 1,900,000
-----------------------------------------------------------
$114,256,000 $15,054,000 $ 765,000 $128,545,000
===========================================================
(a) Beginning balances at June 1, 1992 have been adjusted to reflect valuations under
purchase accounting.
(b) Includes abandonment of property for stores closed and fully depreciated assets
written off.
(c) Includes property purchased as part of the acquisition of Record Shop and Pegasus
stores.
</TABLE>
F-25
<page-F-26>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Costs and Retirements at End
Classification of Period Expenses or Sales of Period
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Company:
Year ended January 31, 1994:
Leasehold improvements $ 3,424,000 $ 5,652,000 $ 3,034,000 $ 6,042,000
Data processing equipment
and software 5,093,000 7,423,000 5,164,000 7,352,000
Store and office fixtures
and equipment 4,502,000 6,970,000 4,669,000 6,803,000
Buildings and building
improvements 238,000 111,000 307,000 42,000
-----------------------------------------------------------
$13,257,000 $20,156,000 $13,174,000 $20,239,000
===========================================================
Eight months ended January
31, 1993:
Leasehold improvements(a) $ - $ 3,431,000 $ 7,000 $ 3,424,000
Data processing equipment
and software(a) - 5,093,000 - 5,093,000
Store and office fixtures
and equipment - 4,503,000 1,000 4,502,000
Buildings and building
improvements(a) - 238,000 - 238,000
-----------------------------------------------------------
$ - $13,265,000 $ 8,000 $13,257,000
===========================================================
</TABLE>
F-26
<page-F-27>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
<CAPTION>
Additions
Balance Charged to Balance
Beginning Costs and Retirements at End
Classification of Period Expenses or Sales of Period
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Predecessor:
Four months ended May 31,
1992:
Leasehold improvements $19,423,000 $ 1,777,000 $ - $21,200,000
Data processing equipment
and software 32,385,000 2,192,000 - 34,577,000
Store and office fixtures
and equipment 19,548,000 1,584,000 10,000 21,122,000
Buildings and building
improvements 646,000 43,000 - 689,000
-----------------------------------------------------------
$72,002,000 $ 5,596,000 $ 10,000 $77,588,000
===========================================================
Year ended January, 31, 1992:
Leasehold improvements $14,529,000 $ 5,299,000 $ 405,000 $19,423,000
Data processing equipment
and software 24,222,000 8,163,000 - 32,385,000
Store and office fixtures
and equipment 15,175,000 4,580,000 207,000 19,548,000
Buildings and building
improvements 485,000 161,000 - 646,000
-----------------------------------------------------------
$54,411,000 $18,203,000 $ 612,000 $72,002,000
===========================================================
(a) Beginning balances at June 1, 1992 have been adjusted to reflect valuations under
purchase accounting.
</TABLE>
F-27
<page-F-28>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions(1) of Period
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated amortization
deducted from video rental
inventory:
Company:
Year ended January 31,
1994 $14,703,000 $41,392,000 $17,129,000 $38,966,000
Eight months ended
January 31, 1993 - 14,703,000 - 14,703,000
Predecessor:
Four months ended
May 31, 1992 44,125,000 4,583,000 4,806,000 43,902,000
Year ended January 31,
1992 38,392,000 15,009,000 9,276,000 44,125,000
(1) Accumulated amortization on disposition of video rental tapes.
</TABLE>
F-28
<page-F-29>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
SCHEDULE IX - SHORT-TERM BORROWINGS
<CAPTION>
Weighted
Maximum Average Average
Weighted Amount Amount Interest
Category Balance at Average Outstanding Outstanding Rate
Short-Term End of Interest During the During the During the
Classification Borrowings Period Rate Period Period(1) Period(2)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Company:
Year ended
January 31, 1994 Bank $ 4,000,000 6.28% $44,600,000 $33,858,000 6.37%
Eight months ended
January 31, 1993 Bank 6,550,000 6.89 41,600,000 21,715,000 6.82
Predecessor:
Four months ended
May 31, 1992 Bank 43,000,000 6.96 43,000,000 32,364,000 7.09
Year ended
January 31, 1992 Bank 5,300,000 9.26 37,200,000 23,877,000 8.93
(1) Computed by multiplying each loan balance by days outstanding.
(2) Computed by dividing the actual interest expense on bank short-term
debt by the average aggregate short-term borrowings during the year.
</TABLE>
F-29
<page-F-30>
<TABLE>
WHEREHOUSE ENTERTAINMENT, INC.
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
<CAPTION>
Company Predecessor
----------------------------------------------------------
Year Eight Months Four Months Year
Ended Ended Ended Ended
January 31, January 31, May 31, January 31,
Description 1994 1993 1992 1992
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maintenance and repairs * * * *
Depreciation and amortiza-
tion of intangible assets,
pre-operating costs and
similar deferrals $4,228,000 $2,655,000 $1,315,000 $3,934,000
Taxes, other than payroll
and income taxes * * * *
Royalties * * * *
Advertising ** $6,910,000 $6,995,000 $4,123,000 $9,197,000
* Less than 1% of revenues.
** Advertising expense net of cooperative advertising allowances.
</TABLE>
F-30
WHEREHOUSE ENTERTAINMENT, INC.
THIRD AMENDMENT AND LIMITED WAIVER
TO CREDIT AGREEMENT
This THIRD AMENDMENT AND LIMITED WAIVER TO CREDIT
AGREEMENT (this "Amendment") is dated as of January 27, 1994 and
entered into by and among WHEREHOUSE ENTERTAINMENT, INC., a
Delaware corporation ("Borrower"), WEI HOLDINGS, INC., a Delaware
corporation ("Holdings"), the lenders listed on the signature
pages hereof ("Lenders") and BANKERS TRUST COMPANY, as agent for
Lenders ("Agent"), and is made with reference to that certain
Credit Agreement dated as of June 11, 1992, as amended by that
certain First Amendment to Credit Agreement dated as of November
17, 1992 and that certain Second Amendment to Credit Agreement
dated as of August 17, 1993 (as so amended, the "Credit Agree-
ment") by and among Borrower, Holdings, Lenders and Agent.
Capitalized terms used herein without definition shall have the
same meanings herein as set forth in the Credit Agreement.
RECITALS
WHEREAS, Borrower and Holdings have asked Lenders to,
among other things, (i) amend certain financial covenants con-
tained in the Credit Agreement and (ii) waive certain mandatory
prepayments required in connection with the issuance of equity
securities by Holdings; and
WHEREAS, subject to the terms and conditions contained
herein, Requisite Lenders are willing to amend the Credit Agree-
ment and agree to such waiver as set forth below.
NOW, THEREFORE, in consideration of the premises and
the agreements, provisions and covenants herein contained, the
parties hereto agree as follows:
Section 1. AMENDMENTS TO THE CREDIT AGREEMENT
1.1 Amendments to Section 1: Definitions
A. The definition of Permitted Encumbrances contained
in subsection 1.1 of the Credit Agreement is hereby amended by
deleting the phrase "unperfected Liens on goods for sale on
consignment or a similar basis" from clause (vii) of such defini-
tion and substituting therefor the phrase "Liens on goods not
owned by Borrower but held by Borrower for sale on consignment."
B. Subsection 1.1 of the Credit Agreement is hereby
amended by inserting the following definition in alphabetical
order:
"Net Worth Adjustment Amount' means the aggregate
amount of charges (measured on an after-tax basis) to
Consolidated Net Worth made in the fourth Fiscal
Quarter of Fiscal Year 1994 for anticipated costs
related to a restructuring of Borrower which will be
substantially as described on Schedule 1.1C annexed
hereto; provided that (i) the aggregate amount of such
charges to Consolidated Net Worth shall not exceed
$40,000,000 (measured on a pre-tax basis) and (ii) the
aggregate amount of such charges which reduce Consoli-
dated Adjusted EBITDAV shall not exceed $8,500,000
(measured on a pre-tax basis):"
1.2 Amendments to Section 6: Negative Covenants
A. Subsection 6.6A of the Credit Agreement is hereby
amended by deleting the table set forth therein in its entirety
and substituting the following therefor:
Minimum Consolidated
"Fiscal Quarter Adjusted EBITDAV
--------------- --------------------
Fiscal Year 1994
----------------
Fourth Fiscal Quarter $24,000,000
Fiscal Year 1995
----------------
First Fiscal Quarter 15,100,000
Second Fiscal Quarter 16,300,000
Third Fiscal Quarter 19,600,000
Fourth Fiscal Quarter 32,000,000
Fiscal Year 1996
----------------
First Fiscal Quarter 32,700,000
Second Fiscal Quarter 33,700,000
Third Fiscal Quarter 34,600,000
Fourth Fiscal Quarter 36,900,000
Fiscal Year 1997
----------------
First Fiscal Quarter 39,500,000
Second Fiscal Quarter 40,000,000
Third Fiscal Quarter 40,100,000
Fourth Fiscal Quarter 42,000,000
Fiscal Year 1998
----------------
First Fiscal Quarter 42,500,000
Second Fiscal Quarter 43,200,000
Third Fiscal Quarter 44,000,000
Fourth Fiscal Quarter 46,500,000
B. Subsection 6.6B of the Credit Agreement is hereby
amended by (i) inserting the phrase "plus the Net Worth Adjust-
ment Amount" immediately after the phrase "Consolidated Net
Worth" and (ii) deleting the table set forth therein in its
entirety and substituting the following therefor:
Maximum
"Fiscal Quarter Leverage Ratio
--------------- --------------
Fiscal Year 1994
Fourth Fiscal Quarter 1.90 to 1.00
Fiscal Year 1995
----------------
First Fiscal Quarter 2.00 to 1.00
Second Fiscal Quarter 2.10 to 1.00
Third Fiscal Quarter 2.15 to 1.00
Fourth Fiscal Quarter 1.95 to 1.00
Fiscal Year 1996
----------------
First Fiscal Quarter 2.10 to 1.00
Second Fiscal Quarter 2.15 to 1.00
Third Fiscal Quarter 2.25 to 1.00
Fourth Fiscal Quarter 1.80 to 1.00
Fiscal Year 1997
----------------
First Fiscal Quarter 1.80 to 1.00
Second Fiscal Quarter 1.75 to 1.00
Third Fiscal Quarter 1.70 to 1.00
Fourth Fiscal Quarter 1.55 to 1.00
Fiscal Year 1998
----------------
First Fiscal Quarter 1.55 to 1.00
Second Fiscal Quarter 1.55 to 1.00
Third Fiscal Quarter 1.50 to 1.00
Fourth Fiscal Quarter 1.25 to 1.00
C. Subsection 6.6C of the Credit Agreement is hereby
amended by deleting the table set forth therein in its entirety
and substituting the following therefor:
Minimum Fixed
"Fiscal Quarter Charge Coverage Ratio
--------------- ---------------------
Fiscal Year 1994
----------------
Fourth Fiscal Quarter 0.66 to 1.00
Fiscal Year 1995
----------------
First Fiscal Quarter 0.42 to 1.00
Second Fiscal Quarter 0.44 to 1.00
Third Fiscal Quarter 0.52 to 1.00
Fourth Fiscal Quarter 0.82 to 1.00
Fiscal Year 1996
----------------
First Fiscal Quarter 0.82 to 1.00
Second Fiscal Quarter 0.83 to 1.00
Third Fiscal Quarter 0.83 to 1.00
Fourth Fiscal Quarter 0.86 to 1.00
Fiscal Year 1997
----------------
First Fiscal Quarter 0.91 to 1.00
Second Fiscal Quarter 0.92 to 1.00
Third Fiscal Quarter 0.91 to 1.00
Fourth Fiscal Quarter 0.93 to 1.00
Fiscal Year 1998
----------------
First Fiscal Quarter 0.92 to 1.00
Second Fiscal Quarter 0.94 to 1.00
Third Fiscal Quarter 0.96 to 1.00
Fourth Fiscal Quarter 1.00 to 1.00
D. Subsection 6.6D of the Credit Agreement is hereby
amended by deleting the table set forth therein in its entirety
and substituting the following therefor:
Capital
"Fiscal Year Expenditure Amount
------------ ------------------
1994 $17,000,000
1995 18,233,000
1996 19,767,000
1997 18,733,000
1998 19,267,000"
1.3 Amendments to Schedules to Credit Agreement
The Credit Agreement is hereby amended by adding
Schedule 1.1C attached to this Amendment as Schedule 1.1C to the
Credit Agreement.
Section 2. LIMITED WAIVER
The undersigned Lenders, constituting Requisite
Lenders, hereby waive compliance with the provisions of subsec-
tion 2.5A(ii)(b) of the Credit Agreement to the extent, and only
to the extent, that such provisions require a prepayment of the
Loans as a result of the receipt by Holdings or any of its
Subsidiaries of Cash Proceeds from the sale of Holdings Common
Stock to MLCP or its Affiliates contemplated by Section 3(a) of
this Amendment.
Without limiting the generality of the provisions of
subsection 10.7 of the Credit Agreement, the waiver set forth
herein shall be limited precisely as written and relates solely
to the noncompliance by Holdings and its Subsidiaries with the
provisions of subsection 2.5A(ii)(b) of the Credit Agreement in
the manner and to the extent described above, and nothing in this
Amendment shall be deemed to constitute a waiver of compliance
by Holdings or its Subsidiaries with respect to (i) subsection
2.5A(ii)(b) of the Credit Agreement in any other instance or (ii)
any other term, provision or condition of the Credit Agreement or
any other instrument or agreement referred to therein.
Section 3. CONDITIONS TO EFFECTIVENESS
Sections 1 and 2 of this Amendment shall become
effective only upon the satisfaction of all of the following
conditions precedent:
(a) Borrower shall have delivered evidence to Agent
(which evidence shall be satisfactory in form and substance
to Agent) that (i) MLCP and its Affiliates have purchased
Holdings Common Stock for a purchase price of not less than
$30,000,000 and (ii) the net Cash Proceeds to Holdings from
such purchase are not less than $29,700,000; and
(b) Agent shall have received an aggregate amendment
fee equal to the product of (i) .5% multiplied by (ii) the
sum of the respective Working Capital Loan Commitments of,
and the aggregate outstanding principal amount of Term Loans
made by, (in each case measured as of January 15, 1994) each
Lender for distribution to each Lender in proportion to such
Lender's Pro Rata Share.
Section 4. BORROWER'S AND HOLDINGS' REPRESENTATIONS
AND WARRANTIES
In order to induce Agent and Lenders to enter into this
Amendment and to amend the Credit Agreement in the mannerprovided
herein, each of Borrower and Holdings represents andwarrants to
Agent and Lenders that the following statements aretrue, correct
and complete:
A. Corporate Power and Authority. Each of Borrower
and Holdings has all requisite corporate power and authority to
enter into this Amendment and to carry out the transactions
contemplated by, and perform its obligations under, the Credit
Agreement as amended by this Amendment (the "Amended Agreement").
B. Authorization of Agreements. The execution and
delivery of this Amendment and have been duly authorized by all
necessary corporate action on the part of Borrower and Holdings.
C. No Conflict. The execution and delivery by
Borrower and Holdings of this Amendment and the performance by
Borrower and Holdings of the Amended Agreement do not and will
not (i) violate any provision of any law or any governmental rule
or regulation applicable to Holdings or any of its Subsidiaries,
the Certificate or Articles of Incorporation or Bylaws of
Holdings or any of its Subsidiaries or any order, judgment or
decree of any court or other agency of government binding on
Holdings or any of its Subsidiaries, (ii) conflict with, result
in a breach of or constitute (with due notice or lapse of time or
both) a default under any Contractual Obligation of Holdings or
any of its Subsidiaries, (iii) result in or require the creation
or imposition of any Lien upon any of the properties or assets of
Holdings or any of its Subsidiaries (other than any Liens created
under any of the Loan Documents in favor of Collateral Agent), or
(iv) require any approval of stockholders or any approval or
consent of any Person under any Contractual Obligation of
Holdings or any of its Subsidiaries.
D. Governmental Consents. The execution and delivery
by Borrower and Holdings of this Amendment and the performance by
Borrower and Holdings of the Amended Agreement do not and will
not require any registration with, consent or approval of, or
notice to, or other action to, with or by, any federal, state or
other governmental authority or regulatory body.
E. Binding Obligation. This Amendment and the
Amended Agreement have been duly executed and delivered by
Borrower and Holdings and are the legally valid and binding
obligations of Borrower and Holdings, enforceable against
Borrower and Holdings in accordance with their respective terms,
except as may be limited by bankruptcy, insolvency, reorganiza-
tion, moratorium or similar laws relating to or limiting
creditors' rights generally or by equitable principles relating
to enforceability.
F. Incorporation of Representations and Warranties
From Credit Agreement. The representations and warranties
contained in Section 4 of the Credit Agreement are true, correct
and complete in all material respects on and as of the date
hereof to the same extent as though made on and as of such date,
except to the extent such representations and warranties specifi-
cally relate to an earlier date, in which case they were true,
correct and complete in all material respects on and as of such
earlier date.
G. Absence of Default. No event has occurred and is
continuing or will result from the consummation of the transac-
tions contemplated by this Amendment that would constitute an
Event of Default or a Potential Event of Default.
Section 5. MISCELLANEOUS
A. Reference to and Effect on the Credit Agreement
and the Other
Loan Documents.
(i) On and after the date hereof, each reference in
the Credit Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import referring to the
Credit Agreement, and each reference in the other Loan
Documents to the "Credit Agreement", "thereunder", "thereof"
or words of like import referring to the Credit Agreement
shall mean and be a reference to the Amended Agreement.
(ii) Except as specifically amended by this Amendment,
the Credit Agreement and the other Loan Documents shall
remain in full force and effect and are hereby ratified and
confirmed.
(iii)The execution, delivery and performance of this
Amendment shall not, except as expressly provided herein,
constitute a waiver of any provision of, or operate as a
waiver of any right, power or remedy of Agent or Lenders
under, the Credit Agreement or any of the other Loan
Documents.
B. Fees and Expenses. Borrower acknowledges that all
costs, fees and expenses as described in subsection 10.3 of the
Credit Agreement incurred by Agent and its counsel with respect
to this Amendment and the documents and transactions contemplated
hereby shall be for the account of Borrower.
C. Headings. Section and subsection headings in this
Amendment are included herein for convenience of reference only
and shall not constitute a part of this Amendment for any other
purpose or be given any substantive effect.
D. Applicable Law. THIS AMENDMENT SHALL BE GOVERNED
BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE
INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
CONFLICTS OF LAWS PRINCIPLES.
E. Counterparts; Effectiveness. This 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, 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 Amendment (other than the provisions of Section 1
hereof) shall become effective upon the execution of a counter-
part hereof by Borrower, Holdings and Requisite Lenders and
receipt by Agent of written or telephonic notification of such
execution and authorization of delivery thereof.
[Remainder of page intentionally left blank]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their respective
officers thereunto duly authorized as of the date first written
above.
WHEREHOUSE ENTERTAINMENT, INC.
By: /s/ Scott Young
-------------------------
Title: Chief Executive Officer
WEI HOLDINGS, INC.
By: /s/ Scott Young
-------------------------
Title: Chief Executive Officer
BANKERS TRUST COMPANY, individually
and as Agent
By: /s/ Mary Zadroza
-------------------------
Title: Vice President
HELLER FINANCIAL, INC.
By: /s/ Andrew D. Marek
-------------------------
Title: Vice President
PRIME INCOME TRUST
By: /s/ Rafael Scolari
-------------------------
Title: Vice President
UNITED STATES NATIONAL BANK OF
OREGON
By: /s/ Janet Jordan
-------------------------
Title: Vice President
<PAGE>
SCHEDULE 1.1C
ESTIMATED RESTRUCTURING CHARGES
NON-CASH DEPRECIATION/AMORTIZATION CHARGES
- ------------------------------------------
RENTAL INVENTORY - VHS
Write off remaining step-up $ 1,400
RENTAL INVENTORY - VHS
Change in depreciation policy $ 0
Eliminate salvage value $ 9,062
RENTAL INVENTORY - VIDEO GAMES
Change in estimated useful life $ 2,505
FIXED ASSETS & SOFTWARE
Write off remaining step-up balance $ 7,892
BENEFICIAL LEASEHOLD
Write off remaining step-up balance $ 7,041
DEFERRED REAL ESTATE & LEGAL
FEE WRITE-OFF $ 110
CAPITALIZED SALARIES WRITE-OFF $ 700
MALL STORE SIGN WRITE-OFF $ 303
--------
Subtotal Non-Cash $29,013
--------
EBITDAV DEDUCTIONS
- ------------------
OBSOLETE SUPPLIES WRITE-OFF $ 600
SALARY CONTINUATION/REORGANIZATION
TERMINATION $ 400
REORGANIZATION $ 1,800
INVENTORY WRITE DOWN $ 5,000
--------
Subtotal EBITDAV Deductions $ 7,800
--------
TOTAL RESTRUCTURING CHARGES $36,813
========
AGREEMENT OF PURCHASE AND SALE
THIS AGREEMENT OF PURCHASE AND SALE (this "Agreement") is
made and entered into as of the 10th day of May, 1993, by and
between WHEREHOUSE ENTERTAINMENT, INC., a Delaware corporation
("Purchaser"), and THE RECORD SHOP, INC., a Minnesota corporation
("Seller"), with reference to the following facts:
A. Seller owns and operates music retail stores in the
States of Arizona, California, Iowa, Minnesota, Nevada, North
Dakota and Utah.
B. Purchaser and Seller desire to enter into this
Agreement pursuant to which, upon the terms and subject to the
conditions set forth below, Purchaser will buy and acquire, and
Seller will sell, assign, transfer and deliver, the assets
hereinafter described.
NOW, THEREFORE, in consideration of the mutual covenants,
agreements, representations and warranties herein contained, the
parties hereto hereby agree as follows:
1. PURCHASE OF TRANSFERRED ASSETS.
1.1 Purchase of Transferred Assets. Upon the terms and
subject to the conditions hereinafter set forth, at the "Closing"
(as hereafter defined) or at any of the "Delayed Closings" (as
hereafter defined), Seller shall sell, assign, transfer and
deliver to Purchaser, and Purchaser shall purchase and acquire
from Seller, the applicable "Transferred Assets" (as hereafter
defined).
1.2 Definition of Transferred Assets. The "Transferred
Assets" shall mean and include:
1.2.1 The leasehold interests (collectively, the
"Store Leasehold Interests") of Seller in the real property
leases (the "Store Leases") for the thirty-one music retail
stores of Seller (collectively, the "Stores") described on
Schedule 1.2.1 attached hereto;
1.2.2 All of the furniture, fixtures, equipment and
supplies located in the Stores, the Store Leasehold Interests of
which are sold to Purchaser at the Closing or a Delayed Closing,
as applicable, and more particularly described on Schedule 1.2.2
attached hereto (collectively, the "F, F & E"), provided, how-
ever, that (i) Seller's cash registers shall not be deemed to be
included within the definition of F, F & E and (ii) Seller's
facsimile machines located, as of the date hereof, at Seller's
Stores in the States of Arizona and California shall not be
deemed to be included within the definition of F, F & E;
1.2.3 The leasehold interests of Seller in the
personal property leases (the "Sensormatic Leases") for the
Sensormatic security systems located in Stores, the Store Lease-
hold Interests of which are sold to Purchaser at the Closing or a
Delayed Closing, as applicable, and more particularly described
on Schedule 1.2.3 attached hereto (the "Sensormatic Equipment");
1.2.4 All of the inventory (collectively, the
"Inventory"), including, without limitation, the inventory of
music, records, pre-recorded and unrecorded tapes and cassettes,
compact discs and accessories, videos and laser discs, of Seller
(x) located as of the "Closing Date" (as hereafter defined) (i)
in the Stores (a) which are subject to Store Leases with respect
to which Seller transfers all of its interest to Purchaser
pursuant to the terms of this Agreement at the Closing (collec-
tively, the "Transferred Leases"), (b) which may become subject
to "Post-Closing Transferred Leases" and for which a "Management
Agreement" is executed at the Closing (as those terms are here-
after defined), (c) which are subject to a Management Agreement
at the Closing, but Purchaser and Seller do not believe will
become subject to a Post-Closing Transferred Lease or (d) at
which on or before the Closing Date Seller (with the written
approval of Purchaser) has permanently ceased operations or for
which on or before the Closing Date the Store Lease has expired
or been terminated, and (ii) at Seller's warehouse in Golden
Valley, Minnesota (the "Minnesota Warehouse") and (y) located as
of any applicable "Delayed Closing Date" (as hereafter defined)
in (a) Stores, the possession of which are delivered to Purchaser
on the applicable Delayed Closing Date and (b) up to two (2)
Stores (the "Additional Stores"), the possession of which are not
delivered at the Closing or a Delayed Closing and which Seller
elects to close and cease operations after the Closing. The
Inventory referred to in clause (y)(b) of this Section is
hereafter sometimes referred to as the "Additional Inventory."
Notwithstanding anything herein to the contrary, in no event
shall Purchaser be obligated to purchase Inventory (other than
Additional Inventory) located at any Store possession of which is
not transferred to Purchaser at the Closing or any applicable
Delayed Closing pursuant to a "Store Leasehold Assignment" (as
hereafter defined) or a Management Agreement.
1.2.5 All tradenames, service names, trademarks,
service marks and logos of Seller and the associated good will,
including, without limitation, the tradenames, service names,
trademarks, service marks and logos listed on Schedule 1.2.5
attached hereto (the "Store Service Marks");
1.2.6 The contracts and leases for goods and
services provided to Seller for Stores, the Store Leasehold
Interests of which are sold to Purchaser at the Closing or a
Delayed Closing, as applicable, (the "Store Contracts") listed on
Schedule 1.2.6 attached hereto; and
1.2.7 All drawings, blueprints, schematics, models,
"as builts," or plans for Stores, the Leasehold Interests of
which are sold to Purchaser at the Closing or a Delayed Closing,
as applicable (collectively, the "Plans") relating in any way to
said Stores or the F, F & E located therein.
1.3 Obligations of Seller not Assumed by Purchaser.
Notwithstanding anything to the contrary set forth or implied
herein or otherwise, except for the "Assumed Obligations" (as
hereafter defined), the Transferred Assets shall not include, and
Purchaser is not assuming and shall not be or be deemed to be,
responsible or liable for, any of Seller's contracts, leases,
agreements, undertakings, commitments, claims, liabilities, debts
or obligations, whether or not known to Purchaser, Seller or any
third party on the Closing Date or on any of the Delayed Closing
Dates and, whether or not now existing or arising at any time
hereafter, including, without limitation, all liabilities, claims
and obligations of any nature whatsoever related to, arising out
of or for (i) past, present and future employment of any and all
persons who were, are or may be employed by Seller at any time
and arising out of Seller's employment of such person including,
without limitation, any liabilities, claims and obligations for
unfair labor and discriminatory employment practices, employee
salaries, vacation pay, severance pay, sick pay, back pay, health
insurance, worker's compensation, employee contracts and other
employee payments and benefits, (ii) any defective condition in
the design, material, workmanship or performance of any products
and services designed, assembled, manufactured, distributed, sold
or furnished by or on behalf of Seller either before or after the
Closing and the Delayed Closings, (iii) subject to Sections 3.5
through 3.7 with respect to "Current Property Taxes," "Sales
Taxes" and "Payroll Taxes" (each as hereafter defined), any
federal, state or local taxes, payroll withholding obligations,
governmental charges, penalties, interest and fines of Seller
(whether due and payable before, on or after the Closing Date or
the applicable Delayed Closing Date, as the case may be), (iv)
any acts or omissions of Seller related to the conduct of its
business or otherwise at any time either before or after the
Closing and the Delayed Closings, (v) any acts or omissions of
any assignee of Seller (other than Purchaser) related to the
conduct of its business or otherwise at any time either before or
after the Closing and the Delayed Closings, (vi) notwithstanding
anything to the contrary in any of the Store Leases, the Sensor-
matic Leases or the Store Contracts, the presence or migration
prior to the Closing or the applicable Delayed Closing of any
pollutants, contaminants, chemicals, or industrial, toxic or
hazardous substances or waste, including, without limitation,
asbestos (collectively, "Polluting Substances") in, on, into or
from the Stores, the real property on which the Stores are
located (the "Store Real Property") or the common areas of the
shopping centers in which any of the Stores are located (the
"Shopping Centers"), (vii) any defaults by Seller under or
breaches of the Store Leases, the Sensormatic Leases or the Store
Contracts occurring prior to Closing or the applicable Delayed
Closing, and (viii) past, present and future litigation, suits,
causes of action, arbitration or other proceedings related to or
arising out of the conduct of Seller's business or any business
of Seller's assignees (other than Purchaser).
2. PURCHASE PRICE FOR TRANSFERRED ASSETS.
2.1 Transferred Assets Purchase Price. The consideration,
which is subject to adjustment as provided herein, for the sale,
assignment, transfer and delivery of the Transferred Assets (the
"Transferred Assets Purchase Price") shall consist of:
2.1.1 $8,250,000 (the "Base Purchase Price"),
payable as follows:
2.1.1.1 up to an aggregate of $7,650,000 in cash
payable to Seller at Closing and/or the Delayed Closings in
accordance with Section 3 hereof; and
2.1.1.2 up to an aggregate of $600,000 in cash
(the "Escrow Funds") deposited by Purchaser at Closing and/
or the Delayed Closings into an interest bearing account
under the exclusive control of Lawyers Title of Arizona,
Inc. ("Escrow Agent") in accordance with Section 3.8 hereof;
2.1.2 An amount (the "Transferred Inventory
Purchase Price") equal to the Transferred Assets Purchase Price
for the Inventory, which shall be determined on the basis of
audits conducted by R.G.I.S. or such other independent auditor
selected by Purchaser with Seller's approval (such approval not
to be unreasonably withheld) (the "Inventory Auditor"). All fees
and costs of conducting the audits of the Inventory shall be
borne two-thirds by Purchaser and one-third by Seller. The
Transferred Inventory Purchase Price shall be paid to Seller in
accordance with Section 3.11 hereof. The Transferred Inventory
Purchase Price shall be valued as of the close of business on the
day before the Closing Date and all applicable Delayed Closing
Dates.
The Transferred Inventory Purchase Price shall be valued as
follows:
2.1.2.1 Items of Inventory which are returnable
to, or are in the current catalog of, the vendor thereof
according to Purchaser's records and information (collec-
tively, the "Current Catalog Inventory") shall equal the
aggregate dollar amount of the Current Catalog Inventory
valued at Purchaser's wholesale costs at the end of the
fiscal year of Purchaser immediately preceding the fiscal
year in which the Closing or applicable Delayed Closing
occurs (the "Current Catalog Inventory Value") less the sum
of (a) an amount equal to 80% of the Current Catalog Inven-
tory Value multiplied by 0.09%, (b) an amount equal to 15%
of the Current Catalog Inventory Value multiplied by 2% and
(c) an amount equal to 85% of the Current Catalog Inventory
Value multiplied by 6.16%.
2.1.2.2 Items of Inventory which are not return-
able to, and are not in the current catalog of, the vendor
thereof according to Purchaser's records and information
(collectively, the "Non-Returnable Inventory") shall be
valued as follows: (i) in the event that the total number of
pieces of Non-Returnable Inventory does not exceed 5% of the
total number of pieces of Current Catalog Inventory then
being purchased at the Closing or applicable Delayed
Closing, the Non-Returnable Inventory shall be valued at 85%
of Seller's original cost for each such item as indicated on
Seller's schedule of original costs provided by Seller to
Purchaser after the Closing or applicable Delayed Closing as
contemplated by Section 7.15 hereof (the "Schedule of
Original Costs"); and (ii) in the event that the total
number of pieces of Non-Returnable Inventory is greater than
5% but does not exceed 15% of the total number of pieces of
the Current Catalog Inventory then being purchased at the
Closing or applicable Delayed Closing, the Non-Returnable
Inventory shall be valued at 75% of Seller's original cost
for each such item as indicated on the applicable Schedule
of Original Costs. In the event that the total number of
pieces of Non-Returnable Inventory exceeds 15% of the total
number of pieces of the Current Catalog Inventory then being
purchased at the Closing or applicable Delayed Closing,
Purchaser shall not be obligated to purchase any of such
Non-Returnable Inventory.
2.1.2.3 Notwithstanding the immediately
preceding Section, items of Non-Returnable Inventory (which
includes by definition items which are non-returnable to,
and are not in the current catalogue of, the vendor) which
are deemed obsolete by Purchaser, in its reasonable
discretion (collectively, the "Other Inventory"), shall be
valued as follows: (i) in the event that the total number of
pieces of Other Inventory does not exceed 5% of the total
number of pieces of Current Catalog Inventory then being
purchased at the Closing or applicable Delayed Closing, the
Other Inventory shall be valued at 75% of Seller's original
cost for each such item as indicated on the applicable
Schedule of Original Costs; and (ii) in the event that the
total number of pieces of Other Inventory is greater than 5%
but does not exceed 15% of the total number of pieces of the
Current Catalog Inventory then being purchased at the
Closing or applicable Delayed Closing, the Other Inventory
shall be valued at 65% of Seller's original cost for each
such item as indicated on the applicable Schedule of
Original Costs. In the event that the total number of
pieces of Other Inventory exceeds 15% of the total number of
pieces of the Current Catalog Inventory then being purchased
at the Closing or applicable Delayed Closing, Purchaser
shall not be obligated to purchase any of such Other
Inventory.
2.1.2.4 In addition to the discounts to the
Transferred Inventory Purchase Price contemplated by
Sections 2.1.2.1 through 2.1.2.3 hereof, the Transferred
Inventory Purchase Price to be paid at the Closing or
applicable Delayed Closing shall be further reduced by an
amount equal to $0.20 multiplied by 72.5% of the number of
music compact discs included within the Inventory purchased
at the Closing or such Delayed Closing. The discount
described above in this Section 2.1.2.4 with respect to the
Inventory purchased at the Closing (but not at any of the
Delayed Closings) shall be reduced by $7,000 (such $7,000
reduction being subject to Seller providing Purchaser
reasonable evidence that at least $7,000 shall already have
been expended by Seller on compact disc "keepers").
2.1.3 The assumption by Purchaser from Seller at
the Closing or the applicable Delayed Closing, as the case may
be, of the following items (collectively, the "Assumed Obliga-
tions"): (i) all liabilities and obligations of Seller arising
and accruing under the Store Leases, the Sensormatic Leases and
the Store Contracts then being assigned by Seller to Purchaser
after the Closing or the applicable Delayed Closing, as the case
may be; and (ii) the obligation to honor up to an aggregate
amount of $30,000 of (x) Seller's unredeemed Store gift certifi-
cates and merchandise credits and deposits accepted for special
orders (collectively, the "Gift Certificates and Merchandise
Credits") issued prior to that certain Letter of Intent dated
March 17, 1993 by and between Purchaser and Seller (the "Letter
of Intent") and (y) Seller's unredeemed Gift Certificates and
Merchandise Credits issued after execution of the Letter of
Intent but prior to the date the parties agree in writing, such
agreement not to be unreasonably withheld, that the parties will
not be able to obtain Store Leasehold Consents for any remaining
"Non-Transferred Leases" (as hereafter defined), which are issued
in a manner consistent with Seller's past practices and in the
ordinary course of its business. For the avoidance of doubt,
the Assumed Obligations do not include any obligations, debts or
liabilities of Seller arising or accruing under or in connection
with any of the Store Leases, the Sensormatic Leases or Store
Contracts or otherwise before the Closing or the applicable
Delayed Closing, as the case may be, whether or not known by
Purchaser, Seller or any third party on the Closing Date or the
applicable Delayed Closing Date, as the case may be, including,
without limitation, any obligations, debts or liabilities
(whether matured, unmatured, contingent or otherwise) resulting
from or arising before the Closing or applicable Delayed Closing
in connection with (a) Seller entering into the Store Leases, the
Sensormatic Leases or Store Contracts including, without limita-
tion, any default under or breach of any of the Store Leases, the
Sensormatic Leases or Store Contracts by Seller, (b) the presence
or migration of any Polluting Substances in, on, into or from the
Stores or in, on, into or from the Store Real Property or any of
the real property adjacent thereto before the Closing or the
applicable Delayed Closing, as the case may be, and irrespective
of whether or not the existence of such Polluting Substance is
known to Purchaser or Seller on the Closing Date or the appli-
cable Delayed Closing Date, as the case may be, (c) any act or
omission of Seller, including, without limitation, all acts or
omissions which constitute a default under or breach of any of
the Store Leases, the Sensormatic Leases or Store Contracts, (d)
any of Seller's unredeemed Gift Certificates and Merchandise
Credits, whether issued prior to the execution of the Letter of
Intent or thereafter, in excess of an aggregate of $30,000, (e)
any of Seller's unredeemed Gift Certificates and Merchandise
Credits which are issued by Seller after execution of the Letter
of Intent and, in the reasonable discretion of Purchaser, have
not been issued in a manner consistent with Seller's past
practices and in the ordinary course of its business prior to the
execution of the Letter of Intent, (f) subject to Sections 3.5
through 3.7 with respect to Current Property Taxes, Sales Taxes
and Payroll Taxes, any obligations, claims or liabilities arising
out of or related to the operation of Seller's business by Seller
after the Closing, or (g) any obligations, claims or liabilities
arising out of or related to the operation of any business of
Seller or any assignee of Seller (other than Purchaser). Not-
withstanding anything in this Section 2.1.3 to the contrary,
Purchaser agrees to honor after the Closing at all Stores,
possession of which are delivered to Purchaser at the Closing,
Gift Certificates and Merchandise Credits issued after execution
of the Letter of Intent and prior to the Closing, which are
issued in a manner consistent with Seller's past practices and in
the ordinary course of Seller's business whether or not such Gift
Certificates and Merchandise Credits (together with those Gift
Certificates and Merchandise Credits issued prior to the date of
the Letter of Intent) exceed in the aggregate $30,000, provided,
however, that Escrow Agent shall reimburse Purchaser out of the
Escrow Funds (to the extent Escrow Funds are available for
distribution to Purchaser pursuant to Section 3.8 hereof) upon
presentation by Purchaser of canceled gift certificates and/or
merchandise credits issued by Seller which when added to the Gift
Certificates and Merchandise Credits already honored by Purchaser
exceed $30,000 in the aggregate (the "Reimbursement Evidence").
In the event Purchaser is entitled to be reimbursed in accordance
with the immediately preceding sentence and, pursuant to Section
3.8 hereof, there exists no Escrow Funds available to make such
reimbursement, Seller shall reimburse Purchaser within ten (10)
days of Purchaser or the Escrow Agent presenting the Reimburse-
ment Evidence to Seller. Also, notwithstanding anything in this
Agreement to the contrary, Purchaser agrees that after the
Closing it will give merchandise credits or exchanges at all
Stores, possession of which are delivered to Purchaser at the
Closing or any Delayed Closing, for any merchandise sold at
retail to the public by Seller in accordance with Seller's past
practices and in the ordinary course of Seller's business prior
to the Closing or such Delayed Closing which is defective, such
merchandise credits and exchanges to be given in accordance with
Purchaser's usual policies in connection therewith, which
Purchaser may from time to time, in its sole and absolute
discretion, change, amend or modify.
2.2 Allocation of Transferred Assets Purchase Price. The
Transferred Assets Purchase Price shall be allocated among the
Transferred Assets in accordance with Schedule 2.2 hereof. Each
of Seller and Purchaser agrees (i) to report the sale of the
Transferred Assets for federal and state income tax purposes in
accordance with the allocations set forth on Schedule 2.2 hereto,
(ii) not to take any position inconsistent with such allocations
on any of its tax returns and (iii) to timely file federal tax
form 8594 with the applicable tax return for the year of this
transaction and any other year in which any Delayed Closing
occurs. Each party shall provide the other party with a draft
copy of its federal tax form 8594 at least fifteen (15) days
prior to filing it.
2.3 Payment of Sales and Use Taxes. Seller shall be
responsible for all sales and use taxes, if any, arising out of
the sale of the Transferred Assets to Purchaser pursuant to this
Agreement. Purchaser shall provide Seller with an officer's
certificate or certificates executed by an officer of Purchaser
(or any other form required by applicable law), certifying that
Purchaser is purchasing the Inventory for resale.
2.4 Prorations and Adjustments. The Transferred Assets
Purchase Price shall be adjusted at the Closing or the applicable
Delayed Closing (i) for Seller's preliminary prorated share of
Current Property Taxes calculated in accordance with Section 3.5
hereof; (ii) for Seller's preliminary unpaid Sales Taxes calcu-
lated in accordance with Section 3.6 hereof; and (iii) for
Seller's preliminary unpaid Payroll Taxes calculated in accord-
ance with Section 3.7 hereof. The Transferred Assets Purchase
Price shall be adjusted to prorate all rents, real property taxes
and "CAM" and other charges paid by Seller under the Store Leases
and utilities paid by Seller and all lease and other payments due
under the Sensormatic Leases and Store Contracts paid by Seller
for the period from the due date of the last such payment to be
made by Seller immediately prior to the Closing Date or the
applicable Delayed Closing Date, as the case may be, to the
Closing Date or the applicable Delayed Closing Date. The Trans-
ferred Assets Purchase Price shall be increased by all utilities
deposits of Seller which Seller causes the applicable utilities
to transfer to the account of Purchaser at the Closing or any
Delayed Closing, as applicable.
2.5 Reduction of Base Purchase Price; Assignment of Store
Leasehold Interests.
2.5.1 The Base Purchase Price shall be reduced as
provided in Section 2.5.2 hereof upon the occurrence of either of
the following events:
2.5.1.1 Seller and Purchaser fail to obtain with
respect to all Store Leases by the Closing Date (i) an
unconditional consent from the applicable lessor to the
assignment by Seller to Purchaser of the applicable Store
Leasehold Interest and (ii) an amendment to the applicable
Store Lease which contains all of the essential provisions
(the "Essential Provisions") set forth on Schedule 2.5.1.1
attached hereto (which unconditional consent and amendment
to lease shall be in a form reasonably acceptable to
Purchaser) (collectively, the "Store Leasehold Consents")
duly executed by each of the lessors of the Store Leases
(collectively, the "Non-Transferred Leases").
2.5.1.2 With respect to each of the Store Leases
the current term of which is to expire on or before December
31, 1995 (including renewal options, if previously exercised
by Seller or if Purchaser will have the right to exercise
such options under the applicable Store Leases) which are
listed on Schedule 2.5.1.2 (collectively, the "Short Term
Store Leases"), and irrespective of whether or not Purchaser
obtains Store Leasehold Consents with respect to such Store
Leases and/or an assignment of Seller's interests in such
Store Leases at the Closing, Purchaser fails to enter into
by the Closing Date a definitive agreement with the lessor
for each such Short Term Store Lease for an extension (an
"Extension") of the term of each such Short Term Store Lease
at the applicable Store's current location or another
location within the same shopping center (which location is
acceptable to Purchaser, in its sole and absolute discre-
tion), and otherwise on terms and conditions (including,
without limitation, the length of the Extension) reasonably
acceptable to Purchaser (collectively, the "Non-Extended
Short Term Leases").
2.5.1.3 For the avoidance of doubt, a Store
Lease may be both a Non-Transferred Lease and a Non-Extended
Short Term Lease.
2.5.2 Upon the occurrence of the events described
in Section 2.5.1.1 or 2.5.1.2 hereof, the Base Purchase Price
shall be reduced by an amount equal to the Base Purchase Price
multiplied by a fraction, the numerator of which shall be the sum
of the actual or deemed revenues for the Stores for the immedi-
ately preceding 12 complete calendar months prior to the Closing
Date as indicated on a schedule, which Seller shall deliver to
Purchaser at the Closing (the "Revenue Schedule"), for each of
the Stores which are leased to Seller pursuant to a Non-Trans-
ferred Lease and/or a Non-Extended Short Term Lease, and the
denominator of which shall be the sum of the revenues listed on
the Revenue Schedule for all Stores (the "Non-Transferred Lease
Reduced Amount"). Notwithstanding the foregoing reduction in
Base Purchase Price, an amount equal to the lesser of $500,000 or
the Non-Transferred Lease Reduced Amount (the "Consent Funds
Initial Deposit"), shall be deposited by Purchaser at Closing
into an interest bearing account under the exclusive control of
the Escrow Agent in accordance with Section 3.9 hereof; provided,
however, that if the Non-Transferred Lease Reduced Amount is more
than $500,000, this will not limit Purchaser's obligation to pay
amounts in excess of the Consent Funds Initial Deposit, if Seller
is entitled to receive such payment as a result of a Delayed
Closing.
2.5.3 Notwithstanding the provisions of this
Section 2.5 to the contrary, in the event that (i) after the
Closing and prior to the date one year from the Closing Date (if
the Store Lease in question is not also a Short Term Lease),
Seller and Purchaser obtain a Store Leasehold Consent with
respect to a Store subject to a Non-Transferred Lease (a "Post-
Closing Transferred Lease"), or (ii) after the Closing Purchaser
enters into an Extension with respect to a Non-Extended Short
Term Lease (and receives the applicable Store Leasehold Consent)
(a) during the existing term of such Non-Extended Short Term
Lease, (b) within 45 days of the expiration of the existing term
of such Non-Extended Short Term Lease or (c) within one year
of the expiration of the existing term of such Non-Extended Short
Term Lease, if the Store, subject to such Non-Extended Short Term
Lease, continues to be operated during such one-year period (a
Non-Extended Short Term Lease referred to in clause (ii)(a),
(ii)(b) or (ii)(c) hereof, a "Post-Closing Extended Short Term
Lease"), then, subject to Section 3.9 hereof, (x) Purchaser and/
or the Escrow Agent, as appropriate, shall pay to Seller an
amount equal to the Base Purchase Price multiplied by a fraction,
the numerator of which shall be the revenues listed on the
Revenue Schedule for the Store subject to such Post-Closing
Transferred Lease or such Post-Closing Extended Short Term Lease,
as the case may be, and the denominator of which shall be the sum
of the revenues listed on the Revenue Schedule for all Stores
(the "Post-Closing Transferred Lease Payment Amount") and, in
accordance with Section 3.11.1, Purchaser shall pay to Seller the
Transferred Inventory Purchase Price applicable to the Inventory
located at such Store then transferred to Purchaser pursuant to
this Section 2.5.3 and which had not been previously transferred
to Purchaser, and (y) Seller shall sell and transfer (the "Post-
Closing Asset Transfer") all of its right, title and interest in
and to said Store Lease and all Inventory, F, F & E, Sensormatic
Leases, Store Contracts, Sensormatic Equipment and Plans related
to, or located in, the Store subject to the Post-Closing Trans-
ferred Lease or Post-Closing Extended Short Term Lease which have
not been previously sold and transferred to Purchaser. Purchaser
and/or the Escrow Agent, as appropriate, shall pay to Seller the
appropriate Post-Closing Transferred Lease Payment Amount and
Purchaser shall pay the Transferred Inventory Purchase Price
applicable to the Inventory located at such Store which is then
being transferred to Purchaser pursuant to this Section 2.5.3,
and Seller shall make the appropriate Post-Closing Asset Transfer
to Purchaser at the offices of Purchaser and "MSK" (as hereafter
defined) in accordance with Section 3 hereof on the fifth
business day (the "Delayed Closing Date") after a Non-Transferred
Lease shall become a Post-Closing Transferred Lease, and/or a
Non-Extended Short Term Lease shall become a Post-Closing
Extended Short Term Lease, as the case may be (the consummation
of each such transaction a "Delayed Closing"), provided, that
each of the conditions to such Delayed Closing set forth in
Sections 4 and 5 hereof have been satisfied or waived by the
appropriate party. Purchaser hereby agrees to use its best
efforts to obtain Extensions with respect to all Non-Extended
Short Term Leases prior to the Closing or within the time periods
set forth in subclause (ii) of this Section 2.5.3 on terms and
conditions reasonably acceptable to Purchaser and on a timely
basis, provided that in no event shall Purchaser be required to
accept an Extension of any Non-Extended Short Term Lease if such
Extension does not contain all applicable Essential Provisions.
2.5.4 Notwithstanding the provisions of this
Section 2.5 to the contrary, (i) in the event that (a) Purchaser
obtains an Extension for the Store located in the Westridge Mall,
Phoenix, Arizona ("Westridge") and, on or prior to the Closing or
the Delayed Closing for such Store, Purchaser enters into a
lease, or reaches an agreement in principle with the applicable
Lessor to enter into a lease, which it represents to Seller is
for premises in excess of 4,000 square feet located at Westridge
(the "Expansion"), or (b) Purchaser fails to enter into an
Extension for the Store located at Westridge, but obtains the
Expansion, then the Base Purchase Price attributable to the Store
located at Westridge which is to be paid to Seller shall be
reduced by 50%, and (ii) in the event Purchaser fails to obtain
the Expansion on or prior to the Closing or Delayed Closing for
the Store located at Westridge, then the Base Purchase Price
attributable to the Store located at Westridge which is to be
paid to Seller shall not be reduced. In the event Purchaser is
unable to obtain an Extension, but obtains the Expansion, the
Base Purchase Price attributable to the Store located at West-
ridge shall be paid on the fifth business day after Purchaser
provides written notice to Seller of Purchaser's inability to
obtain an Extension, provided that all other conditions precedent
to Purchaser's payment to Seller of the Base Purchase Price
attributable to the Store located at Westridge, including,
without limitation, Purchaser and Seller obtaining a Store
Leasehold Consent with respect to the applicable Store Lease,
shall have been satisfied or waived in writing by the appropriate
party.
2.6 Obligation to Purchase Transferred Assets. Except as
expressly provided to the contrary in this Agreement, Purchaser
shall not purchase any of Seller's rights in the Inventory, F, F
& E, Sensormatic Leases, Store Contracts, Sensormatic Equipment
or Plans related to, or located in, any Stores subject to a Non-
Transferred Lease or a Non-Extended Short Term Lease; provided,
however, Purchaser shall take possession of said assets if they
are located in or relate to a Store, the Store Leasehold Interest
of which is sold to Purchaser as provided herein or which will be
the subject of a Management Agreement as provided herein.
3. THE CLOSING.
3.1 Closing Date and Location. The "Closing" shall mean
the time at which Seller consummates the sale of the Transferred
Assets to Purchaser by delivery to it of the Transferred Assets
in the manner contemplated by this Section 3. The Closing shall
take place at the offices of Mitchell, Silberberg & Knupp
("MSK"), 11377 West Olympic Boulevard, Los Angeles, California
90064 on June 15, 1993, or on such other date mutually accept-
able to Purchaser and Seller after all conditions set forth in
this Agreement have been satisfied or waived in writing by the
appropriate party, but in no event later than August 13, 1993.
The "Closing Date" shall mean the date on which the Closing
occurs.
3.2 Delivery of Transfer and Sale Documents. At the
Closing or the applicable Delayed Closing, Seller shall sell,
transfer and deliver the appropriate Transferred Assets to
Purchaser by the Leasehold Assignments, and by bills of sale,
assignments of trademarks, service marks, tradenames and service
names, assignments of contracts, and assignment of leasehold
interests in substantially the forms attached hereto as Exhibit
B.
3.3 Delivery of Transferred Assets. Subject to the Store
Leases, Sensormatic Leases and Store Contracts, possession of the
Transferred Assets shall be delivered to Purchaser at the Closing
or the applicable Delayed Closing, as the case may be, (i) at the
offices of MSK, referred to above with respect to all intangible
Transferred Assets and (ii) at the Stores or the Minnesota
Warehouse, as applicable, with respect to all tangible Trans-
ferred Assets. In addition, at the Closing or the applicable
Delayed Closing, as the case may be, Seller shall also deliver to
Purchaser appropriate authorizations to provide for the transfer
of the Stores' telephone numbers and other utilities to Purchaser
and for the closing of billing as of the Closing Date or the
applicable Delayed Closing Date, as the case may be.
3.4 Delivery of Other Documents. At the Closing, Seller
shall also deliver to Purchaser (i) all blank gift certificates
and merchandise credits for the Stores, each of which will be
marked "void," (ii) a schedule of all Gift Certificates and
Merchandise Credits issued by Seller on or after March 17, 1993
and before the Closing, such information provided on a Store by
Store and week by week basis (the "Schedule of Gift Certificates
and Merchandise Credits"), (iii) copies of all "Occupancy
Certificates and Permits" (as hereafter defined), (iv) the
Revenue Schedule, and (v) the "Payroll Tax Schedule" (as
hereafter defined). On the later of (a) September 30, 1993 or
(b) the date on which Seller ceases operations at all Stores,
Seller shall deliver to Purchaser all documents required to
change the corporate name of Seller from "The Record Shop, Inc."
to a name not confusingly similar to such name, which documents
Purchaser is hereby authorized to record with the Office of the
Secretary of State of the State of Minnesota as Purchaser may
deem appropriate.
3.5 Proration of Personal Property Taxes. With respect to
all unpaid current year's personal property taxes owed by Seller
(collectively, the "Current Property Taxes") for which Seller
does not deliver to Purchaser at the Closing or the applicable
Delayed Closing a "Tax Liability Release" (as hereafter defined),
at the Closing or the applicable Delayed Closing, Purchaser and
Seller shall preliminarily prorate all Current Property Taxes for
the Stores based upon the personal property taxes for the Stores.
At the Closing or applicable Delayed Closing, Purchaser shall
receive a credit against the cash price payable pursuant to
Section 2.1.1.1 hereof in an amount equal to the Seller's
preliminary prorated share of Current Property Taxes for the
Stores (the "Personal Property Tax Reserve"), it being understood
that Purchaser will use the Personal Property Tax Reserve to pay
Seller's final prorated share of the Current Property Taxes for
the Stores on behalf of Seller and as it has requested. In the
event that Seller's final prorated share of the Current Property
Taxes for the Stores (based upon the actual Current Property Tax
bills for the Stores) (i) is greater than the Personal Property
Tax Reserve, then (subject to Section 3.8.2 hereof) at Purchas-
er's election either (a) Seller shall promptly pay such short
fall amount directly to Purchaser or (b) the Escrow Funds shall
be used to pay such short-fall amount; or (ii) is less than the
Personal Property Tax Reserve, then Purchaser shall promptly
remit the excess Personal Property Tax Reserve to Seller. Not-
withstanding the foregoing, nothing herein shall be construed
to mean that Purchaser has assumed or shall be held liable for
any personal property taxes which Seller is obligated to pay
other than the Personal Property Tax Reserve.
3.6 Proration of Sales Taxes. With respect to all unpaid
sales, use, income and other business taxes for which Purchaser
has potential "successor liability" or for which a "Lien" (as
hereafter defined) may attach to any of the Transferred Assets
(collectively, the "Sales Taxes") for which Seller does not
deliver to Purchaser a Tax Liability Release at the Closing or
the applicable Delayed Closing, at the Closing or the applicable
Delayed Closing, Seller and Purchaser shall project the aggregate
amount of unpaid Sales Taxes of Seller arising from Seller's
operation of the Stores through the Closing Date or the appli-
cable Delayed Closing Date and the amount of Sales Tax due as a
result of the sale of the Transferred Assets to Purchaser (the
"Projected Unpaid Sales Taxes"), and Seller shall deliver to
Purchaser either (i) copies of all canceled checks evidencing the
payment of any Sales Taxes accrued since January 1, 1993 through
the date indicated on the latest Sales Tax returns required to be
filed by Seller with all applicable taxing authorities prior to
the Closing or the applicable Delayed Closing (the "Sales Tax
Filing Period") or (ii) certificates from the appropriate taxing
authorities indicating that all of the Sales Tax for the Sales
Tax Filing Period has been paid. At the Closing or the appli-
cable Delayed Closing, Purchaser shall receive a credit against
the cash price payable pursuant to Section 2.1.1.1 hereof in an
amount equal to Projected Unpaid Sales Taxes (the "Sales Tax
Reserve"), it being understood that Purchaser will use the Sales
Tax Reserve to pay (on behalf of Seller and as it has requested)
Seller's actual unpaid Sales Taxes arising from Seller's opera-
tion of the Stores through the Closing Date or the applicable
Delayed Closing Date and the Sales Taxes arising in connection
with the sale of the Transferred Assets to Purchaser. Promptly
following the Closing or the applicable Delayed Closing, Seller
shall calculate the final aggregate amount of unpaid Sales Taxes
arising from Seller's operation of the Stores through the Closing
Date or the applicable Delayed Closing Date and the Sales Tax due
as a result of the sale of the Transferred Assets to Purchaser.
In the event that such final aggregate unpaid Sales Taxes (i) are
greater than the Sales Tax Reserve, then (subject to Section
3.8.2 hereof) at Purchaser's election either (a) Seller shall
promptly forward to Purchaser a cashier's check for such short-
fall amount made payable to the appropriate taxing authority
(which Purchaser will promptly thereafter forward to the appro-
priate taxing authority) or (b) the Escrow Funds shall be used to
pay such shortfall amount; or (ii) are less than the Sales Tax
Reserve, Purchaser shall promptly remit the excess Sales Tax
Reserve to Seller. Notwithstanding the foregoing, nothing herein
shall be construed to mean that Purchaser has assumed or shall be
held liable for any Sales Taxes other than the Sales Tax Reserve.
3.7 Payment of Employee Payroll Taxes. With respect to all
unpaid federal and state social security, disability, unemploy-
ment and other payroll taxes (including the portion to be paid by
the employer and the portion of said taxes and income taxes to be
withheld by the employer from its employees and paid over to the
appropriate tax authority) (collectively, the "Payroll Taxes")
for which Seller does not deliver to Purchaser a Tax Liability
Release at the Closing or applicable Delayed Closing, at the
Closing or applicable Delayed Closing, Seller and Purchaser shall
project the aggregate amount of unpaid Payroll Taxes of Seller
arising from Seller's operation of the Stores through the Closing
Date or the applicable Delayed Closing Date, and Seller shall
deliver to Purchaser either (i) copies of all canceled checks
evidencing the payment of any Payroll Taxes accrued since January
1, 1993 through the date indicated on the latest Payroll Tax
returns required to be filed by Seller with all applicable taxing
authorities prior to the Closing or the Delayed Closing (the
"Payroll Tax Filing Period"), or (ii) certificates from the
appropriate taxing authorities indicating that all of the Payroll
Taxes for the Payroll Tax Filing Period has been paid. At the
Closing or the applicable Delayed Closing, Purchaser shall
receive a credit against the cash price payable pursuant to
Section 2.1.1.1 hereof in an amount equal to such projected
unpaid Payroll Taxes (the "Payroll Tax Reserve"), it being
understood that Purchaser will use the Payroll Tax Reserve to pay
(on behalf of Seller and as it has requested) Seller's actual
unpaid Payroll Tax arising from Seller's operation of the Stores
through the Closing Date or the applicable Delayed Closing Date.
Promptly following the Closing or the applicable Delayed Closing,
Seller shall calculate the final aggregate amount of unpaid
Payroll Taxes arising from Seller's operation of the Stores
through the Closing Date or the applicable Delayed Closing Date
and the Payroll Taxes due thereby. In the event that such final
aggregate unpaid Payroll Taxes (i) are greater than the Payroll
Tax Reserve, then (subject to Section 3.8.2 hereof) at Purchas-
er's election either (a) Seller shall promptly forward to
Purchaser a cashier's check for such short-fall amount made
payable to the appropriate taxing authority (which Purchaser will
promptly thereafter forward to the appropriate taxing authority)
or (b) the Escrow Funds shall be used to pay such shortfall
amount; or (ii) are less than the Payroll Tax Reserve, Purchaser
shall promptly remit the excess Payroll Tax Reserve to Seller.
Notwithstanding the foregoing, nothing herein shall be construed
to mean that Purchaser has assumed or shall be held liable for
any Payroll Taxes other than the Payroll Tax Reserve.
3.8 Escrow Funds. Pursuant to Section 2.1.2 hereof, at
Closing and each Delayed Closing, Purchaser shall deposit an
amount equal to $20,689.66 multiplied by the number of Stores
possession of which are being transferred to Purchaser pursuant
to a Store Leasehold Assignment at such Closing or Delayed
Closing (and together with any interest earned on each such
deposit, an "Escrow Deposit"; the Escrow Deposits are referred to
herein collectively as the "Escrow Funds") into an interest
bearing account under the exclusive control of the Escrow Agent
in accordance with the following terms and conditions:
3.8.1 Purchaser and Seller shall each pay one-half
of the fees and expenses incurred in connection with the manage-
ment of the Escrow Funds, including, without limitation, the fees
and expenses of the Escrow Agent. Subject to Section 3.8.3, no
portion of any particular Escrow Deposit shall be disbursed to
Seller during the period commencing as of the Closing Date or the
applicable Delayed Closing Date, as the case may be, and ending
five (5) months thereafter (the "Escrow Period").
3.8.2 During any Escrow Period, Purchaser may
request the Escrow Agent to disburse the Escrow Funds (a) to
reimburse Purchaser for any actual damages it has incurred as a
result of any breach of any representations and warranties of
Seller under this Agreement or any other covenants or agreements
of Seller to Purchaser contained in this Agreement, any Manage-
ment Agreement, the "Service Mark License" (as hereafter defined)
or any other document or agreement contemplated hereby or thereby
(it being understood that any such application of the Escrow
Funds shall not release Seller from its liability to Purchaser
for any breach of the representations and warranties of Seller or
any other covenants or agreements of Seller to Purchaser to the
extent such breaches cause Purchaser to incur damages in excess
of the amount of the Escrow Funds applied against any such
damages), (b) to pay Seller's actual prorated Current Property
Taxes, Sales Taxes and Payroll Taxes as contemplated in Sections
3.5, 3.6 and 3.7 hereof, respectively that exceed the amount for
which Purchaser previously received credit against the Trans-
ferred Assets Purchase Price and/or (c) to reimburse Purchaser
for all Gift Certificates and Merchandise Credits redeemed or
honored during the Escrow Period in excess of the aggregate
amount of $30,000. Notwithstanding anything in this Section
3.8.2 or Sections 3.5, 3.6 or 3.7 to the contrary, Purchaser
shall use the Escrow Funds to pay Seller's actual prorated
Property Taxes, Sales Taxes and Payroll Taxes in excess of the
reserves established therefor unless and until the balance of the
Escrow Funds after paying such taxes therefrom is less than
$60,000.
3.8.3 Subject to Sections 3.8.4, 3.8.5 and 3.8.6
hereof, the then remaining balance of each particular Escrow
Deposit shall be paid to Seller on the first business day after
the later of (i) the expiration of the Escrow Period with respect
to such Escrow Deposit, and (ii) the date on which Seller
provides the Escrow Agent with written notice that, to the best
of its knowledge, there have been no breaches, nor does Seller
anticipate any breaches, of any of Seller's representations,
warranties, covenants or agreements contained in this Agreement,
any Management Agreement, the Service Mark License or in any
other document or agreement contemplated hereby or thereby. The
distribution of the then remaining balance of the most recently
deposited Escrow Deposit (the "Final Escrow Deposit") prior to
the date on which Purchaser and Seller provide the Escrow Agent
with written notice that the parties have agreed, such agreement
not to be unreasonably withheld, that they will not be able to
obtain Store Leasehold Consents for any remaining Non-Transferred
Leases and Extensions and Store Leasehold Consents for any
remaining Non-Extended Short Term Leases, shall be accompanied
by a true and correct accounting of all Escrow Funds expended by
the Escrow Agent.
3.8.4 Notwithstanding anything herein to the
contrary but subject to Section 3.8.6 hereof, at no time between
the Closing and the distribution of the Final Escrow Deposit in
accordance with Section 3.8.3 hereof shall the balance of the
Escrow Funds be less than $60,000. Notwithstanding anything
herein to the contrary, in no event shall the aggregate amount of
Escrow Deposits (excluding therefrom all interest earned on any
such deposits) exceed $600,000.
3.8.5 Notwithstanding anything herein to the
contrary, an amount of the Escrow Funds equal to the aggregate
amount of all claims against the Escrow Funds made by Purchaser
shall either be paid to Purchaser or retained by the Escrow Agent
until a final determination of the validity of Purchaser's claims
is made in accordance with the "Section 3.8 Escrow Agreement" (as
hereinafter defined).
3.8.6 In the event Purchaser and Seller obtain a
Store Leasehold Consent with respect to any Store Lease which
does not contain all "Essential Estoppel Terms" (as hereafter
defined), (i) at the Closing or the applicable Delayed Closing,
Seller shall represent and warrant to Purchaser in writing as to
each of the Essential Estoppel Terms which are not contained in
the Store Leasehold Consent for such Store Lease (which represen-
tation and warranty shall survive the Closing or the applicable
Delayed Closing and shall expire on the later of the date one
year from the Closing Date or the date one year from the last
Delayed Closing Date) (the "Estoppel Representations"), and (ii)
notwithstanding anything herein to the contrary, at no time
between the Closing and the expiration of the Estoppel Represen-
tations shall the balance of the Escrow Funds be less than
$100,000. For purposes of this Agreement, each of the following
shall be deemed an "Essential Estoppel Term": (a) a certification
by the applicable lessor that attached to such certification is a
true and complete copy of the applicable Store Lease and all
amendments, modifications, supplements and assignments thereof
and thereto, (b) a certification by the applicable lessor that as
of the date of the applicable Store Leasehold Consent, all rental
payments, real property taxes and "CAM" and other charges to be
paid by the lessee under such Store Lease have been paid in full,
and (c) a certification by the applicable lessor that, to the
best knowledge of such lessor, such Store Lease is not in default
and no event has occurred which, with the passage of time or the
giving of notice or both, would constitute a default under such
Store Lease.
3.8.7 For the avoidance of doubt, all interest
earned on the Escrow Funds shall inure to the benefit of Seller,
provided that all such interest may be disbursed by the Escrow
Agent to satisfy claims in accordance with Section 3.8.2.
3.9 Consent Funds. Pursuant to Section 2.5.2 hereof, at
Closing, Purchaser shall deposit the Consent Funds Initial
Deposit (and together with any interest earned on such amount,
collectively referred to herein as the "Consent Funds") into an
interest bearing account under the exclusive control of the
Escrow Agent in accordance with the following terms and
conditions:
3.9.1 Purchaser and Seller shall each pay one-half
of thefees and expenses incurred in connection with the manage-
ment of the Consent Funds, including, without limitation, the
fees and expenses of the Escrow Agent. No portion of the Consent
Funds shall be disbursed to Seller or Purchaser at any time
except as expressly provided for herein.
3.9.2 In the event that (i) Seller and Purchaser
obtain a Store Leasehold Consent with respect to a Post-Closing
Transferred Lease or an Extension with respect to a Non-Extended
Short Term Lease (together with the applicable Store Leasehold
Consent), and (ii) an amount equal to the Non-Transferred Lease
Reduced Amount less the Consent Funds Initial Deposit has previ-
ously been paid by Purchaser to Seller in connection with other
Post-Closing Transferred Leases or Post-Closing Extended Short
Term Leases, then, subject to the terms of this Agreement, the
Escrow Agent shall disburse the Consent Funds to Seller in an
amount equal to that portion of the Post-Closing Transferred
Lease Payment Amount which pertains to the relevant Store.
3.9.3 Any remaining balance of the Consent Funds
shall be paid to Purchaser (accompanied by a true and correct
accounting of all Consent Funds so expended) on the first
business day after the earlier of (i) the date the Seller and
Purchaser agree in writing, such agreement not to be unreasonably
withheld, that the parties will not be able to obtain Store
Leasehold Consents for any remaining Non-Transferred Leases, and
Extensions and Store Leasehold Consents for any remaining Non-
Extended Short Term Leases, and (ii) January 15, 1994; provided,
however, that notwithstanding the release of any Consent Funds to
Purchaser, if Seller is thereafter entitled to payment hereunder
of any portion of the Non-Transferred Lease Reduced Amount, such
funds shall be paid directly from Purchaser to Seller.
3.9.4 For the avoidance of doubt, all interest
earned on the Consent Funds Initial Deposit shall inure to the
benefit of Purchaser.
3.10 Payment of the Balance of the Transferred Assets
Purchase Price (Other Than the Transferred Inventory Purchase
Price). Subject to the provisions of Section 3.12 hereof, the
balance of the Transferred Assets Purchase Price which is
adjusted as provided herein (other than the Transferred Inventory
Purchase Price), not paid to Seller or otherwise disbursed in
accordance with Sections 3.5 through 3.9 hereof shall be paid
by Purchaser to Seller at the Closing by cashier's check or wire
transfer.
3.11 Payment of Transferred Inventory Purchase Price. The
Transferred Inventory Purchase Price shall be paid (with interest
at a rate of 6% per annum from the Closing Date or applicable
Delayed Closing Date until paid) as follows:
3.11.1 The Transferred Inventory Purchase Price for
Inventory which at Closing or applicable Delayed Closing (with
respect to Inventory located at Stores) is located in (i) Stores
subject to Transferred Leases (including, without limitation,
Stores subject to Non-Extended Short Term Leases which are trans-
ferred to Purchaser and which are not the subject of a Management
Agreement), (ii) Stores subject to Post-Closing Transferred
Leases which are not the subject of a Management Agreement, (iii)
Stores which have permanently ceased operations in accordance
with Section 1.2.4 hereof, or (iv) the Minnesota Warehouse shall
be paid upon the later of (a) 90 days from the Closing or appli-
cable Delayed Closing or (b) later of the date on which Purchaser
and Seller agree in writing as to the characterization of such
Inventory as Current Catalog Inventory, Non-Returnable Inventory
or Other Inventory or the date on which the "Arbitrator" (as
hereafter defined) issues his or her decision in connection
therewith; and
3.11.2 The Transferred Inventory Purchase Price for
Inventory which atClosing is located in all Stores (the "Managed
Stores") subject to Management Agreements (the "Managed Inven-
tory") shall be paid as follows:
3.11.2.1 An amount equal to the lesser of (i) the
Transferred Inventory Purchase Price for the Managed Inven-
tory (together with interest) or (ii) 50% of the "Gross
Sales" (as hereafter defined) realized from the operation of
the Managed Stores for the first calendar month immediately
succeeding the month (the "Audit Month") during which the
Inventory Auditor completes its calculation of the Trans-
ferred Inventory Purchase Price.
3.11.2.2 An amount equal to the lesser of (i) the
then remaining unpaid balance of the Transferred Inventory
Purchase Price for the Managed Inventory (together with
interest) or (ii) 50% of Purchaser's Gross Sales realized
from the operation of the Managed Stores for the second
calendar month immediately succeeding the Audit Month.
3.11.2.3 An amount equal to the lesser of (i) the
then remaining unpaid balance of the Transferred Inventory
Purchase Price for the Managed Inventory (together with
interest) or (ii) 25% of the Gross Sales realized from the
operation of the Managed Stores during the third calendar
month immediately succeeding the Audit Month.
3.11.2.4 The then unpaid balance of the Trans-
ferred Inventory Purchase Price for the Managed Inventory
(together with interest).
3.11.2.5 For purposes of this Section 3.11.2, the
term "Gross Sales" shall mean all revenues realized from the
operations of the Managed Stores as reported by Purchaser on
its internal sales reports. The payments contemplated by
Sections 3.11.2.1, 3.11.2.2 and 3.11.2.3 shall be made
within the first ten days of the relevant month and the
payment contemplated by Section 3.11.2.4 shall be made
within the first ten days of the fourth calendar month
immediately succeeding the Audit Month. Notwithstanding
anything in this Section 3.11.2 to the contrary, in the
event that Purchaser and Seller are unable to agree in
writing as to the characterization of the Managed Inventory
as Current Catalog Inventory, Non-Returnable Inventory or
Other Inventory, no payment of the Transferred Inventory
Purchase Price for the Managed Inventory shall be made until
the Arbitrator issues his or her decision in connection
therewith.
3.12 Compliance With Bulk Transfer Laws. Notwithstanding
anything herein to the contrary, all or any portion of the Trans-
ferred Assets Purchase Price may be paid by Purchaser to any
creditor of Seller, rather than to Seller, in compliance with all
applicable "bulk transfer" laws; provided that (i) Purchaser
shall only pay creditors to the extent required by applicable
law, and (ii) prior to the making of any such payment, Purchaser
shall notify Seller in writing of Purchaser's intention to make
said payment and (a) Seller shall have a reasonable opportunity
to make alternative arrangements consistent with applicable law
with such creditor which arrangements are acceptable to Purchaser
in its reasonable discretion, or (b) if Seller disputes the
validity or amount of the claim out of which such payment is to
be made, the Purchaser and Seller shall make arrangements for
determination of the validity and/or amount of such claim consis-
tent with applicable law.
3.13 Recovery of Security Deposits and Releases of Personal
Guarantees. Seller shall be permitted to recover (but only from
the lessors under the Store Leases) all security deposits, and to
cause to be released any and all personal guarantees, previously
furnished to the lessors under the Store Leases, provided that
such reimbursements and/or releases do not jeopardize or inter-
fere in any way with Purchaser's rights under the Store Leases
and in no event shall Purchaser be obligated to reimburse Seller
for the amount of any such security deposit or to deposit with or
pay to the lessor any sums as a result of lessor's refunding to
Seller any of said security deposits or releasing any of said
personal guarantees. After the Closing and upon expiration of
the term (including all renewal options) of the applicable Store
Lease, upon the written request of Seller, Purchaser shall pay to
Seller any security deposit paid by Seller with respect to such
Store Lease which has been refunded by the applicable lessor to
Purchaser and which has not been previously refunded to Seller.
3.14 Transfer of the Store Service Marks. Notwithstanding
anything herein to the contrary, in the event that Seller retains
possession of and continues to operate any of the Stores after
the Closing (the "Retained Stores"), the Store Service Marks
shall not be transferred to Purchaser until such time as Seller
or its assignee ceases to operate all of the Retained Stores at
which time, without the payment of any further consideration to
Seller, Seller shall execute and deliver to Purchaser any and all
bills of sale and assignments requested by Purchaser to evidence
the sale and transfer of the Store Service Marks to Purchaser.
With respect to all of the Retained Stores, Seller shall not
permit any assignee thereof to use any of the Store Service Marks
without the prior written consent of Purchaser.
3.15 Purchase of Additional Inventory. The consummation of
the sale of Additional Inventory to Purchaser shall take place at
the offices of MSK on the fifth business day following Seller's
closure of one or both of the Additional Stores and Seller's
cessation of operations thereat, subject to the satisfaction or
waiver in writing by the appropriate party of all conditions set
forth in Sections 4 and 5 hereof. As used in this Agreement, the
consummation of the purchase and sale of Additional Inventory and
the date on which such purchase and sale occurs are included
within the terms "Delayed Closing" and "Delayed Closing Date",
respectively.
4. CONDITIONS TO OBLIGATIONS OF PURCHASER.
Purchaser shall have no obligation to purchase the Trans-
ferred Assets or to effect the transactions contemplated by this
Agreement unless at or prior to the Closing or the Delayed
Closing, as applicable, each of the following conditions is
complied with (to the extent applicable to the Transferred Assets
which are the subject of the Closing or the applicable Delayed
Closing) to the satisfaction of, or waived in writing by,
Purchaser:
4.1 Completion of Due Diligence Investigation. Purchaser
shall have completed the "Due Diligence Investigation" (as here-
after defined) to its reasonable satisfaction prior to the dates
specified in Section 7.1 below.
4.2 Liens on Transferred Assets. On or before the Closing
and each Delayed Closing, Purchaser shall have received evidence,
reasonably satisfactory to Purchaser, that all security inter-
ests, liens, pledges, encumbrances, claims, charges, agreements,
rights, options, warranties, equities or restrictions ("Liens")
on the Transferred Assets so sold and transferred have been
released. Notwithstanding anything in this Section 4.2 to the
contrary, "evidence, reasonably satisfactory to Purchaser" shall
include without limitation, copies of duly executed and recorded
UCC termination statements or releases for each secured creditor,
who, as indicated on any official or unofficial Lien searches
obtained by Purchaser, has a Lien on any of the Transferred
Assets so sold and transferred, which termination statements or
releases indicate that said Liens have been removed or termin-
ated.
4.3 Damage to Transferred Assets. As of the Closing and
each Delayed Closing, there shall have been no material damage to
or destruction of the Transferred Assets so sold and transferred,
or any portion thereof, and Seller shall not have received any
notice of any intended or proposed claim by any person or entity
affecting the Transferred Assets so sold and transferred, or any
portion thereof.
4.4 Proceedings. As of the Closing and each Delayed
Closing, no claim, investigation, proceeding or litigation,
administrative or judicial, shall be threatened or pending for
the purpose of enjoining or preventing the consummation of the
transactions contemplated by this Agreement or otherwise claiming
that this Agreement or the consummation of such transactions is
unlawful or would result in a fraudulent conveyance, or which
adversely affect the right of Purchaser to retain the Transferred
Assets.
4.5 Transfer Documents. At the Closing and each Delayed
Closing, Seller shall have delivered to Purchaser (i) each of the
instruments or other items set forth in Sections 3.2 and 3.4
hereof, and (ii) possession of the Transferred Assets so sold and
transferred.
4.6 Service Mark License. In the event the Store Service
Marks are not transferred to Purchaser at the Closing in accord-
ance with Section 3.14 hereof, at the Closing, Seller shall have
executed and delivered to Purchaser a service mark license (the
"Service Mark License") substantially in the form of Exhibit C
attached hereto.
4.7 Management Agreement. At the Closing, Seller shall
have executed and delivered to Purchaser a management agreement
(a "Management Agreement") substantially in the form of either
Exhibit D-1 or Exhibit D-2 attached hereto (as applicable) with
respect to each of the Stores listed on Schedule 4.7, which
Schedule will be created in accordance with Section 7.18.
4.8 Certificate of Seller. Seller shall have delivered to
Purchaser at the Closing and each Delayed Closing a Certificate
of the Corporate Secretary of Seller, dated the Closing Date or
the applicable Delayed Closing Date, as the case may be, reason-
ably acceptable to Purchaser certifying (i) that attached thereto
is a true and complete copy of resolutions of the Board of
Directors and shareholders of Seller authorizing the sale of the
Transferred Assets to Purchaser and the consummation of the
transactions contemplated herein, (ii) as to the incumbency and
specimen signature of each officer of Seller executing the
certificate, this Agreement and the other documents and instru-
ments to be delivered pursuant to this Agreement, (iii) that
attached thereto are true and complete copies of the Articles of
Incorporation and Bylaws of Seller, (iv) that attached thereto is
a true and complete copy of a "Good Standing" Certificate of
Seller issued by the Secretary of State of the State of Minnesota
indicating that Seller is in good standing in the State of
Minnesota and said "Good Standing" Certificate shall be dated as
of a date no earlier than five business days prior to the Closing
Date or the applicable Delayed Closing Date, as the case may be,
and (v) that attached thereto are true and complete copies of
"Good Standing" Certificates of Seller issued by the Secretaries
of State of the States of California, Arizona, Nevada, Utah,
North Dakota and Iowa indicating that Seller is qualified to do
business in those States as a foreign corporation and is in good
standing therein and said "Good Standing" Certificates shall be
dated as of a date no earlier than five business days prior to
the Closing Date or the applicable Delayed Closing Date, as the
case may be.
4.9 Opinion of Seller's Counsel. At the Closing, Seller
shall have delivered to Purchaser the opinion of Snell & Wilmer,
substantially in the form attached hereto as Exhibit E.
4.10 Store Leasehold Consents and Store Leasehold Assign-
ments. At or before the Closing, Seller shall have delivered to
Purchaser the Store Leasehold Consents, duly executed by Seller
and the lessor under each such Store Lease and assignments of
said Store Leasehold Interests in substantially the forms
attached hereto as Exhibit F (the "Store Leasehold Assignments")
for at least a majority of all Stores located in the States of
Arizona and California and for at least a total of seven Stores
in the States of Iowa, Minnesota and North Dakota. At or before
Closing and each Delayed Closing, Seller shall use its best
efforts to deliver to Purchaser all other applicable consents of
third parties which Purchaser may reasonably request in connec-
tion with the assignments of the Store Leasehold Interests.
4.11 Assignment of Sensormatic Leases. At or before the
Closing and each Delayed Closing, Seller shall have delivered to
Purchaser consents to the assignment to Purchaser of all Sensor-
matic Leases for Sensormatic Equipment located at the Stores, the
Store Leasehold Interests of which are being transferred to
Purchaser at the Closing or applicable Delayed Closing, and
estoppel certificates, in substantially the form attached hereto
as Exhibit G, duly executed by the parties to such Sensormatic
Leases (collectively, the "Sensormatic Lease Consents"). At or
before Closing and each Delayed Closing, Seller shall use its
best efforts to deliver to Purchaser all other consents of third
parties which Purchaser may reasonably request in connection with
the assignments of Seller's interests under the Sensormatic
Leases.
4.12 Assignment of Store Contracts. At or before the
Closing and each Delayed Closing, Seller shall have delivered to
Purchaser consents to the assignment to Purchaser of all Store
Contracts for goods and services affecting the Stores, the Store
Leasehold Interests of which are being transferred to Purchaser
at the Closing or applicable Delayed Closing and estoppel certi-
ficates in substantially the forms attached hereto as Exhibit H,
duly executed by the parties to such Store Contracts (collective-
ly, the "Store Contract Consents"). At or before Closing and
each Delayed Closing, Seller shall use its best efforts to
deliver to Purchaser all other consents of third parties which
Purchaser may reasonably request in connection with the assign-
ments of Seller's interests under the Store Contracts.
4.13 Third Party Consents. At or before the Closing and
each Delayed Closing, Seller shall have delivered to Purchaser
all consents and approvals of any third party (including, without
limitation, Seller's shareholders), administrative agency or
governmental body required by law applicable to Seller in connec-
tion with the transactions contemplated by this Agreement, such
consents and approvals to be in forms and content reasonably
acceptable to Purchaser. Without limiting the generality of the
foregoing, at or before the Closing, Seller shall have obtained
all governmental consents and approvals required to be obtained
by Seller in order to comply with the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 ("HSR").
4.14 Escrow Agreements. At the Closing, Seller shall
deliver to Purchaser an escrow agreement, duly executed by Seller
and Escrow Agent substantially in the form attached hereto as
Exhibit I-1 (the "Section 3.8 Escrow Agreement") and an escrow
agreement duly executed by Seller and Escrow Agent substantially
in the form attached hereto as Exhibit I-2 (the "Section 3.9
Escrow Agreement").
4.15 Entry Devices. At the Closing, Seller shall have
delivered to Purchaser all keys, combinations to locks and
security codes for all security systems (collectively, the "Entry
Devices") relating to those Stores, possession of which are being
delivered to Purchaser at the Closing. At each Delayed Closing,
Seller shall have delivered to Purchaser all Entry Devices
relating to the Store which is the subject of such Delayed
Closing and of which possession was not already delivered to
Purchaser at the Closing.
4.16 Compliance with Bulk Transfer Laws. Seller, to the
extent applicable to a seller of assets, shall have complied with
all applicable bulk transfer laws.
4.17 Auditors' Confirmation. At or before the Closing,
Purchaser shall have received written confirmation from its
auditors (the "Auditors"), which confirmation shall be in form
and substance reasonably acceptable to Purchaser and shall
provide that either (i) Purchaser will not be required to
disclose or include in any filing with the Securities and
Exchange Commission ("SEC") or disseminate to the public separate
financial statements or financial information of, related to or
with respect to any of the Transferred Assets or Purchaser's
financial statements or financial information containing such
financial statements or financial information for the Transferred
Assets, or (ii) Seller's books and records are in such condition
that, in the reasonable opinion of the Auditors, it would be
possible to prepare all audited and unaudited financial state
ments and financial information of, related to or with respect to
any of the Transferred Assets which may be required to be
prepared by any federal securities law or any rule or regulation
promulgated by the SEC and to be filed with the SEC or dissemin-
ated to the public.
4.18 Accuracy of Representations and Warranties. The
representations and warranties of Seller made herein shall be
true in all respects as of the date hereof and as of the Closing
and each Delayed Closing as if each were made again at such time,
and Seller shall have complied with and performed each and every
of the covenants and agreements set forth in this Agreement to be
performed by Seller at or before the Closing and each Delayed
Closing.
4.19 Failure of Delayed Closing. Notwithstanding anything
herein to the contrary, in no event shall the failure to consum-
mate the transactions contemplated at any Delayed Closing due to
the failure of any of the conditions precedent to such Delayed
Closing set forth in this Section 4 affect in any way the trans-
actions consummated at the Closing, or any prior or subsequent
Delayed Closing.
5. CONDITIONS TO OBLIGATIONS OF SELLER.
Seller shall have no obligation to sell the Transferred
Assets to Purchaser or to effect the transactions contemplated by
this Agreement unless at or prior to the Closing and each Delayed
Closing, as applicable, each of the following conditions is
complied with (to the extent applicable to the Transferred Assets
which are the subject of the Closing or the applicable Delayed
Closing) to the satisfaction of, or waived in writing by, Seller:
5.1 Payment of Transferred Asset Purchase Price. At or
before the Closing, Purchaser shall have paid the Transferred
Assets Purchase Price (as adjusted) (other than the Transferred
Inventory Purchase Price) in accordance with the provisions of
Sections 2 and 3 hereof. At or before each Delayed Closing,
Purchaser shall have paid the Post-Closing Transferred Lease
Payment Amount in accordance with the provisions of Sections 2
and 3 hereof.
5.2 Proceedings. As of the Closing and each Delayed
Closing, no claim, investigation, proceeding or litigation,
administrative or judicial, shall be threatened or pending for
the purposes of enjoining or preventing the consummation of the
transactions contemplated in this Agreement or otherwise claiming
that this Agreement or the consummation of such transactions is
unlawful or would result in a fraudulent conveyance.
5.3 Management Agreement. At the Closing, Purchaser shall
have executed and delivered to Seller a Management Agreement
substantially in the form of either Exhibit D-1 or Exhibit D-2
attached hereto (as applicable) with respect to each of the
Stores listed on Schedule 4.7.
5.4 Certificate of Purchaser. Purchaser shall have
delivered to Seller at the Closing and each Delayed Closing a
Certificate of the Corporate Secretary of Purchaser, dated the
Closing Date or the applicable Delayed Closing Date, as the case
may be, reasonably acceptable to Seller certifying (i) that
attached thereto is a true and complete copy of resolutions of
the Board of Directors of Purchaser authorizing the purchase of
the Transferred Assets by Purchaser and the consummation of the
transactions contemplated herein, (ii) as to the incumbency and
specimen signature of each officer of Purchaser executing the
certificate, this Agreement and the other documents and instru-
ments to be delivered by Purchaser pursuant to this Agreement,
(iii) that attached thereto are true and complete copies of the
Certificate of Incorporation and Bylaws of Purchaser, (iv) that
attached thereto is a true and complete copy of a "Good Standing"
Certificate of Purchaser issued by the Secretary of State of the
State of Delaware indicating that Purchaser is in good standing
in the State of Delaware and said "Good Standing" Certificate
shall be dated as of a date no earlier than five business days
prior to the Closing Date or the applicable Delayed Closing Date,
as the case may be, and (v) that attached thereto is a true and
complete copy of a "Good Standing" Certificate of Purchaser
issued by the Secretary of State of the State of California
indicating that Purchaser is qualified to do business in the
State of California and is in good standing, and said "Good
Standing" Certificate shall be dated as of a date no earlier than
five (5) business days prior to the Closing Date or the applica-
ble Delayed Closing Date, as the case may be.
5.5 Opinion of Purchaser's Counsel. At the Closing,
Purchaser shall have delivered to Seller the opinion of Mitchell,
Silberberg & Knupp, substantially in the form attached hereto as
Exhibit J.
5.6 Store Leasehold Assignments and Store Leasehold
Consents. At or before the Closing, Purchaser shall have
delivered to Seller the Store Leasehold Assignments and Store
Leasehold Consents duly executed by Purchaser for those Store
Leases for which Seller delivers Store Leasehold Assignments duly
executed by Seller and Store Leasehold Consents duly executed by
Seller and the applicable lessor pursuant to Section 4.10 hereof.
5.7 Assignment of Sensormatic Leases. At or before the
Closing and each Delayed Closing, Purchaser shall have delivered
to Seller acceptances of the assignments of all Sensormatic
Leases for which Seller delivers to Purchaser assignments thereof
pursuant to Section 4.11 hereof, duly executed by Purchaser.
5.8 Assignment of Store Contracts. At or before the
Closing and each Delayed Closing, Purchaser shall have delivered
to Seller acceptances of the assignment of all Store Contracts
for which Seller delivers to Purchaser assignments thereof
pursuant to Section 4.12 hereof, duly executed by Purchaser.
5.9 Escrow Agreements. At or before the Closing, Purchaser
shall deliver to Seller counterpart copies of the Section 3.8
Escrow Agreement and the Section 3.9 Escrow Agreement, duly
executed by Purchaser.
5.10 Compliance with Bulk Transfer Laws. Purchaser, to the
extent applicable to a purchaser of assets, shall have complied
with all applicable bulk transfer laws.
5.11 Third Party Consents. At or before the Closing and
each Delayed Closing, Purchaser shall have delivered to Seller
all consents and approvals of any third party, administrative
agency or governmental body required by law applicable to
Purchaser which are to be obtained by Purchaser, and all consents
and approvals of any third party pursuant to any contract or
agreement to which Purchaser is a party or is bound immediately
prior to the Closing or the applicable Delayed Closing, in
connection with the transactions contemplated by this Agreement,
such consents and approvals to be in forms and content reasonably
acceptable to Seller. Without limiting the generality of the
foregoing, at or before the Closing, Purchaser shall have
obtained all governmental consents and approvals required to be
obtained by Purchaser in order to comply with HSR.
5.12 Accuracy of Representations and Warranties. The
representations and warranties of Purchaser made herein shall be
true in all respects as of the date hereof and as of the Closing
and each Delayed Closing as if each were made again at such time
and Purchaser shall have complied with and performed each and
every of the covenants and agreements set forth in this Agreement
to be performed by Purchaser at or before the Closing and each
Delayed Closing.
5.13 Failure of Delayed Closing. Notwithstanding anything
herein to the contrary, in no event shall the failure to consum-
mate the transactions contemplated at any Delayed Closing due to
the failure of any of the conditions precedent to such Delayed
Closing set forth in this Section 5 affect in any way the trans-
actions consummated at the Closing, or any prior or subsequent
Delayed Closing.
6. REPRESENTATIONS AND WARRANTIES.
6.1 Seller represents, warrants and covenants to Purchaser
that:
6.1.1 Absence of Conflict. Except as disclosed on
Schedule 6.1.1 attached hereto, the execution and delivery of
this Agreement, the Service Mark License and any Management
Agreement and the consummation of the transactions contemplated
hereby and thereby (i) do not and will not result in the breach
of any of the terms or conditions of, or constitute a default
under, any contract, agreement, lease, commitment, indenture,
mortgage, note, security interest, bond, license, pledge, encum-
brance, Lien, claim, charge, right, option or other instrument or
obligation to which Seller is now a party or by which any item of
the Transferred Assets may be bound or affected; (ii) to the best
knowledge of Seller, do not and will not violate any law, stat-
ute, ordinance, rule or regulation of any administrative agency
or governmental body, or any order, writ, injunction, judgment or
decree of any court, administrative agency or governmental body
binding on Seller, or any decision or finding of any arbitration
panel binding upon Seller or any of the Transferred Assets; (iii)
do not require the consent, authorization or approval of any
third person or administrative agency or governmental body to
which Seller is subject.
6.1.2 Corporate Existence and Authority. Seller is
a corporation duly organized, validly existing and in good stand-
ing under the laws of the State of Minnesota, is authorized to
transact business in each of the States of Arizona, California,
Iowa, Nevada, North Dakota and Utah and has full corporate power
and authority to own its assets and to carry on its business as
it is now being conducted. This Agreement has been duly executed
and delivered by Seller and constitutes its valid and legally
binding agreement and obligation, except to the extent that
enforceability may be limited by applicable bankruptcy, insolv-
ency or similar laws affecting the enforcement of creditors'
rights generally, and subject, as to enforceability, to general
principles of equity (regardless of whether enforcement is sought
in a court of law or equity). This Agreement, the Service Mark
License and any Management Agreement and their performance by
Seller have been duly authorized by all requisite corporate
action of Seller. Seller has the full power, right, legal
capacity and authority to make, execute and deliver this Agree-
ment, the Service Mark License and any Management Agreement and
to perform their obligations hereunder. The shareholders,
beneficially and of record, of Seller are Mary Ann Levitt, Thomas
I. Levitt and Janet Levitt.
6.1.3 Material Agreements. Except as disclosed on
Schedule 6.1.3 and except for the Store Leases, the Sensormatic
Leases and the Store Contracts, Seller is not a party to or bound
by any material contract, lease, agreement, covenant, license or
instrument or commitment, written or oral, affecting or purport-
ing to affect any of the Transferred Assets which will continue
to so affect such Transferred Assets after the Closing or the
applicable Delayed Closing, as the case may be.
6.1.4 Litigation. Except as disclosed on Schedule
6.1.4 attached hereto (the "Existing Litigation"), there are no
actions, suits, proceedings (administrative or otherwise),
arbitrations, investigations pending, or to the best of Seller's
knowledge, threatened against or adversely affecting any of the
Transferred Assets, or Seller, at law or in equity, in any court
or before any federal, state, municipal or other governmental
department, commission, bureau, board, agency or instrumentality
(including, but not limited to, the National Labor Relations
Board), or before any arbitration panel, and to the best of
Seller's knowledge, there are no facts or circumstances which
could form the basis for any such actions, suits, proceedings,
arbitrations or investigations.
6.1.5 Taxes. Seller has duly and timely filed (i)
all federal and state income, profits, franchise, sales, use,
occupation, employment, and other tax returns and reports, (ii)
all federal, state, county and local property tax returns and
reports, and (iii) to the best knowledge of Seller, all county
and local income, profits, franchise, sales, use, occupation,
employment, and other tax returns and reports, required to have
been filed by it, up to and including the date hereof; and Seller
has paid all taxes due and payable, all assessment notices, and
all other taxes, governmental charges, penalties, interests and
fines due and payable by it, on or before the date hereof. There
are no agreements, waivers or other arrangements providing for an
extension of time with respect to the filing of any charges or
deficiencies by, or the assessment of any tax or deficiency
against Seller. Seller is presently current in its employee
payroll taxes. Seller has duly withheld from each payment made
to each person from whom such withholding is required by law the
amount of all taxes or other sums (including, but not limited to,
United States federal income taxes, any applicable state or
municipal income tax, disability tax and Federal Insurance
Contribution Act taxes) required to be withheld therefrom and has
paid the same to the proper tax receiving officers prior to the
due date thereof.
6.1.6 Title to Transferred Assets. When the
Transferred Assets are sold, assigned and delivered to Purchaser
in accordance with this Agreement at the Closing and each Delayed
Closing, as applicable Purchaser will receive, good and market-
able title to the Transferred Assets, free and clear of all
Liens.
6.1.7 Store Lease Defaults. Except as disclosed on
schedule 6.1.7 attached hereto, as to each of the Store Leases,
to the best knowledge of Seller, Seller is not, and no other
party to such lease is, in default with respect to any material
term or condition thereof, nor has any event occurred which
through the passage of time or the giving of notice, or both,
could constitute a default thereunder, or could give a party
thereto the right to accelerate the performance of any obligation
thereunder, or excuse any party from the performance of any
obligation thereunder, or could cause the creation of a Lien on
any of the Transferred Assets. Except as disclosed on Schedule
6.1.7 attached hereto and in the Store Lease and pursuant to any
local laws granting to Lessor a landlord's lien, to the best
knowledge of Seller, the lessor under each Store Lease has no
charge, Lien, claim, defense or offset of any kind under such
lease or otherwise against Seller or the Transferred Assets.
6.1.8 Sensormatic Lease and Store Contracts
Defaults. Except as described on Schedule 6.1.8 attached hereto,
as to each Sensormatic Lease and each Store Contract, to the best
knowledge of Seller, Seller is not, and no other party to such
contract is, in default with respect to any material term or
condition thereof, nor has any event occurred which through the
passage of time, or the giving of notice, or both, could consti-
tute a default thereunder, or could give any party thereto the
right to accelerate the performance of any obligation thereunder
or excuse any party from the performance of any obligation
thereunder, or could cause the creation of a Lien on any of the
Transferred Assets. Except as provided in the Sensormatic Leases
and the Store Contracts, to the best knowledge of Seller, the
parties to the Sensormatic Leases and the Store Contracts (other
than Seller) have no charge, Lien, claim, defense or offset of
any kind under any of the Sensormatic Leases or the Store
Contracts, as the case may be, or otherwise against Seller or,
the Transferred Assets.
6.1.9 Physical Condition of Stores and F, F & E.
Except as described on Schedule 6.1.9 attached hereto, to the
best knowledge of Seller, all of the Stores and the F, F & E,
including, without limitation, the roofs and structural elements
thereof and the heating, ventilation, air conditioning, plumbing,
electrical, mechanical, sewer, waste water, storm water, and
other systems or facilities included therein, are in good
operating condition and repair and structurally sound with no
known defects other than those readily observable during the Due
Diligence Investigation. Seller has provided Purchaser with
copies of all written evidence which Seller has in its possession
regarding any such defects (irrespective of whether such defects
are readily observable during the Due Diligence Investigation).
To the best knowledge of Seller, all of the Stores, the Store
Real Property, the Shopping Centers and all of the F, F & E are
free from any and all Polluting Substances.
6.1.10 Store Compliance with Laws.
6.1.10.1 To the best knowledge of Seller, none of
the Stores or the Shopping Centers, nor the use or occupancy
of the Stores or of the Shopping Centers is in violation of
any building, zoning, land use or other law, ordinance,
code, rule or regulation, and Seller has not received any
notice from any governmental or regulatory body or other
person or entity asserting any violation of any such law,
ordinance, code, rule or regulation or requiring any work,
repairs, construction, alterations or installations on or in
connection with said property which has not been complied
with. To the best knowledge of Seller, the continued use,
occupancy and operation of the Stores and the Shopping
enters as currently used, occupied and operated, does not
constitute a non-conforming use under any law. Seller does
not have any knowledge of any pending or anticipated change
in any real property law which could have a material adverse
effect upon ownership, alteration, use, occupancy or opera-
tion of the Stores or the Shopping Centers or any portion
thereof. Seller is not a party to any dispute with any
governmental authority having jurisdiction over any of the
Stores regarding the application of any real property law to
such property.
6.1.10.2 All certificates of occupancy, permits,
licenses, franchises, approvals and other authorizations of
all governmental authorities having jurisdiction over the
Stores, and from all insurance companies and fire rating or
other simiar boards and organizations, required to have been
issued to Seller or the lessors under the Store Leases to
enable the Stores to be lawfully occupied and used for all
of the purposes for which they are occupied and used (col-
lectively, the "Occupancy Certificates and Permits") have
been lawfully issued and, to the best knowledge of Seller,
are in full force and effect as of the date hereof. Seller
has not received or been informed by any third party of the
receipt by it of any notice from any governmental authority
having jurisdiction over the Stores or any applicable
insurance companies and/or fire rating or similar boards or
organizations threatening a suspension, revocation, modifi-
cation or cancellation of any Occupancy Certificates and
Permits and to the best of the knowledge of Seller there is
no basis for the issuance of any such notice or the taking
of any such action.
6.1.10.3 To the best knowledge of Seller, the
Stores are not in violation of any federal, state or local
law, ordinance or regulation in regard to industrial hygiene
or occupational safety or to the environmental conditions
on, under, above or about the Stores, the Store Real Proper-
ty or the Shopping Centers, including, without limitation,
soil and ground water conditions. Except as described on
Schedule 6.1.10.3 attached hereto, Seller has not and, to
the best of Seller's knowledge, no third party has, used,
generated, manufactured, stored or disposed of on, under,
above, or about the Stores, the Store Real Property, or the
Shopping Centers, or transported to or from the Stores and
said real property, any Polluting Substances, other than in
compliance with all applicable federal, state and local laws
and ordinances and regulations.
6.1.10.4 To the best knowledge of Seller, no
employee or other third party has claimed in writing to have
suffered from "sick building" syndrome as a result of having
been in any of the Stores.
6.1.11 Inventory. Each item of Inventory is unused
(except for non-promotional play copies).
6.1.12 Offices and Places of Business. Since its
incorporation Seller has not established any offices or places of
business outside of the States of Arizona, California, Iowa,
Minnesota, Nevada, North Dakota, Utah, South Dakota, Illinois,
Nebraska, Colorado and Oklahoma and has not done business under
any name other than "The Record Shop, Inc.," "Record Shop,"
"Paradise Music" or "Record Store"; and Schedule 1.2.5 attached
hereto, sets forth all Store Trade Names. For purposes of
applicable bulk transfer law, Seller's chief executive office is
in the State of California.
6.1.13 Employee Obligations. As of the Closing Date
and each Delayed Closing Date, Seller will not be in breach of or
default under any undertakings or obligations, including, without
limitation, the salaries and other payments (including, without
limitation, severance pay, vacation pay, sick pay, back pay,
health insurance, worker's compensation and other benefits) due
to or for the account of Seller's employees and agents pursuant
to any oral, written or implied contracts or otherwise.
6.1.14 Labor Agreements. There are no union, labor
or collective bargaining agreements or contracts, whether oral,
written or implied, pertaining to or affecting the business of
Seller or any employment agreements, written or (to the best
knowledge of Seller) oral, with any employee of Seller or of any
other persons or entities performing services in connection with
the operation or maintenance of the Transferred Assets. To the
best knowledge of Seller, there is no labor organization which
has the right to, or claims to have the right to, represent any
employee of Seller or any other person performing services in
connection with the operation or maintenance of the Transferred
Assets. Seller has heretofore or concurrently herewith delivered
to Purchaser true and complete copies of its credit policies
and credit data with respect to its customers and all of its
employee manuals, handbooks, policies and benefits. All such
policies are in full force and effect, have not been amended or
modified in any respect whatsoever, and have been followed in all
material respects by Seller. Since the commencement of opera-
tions of Seller there has not been any strike, work stoppage,
interruption, slow-down or other occurrence, event or similar
labor disturbance in connection with the operation of Seller's
business, and, to the best knowledge of Seller, no strike, work
stoppage, interruption, slow-down or other such occurrence,
event, condition, or disturbance is threatened.
6.1.15 ERISA. Except as described on Schedule
6.1.15, Seller is not a party to, nor is required to make
employer contributions to, any "employee pension benefit plan"
(within the meaning of Section 3(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) or any
"employee welfare benefit plan" (within the meaning of Section
3(1) of ERISA) or any other pension, profit sharing, retirement,
deferred compensation, bonus, stock purchase, severance, hospi-
talization, medical insurance, life insurance or other employee
benefit plan, agreement, arrangement or understanding maintained
for the benefit of employees involved in the management or
operation of its business.
6.1.16 Employee Claims. Except as described on
Schedule 6.1.16 attached hereto, Seller has not received written
notice of any workers' compensation, unemployment, discrimination
or overtime claim; to the best knowledge of Seller, Seller is not
in violation or alleged violation, and has not received any
written notice of any alleged violation, committed any act or
omitted to perform any act which upon the passage of time will
cause it to be in violation of, any applicable federal, state,
local or foreign law, ordinance, regulation, order, judgment,
injunction, award, decree, license, permit, authorization or
other requirement of any governmental or regulatory body, law
enforcement agency or organization, court or arbitrator,
including, without limitation, any federal, state or local laws,
ordinances, regulations or requirements relating to the pollution
or protection of the environment.
6.1.17 Accuracy and Completeness of Documents. The
copies of the Store Leases, the Sensormatic Leases, the Store
Contracts, the Occupancy Certificates and Permits, the Schedule
of Original Costs, the Schedule of Gift Certificates and Merchan-
dise Credits, the Revenue Schedule, the Payroll Tax Schedule and
the "Financial Statements" (as hereafter defined) provided to
Purchaser or the Auditors, as the case may be, are (or when
delivered will be) true, correct, complete and accurate. None of
the Store Leases, Sensormatic Leases, Store Contracts or Occupan-
cy Certificates and Permits have been amended (except pursuant
to amendments, copies of which have been delivered to Purchaser),
or revoked and they represent binding and enforceable agreements
against the parties thereto.
6.1.18 Gift Certificates and Merchandise Credits.
As of the Closing Date or the applicable Delayed Closing Date,
all Gift Certificates and Merchandise Credits will have been
issued by Seller consistent with Seller's past practices and in
the ordinary course of its business.
6.1.19 Fiscal Year of Seller. Seller's fiscal year
ends March 31.
6.1.20 Absence of Change. As of the Closing Date
and each Delayed Closing Date, no event has occurred or failed to
occur subsequent to Purchaser's inspection of the Transferred
Assets and the Stores which has materially and adversely affected
any of the Transferred Assets or the Stores exclusive of changes
in industry and general economic conditions.
6.1.21 Misstatement or Omission of Material Facts.
No representation or warranty by Seller in this Agreement or in
any document, agreement, instrument, certificate, exhibit or
schedule attached hereto or delivered pursuant hereto contains
any untrue statement of a material fact or omits to state any
facts necessary to make the statements or facts contained herein
or therein not misleading.
6.2 Purchaser represents, warrants and covenants to Seller
that:
6.2.1 Absence of Conflicts. Except as disclosed on
Schedule 6.2 attached hereto, the execution and delivery of this
Agreement, the Service Mark License, and any Management Agreement
by Purchaser and the consummation of the transactions contemplat-
ed hereby to be performed by Purchaser (i) do not and will not
result in the breach of any of the terms or conditions of, or
constitute a default under, any contract, agreement, lease,
commitment, indenture, mortgage, note, security interest, bond,
license, pledge, encumbrance, lien, claim, charge, right, option
or other instrument or obligation to which Purchaser is now a
party; (ii) to the best knowledge of Purchaser, do not and will
not violate any law, statute, ordinance, rule or regulation of
any administrative agency or governmental body to which Purchaser
is subject, or any order, writ, injunction, judgment or decree of
any court, administrative agency or governmental body binding
upon Purchaser, or any decision or finding of any arbitration
panel binding upon Purchaser; (iii) do not require the consent,
authorization or approval of any third person or administrative
agency or governmental body to which Purchaser is subject.
6.2.2 Corporate Existence and Authority. Purchaser
is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, is authorized
to transact business in the State of California and has full
corporate power and authority to own its assets and to carry on
its business as it is now being conducted. This Agreement has
been duly executed and delivered by Purchaser and constitutes its
valid and legally binding agreement and obligation, except to the
extent that enforceability may be limited by applicable bankrupt-
cy, insolvency or similar laws affecting the enforcement of
creditors' rights generally, and subject, as to enforceability,
to general principles of equity (regardless of whether enforce-
ment is sought in a court of law or equity). This Agreement,
the Service Mark License and any Management Agreements and their
performance by Purchaser have been duly authorized by all
requisite corporate action of Purchaser. Purchaser has the full
power, right, legal capacity and authority to make, execute and
deliver this Agreement, the Service Mark License and any Manage-
ment Agreements and to perform their obligations hereunder.
6.2.3 Misstatement or Omission of Material Fact.
No representation or warranty by Purchaser in this Agreement or
in any document, agreement, instrument, certificate, exhibit or
schedule delivered pursuant hereto contains any untrue statement
of a material fact or omits to state any facts necessary to make
the statements or facts contained herein or therein not
misleading.
6.3 Accuracy on Closing Date and each Delayed Closing Date.
Each of the representations and warranties by Purchaser and
Seller set forth in this Agreement and in any document, agree-
ment, instrument, certificate, exhibit or schedule referred to
herein or delivered pursuant hereto shall be deemed renewed and
made again at the Closing and each Delayed Closing (if applicable
to the Transferred Assets which are the subject of such Delayed
Closing) as if made at such times, and subject to Section 6.4
hereof, shall survive the Closing and each Delayed Closing and
any investigation conducted by or on behalf of the parties hereto
whether before or after the Closing Date or each Delayed Closing
Date, including, but not limited to, the investigations and
audits contemplated by Section 7.1 hereof.
6.4 Limitations on Representations and Warranties. When a
representation and warranty is qualified by the phrase "to the
best of Seller's knowledge" or words of similar import, such
phrase shall mean the representation or warranty is made to the
best knowledge of Seller's officers and directors with due review
of Seller's books, records and files. The representations and
warranties of Seller in Section 6.1 and of Purchaser in Section
6.2 shall survive for a period of one (1) year following the
Closing or the applicable Delayed Closing. Notwithstanding the
immediately preceding sentence, with respect to those representa-
tions and warranties of Seller which relate to unpaid sales, use,
personal property, payroll and other taxes and violations of laws
or compliance with laws for which Purchaser may have "successor
liability" to a third party, such representations and warranties
shall survive until the later of (i) the first anniversary of the
Closing or applicable Delayed Closing or (ii) the expiration of
the applicable statute of limitations.
7. ADDITIONAL COVENANTS.
7.1 Purchaser's Due Diligence Investigation.
7.1.1 Seller acknowledges that Purchaser has
conducted, and intends to conduct, at Purchaser's expense,
investigations concerning Seller and its assets, liabilities,
financial condition, business and affairs, the Transferred Assets
and all other matters reasonably related to the transactions
contemplated by this Agreement, including, without limitation,
(i) one or more physical inspections of the Stores, F, F & E,
Sensormatic Equipment and Inventory, (ii) a review of all books,
records, agreements, documents and other materials and informa-
tion reasonably related to the transactions contemplated by this
Agreement, including, without limitation, all Store Leases, the
Sensormatic Leases and Store Contracts (collectively, the "Due
Diligence Materials"), (iii) an environmental audit of the Stores
and the Store Real Property regarding the presence of unlawful
hazardous materials under or within the Stores, the Store Real
Property or the common areas of the Shopping Centers (to the
extent permitted by the Store Leases), (iv) an environmental
audit of the Stores and the Store Real Property regarding the
presence of asbestos under or within the Stores, the Store Real
Property or the common areas of the Shopping Centers (to the
extent permitted by the Store Leases), and (v) a determination
that Purchaser will not have any "successor liability" for any
debts, obligations and liabilities of Seller (other than the
Assumed Obligations) (collectively, the "Due Diligence Investi-
gation").
7.1.2 Prior to Closing, and thereafter with respect
to any of the Transferred Assets the sale of which is consummated
at a Delayed Closing, Seller agrees to cooperate fully with all
such investigations conducted by or on behalf of Purchaser
hereunder, and shall provide Purchaser and its authorized
representatives with reasonable access (a) to all Stores, Store
Real Property, Sensormatic Equipment, F, F & E and Inventory, (b)
to all Due Diligence Materials, and (c) to all employees, agents,
attorneys and accountants of Seller. In addition, subject to
Section 7.1.3 hereof, Seller shall furnish to Purchaser such
financial information, operating data and other information
concerning Seller's operations as Purchaser may reasonably
request from time to time. Purchaser acknowledges that it has
completed its due diligence review of the Store Leases (other
than those documents and agreements relating to the Store Leases
which have not, as of the date hereof, been provided to Purchas-
er, and which are listed in that certain letter from Gregory A.
Fisher to John Hatherley dated April 7, 1993 (the "Letter
Documents")) and has completed a "walk through" inspection of the
Stores (including an inventory of the F, F & E). Purchaser
further acknowledges that it has notified Seller of all of
Purchaser's objections to the conditions it has discovered as
part of such "walk through" inspection and review of the Store
Leases (other than the Letter Documents). Purchaser shall
complete its due diligence review of the Letter Documents, any
Sensormatic Leases and Store Contracts not delivered to Purchaser
prior to the date hereof (the "Undelivered Documents") and any of
"Seller's Schedules" (as hereafter defined) which are contem-
plated by this Agreement to be delivered by Seller to Purchaser
prior to or on the date hereof but which have not been delivered
to Purchaser as of the date hereof (the "Undelivered Seller's
Schedules"), within three weeks after delivery to Purchaser of
the Letter Documents, the Undelivered Documents and the Undeli-
vered Seller's Schedules, respectively, at which time Purchaser
shall notify Seller whether Purchaser objects to any of the
conditions it discovered as part of its review of the Letter
Documents, the Undelivered Documents and the Undelivered Seller's
Schedules, provided, however, Seller acknowledges that all
environmental audits conducted pursuant to this Section 7.1 shall
be concluded as expeditiously as possible, but may not be
completed prior to the Closing or applicable Delayed Closing.
Subject to Section 7.1.3 hereof, in the event Purchaser notifies
Seller within the periods specified above of any objections to
the conditions it discovers as part of the Due Diligence Investi-
gation, Seller shall have right, but not the obligation, to cure
such objections to Purchaser's reasonable satisfaction prior to
Closing. In the event Seller fails to so cure all such objec-
tions prior to Closing, notwithstanding anything to the contrary
in this Agreement, Purchaser shall not be obligated to purchase
any Sensormatic Lease or Store Contract which is the subject of
such uncured objections, or to purchase the Store Leasehold
Interests, or any Inventory, F, F & E, Sensormatic Leases, Store
Contracts, Sensormatic Equipment or Plans related to, or located
in, the Stores subject to such Store Leasehold Interests, and the
Base Purchase Price shall be reduced in accordance with Section
2.5 hereof, with respect to all Stores which are the subject of
such uncured objections. Failure by Purchaser to object based on
its Due Diligence Investigation within the periods specified
above, shall be deemed to be Purchaser's acknowledgement that the
conditions set forth in Section 4.1 hereof have been met.
7.1.3 Notwithstanding anything to the contrary
contained in this Agreement, commencing as soon as practicable
after the date hereof and continuing until the Closing or the
applicable Delayed Closing, Purchaser shall have the right to
review Seller's relevant books and records solely for the
purposes of verifying the accuracy of (i) Seller's representa-
tions and warranties contained in this Agreement, and (ii)
Seller's Schedules, the schedule of personal property taxes to be
delivered by Seller to Purchaser pursuant to Section 3.5 hereof
(the "Personal Property Tax Schedule"), the schedule of sales
taxes to be delivered by Seller to Purchaser pursuant to Section
3.6 hereof (the "Sales Tax Schedule"), and the schedule of
employee payroll taxes to be delivered by Seller to Purchaser
pursuant to Section 3.7 hereof (the "Employee Payroll Tax
Schedule"). In the event Purchaser notifies Seller of any
material objections to the accuracy of the information set forth
on Seller's Schedules, the Personal Property Tax Schedule, the
Sales Tax Schedule or the Employee Payroll Tax Schedule, or any
material breaches of Seller's representations and warranties it
has discovered as part of such review, Seller shall have the
right, but not the obligation, to cure the same to the reasonable
satisfaction of Purchaser within a reasonable time after such
notification by Purchaser. In the event Seller fails to so cure
such objections to Purchaser's reasonable satisfaction within the
specified time period, Purchaser shall have the right to termi-
nate this Agreement.
7.1.4 After the Closing and each applicable Delayed
Closing, Purchaser may conduct an audit of the Revenue Schedule,
the Schedule of Original Costs and the Schedule of Gift Certifi-
cates and Merchandise Credits. Seller agrees to fully cooperate
with Purchaser and its authorized representatives in connection
with such audits and to give Purchaser and its representatives
reasonable access to all of the books and records of Seller in
order to permit Purchaser to conduct such audits.
7.2 Store Leasehold Consents. Seller shall take all
actions reasonably necessary to obtain the Store Leasehold
Consents from each of the lessors under the Store Leases in
substantially the form attached hereto as Exhibit A; provided,
however, that (a) obtaining the Store Leasehold Consents in the
attached form shall not be a condition to the Closing or any
Delayed Closing and Purchaser shall be obligated to purchase any
Store Leasehold Interest, and any Inventory (to the extent not
previously transferred to Purchaser), F, F & E, Sensormatic
Leases, Store Contracts or Plans related to, or located in, the
Store subject to such Store Leasehold Interest, in the event that
(i) the applicable lessor executes and delivers a Store Leasehold
Consent in accordance with Section 2.5.1.1 hereof, and (ii)
Purchaser would otherwise be required to purchase the applicable
Store Leasehold Consent pursuant to the terms of this Agreement,
and (b) Seller shall not be required to commence litigation in
order to obtain such Store Leasehold Consents. Purchaser may
also attempt to renegotiate the Store Leases with the various
lessors thereunder and Seller agrees to cooperate with Purchaser
in requesting such changes; provided, however, that this trans-
action is only contingent on Purchaser renegotiating the terms of
the Store Leases with respect to the Essential Provisions and
Purchaser shall not condition its request for consent to
assignment of a Store Lease on any terms which are not Essential
Provisions or communicate to any lessor that this transaction is
contingent on lessor's agreement to renegotiateits Store Lease
with respect to any terms which are not Essential Provisions.
Notwithstanding the foregoing, the parties acknowledge and agree
that Purchaser shall attempt to obtain the Store Leasehold
Consents as well as non-disturbance agreements from the lessors'
secured lenders on behalf of Seller (provided that obtaining any
or all of said non-disturbance agreements shall not be a
condition of the Closing or any Delayed Closing) by delivering a
letter to the relevant lessor requesting the Store Leasehold
Consents (and any changes or modifications to the Store Lease
which Purchaser may desire) and the non-disturbance agreements;
provided, however, that Seller shall approve all correspondence
and written materials transmitted by Purchaser to the lessors
before the same are transmitted, such approval not to be
unreasonably withheld. Purchaser agrees to provide Seller with
at least 48 hours notice prior to Purchaser's initial meeting
with any lessor in connection with the negotiation of any store
Leasehold Consent in order to provide Seller with the opportunity
to participate in such meeting. Purchaser shall be under no
obligation to give Seller any notice of any subsequent meetings
with said lessors. Purchaser shall act reasonably and profes-
sionally in its written and oral communications with all lessors
and in a manner designed to secure the lessor's consent to this
transaction. Purchaser also agrees to pay all of the costs of
the lessors under the Store Leases in connection with obtaining
the Store Leasehold Consents (the "Lessor Costs") and renegotiate
the Store Leases, provided that the Lessor Costs in connection
with obtaining the Store Leasehold Consents shall not exceed
$2,000 for any Store or $30,000 in the aggregate. In the event
that in connection with obtaining any Store Leasehold Consents,
the Lessor Costs exceeds $2,000 (or exceeds $30,000 in the
aggregate) and Purchaser elects not to pay the additional cost,
the related Store Leasehold Interest shall not be deemed to be
included within the Transferred Assets (resulting in an appropri-
ate reduction in the Transferred Assets Purchase Price) unless
Seller elects to pay, and in fact pays, all Lessor Costs with
respect to such Store Leasehold Consents in excess of $2,000 per
Store Lease (or in excess of $30,000 in the aggregate).
7.3 Consents to Assignment of Sensormatic Leases and Store
Contracts. Seller shall take all actions reasonably necessary
obtain from each of the other parties to the Sensormatic Leases
and the Store Contracts (i) the consents to the assignment of all
Sensormatic Leases and Store Contracts to Purchaser and (ii)
estoppel certificates, dated the Closing Date, in substantially
the forms attached hereto as Exhibits G and H; provided, however,
that Seller shall not be required to commence litigation in order
to obtain such documents.
7.4 Tax Liability Releases. Seller will cooperate fully
with Purchaser as reasonably requested by Purchaser in connection
with obtaining all relevant releases from appropriate federal,
state and/or municipal taxing authorities whereby Purchaser is
released from any and all liability for unpaid Current Property
Taxes, Sales Taxes and Payroll Taxes (collectively, the "Tax
Liability Releases").
7.5 Operation of Seller's Business. Without prior written
consent of Purchaser, Seller shall not sell, lease, abandon,
assign, transfer, license, use or otherwise dispose of any item
of the Transferred Assets; or enter into any contracts, agree-
ments, understanding or transaction other than in the ordinary
course of Seller's business; or commit any act which would result
in the failure or breach of Seller's representations and warran-
ties made herein, or which would render any of them untrue, or
which would or may diminish the value of the Transferred Assets
to Purchaser. Without limiting the generality of the foregoing,
Seller shall not amend, modify, supplement, terminate or rescind
any of the Store Leases, Sensormatic Leases or Store Contracts,
without the prior written consent of Purchaser. Notwithstanding
the foregoing, Purchaser hereby consents to the sale by Seller
prior to the Closing of all or a portion of the Inventory for
Seller's account prior to the Closing in the ordinary course of
business of Seller.
7.6 Maintenance of Transferred Assets. Seller shall keep
and maintain in operating condition, substantially equivalent to
the condition existing on the date of this Agreement, the Stores
and each item of F, F & E, Sensormatic Equipment and Inventory,
reasonable wear and tear excepted.
7.7 Seller's Employees.
7.7.1 Seller shall use reasonable efforts to keep
available to Purchaser the services of Seller's Store and field
operation personnel (although nothing herein shall be deemed to
require or obligate Purchaser to employ or retain any such
employees), and to preserve for Purchaser the goodwill of
customers, clients and all others having business relations with
Seller.
7.7.2 Seller shall make available to Purchaser true
and complete copies of (i) all of Seller's employee books and
records (subject to the prior written consent of the affected
employee) as soon as practical after Purchaser's reasonable
request, and (ii) all of Seller's books and records relevant to
any claim, suit or proceeding against Purchaser threatened,
commenced, made or brought by any third party in connection with
or arising out of the operation of the Stores or the Transferred
Assets as soon as practicable after Purchaser's request therefor.
7.7.3 Seller shall not enter into any union, labor
or collective bargaining agreement or contract or employment
contract pertaining to or affecting any of the Transferred Assets
or the conduct of business of Seller as presently being con-
ducted, whether or not with a union or other bargaining agent
representing employees of Seller or with an employee directly.
Seller shall be solely responsible for and shall pay to its
employees all accrued salaries, severance pay, vacation pay, sick
pay, back pay and other benefits accrued through or owing as of
the Closing and each Delayed Closing.
7.7.4 Immediately prior to the Closing, Seller
shall terminate all Store employees working in Stores, the
possession of which is delivered to Purchaser on the Closing
Date. Immediately prior to any Delayed Closing, Seller shall
terminate all Store Employees working in Stores, the possession
of which is delivered to Purchaser on the applicable Delayed
Closing Date.
7.8 Maintenance of Insurance. Seller shall continue to
maintain in full force and effect all policies of insurance now
in effect or renewals or appropriate replacements thereof, and
shall give all notices and present all claims under all policies
of insurance in due and timely fashion, until the Closing or
Delayed Closing for insurance relating to Stores possession of
which is not transferred at the Closing.
7.9 Maintenance of Books and Records. Both prior to and
for five years after the Closing, Seller (or Seller's share-
holders, in the event that Seller has been dissolved) shall keep
and shall make available to Purchaser for inspection and copying
upon reasonable notice all of the materials referred to in
Sections 7.1 and 7.7.2. For the avoidance of the doubt, Seller
shall permit Purchaser and Purchaser's accountants and attorneys
with reasonable access to all books and records of Seller for the
purpose of preparing any financial statements and information
which may be required under any applicable laws, rules or
regulations, including, without limitation, all federal and state
securities laws and all rules and regulations which may be
promulgated from time to time by the SEC or any state agency
or authority having jurisdiction over Purchaser and its
affiliates.
7.10 Payment of Taxes. Seller shall duly and timely file
all tax returns required to be filed by it and will promptly pay
all taxes, assessments and governmental charges which shall be
due and payable; Seller shall not enter into any agreement,
waiver or arrangement providing for an extension of time with
respect to the filing of any tax return or the payment or assess-
ment of any tax, governmental charge or deficiency; and Seller
shall withhold from each payment to each of its employees the
amount of all taxes or other sums (including, but not limited to,
United States federal income taxes and any applicable state or
local income taxes or federal Insurance Contribution Act taxes)
required to be withheld therefrom and will pay the same to the
proper tax-receiving officers prior to their respective due
dates.
7.11 Compliance with Bulk Transfer Laws. Purchaser and
Seller agree to cooperate fully with the other party in connec-
tion with the compliance with all applicable bulk transfer laws
other than the bulk transfer laws of the States of Arizona and
Utah.
7.12 Use of Cash Registers. For no additional considera-
tion, Seller hereby grants Purchaser the right to use all of
Seller's cash registers located in each of the Stores as of the
date hereof for a period of 90 days from the Closing Date or
applicable Delayed Closing Date for such Store, and Purchaser
agrees to deliver (at Seller's expense) said cash registers to
Seller within 14 days of the expiration of said 90 day period.
Until Purchaser delivers all of the applicable cash registers to
a common carrier selected by Seller, all "risk of loss" to said
cash registers shall remains with Purchaser.
7.13 Removal of Certain Inventory. Within 14 days after the
later of the date on which Purchaser and Seller agree in writing
as to the character of such Inventory as Current Catalog Inven-
tory, Non-Returnable Inventory or Other Inventory or the date on
which the Arbitrator issues his or her decision in connection
therewith, Seller shall remove, at its sole cost and expense, all
Non-Returnable Inventory and Other Inventory not purchased by
Purchaser pursuant to the terms of this Agreement from all Stores
(other than those Stores which Seller will continue to operate
after the Closing or applicable Delayed Closing) and all other
assets located in said Stores that do not constitute Transferred
Assets. All Non-Returnable Inventory or Other Inventory and
other assets not purchased pursuant to the terms of this Agree-
ment and not removed by Seller from the Stores (other than those
Stores which Seller will continue to operate after the Closing or
applicable Delayed Closing) within said 14-day period shall be
deemed sold to Purchaser for no additional consideration. Within
14 days of the later of the date on which Purchaser and Seller
agree in writing as to the character of such Inventory as Current
Catalog Inventory, Non-Returnable Inventory or Other Inventory or
the date on which the Arbitrator issues his or her decision in
connection therewith, Seller shall deliver to the Minnesota
Warehouse or to one of the other Stores possession of which is
then being transferred to Purchaser all of the Inventory which is
to be purchased by Purchaser at the Closing which is located at a
Store, possession of which will not be transferred to Purchaser
at the Closing and at which Seller, with the written consent of
Purchaser (which consent will not be unreasonably withheld), has
ceased operations on or before the Closing or is subject to a
Lease which, on or before the Closing Date, has been terminated.
Within 21 days of the later of the date on which Purchaser and
Seller agree in writing as to the character of such Inventory as
Current Catalog Inventory, Non-Returnable Inventory or Other
Inventory or the date on which the Arbitrator issues his or her
decision in connection therewith, Purchaser shall remove from the
Minnesota Warehouse all Inventory (the "Removed Inventory")
purchased by Purchaser pursuant to the terms of this Agreement
which is located at the Minnesota Warehouse (the "Inventory
Removal"). Until the Inventory Removal is completed, (i) Seller
agrees to provide Purchaser with reasonable access to the
Minnesota Warehouse in order to effect the Inventory Removal, and
(ii) all "risk of loss" to the Removed Inventory shall remain
with Seller.
7.14 Repair of Damaged Transferred Assets. If any item of
the Transferred Assets (other than items of Inventory) shall be
lost, sold or otherwise disposed of, damaged (ordinary wear and
tear excepted) or stolen prior to the Closing, Seller shall
repair or replace the same to the satisfaction of Purchaser (with
repairs or replacements of equal quality to the item in its
condition as of the date of this Agreement) prior to the Closing
or delete the same from the Transferred Assets with an appropri-
ate reduction in the Transferred Assets Purchase Price to be
agreed upon by Purchaser and Seller.
7.15 Inventory Audit. Seller agrees that not later than
5:00 p.m. (local time) on the day before the Closing Date or
applicable Delayed Closing Date, Seller shall close all Stores,
possession of which are being transferred to Purchaser at the
Closing or applicable Delayed Closing, or the applicable Addi-
tional Store, in order to conduct the audit of the Inventory
located therein contemplated by this Agreement. Within two days
after the Inventory Auditor's completion of said audit, Seller
shall deliver to Purchaser the applicable Schedule of Original
Costs.
7.16 Gift Certificates and Merchandise Credits. From and
after the Closing, Purchaser shall only issue gift certificates
and merchandise credits on forms which clearly and unambiguously
state that they have not been issued by any Store, possession of
which at the time of the issuance of such gift certificate or
merchandise credit has been previously delivered to Purchaser.
Purchaser shall have the right to approve, which approval shall
not be unreasonably withheld, the form of all gift certificates
and merchandise credits issued by Seller after the Closing in
order to insure Seller's performance with the terms of this
Section.
7.17 Operation of Stores by Seller using the Store Service
Marks. From and after the Closing Seller shall take all steps
reasonably requested by Purchaser to notify all current and
future creditors of Seller and creditors of all assignees of
Seller which utilize any of the Store Service Marks (collective-
ly, the "Seller's Assignees") and to notify the general public
that Seller and the Seller's Assignees are not affiliated in any
way with Purchaser notwithstanding the fact that Purchaser,
Seller and the Seller's Assignees are concurrently using some or
all of the Store Service Marks.
7.18 Management Agreements. Except as specifically provided
to the contrary in this Section 7.18, Purchaser and Seller shall
mutually determine the Stores which shall be the subject of
Management Agreements. Notwithstanding anything in this Section
7.18 to the contrary, Purchaser and Seller shall enter into a
Management Agreement at Closing at Seller's request upon the
following terms and conditions:
7.18.1 With respect to an unlimited number of
Stores, (i) Purchaser and Seller both have determined, in their
reasonable discretion, that they may be able to obtain a Store
Leasehold Consent for such Store in the future, (ii) Purchaser
and Seller both have determined, in their reasonable discretion,
that entering into a Management Agreement with respect to such
Store will not result in a breach of the applicable Store Lease
or Purchaser and Seller shall have obtained the written consent
of the lessor under the applicable Store Lease to Purchaser and
Seller entering into and performing their respective obligations
under a Management Agreement for such Store, and (iii) Purchaser
and Seller both have determined, in their reasonable discretion,
that entering into and performing their respective obligations
under a Management Agreement will not adversely affect the
parties' ability to obtain a Store Leasehold Consent with respect
to such Store Lease.
7.18.2 Notwithstanding the provisions of Section
7.18.1 to the contrary, with respect to a maximum of two Stores,
Purchaser shall have determined, in its reasonable discretion,
that it will be able to terminate such Management Agreement
pursuant to the terms of such Management Agreement without
incurring any liability to Seller, the applicable lessor or any
third party.
7.19 Delivery of Seller's Financial Statements to the
Auditors. As soon as practicable after the date hereof and in
any event prior to the Closing, Seller hereby agrees to provide
the Auditors with copies of Seller's complete audited financial
statements for the fiscal year of Seller ended March 31, 1992 and
Seller's complete unaudited financial statements for the fiscal
year ended March 31, 1993 (collectively, the "Financial State-
ments"), provided that prior to delivery of the Financial
Statements, Seller and the Auditors shall have entered into a
confidentiality agreement (such agreement to be on terms and
conditions reasonably acceptable to Seller) pursuant to which the
Auditors agree not to provide or disclose to Purchaser or any
other person or entity any information contained in the Financial
Statements unless required by applicable law. Seller hereby
agrees to cooperate with any reasonable request by the Auditors
in connection with the Auditors' review of the Financial
Statements.
8. IDEMNIFICATION OF PURCHASER.
8.1 Notwithstanding the Closing, and regardless of any
investigation at any time made by or on behalf of Purchaser or of
any knowledge or information that Purchaser may have, Seller
agrees to, and hereby does, fully indemnify, defend and save and
hold Purchaser harmless at all times in the event that Purchaser
shall at any time or from time to time suffer any damage,
liability, loss, cost, expense, claim, settlement or causes of
action (including all reasonable attorneys' fees) arising out of,
resulting from or in connection with, or shall pay or become
obligated to pay any sum on account of, any and every "Event of
Purchaser Indemnification." As used herein, an "Event of Purchas-
er Indemnification" shall mean any one or more of the following:
(i) any untruth or any inaccuracy in any representation of Seller
or the breach of any warranty of Seller; (ii) the breach of any
other term, provision, covenant or agreement on the part of
Seller to be performed or observed hereunder; (iii) any other
misrepresentation by Seller in, or omission by Seller from, any
statement, certificate, schedule, exhibit or other document
furnished pursuant to this Agreement by Seller or an officer or
other authorized agent of Seller; (iv) any and all debts,
liabilities and obligations of Seller (whether matured, unma-
tured, contingent or otherwise and whether or not subsequently
discharged in any bankruptcy case or proceeding or otherwise)
which do not constitute an "Assumed Obligation," including,
without limitation, any debts, liabilities or obligations of
Seller arising or accruing as a result of the ownership or
operation of Seller's business or under or in connection with any
of the Store Leases, Sensormatic Leases or Store Contracts prior
to the Closing or the applicable Delayed Closing, whether or not
known by Purchaser, Seller or any third party on the Closing Date
or the applicable Delayed Closing Date including, without
limitation, any debts, liabilities or obligations (whether
matured, unmatured, contingent or otherwise and whether or not
subsequently discharged in any bankruptcy case or proceeding or
otherwise) resulting from or arising in connection with (a)
Seller entering into the Store Leases, Sensormatic Leases and
Store Contracts including, without limitation, any default under
or breach of any of the Store Leases, Sensormatic Leases or Store
Contracts, whether or not known on the Closing Date or the
applicable Delayed Closing Date to Purchaser, Seller or the other
parties to such leases or contracts, or (b) any act or omission
of Seller including, but not limited to, all acts or omissions
which constitute a default under or breach of any of the Store
Leases, Sensormatic Leases or Store Contracts; (v) any liability,
loss, cost, expense, claim, settlement, payment or obligation to
pay arising out of, resulting from or in connection with the
Existing Litigation; (vi) any liability, loss, cost, expense,
claim, or obligation arising out of, resulting from or in connec-
tion with the failure by Seller to comply with any fraudulent
conveyance or transfer, bulk transfer laws or statutes or other
laws or statutes intended to protect the rights of creditors of
Seller, including, without limitation, the bulk transfer laws of
the States of Arizona and Utah and all other states which
Purchaser and Seller mutually agree in writing not to comply with
prior to the Closing or the applicable Delayed Closing; (vii) any
liability, loss, cost, expense, claim or obligation to pay
arising out of, resulting from or in connection with any claim by
a lessor under any Store Lease subject to a Management Agreement
or other party to a Sensormatic Lease or Store Contract subject
to a Management Agreement resulting from Seller's failure to
obtain all applicable consents to Purchaser and Seller entering
into said Management Agreement; (viii) any liability, loss, cost,
expense, claim or obligation to pay arising out of, resulting
from or in connection with Seller's business which it continues
to conduct after the Closing or the applicable Delayed Closing at
any of the Stores or otherwise; or (ix) any liability, loss,
cost, expense or obligation to pay arising out of, resulting from
or in any way connected with any Seller's Assignee (other than
Purchaser).
8.2 Whenever any claim shall arise for indemnification
pursuant to Section 8.1, Purchaser shall promptly notify Seller
of the claim and, when known, the facts constituting the basis
for such claim, provided that failure of Purchaser to provide
Seller with such notice shall not excuse or affect Seller's
indemnification obligations under Section 8.1 unless the failure
to provide such notice shall actually prejudice Seller. In the
event Seller shall become obligated to Purchaser pursuant to
Section 8.1, or in the event that any suit, action, investiga-
tion, claim or proceeding is begun, made or instituted as a
result of which Seller may become obligated to Purchaser
thereunder, Seller shall have the right to defend, contest or
otherwise protect against any such suit, action, investigation,
claim or proceeding by one or more counsel reasonably acceptable
to Purchaser. In the event Seller so elects to defend or
contest, Purchaser shall have the right, at its expense, to
participate in such defense, but such defense shall at all times
be conducted by and under the control of Seller and its counsel.
In the event that Seller elects not to defend, contest or
otherwise protect against any action, investigation, claim or
proceeding, Purchaser shall have the right, at Seller's expense,
to pursue any such defense, contest or protection.
9. INDEMNIFICATION OF SELLER.
9.1 Notwithstanding the Closing, and regardless of any
investigation at any time made by or on behalf of Seller or of
any knowledge or information that Seller may have, Purchaser
agrees to, and hereby does, fully indemnify, defend and save and
hold Seller harmless at all times in the event that Seller shall
at any time or from time to time suffer any damage, liability,
loss, cost, expense, claim, settlement or causes of action
(including all reasonable attorneys' fees) arising out of,
resulting from or in connection with, or shall pay or become
obligated to pay any sum on account of any and every "Event of
Seller Indemnification." As used herein "Event of Seller Indem-
nification" shall mean any one or more of the following: (i) any
untruth or inaccuracy in any representation of Purchaser or the
breach of any warranty of Purchaser; (ii) the breach of any other
term, provision, covenant or agreement on the part of Purchaser
to be performed or observed hereunder; (iii) any other misrepre-
sentation by Purchaser in, or omission by Purchaser from, any
statements, certificate, schedule, exhibit or other document
furnished pursuant to this Agreement by Purchaser or an officer
or other authorized agent of Purchaser; (iv) Purchaser's opera-
tion of the Stores on and after the Closing, provided that any
such Event of Seller Indemnification is not and is not attribut-
able to an Event of Purchaser Indemnification or any actions
taken by the lessor under any Store Lease subject to a Management
Agreement or any other party to a Sensormatic Lease or Store
Contract subject to a Management Agreement which actions are
taken as a result or Seller's failure to obtain all applicable
consents to Purchaser and Seller entering into said Management
Agreement.
9.2 Whenever any claim shall arise for indemnification
pursuant to Section 9.1, Seller shall promptly notify Purchaser
of the claim and, when known, the facts constituting the basis
for such claim, provided that failure of Seller to provide
Purchaser with such notice shall not excuse or affect Purchaser's
indemnification obligations under Section 9.1 unless the failure
to provide such notice shall actually prejudice Purchaser. In
the event Purchaser shall become obligated to Seller pursuant to
Section 9.1, or in the event that any suit, action, investiga-
tion, claim or proceeding is begun, made or instituted as a
result of which Purchaser may become obligated to Seller there-
under, Purchaser shall have the right to defend, contest or
otherwise protect against any such suit, action, investigation,
claim or proceeding by one or more counsel of its choice
reasonably acceptable to Seller. If Purchaser so elects to
defend or contest, Seller shall have the right, at its expense,
to participate in such defense, but such defense shall at all
times be conducted by and under the control of Purchaser and its
counsel, and Seller shall be fully bound by the results thereof.
In the event Purchaser elects not to defend, contest or otherwise
protest against any such suit, investigation, claim or proceed-
ing, Seller shall have the right, at Purchaser's expense, to
pursue any such defense, contest or protection.
10. BROKERS.
10.1 Representation by Purchaser. Purchaser represents and
warrants to Seller that it has not engaged the services of a
broker or finder in connection with this Agreement or the trans-
actions contemplated herein.
10.2 Representation by Seller. Seller represents and
warrants to Purchaser that it has not engaged the services of a
broker or finder in connection with this Agreement or the
transactions contemplated herein other than Ladenburg, Thalmann &
Co. Inc. ("LT"). Seller covenants that it shall be solely
responsible for all fees and other compensation, and for the
reimbursement of all costs and expenses, due LT as a result of
this transaction.
11. NOTICES.
All notices, statements or other documents which any party
shall be required or shall desire to give to the other hereunder
shall be in writing and shall be given by said party only by
telecopier, or by courier or personal delivery or by addressing
it as indicated below, and by depositing it certified first-class
mail, postage prepaid, in the U.S. mail. The addresses of the
parties shall be those of which the other party actually receives
written notice pursuant to this Section 11, and until further
notice:
If to Purchaser: Wherehouse Entertainment, Inc.
1901 Hamilton Avenue
Torrance, CA 90502-1334
Facsimile: (310) 538-2583
Attention: Cathy Wood,
Senior Vice President
With a copy to: Mitchell, Silberberg & Knupp
11377 West Olympic Boulevard
Los Angeles, California 90064
Facsimile: (310) 312-3787
Attention: Roy Shults, Esq.
If to Seller: The Record Shop, Inc.
74 Cloudview Road
Sausilito, CA 94695
Facsimile: (415) 331-2657
Attention: Mort Gerber
With a copy to: Snell & Wilmer
400 East Van Buren
One Arizona Center
Phoenix, AZ 85004-0001
Facsimile: (602) 382-6070
Attention: Jody Pokorski, Esq.
Any such communications given by courier or personal
delivery shall be deemed given when delivered if during normal
business hours on a business day (or if not, the next business
day after delivery); any such communications given by telecopier
shall be deemed given when received if during normal business
hours on a business day (or if not, the next business day after
delivery) provided that such telecopy is legible and that at the
time such telecopy is sent the sending party receives written
confirmation of receipt and forwards a copy of the notice by
courier or personal delivery or by mail; and any such communi-
cations sent by certified first-class mail, postage prepaid shall
be deemed given two business days after the date of mailing.
12. ARBITRATION.
12.1 In the event Purchaser and Seller cannot agree on the
classification of the Inventory as contemplated by Section 2.1.2
the parties hereto agree that arbitration shall constitute the
exclusive remedy for the resolution of any such dispute or
controversy. The arbitration proceedings shall be accomplished
in accordance with the provisions of this Section 12.
12.2 Except as expressly provided herein to the contrary,
the arbitration proceeding shall be conducted under the Commer-
cial Arbitration Rules of the American Arbitration Association in
effect at the time a demand for arbitration is made. To the
extent that there is any conflict between the rules of the
American Arbitration Association and this Section 12, this
Section 12 shall govern and determine the rights of the parties
hereto.
12.3 The arbitration will take place in Los Angeles County,
California before a single arbitrator selected as follows: Either
party may request the American Arbitration Association to provide
a list of proposed arbitrators, all of whom must be retired
judges. The parties hereto shall then take turns crossing off
one name at a time from such list with the last remaining retired
judge being appointed the arbitrator. The parties hereto shall
select by lot which of them strikes the first name from the list
of proposed arbitrators. If the person selected in this method
to be the arbitrator declines or is otherwise unavailable to
serve as the arbitrator of the dispute, the arbitrator shall be
selected from the same list of proposed arbitrators selected in
the reverse order to which those proposed arbitrators' names were
struck from the list until one of such individuals selected to be
the arbitrator accepts the appointment and is able to serve as
the arbitrator.
12.4 The arbitrator selected in the manner set forth in
Section 12.3 hereof (the "Arbitrator") shall be requested to
honor the intention of the parties hereto to resolve the disputes
quickly and inexpensively. All decisions shall be made with this
intention in mind. The decision of the Arbitrator, shall be
exclusive, final and binding on all parties, their successors and
assigns as applicable.
12.5 Except as expressly set forth in this Agreement the
Arbitrator shall determine the manner in which the arbitration
proceeding is conducted, including the time and place of all
hearings, the order or presentation of evidence and all of the
questions that arise with respect to the arbitration proceeding.
12.6 The Arbitrator shall be required to determine all
issues in accordance with California law. The rules of evidence
applicable to proceedings at law in the State of California will
be applicable to the arbitration proceedings.
12.7 The Arbitrator shall issue a single judgment at the
close of the arbitration proceeding which shall dispose of all of
the disputes of the parties that are the subject of the arbitra-
tion. Either party to the arbitration may seek a judgment from a
court of competent jurisdiction to enforce the award of the
Arbitrator.
12.8 The cost of arbitration, including administrative fees,
fees for a record and a transcript, and the arbitrator's fees
shall be borne equally by the parties to the arbitration, except
that the arbitrator shall have the right to award reasonable
attorneys' fees to the party determined by the arbitrator to be
the prevailing party.
13. MISCELLANEOUS.
13.1 Best Efforts. Subject to the provisions hereof, each
of the parties hereto shall use its best efforts to bring about
the transactions contemplated by this Agreement as soon as
practicable, including the execution and delivery of all instru-
ments, assignments and assurances, and shall take or cause to be
taken such further or other actions reasonably necessary or
desirable in order to carry out the intents and purposes of this
Agreement. No party will take or knowingly permit to be taken
any action or do or knowingly permit to be done anything in the
conduct of their respective businesses, or otherwise, which would
be contrary to or in breach of any of the terms or provisions of
this Agreement, or which would cause any of the representations
contained herein to be or become untrue or which would prevent
the satisfaction of any condition contained herein.
13.2 Further Assurances. Seller shall promptly, from time
to time after the Closing, execute and deliver to Purchaser such
further bills of sale, conveyances, assignments, assurances or
other instruments of transfer as Purchaser shall reasonably
request in order to vest and confirm the Transferred Assets in
Purchaser.
13.3 Entire Agreement. This Agreement, the Management
Agreements (if any), the Service Mark License, the Store Lease-
hold Consents, the Store Leasehold Assignments, the Sensormatic
Lease Consents and the Store Contract Consents and other closing
documents contemplated hereunder, contain all of the terms and
conditions agreed upon by the parties hereto with respect to the
subject matter hereof and all prior agreements whether oral or
written between the parties hereto, including (without limita-
tion) the Letter of Intent are merged herein and superseded
hereby. No other agreements not specifically referred to herein,
oral or otherwise, shall be deemed to exist or to bind any of the
parties hereto. This Agreement may not be modified or changed
except by written instruments signed by both of the parties
hereto. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors
and assigns. Nothing in this Agreement, expressed or implied, is
intended to confer on any person other than the parties hereto
and their respective successors and assigns any rights or
remedies under or by reason of this Agreement, the Service Mark
License, any Management Agreement, the Store Leasehold Consents,
the Sensormatic Lease Consents and the Store Contract Consents
and all agreements and documents specifically referred to herein.
13.4 Captions. All captions and headings are inserted for
the convenience of the parties, and shall not be used in any way
to modify, limit, construe or otherwise affect this Agreement.
13.5 Payment of Expenses. Subject to the provisions of
Sections 2.1.2, 3.8, 3.9, 7.2, 12.8 and 13.8 hereof, each party
hereto shall bear its own expenses incurred with respect to the
preparation, authorization, execution and performance of this
Agreement and all transactions contemplated hereunder (including,
without limitation, all fees and expenses of agents, representa-
tives, counsel and accountants).
13.6 Counterparts. This Agreement may be executed in
several counterparts each of which shall be deemed to be an
original and which together shall constitute one and the same
instrument.
13.7 Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of
California, without reference to its principles of conflict of
laws.
13.8 Attorneys' Fees. In the event suit is brought to
enforce or interpret any part of this Agreement or the rights or
obligations of any party to this Agreement, the prevailing party
shall be entitled to recover as an element of such party's costs
of suit, and not as damages, reasonable attorneys' fees to be
fixed by the court. The prevailing party shall be the party who
is entitled to recover its costs of suit whether or not the suit
proceeds to final judgment. A party not entitled to recover its
costs shall not recover attorneys' fees. No sum for attorneys'
fees shall be counted in calculating the amount of judgment for
purposes of determining whether a party is entitled to recover
its costs or attorneys' fees.
13.9 Confidentiality. Prior to the Closing, without the
prior written consent of Purchaser or Seller, as the case may be
(which consent shall not be unreasonably withheld), neither
Purchaser nor Seller will disclose the contents of this Agreement
or any instrument, certificate or other document executed in
connection herewith or the negotiations with the parties hereto
regarding the subject matter of this Agreement other than to its
officers, directors, employees, attorneys, accountants and agents
who have a reasonable need to know such information and only upon
such individuals agreeing to keep such information confidential;
provided, however, this Section shall not prohibit (i) any
disclosure (including, without limitation, any dissemination of
copies of this Agreement) required by any applicable law,
statute, rule or requested by any governmental agency (including,
without limitation, any federal or state securities law and any
rule or regulation promulgated by the SEC or any state agency or
authority having jurisdiction over the parties or their affili-
ates) or any subsequent disclosure once said information becomes
public either pursuant to the consent of all of the parties
hereto or as a result of disclosure by a third party whose
disclosure is not a breach of this Section, (ii) disclosure of
such information to lessors of Seller or to creditors of any
party hereto or any lenders of any party hereto who require such
information as a condition to maintaining or extending any
credit, or (iii) any disclosure of such information in any
financial statements of Purchaser, Seller or affiliates thereof
to the extent such disclosures are required by law (including,
without limitation, any federal or state securities law and any
rule or regulation promulgated by the SEC or any state agency or
authority having jurisdiction over the parties or their affili-
ates). If this transaction fails to close for any reason
whatsoever, Purchaser shall immediately return to Seller all
books, records, reports, Store Leases and other information and
documents furnished by Purchaser or relating to the operations of
Seller.
13.10 Exhibits and Schedules. Promptly following the
execution of this Agreement, (i) Purchaser and Seller shall
negotiate in good faith all of the documents to be attached
hereto as Exhibits and Schedules 2.2 and 4.7, (ii) Seller shall
provide to Purchaser all of the Schedules other than Schedules
2.2, 4.7 and 6.2 ("Seller's Schedules"), and (iii) Purchaser
shall provide to Seller Schedule 6.2 ("Purchaser's Schedule").
Following negotiation of the Exhibits and Schedules 2.2 and 4.7
and delivery of Seller's Schedules and Purchaser's Schedule,
Purchaser and Seller shall execute an amendment to this Agreement
incorporating said Exhibits and Schedules herein. In the event
that the said amendment is not executed and delivered on or
prior to May 28, 1993 due to the fact that the Exhibits have not
been completed or Seller has failed to deliver all of Seller's
Schedules, Purchaser may terminate this Agreement in its sole
discretion. In the event that said amendment is not executed and
delivered on or prior to May 28, 1993 due to the fact that the
Exhibits have not been completed or Purchaser has failed to
deliver Purchaser's Schedule, Seller may terminate this Agreement
in its sole discretion. Notwithstanding anything to the contrary
contained in this Section 13.10, Seller and Purchaser hereby
acknowledge and agree that Schedules 2.2 and 4.7 may be completed
at any time prior to the Closing.
13.11 Facsimile Signatures. This Agreement may be
executed by signing and transmitting the signature page of this
Agreement by facsimile transmission to the other party. Any
party transmitting its signature by facsimile transmission shall
thereafter promptly transmit this Agreement bearing an original,
"live" signature to the other party.
13.12 Hart-Scott-Rodino Compliance. Notwithstanding
anything to the contrary contained herein, in no event shall
Purchaser be obligated to purchase any Inventory hereunder which,
in the reasonable discretion of Purchaser and/or Seller, would
cause the parties to violate HSR.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first above written.
PURCHASER: SELLER:
WHEREHOUSE ENTERTAINMENT, INC., THE RECORD SHOP, INC.,
a Delaware corporation a Minnesota
corporation
By: /s/ Scott Young By: /s/ Mary Ann Levitt
----------------------- --------------------
Scott Young Mary Ann Levitt
Its: President Its: President
By: /s/ Cathy Wood
-----------------------
Cathy Wood
Its: Secretary
AJS_D001.RV9
<PAGE>
EXHIBIT A
FORMS OF LANDLORD'S ACKNOWLEDGEMENT, ESTOPPEL,
CONSENT, AMENDMENT TO LEASE AND RELEASE
<PAGE>
EXHIBIT B
FORMS OF BILLS OF SALE, ASSIGNMENTS OF TRADEMARKS,
SERVICE MARKS, TRADE NAMES AND SERVICE NAMES
AND ASSIGNMENTS OF CONTRACTS
<PAGE>
EXHIBIT C
SERVICE MARK LICENSE
<PAGE>
EXHIBIT D
FORM OF MANAGEMENT AGREEMENT
<PAGE>
EXHIBIT E
FORM OF SELLER'S COUNSEL OPINION
<PAGE>
EXHIBIT F
FORM OF STORE LEASEHOLD ASSIGNMENT
<PAGE>
EXHIBIT G
FORM OF SENSORMATIC LEASE CONSENTS
<PAGE>
EXHIBIT H
FORM OF STORE CONTRACTS CONSENTS
<PAGE>
EXHIBITS I-1 and I-2
FORM OF ESCROW AGREEMENTS
<PAGE>
EXHIBIT J
FORM OF PURCHASER'S COUNSEL OPINION
<PAGE>
SCHEDULE 1.2.1
LIST OF STORES
<PAGE>
SCHEDULE 1.2.2
LIST OF FURNITURE, FIXTURES AND EQUIPMENT
List of Stores in which are located the facsimile machines not
included in F, F & E:
<PAGE>
SCHEDULE 1.2.3
LIST OF SENSORMATIC EQUIPMENT
List of Sensormatic Equipment Under Lease:
List of Sensormatic Equipment Owned by Seller:
<PAGE>
SCHEDULE 1.2.5
LIST OF STORE TRADE NAMES
<PAGE>
SCHEDULE 1.2.6
LIST OF STORE CONTRACTS
[Should include Contract for Lindale Mall T.I.'s]
<PAGE>
SCHEDULE 2.2
ALLOCATION OF THE TRANSFERRED ASSETS PURCHASE PRICE
<PAGE>
SCHEDULE 2.5.1.1
ESSENTIAL PROVISIONS
The "Essential Provisions" are agreements by the applicable
lessor to amend the applicable Store Lease in the following
respects, if applicable:
1. To modify any radius restrictions contained in the
applicable Store Lease to permit the operation of stores
currently operated by Purchaser which would otherwise
violate the applicable radius restriction.
2. To delete any landlord's lien contained in the applicable
Store Lease.
3. To include reasonable assignment and sublet provisions
allowing Purchaser to assign and/or sublet the applicable
Store Lease generally in accordance with Section 16.9 of the
form of Store Leasehold Consent attached hereto as Exhibit A
to this Agreement (the "Form Store Leasehold Consent").
4. To include one or more provisions (i) allowing Purchaser to
remodel the leased premises of the applicable Store Lease
generally in accordance with Section 16.4 of the Form Store
Leasehold Consent, and (ii) waiving any continuous operation
clause in the applicable Store Lease for a reasonable period
of time for the purpose of completing such remodeling.
<PAGE>
SCHEDULE 4.7
LIST OF STORES SUBJECT TO MANAGEMENT AGREEMENTS
<PAGE>
SCHEDULE 6.1.1
CONFLICTS
<PAGE>
SCHEDULE 6.1.3
LIST OF EXCEPTIONS TO MATERIAL CONTRACTS
<PAGE>
SCHEDULE 6.1.4
LIST OF LITIGATION
<PAGE>
SCHEDULE 6.1.7
LIST OF DEFAULTS UNDER THE STORE LEASES
<PAGE>
SCHEDULE 6.1.8
LIST OF DEFAULTS UNDER THE SENSORMATIC LEASES
OR THE STORE CONTRACTS
<PAGE>
SCHEDULE 6.1.9
LIST OF CONDITION OF THE STORES AND F, F & E
<PAGE>
SCHEDULE 6.1.10.3
USE OF POLLUTING SUBSTANCES
<PAGE>
SCHEDULE 6.1.15
ERISA EXCEPTIONS
<PAGE>
SCHEDULE 6.1.16
EMPLOYEE CLAIMS
<PAGE>
SCHEDULE 6.1.19
SALES NOT IN THE ORDINARY COURSE OF BUSINESS
<PAGE>
SCHEDULE 6.1.20
OWNERSHIP OF SELLER GROUP
<PAGE>
SCHEDULE 6.2.1
CONFLICTS
AJS_D001.RV9
AMENDMENT NUMBER 1 TO AGREEMENT OF PURCHASE AND SALE
THIS AMENDMENT NUMBER 1 TO AGREEMENT OF PURCHASE AND
SALE (this "Amendment") is made and entered into as of the 28th
day of May, 1993, by and between WHEREHOUSE ENTERTAINMENT, INC.,
a Delaware corporation ("Purchaser"), and THE RECORD SHOP, INC.,
a Minnesota corporation ("Seller"), with reference to the
following facts:
A. Purchaser and Seller have entered into that certain
Agreement of Purchase and Sale dated May 10, 1993 (the "Purchase
Agreement").
B. Purchaser and Seller desire that the Purchase Agreement
be amended as hereinafter set forth.
NOW, THEREFORE, the parties hereto hereby agree as
follows:
1. Amendment to Purchase Agreement. Section 13.10 of the
Purchase Agreement is hereby amended to read in its entirety as
follows:
"13.10 Exhibits and Schedules. Promptly following the
execution of this Agreement, (i) Purchaser and Seller shall
negotiate in good faith all of the documents to be attached
hereto as Exhibits and Schedules 2.2 and 4.7, (ii) Seller shall
provide to Purchaser all of the Schedules other than Schedules
2.2, 4.7 and 6.2 ("Seller's Schedules"), and (iii) Purchaser
shall provide to Seller Schedule 6.2 ("Purchaser's Schedule").
Following negotiation of the Exhibits and Schedules 2.2 and 4.7
and delivery of Seller's Schedules and Purchaser's Schedule,
Purchaser and Seller shall execute an amendment to this Agreement
incorporating said Exhibits and Schedules herein. In the event
that the said amendment is not executed and delivered on or prior
to June 4, 1993 due to the fact that the Exhibits have not been
completed or Seller has failed to deliver all of Seller's
Schedules, Purchaser may terminate this Agreement in its sole
discretion. In the event that said amendment is not executed and
delivered on or prior to June 4, 1993 due to the fact that the
Exhibits have not been completed or Purchaser has failed to
deliver Purchaser's Schedule, Seller may terminate this Agreement
in its sole discretion. Notwithstanding anything to the contrary
contained in this Section 13.10, Seller and Purchaser hereby
acknowledge and agree that Schedules 2.2 and 4.7 may be completed
at any time prior to the Closing."
2. Full Force and Effect. Except as expressly amended
hereby, the Purchase Agreement shall continue in full force and
effect in accordance with the provisions thereof on the date
hereof.
3. Governing Law. This Amendment shall be construed in
accordance with and governed by the laws of the State of
California, without giving effect to that State's conflicts of
law rules.
4. Counterparts. This Amendment may be executed in one or
more counterparts, each of which is deemed an original, but all
of which together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have duly executed this
Amendment as of the date first above written.
PURCHASER: SELLER:
WHEREHOUSE ENTERTAINMENT, INC., THE RECORD SHOP, INC.
a Delaware corporation a Minnesota corporation
By: /s/ Scott Young By: /s/ Mary Ann Levitt
--------------------- -----------------------
Scott Young Mary Ann Levitt
Its: President Its: President
By: /s/ Cathy Wood
---------------------
Cathy Wood
Its: Secretary
AJS_D017.WHE
AMENDMENT NUMBER 2 TO AGREEMENT OF PURCHASE AND SALE
THIS AMENDMENT NUMBER 2 TO AGREEMENT OF PURCHASE AND
SALE (this "Amendment") is made and entered into as of the 18th
day of June, 1993, by and between WHEREHOUSE ENTERTAINMENT, INC.,
a Delaware corporation ("Purchaser"), and THE RECORD SHOP, INC.,
a Minnesota corporation ("Seller"), with reference to the
following facts:
A. Purchaser and Seller have entered into that certain
Agreement of Purchase and Sale dated May 10, 1993, as amended by
that certain Amendment Number 1 to Purchase Agreement dated as of
May 28, 1993 (collectively, the "Purchase Agreement").
B. Purchaser and Seller desire that the Purchase Agreement
be further amended as hereinafter set forth.
NOW, THEREFORE, the parties hereto hereby agree as
follows:
1. Amendments to Purchase Agreement.
1.1 Section 2.4 of the Purchase Agreement is hereby
amended to read in its entirety as follows:
"2.4 Prorations and Adjustments. The Transferred
Assets Purchase Price shall be adjusted at the Closing or the
applicable Delayed Closing (i) for Seller's preliminary prorated
share of Current Property Taxes calculated in accordance with
Section 3.5 hereof; (ii) for Seller's preliminary unpaid Sales
Taxes calculated in accordance with Section 3.6 hereof; and (iii)
for Seller's preliminary unpaid Payroll Taxes calculated in
accordance with Section 3.7 hereof. The Transferred Assets
Purchase Price shall be adjusted to prorate all rents, real
property taxes and "CAM" and other charges paid by Seller under
the Store Leases and utilities paid by Seller and all lease and
other payments due under the Sensormatic Leases and Store
Contracts paid by Seller for the period from the due date of the
last such payment to be made by Seller immediately prior to the
Closing Date or the applicable Delayed Closing Date, as the case
may be, to the Closing Date or the applicable Delayed Closing
Date. In the event that the actual amount of any such taxes,
rents, "CAM" and other charges for the year of the Closing or the
applicable Delayed Closing is more or less than that estimated by
the parties at the Closing or applicable Delayed Closing,
Purchaser or Seller, as the case may be, shall make all appro-
priate payments to the other party so that all payments and
prorations made pursuant to this Section 2.4 are accurate, based
upon the actual assessment for the year of the Closing or the
applicable Delayed Closing. The Transferred Assets Purchase
Price shall be increased by all utilities deposits of Seller
which Seller causes the applicable utilities to transfer to the
account of Purchaser at the Closing or any Delayed Closing, as
applicable."
1.2 Section 7.18 of the Purchase Agreement is hereby
amended to read in its entirety as follows:
"7.18 Management Agreements. Except as specifi-
cally provided to the contrary in this Section 7.18, Purchaser
and Seller shall mutually determine the Stores which shall be the
subject of Management Agreements. Notwithstanding anything in
this Section 7.18 to the contrary, Purchaser and Seller shall
enter into a Management Agreement at Closing at Seller's request
upon the terms and conditions described in this Section 7.18.
7.18.1 With respect to an unlimited number of
Stores, (i) Purchaser and Seller both have determined, in their
reasonable discretion, that they may be able to obtain a Store
Leasehold Consent for such Store in the future, (ii) Purchaser
and Seller both have determined, in their reasonable discretion,
that entering into a Management Agreement with respect to such
Store will not result in a breach of the applicable Store Lease
or Purchaser and Seller shall have obtained the written consent
of the lessor under the applicable Store Lease to Purchaser and
Seller entering into and performing their respective obligations
under a Management Agreement for such Store, and (iii) Purchaser
and Seller both have determined, in their reasonable discretion,
that entering into and performing their respective obligations
under a Management Agreement will not adversely affect the
parties' ability to obtain a Store Leasehold Consent with respect
to such Store Lease. A Management Agreement entered into
pursuant to this Section 7.18.1 shall be hereinafter referred to
as a "Section 7.18.1 Management Agreement."
7.18.2 Notwithstanding the provisions of Section
7.18.1 to the contrary, with respect to a maximum of two Stores,
Purchaser shall have determined, in its reasonable discretion,
that it will be able to terminate such Management Agreement
pursuant to the terms of such Management Agreement without
incurring any liability to Seller, the applicable lessor or any
third party. A Management Agreement entered into pursuant to
this Section 7.18.2 shall be hereinafter referred to as a
"Section 7.18.2 Management Agreement."
7.18.3 Subject to Section 7.18.2 hereof, in the
event that after the Closing or the applicable Delayed Closing,
there shall be less than two Stores which are the subject of
Section 7.18.2 Management Agreements, Seller shall have the right
to convert up to two Stores which are the subject of Section
7.18.1 Management Agreements to Stores which are the subject of
Section 7.18.2 Management Agreements. Notwithstanding the fore-
going, (i) at no time shall there be more than two Section 7.18.2
Management Agreements in effect, and (ii) Seller shall notify
Purchaser prior to the effective date of the termination of a
Section 7.18.1 Management Agreement it wishes to convert to a
Section 7.18.2 Management Agreement and if it fails to do so,
Seller shall not be permitted to convert such Section 7.18.1
Management Agreement which has been previously terminated in
accordance with the terms of such Section 7.18.1 Management
Agreement into a Store which is the subject of a Section 7.18.2
Management Agreement. In the event Seller elects to convert a
Store subject to a Section 7.18.1 Management Agreement to a Store
subject to a Section 7.18.2 Management Agreement (a "Conver-
sion"), Seller shall provide Purchaser with 10 business days
written notice thereof, and Purchaser hereby agrees to execute
such documents, instruments and agreements which may be reason-
ably necessary to complete the Conversion."
1.3 Section 8.1 of the Purchase Agreement is hereby
amended to read in its entirety as follows:
"8.1 Notwithstanding the Closing, and regardless of any
investigation at any time made by or on behalf of Purchaser or of
any knowledge or information that Purchaser may have, Seller
agrees to, and hereby does, fully indemnify, defend and save and
hold Purchaser harmless at all times in the event that Purchaser
shall at any time or from time to time suffer any damage,
liability, loss, cost, expense, claim, settlement or causes of
action (including all reasonable attorneys' fees) arising out of,
resulting from or in connection with, or shall pay or become
obligated to pay any sum on account of, any and every "Event of
Purchaser Indemnification." As used herein, an "Event of
Purchaser Indemnification" shall mean any one or more of the
following: (i) any untruth or any inaccuracy in any represen-
tation of Seller or the breach of any warranty of Seller; (ii)
the breach of any other term, provision, covenant or agreement on
the part of Seller to be performed or observed hereunder; (iii)
any other misrepresentation by Seller in, or omission by Seller
from, any statement, certificate, schedule, exhibit or other
document furnished pursuant to this Agreement by Seller or an
officer or other authorized agent of Seller; (iv) any and all
debts, liabilities and obligations of Seller (whether matured,
unmatured, contingent or otherwise and whether or not subsequent-
ly discharged in any bankruptcy case or proceeding or otherwise)
which do not constitute an "Assumed Obligation," including,
without limitation, any debts, liabilities or obligations of
Seller arising or accruing as a result of the ownership or
operation of Seller's business, or under or in connection with
any of the Store Leases, Sensormatic Leases or Store Contracts
prior to the Closing or the applicable Delayed Closing, whether
or not known by Purchaser, Seller or any third party on the
Closing Date or the applicable Delayed Closing Date including,
without limitation, any debts, liabilities or obligations
(whether matured, unmatured, contingent or otherwise and whether
or not subsequently discharged in any bankruptcy case or proceed-
ing or otherwise) resulting from or arising in connection with
(a) Seller entering into the Store Leases, Sensormatic Leases and
Store Contracts including, without limitation, any default under
or breach of any of the Store Leases, Sensormatic Leases or Store
Contracts, whether or not known on the Closing Date or the
applicable Delayed Closing Date to Purchaser, Seller or the other
parties to such leases or contracts, or (b) any act or omission
of Seller including, but not limited to, all acts or omissions
which constitute a default under or breach of any of the Store
Leases, Sensormatic Leases or Store Contracts; (v) any liability,
loss, cost, expense, claim, settlement, payment or obligation to
pay arising out of, resulting from or in connection with the
Existing Litigation; (vi) any liability, loss, cost, expense,
claim, or obligation arising out of, resulting from or in con-
nection with the failure to comply with any fraudulent conveyance
or transfer, bulk transfer laws or statutes or other laws or
statutes intended to protect the rights of creditors of Seller,
including, without limitation, the bulk transfer laws of the
States of Arizona, North Dakota and Utah and all other states
which Purchaser and Seller mutually agree in writing not to
comply with prior to the Closing or the applicable Delayed
Closing; (vii) any liability, loss, cost, expense, claim or
obligation to pay arising out of, resulting from or in connection
with any claim by a lessor under any Store Lease subject to a
Management Agreement or other party to a Sensormatic Lease or
Store Contract subject to a Management Agreement resulting from
Seller's failure to obtain all applicable consents to Purchaser
and Seller entering into said Management Agreement; (viii) any
liability, loss, cost, expense, claim or obligation to pay
arising out of, resulting from or in connection with Seller's
business which it continues to conduct after the Closing or the
applicable Delayed Closing at any of the Stores or otherwise;
or(ix) any liability, loss, cost, expense or obligation to pay
arising out of, resulting from or in any way connected with any
Seller's Assignee (other than Purchaser)."
1.4 Section 13.10 of the Purchase Agreement is hereby
amended to read in its entirety as follows:
"13.10 Exhibits and Schedules. Promptly following
the execution of this Agreement, (i) Purchaser and Seller shall
negotiate in good faith all of the documents to be attached
hereto as Exhibits and Schedules 2.2 and 4.7, (ii) Seller shall
provide to Purchaser all of the Schedules other than Schedules
2.2, 4.7 and 6.2 ("Seller's Schedules"), and (iii) Purchaser
shall provide to Seller Schedule 6.2 ("Purchaser's Schedule").
Following negotiation of the Exhibits and Schedules 2.2 and 4.7
and delivery of Seller's Schedules and Purchaser's Schedule,
Purchaser and Seller shall execute an amendment to this Agreement
incorporating said Exhibits and Schedules herein. In the event
that the said amendment is not executed and delivered on or prior
to June 18, 1993 due to the fact that the Exhibits have not been
completed or Seller has failed to deliver all of Seller's
Schedules, Purchaser may terminate this Agreement in its sole
discretion. In the event that said amendment is not executed and
delivered on or prior to June 18, 1993 due to the fact that the
Exhibits have not been completed or Purchaser has failed to
deliver Purchaser's Schedule, Seller may terminate this Agreement
in its sole discretion. Notwithstanding anything to the contrary
contained in this Section 13.10, Seller and Purchaser hereby
acknowledge and agree that Schedules 2.2 and 4.7 may be completed
at any time prior to the Closing."
2. Full Force and Effect. Except as expressly amended
hereby, the Purchase Agreement shall continue in full force and
effect in accordance with the provisions thereof on the date
hereof.
3. Governing Law. This Amendment shall be construed in
accordance with and governed by the laws of the State of
California, without giving effect to that State's conflicts of
law rules.
4. Counterparts. This Amendment may be executed in one or
more counterparts, each of which is deemed an original, but all
of which together shall constitute one and the same agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this
Amendment as of the date first above written.
PURCHASER: SELLER:
WHEREHOUSE ENTERTAINMENT, INC., THE RECORD SHOP, INC.
a Delaware corporation a Minnesota corporation
By: /s/ Scott Young By: /s/ Mary Ann Levitt
--------------------- ----------------------
Scott Young Mary Ann Levitt
Its: President Its: President
By: /s/ Cathy Wood
---------------------
Cathy Wood
Its: Secretary
AJS_D022.RV4
AMENDMENT NUMBER 3 TO AGREEMENT OF PURCHASE AND SALE
THIS AMENDMENT NUMBER 3 TO AGREEMENT OF PURCHASE AND
SALE (this "Amendment") is made and entered into as of the 21st
day of June, 1993, by and between WHEREHOUSE ENTERTAINMENT, INC.,
a Delaware corporation ("Purchaser"), and THE RECORD SHOP, INC.,
a Minnesota corporation ("Seller"), with reference to the
following facts:
A. Purchaser and Seller have entered into that certain
Agreement of Purchase and Sale dated May 10, 1993, as amended by
that certain Amendment Number 1 to Purchase Agreement dated as of
May 28, 1993 and that certain Amendment Number 2 to Purchase
Agreement dated as of June 18, 1993 (collectively, the "Purchase
Agreement").
B. Purchaser and Seller desire that the Purchase Agreement
be further amended as hereinafter set forth.
NOW, THEREFORE, the parties hereto hereby agree as
follows:
1. Amendments to Purchase Agreement.
1.1 Section 2.4 of the Purchase Agreement is
hereby amended to read in its entirety as follows:
"2.4 Prorations and Adjustments. The Trans-
ferred Assets Purchase Price shall be adjusted at the
Closing or the applicable Delayed Closing (i) for
Seller's preliminary prorated share of Current Property
Taxes calculated in accordance with Section 3.5 hereof;
(ii) for Seller's preliminary unpaid Sales Taxes
calculated in accordance with Section 3.6 hereof; and
(iii) for Seller's preliminary unpaid Payroll Taxes
calculated in accordance with Section 3.7 hereof. The
Transferred Assets Purchase Price shall be adjusted to
prorate all rents, real property taxes and "CAM" and
other charges paid by Seller under the Store Leases and
utilities paid by Seller and all lease and other
payments due under the Sensormatic Leases and Store
Contracts paid by Seller for the period from the due
date of the last such payment to be made by Seller
immediately prior to the Closing Date or the applicable
Delayed Closing Date, as the case may be, to the
Closing Date or the applicable Delayed Closing Date.
In the event that the actual amount of any such taxes,
rents, "CAM" and other charges for the year of the
Closing or applicable Delayed Closing is more or less
than that estimated by the parties at the Closing or
applicable Delayed Closing, Purchaser or Seller, as the
case may be, shall make all appropriate payments to the
other party so that all payments and prorations made
pursuant to this Section 2.4 are accurate, based upon
the actual assessment for the year of the Closing or
applicable Delayed Closing. The Transferred Assets
Purchase Price shall be increased by all utilities
deposits of Seller which Seller causes the applicable
utilities to transfer to the account of Purchaser at
the Closing or any Delayed Closing, as applicable. The
Transferred Assets Purchase Price payable at the
Closing shall be further increased by $3,799.57, which
amount represents one-half of the rent, real property
taxes and "CAM" and other charges due under the Store
Lease for the Store located at Brookdale Center,
Brooklyn Center, Minnesota for the period from June 1
to June 30."
1.2 Section 2.2 of the Purchase Agreement is
hereby amended to read in its entirety as follows:
"2.2 Allocation of Transferred Assets
Purchase Price. The Transferred Assets Purchase Price
shall be allocated among the Transferred Assets in
accordance with a schedule which Purchaser and Seller
shall attempt to agree upon during the ninety day
period (the "Negotiation Period") commencing immedi-
ately following the Closing Date. In the event that
Purchaser and Seller are able to mutually agree upon
the allocation of the Transferred Assets Purchase Price
(the "Purchase Price Allocations"), Purchaser and
Seller shall evidence such agreement by entering into
an amendment to this Agreement to which shall be
attached a schedule ("Schedule 2.2") on which the
Purchase Price Alloca-tions shall be set forth. In the
event that Seller and Purchaser agree on the Purchase
Price Allocations as provided above, Seller and
Purchaser each agrees (i) to report the sale of the
Transferred Assets for federal and state income tax
purposes in accordance with the allocation set forth on
Schedule 2.2, (ii) not to take any position inconsis-
tent with such allocations on any of its tax returns
and (iii) to timely file federal tax Form 8594 with the
applicable tax return for the year of this transaction
and any other year in which a Delayed Closing occurs
reflecting such Purchase Price Allocations. In the
event that Seller and Purchaser are unable to agree
upon the Purchase Price Allocations during the Negoti-
ation Period, each of Seller and Purchaser shall be
free to report the sale of the Transferred Assets for
federal and state income tax purposes in accordance
with any allocations schedule which each of them may
establish, which allocations may be inconsistent with
those made by the other party hereto. In any event,
each party shall provide the other with a draft copy of
its relevant federal tax Form 8594 at least fifteen
(15) days prior to filing such form."
1.3 Section 7.7 of the Purchase Agreement is
hereby amended to add subsection 7.7.5 thereto, which subsection
shall read in its entirety as follows:
"7.7.5 Seller hereby agrees to offer to
all of its employees and former employees, to the
extent required by the provisions of the Consolidated
Omnibus Budget Reconciliation Act of 1985 ("COBRA"),
all benefits subject to COBRA for the maximum period
required by COBRA."
1.4 Section 7.9 of the Purchase Agreement is
hereby amended to read in its entirety as follows:
"Maintenance of Books and Records. Both
prior to and for the five years after the Closing,
Seller (or Seller's shareholders in the event that
Seller has been dissolved) shall keep and shall make
available to Purchaser for inspection and copying upon
reasonable notice all of its books and records and the
materials referred to in Sections 7.1 and 7.2. For the
avoidance of doubt, after the Closing Seller shall
permit Purchaser and Purchaser's accountants and
attorneys reasonable access to all books and records of
Seller for the purpose of preparing any financial
statements and information which may be required under
applicable laws, rules or regulations, including,
without limitation, all federal and state securities
laws and all rules and regulations which may be promul-
gated from time to time by the SEC or any state agency
or authority having jurisdiction over Purchaser and its
affiliates (collectively, the "Disclosure Rules"),
which financial statements and information may to the
extent required by the Disclosure Rules, be filed with
the SEC or any other federal and state agency or
authority or otherwise disseminated to the public. To
the extent Purchaser either (i) acquires other assets
in fiscal year 1993 and such acquisitions necessitate
Purchaser filing financial statements of Seller with
the SEC or (ii) subsequent to the Closing Purchaser
reasonably concludes that it is required to file with
the SEC Financial Statements of Seller, Seller shall
furnish to Purchaser copies of its audited financial
statements for fiscal year 1992 and prior years
("Seller's Audited Financial Statements") which
Purchaser may use in connection with preparing any
financial statements and information which may be
required under any Disclosure Rules as a result of such
acquisitions or for any other reasonable reason, and
Purchaser may include such audited financial statements
and Seller's Audited Financial Statements in any
filings with the SEC or any other federal or state
agency or authority or otherwise disseminate them to
the public subject, however, to Purchaser obtaining the
prior consent of the auditing firm or firms which
delivered the applicable auditor's report or reports in
connection with Seller's Audited Financial Statements
to the extent required prior to filing or disseminating
them. Purchaser shall pay all costs incurred by Seller
in making such financial information available, includ-
ing, without limitation, the out-of-pocket costs
incurred by Seller in making its former Vice President/
Comptroller available, if necessary."
1.5 Section 6.1 of the Purchase Agreement is
hereby amended by renumbering subsection 6.1.21 thereof as
"6.1.22" and by adding to Section 6.1 immediately after subsec-
tion 6.1.20 thereof the following new subsection 6.1.21:
"6.1.21 Claims Against Health Insurance
Plans. Based solely on the verbal report given by Tami
Faigus of Massachusetts Mutual to Ben Castenada of
Seller for the period commencing on May 31, 1992
through May 31, 1993, there have been no "major claims"
filed by Seller's employees against Seller's health
insurance plans except those described on Schedule
6.1.21. As used herein the term "major claims" shall
mean a claim or series of related claims exceeding
$10,000."
1.6 Section 13.12 of the Purchase Agreement is
hereby amended to read in its entirety as follows:
"13.12 Hart-Scott-Rodino Compliance.
Purchaser and Seller hereby acknowledge to each other
that, pursuant to Section 7A(a)(3) of HSR, HSR will not
apply to the transactions contemplated by this Agree-
ment because the fair market value of the Transferred
Assets Purchase Price for the Transferred Assets is
less than $15,000,000. Seller hereby further acknow-
ledges to Purchaser that, pursuant to Section7A(a)(2)
of HSR, HSR will not apply to the transactions contem-
plated by this Agreement because Seller does not meet
the "size of the parties" requirement set forth
therein. Notwithstanding anything to the contrary
contained herein, in no event shall Purchaser be
obligated to purchase any Inventory hereunder which, in
the reasonable discretion of Purchaser and/or Seller,
would cause the parties to violate HSR."
2. Exhibits and Schedules. Attached hereto are the
following Exhibits and Schedules which are hereby incorporated
into the Purchase Agreement by reference:
Exhibit A (Form of Store Leasehold Consent),
Exhibit B (Form of Transfer and Sale Documents),
Exhibit C (Form of Service Mark License), Exhibit D-1
and D-2 (Forms of Management Agreements), Exhibit E
(Form of Opinion of Seller's Counsel), Exhibit F (Form
of Store Leasehold Assignments), Exhibit G (Form of
Sensormatic Lease Consents), Exhibit H (Form of Store
Contract Consents), Exhibit I-1 and I-2 (Forms of
Escrow Agreements), and Exhibit J (Form of Opinion of
Purchaser's Counsel).
Schedule 1.2.1 (List of Stores), Schedule 1.2.2
(List of F,F&E), Schedule 1.2.3 (Sensormatic Leases),
Schedule 1.2.5 (Store Service Marks), Schedule 1.2.6
(Store Contracts), Schedule 2.5.1.2 (Short Term Store
Leases), Schedule 4.7 (List of Stores Subject to
Management Agreements), Schedule 6.1.1 (Seller's
Conflicts), Schedule 6.1.3 (Material Agreements),
Schedule 6.1.4 (Existing Litigation), Schedule 6.1.7
(Store Lease Defaults), Schedule 6.1.8 (Sensormatic
Lease and Store Contracts Defaults), Schedule 6.1.9
(Physical Condition of Stores and F,F&E), Schedule
6.1.10.3 (Store Compliance with Laws), Schedule 6.1.15
(Employee Plans), Schedule 6.1.16 (Employment Claims),
Schedule 6.1.21 (Claims Against Health Insurance
Plans), and Schedule 6.2 (Purchaser's Conflicts).
3. Other Amendments to the Purchase Agreement. Not-
withstanding anything in the Purchase Agreement to the contrary:
3.1 The physical possession of the Entry Devices
with respect to the Stores possession of which are
being delivered to Purchaser at the Closing will not be
delivered to the Purchaser at the Closing.
3.2 All unused gift certificates of Seller, other
than those currently located at the Store in the Main
Place Mall in Santa Ana, California (the "Santa Ana
Main Place Store"), will be destroyed by Purchaser
promptly after the Closing and those located at the
Santa Ana Main Place Store will be marked to indicate
that they may only be redeemed at such Store.
3.3 Seller shall reimburse Purchaser for the cost
of repairing or replacing the items listed on Schedule
6.1.9 to the Agreement under the heading "Items to be
Repaired or Replaced by Purchaser". Seller shall
promptly reimburse Purchaser for such costs after
Purchaser delivers to Seller evidence reasonably
satisfactory to Seller of the costs incurred therefor.
Promptly following the Closing, Seller shall repair or
replace, at its expense, the items listed on said
Schedule 6.1.9 under the heading "Items to be Repaired
or replaced by Seller." All other conditions identi-
fied in the memoranda from Rick Morley to Greg Fisher
dated June 18, 1993, from Joe Gonzalez to Greg Fisher
dated June 18, 1993 and from Greg Fisher to Mort Gerber
dated June 18, 1993 shall be Purchaser's responsibil-
ity.
3.4 Notwithstanding anything contained in the
Agreement to the contrary, Purchaser and Seller
acknowledge that the UCC-1's filed in various states
affecting the Sensormatic Equipment will not be
released at Closing and Purchaser will acquire
possession to such Sensormatic Equipment subject to
such UCC-1's.
3.5 Following the Closing and each Delayed
Closing Seller shall in a timely manner prepare and
file with the appropriate federal, state or local
governments or governmental agencies all requisite tax
returns and reports with respect to any and all income,
franchise, profits, sales, use, excise, personal
property, real property, payroll (including income tax
withholdings) and other taxes owed by Seller which
accrued on or before the Closing or as a result of the
Closing.
4. Stores Operated Under a Management Agreement.
4.1 Purchaser represents that it has orally
notified each of the lessors of a Store Lease pertain-
ing to a Store the possession of which was then
expected to be delivered to Purchaser at the Closing
pursuant to a Management Agreement (a "Management
Store") that (i) the Purchaser would obtain possession
of the Management Store pursuant to a Management
Agreement, and (ii) Purchaser then intended to close
the Management Store for a short period of time to
remodel said Store.
4.2 Purchaser agrees to reopen all of the
Management Stores no later than June 26, 1993.
5. Full Force and Effect. Except as expressly
amended hereby, the Purchase Agreement shall continue in full
force and effect in accordance with the provisions thereof on the
date hereof.
6. Governing Law. This Amendment shall be construed
in accordance with and governed by the laws of the State of
California, without giving effect to that State's conflicts of
law rules.
7. Counterparts. This Amendment may be executed in
one or more counterparts, each of which is deemed an original,
but all of which together shall constitute one and the same
agreement.<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this
Amendment as of the date first above written.
PURCHASER: SELLER:
WHEREHOUSE ENTERTAINMENT, INC., THE RECORD SHOP, INC.
a Delaware corporation a Minnesota corporation
By: /s/ Scott Young By: /s/ Mary Ann Levitt
--------------------- ----------------------
Scott Young Mary Ann Levitt
Its: President Its: President
By: /s/ Cathy Wood
---------------------
Cathy Wood
Its: Secretary
AJS_D025.RV4
<PAGE>
<PAGE>
EXHIBIT A
LANDLORD'S ACKNOWLEDGEMENT, ESTOPPEL, CONSENT,
AMENDMENT TO LEASE AND RELEASE
THIS LANDLORD'S ACKNOWLEDGMENT, ESTOPPEL, CONSENT AND
AMENDMENT TO LEASE ("Acknowledgment") is executed this _____ day
of _______________, 1993, by __________________________________,
("Landlord") for the benefit of WHEREHOUSE ENTERTAINMENT, INC., a
Delaware corporation, whose business address is 19701 Hamilton
Avenue, Torrance, California 90502 ("Buyer").
A. By a lease dated ________ and amended ________________
(collectively the "Lease"), Landlord leased to The Record Shop,
Inc., a Minnesota corporation ("Tenant"), those premises located
at _____________________. A copy of the Lease is attached hereto
as Exhibit A and incorporated herein by this reference.
B. Tenant is selling a substantial portion of its assets
to Buyer.
C. In accordance with said sale, Tenant will execute an
Assignment of Leasehold Interests by which Tenant will assign to
Buyer all of its right, title and interest in and to the Lease,
among other Leases.
D. As a condition to accepting said assignment, Buyer
requires the Landlord to execute this Acknowledgment upon which
it will rely in succeeding to the interest of Tenant in and to
the Lease.
THEREFORE, in consideration of the promises herein
contained and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Land-
lord does hereby state and agree to the following for the
benefit of Buyer:
1. Attached hereto as Exhibit "A" is a true and
correct copy of the Lease. The Lease is in full force and
effect. There have been no modifications, amendments or restate-
ments to the Lease other than as contained in Exhibit "A". The
Lease constitutes the only agreement between Landlord and Tenant
relating to the premises described therein.
2. As of the date hereof, the Lease is valid and
subsisting and in full force and effect, and the Tenant has
accepted the premises described therein.
3. The Lease commencement date was _________________
and the Lease termination date is __________________, unless
earlier terminated or extended as provided in the Lease.
4. The base rent currently being paid by the Tenant
under the Lease is $__________ per month. The rent on the Lease
has been paid by Tenant through ________________________. No
additional rent is presently due and owing under the Lease and
there are no other payments due or payable from Tenant to Land-
lord under the Lease as of the date hereof unless otherwise
specifically described in this Acknowledgement.
5. The common area maintenance charge currently being
paid by Tenant under the Lease is $__________ per month. No
additional common area maintenance charge is presently due and
owing under the Lease. Tenant's share of common area maintenance
costs have been paid through _______________________, and to the
best of Landlord's knowledge, no material adjustments for the
current or past years' costs are contemplated or required under
the Lease.
6. Tenant's share of the real property taxes
currently being paid under the Lease is $__________ per month.
No additional share of real property taxes are presently due
and owing under the Lease. Tenant's share of real property taxes
have been paid through _______________________, and to the best
of Landlord's knowledge, no material adjustments for the current
or past years' share of taxes are contemplated or required under
the Lease.
7. The association dues and/or advertising fund
charges currently being paid by Tenant under the Lease are
$__________ per month. No additional association dues and/or
advertising fund charges are presently due and owing under the
Lease. Tenant's share of Association dues and/or advertising
fund charges have been paid through _______________________, and
to the best of Landlord's knowledge, no material adjustments
for the current or past years' charges are contemplated or
required under the Lease.
8. Tenant's share of the insurance costs currently
being paid under the Lease is $__________ per month. No addi-
tional insurance costs are presently due and owing under the
Lease. Tenant's share of insurance costs have been paid through
_______________________, and to the best of Landlord's knowledge,
no material adjustments for the current or past years' costs are
contemplated or required under the Lease.
9. All improvements placed on the premises conform to
the Lease and have been satisfactorily completed.
10. The Landlord hereby consents to the assignment
from Tenant to Buyer of Tenant's rights, duties and obligations
under the Lease and waives any rights that Landlord may have to
alter the terms and conditions of the Lease, declare an event of
default under the Lease or increase the rental obligations under
the Lease.
11. The Tenant is not in default under any terms and
conditions of the Lease, nor does there exist any set of facts
which, through the passage of time or by the giving notice to
Tenant, or both, could constitute a default under the Lease or
could give Landlord the right to accelerate the performance of
any obligation thereunder or excuse Landlord from the performance
of any obligation thereunder. Landlord has no charge, lien,
claim, defense or offset of any kind under the Lease or otherwise
against Tenant or the Lease.
12. The Landlord is not in default under any terms and
conditions of the Lease, nor does there exist any set of facts
which, through the passage of time or by the giving of notice to
Tenant, or both, could constitute a default by Landlord under the
Lease or excuse Landlord from the performance of any obligation
thereunder.
13. The Landlord has received no notice from Tenant of
Tenant's assignment, pledge, encumbrance of Tenant's interest in
and to the Lease.
14. Landlord acknowledges that Buyer, as assignee of
the Tenant's interest under the Lease, shall not be responsible
for the performance of any of the terms, conditions and obliga-
tions of the Lease accruing prior to the date of this Acknow-
ledgment.
15. To the best knowledge of Landlord, there are no
pending or threatened eminent domain proceedings or special
assessments which may affect the premises or the shopping center
in which the premises are located.
16. If the Lease contains provisions which are
different from the provisions set forth below, such different
provisions are hereby deleted from the Lease and there are
substituted in their place the provisions set forth below. If
the Lease does not contain any such provisions, the provisions
set forth below are hereby added to the Lease.
16.1 Tradename. Buyer, as tenant under the Lease,
shall have the right, but not the obligation, to change the
current name of the business being conducted from the Premises to
any of the following tradenames: "Record Shop", "Wherehouse",
"Wherehouse Entertainment", "Rocky Mountain Records", or such
other tradename as Buyer shall use to operate the majority of its
stores in the area in which the Premises is located.
16.2 Address for Notice. The address for notices
to tenant under the Lease shall be:
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, California 90502-1334
Attention: Vice President Real Estate
16.3 Uses. Buyer shall have the right to use and
occupy the Premises for the retail sale of all home entertainment
software, such as records, tapes, cassettes, compact discs,
cartridges, video reproductions, audio reproductions and techno-
logical innovations thereto, and all other items, accessories and
devices carried by Buyer's other retail stores of a type similar
to the business being conducted on the Premises.
16.4 Alterations/Remodel. Landlord hereby grants
to Buyer the right to convert and remodel the Premises to bring
them into conformance with Buyer's standard stores and to Land-
lord's construction criteria which will be provided by Landlord
to Buyer concurrently with the execution of this Acknowledgement.
All such work shall be done in conformity with applicable laws,
rules and regulations and shall be fully paid by Buyer.
16.5 Radius Restrictions. All radius restrictions
in the Lease are deleted therefrom.
16.6 No Right to Relocation. Any provision in the
Lease allowing Landlord to relocate the tenant thereunder is
deleted therefrom.
16.7 No Landlord Lien. Any provision of the Lease
granting to Landlord a (contingent) security interest in personal
property, inventory and tenant improvements belong to tenant are
deleted therefrom.
16.8 Hazardous Substances. Landlord represents
and warrants to Buyer that there are no Hazardous Substances
located on, under or adjacent to the Premises or the shopping
center of which the Premises are a part. For purposes of this
provision, the term "Hazardous Substances" shall include, but not
be limited to, substances defined as "hazardous substances,"
"hazardous materials," or "toxic substances" in the Comprehensive
Environmental Response Compensation and Liability Act of 1980, as
amended, 42 U.S.C. Section 9601, et seq.; the Hazardous Materials
Transportation Act, 49 U.S.C. Section 1801, et seq.; the Resource
Conservation and Recovery Act, 42 U.S.C. Section 690 et seq. and
any similar laws applicable to the Property under federal, state
or local law and in the regulations adopted and publications
promulgated pursuant to all said laws.
16.9 Assignment and Subletting. Notwithstanding
anything contained in the Lease, Buyer shall have the right to
assign the Lease, or any interest therein, or sublet the
Premises, without the consent of Landlord, to a franchisee as a
normal part of Buyer's business, or to any corporation with which
it may merge or consolidate, or which acquires all or a substan-
tial portion of the shares of stock or assets of Buyer, or is a
parent or subsidiary of Buyer; provided, that no such assignment
or subletting shall release Buyer from any liability under the
Lease without the consent of Landlord; and provided further, that
any successor to Buyer as tenant under the Lease must deliver to
Landlord a written document confirming the successor's obligation
to perform as tenant under the Lease and an agreement to be bound
by all of the provisions of the Lease.
16.10 Continuous Operations. In order to
allow Buyer to remodel the Premises one time only, Landlord
grants to Buyer a two-week exception from its obligation to
continuously operate its business on the Premises.
16.11 Insurance. Attached hereto are the
specifications of Buyer's blanket property damage and liability
insurance. If and to the extent the insurance required of
tenant under the Lease differs from said specifications, said
specifications shall be deemed to control and anything contrary
in the Lease shall be deleted therefrom.
17. By executing this Acknowledgement, Landlord
releases Tenant from any future liability under the Lease
following the assignment of the Lease to Buyer and agrees to
look solely to Buyer for any such future liability following said
assignment.
18. This Acknowledgement shall only become binding on
the parties hereto when it has been executed by each of the
parties and the Lease has been assigned by Tenant and accepted by
Buyer. Such assignment and acceptance shall occur not later than
July 30, 1993.
19. This Acknowledgment integrates all prior oral and
written conversations between Landlord and Buyer concerning the
terms and conditions of the Lease and Tenant's performance there-
under.
The undersigned Landlord hereby acknowledges that the
Buyer will rely upon the statements contained herein in making
its decision to acquire the assets of Tenant, including Tenant's
interest in the Lease, and Landlord agrees to be bound by its
statements made herein.
This Acknowledgement is executed on the day and date
first above written.
LANDLORD: BUYER:
WHEREHOUSE ENTERTAINMENT, INC.,
a Delaware corporation
_________________________ By:___________________________
Its:__________________________
TENANT:
THE RECORD SHOP, INC.,
a Minnesota corporation
By:_________________________
Its:________________________
<PAGE>
<PAGE>
Specifications of Buyer's Blanket Property Damage and Liability
Insurance
Insurance Company Requirements Within "A" category
Financial Class. V
Notice of Change or Cancellation 20 days
Property Coverage "All Risk" fire
Extended Coverage
80% replacement value
Deductible not to exceed
$100,000
Blanket policies
permitted
Mutual Waiver of
Subrogation
Liability Commercial General
Liability
Occurrence Form
General Aggregate $1,000,000
Products Comp/Op Agg. $1,000,000
Personal and Adv. Injury $1,000,000
Each Occurrence $1,000,000
Fire Damage $ 50,000
Med. Expense nil
Boiler and Machinery Insurance nil
<PAGE>
<PAGE> EXHIBIT B
BILL OF SALE
FOR VALUABLE CONSIDERATION, the receipt and sufficiency
of which are hereby acknowledged, THE RECORD SHOP, INC., a
Minnesota corporation ("Seller"), hereby sells, conveys, assigns,
transfers and delivers, to WHEREHOUSE ENTERTAINMENT, INC., a
Delaware corporation ("Purchaser"), and its successors and
assigns, forever, all of the assets described on Schedule A
attached hereto (the "Purchased Assets").
Seller hereby represents, warrants, covenants and
agrees that it is hereby conveying good and marketable title to
the Purchased Assets, free and clear of all security interests,
liens, pledges, encumbrances, claims, charges, agreements,
rights, options, warranties, equities and restrictions (collec-
tively, the "Liens").
Seller further covenants and agrees that it will, from
time to time, make, execute and deliver such instruments,
consents and assurances as Purchaser may reasonably request in
order to vest or otherwise perfect in Purchaser good and market-
able title to, and to put Purchaser in possession of, all of the
Purchased Assets, free and clear of any Liens.
IN WITNESS WHEREOF, the undersigned has duly executed
and delivered this Bill of Sale as of the 21st day of June, 1993.
THE RECORD SHOP, INC.,
a Minnesota corporation
By: ______________________________
Mary Ann Levitt
Its: President
<PAGE>
<PAGE>
SCHEDULE A
1. All of the "F,F&E" (as that term is defined in that certain
Agreement of Purchase and Sale dated as of May 10, 1993, as
amended, by and between Seller and Purchaser (the "Purchase
Agreement")) located on the date hereof at the stores of
Seller listed on Schedule 1 attached hereto (the "Trans-
ferred Stores").
2. All of the "Inventory" (as that term is defined in the
Purchase Agreement) located on the date hereof in (i)
Seller's warehouse in Golden Valley, Minnesota, (ii) the
Transferred Stores, (iii) the stores of Seller listed on
Schedule 2 attached hereto, and(iv) the stores of Seller
listed on Schedule 3 attached hereto.
3. The "Plans" (as that term is defined in the Purchase
Agreement) relating in any way to the Transferred Stores or
the F,F&E located therein.
<PAGE>
<PAGE>
SCHEDULE 1
[TRANSFERRED STORES]
Store Name Location
20. Arrowhead Mall Arizona
21. Paradise Valley Mall R.S. Arizona
22. Paradise Valley Mall P.M. Arizona
23. Park Central Mall Arizona
24. Superstition Springs Arizona
25. Westridge Mall Arizona
26. Broadway Plaza Mall California
27. Chestnut Street California
28. Manchester Center California
29. Stanford Shopping Center California
30. Valley Fair Mall California
31. North County Fair California
32. Merle Hay Mall Iowa
33. Calhoun Square Minnesota
34. The Meadows Mall Nevada
35. Crossroads Plaza Mall P.M. Utah
36. Crossroads Plaza Mall R.S. Utah
<PAGE>
<PAGE>
SCHEDULE 2
[MANAGEMENT STORES]
Store Name Location
1. Flagstaff Mall Arizona
2. NewPark Mall California
3. Lindale Mall Iowa
4. Southridge Mall Iowa
5. Valley West Mall Iowa
6. Crossroads Center Minnesota
7. Minneapolis City Center Minnesota
8. Ridgedale Center Minnesota
9. Rosedale Center Minnesota
10. Columbia Mall North Dakota<PAGE>
<PAGE>
SCHEDULE 3
[CLOSED STORES]
Store Name Location
1. Brookdale Center Minnesota
2. Southdale Center Minnesota
<PAGE>
<PAGE>
ASSIGNMENT OF SERVICE MARKS
THIS ASSIGNMENT OF SERVICE MARKS is made as of this
____ day of ___________, 199__, by THE RECORD SHOP, INC., a
Minnesota corporation ("Assignor"), whose principal offices are
located at 2330 Marinship Way, Suite 207, Sausilito, California
94695, in favor of WHEREHOUSE ENTERTAINMENT, INC., a Delaware
corporation ("Assignee"), whose principal offices are located at
19701 Hamilton Avenue, Torrance, California 90502-1334, with
reference to the following:
A. Assignor has adopted and used in its business the
following tradenames, service names, trademarks, service marks
and logos (the "Service Marks"): [TO BE PROVIDED BY SELLER]
B. Assignor desires to sell, assign and transfer to
Assignee, and Assignee desires to purchase and acquire from
Assignor, all of Assignor's right, title and interest in and
to the Service Marks, together with all associated goodwill.
NOW, THEREFORE, for good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged,
Assignor agrees as follows:
1. Assignor hereby irrevocably sells, conveys,
assigns and transfers to Assignee and its successors and assigns,
the Service Marks, together with all associated goodwill (collec-
tively, the "Transferred Service Marks").
2. Assignor hereby represents, warrants and covenants
that it is hereby conveying to Assignee good and marketable title
to the Transferred Service Marks, free and clear of all security
interests, liens, pledges, encumbrances, claims, charges, agree-
ments, rights, options, warranties, equities and restrictions
(collectively, the "Liens").
3. Assignor further covenants and agrees that it
will, from time to time, make, execute and deliver such instru-
ments, covenants and assurances as Assignee may reasonably
request in order to vest or otherwise perfect in Assignee good
and marketable title to, and to put Purchaser in possession of,
all of the Transferred Service Marks, free and clear of any
Liens.
IN WITNESS WHEREOF, the undersigned has duly executed
and delivered this Assignment of Service Marks as of the date and
year first above written.
THE RECORD SHOP, INC.,
a Minnesota corporation
By: ______________________________
Mary Ann Levitt
Its: President
<PAGE>
<PAGE>
EXHIBIT C
SERVICE MARK LICENSE
THIS SERVICE MARK LICENSE (this "License") is made and
entered into as of the 21st day of June, 1993, by and between
WHEREHOUSE ENTERTAINMENT, INC., a Delaware corporation
("Licensee"), and THE RECORD SHOP, INC., a Minnesota corporation
("Licensor"), with reference to the following facts:
A. Licensor owns and operates music retail stores in the
States of Arizona, California, Iowa, Minnesota, Nevada, North
Dakota and Utah (the "Business").
B. Licensor has adopted, used and is using in connection
with its Business various tradenames, service names, trademarks,
service marks and logos, including, without limitation, the
tradenames, service names, trademarks, service marks and logos
described on Exhibit A attached hereto (collectively, the
"Service Marks").
C. Licensee owns and operates music stores ("Licensee's
Business").
D. Contemporaneously herewith, Licensee is acquiring
certain of the assets used by Licensor in connection with the
Business pursuant to the terms of the Agreement of Purchase
and Sale dated as of May 10, 1993 by and between Licensor and
Licensee, as amended (the "Purchase Agreement"). Unless
otherwise defined herein, all capitalized terms used herein
shall have the meanings ascribed to them in the Purchase
Agreement.
E. Pursuant to the provisions of the Purchase Agreement,
Licensee desires to obtain from Licensor the non-exclusive,
royalty-free right to use the Service Marks, and Licensor is
willing to grant such license and right to Licensee upon the
terms and conditions set forth below.
NOW, THEREFORE, in consideration of the mutual
covenants, agreements, representations and warranties herein
contained, the parties hereto hereby agree as follows:
1. Licensor hereby grants to Licensee a non-
exclusive, royalty-free license and right to use the Service
Marks during the "Term" (as hereafter defined) in connection with
Licensee's conduct of Licensee's Business throughout the world,
including, but not limited to, in connection with all Stores,
possession of which is delivered at any time to Licensee by
Licensor in accordance with the Purchase Agreement, subject to
the terms and conditions set forth herein. All use and benefit
of the Service Marks by Licensee hereunder shall inure to the
benefit of Licensee.
2. Licensee at no time during the Term shall do or
cause to be done any act which will, or is intended to, impair
any right, title or interest of Licensor in or to the Service
Marks.
3. Licensor may terminate this License and all rights
of Licensee hereunder to use the Service Marks in the event
Licensee materially defaults in any of its obligations hereunder
and fails to cure such default for a period of 60 days (the "Cure
Period") after Licensee's receipt of written notice from Licensor
specifying such failure and requesting that it be remedied,
provided, however, if the failure stated in the notice cannot be
corrected by Licensee within the Cure Period, Licensor will not
unreasonably withhold its consent to an extension of the Cure
Period if it is possible to correct such failure and corrective
action is instituted by Licensee within the Cure Period and
diligently pursued until said failure is corrected.
4. In order to secure the obligations of Licensor
under this License, Licensor hereby grants a continuing first
priority security interest in and lien upon, and hypothecates,
pledges and assigns to Licensee for security purposes, all of
Licensor's right, title and interest in and to the Service Marks,
the good will and all common law and statutory rights in and to
the Service Marks, together with all other property rights
necessary to effectuate the security interest in the Service
Marks (collectively, the "Collateral"). Upon the occurrence of
an "Event of Default" (as hereafter defined), Licensee shall
have, and be entitled to exercise, all of the rights, remedies,
powers and privileges of a secured party under the Commercial
Code of the State of California, and all other rights and
remedies under any applicable laws in any jurisdiction. Licensor
shall pay to Licensee on demand any and all expenses, including,
without limitation, reasonable attorneys' fees, incurred or paid
by Licensee in protecting or enforcing any of its rights under
this Section 4. Upon the request of Licensee, Licensor shall
execute and deliver UCC financing statements for the States of
Arizona, California, Iowa, Minnesota, Nevada, North Dakota and
Utah, and all other documents reasonably requested by Licensee to
perfect Licensee's security interest in the Collateral. As used
in this Agreement the term "Event of Default" shall mean Licensor
or Licensor as a debtor in possession or a trustee for the estate
of Licensor appointed under the United States Bankruptcy Code,
(i) attempts to terminate this License during the Term except
in strict conformance with Section 3 hereof, (ii) licenses,
sells, hypothecates, pledges or transfers any of the Service
Marks or any interest therein to any other person or entity other
than Licensee or Seller's Assignees in accordance with the
provisions of the Purchase Agreement, and/or (iii) uses any of
the Service Marks other than in connection with Licensor's
operation of Retained Stores.
5. No termination of this License shall affect or
release any obligations or liabilities of either party that
accrued prior to the effective date of such expiration or
termination. The provisions of this Section shall survive the
termination of this License.
6. Subject to the provisions for termination set
forth in Section 3 hereof, the term (the "Term") of this Licensee
shall commence as of the date hereof and shall continue until all
of Licensor's right, title and interest in and to all of the
Service Marks are indefeasibly conveyed to Licensee pursuant to
the terms of the Purchase Agreement.
7. Licensor hereby covenants and agrees that during
the Term Licensor, without the prior written consent of Licensee,
which may be withheld in its sole and absolute discretion, (i)
shall not license, sell, hypothecate, pledge, or transfer any of
the Service Marks or any interest therein to any other person or
entity (other than to Licensee or Seller's Assignees in accord-
ance with the Purchase Agreement), and (ii) shall use the Service
Marks solely in connection with Licensor's operation of the
Retained Stores.
8. To the best of Licensor's knowledge, Licensor
represents and warrants that it owns all right, title and
interest in and to the Service Marks, free and clear of all
Liens. This representation and warranty shall survive the
execution and delivery of this License.
9. All notices, statements or other documents which
any party shall be required or shall desire to give to the other
hereunder shall be in writing and shall be given by said party
only by telecopier, or by courier or personal delivery or by
addressing it as indicated below, and by depositing it certified
first-class mail, return receipt requested, postage prepaid, in
the U.S. mail. The addresses of the parties shall be those of
which the other party actually receives written notice pursuant
to this Section 9, and until further notice:
If to Licensee: Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, CA 90502-1334
Facsimile: (310) 538-2583
Attention: Cathy Wood,
Senior Vice President
With a copy to: Mitchell, Silberberg & Knupp
11377 West Olympic Boulevard
Los Angeles, California 90064
Facsimile: (310) 312-3787
Attention: Roy Shults, Esq.
If to Licensor: The Record Shop, Inc.
74 Cloudview Road
Sausalito, CA 94695
Facsimile: (415) 331-2657
Attention: Mort Gerber
With a copy to: Snell & Wilmer
400 East Van Buren
One Arizona Center
Phoenix, AZ 85004-0001
Facsimile: (602) 382-6070
Attention: Jody Pokorski, Esq.
Any such communications given by courier or personal
delivery shall be deemed given when delivered if during normal
business hours on a business day (or if not, the next business
day after delivery); any such communications given by telecopier
shall be deemed given when received if during normal business
hours on a business day (or if not, the next business day after
delivery) provided that such telecopy is legible and that at the
time such telecopy is sent the sending party receives written
confirmation of receipt and forwards a copy of the notice by
courier or personal delivery or by mail; and any such communi-
cations sent by certified first-class mail, return receipt
requested, postage prepaid shall be deemed given two business
days after the date of mailing.
10. The parties shall promptly, from time to time
after the date hereof, execute and deliver to the other party
such further documents, instruments and agreements as the other
party may reasonably request in order to consummate the trans-
actions contemplated by this License.
11. This License and the Purchase Agreement contain
all of the terms and conditions agreed upon by the parties hereto
with respect to the subject matter hereof and all prior agree-
ments whether oral or written between the parties hereto other
than the Purchase Agreement with regard to the subject matter
hereof, are merged herein and superseded hereby. No other
agreements regarding the subject matter hereof not specifically
referred to herein, oral or otherwise, shall be deemed to exist
or to bind any of the parties hereto. This License may not be
modified or changed except by written instruments signed by all
of the parties hereto. Licensor may not assign this License or
any interests therein. Any sale of all or substantially all of
the assets of Licensor (other than to Licensee) or a change in
control of Licensor shall constitute an assignment of this
License. Subject to the immediately preceding two sentences,
this License shall inure to the benefit of and be binding upon
the parties hereto and their respective successors and assigns.
Nothing in this License, expressed or implied, is intended to
confer on any person other than the parties hereto and their
respective successors and assigns any rights or remedies under or
by reason of this License and all agreements specifically
referred to herein.
12. This License may be executed in two counterparts
each of which shall be deemed to be an original and which
together shall constitute one and the same instrument.
13. The parties hereto acknowledge and agree that
monetary damages at law will not be sufficient to compensate
either party hereto in the event of a breach of this Agreement by
the other party hereto and, accordingly, each of the parties
hereto shall have all equitable remedies available to it under
applicable law, including, but not limited to, the right to
obtain preliminary and permanent injunctive relief. No remedy
conferred by any of the specific provisions of this License is
intended to be exclusive of any other remedy, each and every
remedy shall be cumulative and shall be in addition to every
other remedy given hereunder now or hereafter existing at law or
in equity, and an election by a party of one or more remedies
shall not constitute a waiver of the party's right to pursue any
other available remedies.
14. This License shall be governed by and construed in
accordance with the laws of the State of California, without
reference to is principles of conflict of laws.
15. In the event suit is brought to enforce or
interpret any part of this License or the rights or obligations
of any party to this License, the prevailing party shall be
entitled to recover as an element of such party's costs of suit,
and not as damages, reasonable attorneys' fees to be fixed by the
court. The prevailing party shall be the party who is entitled
to recover its costs of suit whether or not the suit proceeds to
final judgment. A party not entitled to recover its costs shall
not recover attorneys' fees. No sum for attorneys' fees shall
be counted in calculating the amount of judgment for purposes of
determining whether a party is entitled to recover its costs or
attorneys' fees.
IN WITNESS WHEREOF, the parties have duly executed this
License as of the date first above written.
LICENSEE: LICENSOR:
WHEREHOUSE ENTERTAINMENT, INC., THE RECORD SHOP, INC.,
a Delaware corporation a Minnesota corporation
By: _____________________ By: ______________________
Scott Young Mary Ann Levitt
Its: President Its: President
By: _____________________
Cathy Wood
Its: Secretary
<PAGE>
<PAGE>
EXHIBIT A
Tradenames
Record Shop
Paradise Music
Logos
Record Shop
Paradise Music - See attached
<PAGE>
<PAGE>
EXHIBIT D-1
SECTION 7.18.1 MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (this "Agreement") is made
and entered into as of the 21st day of June, 1993, by and between
WHEREHOUSE ENTERTAINMENT, INC., a Delaware corporation
("Manager"), and THE RECORD SHOP, INC., a Minnesota corporation
("Lessee"), with reference to the following facts:
A. Pursuant to the terms of that certain lease agreement
("Lease") identified on Exhibit A, attached hereto and hereby
incorporated herein, Lessee leases from "Lessor" (as defined in
Exhibit A) certain retail space (the "Premises").
B. Lessee operates a music retail store at the Premises
[which together with all assets (other than inventory) used in
the operation thereof, including Lessee's interest under the
Lease, all furniture, fixtures and equipment (including, without
limitation, all Sensormatic security systems owned by Lessee),
Lessee's interests under contracts for goods and services
provided to Lessee and leases for the Sensormatic security
systems and other equipment not owned by Lessee shall be referred
to herein collectively as the "Store"], for which it wishes to
obtain professional management services.
C. Manager is experienced and qualified in the management
of retail music stores.
D. Manager and Lessee are entering into this Agreement
pursuant to Sections 4.7, 5.3 and 7.18 of that certain Agreement
of Purchase and Sale, dated as of May 10, 1993, by and between
Manager and Lessee, as amended (the "Acquisition Agreement") and
this Agreement is one of the 7.18.1 "Management Agreements" to be
entered into by the parties hereto pursuant to the Acquisition
Agreement. Each initially capitalized term used but not defined
in this Management Agreement is used herein as defined in the
Acquisition Agreement.
NOW, THEREFORE, in consideration of the mutual
covenants, agreements, representations and warranties herein
contained, the parties hereto hereby agree as follows:
1. Appointment of Manager. Lessee hereby appoints Manager
as sole and exclusive manager of the Store, and Manager hereby
accepts such appointment, all on the terms and conditions set
forth in this Agreement.
2. Scope of Management Services. Commencing with the
"Effective Date" (as hereafter defined) and continuing until
termination of this Agreement as provided herein, Manager shall
employ its skill and professional expertise in managing the Store
and shall manage the Store generally in accordance with the
standards employed in operating retail music stores owned by
Manager. For the avoidance of doubt, the parties acknowledge
that in connection with Manager's operation of the Store, Manager
shall have the exclusive and irrevocable right to exercise all of
Lessee's rights in connection with all assets of Lessee currently
used in the operation thereof (other than Lessee's inventory)
(collectively, the "Lessee's Store Assets"), including, without
limitation, Lessee's interest under the Lease, the furniture,
fixtures and equipment (including, without limitation, all
Sensormatic security systems owned by Lessee) located on the
Premises, Lessee's interests under contracts for goods and
services provided to Lessee listed on Schedule 2 attached hereto
(collectively, the "Store Contracts") and leases for the Sensor-
matic security systems and other equipment not owned by Lessee
listed on Schedule 2 attached hereto (collectively, the "Equip-
ment Leases"). Notwithstanding anything herein to the contrary,
Manager shall have full authority to manage and operate the Store
as it sees fit subject to the terms of this Management Agreement
and shall not be required to obtain Lessee's consent or approval
in connection with any matter arising out of the management or
operation of the Store. Without limiting the generality of the
foregoing, Manager shall be permitted, in its sole discretion, to
(i) enter into and perform contracts and agreements in its own
name for the furnishing of goods and services of all kinds to the
Store, (ii) assume obligations of all kinds in connection with
the management and operation of the Store, and (iii) recruit,
hire and terminate the services of all employees and independent
contractors who perform services in connection with the operation
of the Store. Lessee shall have no rights of any kind in connec-
tion with the operation or management of the Store, provided,
however, that Manager shall grant Lessee reasonable access to the
Store during normal business hours and shall permit Lessee, upon
reasonable advance notice to Manager, to review the books and
records maintained by Manager in connection with the management
and operation of the Store to the extent reasonably necessary to
verify that Manager has performed its obligations under this
Agreement. In addition, Manager shall grant Lessor access to
review the books and records maintained by Manager to the same
extent that Lessee has granted Lessor such rights to review
Lessee's books and records.
3. Term. The term (the "Term") of this Agreement shall
commence on the date Manager obtains sole and exclusive posses-
sion of the Store (the "Effective Date") and shall continue for a
period equal to the remaining term of the Lease (including any
rights of extension and renewal periods exercised by Lessee prior
to the date hereof), unless earlier terminated in accordance with
the terms hereof.
4. Obligations Under the Lease, Store Contracts and
Equipment Leases. During the Term, Manager shall be subject to
and bound by and comply with all terms and conditions of the
Lease with respect to the Premises, Store Contracts and the
Equipment Leases other than those terms and conditions described
on Schedule 4 attached hereto.
5. Management Fees; Expenses.
5.1 As compensation for the services Manager provides
hereunder, Manager shall be entitled to retain for its own
account all revenues, income and proceeds of all sales and
rentals of every kind (whether in cash or on credit) received
by or for the Store or Manager resulting from the operations of
the Store.
5.2 Notwithstanding the provisions of Section 5.1 of
this Agreement, Manager shall pay all costs and expenses of
managing, operating and maintaining the Store during the Term.
Without limiting the generality of the foregoing, Manager shall
pay to Lessee all amounts which accrue during the Term and are
not due to an act of Lessee or a failure by Lessee to perform any
obligation under the Lease, any Store Contract or any Equipment
Lease (i) arising at any time other than during the Term or (ii)
with respect to obligations under the Lease, arising during the
Term and described on Schedule 4 attached hereto, whether or not
resulting in a default thereunder, of (a) rent, additional rent,
common area fees and other amounts due to be paid by Lessee to
Lessor under the Lease as it now is in existence (or hereafter
amended pursuant to Section 6.4 below), and (b) all rent and
other amounts due to be paid by Lessee to the applicable third
party (each a "Contracting Party") under all Store Contracts and
Equipment Leases as such agreements are now in existence (or
hereafter amended pursuant to Section 6.4 below). At least five
(5) business days before the first day of each calendar month
during the Term, Manager shall pay to Lessee (i) all amounts
of rent and additional rent to be paid during such month by
Lessee to Lessor pursuant to the terms of the Lease and (ii) all
amounts of rent and other regularly scheduled payments to be
paid during such month by Lessee to the applicable Contracting
Party pursuant to the terms of the Store Contracts and the
Equipment Leases. Manager shall pay to Lessee all other amounts
due to be paid by Lessee to Lessor or the Contracting Parties, as
applicable, under the Lease, the Store Contracts and/or the
Equipment Leases not described in the immediately preceding
two sentences ("Additional Amounts") upon the later of (a) five
(5) business days after Manager receives written notice of the
Additional Amounts due (which written notice shall include a
detailed description and calculation of such Additional Amounts),
and (b) five (5) business days before such Additional Amounts are
required to be paid pursuant to the terms of the Lease, the Store
Contracts or the Equipment Leases, as the case may be. Payments
to Lessee pursuant to this Section 5.2 for any partial month
during the Term shall be prorated. All rent or other amounts
paid by Manager pursuant to this Section 5.2 which are later
refunded to Lessee by Lessor under the Lease or by any Contract-
ing Party under the Store Contracts and Equipment Leases shall
either, at Manager's option, offset future amounts due to be paid
to Lessee pursuant to this Section 5.2 or be paid by Lessee to
Manager.
6. Additional Covenants.
6.1 On or before the Effective Date, Lessee shall, at
its sole cost and expense:
6.1.1 Deliver possession of the Store to
Manager.
6.1.2 Deliver to Manager appropriate authori-
zations to provide for the transfer of the Store's telephone
numbers and other utilities to Manager and for the closing
of billing as of the Effective Date.
6.1.3 Deliver to Manager all keys, combina-
tions to locks and security codes for all security systems
relating to the Store (collectively, the "Entry Devices").
6.2 Prior to fourteen (14) days after the Effective
Date, Lessee shall, at its sole cost and expense, remove all of
its assets from the Store which do not constitute Lessee's
Store Assets.
6.3 During the Term, Lessee shall make timely payments
of rent, additional rent, lease payments, and all other amounts
as required by the Lease, the Equipment Leases and the Store
Contracts, provided that Lessee shall not be required to make
such payments if Lessee has timely notified Manager of the amount
of any such payment (but only to the extent such notice is
required pursuant to Section 5.2 hereof) and Manager has failed
to make such payments to Lessee. During the Term, Lessee shall
perform all of its obligations under the Lease described on
Schedule 4 attached hereto. Lessee shall use its best efforts to
cause Lessor to perform all of its obligations under the Lease
and to cause each Contracting Party to perform all of its
obligations under the applicable Store Contract and Equipment
Lease except that Lessee shall not be required to commence
litigation to enforce such obligations. Lessee hereby agrees
that Manager shall be assigned all rights which Lessee may have
to proceed against Lessor or the applicable Contracting Party
under the Lease or the applicable Store Contract or Equipment
Lease arising out of or in connection with Lessee's obligations
under the Lease or the applicable Store Contract or Equipment
Lease which Manager has agreed to perform pursuant to the terms
of this Agreement.
6.4 During the Term, Lessee shall give Manager at
least 7 days prior notice of all proposed amendments or modifi-
cations to the Lease or any Store Contract or Equipment Lease.
During the Term, Lessee shall not amend or modify the Lease or
any Store Contract or Equipment Lease in a manner that would
materially and adversely affect Manager, the Store Contracts or
the Equipment Leases without the prior written consent of
Manager, which consent shall not be unreasonably withheld.
6.5 All employees performing services in connection
with the management and operation of the Store during the Term
shall be employees of Manager and Manager shall solely establish
the terms and conditions of employment for all employees and
shall pay all salaries and other compensation due such employees.
6.6 During the Term, Lessee and Manager shall use
their best efforts to insure that notices sent by Lessor to the
lessee under the Lease are sent both to Manager and Lessee at the
address that each party may designate from time to time, provided
that Manager and Lessee mutually determine, in their reasonable
discretion, that doing so will not adversely affect the parties'
ability to obtain a Store Leasehold Consent with respect to the
Store.
6.7 During the Term, each party shall promptly forward
to the other party copies of all communications, including but
not limited to notices, bills and accounting statements, that it
receives from Lessor.
6.8 During the Term, neither Lessee nor Manager shall
perform any act which results in a default under the Lease or any
Store Contract or Equipment Lease.
7. Inventory Located at the Store. Lessee acknowledges
and agrees that all of the inventory of music records, pre-
recorded and unrecorded tapes and cassettes, compact discs and
accessories, videos, laser discs (collectively, the "Inventory")
located at the Store on the Effective Date shall be transferred
to Manager by Lessee pursuant to the Acquisition Agreement and
thereafter Lessee shall have no ownership interest or security
interest in such Inventory or any other Inventory thereafter
located in the Store whatsoever.
8. Termination of Agreement.
8.1 This Agreement shall immediately terminate upon
(i) the occurrence of a "Delayed Closing" (as such term is
defined in the Acquisition Agreement) with respect to the Store,
or (ii) termination of the Lease for any reason.
8.2 Either Manager or Lessee may terminate this
Agreement upon 60 days written notice in the event that Manager
and Lessee mutually determine, in their reasonable discretion,
(i) that they will not be able to obtain a Store Leasehold
Consent for the Store in the future, or (ii) that performing
their respective obligations under this Agreement will adversely
affect the parties' ability to obtain a Store Leasehold Consent
with respect to the Store. Either Manager or Lessee may
terminate this Agreement in its sole discretion upon 60 days
written notice (or such lesser time period if, in such terminat-
ing party's reasonable judgment, the parties should terminate
this Agreement and Manager should vacate the Store within such
lesser time period in order to minimize the parties' potential
liability) in the event that (a) Lessor's consent is required in
order for Manager and Lessee to enter into and perform this
Agreement, (b) Lessor has refused to grant such consent, and (c)
Lessor has taken (or has threatened to take) action which would
have a material adverse effect on either Manager or Lessee. In
addition, either Manager or Lessee may terminate this Agreement
in its sole and arbitrary discretion upon 60 days written notice
to the other party, provided, however, that such notice shall not
be given prior to November 30, 1993.
8.3 In the event a party (the "Breaching Party") fails
to observe and perform its monetary obligations under this Agree-
ment for a period of 15 days or its non-monetary obligations
under this Agreement for a period of 30 days (the "Cure Period")
after the Breaching Party's receipt of written notice from the
other party hereto (the "Non-Breaching Party") specifying such
failure and requesting that it be remedied, the Non-Breaching
Party may terminate this Agreement by delivering written notice
thereof to the Breaching Party, provided, however, if the failure
stated in the notice cannot be corrected by the Breaching Party
within the Cure Period, the Non-Breaching Party will not unrea-
sonably withhold its consent to an extension of the Cure Period
if it is possible to correct such failure and corrective action
is instituted by the Breaching Party within the Cure Period and
diligently pursued until said failure is corrected.
8.4 On or within three days before the date on which
this Agreement terminates (except in the event of a termination
due to a Delayed Closing), Manager shall deliver possession of
the Store to Lessee (in the same condition and repair as at
commencement of the Term, reasonable wear and tear excepted) and
shall (i) remove all of the assets from the Store other than
Lessee's Store Assets, (ii) deliver to Lessee appropriate
authorizations to provide for the transfer of the Store's
telephone numbers and other utilities to Lessee and for the
closing of billing as of the termination date of this Agreement
and (iii) deliver to Lessee all Entry Devices.
8.5 Upon termination of this Agreement, other than a
termination due to a Delayed Closing or termination of the Lease,
Lessee, at Lessee's sole option, shall have the right to purchase
Manager's furniture, fixtures and equipment ("FF&E") and/or
inventory (other than used compact discs) located in the
Premises, provided that Lessee shall notify Manager in writing
that it intends to purchase the FF&E and/or inventory (other than
used compact discs) at least two (2) weeks prior to the date of
the termination of this Agreement or in the event this Agreement
is terminated by either party with less than sixty (60) days
notice in accordance with Section 8.2 hereof prior to the termi-
nation of this Agreement. If Lessee purchases the FF&E pursuant
to this Section, the price for such FF&E shall be Manager's cost.
If Lessee purchases Manager's inventory pursuant to this Section,
the price of such inventory shall be Manager's cost of such
inventory, less the discounts applied to the purchase of inven-
tory set forth in Section 2.1.2 of the Acquisition Agreement
other than the discount referred to in Section 2.1.2.4 of the
Acquisition Agreement. All costs of ascertaining the value of
the property transferred pursuant to this Section 8.5 shall be
borne two-thirds by Lessee and one-third by Manager.
9. Indemnification of Manager.
9.1 Lessee agrees to, and hereby does, fully indem-
nify, defend and save and hold Manager harmless at all times in
the event that Manager shall at any time or from time to time
suffer any damage, obligation, liability, loss, cost, expense,
claim, settlement or causes of action (including all reasonable
attorneys' fees) arising out of, resulting from or in connection
with, or shall pay or become obligated to pay any sum on account
of (i) any damage to the Store or Lessee's Store Assets at any
time other than during the Term, (ii) the management or operation
of the Store by Lessee at any time other than during the Term,
(iii) Lessee's failure to obtain Lessor's or any Contracting
Party's consent to Manager and Lessee entering into this Agree-
ment (collectively the "Lessor/Contracting Party Consents"), (iv)
any action or omission by Lessor or any Contracting Party
resulting from or in connection with Lessee's failure to obtain
all Lessor/Contracting Party Consents, (v) the presence or
migration at any time prior to, during or after the Term of any
pollutants, contaminants, chemicals, or industrial, toxic or
hazardous substances or wastes, including, without limitation,
asbestos (collectively, "Polluting Substances") on, into or from
the Store, the Premises or the real property under or adjacent to
the Premises other than such Polluting Substances brought onto or
in the Store, the Premises or the real property under or adjacent
to the Premises by Manager, its employees or agents, (vi) any
breach by Lessee of the terms hereof (including, without limita-
tion, failure by Lessee to comply with the terms of the Lease,
Equipment Leases and Store Contracts to be performed by Lessee
pursuant hereto), (vii) any act of Lessee which results in a
default under the Lease or any Equipment Lease or Store Contract,
and/or (viii) any failure by Lessee to perform any obligation
under the Lease, any Equipment Lease or any Store Contract which
arose at any time other than during the Term or, with respect to
obligations under the Lease, which arose during the Term and is
described on Schedule 4 attached hereto (collectively, "Events of
Manager Indemnification").
9.2 Whenever any claim shall arise for indemnification
pursuant to Section 9.1, Manager shall promptly notify Lessee of
the claim and, when known, the facts constituting the basis for
such claim, provided that failure of Manager to provide Lessee
with such notice shall not excuse or affect Lessee's indemnifi-
cation obligations under Section 9.1 unless the failure to
provide such notice shall actually prejudice Lessee. In the
event Lessee shall become obligated to Manager pursuant to
Section 9.1, or in the event that any suit, action, investiga-
tion, claim or proceeding is begun, made or instituted as a
result of which Lessee may become obligated to Manager there-
under, Lessee shall have the right to defend, contest or other-
wise protect against any such suit, action, investigation, claim
or proceeding by one or more counsel reasonably acceptable to
Manager. In the event Lessee so elects to defend or contest,
Manager shall have the right, at its expense, to participate in
such defense, but such defense shall at all times be conducted by
and under the control of Lessee and its counsel. In the event
that Lessee elects not to defend, contest or otherwise protect
against any action, investigation, claim or proceeding, Manager
shall have the right, at Lessee's expense, to pursue any such
defense, contest or protection.
10. Indemnification of Lessee.
10.1 Manager agrees to, and hereby does, fully indem-
nify, defend and save and hold Lessee harmless at all times in
the event that Lessee shall at any time or from time to time
suffer any damage, obligation, liability, loss, cost, expense,
claim, settlement or causes of action (including all reasonable
attorneys' fees) arising out of, resulting from or in connection
with, or shall pay or become obligated to pay any sum on account
of (i) any damage to Store or Lessee's Store Assets (other than
reasonable wear and tear) during the Term caused by the gross
negligence or willful misconduct or willful neglect of Manager,
(ii) any breach by Manager of the terms hereof, including without
limitation, failure by Manager to comply with the terms of the
Lease, the Store Contracts and the Equipment Leases to be
complied with by Manager pursuant to the terms of this Agreement,
(iii) the presence or migration at any time during the Term of
any Polluting Substances brought onto, into or from the Store,
the Premises or the real property under or adjacent to the
Premises by Manager, its employees and agents, (iv) the manage-
ment or operation of the Store by Manager during the Term, (v)
any act of Manager during the Term which results in a default
under the Lease or any Equipment Lease or Store Contract, other
than defaults with respect to Lease obligations described on
Schedule 4 attached hereto, or (vi) any failure by Manager to
perform any obligation under the Lease, any Equipment Lease or
any Store Contract which arose during the Term and is not
described on Schedule 4 attached hereto, provided, however, any
such damages, obligations, liabilities, losses, costs expenses,
claims, settlements, or causes of action do not arise out of,
result from or be attributable to (a) an Event of Manager
Indemnification or (b) any action or omission by Lessor or any
Contracting Party resulting from or in connection with Lessee's
failure to obtain all Lessor/Contracting Party Consents and
"Lease Consents" (as defined below). For the avoidance of doubt,
Manager shall have no liability to Lessee for any lost revenues,
profits, income or other sums resulting from or in connection
with Lessor's or the Contracting Parties' termination of the
Lease or any or all of the Equipment Leases and Store Contracts.
However, Manager shall be liable for any and all other damage,
loss, cost, obligation, liability, expense, claim, settlement or
cause of action (including reasonable attorneys' fees) suffered
by Lessee as a result of or in connection with a termination of
the Lease or any or all of the Equipment Leases and Store
Contracts by Lessor or any applicable Contracting Party, which
termination is caused by an act or omission of Manager which
gives rise to indemnification of Lessee under clause (v) or (vi)
of this Section 10.1 provided that such termination is not a
result of Lessee's failure to obtain all Lessor/Contracting Party
Consents and Lease Consents or Lessee's breach of the Lease or
any of the Equipment Leases or Store Contracts.
10.2 Whenever any claim shall arise for indemnification
pursuant to Section 10.1, Lessee shall promptly notify Manager of
the claim and, when known, the facts constituting the basis for
such claim, provided that failure of Lessee to provide Manager
with such notice shall not excuse or affect Manager's indemnifi-
cation obligations under Section 10.1 unless the failure to
provide such notice shall actually prejudice Manager. In the
event Manager shall become obligated to Lessee pursuant to
Section 10.1, or in the event that any suit, action, investiga-
tion, claim or proceeding is begun, made or instituted as a
result of which Manager may become obligated to Lessee there-
under, Manager shall have the right to defend, contest or other-
wise protect against any such suit, action, investigation, claim
or proceeding by one or more counsel of its choice reasonably
acceptable to Lessee. If Manager so elects to defend or contest,
Lessee shall have the right, at its expense, to participate in
such defense, but such defense shall at all times be conducted by
and under the control of Manager and its counsel, and Lessee
shall be fully bound by the results thereof. In the event
Manager elects not to defend, contest or otherwise protest
against any such suit, investigation, claim or proceeding, Lessee
shall have the right, at Manager's expense, to pursue any such
defense, contest or protection.
10.3 For the purposes of this Agreement "Lease
Consents" shall include (i) Lessor's consent to Manager's closing
the Store for the purpose of remodeling the Store generally in
accordance with Section 16.4 of the "Form Store Leasehold
Consent" referenced on Schedule 2.5.1.1 of the Acquisition
Agreement for the period commencing June 20, 1993 and ending June
26, 1993, (ii) Lessor's waiver of any lien on Manager's assets,
{and (iii) the radius restriction set forth in Section ____ of
the Lease}.
11. Notices. All notices, statements or other documents
which any party shall be required or shall desire to give to the
other hereunder shall be in writing and shall be given by said
party only by telecopier, or by courier or personal delivery
or by addressing it as indicated below, and by depositing it
certified first-class mail, return receipt requested, postage
prepaid, in the U.S. mail. The addresses of the parties shall be
those of which the other party actually receives written notice
pursuant to this Section 11, and until further notice:
If to Manager: Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, CA 90502-1334
Facsimile: (310) 538-2583
Attention: Cathy Wood,
Senior Vice President
With a copy to: Mitchell, Silberberg & Knupp
11377 West Olympic Boulevard
Los Angeles, California 90064
Facsimile: (310) 312-3787
Attention: Roy Shults, Esq.
If to Lessee: The Record Shop, Inc.
74 Cloudview Road
Sausalito, CA 94695
Facsimile: (415) 331-2657
Attention: Mort Gerber
With a copy to: Snell & Wilmer
400 East Van Buren
One Arizona Center
Phoenix, AZ 85004-0001
Facsimile: (602) 382-6070
Attention: Jody Pokorski, Esq.
Any such communications given by courier or personal
delivery shall be deemed given when delivered if during normal
business hours on a business day (or if not, the next business
day after delivery); any such communications given by telecopier
shall be deemed given when received if during normal business
hours on a business day (or if not, the next business day after
delivery) provided that such telecopy is legible and that at the
time such telecopy is sent the sending party receives written
confirmation of receipt and forwards a copy of the notice by
courier or personal delivery or by mail; and any such communi-
cations sent by certified first-class mail, return receipt
requested, postage prepaid shall be deemed given two business
days after the date of mailing.
12. Miscellaneous.
12.1 Each of the parties hereto shall use its best
efforts to bring about the transactions contemplated by this
Agreement as soon as practicable, including the execution and
delivery of all instruments, assignments and assurances, and
shall take or cause to be taken such further or other actions
reasonably necessary or desirable in order to carry out the
intents and purposes of this Agreement. No party will take or
knowingly permit to be taken any action or do or knowingly permit
to be done anything in the conduct of their respective business-
es, or otherwise, which would be contrary to or in breach of any
of the terms or provisions of this Agreement, or which would
cause any of the representations contained herein to be or become
untrue or which would prevent the satisfaction of any condition
contained herein.
12.2 The parties shall promptly, from time to time
after the date hereof, execute and deliver to the other party
such further documents, instruments and agreements as the other
party may reasonably request in order to consummate the trans-
actions contemplated by this Agreement.
12.3 This Agreement, the Acquisition Agreement and all
of the other Management Agreements between Manager and Lessee
contain all of the terms and conditions agreed upon by the
parties hereto with respect to the subject matter hereof, and all
prior agreements (other than the Acquisition Agreement and all of
the other Management Agreements between Lessee and Manager)
regarding the subject matter hereof whether oral or written
between the parties hereto, are merged herein and therein and
superseded hereby and thereby. No other agreements regarding the
subject matter hereof not specifically referred to herein or in
the Acquisition Agreement, oral or otherwise, shall be deemed to
exist or to bind any of the parties hereto. This Agreement may
not be modified or changed except by written instruments signed
by all of the parties hereto. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their
respective successors and assigns.
12.4 All captions and headings are inserted for the
convenience of the parties, and shall not be used in any way to
modify, limit, construe or otherwise affect this Agreement.
12.5 Upon termination of this Agreement as provided
herein, the parties' respective obligations hereunder shall
terminate except for the provisions of Sections 9 and 10 hereof
which shall survive the termination of this Agreement.
12.6 Subject to Section 12.9 hereof, each party hereto
shall bear its own expenses incurred with respect to the prepara-
tion, authorization, execution and performance of this Agreement
and all transactions contemplated hereunder (including, without
limitation, all fees and expenses of agents, representatives,
counsel and accountants).
12.7 This Agreement may be executed in two counterparts
each of which shall be deemed to be an original and which toge-
ther shall constitute one and the same instrument.
12.8 This Agreement shall be governed by and construed
in accordance with the laws of the State of California, without
reference to its principles of conflict of laws.
12.9 Notwithstanding any provision to the contrary
contained herein or in any agreement referenced herein, this
Agreement shall not be deemed to confer any rights or benefits
upon any person other than the parties hereto.
12.10 In the event suit is brought to enforce or
interpret any part of this Agreement or the rights or obligations
of any party to this Agreement, the prevailing party shall be
entitled to recover as an element of such party's costs of suit,
and not as damages, reasonable attorneys' fees to be fixed by the
court. The prevailing party shall be the party who is entitled
to recover its costs of suit whether or not the suit proceeds to
final judgment. A party not entitled to recover its costs shall
not recover attorneys' fees. No sum for attorneys' fees shall be
counted in calculating the amount of judgment for purposes of
determining whether a party is entitled to recover its costs or
attorneys' fees.
12.11 Each party shall cooperate with the other
party to the extent that such cooperation is required, by the
terms of the Lease or any of the Equipment Leases or Store
Contracts or otherwise, to enable the other party's performance
of any of its obligations under this Agreement.
12.12 Each party shall hold, and shall use its best
efforts to cause its officers, directors, employees, accountants,
counsel, consultants, advisors and agents ("Representatives") to
hold, in confidence, unless compelled to disclose by judicial or
administrative process or by other requirements of law, the terms
of this Agreement ("Terms"), provided that the parties or a
Representative may disclose the Terms to its Representatives in
connection with the transactions contemplated by this Agreement
so long as such persons are informed of the confidential nature
of the Terms and are directed to treat such information confiden-
tially. Notwithstanding the preceding sentence, this Section
shall not prohibit (i) any disclosure (including, without limita-
tion, any dissemination of copies of this Agreement) required by
any applicable law, statute or rule or requested by any govern-
mental agency (including, without limitation, any federal or
state securities law and any rule or regulation promulgated by
the Securities and Exchange Commission ("SEC") or any state
agency or authority having jurisdiction over the parties or their
affiliates) or (ii) any disclosure of such information in any
financial statements of Manager, Lessee or affiliates thereof to
the extent such disclosures are required by law (including,
without limitation, any federal or state securities law and any
rule or regulation promulgated by the SEC or any state agency or
authority having jurisdiction over the parties or their
affiliates).
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first above written.
MANAGER: LESSEE:
WHEREHOUSE ENTERTAINMENT, INC., THE RECORD SHOP, INC.
a Delaware corporation a Minnesota corporation
By: _______________________ By: _____________________
Scott Young Mary Ann Levitt
Its: President Its: President
By: _______________________
Cathy Wood
Its: Secretary
<PAGE>
<PAGE>
SCHEDULE 2
List of Store Contracts
List of Equipment Leases
<PAGE>
<PAGE>
SCHEDULE 4.1
Provisions of the Lease:
Provisions of the Store Contracts:
Provisions of the Equipment Leases:
<PAGE>
<PAGE>
EXHIBIT D-2
SECTION 7.18.2 MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (this "Agreement") is made
and entered into as of the 21st day of June, 1993, by and between
WHEREHOUSE ENTERTAINMENT, INC., a Delaware corporation
("Manager"), and THE RECORD SHOP, INC., a Minnesota corporation
("Lessee"), with reference to the following facts:
A. Pursuant to the terms of that certain lease agreement
("Lease") identified on Exhibit A, attached hereto and hereby
incorporated herein, Lessee leases from "Lessor" (as defined in
Exhibit A) certain retail space (the "Premises").
B. Lessee operates a music retail store at the Premises
[which together with all assets (other than inventory) used in
the operation thereof, including Lessee's interest under the
Lease, all furniture, fixtures and equipment (including, without
limitation, all Sensormatic security systems owned by Lessee),
Lessee's interests under contracts for goods and services
provided to Lessee and leases for the Sensormatic security
systems and other equipment not owned by Lessee shall be referred
to herein collectively as the "Store"], for which it wishes to
obtain professional management services.
C. Manager is experienced and qualified in the management
of retail music stores.
D. Manager and Lessee are entering into this Agreement
pursuant to Sections 4.7, 5.3 and 7.18 of that certain Agreement
of Purchase and Sale, dated as of May 10, 1993, by and between
Manager and Lessee, as amended (the "Acquisition Agreement") and
this Agreement is one of the 7.18.2 "Management Agreements" to be
entered into by the parties hereto pursuant to the Acquisition
Agreement. Each initially capitalized term used but not defined
in this Management Agreement is used herein as defined in the
Acquisition Agreement.
NOW, THEREFORE, in consideration of the mutual
covenants, agreements, representations and warranties herein
contained, the parties hereto hereby agree as follows:
1. Appointment of Manager. Lessee hereby appoints Manager
as sole and exclusive manager of the Store, and Manager hereby
accepts such appointment, all on the terms and conditions set
forth in this Agreement.
2. Scope of Management Services. Commencing with the
"Effective Date" (as hereafter defined) and continuing until
termination of this Agreement as provided herein, Manager shall
employ its skill and professional expertise in managing the Store
and shall manage the Store generally in accordance with the
standards employed in operating retail music stores owned by
Manager. For the avoidance of doubt, the parties acknowledge
that in connection with Manager's operation of the Store, Manager
shall have the exclusive and irrevocable right to exercise all of
Lessee's rights in connection with all assets of Lessee currently
used in the operation thereof (other than Lessee's inventory)
(collectively, the "Lessee's Store Assets"), including, without
limitation, Lessee's interest under the Lease, the furniture,
fixtures and equipment (including, without limitation, all
Sensormatic security systems owned by Lessee) located on the
Premises, Lessee's interests under contracts for goods and
services provided to Lessee listed on Schedule 2 attached hereto
(collectively, the "Store Contracts") and leases for the
Sensormatic security systems and other equipment not owned by
Lessee listed on Schedule 2 attached hereto (collectively, the
"Equipment Leases"). Notwithstanding anything herein to the
contrary, Manager shall have full authority to manage and operate
the Store as it sees fit subject to the terms of this Management
Agreement and shall not be required to obtain Lessee's consent or
approval in connection with any matter arising out of the manage-
ment or operation of the Store. Without limiting the generality
of the foregoing, Manager shall be permitted, in its sole discre-
tion, to (i) enter into and perform contracts and agreements in
its own name for the furnishing of goods and services of all
kinds to the Store, (ii) assume obligations of all kinds in
connection with the management and operation of the Store, and
(iii) recruit, hire and terminate the services of all employees
and independent contractors who perform services in connection
with the operation of the Store. Lessee shall have no rights of
any kind in connection with the operation or management of the
Store, provided, however, that Manager shall grant Lessee reason-
able access to the Store during normal business hours and shall
permit Lessee, upon reasonable advance notice to Manager, to
review the books and records maintained by Manager in connection
with the management and operation of the Store to the extent
reasonably necessary to verify that Manager has performed its
obligations under this Agreement. In addition, Manager shall
grant Lessor access to review the books and records maintained by
Manager to the same extent that Lessee has granted Lessor such
rights to review Lessee's books and records.
3. Term. The term (the "Term") of this Agreement shall
commence on the date Manager obtains sole and exclusive posses-
sion of the Store (the "Effective Date") and shall continue for a
period equal to the remaining term of the Lease (including any
rights of extension and renewal periods exercised by Lessee prior
to the date hereof), unless earlier terminated in accordance with
the terms hereof.
4. Obligations Under the Lease, Store Contracts and
Equipment Leases. During the Term, Manager shall be subject to
and bound by and comply with all terms and conditions of the
Lease with respect to the Premises, Store Contracts and the
Equipment Leases other than those terms and conditions described
on Schedule 4 attached hereto.
5. Management Fees; Expenses.
5.1 As compensation for the services Manager provides
hereunder, Manager shall be entitled to retain for its own
account all revenues, income and proceeds of all sales and
rentals of every kind (whether in cash or on credit) received
by or for the Store or Manager resulting from the operations of
the Store.
5.2 Notwithstanding the provisions of Section 5.1 of
this Agreement, Manager shall pay all costs and expenses of
managing, operating and maintaining the Store during the Term.
Without limiting the generality of the foregoing, Manager shall
pay to Lessee all amounts which accrue during the Term and are
not due to an act of Lessee or a failure by Lessee to perform any
obligation under the Lease, any Store Contract or any Equipment
Lease (i) arising at any time other than during the Term or (ii)
with respect to obligations under the Lease, arising during the
Term and described on Schedule 4 attached hereto, whether or not
resulting in a default thereunder, of (a) rent, additional rent,
common area fees and other amounts due to be paid by Lessee to
Lessor under the Lease as it now is in existence (or hereafter
amended pursuant to Section 6.4 below), and (b) all rent and
other amounts due to be paid by Lessee to the applicable third
party (each a "Contracting Party") under all Store Contracts and
Equipment Leases as such agreements are now in existence (or
hereafter amended pursuant to Section 6.4 below). At least five
(5) business days before the first day of each calendar month
during the Term, Manager shall pay to Lessee (i) all amounts
of rent and additional rent to be paid during such month by
Lessee to Lessor pursuant to the terms of the Lease and (ii) all
amounts of rent and other regularly scheduled payments to be
paid during such month by Lessee to the applicable Contracting
Party pursuant to the terms of the Store Contracts and the
Equipment Leases. Manager shall pay to Lessee all other amounts
due to be paid by Lessee to Lessor or the Contracting Parties, as
applicable, under the Lease, the Store Contracts and/or the
Equipment Leases not described in the immediately preceding
two sentences ("Additional Amounts") upon the later of (a) five
(5) business days after Manager receives written notice of the
Additional Amounts due (which written notice shall include a
detailed description and calculation of such Additional
Amounts), and (b) five (5) business days before such Additional
Amounts are required to be paid pursuant to the terms of the
Lease, the Store Contracts or the Equipment Leases, as the case
may be. Payments to Lessee pursuant to this Section 5.2 for any
partial month during the Term shall be prorated. All rent or
other amounts paid by Manager pursuant to this Section 5.2 which
are later refunded to Lessee by Lessor under the Lease or by any
Contracting Party under the Store Contracts and Equipment Leases
shall either, at Manager's option, offset future amounts due to
be paid to Lessee pursuant to this Section 5.2 or be paid by
Lessee to Manager.
6. Additional Covenants.
6.1 On or before the Effective Date, Lessee shall, at
its sole cost and expense:
6.1.1 Deliver possession of the Store to
Manager.
6.1.2 Deliver to Manager appropriate authori-
zations to provide for the transfer of the Store's telephone
numbers and other utilities to Manager and for the closing
of billing as of the Effective Date.
6.1.3 Deliver to Manager all keys, combina-
tions to locks and security codes for all security systems
relating to the Store (collectively, the "Entry Devices").
6.2 Prior to fourteen (14) days after the Effective
Date, Lessee shall, at its sole cost and expense, remove all of
its assets from the Store which do not constitute Lessee's
Store Assets.
6.3 During the Term, Lessee shall make timely payments
of rent, additional rent, lease payments, and all other amounts
as required by the Lease, the Equipment Leases and the Store
Contracts, provided that Lessee shall not be required to make
such payments if Lessee has timely notified Manager of the amount
of any such payment (but only to the extent such notice is
required pursuant to Section 5.2 hereof) and Manager has failed
to make such payments to Lessee. During the Term, Lessee shall
perform all of its obligations under the Lease described on
Schedule 4 attached hereto. Lessee shall use its best efforts to
cause Lessor to perform all of its obligations under the Lease
and to cause each Contracting Party to perform all of its
obligations under the applicable Store Contract and Equipment
Lease except that Lessee shall not be required to commence
litigation to enforce such obligations. Lessee hereby agrees
that Manager shall be assigned all rights which Lessee may have
to proceed against Lessor or the applicable Contracting Party
under the Lease or the applicable Store Contract or Equipment
Lease arising out of or in connection with Lessee's obligations
under the Lease or the applicable Store Contract or Equipment
Lease which Manager has agreed to perform pursuant to the terms
of this Agreement.
6.4 During the Term, Lessee shall give Manager at
least 7 days prior notice of all proposed amendments or modifi-
cations to the Lease or any Store Contract or Equipment Lease.
During the Term, Lessee shall not amend or modify the Lease or
any Store Contract or Equipment Lease in a manner that would
materially and adversely affect Manager, the Store Contracts or
the Equipment Leases without the prior written consent of
Manager, which consent shall not be unreasonably withheld.
6.5 All employees performing services in connection
with the management and operation of the Store during the Term
shall be employees of Manager and Manager shall solely establish
the terms and conditions of employment for all employees and
shall pay all salaries and other compensation due such employees.
6.6 During the Term, Lessee and Manager shall use
their best efforts to insure that notices sent by Lessor to the
lessee under the Lease are sent both to Manager and Lessee at the
address that each party may designate from time to time.
6.7 During the Term, each party shall promptly forward
to the other party copies of all communications, including but
not limited to notices, bills and accounting statements, that it
receives from Lessor.
6.8 During the Term, neither Lessee nor Manager shall
perform any act which results in a default under the Lease or any
Store Contract or Equipment Lease.
7. Inventory Located at the Store. Lessee acknowledges
and agrees that all of the inventory of music records, pre-
recorded and unrecorded tapes and cassettes, compact discs
and accessories, videos, laser discs (collectively, the "Inven-
tory") located at the Store on the Effective Date shall be
transferred to Manager by Lessee pursuant to the Acquisition
Agreement and thereafter Lessee shall have no ownership interest
or security interest in such Inventory or any other Inventory
thereafter located in the Store whatsoever.
8. Termination of Agreement.
8.1 This Agreement shall immediately terminate upon
(i) the occurrence of a "Delayed Closing" (as such term is
defined in the Acquisition Agreement) with respect to the Store,
or (ii) termination of the Lease for any reason.
8.2 Either Manager or Lessee may terminate this Agree-
ment in its sole discretion upon 60 days written notice (or such
lesser time period if, in such terminating party's reasonable
judgment, the parties should terminate this Agreement and Manager
should vacate the Store within such lesser time period in order
to minimize the parties' potential liability) in the event that
(a) Lessor's consent is required in order for Manager and Lessee
to enter into and perform this Agreement, (b) Lessor has refused
to grant such consent, and (c) Lessor has taken (or has threat-
ened to take) action which would have a material adverse effect
on either Manager or Lessee. In addition, Lessee may terminate
this Agreement in its sole and arbitrary discretion upon 60 days
written notice to the other party, provided, however, that such
notice shall not be given prior to November 30, 1993.
8.3 In the event a party (the "Breaching Party") fails
to observe and perform its monetary obligations under this Agree-
ment for a period of 15 days or its non-monetary obligations
under this Agreement for a period of 30 days (the "Cure Period")
after the Breaching Party's receipt of written notice from the
other party hereto (the "Non-Breaching Party") specifying such
failure and requesting that it be remedied, the Non-Breaching
Party may terminate this Agreement by delivering written notice
thereof to the Breaching Party, provided, however, if the failure
stated in the notice cannot be corrected by the Breaching Party
within the Cure Period, the Non-Breaching Party will not unrea-
sonably withhold its consent to an extension of the Cure Period
if it is possible to correct such failure and corrective action
is instituted by the Breaching Party within the Cure Period and
diligently pursued until said failure is corrected.
8.4 On or within three days before the date on which
this Agreement terminates (except in the event of a termination
due to a Delayed Closing), Manager shall deliver possession of
the Store to Lessee (in the same condition and repair as at
commencement of the Term, reasonable wear and tear excepted) and
shall (i) remove all of the assets from the Store other than
Lessee's Store Assets, (ii) deliver to Lessee appropriate
authorizations to provide for the transfer of the Store's
telephone numbers and other utilities to Lessee and for the
closing of billing as of the termination date of this Agreement
and (iii) deliver to Lessee all Entry Devices.
8.5 Upon termination of this Agreement, other than a
termination due to a Delayed Closing or termination of the Lease,
Lessee, at Lessee's sole option, shall have the right to purchase
Manager's furniture, fixtures and equipment ("FF&E") and/or
inventory (other than used compact discs) located in the
Premises, provided that Lessee shall notify Manager in writing
that it intends to purchase the FF&E and/or inventory (other than
used compact discs) at least two (2) weeks prior to the date of
the termination of this Agreement or in the event this Agreement
is terminated by either party with less than sixty (60) days
notice in accordance with Section 8.2 hereof prior to the termi-
nation of this Agreement. If Lessee purchases the FF&E pursuant
to this Section, the price for such FF&E shall be Manager's cost.
If Lessee purchases Manager's inventory pursuant to this Section,
the price of such inventory shall be Manager's cost of such
inventory, less the discounts applied to the purchase of inven-
tory set forth in Section 2.1.2 of the Acquisition Agreement
other than the discount referred to in Section 2.1.2.4 of the
Acquisition Agreement. All costs of ascertaining the value of
the property transferred pursuant to this Section 8.5 shall be
borne two-thirds by Lessee and one-third by Manager.
9. Indemnification of Manager.
9.1 Lessee agrees to, and hereby does, fully indem-
nify, defend and save and hold Manager harmless at all times in
the event that Manager shall at any time or from time to time
suffer any damage, obligation, liability, loss, cost, expense,
claim, settlement or causes of action (including all reasonable
attorneys' fees) arising out of, resulting from or in connection
with, or shall pay or become obligated to pay any sum on account
of (i) any damage to the Store or Lessee's Store Assets at any
time other than during the Term, (ii) the management or operation
of the Store by Lessee at any time other than during the Term,
(iii) Lessee's failure to obtain Lessor's or any Contracting
Party's consent to Manager and Lessee entering into this
Agreement (collectively the "Lessor/Contracting Party Consents"),
(iv) any action or omission by Lessor or any Contracting Party
resulting from or in connection with Lessee's failure to obtain
all Lessor/Contracting Party Consents, (v) the presence or
migration at any time prior to, during or after the Term of any
pollutants, contaminants, chemicals, or industrial, toxic or
hazardous substances or wastes, including, without limitation,
asbestos (collectively, "Polluting Substances") on, into or from
the Store, the Premises or the real property under or adjacent to
the Premises other than such Polluting Substances brought onto or
in the Store, the Premises or the real property under or adjacent
to the Premises by Manager, its employees or agents, (vi) any
breach by Lessee of the terms hereof (including, without limita-
tion, failure by Lessee to comply with the terms of the Lease,
Equipment Leases and Store Contracts to be performed by Lessee
pursuant hereto), (vii) any act of Lessee which results in a
default under the Lease or any Equipment Lease or Store Contract,
and/or (viii) any failure by Lessee to perform any obligation
under the Lease, any Equipment Lease or any Store Contract which
arose at any time other than during the Term or, with respect to
obligations under the Lease, which arose during the Term and is
described on Schedule 4 attached hereto (collectively, "Events of
Manager Indemnification").
9.2 Whenever any claim shall arise for indemnification
pursuant to Section 9.1, Manager shall promptly notify Lessee of
the claim and, when known, the facts constituting the basis for
such claim, provided that failure of Manager to provide Lessee
with such notice shall not excuse or affect Lessee's indemnifi-
cation obligations under Section 9.1 unless the failure to
provide such notice shall actually prejudice Lessee. In the
event Lessee shall become obligated to Manager pursuant to
Section 9.1, or in the event that any suit, action, investiga-
tion, claim or proceeding is begun, made or instituted as a
result of which Lessee may become obligated to Manager there-
under, Lessee shall have the right to defend, contest or other-
wise protect against any such suit, action, investigation, claim
or proceeding by one or more counsel reasonably acceptable to
Manager. In the event Lessee so elects to defend or contest,
Manager shall have the right, at its expense, to participate in
such defense, but such defense shall at all times be conducted by
and under the control of Lessee and its counsel. In the event
that Lessee elects not to defend, contest or otherwise protect
against any action, investigation, claim or proceeding, Manager
shall have the right, at Lessee's expense, to pursue any such
defense, contest or protection.
10. Indemnification of Lessee.
10.1 Manager agrees to, and hereby does, fully indem-
nify, defend and save and hold Lessee harmless at all times in
the event that Lessee shall at any time or from time to time
suffer any damage, obligation, liability, loss, cost, expense,
claim, settlement or causes of action (including all reasonable
attorneys' fees) arising out of, resulting from or in connection
with, or shall pay or become obligated to pay any sum on account
of (i) any damage to Store or Lessee's Store Assets (other than
reasonable wear and tear) during the Term caused by the gross
negligence or willful misconduct or willful neglect of Manager,
(ii) any breach by Manager of the terms hereof, including without
limitation, failure by Manager to comply with the terms of the
Lease, the Store Contracts and the Equipment Leases to be
complied with by Manager pursuant to the terms of this Agreement,
(iii) the presence or migration at any time during the Term of
any Polluting Substances brought onto, into or from the Store,
the Premises or the real property under or adjacent to the
Premises by Manager, its employees and agents, (iv) the manage-
ment or operation of the Store by Manager during the Term, (v)
any act of Manager during the Term which results in a default
under the Lease or any Equipment Lease or Store Contract, other
than defaults with respect to Lease obligations described on
Schedule 4 attached hereto, or (vi) any failure by Manager to
perform any obligation under the Lease, any Equipment Lease or
any Store Contract which arose during the Term and is not
described on Schedule 4 attached hereto, provided, however, any
such damages, obligations, liabilities, losses, costs expenses,
claims, settlements, or causes of action do not arise out of,
result from or be attributable to (a) an Event of Manager
Indemnification or (b) any action or omission by Lessor or any
Contracting Party resulting from or in connection with Lessee's
failure to obtain all Lessor/Contracting Party Consents and
"Lease Consents" (as defined below). For the avoidance of doubt,
Manager shall have no liability to Lessee for any lost revenues,
profits, income or other sums resulting from or in connection
with Lessor's or the Contracting Parties' termination of the
Lease or any or all of the Equipment Leases and Store Contracts.
However, Manager shall be liable for any and all other damage,
loss, cost, obligation, liability, expense, claim, settlement or
cause of action (including reasonable attorneys' fees) suffered
by Lessee as a result of or in connection with a termination of
the Lease or any or all of the Equipment Leases and Store
Contracts by Lessor or any applicable Contracting Party, which
termination is caused by an act or omission of Manager which
gives rise to indemnification of Lessee under clause (v) or (vi)
of this Section 10.1 provided that such termination is not a
result of Lessee's failure to obtain all Lessor/Contracting Party
Consents and Lease Consents or Lessee's breach of the Lease or
any of the Equipment Leases or Store Contracts.
10.2 Whenever any claim shall arise for indemnification
pursuant to Section 10.1, Lessee shall promptly notify Manager of
the claim and, when known, the facts constituting the basis for
such claim, provided that failure of Lessee to provide Manager
with such notice shall not excuse or affect Manager's indemnifi-
cation obligations under Section 10.1 unless the failure to
provide such notice shall actually prejudice Manager. In the
event Manager shall become obligated to Lessee pursuant to
Section 10.1, or in the event that any suit, action, investiga-
tion, claim or proceeding is begun, made or instituted as a
result of which Manager may become obligated to Lessee there-
under, Manager shall have the right to defend, contest or other-
wise protect against any such suit, action, investigation, claim
or proceeding by one or more counsel of its choice reasonably
acceptable to Lessee. If Manager so elects to defend or contest,
Lessee shall have the right, at its expense, to participate in
such defense, but such defense shall at all times be conducted by
and under the control of Manager and its counsel, and Lessee
shall be fully bound by the results thereof. In the event
Manager elects not to defend, contest or otherwise protest
against any such suit, investigation, claim or proceeding, Lessee
shall have the right, at Manager's expense, to pursue any such
defense, contest or protection.
10.3 For the purposes of this Agreement "Lease
Consents" shall include (i) Lessor's consent to Manager's closing
the Store for the purpose of remodeling the Store generally in
accordance with Section 16.4 of the "Form Store Leasehold
Consent" referenced on Schedule 2.5.1.1 of the Acquisition
Agreement for the period commencing June 20, 1993 and ending June
26, 1993, (ii) Lessor's waiver of any lien on Manager's assets,
{and (iii) the radius restriction set forth in Section ____ of
the Lease}.
11. Notices. All notices, statements or other documents
which any party shall be required or shall desire to give to the
other hereunder shall be in writing and shall be given by said
party only by telecopier, or by courier or personal delivery or
by addressing it as indicated below, and by depositing it
certified first-class mail, return receipt requested, postage
prepaid, in the U.S. mail. The addresses of the parties shall be
those of which the other party actually receives written notice
pursuant to this Section 11, and until further notice:
If to Manager: Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, CA 90502-1334
Facsimile: (310) 538-2583
Attention: Cathy Wood,
Senior Vice President
With a copy to: Mitchell, Silberberg & Knupp
11377 West Olympic Boulevard
Los Angeles, California 90064
Facsimile: (310) 312-3787
Attention: Roy Shults, Esq.
If to Lessee: The Record Shop, Inc.
74 Cloudview Road
Sausalito, CA 94695
Facsimile: (415) 331-2657
Attention: Mort Gerber
With a copy to: Snell & Wilmer
400 East Van Buren
One Arizona Center
Phoenix, AZ 85004-0001
Facsimile: (602) 382-6070
Attention: Jody Pokorski, Esq.
Any such communications given by courier or personal
delivery shall be deemed given when delivered if during normal
business hours on a business day (or if not, the next business
day after delivery); any such communications given by telecopier
shall be deemed given when received if during normal business
hours on a business day (or if not, the next business day after
delivery) provided that such telecopy is legible and that at the
time such telecopy is sent the sending party receives written
confirmation of receipt and forwards a copy of the notice by
courier or personal delivery or by mail; and any such communica-
tions sent by certified first-class mail, return receipt
requested, postage prepaid shall be deemed given two business
days after the date of mailing.
12. Miscellaneous.
12.1 Each of the parties hereto shall use its best
efforts to bring about the transactions contemplated by this
Agreement as soon as practicable, including the execution and
delivery of all instruments, assignments and assurances, and
shall take or cause to be taken such further or other actions
reasonably necessary or desirable in order to carry out the
intents and purposes of this Agreement. No party will take or
knowingly permit to be taken any action or do or knowingly permit
to be done anything in the conduct of their respective business-
es, or otherwise, which would be contrary to or in breach of any
of the terms or provisions of this Agreement, or which would
cause any of the representations contained herein to be or become
untrue or which would prevent the satisfaction of any condition
contained herein.
12.2 The parties shall promptly, from time to time
after the date hereof, execute and deliver to the other party
such further documents, instruments and agreements as the other
party may reasonably request in order to consummate the trans-
actions contemplated by this Agreement.
12.3 This Agreement, the Acquisition Agreement and all
of the other Management Agreements between Manager and Lessee
contain all of the terms and conditions agreed upon by the
parties hereto with respect to the subject matter hereof, and all
prior agreements (other than the Acquisition Agreement and all of
the other Management Agreements between Lessee and Manager)
regarding the subject matter hereof whether oral or written
between the parties hereto, are merged herein and therein and
superseded hereby and thereby. No other agreements regarding the
subject matter hereof not specifically referred to herein or in
the Acquisition Agreement, oral or otherwise, shall be deemed to
exist or to bind any of the parties hereto. This Agreement may
not be modified or changed except by written instruments signed
by all of the parties hereto. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their
respective successors and assigns.
12.4 All captions and headings are inserted for the
convenience of the parties, and shall not be used in any way to
modify, limit, construe or otherwise affect this Agreement.
12.5 Upon termination of this Agreement as provided
herein, the parties' respective obligations hereunder shall
terminate except for the provisions of Sections 9 and 10 hereof
which shall survive the termination of this Agreement.
12.6 Subject to Section 12.9 hereof, each party hereto
shall bear its own expenses incurred with respect to the prepara-
tion, authorization, execution and performance of this Agreement
and all transactions contemplated hereunder (including, without
limitation, all fees and expenses of agents, representatives,
counsel and accountants).
12.7 This Agreement may be executed in two counterparts
each of which shall be deemed to be an original and which toge-
ther shall constitute one and the same instrument.
12.8 This Agreement shall be governed by and construed
in accordance with the laws of the State of California, without
reference to its principles of conflict of laws.
12.9 Notwithstanding any provision to the contrary
contained herein or in any agreement referenced herein, this
Agreement shall not be deemed to confer any rights or benefits
upon any person other than the parties hereto.
12.10 In the event suit is brought to enforce or
interpret any part of this Agreement or the rights or obligations
of any party to this Agreement, the prevailing party shall be
entitled to recover as an element of such party's costs of suit,
and not as damages, reasonable attorneys' fees to be fixed by the
court. The prevailing party shall be the party who is entitled
to recover its costs of suit whether or not the suit proceeds to
final judgment. A party not entitled to recover its costs shall
not recover attorneys' fees. No sum for attorneys' fees shall be
counted in calculating the amount of judgment for purposes of
determining whether a party is entitled to recover its costs or
attorneys' fees.
12.11 Each party shall cooperate with the other
party to the extent that such cooperation is required, by the
terms of the Lease or any of the Equipment Leases or Store
Contracts or otherwise, to enable the other party's performance
of any of its obligations under this Agreement.
12.12 Each party shall hold, and shall use its best
efforts to cause its officers, directors, employees, accountants,
counsel, consultants, advisors and agents ("Representatives") to
hold, in confidence, unless compelled to disclose by judicial or
administrative process or by other requirements of law, the terms
of this Agreement ("Terms"), provided that the parties or a
Representative may disclose the Terms to its Representatives in
connection with the transactions contemplated by this Agreement
so long as such persons are informed of the confidential nature
of the Terms and are directed to treat such information confiden-
tially. Notwithstanding the preceding sentence, this Section
shall not prohibit (i) any disclosure (including, without limita-
tion, any dissemination of copies of this Agreement) required by
any applicable law, statute or rule or requested by any govern-
mental agency (including, without limitation, any federal or
state securities law and any rule or regulation promulgated by
the Securities and Exchange Commission ("SEC") or any state
agency or authority having jurisdiction over the parties or their
affiliates) or (ii) any disclosure of such information in any
financial statements of Manager, Lessee or affiliates thereof to
the extent such disclosures are required by law (including,
without limitation, any federal or state securities law and any
rule or regulation promulgated by the SEC or any state agency or
authority having jurisdiction over the parties or their
affiliates).
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first above written.
MANAGER: LESSEE:
WHEREHOUSE ENTERTAINMENT, INC., THE RECORD SHOP, INC.
a Delaware corporation a Minnesota corporation
By: _______________________ By: ______________________
Scott Young Mary Ann Levitt
Its: President Its: President
By: _______________________
Cathy Wood
Its: Secretary
<PAGE>
<PAGE>
SCHEDULE 2
List of Store Contracts
List of Equipment Leases
<PAGE>
<PAGE>
SCHEDULE 4.1
Provisions of the Lease:
Provisions of the Store Contracts:
Provisions of the Equipment Leases:
<PAGE>
<PAGE>
EXHIBIT E
FORM OF SELLER'S COUNSEL'S OPINION
SEE ATTACHED
<PAGE>
<PAGE>
EXHIBIT F
ASSIGNMENT AND ASSUMPTION OF
LEASES, SENSORMATIC LEASES AND STORE CONTRACTS
THIS ASSIGNMENT AND ASSUMPTION OF LEASES, SENSORMATIC
LEASES AND STORE CONTRACTS is made and entered into as of this
21st day of June, 1993 by and between THE RECORD SHOP, INC., a
Minnesota corporation ("Assignor"), and WHEREHOUSE ENTERTAINMENT,
INC., a Delaware corporation ("Assignee"), with reference to the
following facts:
A. Assignor owns and operates music retail stores in
the States of Arizona, California, Iowa, Minnesota, Nevada, North
Dakota and Utah.
B. Pursuant to the terms of that certain Agreement of
Purchase and Sale dated as of May 10, 1993 by and between
Assignor and Assignee, as amended (the "Purchase Agreement"),
Assignor has agreed to sell the "Transferred Assets" (as such
term is defined in the Purchase Agreement) to Assignee.
C. In connection with the Purchase Agreement,
Assignor desires to assign to Assignee (i) all right, title and
interest of Assignor as lessee in, to and under the real property
leases described on Exhibit A attached hereto (collectively, the
"Leases"), (ii) all right, title and interest of Assignor as
lessee in, to and under the personal property leases for certain
Sensormatic security systems described on Exhibit B attached
hereto (collectively, the "Sensormatic Leases"), and (iii) all
right, title and interest of Assignor as a party in, to and under
the contracts and leases for goods and services provided to
Assignor described on Exhibit C attached hereto (collectively,
the "Store Contracts"), and Assignee desires to assume certain
obligations of Assignor in, to and under the Leases, the Sensor-
matic Leases and the Store Contracts, on the terms and conditions
hereafter set forth.
NOW, THEREFORE, in consideration of the mutual
covenants, agreements, representations and warranties herein
contained, the parties hereto hereby agree as follows:
1. Assignments of Leases, Sensormatic Leases and
Store Contracts by Assignor. Assignor hereby irrevocably sells,
transfers and assigns to Assignee, and Assignee hereby irrevo-
cably purchases and accepts from Assignor, (i) all right, title
and interest of Assignor as lessee in, to and under the Leases,
(ii) all right, title and interest of Assignor as lessee in, to
and under the Sensormatic Leases, and (iii) all right, title and
interest of Assignor as a party in, to and under the Store
Contracts.
2. Assumption of Obligations by Assignee. Assignee
hereby irrevocably assumes and agrees to perform and observe all
of the terms, covenants, conditions, liabilities and obligations
to be performed or observed by Assignor under or in connection
with the Leases, the Sensormatic Leases, and the Store Contracts
arising and accruing after the "Closing" (as such term is defined
in the Purchase Agreement).
3. Representation and Warranty by Assignor. Assignor
hereby represents, warrants, covenants and agrees that it is
hereby conveying good and marketable title to the interests being
transferred to Assignee pursuant to the terms of this Agreement,
free and clear of all security interests, liens, pledges,
encumbrances, claims, charges, agreements, rights, options,
warranties, equities and restrictions.
4. Binding Effect. This Agreement and the respective
rights and obligations of the parties hereunder shall be binding
upon and inure to the benefit of the parties hereto and their
respective legal representatives, successors and assigns.
5. Further Assurances. Assignor and Assignee each
further covenants and agrees that it will, from time to time,
make, execute and deliver such instruments, consents and assur-
ances as the other party may reasonably request in order to
effectuate the transactions contemplated by this Agreement.
6. Governing Law. This Agreement shall be governed
by and construed in accordance with the laws of the State of
California, without reference to its principles of conflict of
laws.
7. Captions. All captions and headings are inserted
for the convenience of the parties, and shall not be used in any
way to modify, limit, construe or otherwise affect this Agree-
ment.
8. Counterparts. This Agreement may be executed in
several counterparts each of which shall be deemed to be an
original and which together shall constitute one and the same
instrument.
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this
Assignment and Assumption of Leases, Sensormatic Leases and Store
Contracts as of the date first above written.
THE RECORD SHOP, INC.,
a Minnesota corporation
By: ______________________________
Mary Ann Levitt
Its: President
WHEREHOUSE ENTERTAINMENT, INC.,
a Delaware corporation
By: ______________________________
Its: ______________________________<PAGE>
<PAGE>
EXHIBIT A
LEASES
1. Lease Agreement dated as of February 10, 1993, executed by
and between New River Associates, an Arizona general
partnership, as landlord, and The Record Shop, Inc., a
Minnesota corporation, as tenant (WEI #466, Arrowhead Mall,
Arizona).
2. Lease Agreement dated as of May 12, 1989, executed by and
between Westday Associates Limited Partnership, an Arizona
limited partnership, as landlord, and The Record Shop, Inc.,
a Minnesota corporation, as tenant (WEI #468, Paradise
Valley Mall R.S., Arizona).
3. Lease Agreement dated as of February 28, 1991, executed by
and between Westday Associates Limited Partnership, an
Arizona limited partnership, as landlord, and The Record
Shop, Inc., a Minnesota corporation, as tenant, as amended
by that certain First Amendment to Lease dated as of January
14, 1992, and further amended by that certain Second Amend-
ment to Lease dated as of July 23, 1992 (WEI #469, Paradise
Valley Mall P.M., Arizona).
4. Lease dated as of July 21, 1988 executed by and between
Noble "Park Central" Associates, a Texas joint venture, as
landlord, and The Record Shop, Inc., a Minnesota corpora-
tion, as tenant, as amended by that certain First Amendment
to Lease dated as of June 24, 1991, and further amended by
that certain Second Amendment to Lease dated as of January
30, 1992, and further amended by that certain Third Amend-
ment to Lease dated as of December 11, 1992 (WEI #470, Park
Central Mall, Arizona).
5. Lease Agreement dated as of May 16, 1990, executed by and
between East Mesa Associates, a partnership, as landlord,
and The Record Shop, Inc., a California corporation [sic],
as tenant, as amended by that certain Amendment to Lease
dated as of November 16, 1987 (WEI #471, Superstition
Springs, Arizona).
6. Lease Agreement dated as of March 1, 1985, executed by and
between Westpen Associates, a partnership, as landlord, and
The Record Shop, Inc., a Minnesota corporation, as tenant
(WEI #472, Westridge Mall, Arizona).
7. Lease Agreement dated as of March 7, 1990, executed by and
between Macerich Northwestern Associates, a California
general partnership, as landlord, and The Record Shop, Inc.,
a Minnesota corporation dba The Record Shop, Inc., as tenant
(WEI #473, Broadway Plaza Shopping Center, California).
8. Lease dated as of June 23, 1989 executed by and between
George A. Vlantis and James A. Vlantis, as Landlord, and The
Record Shop, Inc., a Minnesota corporation, as tenant (WEI
#474, Chestnut Street, California).
9. Lease dated as of June 19, 1990, executed by and between
Fred J. Russell d.b.a. Manchester Account, as landlord, and
The Record Shop, Inc., a Minnesota corporation d.b.a. Record
Shop, as tenant (WEI #475, Manchester Center, California).
10. Lease dated as of March 29, 1990, executed by and between
The Board of Trustees of the Leland Stanford Junior Univer-
sity, a body having corporate powers under the laws of the
State of California, as landlord, and The Record Shop, Inc.,
a Minnesota corporation, as tenant (WEI #477, Stanford
Shopping Center, California).
11. Shopping Center Lease dated as of March 14, 1986, executed
by and between Stevens Creek Associates, a California
general partnership dba Valley Fair, as landlord, and The
Record Shop, Inc., a Minnesota corporation dba The Record
Shop, as tenant (WEI #478, Valley Fair Mall, California).
12. Shopping Center Lease dated as of July 20, 1992, executed by
and between EWH Escondido Associates dba North County Fair,
as landlord, and The Record Shop, Inc., a Minnesota corpora-
tion dba Record Shop, as tenant (WEI #481, North County
Fair, California).
13. Lease Agreement dated as of April 4, 1989, executed by and
between Merle Hay Mall, an Iowa limited partnership, as
landlord, and The Record Shop, Inc., a Minnesota corpora-
tion, as tenant (WEI #483, Merle Hay Mall, Iowa).
14. Lease Agreement dated as of October 15, 1990, executed by
and between Calhoun Square Associates Limited Partnership,
as landlord, and The Record Shop, Inc., as tenant (WEI #487,
Calhoun Square, Minnesota).
15. Lease dated as of February 3, 1987, executed by and between
International Income Property, Inc., as landlord, and The
Record Shop, Inc., as tenant (WEI #493, The Meadows Mall,
Nevada).
16. Lease dated as of December 10, 1991, executed by and between
Crossroads Plaza Associates, as landlord, and The Record
Shop, Inc., a Minnesota corporation d/b/a Paradise Musick,
as tenant (WEI #495, Crossroads Plaza Mall P.M., Utah).
17. Lease dated as of June 27, 1989, executed by and between
Crossroads Plaza Associates, as landlord, and The Record
Shop, Inc., a Minnesota corporation d/b/a The Record Shop,
Inc., as tenant (WEI #496, Crossroads Plaza Mall R.S.,
Utah).
<PAGE>
<PAGE>
EXHIBIT B
SENSORMATIC LEASES
1. Lease and Lease with Purchase Option Agreement dated August
7, _____ by and between General Electric Capital Corp., as
successor-in-interest to Sensormatic Electronics Corpora-
tion, as lessor, and The Record Shop, Inc., as lessee
(Calhoun Square, Minnesota).
2. Lease and Lease with Purchase Option Agreement dated May 31,
1990 by and between General Electric Capital Corp., as
successor-in-interest to Sensormatic Electronics Corpora-
tion, as lessor, and The Record Shop, Inc., as lessee
(transferred from Mission Valley to Chestnut Street,
California).
3. Lease and Lease with Purchase Option Agreement dated May 19,
1992 by and between General Electric Capital Corp., as
successor-in-interest to Sensormatic Electronics Corpora-
tion, as lessor, and The Record Shop, Inc., as lessee
(Valley Fair Mall, California).
4. Lease and Lease with Purchase Option Agreement by and
between General Electric Capital Corp., as successor-in-
interest to Sensormatic Electronics Corporation, as lessor,
and The Record Shop, Inc., as lessee (Stanford Mall,
California ).
5. Lease and Lease with Purchase Option Agreement dated as of
January 24, 1989 by and between General Electric Capital
Corp., as successor-in-interest to Sensormatic Electronics
Corporation, as lessor, and The Record Shop, Inc., as lessee
(North County Fair, California).
6. Lease and Lease with Purchase Option Agreement by and
between General Electric Capital Corp., as successor-in-
interest to Sensormatic Electronics Corporation, as lessor,
and The Record Shop, Inc., as lessee (Crossroads Mall, Utah
- Record Shop).
7. Lease and Lease with Purchase Option Agreement dated as of
September 20, 1988 by and between General Electric Capital
Corp., as successor-in-interest to Sensormatic Electronics
Corporation, as lessor, and The Record Shop, Inc., as
lessee, but only to the extent of the Sensormatic Equipment
located at Crossroads Mall, Utah - Paradise Music and
Westridge Mall, Arizona.
8. Lease and Lease with Purchase Option Agreement dated as of
November 16, 1988 by and between General Electric Capital
Corp., as successor-in-interest to Sensormatic Electronics
Corporation, as lessor, and The Record Shop, Inc., as lessee
(The Meadows Mall, Nevada).
<PAGE>
<PAGE>
EXHIBIT C
STORE CONTRACTS
1. Agreement dated May 29, 1991 by and between ADT Security
Systems and The Record Shop, Inc.
<PAGE>
<PAGE>
EXHIBITS G and H
FORM OF STORE CONTRACT AND SENSORMATIC LEASE CONSENT
[THE RECORD SHOP, INC. LETTERHEAD]
May __, 1993
[ADDRESSEE]
Ladies/Gentlemen:
On or about June 21, 1993, certain of the assets of The
Record Shop, Inc. will be transferred to Wherehouse Entertain-
ment, Inc. Included among the assets to be transferred is an
agreement with your company (the "Agreement"). In order to
facilitate the transfer of the assets, we hereby cordially
request (i) your consent to thetransfer of all rights and obliga-
tions of The Record Shop, Inc. under the Agreement to Wherehouse
Entertainment, Inc., and (ii) your certification as to the state-
ments set forth on Exhibit A attached hereto.
Please acknowledge your consent to this transfer and
your certification as to the statements set forth on Exhibit A
attached hereto by signing the enclosed copy of this letter and
returning it to us in the enclosed postage-paid envelope. We
thank you in advance for your cooperation.
Very truly yours,
THE RECORD SHOP, INC.
Mary Ann Levitt, President
AGREED AND ACCEPTED:
[ADDRESSEE]
By: _______________________ Dated: _____________, 1993
Its: ______________________
<PAGE>
<PAGE>
EXHIBIT A
1. Attached hereto is a true and complete copy of the Agreement
and all amendments, modifications, supplements and assign-
ments thereof and thereto.
2. As of the date hereof, all payments and other charges to be
paid by The Record Shop, Inc. under the Agreement have been
paid in full.
3. To our best knowledge, no default has occurred under the
Agreement and no event has occurred which, with the passage
of time or the giving of notice or both, would constitute a
default under the Agreement.
<PAGE>
<PAGE>
EXHIBIT I-1
SECTION 3.8 ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Escrow Agreement") is made and
entered into as of the 21st day of June, 1993, by and between
WHEREHOUSE ENTERTAINMENT, INC., a Delaware corporation ("Purchas-
er"), THE RECORD SHOP, INC., a Minnesota corporation ("Seller"),
and LAWYERS TITLE OF ARIZONA, INC. ("Escrow Agent"), with
reference to the following facts:
A. Purchaser and Seller have entered into that certain
Agreement of Purchase and Sale dated as of May 10, 1993 , as
amended (the "Purchase Agreement"), pursuant to which Purchaser
will purchase certain of the assets of Seller. Each initially
capitalized term used but not defined in this Escrow Agreement is
used herein as defined in the Purchase Agreement.
B. Pursuant to the Purchase Agreement, Purchaser is
required to deposit certain sums with a mutually agreed-upon
escrow agent at the Closing and the Delayed Closings.
C. Purchaser and Seller have agreed that Escrow Agent
shall serve as the escrow agent hereunder, and Escrow Agent has
agreed to serve in that capacity, pursuant to the terms hereof
and the terms set forth on Exhibit A attached hereto and incorpo-
rated herein by this reference.
NOW, THEREFORE, in consideration of the promises and the
mutual agreements hereinafter set forth and for other good and
valuable consideration, receipt of which is hereby acknowledged,
the parties hereto hereby agree as follows:
1. Appointment of Escrow Agent; Acceptance.
Purchaser and Seller hereby appoint Escrow Agent to act
as escrow agent in accordance with the terms and provisions of
this Escrow Agreement, and Escrow Agent hereby accepts such
appointment subject to the terms and conditions hereof.
2. Deposit of Funds; Minimum Balance of Escrow Funds.
2.1 At the Closing and each Delayed Closing,
Purchaser shall deliver to the Escrow Agent an amount equal to
$20,689.66 multiplied by the number of Stores possession of which
are being transferred to Purchaser pursuant to a Store Leasehold
Assignment at such Closing or Delayed Closing (and together with
any interest earned on each such deposit, an "Escrow Deposit";
the Escrow Deposits are referred to herein collectively as the
"Escrow Funds"). The Escrow Deposits shall be deposited by
Escrow Agent into an interest-bearing account at Bank One or any
other federally insured lending institution approved by Purchaser
and Seller. The Escrow Agent is directed to hold, deal with and
dispose of the Escrow Funds as hereinafter set forth, and agrees
not to commingle such funds with any other funds held by the
Escrow Agent.
2.2 Subject to Section 3.3 hereof, at no time
between the Closing and the distribution of the Final Escrow
Deposit in accordance with Section 4.1 hereof shall the balance
(the "Minimum Balance") of the Escrow Funds be less than $60,000,
provided, however, that in the event Purchaser and Seller obtain
a Store Leasehold Consent with respect to any Store Lease which
does not contain all Essential Estoppel Terms (a "Non-Conforming
Store Leasehold Consent"), at no time between the Closing and the
expiration of the Estoppel Representations shall the Minimum
Balance of the Escrow Funds be less than $100,000. At the
Closing and at each Delayed Closing, Purchaser shall give written
notice to both Escrow Agent and Seller regarding whether any of
the Store Leasehold Consents are Non-Conforming Store Leasehold
Consents, in which event the proviso in the immediately preceding
sentence shall apply. Notwithstanding anything herein to the
contrary, Purchaser may waive the requirement of the Minimum
Balance. To be effective such waiver must be in writing executed
by Purchaser.
3. Disbursement of Escrow Funds During Any Escrow
Period.
3.1 During any Escrow Period, Purchaser may, by
submitting a "Claim Notice" (as hereinafter defined), request the
Escrow Agent to disburse the Escrow Funds (a) to reimburse
Purchaser for any actual damages it has incurred as a result of
any breach of any representations and warranties of Seller under
the Purchase Agreement or any other covenants or agreements of
Seller to Purchaser contained in the Purchase Agreement, any
Management Agreement, the Service Mark License or any other
document or agreement contemplated thereby (it being understood
that any such application of the Escrow Funds shall not release
Seller from its liability to Purchaser for any breach of the
representations and warranties of Seller or any other covenants
or agreements of Seller to Purchaser to the extent such breaches
cause Purchaser to incur damages in excess of the amount of the
Escrow Funds applied against any such damages), (b) to pay
Seller's actual prorated Current Property Taxes, Sales Taxes and
Payroll Taxes as contemplated in Sections 3.5, 3.6 and 3.7 of the
Purchase Agreement, respectively, that exceed the amount for
which Purchaser previously received credit against the Trans-
ferred Assets Purchase Price and/or (c) to reimburse Purchaser
for all Gift Certificates and Merchandise Credits redeemed or
honored during the Escrow Period in excess of the aggregate
amount of $30,000. Notwithstanding anything in this Section 3.1
or Sections 3.5, 3.6, 3.7 or 3.8 of the Purchase Agreement to the
contrary, Purchaser shall use the Escrow Funds to pay Seller's
actual prorated Property Taxes, Sales Taxes and Payroll Taxes in
excess of the reserves established therefor unless and until the
balance of the Escrow Funds after paying such taxes therefrom is
less than the then applicable Minimum Balance. In the event
that, and from time to time as, Purchaser determines that there
exists a claim for reimbursement from the Escrow Funds pursuant
to this Section 3.1, Purchaser shall submit written notice (such
notice, a "Claim Notice") of such claim (a "Claim") in accordance
with the terms of Section 10 hereof to the Escrow Agent and
Seller, including a description of the claim and stating the
dollar amount thereof (the "Claim Amount").
3.2 Unless the Escrow Agent and Purchaser receive
written notice in accordance with the terms of Section 10 hereof
that Seller disputes a Claim within ten (10) business days
following receipt by the Escrow Agent and Seller of the appli-
cable Claim Notice (such notice, a "Dispute Notice"), which
notice shall include in reasonable detail the basis for Seller's
dispute, the Escrow Agent shall disburse funds from the Escrow
Funds to Purchaser in the amount of the Claim Amount. The Escrow
Agent shall have no responsibility for verifying the Claim Amount
or the facts or circumstances proposed as a basis for the Claim.
All disputes as to Claims hereunder shall be arbitrated in
accordance with Section 7 hereof and the Claim Amount of any
disputed Claim shall be held in escrow hereunder pending resolu-
tion of such dispute.
3.3 Notwithstanding anything herein to the
contrary, in the event the aggregate amount of the Escrow Funds
becomes less than the then applicable Minimum Balance, the Escrow
Agent shall give written notice of such fact to Purchaser and
Seller, and after receipt of such notice, Seller shall within ten
(10) business days thereof deliver to the Escrow Agent for
deposit into the Escrow Funds an amount equal to the difference
between the then applicable Minimum Balance and the then remain-
ing aggregate amount of the Escrow Funds.
4. Termination; Release of Escrow Funds.
4.1 Subject to Sections 2.2 and 4.2 hereof, the
then remaining balance of each particular Escrow Deposit after
the satisfaction of all Claims previously received by the Escrow
Agent or the withholding of any Claim Amounts pursuant to
Sections 3.2 and 4.2 hereof shall be paid to Seller on the first
business day after the later of (i) the expiration of the Escrow
Period with respect to such Escrow Deposit, and (ii) the date on
which Seller provides the Escrow Agent with written notice that,
to the best of its knowledge, there have been no breaches, nor
does Seller anticipate any breaches, of any of Seller's represen-
tations, warranties, covenants or agreements contained in the
Purchase Agreement, any Management Agreement, the Service Mark
License or in any other document or agreement contemplated
thereby other than breaches for which a Claim has previously been
made. A true and correct accounting of all Escrow Funds expended
by the Escrow Agent shall accompany the distribution of the then
remaining balance of the most recently deposited Escrow Deposit
(the "Final Escrow Deposit") prior to the date on which both
Purchaser and Seller provide the Escrow Agent with written notice
that the parties have agreed, such agreement not to be unrea-
sonably withheld, that they will not be able to obtain Store
Leasehold Consents for any remaining Non-Transferred Leases and
Extensions and Store Leasehold Consents for any remaining Non-
Extended Short Term Leases.
4.2 Notwithstanding anything herein to the
contrary, the aggregate unpaid Claim Amounts shall either be paid
to Purchaser or retained by Escrow Agent until a final determina-
tion of the validity of Purchaser's Claims is made in accordance
with the terms of this Escrow Agreement.
5. Fees of Escrow Agent.
Escrow Agent shall be entitled to compensation for
Escrow Agent's services hereunder in accordance with the provi-
sions of Exhibit "A" attached hereto and to reimbursement for
reasonable expenses incurred in connection herewith. Purchaser
and Seller shall each pay one-half (1/2) of such fees and
expenses.
6. Duties of Escrow Agent.
Escrow Agent shall perform only such duties as are
expressly set forth in this Escrow Agreement, including those
duties set forth on Exhibit A attached hereto and incorporated
herein. Escrow Agent may resign and may be discharged from its
duties or obligations hereunder by giving at least twenty (20)
days' prior written notice of such resignation to Purchaser and
Seller, specifying the date when such resignation shall take
effect, which shall not be prior to the appointment of a
successor Escrow Agent. Following receipt of such notice,
Purchaser and Seller shall designate a successor Escrow Agent.
Upon the mutual agreement of Purchaser and Seller, they shall
have the right to remove Escrow Agent by giving written notice of
such removal to Escrow Agent, which notice shall designate a
successor Escrow Agent. Within five (5) calendar days after
receipt of such notice, Escrow Agent shall deliver the Escrow
Funds to the designated successor Escrow Agent.
7. Disputes and Controversies.
7.1 The parties hereto agree that arbitration
shall constitute the exclusive remedy for the resolution of any
dispute, controversy or claim between the parties arising out of
or relating to this Escrow Agreement. The arbitration proceed-
ings shall be accomplished in accordance with the provisions of
this Section 7.
7.2 Except as expressly provided herein to the
contrary, the arbitration proceeding shall be conducted under the
Commercial Arbitration Rules of the American Arbitration Associa-
tion in effect at the time a demand for arbitration is made. To
the extent that there is any conflict between the rules of the
American Arbitration Association and this Section 7, this Section
7 shall govern and determine the rights of the parties hereto.
7.3 The arbitration will take place in Los
Angeles, California before a single arbitrator selected as
follows: Either Purchaser or Seller may request the American
Arbitration Association to provide a list of proposed arbitra-
tors, all of whom must be retired judges. Purchaser and Seller
shall then take turns crossing off one name at a time from such
list with the last remaining retired judge being appointed the
arbitrator. Purchaser and Seller shall select by lot which of
them strikes the first name from the list of proposed arbitra-
tors. If the person selected in this method to be the arbitrator
declines or is otherwise unavailable to serve as the arbitrator
of the dispute, the arbitrator shall be selected from the same
list of proposed arbitrators selected in the reverse order to
which those proposed arbitrators' names were struck from the list
until one of such individuals selected to be the arbitrator
accepts the appointment and is able to serve as the arbitrator.
7.4 The arbitrator selected in the manner set
forth in Section 7.3 shall be requested to honor the intention of
the parties hereto to resolve the disputes quickly and inexpen-
sively. All decisions shall be made with this intention in mind.
The decision of the arbitrator, including determination of the
amount of any damages suffered, shall be exclusive, final and
binding on all parties, their successors and assigns as appli-
cable.
7.5 Except as expressly set forth in this Escrow
Agreement, the arbitrator shall determine the manner in which the
arbitration proceeding is conducted, including the time and place
of all hearings, the order of presentation of evidence and all of
the questions that arise with respect to the arbitration proceed-
ing.
7.6 The arbitrator shall be required to determine
all issues in accordance with California law. The rules of
evidence applicable to proceedings at law in the State of
California will be applicable to the arbitration proceedings.
7.7 The arbitrator shall issue a single judgment
at the close of the arbitration proceeding, which shall dispose
of all of the claims of the parties that are the subject of the
arbitration. Any party to the arbitration may seek a judgment
from a court of competent jurisdiction to enforce the award of
the arbitrator.
7.8 The cost of arbitration, including admini-
strative fees, fees for a record and a transcript, and the
arbitrator's fees shall be borne equally by the parties to the
arbitration, except that the arbitrator shall have the right to
award reasonable attorneys' fees to the party determined by the
arbitrator to be the prevailing party.
8. Interest on Escrow Funds.
All interest earned on the Escrow Funds shall inure to
the benefit of Seller, provided that all such interest may be
disbursed by the Escrow Agent as provided herein to satisfy any
Claim.
9. Method of Payment.
Any amounts to be paid to Purchaser or Seller hereunder
shall be paid by wire transfer or by cashier's check.
10. Notices.
All notices, statements or other documents which
any party shall be required or shall desire to give to the other
hereunder shall be in writing and shall be given by said party
only by telecopier, or by courier or personal delivery or by
addressing it as indicated below, and depositing it certified
first-class mail, return receipt requested, postage prepaid, in
the U.S. mail. The addresses of the parties shall be those of
which the other party actually receives written notice pursuant
to this Section 10, and until further notice:
If to Purchaser: Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, CA 90502-1334
Facsimile: (310) 538-2583
Attention: Cathy Wood,
Senior Vice President
With a copy to: Mitchell, Silberberg & Knupp
11377 West Olympic Boulevard
Los Angeles, California 90064
Facsimile: (310) 312-3787
Attention: Roy Shults, Esq.
If to Seller: The Record Shop, Inc.
74 Cloudview Road
Sausalito, CA 94695
Facsimile: (415) 331-2657
Attention: Mort Gerber
With a copy to: Snell & Wilmer
400 East Van Buren
One Arizona Center
Phoenix, AZ 85004-0001
Facsimile: (602) 382-6070
Attention: Jody Pokorski, Esq.
If to Escrow Agent: Lawyers Title of Arizona, Inc.
2425 E. Camelback Road, Suite 700
Phoenix, AZ 85016
Facsimile: (602) 954-7006
Attention: Lynne Peoples
Any such communications given by courier or personal
delivery shall be deemed given when delivered if during normal
business hours on a business day (or if not, the next business
day after delivery); any such communications given by telecopier
shall be deemed given when received if during normal business
hours on a business day (or if not, the next business day after
delivery) provided that such telecopy is legible and that at the
time such telecopy is sent the sending party receives written
confirmation of receipt and forwards a copy of the notice by
courier or personal delivery or by mail; and any such communi-
cations sent by certified first-class mail, return receipt
requested, postage prepaid shall be deemed given two business
days after the date of mailing.
11. Governing Law.
This Escrow Agreement shall be construed in accordance
with and governed by the laws of the State of California, without
giving effect to that State's conflicts of law rules.
12. Risk of Loss.
As between Purchaser and Seller, the risk of loss of
any funds deposited into escrow pursuant to the terms of this
Escrow Agreement shall be borne equally by Purchaser and Seller,
provided, however, that such assumption of the risk of loss by
Purchaser and Seller shall not release Escrow Agent from liabil-
ity to Purchaser and Seller for Escrow Agent's acts or omissions
which result in or cause a loss of any of the Escrow Funds.
13. Entire Agreement.
This Escrow Agreement and the Purchase Agreement
contain all of the terms and conditions agreed upon by the
parties hereto with respect to the subject matter hereof, and
all prior agreements (other than the Purchase Agreement) whether
oral or written between the parties hereto are merged herein and
superseded hereby. No other agreements not specifically referred
to herein, oral or otherwise, shall be deemed to exist or to bind
any of the parties hereto. This Escrow Agreement may not be
modified or changed except by written instrument signed by all of
the parties hereto. This Escrow Agreement shall inure to the
benefit of and be binding upon the parties hereto and their
respective successors and assigns. Nothing in this Escrow Agree-
ment, expressed or implied, is intended to confer on any person
other than the parties hereto and their respective successors and
assigns any rights or remedies under or by reason of this Escrow
Agreement.
14. Further Assurances.
Each party to this Escrow Agreement agrees on the
written request of any other party hereto to execute and deliver
from time to time any additional instruments or documents
reasonably considered necessary by a party or its counsel to
effect or complete the transactions contemplated hereunder.
15. Counterparts.
This Escrow Agreement may be executed in one or more
counterparts, each of which is deemed an original, but all of
which together shall constitute one and the same agreement.
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this
Escrow Agreement as of the date first above written.
PURCHASER: SELLER:
WHEREHOUSE ENTERTAINMENT, INC., THE RECORD SHOP, INC.
a Delaware corporation a Minnesota corporation
By: _______________________ By: ______________________
Scott Young Mary Ann Levitt
Its: President Its: President
By: _______________________
Cathy Wood
Its: Secretary
ESCROW AGENT:
LAWYERS TITLE OF ARIZONA, INC.
By: ______________________________
Its: _____________________________
<PAGE>
<PAGE>
EXHIBIT A
SELLER and PURCHASER:
1. AGREE that they will deposit with Escrow Agent all docu-
ments, all funds and do or cause to be done all other things
necessary to enable it to comply with the terms of the
Escrow Agreement, direct that all monies payable hereunder
shall be paid in United States Dollars to the Escrow Agent,
and that upon receipt the Escrow Agent shall initially
deposit such funds in a general (noninterest bearing) escrow
account in a financial institution doing business in the
State of Arizona, and Escrow Agent shall not be liable for
any loss or impairment of funds so deposited in any said
bank, savings bank or savings institution resulting from the
failure, insolvency or suspension of such institution and
authorize Escrow Agent to pay from funds held the amounts
necessary to consummate this transaction. Immediately upon
notification to Escrow Agent that funds deposited into the
general escrow account as described above have cleared,
Escrow Agent shall deposit those funds into the interest
bearing account described in the escrow agreement to which
this Exhibit A is attached (the "Escrow Agreement").
2. AGREE that disbursement of any funds may be made by check of
Escrow Agent; that Escrow Agent shall be under no obligation
to disburse any funds represented by check or draft, and no
check or draft shall be payment to Escrow Agent in compli-
ance with any of the requirements hereof, until it is
advised by the Bank in which is its deposited that such
check or draft has been honored; and agree to pay Escrow
Agent upon demand, all charges payable by them respectively,
as provided herein.
3. AGREE to pay to Escrow Agent, upon demand, an escrow fee of
$750, representing payment in full of all escrow fees to be
paid to Escrow Agent for its services under the Escrow
Agreement, except as provided in the immediately succeeding
clause and charges for extraordinary services approved in
writing in advance by Purchaser and Seller, which fees and
charges, unless otherwise provided in writing, shall be paid
one-half by the Seller and one-half by the Purchaser.
4. AGREE that Escrow Agent may destroy its file or files, and
the contents thereof after three (3) years from the final
disbursement and that no action against Escrow Agent shall
be commenced more than three (3) years from the date the
cause of action accrues.
5. AGREE that they will, jointly and severally, indemnify and
save harmless Escrow Agent against all costs, damages,
attorneys' fees, expenses and liabilities (collectively, the
"Liabilities"), which it may incur or sustain in connection
with the Escrow Agent except for any Liabilities resulting
from the willful misconduct or gross negligence of Escrow
Agent.
6. AGREE that the day established within which compliance with
any requirements must be met shall end at the close of then
regularly established public business hours of Escrow Agent
for that day, provided, however, that should the Escrow
Agent be closed for all or any portion of that day, any such
requirement may be met at any time during normal business
hours on the next succeeding business day.
<PAGE>
<PAGE>
EXHIBIT I-2
SECTION 3.9 ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Escrow Agreement") is made and
entered into as of the 21st day of June, 1993, by and between
WHEREHOUSE ENTERTAINMENT, INC., a Delaware corporation ("Purchas-
er"), THE RECORD SHOP, INC., a Minnesota corporation ("Seller"),
and LAWYERS TITLE OF ARIZONA, INC. ("Escrow Agent"), with
reference to the following facts:
A. Purchaser and Seller have entered into that certain
Agreement of Purchase and Sale dated as of May 10, 1993 , as
amended (the "Purchase Agreement"), pursuant to which Purchaser
will purchase certain of the assets of Seller. Each initially
capitalized term used but not defined in this Escrow Agreement is
used herein as defined in the Purchase Agreement.
B. Pursuant to the Purchase Agreement, Purchaser is
required to deposit certain sums with a mutually agreed-upon
escrow agent at the Closing and the Delayed Closings.
C. Purchaser and Seller have agreed that Escrow Agent
shall serve as the escrow agent hereunder, and Escrow Agent has
agreed to serve in that capacity, pursuant to the terms hereof
and the terms set forth on Exhibit A attached hereto and
incorporated herein by this reference.
NOW, THEREFORE, in consideration of the promises and the
mutual agreements hereinafter set forth and for other good and
valuable consideration, receipt of which is hereby acknowledged,
the parties hereto hereby agree as follows:
1. Appointment of Escrow Agent; Acceptance.
Purchaser and Seller hereby appoint Escrow Agent to act
as escrow agent in accordance with the terms and provisions of
this Escrow Agreement, and Escrow Agent hereby accepts such
appointment subject to the terms and conditions hereof.
2. Deposit of Funds.
At the Closing, Purchaser shall deliver to the Escrow
Agent an amount equal to the lesser of (i) $500,000 and (ii) the
Non-Transferred Lease Reduced Amount (the "Escrow Deposit"; and
together with any interest earned on the Escrow Deposit, the
"Escrow Funds"). The Escrow Deposit shall be deposited by Escrow
Agent into an interest-bearing account at Bank One or any other
federally insured lending institution approved by Purchaser and
Seller. The Escrow Agent is directed to hold, deal with and
dispose of the Escrow Funds as hereinafter set forth, and agrees
not to commingle such funds with any other funds held by the
Escrow Agent.
3. Disbursement of Escrow Funds.
During the term of the Escrow Agreement, Seller and
Purchaser may from time to time deliver to Escrow Agent written
instructions executed by both Seller and Purchaser to pay all or
a portion of the Escrow Funds to Seller (the "Joint Instruc-
tions") and the Escrow Agent shall comply with such Joint
Instructions (provided such Joint Instructions are executed
by both Seller and Purchaser) to the extent there are then
sufficient amounts of Escrow Funds to comply with such
instructions.
4. Termination; Release of Escrow Funds.
The then remaining balance of the Escrow Funds shall be
paid to Purchaser (accompanied by a true and correct accounting
of all Escrow Funds so expended) on the first business day after
the earlier of (i) the date Seller and Purchaser agree in
writing, such agreement not to be unreasonably withheld, that the
parties will not be able to obtain Store Leasehold Consents for
any remaining Non-Transferred Leases, and Extensions and Store
Leasehold Consents for any remaining Non-Extended Short Term
Leases, and (ii) January 15, 1994.
5. Fees of Escrow Agent.
Escrow Agent shall be entitled to compensation for
Escrow Agent's services hereunder in accordance with the
provisions of Exhibit A attached hereto and to reimbursement
for reasonable expenses incurred in connection herewith.
Purchaser and Seller shall each pay one-half (1/2) of such fees
and expenses.
6. Duties of Escrow Agent.
Escrow Agent shall perform only such duties as are
expressly set forth in this Escrow Agreement, including those
duties set forth on Exhibit A attached hereto and incorporated
herein. Escrow Agent may resign and may be discharged from its
duties or obligations hereunder by giving at least twenty (20)
days' prior written notice of such resignation to Purchaser and
Seller, specifying the date when such resignation shall take
effect, which shall not be prior to the appointment of a
successor Escrow Agent. Following receipt of such notice,
Purchaser and Seller shall designate a successor Escrow Agent.
Upon the mutual agreement of Purchaser and Seller, they shall
have the right to remove Escrow Agent by giving written notice of
such removal to Escrow Agent, which notice shall designate a
successor Escrow Agent. Within five (5) calendar days after
receipt of such notice, Escrow Agent shall deliver the Escrow
Funds to the designated successor Escrow Agent.
7. Disputes and Controversies.
7.1 The parties hereto agree that arbitration
shall constitute the exclusive remedy for the resolution of any
dispute, controversy or claim between the parties arising out of
or relating to this Escrow Agreement. The arbitration proceed-
ings shall be accomplished in accordance with the provisions of
this Section 7.
7.2 Except as expressly provided herein to the
contrary, the arbitration proceeding shall be conducted under the
Commercial Arbitration Rules of the American Arbitration Associa-
tion in effect at the time a demand for arbitration is made. To
the extent that there is any conflict between the rules of the
American Arbitration Association and this Section 7, this Section
7 shall govern and determine the rights of the parties hereto.
7.3 The arbitration will take place in Los
Angeles, California before a single arbitrator selected as
follows: Either Purchaser or Seller may request the American
Arbitration Association to provide a list of proposed arbitra-
tors, all of whom must be retired judges. Purchaser and Seller
shall then take turns crossing off one name at a time from such
list with the last remaining retired judge being appointed the
arbitrator. Purchaser and Seller shall select by lot which of
them strikes the first name from the list of proposed arbitra-
tors. If the person selected in this method to be the arbitrator
declines or is otherwise unavailable to serve as the arbitrator
of the dispute, the arbitrator shall be selected from the same
list of proposed arbitrators selected in the reverse order to
which those proposed arbitrators' names were struck from the list
until one of such individuals selected to be the arbitrator
accepts the appointment and is able to serve as the arbitrator.
7.4 The arbitrator selected in the manner set
forth in Section 7.3 shall be requested to honor the intention of
the parties hereto to resolve the disputes quickly and inexpen-
sively. All decisions shall be made with this intention in mind.
The decision of the arbitrator, including determination of the
amount of any damages suffered, shall be exclusive, final and
binding on all parties, their successors and assigns as appli-
cable.
7.5 Except as expressly set forth in this Escrow
Agreement, the arbitrator shall determine the manner in which the
arbitration proceeding is conducted, including the time and place
of all hearings, the order of presentation of evidence and all of
the questions that arise with respect to the arbitration proceed-
ing.
7.6 The arbitrator shall be required to determine
all issues in accordance with California law. The rules of
evidence applicable to proceedings at law in the State of
California will be applicable to the arbitration proceedings.
7.7 The arbitrator shall issue a single judgment
at the close of the arbitration proceeding, which shall dispose
of all of the claims of the parties that are the subject of the
arbitration. Any party to the arbitration may seek a judgment
from a court of competent jurisdiction to enforce the award of
the arbitrator.
7.8 The cost of arbitration, including admini-
strative fees, fees for a record and a transcript, and the
arbitrator's fees shall be borne equally by the parties to the
arbitration, except that the arbitrator shall have the right to
award reasonable attorneys' fees to the party determined by the
arbitrator to be the prevailing party.
8. Interest on Escrow Funds.
All interest earned on the Escrow Funds shall inure to
the benefit of Purchaser.
9. Method of Payment.
Any amounts to be paid to Purchaser or Seller hereunder
shall be paid by wire transfer or by cashier's check.
10. Notices.
All notices, statements or other documents which any
party shall be required or shall desire to give to the other
hereunder shall be in writing and shall be given by said party
only by telecopier, or by courier or personal delivery or by
addressing it as indicated below, and depositing it certified
first-class mail, return receipt requested, postage prepaid, in
the U.S. mail. The addresses of the parties shall be those of
which the other party actually receives written notice pursuant
to this Section 10, and until further notice:
If to Purchaser: Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, CA 90502-1334
Facsimile: (310) 538-2583
Attention: Cathy Wood,
Senior Vice President
With a copy to: Mitchell, Silberberg & Knupp
11377 West Olympic Boulevard
Los Angeles, California 90064
Facsimile: (310) 312-3787
Attention: Roy Shults, Esq.
If to Seller: The Record Shop, Inc.
74 Cloudview Road
Sausalito, CA 94695
Facsimile: (415) 331-2657
Attention: Mort Gerber
With a copy to: Snell & Wilmer
400 East Van Buren
One Arizona Center
Phoenix, AZ 85004-0001
Facsimile: (602) 382-6070
Attention: Jody Pokorski, Esq.
If to Escrow Agent: Lawyers Title of Arizona, Inc.
2425 E. Camelback Road, Suite 700
Phoenix, AZ 85016
Facsimile: (602) 954-7006
Attention: Lynne Peoples
Any such communications given by courier or personal
delivery shall be deemed given when delivered if during normal
business hours on a business day (or if not, the next business
day after delivery); any such communications given by telecopier
shall be deemed given when received if during normal business
hours on a business day (or if not, the next business day after
delivery) provided that such telecopy is legible and that at the
time such telecopy is sent the sending party receives written
confirmation of receipt and forwards a copy of the notice by
courier or personal delivery or by mail; and any such communi-
cations sent by certified first-class mail, return receipt
requested, postage prepaid shall be deemed given two business
days after the date of mailing.
11. Governing Law.
This Escrow Agreement shall be construed in accordance
with and governed by the laws of the State of California, without
giving effect to that State's conflicts of law rules.
12. Risk of Loss.
As between Purchaser and Seller, the risk of loss of
any funds deposited into escrow pursuant to the terms of this
Escrow Agreement shall be borne equally by Purchaser and Seller,
provided, however, that such assumption of the risk of loss by
Purchaser and Seller shall not release Escrow Agent from liabil-
ity to Purchaser and Seller for Escrow Agent's acts or omissions
which result in or cause a loss of any of the Escrow Funds.
13. Entire Agreement.
This Escrow Agreement and the Purchase Agreement
contain all of the terms and conditions agreed upon by the
parties hereto with respect to the subject matter hereof, and
all prior agreements (other than the Purchase Agreement) whether
oral or written between the parties hereto are merged herein and
superseded hereby. No other agreements not specifically referred
to herein, oral or otherwise, shall be deemed to exist or to bind
any of the parties hereto. This Escrow Agreement may not be
modified or changed except by written instrument signed by all of
the parties hereto. This Escrow Agreement shall inure to the
benefit of and be binding upon the parties hereto and their
respective successors and assigns. Nothing in this Escrow Agree-
ment, expressed or implied, is intended to confer on any person
other than the parties hereto and their respective successors and
assigns any rights or remedies under or by reason of this Escrow
Agreement.
14. Further Assurances.
Each party to this Escrow Agreement agrees on the
written request of any other party hereto to execute and deliver
from time to time any additional instruments or documents
reasonably considered necessary by a party or its counsel to
effect or complete the transactions contemplated hereunder.
15. Counterparts.
This Escrow Agreement may be executed in one or more
counterparts, each of which is deemed an original, but all of
which together shall constitute one and the same agreement.
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this
Escrow Agreement as of the date first above written.
PURCHASER: SELLER:
WHEREHOUSE ENTERTAINMENT, INC., THE RECORD SHOP, INC.
a Delaware corporation a Minnesota corporation
By: ______________________ By: ____________________
Scott Young Mary Ann Levitt
Its: President Its: President
By: ______________________
Cathy Wood
Its: Secretary
ESCROW AGENT:
LAWYERS TITLE OF ARIZONA, INC.
By: ______________________________
Its: _____________________________
<PAGE>
<PAGE>
EXHIBIT A
SELLER and PURCHASER:
1. AGREE that they will deposit with Escrow Agent all docu-
ments, all funds and do or cause to be done all other things
necessary to enable it to comply with the terms of the
Escrow Agreement, direct that all monies payable hereunder
shall be paid in United States Dollars to the Escrow Agent,
and that upon receipt the Escrow Agent shall initially
deposit such funds in a general (noninterest bearing) escrow
account in a financial institution doing business in the
State of Arizona, and Escrow Agent shall not be liable for
any loss or impairment of funds so deposited in any said
bank, savings bank or savings institution resulting from the
failure, insolvency or suspension of such institution and
authorize Escrow Agent to pay from funds held the amounts
necessary to consummate this transaction. Immediately upon
notification to Escrow Agent that funds deposited into the
general escrow account as described above have cleared,
Escrow Agent shall deposit those funds into the interest
bearing account described in the escrow agreement to which
this Exhibit A is attached (the "Escrow Agreement").
2. AGREE that disbursement of any funds may be made by check of
Escrow Agent; that Escrow Agent shall be under no obligation
to disburse any funds represented by check or draft, and no
check or draft shall be payment to Escrow Agent in compli-
ance with any of the requirements hereof, until it is
advised by the Bank in which it is deposited that such check
or draft has been honored; and agree to pay Escrow Agent
upon demand, all charges payable by them respectively, as
provided herein.
3. AGREE to pay to Escrow Agent, upon demand, an escrow fee of
$750, representing payment in full of all escrow fees to be
paid to Escrow Agent for its services under the Escrow
Agreement, except as provided in the immediately succeeding
clause and charges for extraordinary services approved in
writing in advance by Purchaser and Seller, which fees and
charges, unless otherwise provided in writing, shall be paid
one-half by the Seller and one-half by the Purchaser.
4. AGREE that Escrow Agent may destroy its file or files, and
the contents thereof after three (3) years from the final
disbursement and that no action against Escrow Agent shall
be commenced more than three (3) years from the date the
cause of action accrues.
5. AGREE that they will, jointly and severally, indemnify and
save harmless Escrow Agent against all costs, damages,
attorneys' fees, expenses and liabilities (collectively, the
"Liabilities"), which it may incur or sustain in connection
with the Escrow Agent except for any Liabilities resulting
from the willful misconduct or gross negligence of Escrow
Agent.
6. AGREE that the day established within which compliance with
any requirements must be met shall end at the close of then
regularly established public business hours of Escrow Agent
for that day, provided, however, that should the Escrow
Agent be closed for all or any portion of that day, any such
requirement may be met at any time during normal business
hours on the next succeeding business day.
<PAGE>
<PAGE>
EXHIBIT J
FORM OF PURCHASER'S COUNSEL'S OPINION
SEE ATTACHED
<PAGE>
<PAGE>
SCHEDULE 1.2.1
STORES
Arrowhead Towne Center
Broadway Mall
Brookdale Mall
Calhoun Center
Chestnut Street
Columbia Mall
Crossroads Center
Crossroads Plaza P.M.
Crossroads Plaza R.S.
Flagstaff Mall
Lindale Mall
Manchester Center
Meadows Mall
Merle Hay Mall
Minneapolis City Center
Mission Valley Mall
NewPark Mall
North County Fair
Paradise Valley Mall P.M.
Paradise Valley Mall R.S.
Park Central Mall
Ridgedale Center
Rosedale Center
Santa Ana Mainplace
Southdale Center
Southridge Mall
Stanford Mall
Superstition Springs
Valley Fair Mall
Valley West Mall
Westridge Mall
<PAGE>
<PAGE>
SCHEDULE 1.2.2
F.F & E
SEE ATTACHED
<PAGE>
<PAGE>
SCHEDULE 1.2.3
LIST OF SENSORMATIC LEASES
Leases and Leases with Options to Purchase by and between
G.E. Capital, as successor to Sensormatic Electronics Corpo-
ration, as lessor, and Record Shop, Inc., as lessee, as
follows:
Record Shop Store: G.E. Account: Lease Date:
73 7038065-001 01/24/89
18 7035927-001 09/20/88
19 7035925-001 08/07/--
75 7035924-001 09/20/88
77 7035928-001 05/31/90
87 7035926-001 09/20/88
88 7037232-001 11/16/88
15 7047469-001 05/31/90
94 7035925-002 09/20/88
70 7047468-001 09/20/88
76 7002935-001 05/19/92
79 7060258-001 Undated
83 7060259-001 Undated
86 7060261-001 Undated
<PAGE>
<PAGE>
SCHEDULE 1.2.5
LIST OF STORE TRADENAMES
Tradenames
Record Shop
Paradise Music
Logos
Record Shop
(logo)
Paradise Music
(logo)
<PAGE>
<PAGE>
SCHEDULE 1.2.6
STORE CONTRACTS
1. Proposal/Agreement, dated May 29, 1991, by and between ADT
Security System and The Record Shop, Inc.
<PAGE>
<PAGE>
SCHEDULE 2.5.1.1
ESSENTIAL PROVISIONS
The "Essential Provisions" are agreements by the applicable
lessor to amend the applicable Store Lease in the following
respects, if applicable:
1. To modify any radius restrictions contained in the appli-
cable Store Lease to permit the operation of stores
currently operated by Purchaser which would otherwise
violate the applicable radius restriction.
2. To delete any landlord's lien contained in the applicable
Store Lease.
3. To include reasonable assignment and sublet provisions
allowing Purchaser to assign and/or sublet the applicable
Store Lease generally in accordance with Section 16.9 of the
form of Store Leasehold Consent attached hereto as Exhibit A
to this Agreement (the "Form Store Leasehold Consent").
4. To include one or more provisions (i) allowing Purchaser to
remodel the leased premises of the applicable Store Lease
generally in accordance with Section 16.4 of the Form Store
Leasehold Consent, and (ii) waiving any continuous operation
clause in the applicable Store Lease for a reasonable period
of time for the purpose of completing such remodeling.
<PAGE>
<PAGE>
SCHEDULE 2.5.1.2
SHORT TERM STORE LEASES
Westridge Mall
NewPark Mall
Stanford Mall
Valley West Mall
Brookdale Center
Crossroads Center (Minnesota)
Minneapolis City Center
Ridgedale Center
Southdale Center
<PAGE>
<PAGE>
SCHEDULE 4.7
STORES SUBJECT TO MANAGEMENT AGREEMENTS
Flagstaff
NewPark Mall
Lindale Mall
Southridge Mall
Valley West Mall
Crossroads Center
Minneapolis City Center
Ridgedale Center
Rosedale Center
Columbia Mall
<PAGE>
<PAGE>
SCHEDULE 6.1.1
CONFLICTS
1. Seller must obtain UCC releases from the parties listed on
the UCC Lien Searches obtained by Purchaser and provided to
Seller.
2. Any breach of a Store Lease as a result of the failure to
obtain the applicable lessor's consent to the Management
Agreement relating to such Store Lease.
3. Any breach of a Store Lease as a result of the failure to
obtain the applicable lessor's consent to Purchaser's
closing of the Store for remodeling purposes.
<PAGE>
<PAGE>
SCHEDULE 6.1.3
EXCEPTIONS TO AGREEMENTS
None
<PAGE>
<PAGE>
SCHEDULE 6.1.4
LITIGATION
1. Abbey Road v. The Record Shop, Marin Municipal Court;
Case No. V-930144.
2. Jocelyn Monique Bessard v. The Record Shop, MDCR No.
91256-EM-1A, EEOC No. 26D920028.
3. Melissa Jane Rolfhus v. The Record Shop, MDCR
91251-EM-7, EEOC No. 26D920018.
<PAGE>
<PAGE>
SCHEDULE 6.1.7
STORE LEASE DEFAULTS
1. Pursuant to Seller's lease with General Growth for the
Store in Southridge Mall located in Des Moines, Seller agreed to
remodel the interior of the Store by April 15, 1993. Seller has
not commenced this remodel. However, Judge Nagle, a Vice Presi-
dent at General Growth, has orally agreed to defer this remodel
until after Buyer takes possession of the Store.
<PAGE>
<PAGE>
SCHEDULE 6.1.8
SENSORMATIC LEASE OR STORE CONTRACT DEFAULTS
None
<PAGE>
<PAGE>
SCHEDULE 6.1.9
PHYSICAL CONDITION OF STORES AND F,F &E
Items to be repaired or replaced by Seller:
1. One of the two compressors in the air conditioning unit for
the Store located in Park Center Mall is inoperative (WEI
#470).
2. Air conditioning unit at the Store located in Crossroads
Plaza, Utah (Paradise Music) is inoperative (WEI #495).
3. Flood light at back of the Store located in Crossroads
Plaza, Utah (Paradise Music) is inoperative due to broken
fixture (WEI #495).
4. No electrical power to backroom and bathroom at the Store
located in the Merle Hay Mall (WEI #483).
5. HVAC inoperative at the Store located in the Merle Hay Mall
(WEI #483).
6. HVAC inoperative at the Store located in the Southridge Mall
(WEI #484).
7. Sink in bathroom at the Store located in the Southridge Mall
in inoperative (WEI #484).
8. HVAC inoperative at the Store located in the Columbia Mall
(WEI #494).
9. Electrical gate at Store located in the Ridgedale Center is
inoperative (WEI #490).
Items to be repaired or replaced by Purchaser, at Seller's cost:
1. No emergency bar on the back door at the Store located in
Park Central Mall (WEI #470).
2. Circuits in the electrical box at the Store located in
Flagstaff, Arizona are periodically inoperative (WEI #467).
3. No hot water from sink in the Store located at the Meadows
Mall (WEI #493).
4. Back door at the Store located in the Lindale Mall is broken
and cannot be secured properly (WEI #482).
5. Light fixtures in the Store located in the Lindale Mall do
not conform to the applicable building code (WEI #482).
6. Painted sprinkler heads in the Store located in the Calhoun
Square Mall need to be replaced (WEI #487).
<PAGE>
<PAGE>
SCHEDULE 6.1.10.3
POLLUTING SUBSTANCES
None
<PAGE>
<PAGE>
SCHEDULE 6.1.15
EMPLOYEE PLANS
1. Group Medical and Dental Insurance plans with Select
Group Plus, Massachusetts Mutual and Canada Life (depending on
location of Store) as evidenced by group insurance plan booklets,
copies of which were provided to Buyer.
2. Incentive plan providing monetary awards to store
managers for exceptional sales increases as described in the
Employee Manual, a copy of which was provided to Buyer.
3. Policies relating to funeral leave, holiday pay, jury
duty, maternity leave, sick days, and vacation, all as described
in the Employee Manual.
<PAGE>
<PAGE>
SCHEDULE 6.1.16
EMPLOYEE CLAIMS
1. Jocelyn Monique Bessard v. The Record Shop, MDCR No.
91256-EM-1A, EEOC No. 26D920028.
2. Melissa Jane Rolfhus v. The Record Shop, MDCFR
91251-EM-7, EEOC No. 26D920018.
<PAGE>
<PAGE>
SCHEDULE 6.1.21
CLAIMS AGAINST HEALTH INSURANCE PLANS
1. During the applicable period, the wife ("Wife") of one of
Seller's employees ("Husband") filed claims against Seller's
health insurance plan in an aggregate amount of $43,000.
Husband voluntarily terminated his employment with Seller
approximately six months ago and declined continuing
coverage under COBRA, and no claims have been filed by Wife
during the six month period following such termination.
<PAGE>
<PAGE>
SCHEDULE 6.2
PURCHASER'S CONFLICTS
1. Any breach of a Store Lease as a result of the failure to
obtain the applicable lessor's consent to the Management
Agreement relating to such Store Lease.
2. Any breach of a Store Lease as a result of the failure to
obtain the applicable lessor's consent to Purchaser's
closing of the Store for remodeling purposes.
AGREEMENT OF PURCHASE AND SALE
THIS AGREEMENT OF PURCHASE AND SALE (this "Agreement")
is made and entered into as of the 19th day of November, 1993, by
and between WHEREHOUSE ENTERTAINMENT, INC., a Delaware corpora-
tion ("Purchaser"), PEGASUS MUSIC AND VIDEO, INC., a Utah
corporation ("Seller") and KEVIN S. GARN ("Shareholder"), with
reference to the following facts:
A. Seller owns and operates music retail stores in the
States of Utah and Montana.
B. Shareholder is the sole shareholder of Seller.
C. Purchaser, Shareholder and Seller desire to enter into
this Agreement pursuant to which, upon the terms and subject to
the conditions set forth below, Purchaser will buy and acquire,
and Seller will sell, assign, transfer and deliver, the assets
hereinafter described.
NOW, THEREFORE, in consideration of the mutual
covenants, agreements, representations and warranties herein
contained, the parties hereto hereby agree as follows:
1. PURCHASE OF TRANSFERRED ASSETS.
1.1 Purchase of Transferred Assets. Upon the terms and
subject to the conditions hereinafter set forth, at the "Closing"
(as hereafter defined) or at any of the "Delayed Closings" (as
hereafter defined), Seller shall sell, assign, transfer and
deliver to Purchaser, and Purchaser shall purchase and acquire
from Seller, the applicable "Transferred Assets" (as hereafter
defined).
1.2 Definition of Transferred Assets. The "Transferred
Assets" shall mean and include:
1.2.1 The leasehold interests (collectively, the
"Store Leasehold Interests") of Seller in the real property
leases (the "Store Leases") for the fifteen music retail stores
of Seller (collectively, the "Stores") described on Schedule
1.2.1 attached hereto of which six of the Stores are leased from
K.S.G. Properties, a Utah corporation of which Shareholder is the
sole shareholder ("KSG"), (collectively, the "Affiliated
Stores");
1.2.2 All of the furniture, fixtures, equipment and
supplies located in the Stores, the Store Leasehold Interests of
which are sold to Purchaser at the Closing or a Delayed Closing,
as applicable, and more particularly described on Schedule 1.2.2
attached hereto (collectively, the "F, F & E");
1.2.3 The leasehold interests of Seller in the
personal property leases (the "Computer Leases") for the computer
systems located in Stores, the Store Leasehold Interests of which
are sold to Purchaser at the Closing or a Delayed Closing, as
applicable, and more particularly described on Schedule 1.2.3
attached hereto (the "Computer Equipment");
1.2.4 All of the inventory (collectively, the
"Inventory"), including, without limitation, the inventory of
music, records, pre-recorded and unrecorded tapes and cassettes,
compact discs and accessories, videos and laser discs, of Seller
(x) located as of the "Closing Date" (as hereafter defined) in
the Stores (a) which are subject to Store Leases with respect to
which Seller transfers all of its interest to Purchaser pursuant
to the terms of this Agreement at the Closing (collectively, the
"Transferred Leases"), (b) which may become subject to "Post-
Closing Transferred Leases" and for which a "Management Agree-
ment" is executed at the Closing (as those terms are hereafter
defined) or (c) which are subject to a Management Agreement at
the Closing, but Purchaser and Seller do not believe will become
subject to a Post-Closing Transferred Lease and (y) located as of
any applicable "Delayed Closing Date" (as hereafter defined) in
Stores, the possession of which are delivered to Purchaser on the
applicable Delayed Closing Date. Notwithstanding anything herein
to the contrary, in no event shall Purchaser be obligated to
purchase Inventory located at any Store possession of which is
not transferred to Purchaser at the Closing or any applicable
Delayed Closing pursuant to a "Store Leasehold Assignment" (as
hereafter defined) or a Management Agreement.
1.2.5 All tradenames, service names, trademarks,
service marks and logos of Seller and the associated good will,
including, without limitation, the tradenames, service names,
trademarks, service marks and logos listed on Schedule 1.2.5
attached hereto (the "Store Service Marks");
1.2.6 The contracts and leases for goods and
services (including, without limitation, contracts for signage)
provided to Seller for Stores, the Store Leasehold Interests of
which are sold to Purchaser at the Closing or a Delayed Closing,
as applicable, and the "St. George Sublease" (as hereafter
defined) if the Store Leasehold Interest for the Store located in
St. George, Utah is sold to Purchaser at the Closing or a Delayed
Closing, all listed on Schedule 1.2.6 attached hereto (collec-
tively, the "Store Contracts"); and
1.2.7 All drawings, blueprints, schematics, models,
"as builts," or plans for Stores, the Leasehold Interests of
which are sold to Purchaser at the Closing or a Delayed Closing,
as applicable (collectively, the "Plans") relating in any way to
said Stores or the F, F & E located therein.
1.3 Obligations of Seller not Assumed by Purchaser. Not-
withstanding anything to the contrary set forth or implied herein
or otherwise, except for the "Assumed Obligations" (as hereafter
defined), the Transferred Assets shall not include, and Purchaser
is not assuming and shall not be or be deemed to be, responsible
or liable for, any of Seller's contracts, leases, agreements,
undertakings, commitments, claims, liabilities, debts or obliga-
tions, whether or not known to Purchaser, Seller, Shareholder or
any third party on the Closing Date or on any of the Delayed
Closing Dates and, whether or not now existing or arising at any
time hereafter, including, without limitation, all liabilities,
claims and obligations of any nature whatsoever related to,
arising out of or for (i) past, present and future employment of
any and all persons who were, are or may be employed by Seller at
any time and arising out of Seller's employment of such person
including, without limitation, any liabilities, claims and
obligations for unfair labor and discriminatory employment
practices, employee salaries, vacation pay, severance pay, sick
pay, back pay, health insurance, workers' compensation, employee
contracts and other employee payments and benefits, (ii) any
defective condition in the design, material, workmanship or
performance of any products and services designed, assembled,
manufactured, distributed, sold or furnished by or on behalf of
Seller either before or after the Closing and the Delayed
Closings, (iii) subject to Sections 3.5 through 3.7 with respect
to "Current Property Taxes," "Sales Taxes" and "Payroll Taxes"
(each term as hereafter defined), any federal, state or local
taxes, payroll withholding obligations, governmental charges,
penalties, interest and fines of Seller (whether due and payable
before, on or after the Closing Date or the applicable Delayed
Closing Date, as the case may be), (iv) any acts or omissions of
Seller related to the conduct of its business or otherwise at any
time either before or after the Closing and the Delayed Closings,
(v) any acts or omissions of any assignee of Seller (other than
Purchaser) related to the conduct of its business or otherwise at
any time either before or after the Closing and the Delayed
Closings, (vi) notwithstanding anything to the contrary in any of
the Store Leases, the "New Leases" (as hereafter defined), the
"Store Leasehold Consents" (as hereafter defined), the Computer
Leases or the Store Contracts, the presence or migration prior to
the Closing or the applicable Delayed Closing of any pollutants,
contaminants, chemicals, or industrial, toxic or hazardous
substances or waste, including, without limitation, asbestos
(collectively, "Polluting Substances") in, on, into, under or
from the Stores, the real property on which the Stores are
located (the "Store Real Property") or the common areas or other
portions of the shopping centers in which any of the Stores are
located (the "Shopping Centers") or any real property adjacent
thereto, (vii) any defaults by Seller under or breaches of the
Store Leases, the Computer Leases or the Store Contracts
occurring prior to Closing or the applicable Delayed Closing,
(viii) any defaults by Seller under or breaches of any of the
Store Leases, Computer Leases or Store Contracts subject to
Management Agreements resulting from Seller's failure to obtain
all applicable consents to Purchaser and Seller entering into
said Management Agreements and (ix) past, present and future
litigation, suits, causes of action, arbitration or other
proceedings related to or arising out of the conduct of Seller's
business or any business of Seller's assignees (other than
Purchaser) either before or after the Closing and the Delayed
Closings.
2. PURCHASE PRICE FOR TRANSFERRED ASSETS.
2.1 Transferred Assets Purchase Price. The consideration,
which is subject to adjustment as provided herein, for the sale,
assignment, transfer and delivery of the Transferred Assets (the
"Transferred Assets Purchase Price") shall consist of:
2.1.1 $5,250,000 (the "Base Purchase Price"),
payable as follows:
2.1.1.1 up to an aggregate of $5,025,000 in cash
payable to Seller at Closing and/or the Delayed Closings in
accordance with Section 3 hereof; and
2.1.1.2 up to an aggregate of $225,000 in cash
(the "Escrow Funds") deposited by Purchaser at Closing and/
or the Delayed Closings into an interest bearing account
under the exclusive control of Hill, Harrison & Hill
("Escrow Agent") in accordance with Section 3.8 hereof.
2.1.2 An amount (the "Transferred Inventory
Purchase Price") equal to the Transferred Assets Purchase Price
for the Inventory, which shall be determined on the basis of
audits conducted by R.G.I.S. or such other independent auditor
selected by Purchaser with Seller's approval (such approval not
to be unreasonably withheld) (the "Inventory Auditor"). All fees
and costs of conducting the audits of the Inventory shall be
borne fifty percent by Purchaser and fifty percent by Seller.
The Transferred Inventory Purchase Price shall be paid to Seller
in accordance with Section 3.11 hereof. The Transferred Inven-
tory Purchase Price shall be valued as of the close of business
on the day before the Closing Date and all applicable Delayed
Closing Dates. The Transferred Inventory Purchase Price shall be
valued as follows:
2.1.2.1 Items of Inventory (other than videos
and games used in Seller's rental business (the "Rental
Items") which are returnable to the vendor thereof, accord-
ing to Purchaser's current records and information as
reflected solely on Purchaser's "master inventory list"
(collectively, the "Current Catalog Inventory") shall equal
the aggregate dollar amount of the Current Catalog Inventory
valued at Purchaser's wholesale costs calculated on the "box
lot cost" basis at the time of the Closing or applicable
Delayed Closing (the "Current Catalog Inventory Value") less
5.61% of the Current Catalog Inventory Value.
2.1.2.2 Items of Inventory (other than Rental
Items) which are not returnable to the vendor thereof
according to Purchaser's current records and information
(collectively, the "Non-Returnable Inventory") shall be
valued as follows: (i) in the event that the total number of
pieces of Non-Returnable Inventory does not exceed 5% of the
total number of pieces of Current Catalog Inventory then
being purchased at the Closing or applicable Delayed
Closing, the Non-Returnable Inventory shall be valued at 85%
of Seller's original cost for each such item as indicated on
Seller's schedule of original costs provided by Seller to
Purchaser after the Closing or applicable Delayed Closing as
contemplated by Section 7.14 hereof (the "Schedule of
Original Costs"); and (ii) in the event that the total
number of pieces of Non-Returnable Inventory is greater than
5% but does not exceed 15% of the total number of pieces of
the Current Catalog Inventory then being purchased at the
Closing or applicable Delayed Closing, the Non-Returnable
Inventory shall be valued at 75% of Seller's original cost
for each such item as indicated on the applicable Schedule
of Original Costs. In the event that the total number of
pieces of Non-Returnable Inventory exceeds 15% of the total
number of pieces of the Current Catalog Inventory then being
purchased at the Closing or applicable Delayed Closing,
Purchaser shall not be obligated to purchase any of such
Non-Returnable Inventory.
2.1.2.3 Notwithstanding the immediately
preceding Section, items of Non-Returnable Inventory of
which, according to the books and records of Seller, no
identical item of such Non-Returnable Inventory has been
sold during the 180 days immediately prior to the Closing
Date or applicable Delayed Closing Date (collectively, the
"Other Inventory"), shall be valued as follows: (i) in the
event that the total number of pieces of Other Inventory
does not exceed 5% of the total number of pieces of Current
Catalog Inventory then being purchased at the Closing or
applicable Delayed Closing, the Other Inventory shall be
valued at 75% of Seller's original cost for each such item
as indicated on the applicable Schedule of Original Costs;
and (ii) in the event that the total number of pieces of
Other Inventory is greater than 5% but does not exceed 15%
of the total number of pieces of the Current Catalog
Inventory then being purchased at the Closing or applicable
Delayed Closing, the Other Inventory shall be valued at 65%
of Seller's original cost for each such item as indicated on
the applicable Schedule of Original Costs. In the event
that the total number of pieces of Other Inventory exceeds
15% of the total number of pieces of the Current Catalog
Inventory then being purchased at the Closing or applicable
Delayed Closing, Purchaser shall not be obligated to
purchase any of such Other Inventory.
2.1.2.4 In addition to the discounts to the
Transferred Inventory Purchase Price contemplated by
Sections 2.1.2.1 through 2.1.2.3 hereof, the Transferred
Inventory Purchase Price to be paid at the Closing or
applicable Delayed Closing shall be further reduced by an
amount equal to $0.20 multiplied by 61% of the number of
music compact discs included within the Inventory purchased
at the Closing or such Delayed Closing.
2.1.2.5 Items of Inventory which are Rental
Items shall equal $17.21 per Rental Item.
2.1.3 The assumption by Purchaser from Seller at
the Closing or the applicable Delayed Closing, as the case may
be, of the following items (collectively, the "Assumed Obliga-
tions"): (i) all liabilities and obligations of Seller arising
and accruing under the Store Leases (other than the Store Leases
for the Affiliated Stores, which Store Leases will be terminated
at the Closing), the Computer Leases and the Store Contracts then
being assigned by Seller to Purchaser after the Closing or the
applicable Delayed Closing, as the case may be; and (ii) the
obligation to honor up to an aggregate amount of $15,000 of
Seller's unredeemed Store gift certificates and merchandise
credits and deposits accepted for special orders (collectively,
the "Gift Certificates and Merchandise Credits") issued prior to
the Closing which are issued in a manner consistent with Seller's
past practices and in the ordinary course of its business. For
the avoidance of doubt, the Assumed Obligations do not include
any obligations, debts or liabilities of Seller arising or
accruing under or in connection with any of the Store Leases, the
Computer Leases or Store Contracts or otherwise before the
Closing or the applicable Delayed Closing, as the case may be,
whether or not known by Purchaser, Seller, Shareholder or any
third party on the Closing Date or the applicable Delayed Closing
Date, as the case may be, including, without limitation, any
obligations, debts or liabilities (whether matured, unmatured,
contingent or otherwise) resulting from or arising before the
Closing or applicable Delayed Closing in connection with (a)
Seller entering into the Store Leases, the Computer Leases or
Store Contracts including, without limitation, any default
under or breach of any of the Store Leases, the Computer Leases
or Store Contracts by Seller, (b) the presence or migration of
any Polluting Substances in, on, into, under or from the Stores
or in, on, into, under or from the Store Real Property or
Shopping Centers or any of the real property adjacent thereto
before the Closing or the applicable Delayed Closing, as the
case may be, and irrespective of whether or not the existence of
such Polluting Substance is known to Purchaser, Seller or Share-
holder on the Closing Date or the applicable Delayed Closing
Date, as the case may be, (c) any act or omission of Seller,
including, without limitation, all acts or omissions which
constitute a default under or breach of any of the Store Leases,
the Computer Leases or Store Contracts, (d) any of Seller's
unredeemed Gift Certificates and Merchandise Credits, which are
issued prior to the Closing, in excess of an aggregate of
$15,000, (e) any of Seller's unredeemed Gift Certificates and
Merchandise Credits which either (i) in the reasonable discretion
of Purchaser, have not been issued in a manner consistent with
Seller's past practices and in the ordinary course of its
business prior to the Closing or (ii) are issued after the
Closing, (f) subject to Sections 3.5 through 3.7 with respect to
Current Property Taxes, Sales Taxes and Payroll Taxes, any
obligations, claims or liabilities arising out of or related to
the operation of Seller's business by Seller before the Closing
or applicable Delayed Closing, or (g) any obligations, claims or
liabilities arising out of or related to the operation of any
business of Seller or any assignee of Seller (other than
Purchaser) after the Closing or applicable Delayed Closing.
Notwithstanding anything in this Section 2.1.3 to the contrary,
Purchaser agrees to honor after the Closing at all Stores,
possession of which are delivered to Purchaser at the Closing,
Gift Certificates and Merchandise Credits issued prior to the
Closing, which are issued in a manner consistent with Seller's
past practices and in the ordinary course of Seller's business
whether or not such Gift Certificates and Merchandise Credits
exceed in the aggregate $15,000, provided, however, that Escrow
Agent shall reimburse Purchaser out of the Escrow Funds (to the
extent Escrow Funds are available for distribution to Purchaser
pursuant to Section 3.8 hereof) upon presentation by Purchaser of
canceled gift certificates and/or merchandise credits and/or
deposits issued by Seller which when added to the Gift Certifi-
cates and Merchandise Credits already honored by Purchaser exceed
$15,000 in the aggregate (the "Reimbursement Evidence"). In the
event Purchaser is entitled to be reimbursed in accordance with
the immediately preceding sentence and, pursuant to Section 3.8
hereof or otherwise, there exists no Escrow Funds available to
make such reimbursement, Seller shall reimburse Purchaser within
ten (10) days of Purchaser or the Escrow Agent presenting the
Reimbursement Evidence to Seller. Also, notwithstanding anything
in this Agreement to the contrary, Purchaser agrees that after
the Closing it will give merchandise credits or exchanges at all
Stores, possession of which are delivered to Purchaser at the
Closing or any Delayed Closing, for any merchandise sold at
retail to the public by Seller in accordance with Seller's past
practices and in the ordinary course of Seller's business prior
to the Closing or such Delayed Closing which is defective, such
merchandise credits and exchanges to be given in accordance with
Purchaser's usual policies in connection therewith, which
Purchaser may from time to time, in its sole and absolute
discretion, change, amend or modify.
2.2 Allocation of Transferred Assets Purchase Price. In
the event that Purchaser and Seller are unable to agree on the
allocation of the Transferred Assets Purchase Price prior to the
Closing Date, they shall continue to attempt to agree upon such
allocation during the ninety day period (the "Post-Closing
Negotiation Period") commencing immediately following the Closing
Date. In the event that Purchaser and Seller are able to mutu-
ally agree upon the allocation of the Transferred Assets Purchase
Price (the "Purchase Price Allocations"), Purchaser and Seller
shall evidence such agreement by entering into an amendment to
this Agreement to which shall be attached a schedule ("Schedule
2.2") on which the Purchase Price Allocation shall be set forth.
In the event that Seller and Purchaser agree on the Purchase
Price Allocations as provided above, Seller and Purchaser each
agrees (i) to report the sale of the Transferred Assets for
federal, state and local income tax purposes in accordance with
the allocation set forth on Schedule 2.2, (ii) not to take any
position inconsistent with such allocations on any of its tax
returns and (iii) to timely file federal tax Form 8594 (and the
state equivalent forms) with the applicable tax return for the
year of this transaction and any other year in which a Delayed
Closing occurs reflecting such Purchase Price Allocations. In
the event that Seller and Purchaser are unable to agree upon the
Purchase Price Allocations prior to the termination of the
Post-Closing Negotiation Period, each of Seller and Purchaser
shall be free to report the sale of the Transferred Assets for
federal, state and local income tax purposes in accordance with
any allocation schedule which each of Seller and Purchaser may
establish, which allocations may be inconsistent with those made
by the other. In any event, Purchaser and Seller shall provide
the other with draft copies of its relevant federal tax Form 8594
(and the state equivalent forms) at least fifteen (15) days prior
to filing such forms.
2.3 Payment of Sales and Use Taxes. Seller shall be
responsible for all sales and use taxes, if any, arising out of
the sale of the Transferred Assets to Purchaser pursuant to this
Agreement. Purchaser shall provide Seller with an officer's
certificate or certificates executed by an officer of Purchaser
(or any other form required by applicable law), certifying that
Purchaser is purchasing the Inventory for resale.
2.4 Prorations and Adjustments. The Transferred Assets
Purchase Price shall be adjusted at the Closing or the applicable
Delayed Closing (i) for Seller's preliminary prorated share of
Current Property Taxes calculated in accordance with Section 3.5
hereof; (ii) for Seller's preliminary unpaid Sales Taxes calcu-
lated in accordance with Section 3.6 hereof; and (iii) for
Seller's preliminary unpaid Payroll Taxes calculated in accord-
ance with Section 3.7 hereof. The Transferred Assets Purchase
Price shall be adjusted to prorate all rents, real property taxes
and common area maintenance ("CAM") and other charges paid by
Seller under the Store Leases and utilities paid by Seller and
all lease and other payments due under the Computer Leases and
Store Contracts paid by Seller for the period from the due dates
of the last such payments to be made by Seller immediately prior
to the Closing Date or the applicable Delayed Closing Date, as
the case may be, to the Closing Date or the applicable Delayed
Closing Date. The Transferred Assets Purchase Price shall also
be adjusted to prorate payments and other amounts due Seller by
the "St. George Sublessee" (as hereafter defined) due under the
St. George Sublease from the due dates of the last such payments
to be made by the St. George Sublessee to the Closing Date or
applicable Delayed Closing Date. In the event that the actual
amount of any such taxes, rents, CAM and other charges and
payments for the year of the Closing or applicable Delayed
Closing is more or less than that estimated by the parties hereto
at the Closing or applicable Delayed Closing, Purchaser or
Seller, as the case may be, shall make all appropriate payments
to the other party so that all payments and prorations made
pursuant to this Section 2.4 are accurate, based upon the actual
assessment for the year of the Closing or applicable Delayed
Closing. The Transferred Assets Purchase Price shall be
increased by all utilities deposits of Seller which Seller causes
the applicable utilities to transfer to the account of Purchaser
at the Closing or any Delayed Closing, as applicable.
2.5 Reduction of Base Purchase Price; Assignment of Store
Leasehold Interests.
2.5.1 The Base Purchase Price shall be reduced as
provided in Section 2.5.2 hereof upon the occurrence of either of
the following events:
2.5.1.1 Seller and Purchaser fail to obtain with
respect to all Store Leases other than Store Leases for
Affiliated Stores by the Closing Date (i) an unconditional
consent from the applicable lessor to the assignment by
Seller toPurchaser of the applicable Store Leasehold
Interest and (ii) an amendment to the applicable Store Lease
which contains all of the essential provisions the "Essen-
tial Provisions") set forth on Schedule 2.5.1.1 attached
hereto (which unconditional consent and amendment to lease
shall be in a form reasonably acceptable to Purchaser)
(collectively, the "Store Leasehold Consents") duly executed
by each of the lessors of the Store Leases other than Store
Leases for Affiliated Stores (collectively, the
"Non-Transferred Leases").
2.5.1.2 With respect to each of the Store Leases
other than Store Leases for Affiliated Stores, the current
term of which is to expire on or before December 31, 1995
(including renewal options, if previously exercised by
Seller or if Purchaser will have the right to exercise such
options under the applicable Store Leases) which are listed
on Schedule 2.5.1.2 (collectively, the "Short Term Store
Leases"), and irrespective of whether or not Purchaser
obtains Store Leasehold Consents with respect to such Store
Leases and/or an assignment of Seller's interests in such
Store Leases at the Closing, Purchaser fails to enter into
by the Closing Date a definitive agreement with the lessor
for each such Short Term Store Lease for an extension (an
"Extension") of the term of each such Short Term Store Lease
at the applicable Store's current location or current, but
expanded or reduced location or another location within the
same Shopping Center (which expanded or reduced location or
new location is acceptable to Purchaser, in its sole and
absolute discretion), and otherwise on terms and conditions
(including, without limitation, the length of the Extension)
reasonably acceptable to Purchaser (collectively, the "Non-
Extended Short Term Leases").
2.5.1.3 For the avoidance of doubt, a Store
Lease may be both a Non-Transferred Lease and a Non-Extended
Short Term Lease.
2.5.2 Upon the occurrence of the events described
in Section 2.5.1.1 or 2.5.1.2 hereof, the Base Purchase Price
shall be reduced by an amount equal to the Base Purchase Price
multiplied by a fraction, the numerator of which shall be the sum
of the actual revenues for the Stores for the immediately preced-
ing 12 complete calendar months prior to the Closing Date as
indicated on a schedule, which Seller shall deliver to Purchaser
at the Closing (the "Revenue Schedule"), for each of the Stores
which are leased to Seller pursuant to a Non-Transferred Lease
and/or a Non-Extended Short Term Lease, and the denominator of
which shall be the sum of the revenues listed on the Revenue
Schedule for all Stores (the "Non-Transferred Lease Reduced
Amount").
2.5.3 Notwithstanding the provisions of this
Section 2.5 to the contrary, in the event that (i) after the
Closing and prior to the date one year from the Closing Date (if
the Store Lease in question is not also a Short Term Lease),
Seller and Purchaser obtain a Store Leasehold Consent with
respect to a Store subject to a Non-Transferred Lease (a "Post-
Closing Transferred Lease"), or (ii) after the Closing Purchaser
enters into an Extension with respect to a Non-Extended Short
Term Lease (and receives the applicable Store Leasehold Consent)
(a) during the existing term of such Non-Extended Short Term
Lease, (b) within 45 days of the expiration of the existing term
of such Non-Extended Short Term Lease or (c) within one year of
the expiration of the existing term of such Non-Extended Short
Term Lease, if the Store, subject to such Non-Extended Short Term
Lease, continues to be operated during such one-year period (a
Non-Extended Short Term Lease referred to in clause (ii)(a),
(ii)(b) or (ii)(c) hereof, a "Post-Closing Extended Short Term
Lease"), then, (x) Purchaser shall pay to Seller an amount equal
to the Base Purchase Price multiplied by a fraction, the numera-
tor of which shall be the revenues listed on the Revenue Schedule
for the Store subject to such Post-Closing Transferred Lease or
such Post-Closing Extended Short Term Lease, as the case may be,
and the denominator of which shall be the sum of the revenues
listed on the Revenue Schedule for all Stores (the "Post-Closing
Transferred Lease Payment Amount") plus interest on the Post-
Closing Transferred Lease Payment Amount for the Store Leasehold
Interest if said Store is subject to a Management Agreement (and
the F, F & E, Computer Leases, Store Contracts and Plans related
to, or located in said Store), which interest shall be calculated
at the rate of six percent (6%) per annum from the Closing Date
to the applicable Delayed Closing Date and, in accordance with
Sections 3.9 and 3.10, Purchaser shall pay to Seller the Trans-
ferred Inventory Purchase Price applicable to the Inventory
located at such Store then transferred to Purchaser pursuant to
this Section 2.5.3 and which had not been previously transferred
to Purchaser, and (y) Seller shall sell and transfer (the "Post-
Closing Asset Transfer") all of its right, title and interest in
and to said Store Lease and all Inventory, F, F & E, Computer
Leases, Store Contracts and Plans related to, or located in, the
Store subject to the Post-Closing Transferred Lease or Post-
Closing Extended Short Term Lease which have not been previously
sold and transferred to Purchaser. Purchaser shall pay to Seller
the appropriate Post-Closing Transferred Lease Payment Amount
(plus applicable interest) and Purchaser shall pay the Trans-
ferred Inventory Purchase Price applicable to the Inventory
located at such Store which Inventory is then being transferred
to Purchaser pursuant to this Section 2.5.3, and Seller shall
make the appropriate Post-Closing Asset Transfer to Purchaser at
the offices of Purchaser and "MSK" (as hereafter defined) in
accordance with Section 3 hereof on the fifth business day (the
"Delayed Closing Date") after a Non-Transferred Lease shall
become a Post-Closing Transferred Lease, and/or a Non-Extended
Short Term Lease shall become a Post-Closing Extended Short Term
Lease, as the case may be (the consummation of each such
transaction a "Delayed Closing"), provided, that each of the
conditions to such Delayed Closing set forth in Sections 4 and 5
hereof have been satisfied or waived by the appropriate party.
Purchaser hereby agrees to use its best efforts to obtain
Extensions with respect to all Non-Extended Short Term Leases
prior to the Closing or within the time periods set forth in
subclause (ii) of this Section 2.5.3 on terms and conditions
reasonably acceptable to Purchaser and on a timely basis,
provided that in no event shall Purchaser be required to accept
an Extension of any Non-Extended Short Term Lease if such
Extension does not contain all applicable Essential Provisions
and if the Extension requires Purchaser to relocate the Store,
which relocation is not acceptable to Purchaser in its sole and
absolute discretion, or requires Purchaser to expand or reduce
the size of the current location of the Store, which expansion or
reduction is not acceptable to Purchaser in its sole and absolute
discretion.
2.6 Increase of Base Purchase Price. In the event Seller
sells to Purchaser the Store Leasehold Interest for the Store
located in St. George, Utah (the "St. George Store") free and
clear of that certain sublease by and between Seller and South-
west International, Inc., a Nevada corporation (the "St. George
Sublessee"), and related guarantees (collectively, the "St.
George Sublease") and the St. George Sublease is terminated as of
the Closing (or the applicable Delayed Closing if the Store
Leasehold Interest for the St. George Store is transferred at
such Delayed Closing), the Transferred Assets Purchase Price
shall be increased by $200,000 (the "St. George Additional
Consideration").
2.7 Obligation to Purchase Transferred Assets. Except as
expressly provided to the contrary in this Agreement, Purchaser
shall not purchase any of Seller's rights in the F, F & E,
Computer Leases, Store Contracts or Plans related to, or located
in, any Stores subject to a Non-Transferred Lease or a Non-
Extended Short Term Lease; provided, however, Purchaser shall
take possession of said assets if they are located in or relate
to a Store, the Store Leasehold Interest of which is sold to
Purchaser as provided herein or which will be the subject of a
Management Agreement as provided herein. With respect to the
Inventory located in any of the "Retained Stores" (as hereafter
defined), Purchaser shall not be obligated to purchase any of
such Inventory at the Closing.
3. THE CLOSING.
3.1 Closing Date and Location. The "Closing" shall mean
the time at which Seller consummates the sale of the Transferred
Assets to Purchaser by delivery to it of the Transferred Assets
in the manner contemplated by this Section 3. The Closing shall
take place at the offices of Mitchell, Silberberg & Knupp
("MSK"), 11377 West Olympic Boulevard, Los Angeles, California
90064 on January 11, 1994, or on such other date mutually accept-
able to Purchaser and Seller after all conditions set forth in
this Agreement have been satisfied or waived in writing by the
appropriate party, but in no event later than February 28, 1994.
The "Closing Date" shall mean the date on which the Closing
occurs.
3.2 Delivery of Transfer and Sale Documents. At the
Closing or the applicable Delayed Closing, Seller shall sell,
transfer and deliver the appropriate Transferred Assets to
Purchaser by the Leasehold Assignments, by the "New Leases" (as
that term is defined herein), and by bills of sale, assignments
of trademarks, service marks, tradenames and service names,
assignments of contracts, and assignment of leasehold interests
in substantially the forms attached hereto as Exhibit B.
3.3 Delivery of Transferred Assets. Subject to the Store
Leases, Computer Leases and Store Contracts, possession of the
Transferred Assets shall be delivered to Purchaser at the Closing
or the applicable Delayed Closing, as the case may be, (i) at the
offices of MSK, referred to above with respect to all intangible
Transferred Assets and (ii) at the Stores with respect to all
tangible Transferred Assets. In addition, at the Closing or the
applicable Delayed Closing, as the case may be, Seller shall also
deliver to Purchaser appropriate authorizations to provide for
the transfer of the Stores' telephone numbers and other utilities
to Purchaser and for the closing of billing as of the Closing
Date or the applicable Delayed Closing Date, as the case may be.
3.4 Delivery of Other Documents. At the Closing, Seller
shall also deliver to Purchaser (i) all blank gift certificates
and merchandise credits and deposits for the Stores, each of
which will be marked "void," (ii) a schedule of all outstanding
Gift Certificates and Merchandise Credits issued by Seller before
the Closing, such information provided on a Store by Store and
week by week basis (the "Schedule of Gift Certificates and
Merchandise Credits"), (iii) copies of all "Occupancy Certifi-
cates and Permits" (as hereafter defined) and (iv) the Revenue
Schedule. On the later of (a) March 15, 1994, or (b) the earlier
of (x) the date on which Seller ceases operations at all Retained
Stores or (y) the date which is six months after the Closing
Date, Seller shall deliver to Purchaser all documents required to
change the corporate name of Seller from "Pegasus Music and
Video, Inc." to a name not confusingly similar to such name,
which documents Purchaser is hereby authorized to record with the
Office of the Secretary of State of the State of Utah as Purchas-
er may deem appropriate. Notwithstanding anything in this
Section to the contrary, if Seller continues to operate Retained
Stores after the Closing utilizing any of the Store Service
Marks, Seller may retain all of its blank gift certificates and
merchandise credits and deposits until such time as it ceases to
use any of the Store Service Marks or was obligated to cease
using the Store Service Marks as contemplated by this Agreement,
at which time it will promptly deliver said blank gift certifi-
cates and merchandise credits and deposits marked "void."
3.5 Proration of Personal Property Taxes. With respect to
all unpaid current year's personal property taxes owed by Seller
(collectively, the "Current Property Taxes") for which Seller
does not deliver to Purchaser at the Closing or the applicable
Delayed Closing a "Tax Liability Release" (as hereafter defined),
at the Closing or the applicable Delayed Closing, Purchaser and
Seller shall preliminarily prorate all Current Property Taxes for
the Stores based upon the personal property taxes for the Stores.
At the Closing or applicable Delayed Closing, Purchaser shall
receive a credit against the cash price payable pursuant to
Section 2.1.1.1 hereof in an amount equal to the Seller's
preliminary prorated share of Current Property Taxes for the
Stores (the "Personal Property Tax Reserve"), it being understood
that Purchaser will use the Personal Property Tax Reserve to pay
Seller's final prorated share of the Current Property Taxes for
the Stores on behalf of Seller and as it has requested. In the
event that Seller's final prorated share of the Current Property
Taxes for the Stores (based upon the actual Current Property Tax
bills for the Stores) (i) is greater than the Personal Property
Tax Reserve, then (subject to Section 3.8.2 hereof) at Purchas-
er's election either (a) Seller shall promptly pay such short
fall amount directly to Purchaser or (b) the Escrow Funds shall
be used to pay such short-fall amount; or (ii) is less than the
Personal Property Tax Reserve, then Purchaser shall promptly
remit the excess Personal Property Tax Reserve to Seller. Not-
withstanding the foregoing, nothing herein shall be construed to
mean that Purchaser has assumed or shall be held liable for any
personal property taxes which Seller is obligated to pay other
than the Personal Property Tax Reserve.
3.6 Proration of Sales Taxes. With respect to all unpaid
sales, use, income and other business taxes for which Purchaser
has potential "successor liability" or for which a "Lien" (as
hereafter defined) may attach to any of the Transferred Assets
(collectively, the "Sales Taxes") for which Seller does not
deliver to Purchaser a Tax Liability Release at the Closing or
the applicable Delayed Closing, at the Closing or the applicable
Delayed Closing, Seller and Purchaser shall project the aggregate
amount of unpaid Sales Taxes of Seller arising from Seller's
operation of the Stores through the Closing Date or the appli-
cable Delayed Closing Date and the amount of Sales Tax due as a
result of the sale of the Transferred Assets to Purchaser (the
"Projected Unpaid Sales Taxes"), and Seller shall deliver to
Purchaser either (i) copies of all canceled checks evidencing the
payment of any Sales Taxes accrued since January 1, 1993 through
the date indicated on the latest Sales Tax returns required to be
filed by Seller with all applicable taxing authorities prior to
the Closing or the applicable Delayed Closing (the "Sales Tax
Filing Period") or (ii) certificates from the appropriate taxing
authorities indicating that all of the Sales Tax for the Sales
Tax Filing Period has been paid. At the Closing or the appli-
cable Delayed Closing, Purchaser shall receive a credit against
the cash price payable pursuant to Section 2.1.1.1 hereof in an
amount equal to Projected Unpaid Sales Taxes (the "Sales Tax
Reserve"), it being understood that Purchaser will use the Sales
Tax Reserve to pay (on behalf of Seller and as it has requested)
Seller's actual unpaid Sales Taxes arising from Seller's opera-
tion of the Stores through the Closing Date or the applicable
Delayed Closing Date and the Sales Taxes arising in connection
with the sale of the Transferred Assets to Purchaser. Promptly
following the Closing or the applicable Delayed Closing, Seller
shall calculate the final aggregate amount of unpaid Sales Taxes
arising from Seller's operation of the Stores through the Closing
Date or the applicable Delayed Closing Date and the Sales Tax due
as a result of the sale of the Transferred Assets to Purchaser.
In the event that such final aggregate unpaid Sales Taxes (i) are
greater than the Sales Tax Reserve, then (subject to Section
3.8.2 hereof) at Purchaser's election either (a) Seller shall
promptly forward to Purchaser a cashier's check for such short-
fall amount made payable to the appropriate taxing authority
(which Purchaser will promptly thereafter forward to the appro-
priate taxing authority) or (b) the Escrow Funds shall be used to
pay such shortfall amount; or (ii) are less than the Sales Tax
Reserve, Purchaser shall promptly remit the excess Sales Tax
Reserve to Seller. Notwithstanding the foregoing, nothing herein
shall be construed to mean that Purchaser has assumed or shall be
held liable for any Sales Taxes other than the Sales Tax Reserve.
3.7 Payment of Employee Payroll Taxes. With respect to all
unpaid federal and state social security, disability, unemploy-
ment and other payroll taxes (including the portion to be paid by
the employer and the portion of said taxes and income taxes to be
withheld by the employer from its employees and paid over to the
appropriate tax authority) (collectively, the "Payroll Taxes")
for which Seller does not deliver to Purchaser a Tax Liability
Release at the Closing or applicable Delayed Closing, at the
Closing or applicable Delayed Closing, Seller and Purchaser shall
project the aggregate amount of unpaid Payroll Taxes of Seller
arising from Seller's operation of the Stores through the Closing
Date or the applicable Delayed Closing Date, and Seller shall
deliver to Purchaser either (i) copies of all canceled checks
evidencing the payment of any Payroll Taxes accrued since January
1, 1993 through the date indicated on the latest Payroll Tax
returns required to be filed by Seller with all applicable
taxing authorities prior to the Closing or the Delayed Closing
(the "Payroll Tax Filing Period"), or (ii) certificates from the
appropriate taxing authorities indicating that all of the Payroll
Taxes for the Payroll Tax Filing Period has been paid. At the
Closing or the applicable Delayed Closing, Purchaser shall
receive a credit against the cash price payable pursuant to
Section 2.1.1.1 hereof in an amount equal to such projected
unpaid Payroll Taxes (the "Payroll Tax Reserve"), it being
understood that Purchaser will use the Payroll Tax Reserve to pay
(on behalf of Seller and as it has requested) Seller's actual
unpaid Payroll Tax arising from Seller's operation of the Stores
through the Closing Date or the applicable Delayed Closing Date.
Promptly following the Closing or the applicable Delayed Closing,
Seller shall calculate the final aggregate amount of unpaid
Payroll Taxes arising from Seller's operation of the Stores
through the Closing Date or the applicable Delayed Closing Date
and the Payroll Taxes due thereby. In the event that such final
aggregate unpaid Payroll Taxes (i) are greater than the Payroll
Tax Reserve, then (subject to Section 3.8.2 hereof) at Purchas-
er's election either (a) Seller shall promptly forward to
Purchaser a cashier's check for such short-fall amount made
payable to the appropriate taxing authority (which Purchaser will
promptly thereafter forward to the appropriate taxing authority)
or (b) the Escrow Funds shall be used to pay such shortfall
amount; or (ii) are less than the Payroll Tax Reserve, Purchaser
shall promptly remit the excess Payroll Tax Reserve to Seller.
Notwithstanding the foregoing, nothing herein shall be construed
to mean that Purchaser has assumed or shall be held liable for
any Payroll Taxes other than the Payroll Tax Reserve.
3.8 Escrow Funds. Pursuant to Section 2.1.1.2 hereof, at
Closing and each Delayed Closing, Purchaser shall deposit an
amount equal to $15,000 multiplied by the number of Stores
possession of which are being transferred to Purchaser pursuant
to a Store Leasehold Assignment at such Closing or Delayed
Closing (and together with any interest earned on each such
deposit, an "Escrow Deposit"; the Escrow Deposits are referred to
herein collectively as the "Escrow Funds") into an interest
bearing account under the exclusive control of the Escrow Agent
in accordance with the following terms and conditions:
3.8.1 Purchaser and Seller shall each pay one-half
of the fees and expenses incurred in connection with the manage-
ment of the Escrow Funds, including, without limitation, the fees
and expenses of the Escrow Agent. Subject to Section 3.8.3, no
portion of any particular Escrow Deposit shall be disbursed to
Seller during the period commencing as of the Closing Date or the
applicable Delayed Closing Date, as the case may be, and ending
five (5) months thereafter (the "Escrow Period").
3.8.2
3.8.2.1 During any Escrow Period, Purchaser may,
by submitting a "Claim Notice" (as hereafter defined),
request the Escrow Agent to disburse the Escrow Funds (a) to
reimburse Purchaser for any actual damages it has incurred
as a result of any breach of any representations and
warranties of Seller or Shareholder under this Agreement or
any other covenants or agreements of Seller or Shareholder
to Purchaser contained in this Agreement, any Management
Agreement, the "Service Mark License" (as hereafter defined)
or any other document or agreement contemplated hereby or
thereby (it being understood that any such application of
the Escrow Funds shall not release Seller or Shareholder
from their liability to Purchaser for any breach of the
representations and warranties of Seller or Shareholder or
any other covenants or agreements of Seller or Shareholder
to Purchaser to the extent such breaches cause Purchaser to
incur damages in excess of the amount of the Escrow Funds
applied against any such damages), (b) to pay Seller's
actual prorated Current Property Taxes, Sales Taxes and
Payroll Taxes as contemplated in Sections 3.5, 3.6 and 3.7
hereof, respectively that exceed the amount for which
Purchaser previously received credit against the Transferred
Assets Purchase Price and/or (c) to reimburse Purchaser for
all Gift Certificates and Merchandise Credits, which were
issued by Seller prior to the Closing, redeemed or honored
during the Escrow Period in excess of the aggregate amount
of $15,000. Notwithstanding anything in this Section 3.8.2
or Sections 2.1.3, 3.5, 3.6 or 3.7 hereof to the contrary,
Purchaser shall use the Escrow Funds to reimburse Purchaser
for Gift Certificates and Merchandise Credits for which
Purchaser is entitled to reimbursement as provided in
Section 2.1.3 hereof and to pay Seller's actual prorated
Property Taxes, Sales Taxes and Payroll Taxes in excess of
the reserves established therefor unless and until the
balance of the Escrow Funds after making such reimbursement
and paying such taxes therefrom is less than $60,000.
3.8.2.2 In the event that, and from time to time
as, Purchaser determines that there exists a claim for reim-
bursement from the Escrow Funds pursuant to this Section
3.8, Purchaser shall submit written notice (such notice a
"Claim Notice") of such claim (a "Claim") to the Escrow
Agent and Seller, including a description of the Claim and
stating the dollar amount thereof (the "Claim Amount").
Unless the Escrow Agent and Purchaser receive written notice
that Seller disputes a Claim within ten (10) business days
following receipt by the Escrow Agent and Seller of the
applicable Claim Notice (such notice, a "Dispute Notice"),
which notice shall include in reasonable detail the basis
for Seller's dispute, the Escrow Agent shall disburse funds
from the Escrow Funds to Purchaser in the amount of the
Claim Amount. All disputes as to Claims hereunder shall be
arbitrated in accordance with Section 12 hereof and the
Claim Amount of any Disputed Claim shall be held in escrow
pending resolution of such dispute.
3.8.3 Subject to Sections 3.8.4, 3.8.5 and 3.8.6
hereof, the then remaining balance of each particular Escrow
Deposit shall be paid to Seller on the first business day after
the later of (i) the expiration of the Escrow Period with respect
to such Escrow Deposit, and (ii) the date on which Seller,
Shareholder and Purchaser jointly provide the Escrow Agent with
written notice (the "Escrow Release Notice") that, to the best of
their respective knowledge there have been no breaches, nor does
Seller, Shareholder or Purchaser anticipate any breaches, of any
of Seller's or Shareholder's representations, warranties, cove-
nants or agreements contained in this Agreement, any Management
Agreement, the Service Mark License or in any other document or
agreement contemplated hereby or thereby. The distribution of
the then remaining balance of the most recently deposited Escrow
Deposit (the "Final Escrow Deposit") prior to the date on which
Purchaser and Seller provide the Escrow Agent with written notice
that the parties have agreed, such agreement not to be unreason-
ably withheld, that they will not be able to obtain Store Lease-
hold Consents for any remaining Non-Transferred Leases and
Extensions and Store Leasehold Consents for any remaining Non-
Extended Short Term Leases, shall be accompanied by a true and
correct accounting of all Escrow Funds expended by the Escrow
Agent. In the event Seller, Shareholder and Purchaser cannot
agree on whether or not an Escrow Release Notice should be given
to the Escrow Agent, such dispute shall be arbitrated in accord-
ance with Section 12 hereof.
3.8.4 Notwithstanding anything herein to the
contrary but subject to Section 3.8.6 hereof, at no time between
the Closing and the distribution of the Final Escrow Deposit in
accordance with Section 3.8.3 hereof shall the balance of the
Escrow Funds be less than $60,000. Notwithstanding anything
herein to the contrary, in no event shall the aggregate amount of
Escrow Deposits (excluding therefrom all interest earned on any
such deposits)exceed $225,000.
3.8.5 Notwithstanding anything herein to the
contrary, an amount of the Escrow Funds equal to the aggregate
amount of all claims against the Escrow Funds made by Purchaser
shall either be paid to Purchaser or retained by the Escrow Agent
until a final determination of the validity of Purchaser's claims
is made in accordance with the "Section 3.8 Escrow Agreement" (as
hereinafter defined).
3.8.6 In the event Purchaser and Seller obtain a
Store Leasehold Consent with respect to any Store Lease which
does not contain all "Essential Estoppel Terms" (as hereafter
defined), (i) at the Closing or the applicable Delayed Closing,
Seller and Shareholder shall represent and warrant to Purchaser
in writing as to each of the Essential Estoppel Terms which are
not contained in the Store Leasehold Consent for such Store Lease
(which representation and warranty shall survive the Closing or
the applicable Delayed Closing and shall expire on the later of
the date one year from the Closing Date or the date one year from
the last Delayed Closing Date) (the "Estoppel Representations"),
and (ii) notwithstanding anything herein to the contrary, at no
time between the Closing and the expiration of the Estoppel
Representations shall the balance of the Escrow Funds be less
than $100,000. For purposes of this Agreement, each of the
following shall be deemed an "Essential Estoppel Term": (a) a
certification by the applicable lessor that attached to such
certification is a true and complete copy of the applicable Store
Lease and all amendments, modifications, supplements and assign-
ments thereof and thereto, (b) a certification by the applicable
lessor that as of the date of the applicable Store Leasehold
Consent, all rental payments, real property taxes and CAM and
other charges to be paid by the lessee under such Store Lease
have been paid in full, and (c) a certification by the applicable
lessor that, to the best knowledge of such lessor, such Store
Lease is not in default and no event has occurred which, with the
passage of time or the giving of notice or both, would constitute
a default under such Store Lease.
3.8.7 For the avoidance of doubt, all interest
earned on the Escrow Funds shall inure to the benefit of Seller,
provided that all such interest may be disbursed by the Escrow
Agent to satisfy claims in accordance with Section 3.8.2.
3.9 Payment of the Balance of the Transferred Assets
Purchase Price (Other Than the Transferred Inventory Purchase
Price).
3.9.1 Subject to the provisions of Section 3.11
hereof, the balance of the Transferred Assets Purchase Price
which is adjusted as provided herein (other than the Transferred
Inventory Purchase Price), not paid to Seller or otherwise
disbursed in accordance with Sections 2.1.1.2 and 3.5 through 3.8
hereof shall be paid by Purchaser to Seller at the Closing or
applicable Delayed Closing by cashier's check or wire transfer.
3.9.2 Subject to the provisions of Section 3.11
hereof Purchaser shall pay, unless otherwise disbursed in
accordance with Sections 2.1.1.2 and 3.5 through 3.8 hereof, an
amount equal to 75% of the "Estimated Transferred Inventory
Purchase Price" (as that term is defined herein) (the "Estimated
Inventory Payment") to Seller at the Closing or applicable
Delayed Closing by cashier's check or wire transfer. The full
amount of the Estimated Inventory Payment whether paid directly
to Seller or disbursed in accordance with Sections 2.1.1.2 and
3.5 through 3.8 hereof shall be credited against the Transferred
Assets Inventory Purchase Price.
3.10 Payment of Transferred Inventory Purchase Price
Balance.
3.10.1 In the event that the amount of the Trans-
ferred Inventory Purchase Price exceeds the Estimated Inventory
Payment, the balance of the Transferred Inventory Purchase Price
(the "Transferred Inventory Purchase Price Balance") shall be
paid upon the later of (a) 90 days from the Closing or applicable
Delayed Closing or (b) the earlier of (x) the date on which
Purchaser and Seller agree in writing as to the characterization
of such Inventory as Current Catalog Inventory, Non-Returnable
Inventory or Other Inventory or (y) the date on which the
"Arbitrator" (as hereafter defined) issues his or her decision in
connection therewith.
3.10.2 In the event that the Transferred Inventory
Purchase Price is less than the Estimated Inventory Payment,
Seller shall reimburse to Purchaser the difference between the
Transferred Inventory Purchase Price and the Estimated Inventory
Payment (the "Overpayment") within 15 days of Seller's receipt of
notice from Purchaser of the existence of and the amount of the
Overpayment.
3.11 Compliance With Bulk Transfer Laws. Notwithstanding
anything herein to the contrary, all or any portion of the
Transferred Assets Purchase Price may be paid by Purchaser
to any creditor of Seller, rather than to Seller, in compliance
with the applicable "bulk transfer" laws of the States of Montana
and Utah; provided that (i) Purchaser shall only pay creditors to
the extent required by applicable law, and (ii) prior to the
making of any such payment, Purchaser shall notify Seller in
writing of Purchaser's intention to make said payment and (a)
Seller shall have a reasonable opportunity to make alternative
arrangements consistent with applicable law with such creditor
which arrangements are acceptable to Purchaser in its reasonable
discretion, or (b) if Seller disputes the validity or amount of
the claim out of which such payment is to be made, Purchaser and
Seller shall make arrangements for determination of the validity
and/or amount of such claim consistent with applicable law.
3.12 Recovery of Security Deposits and Releases of Personal
Guarantees. Seller shall be permitted to recover (but only from
the lessors under the Store Leases) all security deposits, and to
cause to be released any and all personal guarantees, previously
furnished to the lessors under the Store Leases, provided that
such reimbursements and/or releases do not jeopardize or inter-
fere in any way with Purchaser's rights under the Store Leases
and in no event shall Purchaser be obligated to reimburse Seller
or lessor for the amount of any such security deposit or to
deposit with or pay to the lessor any sums as a result of
lessor's refunding to Seller any of said security deposits or
releasing any of said personal guarantees. After the Closing and
upon expiration of the term (including all renewal options) of
the applicable Store Lease, upon the written request of Seller,
Purchaser shall pay to Seller any security deposit paid by Seller
with respect to such Store Lease which has been refunded by the
applicable lessor to Purchaser and which has not been previously
refunded to Seller.
3.13 Transfer of the Store Service Marks. Notwithstanding
anything herein to the contrary, in the event that Seller retains
possession of and continues to operate any of the Stores after
the Closing (the "Retained Stores") as contemplated by Section
7.17 hereof, the Store Service Marks shall not be transferred to
Purchaser until the earlier of (i) such time as Seller ceases to
operate all of the Retained Stores or (ii) six months after the
Closing Date at which time, without the payment of any further
consideration to Seller, Seller shall execute and deliver to
Purchaser any and all bills of sale and assignments requested by
Purchaser to evidence the sale and transfer of the Store Service
Marks to Purchaser. With respect to all of the Retained Stores,
Seller shall not permit any assignee thereof to use any of the
Store Service Marks without the prior written consent of Purchas-
er. During the six-month period immediately following the
Closing Date (the "Transition Period"), Seller shall be permitted
to continue to use the Store Service Marks in connection with the
operation of Seller's current business at the Retained Stores.
At the end of the Transition Period, Seller shall cease doing
business utilizing any of the Store Service Marks and at its
expense will change the name under which it does business to a
name which is not identical or confusingly similar to any of
the Store Service Marks. From and after the date hereof Seller
agrees not to do or fail to do anything which would damage or
lessen the value of any of the Store Service Marks.
4. CONDITIONS TO OBLIGATIONS OF PURCHASER.
Purchaser shall have no obligation to purchase the Trans-
ferred Assets or to effect the transactions contemplated by this
Agreement unless at or prior to the Closing or the Delayed
Closing, as applicable, each of the following conditions is
complied with (to the extent applicable to the Transferred Assets
which are the subject of the Closing or the applicable Delayed
Closing) to the satisfaction of, or waived in writing by,
Purchaser:
4.1 Completion of Due Diligence Investigation. Purchaser
shall have completed the "Due Diligence Investigation" (as here-
after defined) to its complete satisfaction prior to the Closing
or the applicable Delayed Closing.
4.2 Liens on Transferred Assets. On or before the Closing
and each Delayed Closing, Purchaser shall have received evidence,
reasonably satisfactory to Purchaser, that all security inter-
ests, liens, pledges, encumbrances, claims, charges, agreements,
subleases (other than the St. George Sublease), rights, options,
warranties, equities or restrictions ("Liens") on the Transferred
Assets so sold and transferred have been released. Notwithstand-
ing anything in this Section 4.2 to the contrary, "evidence,
reasonably satisfactory to Purchaser" shall include without
limitation, copies of duly executed and recorded UCC termination
statements or releases for each secured creditor, who, as
indicated on any official or unofficial Lien searches obtained by
Purchaser, has a Lien on any of the Transferred Assets so sold
and transferred, which termination statements or releases
indicate that said Liens have been removed or terminated.
4.3 Damage to Transferred Assets. As of the Closing and
each Delayed Closing, there shall have been no material damage to
or destruction of the Transferred Assets so sold and transferred,
or any portion thereof, and Seller shall not have received any
notice of any intended or proposed claim by any person or entity
affecting the Transferred Assets so sold and transferred, or any
portion thereof.
4.4 Proceedings. As of the Closing and each Delayed
Closing, no claim, investigation, proceeding or litigation,
administrative or judicial, shall be threatened or pending
for the purpose of enjoining or preventing the consummation of
the transactions contemplated by this Agreement or otherwise
claiming that this Agreement or the consummation of such trans-
actions is unlawful or would result in a fraudulent conveyance,
or which adversely affect the right of Purchaser to retain the
Transferred Assets.
4.5 Transfer Documents. At the Closing and each Delayed
Closing, Seller shall have delivered to Purchaser (i) each of the
instruments or other items set forth in Sections 3.2 and 3.4
hereof, and (ii) possession of the Transferred Assets so sold and
transferred.
4.6 Service Mark License. In the event the Store Service
Marks are not transferred to Purchaser at the Closing in accord-
ance with Section 3.13 hereof, at the Closing, Seller shall have
executed and delivered to Purchaser a service mark license (the
"Service Mark License") substantially in the form of Exhibit C
attached hereto.
4.7 Management Agreement. At the Closing, Seller shall
have executed and delivered to Purchaser a management agreement
(a "Management Agreement") substantially in the form of Exhibit D
with respect to each of the Stores listed on Schedule 4.7, which
Schedule will be created in accordance with Section 7.17.
4.8 Certificate of Seller. Seller shall have delivered to
Purchaser at the Closing and each Delayed Closing a Certificate
of the Corporate Secretary of Seller, dated the Closing Date or
the applicable Delayed Closing Date, as the case may be, reason-
ably acceptable to Purchaser certifying (i) that attached thereto
is a true and complete copy of resolutions of the Board of
Directors and shareholders of Seller authorizing the sale of the
Transferred Assets to Purchaser and the consummation of the
transactions contemplated herein, (ii) as to the incumbency and
specimen signature of each officer of Seller executing the
certificate, this Agreement and the other documents and instru-
ments to be delivered pursuant to this Agreement, (iii) that
attached thereto are true and complete copies of the Articles of
Incorporation and Bylaws of Seller, (iv) that attached thereto is
a true and complete copy of a "Good Standing" Certificate of
Seller issued by the Secretary of State of the State of Utah
indicating that Seller is in good standing in the State of Utah
and said "Good Standing" Certificate shall be dated as of a date
no earlier than five business days prior to the Closing Date or
the applicable Delayed Closing Date, as the case may be, and (v)
that attached thereto is a true and complete copy of "Good
Standing" Certificate of Seller issued by the Secretary of State
of the State of Montana indicating that Seller is qualified to do
business in such State as a foreign corporation and is in good
standing therein and said "Good Standing" Certificate shall be
dated as of a date no earlier than five business days prior to
the Closing Date or the applicable Delayed Closing Date, as the
case may be.
4.9 Opinion of Seller's Counsel. At the Closing, Seller
shall have delivered to Purchaser the opinion of Durbano &
Associates, substantially in the form attached hereto as Exhibit
E.
4.10 Store Leasehold Consents and Store Leasehold Assign-
ments. With respect to Stores other than Affiliated Stores at or
before the Closing, Seller shall have delivered to Purchaser the
Store Leasehold Consents, duly executed by Seller and the lessor
under each such Store Lease and assignments of said Store Lease-
hold Interests in substantially the forms attached hereto as
Exhibit F (the "Store Leasehold Assignments") for at least two of
the Stores,which are not Affiliated Stores. At or before the
Closing and each Delayed Closing, Seller shall use its best
efforts to deliver to Purchaser all other applicable consents of
third parties which Purchaser may reasonably request in connec-
tion with the assignments of the Store Leasehold Interests.
4.11 Store Lease Terminations and New Leases. At or before
the Closing, Seller shall have delivered to Purchaser lease
termination agreements, in substantially the form attached hereto
as Exhibit G (the "Lease Termination Agreement") for each of the
leases pertaining to the six Affiliated Stores, duly executed by
Seller and KSG, and Seller shall have delivered to Purchaser
lease agreements, substantially in the forms attached hereto as
Exhibits H-1, H-2, H-3, H-4, H-5 and H-6 (the "New Leases") for
the six Affiliated Stores, duly executed by KSG.
4.12 Assignment of Computer Leases. At or before the
Closing and each Delayed Closing, Seller shall have delivered to
Purchaser consents to the assignment to Purchaser of all Computer
Leases for Computer Equipment located at the Stores, the Store
Leasehold Interests of which are being transferred to Purchaser
at the Closing or applicable Delayed Closing, and estoppel
certificates, in substantially the forms attached hereto as
Exhibit J, duly executed by the parties to such Computer Leases
(collectively, the "Computer Lease Consents"). At or before
Closing and each Delayed Closing, Seller shall use its best
efforts to deliver to Purchaser all other consents of third
parties which Purchaser may reasonably request in connection with
the assignments of Seller's interests under the Computer Leases.
4.13 Assignment of Store Contracts. At or before the
Closing and each Delayed Closing, Seller shall have delivered to
Purchaser consents to the assignment to Purchaser of all Store
Contracts for goods and services affecting the Stores, the Store
Leasehold Interests of which are being transferred to Purchaser
at the Closing or applicable Delayed Closing and estoppel
certificates in substantially the forms attached hereto as
Exhibit K-1, duly executed by the parties to such Store Contracts
(collectively, the "Store Contract Consents"). At or before the
Closing or the applicable Delayed Closing at which the Store
Leasehold Interest for the St. George Store is being transferred
to Purchaser, Seller shall deliver to Purchaser consents to the
assignment to Purchaser of the St. George Sublease and estoppel
certificates substantially in the forms attached hereto as
Exhibit K-2, duly executed by the parties to the St. George
Sublease. At or before the Closing and each Delayed Closing,
Seller shall use its best efforts to deliver to Purchaser all
other consents of third parties which Purchaser may reasonably
request in connection with the assignments of Seller's interests
under the Store Contracts.
4.14 Third Party Consents. At or before the Closing and
each Delayed Closing, Seller shall have delivered to Purchaser
all consents and approvals of any third party (including, without
limitation, the Shareholder), administrative agency or govern-
mental body required by law applicable to Seller in connection
with the transactions contemplated by this Agreement, such
consents and approvals to be in forms and content reasonably
acceptable to Purchaser. Without limiting the generality of the
foregoing, at or before the Closing, Seller shall have obtained
all governmental consents and approvals required to be obtained
by Seller in order to comply with the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 ("HSR").
4.15 Escrow Agreement. At the Closing, Seller shall deliver
to Purchaser an escrow agreement, duly executed by Seller and
Escrow Agent substantially in the form attached hereto as Exhibit
K (the "Section Escrow Agreement").
4.16 Entry Devices. At the Closing, Seller shall have
delivered to Purchaser all keys, combinations to locks and
security codes for all security systems (collectively, the "Entry
Devices") relating to those Stores, possession of which are being
delivered to Purchaser at the Closing. At each Delayed Closing,
Seller shall have delivered to Purchaser all Entry Devices
relating to the Store which is the subject of such Delayed
Closing and of which possession was not already delivered to
Purchaser at the Closing.
4.17 Compliance with Bulk Transfer Laws. Seller, to the
extent applicable to a seller of assets, shall have complied with
all applicable bulk transfer laws of the States of Montana and
Utah.
4.18 Auditors' Confirmation. At or before the Closing,
Purchaser shall have received written confirmation from its
auditors (the "Auditors"), which confirmation shall be in form
and substance acceptable to Purchaser in its sole and absolute
discretion (i) that in the opinion of the Auditors assuming
Purchaser does not engage in or contemplate engaging in another
transaction (the "Additional Acquisition Transaction") in which
it acquires a "business" as that term is defined in Rule 11-01(d)
of Regulation S-X promulgated by the Securities and Exchange
Commission ("SEC") during the two years ending January 31, 1995,
Purchaser will not be required to disclose or include in any
filing with the SEC and/or disseminate to the public separate
financial statements or financial information of, related to or
with respect to any of the Transferred Assets or Purchaser's
financial statements or financial information containing such
financial statements or financial information of, related to or
with respect to any of the Transferred Assets and (ii) Seller's
books and records are in such condition that, in the opinion of
the Auditors, it would be possible to prepare all audited and
unaudited financial statements and financial information of,
related to or with respect to any of the Transferred Assets which
would be required to be prepared, filed with the SEC and/or
disseminated to the public by any federal securities law or any
rule or regulation promulgated by the SEC in the event that
Purchaser engages in or contemplates engaging in an Additional
Acquisition Transition during the two-year period ending January
31, 1995.
4.19 St. George Sublease. With respect to the purchase of
the Store Leasehold Interest and the other Transferred Assets
located in or directly pertaining to the St. George Store,
Purchaser's obligation to pay the St. George Additional Consi-
deration shall be conditioned upon, in addition to the other
conditions set forth in this Agreement, that Seller deliver to
Purchaser written evidence reasonably satisfactory to Purchaser
that the Store Leasehold Interest for the St. George Store is
being transferred to Purchaser free and clear of the St. George
Sublease and the St. George Sublease has been terminated.
4.20 Estimated Transferred Inventory Purchase Price. Not
later than five business days prior to the Closing and each
applicable Delayed Closing, Seller shall deliver to Purchaser a
certificate, substantially in the form attached hereto as Exhibit
L (the "Inventory Certificate") duly executed by Seller and
Shareholder, on which Seller and Shareholder state their estimate
of the dollar amount of the Transferred Inventory Purchase Price
for the Inventory which will be sold and transferred to Purchaser
at the Closing and each applicable Delayed Closing (the "Estimat-
ed Transferred Inventory Purchase Price"). On the Inventory
Certificate, Seller and Shareholder shall certify that their
estimate of the Estimated Transferred Inventory Purchase Price
represents their best judgment based on the information they then
had available as of the date of such Certificate.
4.21 Approval of Purchaser's Board of Directors. The Board
of Directors of Purchaser shall have duly adopted resolutions
authorizing Purchaser to enter into this Agreement, to purchase
the Transferred Assets and to perform its other obligations
hereunder.
4.22 Accuracy of Representations and Warranties. The
representations and warranties of Seller and Shareholder made
herein shall be true in all respects as of the date hereof and as
of the Closing and each Delayed Closing as if each were made
again at such time, and Seller and Shareholder shall have
complied with and performed each and every of the covenants and
agreements set forth in this Agreement to be performed by Seller
and/or Shareholder at or before the Closing and each Delayed
Closing.
4.23 Failure of Delayed Closing. Notwithstanding anything
herein to the contrary, in no event shall the failure to consum-
mate the transactions contemplated at any Delayed Closing due to
the failure of any of the conditions precedent to such Delayed
Closing set forth in this Section 4 affect in any way the trans-
actions consummated at the Closing, or any prior or subsequent
Delayed Closing.
5. CONDITIONS TO OBLIGATIONS OF SELLER.
Seller shall have no obligation to sell the Transferred
Assets to Purchaser or to effect the transactions contemplated by
this Agreement unless at or prior to the Closing and each Delayed
Closing, as applicable, each of the following conditions is
complied with (to the extent applicable to the Transferred Assets
which are the subject of the Closing or the applicable Delayed
Closing) to the satisfaction of, or waived in writing by, Seller:
5.1 Payment of Transferred Asset Purchase Price. At or
before the Closing, Purchaser shall have paid the Transferred
Assets Purchase Price (as adjusted) (other than the Transferred
Inventory Purchase Price) in accordance with the provisions of
Sections 2 and 3 hereof. At or before each Delayed Closing,
Purchaser shall have paid the Post-Closing Transferred Lease
Payment Amount in accordance with the provisions of Sections 2
and 3 hereof.
5.2 Proceedings. As of the Closing and each Delayed
Closing, no claim, investigation, proceeding or litigation,
administrative or judicial, shall be threatened or pending
for the purposes of enjoining or preventing the consummation of
the transactions contemplated in this Agreement or otherwise
claiming that this Agreement or the consummation of such trans-
actions is unlawful or would result in a fraudulent conveyance.
5.3 Management Agreement. At the Closing, Purchaser shall
have executed and delivered to Seller a Management Agreement
substantially in the form of Exhibit D attached hereto with
respect to each of the Stores listed on Schedule 4.7.
5.4 Certificate of Purchaser. Purchaser shall have
delivered to Seller at the Closing and each Delayed Closing a
Certificate of the Corporate Secretary of Purchaser, dated the
Closing Date or the applicable Delayed Closing Date, as the case
may be, reasonably acceptable to Seller certifying (i) that
attached thereto is a true and complete copy of resolutions of
the Board of Directors of Purchaser authorizing the purchase of
the Transferred Assets by Purchaser and the consummation of the
transactions contemplated herein, (ii) as to the incumbency and
specimen signature of each officer of Purchaser executing the
certificate, this Agreement and the other documents and instru-
ments to be delivered by Purchaser pursuant to this Agreement,
(iii) that attached thereto are true and complete copies of the
Certificate of Incorporation and Bylaws of Purchaser, (iv) that
attached thereto is a true and complete copy of a "Good Standing"
Certificate of Purchaser issued by the Secretary of State of the
State of Delaware indicating that Purchaser is in good standing
in the State of Delaware and said "Good Standing" Certificate
shall be dated as of a date no earlier than five business days
prior to the Closing Date or the applicable Delayed Closing Date,
as the case may be, and (v) that attached thereto is a true and
complete copy of a "Good Standing" Certificate of Purchaser
issued by the Secretary of State of the State of California
indicating that Purchaser is qualified to do business in the
State of California and is in good standing, and said "Good
Standing" Certificate shall be dated as of a date no earlier than
five (5) business days prior to the Closing Date or the appli-
cable Delayed Closing Date, as the case may be.
5.5 Opinion of Purchaser's Counsel. At the Closing, Pur-
chaser shall have delivered to Seller the opinions of Mitchell,
Silberberg & Knupp and Hill, Harrison & Hill, substantially in
the forms attached hereto as Exhibits M-1 and M-2.
5.6 Store Leasehold Assignments and Store Leasehold
Consents. At or before the Closing, Purchaser shall have
delivered to Seller the Store Leasehold Assignments and Store
Leasehold Consents duly executed by Purchaser for those Store
Leases for which Seller delivers Store Leasehold Assignments duly
executed by Seller and Store Leasehold Consents duly executed by
Seller and the applicable lessor pursuant to Section 4.10 hereof.
5.7 New Leases. At or before the Closing, Purchaser shall
have delivered to Seller the New Leases duly executed by
Purchaser, which New Leases have been duly executed by KSG
pursuant to Section 4.11.
5.8 Assignment of Computer Leases. At or before the
Closing and each Delayed Closing, Purchaser shall have delivered
to Seller acceptances of the assignments of all Computer Leases
for which Seller delivers to Purchaser assignments thereof
pursuant to Section 4.12 hereof, duly executed by Purchaser.
5.9 Assignment of Store Contracts. At or before the
Closing and each Delayed Closing, Purchaser shall have delivered
to Seller acceptances of the assignment of all Store Contracts
for which Seller delivers to Purchaser assignments thereof
pursuant to Section 4.13 hereof, duly executed by Purchaser.
5.10 Escrow Agreements. At or before the Closing, Purchaser
shall deliver to Seller a counterpart copy of the Section 3.8
Escrow Agreement, duly executed by Purchaser.
5.11 Compliance with Bulk Transfer Laws. Purchaser, to the
extent applicable to a purchaser of assets, shall have complied
with all applicable bulk transfer laws of the States of Montana
and Utah.
5.12 Third Party Consents. At or before the Closing and
each Delayed Closing, Purchaser shall have delivered to Seller
all consents and approvals of any third party, administrative
agency or governmental body required by law applicable to
Purchaser which are to be obtained by Purchaser, and all consents
and approvals of any third party pursuant to any contract or
agreement to which Purchaser is a party or is bound immediately
prior to the Closing or the applicable Delayed Closing, in
connection with the transactions contemplated by this Agreement,
such consents and approvals to be in forms and content reasonably
acceptable to Seller. Without limiting the generality of the
foregoing, at or before the Closing, Purchaser shall have
obtained all governmental consents and approvals required to be
obtained by Purchaser in order to comply with HSR. For avoidance
of doubt, Purchaser shall be responsible, at its expense, for
obtaining all state, county and local business licenses and tax
resale permits and licenses in connection with Purchaser's
operating any of the Stores after the Closing.
5.13 Accuracy of Representations and Warranties. The
representations and warranties of Purchaser made herein shall be
true in all respects as of the date hereof and as of the Closing
and each Delayed Closing as if each were made again at such time
and Purchaser shall have complied with and performed each and
every of the covenants and agreements set forth in this Agreement
to be performed by Purchaser at or before the Closing and each
Delayed Closing.
5.14 Failure of Delayed Closing. Notwithstanding anything
herein to the contrary, in no event shall the failure to consum-
mate the transactions contemplated at any Delayed Closing due to
the failure of any of the conditions precedent to such Delayed
Closing set forth in this Section 5 affect in any way the trans-
actions consummated at the Closing, or any prior or subsequent
Delayed Closing.
6. REPRESENTATIONS AND WARRANTIES.
6.1 Seller and Shareholder, jointly and severally, repre-
sent, warrant and covenant to Purchaser that:
6.1.1 Absence of Conflict. Except as disclosed on
Schedule 6.1.1 attached hereto, the execution and delivery of
this Agreement, the Service Mark License, the Lease Termination
Agreements, and any Management Agreement and the consummation of
the transactions contemplated hereby and thereby (i) do not and
will not result in the breach of any of the terms or conditions
of, or constitute a default under, any contract, agreement,
lease, commitment, indenture, mortgage, note, security interest,
bond, license, pledge, encumbrance, Lien, claim, charge, right,
option or other instrument or obligation to which Seller, Share-
holder or KSG is now a party or by which any item of the
Transferred Assets may be bound or affected; (ii) to the best
knowledge of Seller and Shareholder (after due investigation)
do not and will not violate any law, statute, ordinance, rule or
regulation of any administrative agency or governmental body, or
any order, writ, injunction, judgment or decree of any court,
administrative agency or governmental body binding on Seller,
Shareholder or KSG, or any decision or finding of any arbitration
panel binding upon Seller, Shareholder or KSG, or any of the
Transferred Assets; (iii) do not require the consent, authoriza-
tion or approval of any third person or administrative agency or
governmental body to which Seller, Shareholder or KSG is subject.
6.1.2 Corporate Existence and Authority. Each of
Seller and KSG is a corporation duly organized, validly existing
and in good standing under the laws of the State of Utah, is
authorized to transact business in the State of Montana and has
full corporate power and authority to own its assets and to carry
on its business as it is now being conducted. This Agreement has
been duly executed and delivered by Seller and Shareholder and
constitutes their respective valid and legally binding agreements
and obligations, except to the extent that enforceability may be
limited by applicable bankruptcy, insolvency or similar laws
affecting the enforcement of creditors' rights generally, and
subject, as to enforceability, to general principles of equity
(regardless of whether enforcement is sought in a court of law or
equity). This Agreement, the Service Mark License, the Lease
Termination Agreements, and any Management Agreement and their
performance by Seller have been duly authorized by all requisite
corporate action of Seller. As of the Closing, the Service Mark
License, the Lease Termination Agreements and any Management
Agreement will constitute the valid and legally binding agree-
ments and obligations of Seller, except to the extent that
enforceability may be limited by applicable bankruptcy, insol-
vency or similar laws affecting the enforcement of creditors'
rights generally, and subject, as to enforceability, to general
principles of equity (regardless of whether enforcement is sought
in a court of law or equity). Seller has the full power, right,
legal capacity and authority to make, execute and deliver this
Agreement, the Service Mark License, the Lease Termination
Agreements, and any Management Agreement and to perform its
obligations hereunder and thereunder. Shareholder has the full
power, right and legal capacity to make, execute and deliver this
Agreement and the Lease Termination Agreement, and to perform his
obligations hereunder and thereunder. KSG has full power, right
and legal capacity to make, execute and deliver the Lease
Termination Agreements and the New Leases and said agreements and
their performance have been duly authorized by all requisite
corporate action of KSG. As of the Closing, the Lease Termina-
tion Agreements and the New Leases will constitute the valid and
legally binding agreements and obligations of KSG, except to the
extent that enforceability may be limited by applicable bankrupt-
cy, insolvency or similar laws affecting the enforcement of
creditors' rights generally, and subject, as to enforceability,
to general principles of equity (regardless of whether enforce-
ment is sought in a court of law or equity). The sole share-
holder, beneficially and of record, of Seller is Kevin S. Garn.
6.1.3 Material Agreements. Except as disclosed on
Schedule 6.1.3 and except for the Store Leases, the Computer
Leases and the Store Contracts, Seller is not a party to or
bound by any material contract, lease, agreement, covenant,
license or instrument or commitment, written or oral, affecting
or purporting to affect any of the Transferred Assets which will
continue to so affect such Transferred Assets after the Closing
or the applicable Delayed Closing, as the case may be.
6.1.4 Litigation. Except as disclosed on Schedule
6.1.4 attached hereto (the "Existing Litigation"), there are no
actions, suits, proceedings (administrative or otherwise),
arbitrations, investigations pending, or to the best knowledge of
Seller and Shareholder (after due investigation), threatened
against or adversely affecting any of the Transferred Assets, or
Seller, at law or in equity, in any court or before any federal,
state, municipal or other governmental department, commission,
bureau, board, agency or instrumentality (including, but not
limited to, the National Labor Relations Board), or before any
arbitration panel, and to the best knowledge of Seller and
Shareholder (after due investigation), there are no facts or
circumstances which could form the basis for any such actions,
suits, proceedings, arbitrations or investigations.
6.1.5 Taxes. Seller has duly and timely filed (i)
all federal and state income, profits, franchise, sales, use,
occupation, employment, and other tax returns and reports, (ii)
all federal, state, county and local property tax returns and
reports, and (iii) all county and local income, profits,
franchise, sales, use, occupation, employment, and other tax
returns and reports, required to have been filed by it, up to and
including the date hereof; and Seller has paid all taxes due and
payable, all assessments and all other taxes, governmental
charges, penalties, interests, fines and other sums due and
payable by it, on or before the date hereof. There are no
agreements, waivers or other arrangements providing for an
extension of time with respect to the filing of any charges or
deficiencies by, or the assessment of any tax or deficiency
against Seller. Seller is presently current in its employee
payroll taxes withholdings and other sums. Seller has duly
withheld from each payment made to each person from whom such
withholding is required by law the amount of all taxes or other
sums (including, but not limited to, United States federal income
taxes, any applicable state or municipal income tax, disability
tax and Federal Insurance Contribution Act taxes) required to be
withheld therefrom and has paid the same (and the employer's
portion of all payroll taxes) to the proper tax receiving
officers prior to the due date thereof.
6.1.6 Title to Transferred Assets. When the
Transferred Assets are sold, assigned and delivered to Purchaser
in accordance with this Agreement at the Closing and each Delayed
Closing, as applicable Purchaser will receive, good and market-
able title to the Transferred Assets, free and clear of all
Liens.
6.1.7 Store Lease Defaults. Except as disclosed
on Schedule 6.1.7 attached hereto, as to each of the Store
Leases, Seller is not, and no other party to such lease is, in
default with respect to any material term or condition thereof,
nor has any event occurred which through the passage of time or
the giving of notice, or both, could constitute a default there-
under, or could give a party thereto the right to accelerate the
performance of any obligation thereunder, or excuse any party
from the performance of any obligation thereunder, or could cause
the creation of a Lien on any of the Transferred Assets. Except
as disclosed on Schedule 6.1.7 attached hereto and in the Store
Lease and pursuant to any local laws granting to Lessor a land-
lord's lien, the lessor under each Store Lease has no charge,
Lien, claim, defense or offset of any kind under such lease or
otherwise against Seller or the Transferred Assets.
6.1.8 Computer Lease and Store Contracts Defaults.
Except as described on Schedule 6.1.8 attached hereto, as to each
Computer Lease and each Store Contract, Seller is not, and no
other party to such contract is, in default with respect to any
material term or condition thereof, nor has any event occurred
which through the passage of time, or the giving of notice, or
both, could constitute a default thereunder, or could give any
party thereto the right to accelerate the performance of any
obligation thereunder or excuse any party from the performance of
any obligation thereunder, or could cause the creation of a Lien
on any of the Transferred Assets. Except as provided in the
Computer Leases and the Store Contracts, the parties to the
Computer Leases and the Store Contracts (other than Seller) have
no charge, Lien, claim, defense or offset of any kind under any
of the Computer Leases or the Store Contracts, as the case may
be, or otherwise against Seller or, the Transferred Assets.
6.1.9 Physical Condition of Stores and F, F & E.
Except as described on Schedule 6.1.9 attached hereto, all of the
Stores, the Rental Items and the F, F & E, including, without
limitation, the roofs and structural elements thereof and the
heating, ventilation, air conditioning, plumbing, electrical,
mechanical, sewer, waste water, storm water, and other systems or
facilities included therein, are in good operating condition and
repair and structurally sound with no known defects other than
those readily observable during the Due Diligence Investigation.
Seller has provided Purchaser with copies of all written evidence
which Seller has in its possession regarding any such defects
(irrespective of whether such defects are readily observable
during the Due Diligence Investigation). All of the Stores, the
Store Real Property, the Shopping Centers and all of the F, F & E
are free from any and all Polluting Substances.
6.1.10 Store Compliance with Laws.
6.1.10.1 None of the Stores or the Shopping
Centers, nor the use or occupancy of the Stores or of the
Shopping Centers is in violation of any building, zoning,
land use or other law, ordinance, code, rule or regulation,
and neither Seller nor Shareholder has received any notice
from any governmental or regulatory body or other person or
entity asserting any violation of any such law, ordinance,
code, rule or regulation or requiring any work, repairs,
construction, alterations or installations on or in connec-
tion with said property which has not been complied with.
The continued use, occupancy and operation of the Stores and
the Shopping Centers as currently used, occupied and
operated, do not constitute a non-conforming use under any
law. Neither Seller nor Shareholder has any knowledge of
any pending or anticipated change in any real property law
which could have a material adverse effect upon ownership,
alteration, use,occupancy or operation of the Stores or the
Shopping Centers or any portion thereof. Neither Seller nor
Shareholder is a party to any dispute with any governmental
authority having jurisdiction over any of the Stores
regarding the application of any real property law to such
property.
6.1.10.2 All certificates of occupancy, permits,
licenses, franchises, approvals and other authorizations of
all governmental authorities having jurisdiction over the
Stores, and from all insurance companies and fire rating or
other similar boards and organizations, required to have
been issued to Seller or the lessors under the Store Leases
to enable the Stores to be lawfully occupied and used for
all of the purposes for which they are occupied and used
(collectively, the "Occupancy Certificates and Permits")
have been lawfully issued and are in full force and effect
as of the date hereof. Neither Seller nor Shareholder has
received or been informed by any third party of the receipt
by it of any notice from any governmental authority having
jurisdiction over the Stores or any applicable insurance
companies and/or fire rating or similar boards or organiza-
tions threatening a suspension, revocation, modification or
cancellation of any Occupancy Certificates and Permits and
to the best of the knowledge of Seller and Shareholder
(after due investigation) there is no basis for the issuance
of any such notice or the taking of any such action.
6.1.10.3 The Stores are not in violation of any
federal, state or local law, ordinance or regulation in
regard to industrial hygiene or occupational safety or to
the environmental conditions on, under, above or about the
Stores, the Store Real Property or the Shopping Centers,
including, without limitation, soil and ground water
conditions. Except as described on Schedule 6.1.10.3
attached hereto, Seller and Shareholder have not and no
third party has, used, generated, manufactured, stored or
disposed of on, under, above, or about the Stores, the Store
Real Property, or the Shopping Centers, or transported to or
from the Stores and said real property, any Polluting
Substances, other than in compliance with all applicable
federal, state and local laws, ordinances and regulations
and there are no Polluting Substances located in, on or
under the Stores, the Store Real Property or the Shopping
Centers except as otherwise permitted in compliance with
applicable federal, state and local laws, ordinances and
regulations.
6.1.10.4 To the best knowledge of Seller and
Shareholder (after due investigation) none of the Stores
suffers from "sick building" syndrome and to the best
knowledge of Seller and Shareholder (after due investiga-
tion), no employee or other third party has claimed to have
suffered from "sick building" syndrome as a result of having
been in any of the Stores.
6.1.11 Inventory. Each item of Inventory is unused
(except for non-promotional play copies and the Rental Items).
6.1.12 Offices and Places of Business. Since its
incorporation Seller has not established any offices or places of
business outside of the States of Utah and Montana and has not
done business under any name other than "Pegasus Music and
Video", "Pegasus Records and Tapes" or "Pegasus"; and Schedule
1.2.5 attached hereto, sets forth all Store Service Marks. For
purposes of applicable bulk transfer law, Seller's chief execu-
tive office is in the State of Utah.
6.1.13 Employee Obligations. As of the Closing Date
and each Delayed Closing Date, Seller will not be in breach of or
default under any undertakings or obligations, including, without
limitation, the salaries and other payments (including, without
limitation, severance pay, vacation pay, sick pay, back pay,
health insurance, worker's compensation and other benefits) due
to or for the account of Seller's employees and agents pursuant
to any oral, written or implied contracts or otherwise.
6.1.14 Labor Agreements. There are no union, labor
or collective bargaining agreements or contracts, whether oral,
written or implied, pertaining to or affecting the business of
Seller or any employment agreements, written or (to the best
knowledge of Seller and Shareholder (after due investigation))
oral, with any employee of Seller or of any other persons or
entities performing services in connection with the operation or
maintenance of the Transferred Assets. To the best knowledge of
Seller and Shareholder (after due investigation), there is no
labor organization which has the right to, or claims to have the
right to, represent any employee of Seller or any other person
performing services in connection with the operation or mainte-
nance of the Transferred Assets. Seller has heretofore or
concurrently herewith delivered to Purchaser true and complete
copies of its credit policies and credit data with respect to its
customers and all of its employee manuals, handbooks, policies
and benefits. All such policies are in full force and effect,
have not been amended or modified in any respect whatsoever, and
have been followed in all material respects by Seller. Since the
commencement of operations of Seller there has not been any
strike, work stoppage, interruption, slow-down or other occur-
rence, event or similar labor disturbance in connection with the
operation of Seller's business, and, to the best knowledge of
Seller and Shareholder (after due investigation), no strike, work
stoppage, interruption, slow-down or other such occurrence,
event, condition, or disturbance is threatened.
6.1.15 ERISA. Except as described on Schedule
6.1.15, Seller is not a party to, nor is required to make
employer contributions to, any "employee pension benefit plan"
(within the meaning of Section 3(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) or any
"employee welfare benefit plan" (within the meaning of Section
3(1) of ERISA) or any other pension, profit sharing, retirement,
deferred compensation, bonus, stock purchase, severance, hospi-
talization, medical insurance, life insurance or other employee
benefit plan, agreement, arrangement or understanding maintained
for the benefit of employees involved in the management or
operation of its business.
6.1.16 Employee Claims. Except as described on
Schedule 6.1.16 attached hereto, neither Seller nor Shareholder
has received written notice of any workers' compensation,
unemployment, discrimination or overtime claim; Seller is not in
violation or alleged violation, and neither Seller nor Share-
holder has received any written notice of any alleged violation,
committed any act or omitted to perform any act which upon the
passage of time will cause Seller to be in violation of, any
applicable federal, state, local or foreign law, ordinance,
regulation, order, judgment, injunction, award, decree, license,
permit, authorization or other requirement of any governmental or
regulatory body, law enforcement agency or organization, court or
arbitrator, including, without limitation, any federal, state or
local laws, ordinances, regulations or requirements relating to
the pollution or protection of the environment.
6.1.17 Accuracy and Completeness of Documents. The
copies of the Store Leases, the Computer Leases, the Store
Contracts, the Occupancy Certificates and Permits, the Schedule
of Original Costs, the Inventory Certificate, the Schedule of
Gift Certificates and Merchandise Credits, the Revenue Schedule
and all financial statements and other financial information of
Seller provided to Purchaser or the Auditors, as the case may
be, are (or when delivered will be) true, correct, complete and
accurate. None of the Store Leases, Computer Leases, Store
Contracts or Occupancy Certificates and Permits have been amended
(except pursuant to amendments, copies of which have been
delivered to Purchaser), or revoked and they represent binding
and enforceable agreements against the parties thereto.
6.1.18 Gift Certificates and Merchandise Credits.
As of the Closing Date or the applicable Delayed Closing Date,
all Gift Certificates and Merchandise Credits will have been
issued by Seller consistent with Seller's past practices and in
the ordinary course of its business.
6.1.19 Fiscal Year of Seller. Seller's fiscal year
ends December 31.
6.1.20 Claims Against Health Insurance Plans. For
the period commencing on January 1, 1993 through the Closing
Date, there have been no "major claims" filed against Seller's
health insurance plans. As used herein the term "major claims"
shall mean a claim or series of related claims exceeding $5,000.
To the best knowledge of Seller and Shareholder (after due
investigation), during the twelve month period immediately
preceding the Closing there has not been any major illnesses for
which claims have been made against Seller's health insurance
plans, such illnesses to include, without limitation, heart
disease, kidney disease, AIDS and cancer.
6.1.21 Hart-Scott-Rodino Compliance. Neither Seller
nor any Affiliate of Seller has sold since February 1, 1993 any
assets to Purchaser, Merrill Lynch Capital Partners, Inc.
("Merrill Partners"), Merrill Lynch & Co., Inc. ("Merrill Lynch")
or any Affiliate of Purchaser, Merrill Partners or Merrill Lynch.
Since February 1, 1993 neither Seller nor any of its Affiliates
has bought and/or sold any securities utilizing the brokerage
services of Merrill Lynch or any Affiliate of Merrill Lynch.
Seller is not an Affiliate of The Record Shop, Inc., a Minnesota
corporation, Mary Ann Levitt and/or Mort Gerber. For purposes of
this Section 6.1.21, the term "Affiliate" means any corporation,
partnership, trust, association, other entity or natural person
who, directly or indirectly, controls, is controlled by or is
under common control with any other corporation, partnership,
trust, association, other entity or natural person.
6.1.22 Absence of Change. As of the Closing Date
and each Delayed Closing Date, no event has occurred or failed to
occur subsequent to Purchaser's inspection of the Transferred
Assets and the Stores which has materially and adversely affected
any of the Transferred Assets or the Stores exclusive of changes
in industry and general economic conditions.
6.1.23 Misstatement or Omission of Material Facts.
No representation or warranty by Seller or Shareholder in this
Agreement or in any document, agreement, instrument, certificate,
exhibit or schedule attached hereto or delivered pursuant hereto
contains any untrue statement of a material fact or omits to
state any facts necessary to make the statements or facts
contained herein or therein not misleading.
6.2 Purchaser Represents, Warrants and Covenants to Seller
that:
6.2.1 Absence of Conflicts. Except as disclosed on
Schedule 6.2 attached hereto, the execution and delivery of this
Agreement, the Service Mark License, the New Leases and any
Management Agreement by Purchaser and the consummation of the
transactions contemplated hereby to be performed by Purchaser (i)
do not and will not result in the breach of any of the terms or
conditions of, or constitute a default under, any contract,
agreement, lease, commitment, indenture, mortgage, note, security
interest, bond, license, pledge, encumbrance, lien, claim,
charge, right, option or other instrument or obligation to which
Purchaser is now a party; (ii) to the best knowledge of Purchaser
(after due investigation), do not and will not violate any law,
statute, ordinance, rule or regulation of any administrative
agency or governmental body to which Purchaser is subject, or any
order, writ, injunction, judgment or decree of any court, admini-
strative agency or governmental body binding upon Purchaser, or
any decision or finding of any arbitration panel binding upon
Purchaser; (iii) do not require the consent, authorization or
approval of any third person or administrative agency or govern-
mental body to which Purchaser is subject.
6.2.2 Corporate Existence and Authority. Purchaser
is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, is authorized
to transact business in the State of California and has full
corporate power and authority to own its assets and to carry on
its business as it is now being conducted. This Agreement will
have been duly executed and delivered by Purchaser and will
constitute its valid and legally binding agreement and obligation
prior to the Closing, except to the extent that enforceability
may be limited by applicable bankruptcy, insolvency or similar
laws affecting the enforcement of creditors' rights generally,
and subject, as to enforceability, to general principles of
equity (regardless of whether enforcement is sought in a court of
law or equity). This Agreement, the New Leases, the Service Mark
License and any Management Agreements and their performance by
Purchaser will have been duly authorized by all requisite
corporate action of Purchaser prior to the Closing. Purchaser
has the full power, right, legal capacity and will have prior to
the Closing authority to make, execute and deliver this Agree-
ment, the Service Mark License and any Management Agreements and
to perform their obligations hereunder.
6.2.3 Misstatement or Omission of Material Fact.
No representation or warranty by Purchaser in this Agreement or
in any document, agreement, instrument, certificate, exhibit or
schedule delivered pursuant hereto contains any untrue statement
of a material fact or omits to state any facts necessary to make
the statements or facts contained herein or therein not mis-
leading.
6.3 Accuracy on Closing Date and each Delayed Closing Date.
Each of the representations and warranties by Purchaser, Seller
and Shareholder set forth in this Agreement and in any document,
agreement, instrument, certificate, exhibit or schedule referred
to herein or delivered pursuant hereto shall be deemed renewed
and made again at the Closing and each Delayed Closing (if appli-
cable to the Transferred Assets which are the subject of such
Delayed Closing) as if made at such times, and shall survive the
Closing and each Delayed Closing and any investigation conducted
by or on behalf of the parties hereto whether before or after the
Closing Date or each Delayed Closing Date, including, but not
limited to, the investigations and audits contemplated by Section
7 hereof.
7. ADDITIONAL COVENANTS.
7.1 Purchaser's Due Diligence Investigation.
7.1.1 Seller acknowledges that Purchaser has
conducted, and intends to conduct, at Purchaser's expense,
investigations concerning Seller and its assets, liabilities,
financial condition, business and affairs, the Transferred Assets
and all other matters reasonably related to the transactions
contemplated by this Agreement, including, without limitation,
(i) one or more physical inspections of the Stores, F, F & E,
Computer Equipment and Inventory, (ii) a review of all books,
records, financial statements, agreements, documents and other
materials and information reasonably related to the transactions
contemplated by this Agreement, including, without limitation,
all Store Leases, the Computer Leases, Store Contracts and the
St. George Sublease (collectively, the "Due Diligence Materi-
als"), (iii) an environmental audit of the Stores and the Store
Real Property regarding the presence of unlawful hazardous
materials under or within the Stores, the Store Real Property or
the common areas of the Shopping Centers (to the extent permitted
by the Store Leases), (iv) an environmental audit of the Stores
and the Store Real Property regarding the presence of asbestos
under or within the Stores, the Store Real Property or the common
areas of the Shopping Centers (to the extent permitted by the
Store Leases), (v) a determination that Purchaser will not have
any "successor liability" for any debts, obligations and liabili-
ties of Seller (other than the Assumed Obligations) and (vi) a
review of all of "Seller's Schedules" (as hereafter defined)
(collectively, the "Due Diligence Investigation").
7.1.2 Prior to Closing, and thereafter with respect
to any of the Transferred Assets the sale of which is consummated
at a Delayed Closing, Seller agrees to cooperate fully with all
such investigations conducted by or on behalf of Purchaser
hereunder, and shall provide Purchaser and its authorized
representatives with reasonable access (a) to all Stores, Store
Real Property, Computer Equipment, F, F & E and Inventory, (b) to
all Due Diligence Materials, and (c) to all employees, agents,
attorneys and current and former accountants of Seller. Seller
shall furnish to Purchaser such financial information, operating
data and other information concerning Seller's operations as
Purchaser may reasonably request from time to time. Purchaser
shall complete its Due Diligence Investigation as soon as
reasonably practical, provided, however, Seller acknowledges that
certain aspects of the Due Diligence Investigation, including
(without limitation) all environmental audits conducted pursuant
to this Section 7.1 and review and examination of the books and
records of Seller may not be completed prior to the Closing.
Notwithstanding the foregoing to the contrary, with respect to
any of the Transferred Assets not transferred to Purchaser at the
Closing, Purchaser may conduct further Due Diligence Investiga-
tions prior to the applicable Delayed Closing at which said
Transferred Assets are transferred to Purchaser.
7.1.3 After the Closing and each applicable Delayed
Closing, Purchaser may conduct an audit of the Revenue Schedule,
the Schedule of Original Costs and the Schedule of Gift Certifi-
cates and Merchandise Credits and of Seller's books and records
to determine the amount of Other Inventory. Seller agrees to
fully cooperate with Purchaser and its authorized representatives
in connection with such audits and to give Purchaser and its
representatives reasonable access to all of the books and records
of Seller in order to permit Purchaser to conduct such audits.
7.2 Store Leasehold Consents.
7.2.1 Seller shall take all actions reasonably
necessary to obtain the Store Leasehold Consents from each of the
lessors under the Store Leases other than the Store Leases for
the Affiliated Stores in substantially the form attached hereto
as Exhibit A; provided, however, that (a) obtaining the Store
Leasehold Consents in the attached form shall not be a condition
to the Closing or any Delayed Closing and Purchaser shall be
obligated to purchase any Store Leasehold Interest for a Store
Lease other than a Store Lease for an Affiliated Store, and any
Inventory (to the extent not previously transferred to Purchas-
er), F, F & E, Computer Leases, Store Contracts or Plans related
to, or located in, said Store subject to such Store Leasehold
Interest, in the event that (i) the applicable lessor executes
and delivers a Store Leasehold Consent containing all of the
applicable Essential Provisions in accordance with Section
2.5.1.1 hereof and which Store Leasehold Consent does not require
as a condition of obtaining lessor's consent to the transfer of
said Store Leasehold Interest, Purchaser's agreement either to
relocate the Store or expand or reduce the size of the Store or
both, and (ii) Purchaser would otherwise be required to purchase
the applicable Store Leasehold Consent pursuant to the terms of
this Agreement, and (b) Seller shall not be required to commence
litigation in order to obtain such Store Leasehold Consents.
Purchaser may also attempt to renegotiate the Store Leases with
the various lessors thereunder and Seller agrees to cooperate
with Purchaser in requesting such changes; provided, however,
that this transaction is only contingent on Purchaser renegoti-
ating the terms of the Store Leases other than the Store Leases
for the Affiliated Stores, with respect to the Essential
Provisions and Purchaser shall not condition its request for
consent to assignment of a Store Lease on any terms which are not
Essential Provisions or communicate to any lessor that this
transaction is contingent on lessor's agreement to renegotiate
its Store Lease with respect to any terms which are not Essential
Provisions. Notwithstanding the foregoing, the parties
acknowledge and agree that Purchaser may attempt to obtain the
Store Leasehold Consents as well as non-disturbance agreements
from the lessors' secured lenders on behalf of Seller (provided
that obtaining any or all of said non-disturbance agreements
shall not be a condition of the Closing or any Delayed Closing)
by delivering a letter to the relevant lessor requesting the
Store Leasehold Consents (and any changes or modifications to the
Store Lease which Purchaser may desire) and the non-disturbance
agreements; provided, however, that Seller shall approve all
correspondence and written materials transmitted by Purchaser to
the lessors before the same are transmitted, such approval not to
be unreasonably withheld or delayed. Purchaser agrees to provide
Seller with at least 48 hours notice prior to Purchaser's initial
meeting with any lessor (other than KSG) in connection with the
negotiation of any Store Leasehold Consent in order to provide
Seller with the opportunity to participate in such meeting.
Purchaser shall be under no obligation to give Seller any notice
of any subsequent meetings with said lessors. Purchaser shall
act reasonably and professionally in its written and oral
communications with all lessors and in a manner designed to
secure the lessor's consent to this transaction. Purchaser also
agrees to pay all of the costs of the lessors under the Store
Leases for the Stores other than the Affiliated Stores in
connection with obtaining the Store Leasehold Consents (the
"Lessor Costs") and renegotiate the Store Leases, provided that
the Lessor Costs in connection with obtaining the Store Leasehold
Consents shall not exceed $1,000 for any Store or $7,000 in the
aggregate. In the event that in connection with obtaining any
Store Leasehold Consents, the Lessor Costs exceeds $1,000 (or
exceeds $7,000 in the aggregate) and Purchaser elects not to pay
the additional cost, the related Store Leasehold Interest shall
not be deemed to be included within the Transferred Assets
(resulting in an appropriate reduction in the Transferred Assets
Purchase Price) unless Seller elects to pay, and in fact pays,
all Lessor Costs with respect to such Store Leasehold Consents in
excess of $1,000 per Store Lease (or in excess of $7,000 in the
aggregate). Notwithstanding anything in this Section 7.2.1 to
the contrary and for the avoidance of doubt Purchaser shall have
no obligation to purchase any Store Leasehold Interest for an
Affiliated Store and the related Inventory, F, F & E, Computer
Leases, Store Contracts or Plans unless all of the conditions set
forth in Section 4.11 regarding the New Leases and the Termina-
tion Agreements are satisfied or waived by Purchaser in writing.
7.2.2 In the event that a lessor of any of the
Store Leasehold Interest requires as a condition to its consent
to the transfer of said Store Leasehold Interest or its grant of
an Extension that Purchaser agree to either relocate the Store
which pertains to such Store Leasehold Interest or expand or
reduce such Store or both, Purchaser shall not be obligated to
purchase such Store Leasehold Interest (and the F, F & E,
Inventory, Computer Leases, Store Contracts and Plans located in
or pertaining to the Store which is the subject of such Store
Leasehold Interest) or accept and pay for the Extension at the
original price calculated in accordance with this Agreement. In
such event, Purchaser shall make a written offer to Seller to
purchase such Store Leasehold Interests (and the F, F & E,
Inventory, Computer Leases, Store Contracts and Plans located in
or pertaining to the Store which is the subject of such Store
Leasehold Interest) or accept and pay for the Extension at a
reduced price to be determined by Purchaser in its sole and
absolute discretion. In the event Seller elects not to accept
Purchaser's offer at such reduced price, Purchaser shall have no
obligation to purchase said assets or accept and pay for said
Extension.
7.3 Consents to Assignment of Computer Leases and Store
Contracts. Seller shall take all actions reasonably necessary to
obtain from each of the other parties to the Computer Leases and
the Store Contracts (i) the consents to the assignment of all
Computer Leases and Store Contracts to Purchaser and (ii)
estoppel certificates, dated the Closing Date, in substantially
the forms attached hereto as Exhibits J and K; provided, however,
that Seller shall not be required to commence litigation in order
to obtain such documents.
7.4 Tax Liability Releases. Seller will cooperate fully
with Purchaser as reasonably requested by Purchaser in connection
with obtaining all relevant releases from appropriate federal,
state, local and/or municipal taxing authorities whereby Purchas-
er is released from any and all liability for unpaid Current
Property Taxes, Sales Taxes and Payroll Taxes (collectively, the
"Tax Liability Releases").
7.5 Operation of Seller's Business. Without prior written
consent of Purchaser, Seller shall not sell, lease, abandon,
assign, transfer, license, use or otherwise dispose of any item
of the Transferred Assets; or enter into any contracts, agree-
ments, understanding or transaction other than in the ordinary
course of Seller's business; or commit any act which would result
in the failure or breach of Seller's or Shareholder's representa-
tions and warranties made herein, or which would render any of
them untrue, or which would or may diminish the value of the
Transferred Assets to Purchaser. Without limiting the generality
of the foregoing, Seller shall not amend, modify, supplement,
terminate or rescind any of the Store Leases, Computer Leases or
Store Contracts, without the prior written consent of Purchaser
except as expressly provided herein to the contrary. Notwith-
standing the foregoing, Purchaser hereby consents to the sale by
Seller prior to the Closing of all or a portion of the Inventory
for Seller's account prior to the Closing in the ordinary course
of business of Seller.
7.6 Maintenance of Transferred Assets. Seller shall keep
and maintain in operating condition, substantially equivalent to
the condition existing on the date of this Agreement, the Stores
and each item of F, F & E, Computer Equipment and Inventory,
reasonable wear and tear excepted.
7.7 Seller's Employees.
7.7.1 Seller shall use reasonable efforts to keep
available to Purchaser the services of Seller's Store and field
operation personnel (although nothing herein shall be deemed to
require or obligate Purchaser to employ or retain any such
employees), and to preserve for Purchaser the goodwill of
customers, clients and all others having business relations with
Seller.
7.7.2 Seller shall make available to Purchaser true
and complete copies of (i) all of Seller's employee books and
records (subject to the prior written consent of the affected
employee) as soon as practical after Purchaser's reasonable
request, and (ii) all of Seller's books and records relevant to
any claim, suit or proceeding against Purchaser threatened,
commenced, made or brought by any third party in connection with
or arising out of the operation of the Stores or the Transferred
Assets as soon as practicable after Purchaser's request therefor.
7.7.3 Seller shall not enter into any union, labor
or collective bargaining agreement or contract or employment
contract pertaining to or affecting any of the Transferred Assets
or the conduct of business of Seller as presently being con-
ducted, whether or not with a union or other bargaining agent
representing employees of Seller or with an employee directly.
Seller shall be solely responsible for and shall pay to its
employees all accrued salaries, severance pay, vacation pay, sick
pay, back pay and other benefits and compensation accrued through
or owing as of the Closing and each Delayed Closing.
7.7.4 Immediately prior to the Closing, Seller
shall terminate all Store employees working in Stores, the
possession of which is delivered to Purchaser on the Closing
Date. Immediately prior to any Delayed Closing, Seller shall
terminate all Store Employees working in Stores, the possession
of which is delivered to Purchaser on the applicable Delayed
Closing Date.
7.7.5 Seller hereby agrees to offer to all of its
employees and former employees, for the maximum period required
by "COBRA" (as defined below), all benefits which an individual
would be entitled to receive if such individual was a qualified
beneficiary under or an employee covered by the provisions of the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA").
7.8 Maintenance of Insurance. Seller shall continue to
maintain in full force and effect all policies of insurance now
in effect or renewals or appropriate replacements thereof, and
shall give all notices and present all claims under all policies
of insurance in due and timely fashion until the Closing. After
the Closing Seller shall maintain all general liability and
products liability policies, which Seller currently has, until
September 1, 1994.
7.9 Maintenance of Books and Records. Both prior to and
for the five years after the Closing, Seller (or Shareholder in
the event that Seller has been dissolved) shall keep and shall
make available to Purchaser for inspection and copying upon
reasonable notice all of its books and records and the materials
referred to in Sections 7.1 and 7.2. For the avoidance of doubt,
after the Closing Seller shall permit Purchaser and Purchaser's
accountants and attorneys reasonable access to all books and
records of Seller for the purpose of preparing any financial
statements and information which may be required under applicable
laws, rules or regulations, including, without limitation, all
federal and state securities laws and all rules and regulations
which may be promulgated from time to time by the SEC or any
state agency or authority having jurisdiction over Purchaser and
its affiliates, which financial statements and information may be
filed with the SEC or any other federal and state agency or
authority or otherwise disseminated to the public. Purchaser may
also file with the SEC or other federal and state agency or
authority or otherwise disseminate to the public any of Seller's
audited financial statements upon Purchaser's obtaining the
consent of the auditors who rendered the opinion in connection
with said financial statements and Seller will cooperate with
Purchaser in seeking to obtain said auditor's consent. Seller
will also cooperate with Purchaser, at Purchaser's expense, in
connection with the preparation of all of said financial state-
ments and information.
7.10 Payment of Taxes. Seller shall duly and timely file
all tax returns required to be filed by it and will promptly pay
all taxes, assessments and governmental charges which shall be
due and payable; Seller shall not enter into any agreement,
waiver or arrangement providing for an extension of time with
respect to the filing of any tax return or the payment or assess-
ment of any tax, governmental charge or deficiency; and Seller
shall withhold from each payment to each of its employees the
amount of all taxes or other sums (including, but not limited
to, United States federal income taxes and any applicable state
or local income taxes or federal Insurance Contribution Act
taxes) required to be withheld therefrom and will pay the same to
the proper tax-receiving officers prior to their respective due
dates.
7.11 Compliance with Bulk Transfer Laws. Purchaser and
Seller agree to cooperate fully with the other party in connec-
tion with the compliance with all applicable bulk transfer laws
of the States of Utah and Montana.
7.12 Removal of Certain Inventory. Within 14 days after the
later of the date on which Purchaser and Seller agree in writing
as to the character of such Inventory as Current Catalog Inven-
tory, Non-Returnable Inventory or Other Inventory or the date on
which the Arbitrator issues his or her decision in connection
therewith, Seller shall remove, at its sole cost and expense, all
Non-Returnable Inventory and Other Inventory not purchased by
Purchaser pursuant to the terms of this Agreement from all Stores
(other than those Stores which Seller will continue to operate
after the Closing or applicable Delayed Closing) and all other
assets located in said Stores that do not constitute Transferred
Assets. All Non-Returnable Inventory or Other Inventory and
other assets not purchased pursuant to the terms of this Agree-
ment and not removed by Seller from the Stores (other than those
Stores which Seller will continue to operate after the Closing or
applicable Delayed Closing) within said 14-day period shall be
deemed sold to Purchaser for no additional consideration.
7.13 Repair of Damaged Transferred Assets. If any item of
the Transferred Assets (other than items of Inventory) shall be
lost, sold or otherwise disposed of, damaged (ordinary wear and
tear excepted) or stolen prior to the Closing, Seller shall
repair or replace the same to the satisfaction of Purchaser (with
repairs or replacements of equal quality to the item in its
condition as of the date of this Agreement) prior to the Closing
or delete the same from the Transferred Assets with an appropri-
ate reduction in the Transferred Assets Purchase Price to be
agreed upon by Purchaser and Seller.
7.14 Inventory Audit. Seller agrees that not later than
5:00 p.m. (local time) on the day before the Closing Date or
applicable Delayed Closing Date, Seller shall close all Stores,
possession of which are being transferred to Purchaser at the
Closing or applicable Delayed Closing, in order to conduct the
audit of the Inventory located therein contemplated by this
Agreement. Within two days after the Inventory Auditor's
completion of said audit, Seller shall deliver to Purchaser the
applicable Schedule of Original Costs.
7.15 Gift Certificates and Merchandise Credits.
7.15.1 From and after the Closing, Purchaser shall
only issue gift certificates and merchandise credits and deposits
accepted for special orders on forms which clearly and unambi-
guously state that they have not been issued by any Store,
possession of which at the time of the issuance of such gift
certificate or merchandise credit or deposit has been previously
delivered to Purchaser. Purchaser shall have the right to
approve, which approval shall not be unreasonably withheld, the
form of all gift certificates and merchandise credits and
deposits issued by Seller after the Closing in order to insure
Seller's performance with the terms of this Section.
7.15.2 In the event that Seller continues after
the Closing to own and operate any of the Retained Stores,
Purchaser shall honor all of the Gift Certificates and Merchan-
dise Credits (the "Seller Gift Certificates and Merchandise
Credits") issued by Seller at the Retained Stores during the
Transition Period if during said period Seller continues to use
any of the Store Service Marks and provided such Seller Gift
Certificates and Merchandise Credits are issued by Seller in the
ordinary course of its business and consistent with Seller's
past practices. Seller shall honor any gift certificates and
merchandise credits and deposits accepted for special orders
issued by Purchaser from any of the Stores or any of Purchaser's
other retail stores at which Purchaser is using any of the Store
Service Marks (the "Purchaser Gift Certificates and Merchandise
Credits") provided such Purchaser Gift Certificates and Merchan-
dise Credits are issued by Purchaser in the ordinary course of
its business and consistent with past practices of Purchaser. No
less frequently than once every thirty days after the Closing and
at each of the Delayed Closings, Purchaser shall reimburse Seller
the amount of any of the Purchaser Gift Certificates and Merchan-
dise Credits honored by Seller against delivery to Purchaser of
the original Purchaser Gift Certificates and Merchandise Credits
so honored and Seller shall reimburse to Purchaser the amount of
the Seller Gift Certificates and Merchandise Credits honored by
Purchaser against delivery to Seller of the original Seller Gift
Certificates and Merchandise Credits so honored. Seller agrees
that during the Transition Period it will give merchandise
credits or exchanges at all Retained Stores at which it is using
any of the Store Service Marks, for any merchandise sold after
the Closing at retail to the public by Purchaser at any of the
Stores or any of Purchaser's other retail stores at which it is
using any of the Store Service Marks, in accordance with Purchas-
er's past practices and in the ordinary course of Purchaser's
business which is defective, such merchandise credits and
exchanges to be given in accordance with Seller's usual policies
in connection therewith which Seller may from time to time, in
its sole and absolute discretion, change, amend or modify.
7.16 Operation of Stores by Seller using the Store Service
Marks. From and after the Closing Seller shall take all steps
reasonably requested by Purchaser to notify all current and
future creditors of Seller and creditors of all assignees of
Seller (collectively, the "Seller's Assignees"), other than
Purchaser, and to notify the general public that Seller and the
Seller's Assignees are not affiliated in any way with Purchaser
notwithstanding the fact that Purchaser, Seller and the Seller's
Assignees are concurrently using some or all of the Store Service
Marks.
7.17 Management Agreements. With respect to up to seven of
the Store Leases (other than Store Leases pertaining to the
Affiliated Stores), in the event Seller is unable to deliver at
the Closing the requisite Store Leasehold Consents, Purchaser and
Seller shall mutually determine which of said Stores, if any,
will be the subject of a Management Agreement, in which event
Purchaser and Seller will jointly prepare Schedule 4.7. In the
event the parties do not mutually agree on the Stores, if any,
which will be the subject of Management Agreements, Seller may at
its election continue to operate said Stores as Retained Stores.
7.18 KSG. Shareholder agrees to cause KSG to enter into the
Lease Termination Agreements and the New Leases.
8. INDEMNIFICATION OF PURCHASER.
8.1 Notwithstanding the Closing, and regardless of any
investigation at any time made by or on behalf of Purchaser or of
any knowledge or information that Purchaser may have, Seller and
Shareholder jointly and severally agree to, and hereby do, fully
indemnify, defend and save and hold Purchaser harmless at all
times in the event that Purchaser shall at any time or from time
to time suffer any damage, liability, loss, cost, expense, claim,
settlement or causes of action (including all reasonable attor-
neys' fees) arising out of, resulting from or in connection with,
or shall pay or become obligated to pay any sum on account of,
any and every "Event of Purchaser Indemnification." As used
herein, an "Event of Purchaser Indemnification" shall mean any
one or more of the following: (i) any untruth or any inaccuracy
in any representation of Seller or Shareholder or the breach of
any warranty of Seller or Shareholder; (ii) the breach of any
other term, provision, covenant or agreement on the part of
Seller or Shareholder to be performed or observed hereunder;
(iii) any other misrepresentation by Seller or Shareholder in, or
omission by Seller or Shareholder from, any statement, certifi-
cate, schedule, exhibit or other document furnished pursuant to
this Agreement by Seller or Shareholder, an officer of Seller or
other authorized agent of Seller or Shareholder; (iv) any and all
debts, liabilities and obligations of Seller (whether matured,
unmatured, contingent or otherwise and whether or not subsequent-
ly discharged in any bankruptcy case or proceeding or otherwise)
which do not constitute an "Assumed Obligation," including,
without limitation, any debts, liabilities or obligations of
Seller arising or accruing as a result of the ownership or
operation of Seller's business, or under or in connection with
any of the Store Leases, Computer Leases or Store Contracts prior
to the Closing or the applicable Delayed Closing, whether or not
known by Purchaser, Seller, Shareholder or any third party on the
Closing Date or the applicable Delayed Closing Date including,
without limitation, any debts, liabilities or obligations
(whether matured, unmatured, contingent or otherwise and whether
or not subsequently discharged in any bankruptcy case or proceed-
ing or otherwise) resulting from or arising in connection with
(a) Seller entering into the Store Leases, Computer Leases and
Store Contracts including, without limitation, any default under
or breach of any of the Store Leases, Computer Leases or Store
Contracts, whether or not known on the Closing Date or the appli-
cable Delayed Closing Date to Purchaser, Seller or Shareholder or
the other parties to such leases or contracts, or (b) any act or
omission of Seller or Shareholder including, but not limited to,
all acts or omissions which constitute a default under or breach
of any of the Store Leases, Computer Leases or Store Contracts;
(v) any liability, loss, cost, expense, claim, settlement,
payment or obligation to pay arising out of, resulting from or in
connection with the Existing Litigation; (vi) any liability,
loss, cost, expense, claim, or obligation arising out of,
resulting from or in connection with the failure by Seller to
comply with any fraudulent conveyance or transfer, bulk transfer
laws or statutes or other laws or statutes intended to protect
the rights of creditors of Seller, including, without limitation,
the bulk transfer laws of the States of Montana and Utah; (vii)
any liability, loss, cost, expense, claim or obligation to pay
arising out of, resulting from or in connection with any claim by
a lessor under any Store Lease subject to a Management Agreement
or other party to a Computer Lease or Store Contract subject to a
Management Agreement resulting from Seller's failure to obtain
all applicable consents to Purchaser and Seller entering into
said Management Agreement; (viii) any liability, loss, cost,
expense, claim or obligation to pay arising out of, resulting
from or in connection with Seller's business which it continues
to conduct after the Closing or the applicable Delayed Closing at
any of the Retained Stores or otherwise; (ix) any liability,
loss, cost, expense or obligation to pay arising out of, result-
ing from or in any way connected with any Seller's Assignee
(other than Purchaser); (x) any liability, loss, cost, expense or
obligation to pay arising out of, resulting from or in any way
connected with Purchaser being deemed to be the "successor" of
Seller with respect to any acts or omissions of Seller arising
prior to or after the Closing or the applicable Delayed Closing
or with respect to any obligations, debts or liabilities of
Seller; (xi) any liability, loss, cost, expense or obligation to
pay arising out of, resulting from or in any way connected with
Seller continuing to the use of any of the Store Service Marks
after the Closing; (xii) any liability, loss, cost, expense or
obligation to pay arising out of, resulting from or in any way
connected with Seller being in default under or breach of any of
the Store Leases or any other agreement or contract of which it
is a party as a result of Seller's ceasing to use any of the
Store Service Marks after the Closing; and/or (xiii) the presence
or migration of any Polluting Substances in, on, into, under or
from the Stores or in, on, into or from the Real Property or the
Shopping Centers or any real property adjacent thereto before the
Closing or applicable Delayed Closing.
8.2 Whenever any claim shall arise for indemnification
pursuant to Section 8.1, Purchaser shall promptly notify Seller
and Shareholder of the claim and, when known, the facts consti-
tuting the basis for such claim, provided that failure of
Purchaser to provide Seller and Shareholder with such notice
shall not excuse or affect Seller's and Shareholder's indemnifi-
cation obligations under Section 8.1 unless the failure to
provide such notice shall actually prejudice Seller and/or
Shareholder. In the event Seller and Shareholder shall become
obligated to Purchaser pursuant to Section 8.1, or in the event
that any suit, action, investigation, claim or proceeding is
begun, made or instituted as a result of which Seller and
Shareholder may become obligated to Purchaser thereunder, Seller
and Shareholder shall have the right to defend, contest or
otherwise protect against any such suit, action, investigation,
claim or proceeding by one or more counsel reasonably acceptable
to Purchaser. In the event Seller and Shareholder so elect to
defend or contest, Purchaser shall have the right, at its
expense, to participate in such defense, but such defense shall
at all times be conducted by and under the control of Seller and
Shareholder and their counsel. In the event that Seller and
Shareholder elect not to defend, contest or otherwise protect
against any action, investigation, claim or proceeding, Purchaser
shall have the right, at Seller's and Shareholder's expense, to
pursue any such defense, contest or protection.
9. INDEMNIFICATION OF SELLER.
9.1 Notwithstanding the Closing, and regardless of any
investigation at any time made by or on behalf of Seller or of
any knowledge or information that Seller may have, Purchaser
agrees to, and hereby does, fully indemnify, defend and save and
hold Seller harmless at all times in the event that Seller shall
at any time or from time to time suffer any damage, liability,
loss, cost, expense, claim, settlement or causes of action
(including all reasonable attorneys' fees) arising out of,
resulting from or in connection with, or shall pay or become
obligated to pay any sum on account of any and every "Event of
Seller Indemnification." As used herein "Event of Seller
Indemnification" shall mean any one or more of the following: (i)
any untruth or inaccuracy in any representation of Purchaser or
the breach of any warranty of Purchaser; (ii) the breach of any
other term, provision, covenant or agreement on the part of
Purchaser to be performed or observed hereunder; (iii) any other
misrepresentation by Purchaser in, or omission by Purchaser from,
any statements, certificate, schedule, exhibit or other document
furnished pursuant to this Agreement by Purchaser or an officer
or other authorized agent of Purchaser; (iv) Purchaser's
operation of the Stores on and after the Closing, provided that
any such Event of Seller Indemnification is not and is not
attributable to an Event of Purchaser Indemnification or any
actions taken by the lessor under any Store Lease subject to a
Management Agreement or any other party to a Computer Lease or
Store Contract subject to a Management Agreement which actions
are taken as a result or Seller's failure to obtain all appli-
cable consents to Purchaser and Seller entering into said
Management Agreement.
9.2 Whenever any claim shall arise for indemnification
pursuant to Section 9.1, Seller shall promptly notify Purchaser
of the claim and, when known, the facts constituting the basis
for such claim, provided that failure of Seller to provide
Purchaser with such notice shall not excuse or affect Purchaser's
indemnification obligations under Section 9.1 unless the failure
to provide such notice shall actually prejudice Purchaser. In
the event Purchaser shall become obligated to Seller pursuant to
Section 9.1, or in the event that any suit, action, investiga-
tion, claim or proceeding is begun, made or instituted as a
result of which Purchaser may become obligated to Seller there-
under, Purchaser shall have the right to defend, contest or
otherwise protect against any such suit, action, investigation,
claim or proceeding by one or more counsel of its choice reason-
ably acceptable to Seller. If Purchaser so elects to defend or
contest, Seller shall have the right, at its expense, to partici-
pate in such defense, but such defense shall at all times be
conducted by and under the control of Purchaser and its counsel,
and Seller shall be fully bound by the results thereof. In the
event Purchaser elects not to defend, contest or otherwise
protest against any such suit, investigation, claim or proceed-
ing, Seller shall have the right, at Purchaser's expense, to
pursue any such defense, contest or protection.
10. BROKERS.
10.1 Representation by Purchaser. Purchaser represents and
warrants to Seller that it has not engaged the services of a
broker or finder in connection with this Agreement or the trans-
actions contemplated herein.
10.2 Representation by Seller. Seller represents and
warrants to Purchaser that it has not engaged the services of a
broker or finder in connection with this Agreement or the trans-
actions contemplated herein.
11. NOTICES.
All notices, statements or other documents which any party
shall be required or shall desire to give to the other hereunder
shall be in writing and shall be given by said party only by
telecopier, or by courier or personal delivery or by addressing
it as indicated below, and by depositing it certified first-class
mail, postage prepaid, in the U.S. mail. The addresses of the
parties shall be those of which the other party actually receives
written notice pursuant to this Section 11, and until further
notice:
If to Purchaser: Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, CA 90502-1334
Facsimile: (310) 538-2583
Attention: Gregory A. Fisher,
Vice President
With a copy to: Mitchell, Silberberg & Knupp
11377 West Olympic Boulevard
Los Angeles, California 90064
Facsimile: (310) 312-3787
Attention: Roy Shults, Esq.
If to Seller and/or
Shareholder: Pegasus Music and Video, Inc.
901 East Highway 193
Layton, Utah 84040
Facsimile: (801) 771-0890
Attention: Kevin S. Garn,
President
With a copy to: Durbano & Associates
3340 Harrison Blvd., Suite 200
Ogden, Utah 84403
Facsimile: (801) 399-3406
Attention: Douglas M. Durbano, Esq.
Any such communications given by courier or personal
delivery shall be deemed given when delivered if during normal
business hours on a business day (or if not, the next business
day after delivery); any such communications given by telecopier
shall be deemed given when received if during normal business
hours on a business day (or if not, the next business day after
delivery) provided that such telecopy is legible and that at the
time such telecopy is sent the sending party receives written
confirmation of receipt and forwards a copy of the notice by
courier or personal delivery or by mail; and any such communi-
cations sent by certified first-class mail, postage prepaid shall
be deemed given two business days after the date of mailing.
12. ARBITRATION.
12.1 To the extent permitted by applicable law, in the event
any dispute arises between the parties under this Agreement, the
parties hereto agree that arbitration shall constitute the
exclusive remedy for the resolution of any such dispute or
controversy. The arbitration proceedings shall be accomplished
in accordance with the provisions of this Section 12.
12.2 Except as expressly provided herein to the contrary,
the arbitration proceeding shall be conducted under the Commer-
cial Arbitration Rules of the American Arbitration Association in
effect at the time a demand for arbitration is made. To the
extent that there is any conflict between the rules of the
American Arbitration Association and this Section 12, this
Section 12 shall govern and determine the rights of the parties
hereto.
12.3 The arbitration will take place in Salt Lake County,
Utah before a single arbitrator selected as follows: Either party
may request the American Arbitration Association to provide a
list of proposed arbitrators, all of whom must be retired judges,
but who may still be active in the practice of law. The parties
hereto shall then take turns crossing off one name at a time from
such list with the last remaining retired judge being appointed
the arbitrator. The parties hereto shall select by lot which of
them strikes the first name from the list of proposed arbitra-
tors. If the person selected in this method to be the arbitrator
declines or is otherwise unavailable to serve as the arbitrator
of the dispute, the arbitrator shall be selected from the same
list of proposed arbitrators selected in the reverse order to
which those proposed arbitrators' names were struck from the list
until one of such individuals selected to be the arbitrator
accepts the appointment and is able to serve as the arbitrator.
12.4 The arbitrator selected in the manner set forth in
Section 12.3 hereof (the "Arbitrator") shall be requested to
honor the intention of the parties hereto to resolve the disputes
quickly and inexpensively. All decisions shall be made with this
intention in mind. Except as otherwise provided by applicable
law, the decision of the Arbitrator, shall be exclusive, final
and binding on all parties, their successors and assigns as
applicable.
12.5 Except as expressly set forth in this Agreement the
Arbitrator shall determine the manner in which the arbitration
proceeding is conducted, including the time and place of all
hearings, the order or presentation of evidence and all of the
questions that arise with respect to the arbitration proceeding.
12.6 The Arbitrator shall be required to determine all
issues in accordance with Utah law. The rules of evidence
applicable to proceedings at law in the State of Utah will be
applicable to the arbitration proceedings.
12.7 The Arbitrator shall issue a single judgment at the
close of the arbitration proceeding which shall dispose of all of
the disputes of the parties that are the subject of the arbitra-
tion. Either party to the arbitration may seek a judgment from a
court of competent jurisdiction to enforce the award of the
Arbitrator.
12.8 The cost of arbitration, including administrative fees,
fees for a record and a transcript, and the Arbitrator's fees
shall be borne equally by the parties to the arbitration. Each
party shall bear the costs of the fees charged such party by its
own counsel, provided, however, the Arbitrator shall have the
right to award reasonable attorneys' fees to the party determined
by the arbitrator to be the prevailing party.
13. MISCELLANEOUS.
13.1 Best Efforts. Subject to the provisions hereof, each
of the parties hereto shall use its best efforts to bring about
the transactions contemplated by this Agreement as soon as
practicable, including the execution and delivery of all instru-
ments, assignments and assurances, and shall take or cause to be
taken such further or other actions reasonably necessary or
desirable in order to carry out the intents and purposes of this
Agreement. No party will take or knowingly permit to be taken
any action or do or knowingly permit to be done anything in the
conduct of their respective businesses, or otherwise, which would
be contrary to or in breach of any of the terms or provisions of
this Agreement, or which would cause any of the representations
contained herein to be or become untrue or which would prevent
the satisfaction of any condition contained herein.
13.2 Further Assurances. Seller shall promptly, from time
to time after the Closing, execute and deliver to Purchaser such
further bills of sale, conveyances, assignments, assurances or
other instruments of transfer as Purchaser shall reasonably
request in order to vest and confirm the Transferred Assets in
Purchaser.
13.3 Entire Agreement. This Agreement, the Management
Agreements (if any), the Service Mark License, the Store Lease-
hold Consents, the Store Leasehold Assignments, the Computer
Lease Consents, the Lease Termination Agreements, the New Leases
and the Store Contract Consents and other closing documents
contemplated hereunder, contain all of the terms and conditions
agreed upon by the parties hereto with respect to the subject
matter hereof and all prior agreements whether oral or written
between the parties hereto, including (without limitation), that
certain letter of intent, dated October 20, 1993, by and between
Seller and Purchaser and that certain Confidentiality Agreement,
dated September 23, 1993, and that certain Agreement, dated
October 12, 1993, both by and between Purchaser and Seller, are
merged herein and superseded hereby. No other agreements not
specifically referred to herein, oral or otherwise, shall be
deemed to exist or to bind any of the parties hereto. This
Agreement may not be modified or changed except by written
instruments signed by all of the parties hereto. This Agreement
shall inure to the benefit of and be binding upon the parties
hereto and their respective successors and assigns. Nothing in
this Agreement, expressed or implied, is intended to confer on
any person other than the parties hereto and their respective
successors and assigns any rights or remedies under or by reason
of this Agreement, the Service Mark License, any Management
Agreement, the Store Leasehold Consents, the Computer Lease
Consents and the Store Contract Consents and all agreements and
documents specifically referred to herein.
13.4 Captions. All captions and headings are inserted for
the convenience of the parties, and shall not be used in any way
to modify, limit, construe or otherwise affect this Agreement.
13.5 Payment of Expenses. Subject to the provisions of
Sections 2.1.2, 3.8, 7.2, 12.8 and 13.8 hereof, each party hereto
shall bear its own expenses incurred with respect to the prepara-
tion, authorization, execution and performance of this Agreement
and all transactions contemplated hereunder (including, without
limitation, all fees and expenses of agents, representatives,
counsel and accountants).
13.6 Counterparts. This Agreement may be executed in
several counterparts each of which shall be deemed to be an
original and which together shall constitute one and the same
instrument.
13.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Utah, with-
out reference to its principles of conflict of laws.
13.8 Attorneys' Fees. Subject to Section 12 hereof, in the
event suit is brought to enforce or interpret any part of this
Agreement or the rights or obligations of any party to this
Agreement, the prevailing party shall be entitled to recover as
an element of such party's costs of suit, and not as damages,
reasonable attorneys' fees to be fixed by the court. The
prevailing party shall be the party who is entitled to recover
its costs of suit whether or not the suit proceeds to final
judgment. A party not entitled to recover its costs shall not
recover attorneys' fees. No sum for attorneys' fees shall be
counted in calculating the amount of judgment for purposes of
determining whether a party is entitled to recover its costs or
attorneys' fees.
13.9 Confidentiality. Prior to the Closing, without the
prior written consent of Purchaser or Seller, as the case may be
(which consent shall not be unreasonably withheld), neither
Purchaser, Seller nor Shareholder will disclose the contents of
this Agreement or any instrument, certificate or other document
executed in connection herewith or the negotiations with the
parties hereto regarding the subject matter of this Agreement
other than to its officers, directors, employees, attorneys,
accountants and agents who have a reasonable need to know such
information and only upon such individuals agreeing to keep such
information confidential; provided, however, this Section shall
not prohibit (i) any disclosure (including, without limitation,
any dissemination of copies of this Agreement) required by any
applicable law, statute, rule or requested by any governmental
agency (including, without limitation, any federal or state
securities law and any rule or regulation promulgated by the SEC
or any state agency or authority having jurisdiction over the
parties or their affiliates) or any subsequent disclosure once
said information becomes public either pursuant to the consent of
all of the parties hereto or as a result of disclosure by a third
party whose disclosure is not a breach of this Section, (ii)
disclosure of such information to lessors of Seller or to
creditors of any party hereto or any lenders of any party hereto
who require such information as a condition to maintaining or
extending any credit, or (iii) any disclosure of such information
in any financial statements of Purchaser, Seller or affiliates
thereof to the extent such disclosures are required by law
(including, without limitation, any federal or state securities
law and any rule or regulation promulgated by the SEC or any
state agency or authority having jurisdiction over the parties or
their affiliates). If this transaction fails to close for any
reason whatsoever, Purchaser shall immediately return to Seller
all books, records, reports, Store Leases and other information
and documents furnished by Purchaser or relating to the opera-
tions of Seller.
13.10 Exhibits and Schedules. Promptly following the
execution of this Agreement, (i) Purchaser and Seller shall
negotiate in good faith all of the documents to be attached
hereto as Exhibits and Schedules 2.2, 2.5.1.1, and 4.7, (ii)
Seller shall provide to Purchaser all of the Schedules other than
Schedules 2.2, 4.7, 2.5.1.1 and 6.2 ("Seller's Schedules"), and
(iii) Purchaser shall provide to Seller Schedule 6.2 ("Purchas-
er's Schedule"). Following negotiation of the Exhibits and
Schedules 2.2, 2.5.1.1, and 4.7 and delivery of Seller's
Schedules and Purchaser's Schedule, Purchaser and Seller shall
execute an amendment to this Agreement incorporating said
Exhibits and Schedules herein. In the event that the said
amendment is not executed and delivered on or prior to December
7, 1993 due to the fact that the Exhibits and Schedule 2.5.1.1
have not been completed or Seller has failed to deliver all of
Seller's Schedules, Purchaser may terminate this Agreement in its
sole discretion. In the event that said amendment is not execut-
ed and delivered on or prior to December 7, 1993 due to the fact
that the Exhibits and Schedule 2.5.1.1 have not been completed or
Purchaser has failed to deliver Purchaser's Schedule, Seller may
terminate this Agreement in its sole discretion.
Notwithstanding anything to the contrary contained in this
Section 13.10, Seller, Shareholder and Purchaser hereby acknow-
ledge and agree that Schedule 4.7 may be completed, if at all, at
any time prior to the Closing and Schedule 2.2 may be completed,
if at all, after the Closing in accordance with Section 2.2
hereof.
13.11 Fair Market Rental. For purposes of compliance
with HSR, the parties hereto acknowledge that the aggregate rent
which Purchaser will be obligated to pay KSG under each of the
New Leases does not exceed the current fair market rental for
comparable space rented on comparable terms and conditions.
13.12 Facsimile Signatures. This Agreement may be
executed by signing and transmitting the signature page of this
Agreement by facsimile transmission to the other party. Any
party transmitting its signature by facsimile transmission shall
thereafter promptly transmit this Agreement bearing an original,
"live" signature to the other party.
13.13 Hart-Scott-Rodino Compliance. Notwithstanding
anything to the contrary contained herein, in no event shall
Purchaser be obligated to purchase any Inventory hereunder which,
in the reasonable discretion of Purchaser and/or Seller, would
cause the parties to violate HSR.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first above written.
PURCHASER: SELLER:
WHEREHOUSE ENTERTAINMENT, INC., PEGASUS MUSIC AND VIDEO, INC.
a Delaware corporation a Utah corporation
By: /s/ Scott Young By: /s/ Kevin S. Garn
---------------------- ----------------------
Scott Young Kevin S. Garn
Its: President Its: President
By: /s/ Cathy Wood SHAREHOLDER:
----------------------
Cathy Wood
Its: Secretary KEVIN S. GARN
___________________________________
AAA_D045.RV7
AMENDMENT NUMBER 1 TO AGREEMENT OF PURCHASE AND SALE
THIS AMENDMENT NUMBER 1 TO AGREEMENT OF PURCHASE AND
SALE (this "Amendment") is made and entered into as of the 14th
day of January, 1994, by and between WHEREHOUSE ENTERTAINMENT,
INC., a Delaware corporation ("Purchaser"), PEGASUS MUSIC AND
VIDEO, INC., a Utah corporation ("Seller"), and KEVIN S. GARN
("Shareholder"), with reference to the following facts:
A. Purchaser, Seller and Shareholder have entered into
that certain Agreement of Purchase and Sale, dated November 19,
1993 (the "Purchase Agreement").
B. Purchaser, Seller and Shareholder desire that the
Purchase Agreement be amended as hereinafter set forth.
NOW, THEREFORE, the parties hereto hereby agree as
follows:
1. Capitalized Terms. All capitalized terms not
otherwise defined herein shall have the same meanings set forth
in the Purchase Agreement.
2. Amendments to Purchase Agreement.
2.1 The term "Agreement" set forth in the
Purchase Agreement shall refer to the Purchase Agreement as
amended hereby. The reference in Section 2.1.2 of the
Purchase Agreement to Section 3.11 of the Purchase Agreement
is hereby changed to refer to Section 3.10 of the Purchase
Agreement. The reference in Section 4.15 of the Purchase
Agreement to "Section Escrow Agreement" is hereby changed to
"Section 3.8 Escrow Agreement." The reference to "K.S.G.
Properties" in Section 1.2.1 of the Purchase Agreement is
hereby changed to refer to "K.S.G. Properties, Inc."
Whenever the term "KSG" is used in the Agreement it shall
refer to K.S.G. Properties, Inc., North Park Plaza of Provo,
Inc. and/or Shareholder as the context requires. The
reference to the term "Purchaser" in line 1 of Section
7.15.1 shall be changed to refer to "Seller."
2.2 Notwithstanding anything in the Purchase
Agreement to the contrary, the Purchaser will not purchase
from Seller any of the Non-Returnable Inventory or the Other
Inventory of the Seller, however, Purchaser shall purchase
from Seller all of Seller's Sony T-120 HG blank Video
3-packs, posters (flat and rolled) and batteries which are
located in the Stores on the Closing Date; said items shall
be considered part of the Inventory for purposes of the
Agreement. The purchase price for the Sony T-120 HG blank
Video 3-packs, posters and batteries shall be $2.00 per
3-pack, $1.50 per poster and $1.00 per pack of batteries,
respectively.
2.3 Notwithstanding anything in the Purchase
Agreement to the contrary, Purchaser shall not purchase from
Seller any assets currently located in any of the Stores
which Seller is selling on a consignment basis (collectively
the "Consignment Goods"). Promptly after the Closing or any
Delayed Closing, as the case may be, Seller shall remove
from the Stores, the possession of which are being delivered
to Purchaser at the Closing or the Delayed Closing, as the
case may be, all of the Consignment Goods located therein.
2.4 The parties hereto acknowledge and agree that
in the Stores the Seller has certain items of videos and
games which Seller previously used in Seller's rental busi-
ness and which Seller currently offers for sale to the
public (collectively the "Clearance Items"). Notwithstand-
ing anything in the Purchase Agreement to the contrary, the
purchase price for each Clearance Item shall equal $7.00 per
Clearance Item, rather than $17.21 per Clearance Item. The
Clearance Items shall be considered Inventory for purposes
of the Agreement.
2.5 Notwithstanding anything to the contrary in
the Purchase Agreement, the Personal Property Tax Reserve,
the Projected Unpaid Sales Taxes, the Payroll Tax Reserve,
and the projected percentage rent due the Landlords under
the Store Leases for calendar year 1993 shall be credited
against the Transferred Assets Purchase Price to be other-
wise paid to Seller at the Closing and the aggregate of said
credited amounts shall be paid to the Escrow Agent who will
be instructed to disburse those amounts to the applicable
government agency or Landlord, in accordance with joint
written instructions of Purchaser and Seller.
2.6 Seller acknowledges and agrees that it shall
be responsible for the cost of repairing or replacing the
items listed on Schedule 1 to this Amendment up to a maximum
aggregate amount of $27,830 (the "Repair Adjustment
Amount"). At the Closing, Purchaser shall receive a credit
against the Transferred Assets Purchase Price to be
otherwise paid to the Seller at the Closing of the Repair
Adjustment Amount, which credited amount shall be paid to
the Escrow Agent. As Seller or Purchaser incurs the costs
of repairing and replacing the items listed on Schedule 1
attached hereto, it shall obtain reimbursement from the
Escrow Agent of such costs up to the Repair Adjustment
Amount.
2.7 The parties hereto acknowledge that Seller
has sold to the public a certain number of movie punch cards
(the "Movie Punch Cards") pursuant to which the owners
thereof are entitled to a certain number of movie video
rentals. For purposes of the Purchase Agreement, the Movie
Punch Cards shall be considered to be Gift Certificates and
Merchandise Credits which Purchaser will honor to the extent
and on the same terms and conditions as the other Gift
Certificates and Merchandise Credits under the Purchase
Agreement. For purposes of valuing the amount of Movie
Punch Cards honored by Purchaser as Gift Certificates and
Merchandise Credits, Purchaser's standard one day rental
rate for videos and games in effect at the time of such
valuation shall be utilized.
2.8 With respect to all Rental Items which are
not physically located in the Stores at the Closing because
they have been rented to the public (the "Additional Rental
Items"), Purchaser shall purchase those Additional Rental
Items at a purchase price of $17.21 per Additional Rental
Item which as of the Closing Date currently have been rented
to the public for less than two weeks immediately prior to
the Closing Date as set forth on a schedule to be delivered
to Purchaser by Seller not later than one week after the
Closing Date (the "Aging Schedule"). For avoidance of
doubt, Purchaser is not purchasing any Additional Rental
Items which have been rented to the public for a period of
two weeks or more as indicated on the Aging Schedule. The
Additional Rental Items to be purchased by Purchaser shall
be considered Inventory for purposes of the Agreement.
2.9 At the Closing, Purchaser shall receive a
$18,000 credit against the Transferred Assets Purchase Price
to be otherwise paid to Seller at the Closing, which amount
(the "Disputed Payment") shall be paid to Young Systems
Limited ("YSL") to satisfy the amounts, which YSL claims it
is owed by Seller for the right to use certain software of
YSL.
2.10 Section 6.1 of the Purchase Agreement is
hereby amended by renumbering Subsections 6.1.22 and 6.1.23
as 6.1.23 and 6.1.24, respectively, and by adding to said
Section 6.1 a new subsection to read as follows:
"6.1.22 Ownership of the Affiliated Stores.
As of the Closing Date, each of the Affiliated Stores,
the buildings in which they are located and the real
property on which they are situated shall be owned by
the person or corporation which is entering into a New
Lease with Purchaser for said Affiliated Store and said
person or corporation shall have the right and power to
enter into said New Lease with Purchaser."
2.11 Section 8.1 of the Purchase Agreement is
hereby amended by renumbering clause (xiii) as (xv) and by
inserting immediately after clause (xii) the following:
"(xiii) any liability, loss, cost, expense,
claim or obligation arising out of the removal prior to
the Closing of asbestos floor tiles located in the
Store in the University Mall, in Orem, Utah and the
disposal thereof; (xiv) any liability, loss, cost,
expense, claim or obligation arising out of any person
or entity (a "Third Party") asserting that the person
or corporation, which entered into a New Lease with
Purchaser, did not have the right to enter into such
New Lease with Purchaser or any Third Party disturbing
or attempting to disturb Purchaser's quiet enjoyment of
the Affiliated Stores under the New Leases;"
2.12 Notwithstanding anything to the contrary in
any agreement between Purchaser, any of the landlords under
the Leases and Seller or any agreement between Purchaser,
Young Systems Limited and Seller, as between Purchaser and
Seller, Purchaser shall not be liable for any obligations,
liabilities, debts or claims arising or accruing prior to
the Closing under any of the Leases or software licenses
(including, without limitation, any rent or other charges
and payments).
2.13 Shareholder and Seller warrant and represent
to Purchaser that Seller has given Purchaser a true and
complete copy of the St. George Sublease.
2.14 For the avoidance of doubt and notwithstand-
ing anything in the Agreement to the contrary, Purchaser is
not assuming any liability for any claims, debts, awards,
damages, obligations or liabilities arising out of any
lawsuit brought against Jeffrey L. Garn, Seller and/or
Shareholder, including, but not limited to, the lawsuit
referred to in Schedule 6.1.4 to the Agreement, and Share-
holder and Seller shall indemnify and hold Purchaser
harmless from all said claims, debts, awards, damages,
obligations or liabilities pursuant to Section 8 of the
Agreement.
2.15 Subsection 2.5.3(ii) of the Purchase
Agreement is hereby amended by deleting the clause "(b)
within 45 days of the expiration of the existing term of
such Non-Extended Short Term Lease".
2.16 Notwithstanding the fact that no Management
Agreement will be entered into for the Store located in the
Holladay Mall, the interest provisions of Section 2.5.3 of
the Purchase Agreement shall apply.
3. Schedules. Attached hereto are the following
Schedules which are hereby incorporated into the Purchase Agree-
ment by reference:
Schedule 1.2.1 (List of Stores), Schedule 1.2.2
(List of F,F&E), Schedule 1.2.3 (Computer Leases), Schedule
1.2.5 (Store Service Marks), Schedule 1.2.6 (Store Con-
tracts), Schedule 2.5.1.1 (Essential Provisions), Schedule
2.5.1.2 (Short Term Store Leases), Schedule 4.7 (List of
Stores Subject to Management Agreements), Schedule 6.1.1
(Seller's Conflicts), Schedule 6.1.3 (Material Agreements),
Schedule 6.1.4 (Existing Litigation), Schedule 6.1.7 (Store
Lease Defaults), Schedule 6.1.8 (Computer Lease and Store
Contracts Defaults), Schedule 6.1.9 (Physical Condition of
Stores and F,F&E), Schedule 6.1.10.3 (Store Compliance with
Laws), Schedule 6.1.15 (Employee Plans), Schedule 6.1.16
(Employment Claims), and Schedule 6.2 (Purchaser's
Conflicts).
4. Exhibits. The parties hereto agree that none of
the designated exhibits to the Purchase Agreement other than the
ones attached to this Amendment will be created, attached and
incorporated by reference into the Purchase Agreement.
5. Purchase Price Settlement Statement. Attached
hereto as Exhibit 2 is a purchase price settlement statement
setting forth all adjustments to the Transferred Assets
Purchase Price to be paid at the Closing, to which the parties
hereto have agreed.
6. Full Force and Effect. Except as expressly
amended hereby, the Purchase Agreement shall continue in full
force and effect in accordance with the provisions thereof on the
date hereof.
7. Governing Law. This Amendment shall be construed
in accordance with and governed by the laws of the State of Utah,
without giving effect to that State's conflicts of law rules.
8. Counterparts. This Amendment may be executed in
one or more counterparts, each of which is deemed an original,
but all of which together shall constitute one and the same
agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this
Amendment as of the date first above written.
PURCHASER: SELLER:
WHEREHOUSE ENTERTAINMENT, INC., PEGASUS MUSIC AND VIDEO, INC.
a Delaware corporation a Utah corporation
By: /s/ Scott Young By: /s/ Kevin S. Garn
------------------------ -------------------------
Scott Young Kevin S. Garn
Its: Chairman of the Board Its: President
and Chief Executive Officer
By: /s/ Cathy Wood
------------------------
Cathy Wood SHAREHOLDER:
Its: Senior Vice President
and Secretary
KEVIN S. GARN
AAA_D097.RV4
<PAGE>
SCHEDULE 1
MEMORANDUM
Date: January 12, 1994
To: Greg Fisher
From: Larry Price and Jody Robbins
Subject: Pegasus L/L Repair Issues
The following is a list of each of the Pegasus stores and
itemization of the repairs that need to be corrected along with
their estimated costs.
520 Bountiful Replace sprinkler timer $145
Replace broken pipe $75
Repair roof leak $1500
Balance HVAC System $300
Replace ceiling tiles $175
Total $2195
521 Layton Remove/replace damaged
ceiling tile $240
Replace 8 light fixtures $880
Replace damaged lenses $140
Repair electrical panel $160
Install crash bar $500 *
Total $1920
522 St. George Water leak storefront $200
Total $200
523 Orem Replace floor tile $800 *
Total $800
524 So. Towne Replace damaged ceiling tile $225
Paint touchup $200
Repair/repaint wall $350
Replace damaged ceiling tiles $125
Repair door hardware $100
Checkout/balance HVAC system $275
Total $2350
531 Holiday Repair exterior sign $450
Repair wall mirror $75
Relamp/reballast flourescent
lights $580
Repair 40 downlights $600
Replace ceiling tiles $250
Total $1955
532 Ogden Replace damaged ceiling tile $190
Replace A/C stat $140
Repair/replace light fixtures $880
Total $1210
533 Logan Repair neon $300
Repair Knogo $2300
Total $2600
534 Fashion Pl. No issues
Sub Total $25630
$3500 to upgrade electrical service 200 amp
for #529, Fort Union $3500
Grand Total $29130
- 1300
------
$27830
* Deleted
<PAGE>
SCHEDULE 1.2.1
(LEASE DESCRIPTIONS)
THIRD PARTY PROPERTIES
Store Name Mall Name Lease Term Lease Space
Pegasus #2 Layton Hills Apr. 31, 2001 2012 & 2014
#163060 Mall
Pegasus #3 St. George,
#270559 Utah
Pegasus #4 University Jan. 31, 1997 A-5
#163070 Mall
Pegasus #7 South Town Dec. 31, 2002 2250
#153085 Centre
Pegasus #8 Capital Hill Sept. 30, 1996 123
#163095
Pegasus #12 Valley Fair Dec. 31, 2003 E-106
#271208
Pegasus #15 Holladay 1995
#300018 Center
Pegasus #16 Ogden City Nov. 30, 2002 E-6
#300040 Mall
Pegasus 318 Fashion Place Mar. 31, 2003 H-4
#300328 Mall
<PAGE>
SCHEDULE 1.2.1
(LEASE DESCRIPTIONS)
K.S.G. PROPERTIES
Store Name Mall Name Lease Term Lease Space
Pegasus #1 Bountiful, 15 years + 2 7000 sq. ft.
#163008 Utah option of 5 yrs
Pegasus #10 Roy, Utah 15 years + 2 3900 sq. ft.
#270733 option of 5 yrs
Pegasus #11 Provo, Utah 15 years + 2 5500 sq. ft.
#271115 option of 5 yrs 1152 sq. ft.
optional
Pegasus #13 Fort Union 15 years + 2 5500 sq. ft.
#271235 Blvd, Salt options of 5 yrs
Lake City, UT
Pegasus #14 4th South 15 years + 2 3000 sq. ft.
#271247 Salt Lake options of 5 yrs
City, Utah
Pegasus #17 Logan, Utah 15 years + 2 7400 sq. ft.
#300265 option of 5 yrs
<PAGE>
SCHEDULE 1.2.2
(F,F & E)
All furniture, fixtures, equipment and supplies located in the
Stores, the Store Leasehold Interests of which are sold to
Purchaser at the Closing or a Delayed Closing, including, but not
limited to, all computer equipment, security systems, CD players,
cassette players, speakers, televisions, video monitors, facsi-
mile machines, cash registers, CD racks, cassette racks, box set
racks, single racks, boom box racks, video gondolas, display
boards and display stands, as more particularly described on the
attached depreciation schedules of Seller.
<PAGE>
[DEPRECIATION SCHEDULES]
<PAGE>
SCHEDULE 1.2.3
(COMPUTER EQUIPMENT)
<PAGE>
SEE COMPUTER LEASES.
<PAGE>
SCHEDULE 1.2.5
(STORE SERVICE MARKS)
TRADENAMES: Pegasus Music & Video
SERVICE NAMES: None.
TRADENAMES: None.
SERVICE MARKS: None.
LOGOS: See attached logo.
The Pegasus Music & Video name is registered as the name of a
Utah corporation only. It is not registered with any other state
or federal agency or entity.
<PAGE>
[Pegasus Logo]
<PAGE>
SCHEDULE 1.2.6
(STORE CONTRACTS)
Sublease Agreement, dated June 22, 1993 between Pegasus Music and
Video, Inc. and Southwest Entertainment, inc. and Douglas
K.McPhail and Mary-Rose McPhail as guarantors and First Amendment
to Sublease dated August 4, 1993 between the parties to the
Sublease.
All software licenses granted by Young Systems Limited to Seller.
<PAGE>
SCHEDULE 2.5.1.1
ESSENTIAL PROVISIONS
The "Essential Provisions" are agreements by the applicable
lessor to amend the applicable Store Lease in the following
respects, if applicable:
1. To modify any radius restrictions contained in the
applicable Store Lease to permit the operation of stores
currently operated by Purchaser or stores acquired in the
future by Purchaser which would otherwise violate the
applicable radius restrictions.
2. To delete any landlord's lien contained in the applicable
Store Lease.
3. To include reasonable assignment and sublet provisions
allowing Purchaser to assign and/or sublet the applicable
Store Lease generally in accordance with Section 16.9 of the
form of Store Leasehold Consent attached hereto as Exhibit A
to this Agreement (the "Form Store Leasehold Consent").
4. Delete Landlord's right to relocate the Store or terminate
the Store Lease due to expansion, remodeling or enclosure of
the Shopping Center or the building in which the Store is
located.
5. Delete requirements for Tenant to maintain records, books,
etc. on the store premises or in the State of Utah. Tenant
will maintain all records at its headquarters office in
California.
6. Delete any reference to Landlord acting as Tenant's attorney
-in-fact.
7. Without the consent of the Landlord, Tenant or its assignee
may change the trade name under which it does business at
the store to a trade name identical to the one used by a
majority of its other stores in Utah and Montana.
8. Delete Tenant's requirement to remodel the premises during
existing term.
9. Delete the provision pursuant to which Tenant has no right
to the insurance proceeds from Tenant's policies due to
casualty unless Tenant uses proceeds to rebuild the Store.
10. Delete the provision pursuant to which Landlord is not
responsible if it prepares Tenant's advertising copy without
Tenant's consent and Tenant will indemnify Landlord from
damages caused by such advertising.
11. Delete the provision pursuant to which Tenant will contri-
bute to Landlord's cost of construction, remodeling or
enclosure of the Shopping Center or the building in which
the Store is located and Landlord's right to terminate the
Store Lease if Tenant does not pay for such costs.
12. Delete the provision pursuant to which Tenant waives right
to jury trial, right to file cross-claims or counter suit
against Landlord.
13. To include one or more provisions (i) allowing Purchaser to
remodel the leased premises of the applicable Store Lease
generally in accordance with Section 16.4 of the Form Store
Leasehold Consent, and (ii) waiving any continuous operation
clause in the applicable Store Lease for a specific reason-
able period of time for the purpose of completing such
remodeling, which time period shall not be less than 14
days.
14. Delete the following covenants of the Tenant:
14.1 Conduct business to produce maximum sales.
14.2 Maintain adequate trained personnel.
14.3 Tenant to employ qualified store manager and give name,
home address and home telephone number to mall manager.
15. Delete the provision pursuant to which Tenant's insurance
carrier is required to notify Landlord within twenty to
thirty days of any cancellation, expiration or replacement
of the subject insurance policies.
16. Delete the provision pursuant to which Landlord's right to
terminate if Tenant under reports Gross Sales by at lease
$1,000.00. [Purchaser would agree to leave in this provi-
sion if the $1,000.00 amount is increased substantially.]
17. Delete the provision pursuant to which Landlord's successor
need not be bound by any amendment to the Store Lease made
after the effective date of said Store Lease unless
successor consents to be bound.
<PAGE>
SCHEDULE 2.5.1.2
(SHORT-TERM STORE LEASES)
Pegasus #15 Holladay 1995
#300018 Center
<PAGE>
SCHEDULE 4.7
[List of Stores subject to a Management Agreement]
None
<PAGE>
SCHEDULE 6.1.1
(CONFLICTS
None.
<PAGE>
SCHEDULE 6.1.3
(MATERIAL AGREEMENTS)
None.
<PAGE>
SCHEDULE 6.1.4
(EXISTING LITIGATION)
K.L.T.; M.L.V., and R.C.M. v. Jeffrey Layne Garn; and
Pegasus Records and Tapes, a/k/a Pegasus Music and Video; KSG
Distributing, Montana First Judicial District, Lewis & Clark
County. Case No. cDV 93-556.
<PAGE>
SCHEDULE 6.1.7
(STORE LEASE DEFAULTS)
None.
<PAGE>
SCHEDULE 6.1.8
(COMPUTER LEASE AND STORE CONTRACT DEFAULTS)
Young Systems, Ltd. contract dispute.
<PAGE>
SCHEDULE 6.1.9
(PHYSICAL CONDITION OF STORES AND F, F, & E)
None.
<PAGE>
SCHEDULE 6.1.10.3
(STORE COMPLIANCE WITH LAWS)
None.
<PAGE>
SCHEDULE 6.1.15
(ERISA)
None.
<PAGE>
SCHEDULE 6.1.16
(EMPLOYEE CLAIMS)
None.
<PAGE>
SCHEDULE 6.2
[Purchaser's Conflicts]
None
<PAGE>
EXHIBIT 2
WHEREHOUSE/PEGASUS CLOSING STATEMENT
Date: January 14, 1994
Seller: Pegasus Music and Video, Inc.
Buyer: Wherehouse Entertainment, Inc.
Escrow: Richard Hill, Esq.
PURCHASE PRICE
Base $5,250,000.00
Resale Inventory @75% 2,710,000.00
Video Rental Inventory @75% 353,000.00
-------------
SUB-TOTAL $8,313,000.00
ADJUSTMENTS TO PRICE
Pre-paid rent $+ 37,792.63
St. George lease rights + 2,940.17
Holladay base purchase - 247,275.00
Personal property tax (1/2 of Jan 94) - 211.00
-------------
DUE FROM PURCHASER
$8,106,246.80
ESCROW FUNDS
Base price 210,000.00
Dec. 93 & Jan. 94 Sales Tax Escrow 174,922.20
Dec. 93 & Jan. 94 Emp. Tax Escrow 26,361.79
1993 % Rent Due 12,000.00
Personal property tax 1993 5,417.90
Repairs 27,830.00
-------------
TOTAL ESCROW FUNDS $ 456,531.89
Payment to Young Software 18,000.00
WIRE TRANSFER TO SELLER $7,631,714.91
AGREEMENT AND MUTUAL GENERAL RELEASE
This Agreement and Mutual General Release ("this Agreement")
is entered into between Scott Hessler ("Mr. Hessler") and Where-
house Entertainment, Inc. ("WEI").
WHEREAS, Mr. Hessler and WEI have been parties to that
certain Employment Agreement between them ("Employment Agree-
ment"); and
WHEREAS, Mr. Hessler and WEI seek to terminate the employ-
ment relationship between them;
THEREFORE, it is hereby agreed that:
1. Mr. Hessler's Employment Agreement remained in effect
through January 31, 1994, and he remained employed under that
Employment through that date. Beginning February 1, 1994, WEI
will pay Mr. Hessler twelve full months of his final base salary,
payable in installments on WEI's regular paydates. Mr. Hessler
hereby acknowledges that he has already received the installment
payments from February 1, 1994 through the date of his signature
on this Agreement.
2. WEI will pay Mr. Hessler an additional $25,000, payable
in installments over a twelve-month period, on WEI's regular
paydates, beginning February 1, 1994.
3. WEI will continue Mr. Hessler's current medical
insurance coverage, including Execucare, at WEI's expense, for a
six-month period, beginning February 1, 1994. Mr. Hessler's
normal ability to exercise options under the Comprehensive
Omnibus Budget Reconciliation Act ("COBRA") will come into effect
on the termination of his current medical insurance coverage.
4. For a three-month period beginning February 1, 1994, at
WEI's expense, WEI will arrange to provide Mr. Hessler continued
benefits under the WEI group life insurance plan in existence as
of February 1, 1994 (subject to the limitations described in Mr.
Hessler's Employment Agreement).
5. WEI will assign to Mr. Hessler, without charge, any
life insurance policy now owned by WEI which insures his life
(subject to limitations described in Mr. Hessler's Employment
Agreement).
6. The benefits described in Paragraphs 1 through 5,
above, are subject to the limitation that if Mr. Hessler becomes
employed, otherwise earns income, or becomes covered under a
group medical plan, between February 1, 1994 and January 31,
1995, the amount of income that he earns, and any benefits that
he is entitled to, will be offset against the benefits described
in paragraphs 1 through 5. For example, if Mr. Hessler becomes
newly employed and receives a salary of $200,000 per year, the
payment schedule described in Paragraph 1, above, will be changed
so that Mr. Hessler will receive a bi-weekly sum that equates to
the rate of $65,000 per year. Similarly, if Mr. Hessler becomes
covered under a group medical plan before July 31, 1994, coverage
at WEI's expense under the WEI medical plans will stop; if Mr.
Hessler has problems getting coverage during this period for
"pre-existing conditions", WEI will consider in good faith the
possibility of continuing WEI coverage through July 31, 1994 for
the "pre-existing condition". Mr. Hessler agrees that he will
inform WEI as soon as he is earning income or is covered under
group medical or life insurance.
7. a. Mr. Hessler agrees to sell all of his shares of
WEI common stock and incentive options and vested performance
options to WEI as of January 31, 1994. Mr. Hessler agrees to
accept a gross sale price of $44.00 per share for all shares of
his WEI common stock, (1) minus a personal loan (with accrued
interest thereon) of $25,000 made to Mr. Hessler by WEI for the
purpose of acquiring a portion of this equity, which personal
loan of $25,000 (with accrued interest thereon) shall thereby be
paid by WEI to itself in full payment of such loan, and (2) minus
a personal loan (with accrued interest thereon), if any) of
$25,000 made to Mr. Hessler by Scott Young for the purpose of
acquiring a portion of this equity, which personal loan of
$25,000 shall be paid by WEI directly to Scott Young in full
payment of such loan. WEI shall make one payment without
interest for such common stock on or before May 15, 1994.
b. WEI shall pay Mr. Hessler a grossed up amount
which shall be sufficient after withholding of applicable taxes
to allow him to pay the interest due on the loan from WEI
described in Section 7(a) above.
8. In consideration of the promises and obligations
contained herein, Mr. Hessler hereby releases and discharges
Wherehouse Entertainment, Inc., and each of its representatives
including, without limitation, agents, employees, directors,
shareholders, officers, attorneys, insurers, affiliates, assigns
and successors, and each of them, from any and all claims,
demands, sums of money, actions, rights, causes of action,
obligations and liabilities of any kind or nature whatsoever,
whether known or unknown, present of future which he had or
claims to have had, now has or claims to have, or hereafter may
have or asserts to have, including without limitation, claims as
a result of the termination of his employment with WEI. Mr.
Hessler further understands and agrees that:
a. This letter constitutes a voluntary waiver of any
and all rights and claims Mr. Hessler has against WEI as of the
date of the execution of this letter, including rights or claims
arising under the federal Age Discrimination in Employment Act of
1967, 29 U.S.C. section 621, et seq.;
b. Mr. Hessler has waived rights or claims pursuant
to this Agreement and in exchange for consideration, the value of
which exceeds payment or remuneration to which he was already
entitled;
c. Mr. Hessler is and has been advised to consult
with an attorney concerning this Agreement prior to executing it;
d. Mr. Hessler has been afforded a period of at least
21 days to consider the terms of this Agreement, and in the event
he should decide to execute this Agreement in less than 21 days,
he has done so only after conferring with an attorney of his
choice and with the express understanding that he has been given
and declined the opportunity to consider this Agreement for a
full 21 days; and
e. Mr. Hessler may revoke this Agreement at any time
during the seven (7) days following the date of execution of this
Agreement, and this Agreement shall not become effective or
enforceable until such revocation period has expired.
9. All rights under California Civil Code section 1542,
are hereby expressly waived by Mr. Hessler. Section 1542 of the
California Civil Code reads as follows: "A general release does
not extend to claims which the creditor does not know or suspect
to exist in his favor at the time of executing the release, which
if known by him must have materially affected his settlement."
Except for the obligations created or confirmed in this Agree-
ment, Mr. Hessler is completely severing his relationship with
WEI, and releasing all rights he may have, known or unknown.
10. In consideration of the promises and release contained
herein, and except as limited in Paragraph 11, below, WEI hereby
releases Scott Hessler from any and all claims, demands, sums of
money, actions, rights, causes of action, obligations and
liabilities of any kind or nature whatsoever, whether known or
unknown, present or future which it had or claims to have had now
has or claims to have, or hereafter may have or asserts to have
against him.
11. Notwithstanding the generality of the release in
Paragraph 10 hereof, WEI does not release Mr. Hessler from any
obligations he may have regarding any trade secrets of WEI.
12. Mr. Hessler and WEI agree that the terms and conditions
of this Agreement shall remain confidential and each shall not
disclose, disseminate or publicize any part of this Agreement to
any other persons, except as follows: (1) the fact that the
Action has settled (without disclosing any other terms); (2)
spouses of the parties; (3) to the extent necessary to report for
bonafide tax, accounting or other reporting requirements; (4) in
response to an order of a court of competent jurisdiction; or (5)
in response to a properly issued subpoena. The agreement to keep
the terms and conditions of this Agreement confidential is a
material inducement for each party to agree to enter into this
Settlement Agreement.
13. WEI agrees that it shall not, directly or indirectly,
by any manner or means, in public or in private, disparage,
demean, insult, or defame Mr. Hessler at any time. Mr. Hessler
agrees that he shall not, directly or indirectly, by any manner
or means, in public or in private, disparage, demean, insult, or
defame WEI, or any other person associated with WEI, at any time.
14. In making and executing this Agreement, Mr. Hessler
does not rely and has not relied upon any statement or represen-
tation, oral or written, made by any other party to this Agree-
ment with regard to any of the facts involved in any dispute or
possible dispute between the parties hereto, or with regard to
any of their rights or asserted rights, or with regard to the
advisability of making and executing this Agreement.
15. Mr. Hessler does hereby expressly assume the risk of
any mistake of fact or that the true facts might be other than or
different from the facts now known or believed to exist, and it
is his express intention to forever settle, adjust and compromise
any and all issues between himself and WEI pertaining to the
subject, matter hereof, finally and forever, and without regard
to who may or may not have been correct in their respective
understandings of the facts or the law relating thereto.
16. Mr. Hessler has made such investigation of the facts
and the law pertaining to the matters described in this Agreement
as he deems necessary and he neither has relied nor does he rely
on any promise or representation made by the other party with
respect to any such matters.
17. In consideration of the actions to be taken by WEI as
set forth herein, Mr. Hessler agrees to take no steps now or in
the future to seek reemployment with WEI, or with any company
associated or affiliated at that time with WEI.
18. In any legal action or proceeding allegedly arising out
of the course and scope of Mr. Hessler's employment with WEI in
which Mr. Hessler is named as a defendant, respondent or charged
party, or in which Mr. Hessler's testimony is sought as a witness
or potential witness (including but not limited to a deposition),
or in which any documents or other things are sought from Mr.
Hessler, WEI shall furnish legal representation to Mr. Hessler at
WEI's sole cost and expense, and WEI shall indemnify Mr. Hessler
against any future legal action brought against WEI or against
Mr. Hessler in his capacity as an officer of WEI in the same
manner as all officers of WEI are currently, or continue to be,
indemnified by WEI. Mr. Hessler shall notify WEI's Chairman or
Chief Financial Officer immediately upon Mr. Hessler's receipt,
by personal service, mail, or otherwise, of any summons and
complaint, subpoena or notice of deposition or appearance at any
trial or proceeding, and subpoena or notice to produce documents
or other things at any trial or proceeding.
19. Mr. Hessler represents and agrees that he has carefully
read and fully understands all of the provisions of this Agree-
ment, that he has been given the opportunity to fully discuss the
contents of this Agreement with independent counsel of his choice
and has done so and that he is voluntarily entering into this
Agreement.
20. Mr. Hessler and WEI have cooperated in the drafting and
preparation of this Agreement. In any construction to be made of
this Agreement, the same shall not be construed against any
party.
21. This Agreement constitutes the entire agreement between
the parties pertaining to the subject matter hereof, and the
final, complete and exclusive expression of the terms and
conditions of their Agreement. Any and all prior agreements,
representations, negotiations and understandings made by the
parties, oral and written, express or implied, are hereby
supersede and merged herein.
22. This Agreement shall be binding upon and shall inure to
the benefit of the heirs, successors or assigns of the parties.
23. This Agreement may be executed in counterparts, with
some of each of the signatures appearing on a different page.
The collective signature pages shall constitute a fully executed
agreement as of the date of the final signature.
24. This Agreement is entered into in, and shall be
construed and interpreted in accordance with the laws of, the
State of California.
Dated: April 26, 1994 /s/ Scott Hessler
---------------------
Scott Hessler
Dated: April 28, 1994 /s/ Scott Young
---------------------
Its: Chairman & CEO
<page-i>
CORPORATE INCENTIVE COMPENSATION PLAN
For the Fiscal Year Ending January 31, 1994
THIS PLAN SUPERSEDES ALL PREVIOUS PLANS
<PAGE>
<PAGE>
CORPORATE INCENTIVE COMPENSATION PLAN
TABLE OF CONTENTS
Eligibility................................................1
Bonus Level Placement......................................2
Bonus Components...........................................2
Bonus Calculation Level....................................2
Award Determination........................................3
HEBIT.................................................3
CONTROLLABLE CASH FLOW................................3
GROSS MARGIN..........................................4
Bonusable Compensation.....................................5
Discretionary Bonus........................................5
Incremental Bonus..........................................5
Payment of Awards..........................................5
Miscellaneous Provisions...................................5
ATTACHMENT A - Summary of Bonus Component Targets..........8
ATTACHMENT B - HEBIT.......................................9
ATTACHMENT C - Controllable Cash Flow......................10
ATTACHMENT D - Gross Margin................................12
Glossary..............................................ii, iii
i
<PAGE>
<Page-1>
CORPORATE INCENTIVE COMPENSATION PLAN
For the Fiscal Year Ending January 31, 1994
The purpose of the Corporate Incentive Compensation Plan (the
"Plan") is to reward associates for helping the Company achieve
its financial goals. In addition, the Plan will reward
associates for individual achievement through the use of a
discretionary bonus.
ELIGIBILITY
All of the following eligibility criteria must be met in order to
participate in the Plan.
1. An associate must be employed in an eligible administrative
position as of January 31, 1994. Eligible positions are
defined based upon level of responsibilities, impact on
company earnings and gross margin.
2. An associate must be employed by the Company on the day the
bonuses are distributed. Any associate who leaves employ-
ment with the Company before the bonus distribution date is
not eligible for any bonus payment.
3. Associates eligible to participate in any Field Bonus
program will not be eligible to participate in this Plan.
4. At any time in the period February 1, 1993 through January
31, 1994 and including the bonus distribution date of, on,
or about April 15, 1994, any associate who has been placed
on disciplinary probation, who has received a final written
warning, or an overall unsatisfactory performance appraisal
from their supervisor for the fiscal year ending January 31,
1994, will not be eligible to receive any bonus payment.
5. No associate at any time has any vested right or entitlement
to any bonus payment under this Plan.
6. Only those associates who have completed and signed the
Corporate Incentive Compensation Plan Acknowledgement form
prepared by Company management shall be eligible for any
bonus payment under the Plan.
<PAGE>
<Page-2>
BONUS LEVEL PLACEMENT
A participant's placement within the six Bonus Calculation Levels
is determined primarily by position responsibilities and impact
upon company earnings and gross margin.
If a promotional increase affects your bonus level placement,
your bonus level will be prorated by the amount of time that was
spent at each level based on your annual base salary.
If you are transferred from a non-bonusable position to a
bonusable position during the fiscal year, your bonus level will
be prorated by the amount of time spent in the bonusable
position. Annual base salary will be as of your transfer date.
BONUS COMPONENTS
The following bonus components have been established to encourage
maximization of results for the Company through cooperation and
teamwork.
Percent of
Bonus Components Bonus
1) HEBIT 55%
2) Controllable Cash Flow 15%
3) Gross Margin 30%
(See Attachment A)
BONUS CALCULATION LEVEL
With the achievement of 100% of all three components under the
Plan, you will be eligible to achieve a bonus payout based on
your bonus level placement (as determined by your position
responsibilities)and your actual bonusable compensation earned in
the fiscal year. The following list displays the bonus percen-
tage you are eligible for as defined by your level.
Bonus
Level % Bonusable Compensation
1 20%
2 15%
3 13%
4 10%
5 8%
6 5%
<PAGE>
<Page-3>
AWARD DETERMINATION
In order to realize a payout on any portion of the plan, the bank
debt repayment requirement of $6 million for the fiscal year
ending January 31, 1994 must be met. In addition, for a 30 day
period within the fiscal year, our bank revolver must be and
remain at a $0 balance. Achievement of less than 100% of the
debt repayment and/or not achieving the bank revolver balance for
the required time period will result in no bonus payment for
FY'94.
The following will assist you in understanding how each of the
three bonus components are determined.
1. HEBIT (Historical Earnings before Interest and Taxes)
This component of the Plan is obtained by taking the year-end
audited Company Net Income amount, adjusted for historical
consistency, and adding back Taxes and Interest.
A HEBIT goal of $33.5 million has been established for this
fiscal year. Based on the attainment of the HEBIT target, you
will be eligible to earn up to 55% of your total bonus for this
component as shown on Attachment B.
No HEBIT bonus will be paid on the achievement of less than $30.0
million for this fiscal year.
2. CONTROLLABLE CASH FLOW
This component of the Plan uses our audited Company financial
statements (adjusted for historical consistency) and adjusts it
to a purely cash basis.
A CONTROLLABLE CASH FLOW goal has been established for the fiscal
year-end of $3.0 million. Based on the attainment of the
CONTROLLABLE CASH FLOW target, you will be eligible to earn up to
15% of your total bonus for this component as shown on Attachment
C.
No CONTROLLABLE CASH FLOW bonus will be paid on the achievement
of less than $3.0 million for this fiscal year.
<PAGE>
<Page-4>
3. GROSS MARGIN
This component of the Plan is the sum of the margin from general
merchandise sales (net merchandise sales minus the total cost of
sales), rental income (total rental video income minus the total
cost of rental video step up) and ticket commissions, less
advertising (media, visual merchandising, and FRP).
A GROSS MARGIN goal has been established for the fiscal year-end
of $217.8 million. Based on the attainment of the GROSS MARGIN
target, you will be able to earn up to 30% of your total bonus
for this component as shown on Attachment D.
No GROSS MARGIN bonus will be paid on the achievement of less
than 196.2 million for this fiscal year.
<PAGE>
<Page-5>
BONUSABLE COMPENSATION
Bonus under the Plan will be calculated on bonusable compensation
actually earned from February 1, 1993 through January 31, 1994.
Bonusable compensation is defined as base pay plus overtime,
double-time, holiday pay, sick pay, vacation pay, bereavement and
retroactive pay. Earnings excluded are bonus payments, bonus
draws, auto mileage, auto allowances, and other earnings which
shall be considered outside of regular earnings.
DISCRETIONARY BONUS
In order to reward individuals for outstanding performance, an
additional amount equal to 10% of the total earned bonus may be
set aside in a discretionary pool. This 10% will be comprised of
equal percentages from each bonus component multiplied by the
percent of bonus achieved for each target. These monies will be
awarded based on recommendations made by Senior Management to the
Chief Executive Officer.
INCREMENTAL BONUS
An additional amount equal to 10% of the amount over HEBIT target
may be set aside in an Incremental Bonus pool for pro-rata distri-
bution. These monies will be awarded based on recommenda-
tions made by Senior Management to the Chief Executive Officer.
PAYMENT OF AWARDS
Bonus payments will be paid on or about April 15, 1994 at the
direction of the Chief Executive Officer, by payroll check, minus
applicable taxes.
MISCELLANEOUS PROVISIONS
The Chief Financial Officer will make the computation of the
attainment of targets under each bonus component and will provide
the Chief Executive Officer with a copy of these computations and
award results.
The bonus percentages achieved will be applied to Bonusable
Compensation actually earned for the period from February 1, 1993
through January 31, 1994. An individual who becomes eligible
under the Plan will be included in the extent that he/she earns
Eligible Compensation during the fiscal year.
If, as a result of unanticipated changes in the capital
requirements of the Company, or other unanticipated future events
of a material nature, the Board of Directors of the Company
<PAGE>
<Page-6>
believes, in its sole discretion, that the payment of the bonuses
contemplated by this Plan would be inappropriate, the Plan may be
amended in whole or in part, or rescinded at any time, with the
approval of a majority vote of the Board of Directors of the
Company.
The Plan is developed and approved annually. The Company
reserves the right to continue, modify, or discontinue the Plan
each fiscal year. The Company reserves the right to review and
approve exceptions to the Plan throughout the fiscal year.
Each participant in the Plan will receive a copy of the Plan and
a memo indicating his/her level of participation.
<PAGE>
<Page-7>
BONUS CALCULATION EXAMPLE
To aid you in calculating the amount of bonus you may be eligible
for, the following example has been provided.
Bonus Calculation Level = 5%
BONUS
PERCENTAGE BONUS BONUS
GOAL ACHIEVED ACHIEVED LEVEL PAYOUT
HEBIT $33.5 MM 55% x 5% = 2.75%
Controllable Cash Flow $3.0 MM 15% x 5% = .75%
Gross Margin $217.8 MM 30% x 5% = 1.50%
TOTAL 5.0%
Bonusable Compensation = $70,000
Bonus Percent Achieved = 5%
Bonus Paid $ 3,500
<PAGE>
<Page-8>
ATTACHMENT A
Summary of Bonus Component Targets
The following targets have been established for each bonus
component of the Plan
BONUS COMPONENT PLAN TARGET
1. HEBIT $33.5 MM
2. Controllable Cash Flow $ 3.0 MM
3. Gross Margin $217.8 MM
<PAGE>
<Page-9>
ATTACHMENT B
HEBIT
HEBIT - This component of the Plan is obtained by taking the
year-end audited Company Net Income amount, adjusted for
historical consistency, and adding back Taxes and Interest.
This 55% of the bonus is fully earned at a HEBIT level of $33.6
million*
Below is a table showing the HEBIT target and the corresponding
bonus percentage that will be achieved.
HEBIT TABLE
HEBIT TARGET BONUS(1)
(in millions) PERCENTAGE
$30.0 AND UNDER 0
$31.5 25.0%
$32.5 40.0%
$33.5* 55.0%
Once HEBIT reaches target, 10% of the amount over HEBIT target
will be added to the bonus pool and distributed pro-rata.
To determine payout percentages for HEBIT amounts falling between
those shown, interpolation will be used.
*Indicates the targeted level of performance.
(1)Indicates the percent of bonus that will be achieved at each
HEBIT target. This amount is then multiplied against your Bonus
Calculation Level to determine the overall percent payout you are
eligible for.
<PAGE>
<Page-10>
ATTACHMENT C
CONTROLLABLE CASH FLOW
CONTROLLABLE CASH FLOW - This component of the Plan uses our
audited Company financial statements (adjusted for historical
consistency) and adjusts it to a purely cash basis. This target
number will be adjusted using the EBITDAV calculations according
to the bank credit agreement. The formula for CCF is provided
below (NOTE: numbers displayed are used for example purposes
only):
NET INCOME ($ 3,011)
+Income Tax Provision $ 355
+Interest Expense $22,151
+Purchase Accounting
Goodwill $ 3,297
Amortization $ 4,580
L/H Interest $ 550
Video Step-Up $ 2,715
$11,142
$11,142
+FAS 13 Rent $ 3,229
-Other Income ($ 366)
HEBIT $ 33,500
ADJUSTED EBITDAV
HEBIT $ 33,500
+Other Income $ 266
PLUS NON-CASH EXPENSES
+Depreciation $ 17,983
+Amortization $ 511
+Non-Cash Cost of Rental $ 31,206
$ 83,466
LESS CASH EXPENDITURES
-Rental Inventory Cash Purchases $ 31,133
ADJUSTED EBITDAV $52,333
LESS
-Capital Expenditures $ 17,102
-Principal Payment on Debt $ 10,562
-Interest Expense (Cash) $ 21,669
Controllable Cash Flow $ 3,000
<PAGE>
<Page-11>
This 15% of the bonus is fully earned at a CONTROLLABLE CASH FLOW
level of $3.0 million.*
Below is a table showing the CONTROLLABLE CASH FLOW target and
the corresponding bonus percentage that will be achieved.
CONTROLLABLE CASH FLOW TABLE
CONTROLLABLE CASH
FLOW TARGET BONUS(1)
(in millions) PERCENTAGE
Under $3.0 0
$3.0* 15.0%
*Indicates the targeted level of performance.
(1)Indicates the percent of bonus that will be achieved with each
CONTROLLABLE CASH FLOW target. This amount is then multiplied
against your Bonus Calculation Level to determine the overall
percent payout you are eligible for.
<PAGE>
<Page-12>
ATTACHMENT D
GROSS MARGIN
GROSS MARGIN - This component of the Plan is the sum of the
margin from general merchandise sales (net merchandise sales
minus the total cost of sales), rental income (total rental video
income minus the total cost of rental video step up) and ticket
commissions, less advertising (media, visual merchandising, and
FRP).
This 30% of the bonus is fully earned at a Gross Margin level of
$217.8 million.*
Below is a table showing the Gross Margin and the corresponding
bonus percentage that will be achieved.
GROSS MARGIN
GROSS MARGIN
TARGET BONUS(1)
(in millions) PERCENTAGE
$196.2 AND UNDER 0
$203.4 10.0%
$210.6 20.0%
$217.8* 30.0%
To determine payout percentages for Gross Margin amounts falling
between those shown, interpolation will be used.
*Indicates the targeted level of performance.
(1)Indicates the percent of bonus that will be achieved at each
Gross Margin target. This amount is then multiplied against your
Bonus Calculation Level to determine the overall percent payout
you are eligible for.
<PAGE>
<Page-ii>
GLOSSARY
Award Determination - In order to realize a payout on any portion
of the plan, the bank debt repayment requirement of $6 million
for the fiscal year ending January 31, 1994 must be met. In
addition, for a 30 day period within the fiscal year, our bank
revolver must be and remain at a $0 balance. Achievement of less
than 100% of the debt repayment and/or not achieving the bank
revolver balance for the required time period will result in no
bonus payment for FY'94.
Bonus Calculation Level - A level from 1 to 6 that determines the
percentage of your bonus payout.
Bonus Components - The bonus components that have been esta-
blished to encourage maximization of results for the Company
through cooperation and teamwork. These components consist of
HEBIT, Controllable Cash Flow and Gross Margin.
Bonus Level Placement - A participant's placement within the six
Bonus Calculation Levels. Your bonus level is determined
primarily by your position responsibilities and impact upon
company earnings and gross margin.
Bonusable Compensation - Base pay plus overtime, double-time,
holiday pay, sick pay, vacation pay, bereavement and retroactive
pay. Earnings excluded are bonus payments, bonus draws, auto
mileage, auto allowances, and other earnings which shall be
considered outside of regular earnings. Bonus under the Plan
will be calculated on bonusable compensation actually earned from
February 1, 1993 through January 31, 1994.
Controllable Cash Flow - The component of the Plan which uses our
audited Company financial statements and adjusts it to a purely
cash basis.
Discretionary Bonus - An additional pool amount which is set
aside to reward individuals for outstanding performance. A total
discretionary bonus of 10% of the total earned bonus will be
comprised of equal percentages from each bonus component
multiplied by the percent of bonus achieved for each target.
Eligibility - The criteria which must be met in order to
participate in the Plan.
Gross Margin - The component of the Plan which is the sum of the
margin from general merchandise sales (net merchandise sales
minus the total cost of sales), rental income (total rental video
income minus the total cost of rental video step up) and ticket
commissions, less advertising (media, visual merchandising, and
FRP).
<PAGE>
(Page-iii)
HEBIT - The year-end audited Company Net Income amount (adjusted
for historical consistency) which adds back Taxes and Interest.
Incremental Bonus - An additional pool amount will be set aside
for outstanding performance when the HEBIT target is exceeded.
Payment of Awards - Bonus payments will be paid by April 15, 1994
by payroll check, minus applicable taxes.
Plan - Wherehouse Entertainment, Inc. Corporate Incentive
Compensation Plan (the "Plan").
Targets - The business goals that have been established for each
bonus component of the Plan to be met to realize a bonus payout.
<PAGE>
<PAGE>
CORPORATE INCENTIVE COMPENSATION PLAN
For the Fiscal Year Ending January 31, 1994
ACKNOWLEDGEMENT
I hereby acknowledge that I am eligible to participate in the
Corporate Incentive Compensation Plan for the fiscal year ending
January 31, 1994. The criteria and details of this plan have
been given to me. I understand that it is my responsibility to
read and understand all requirements as set forth in the plan
document.
I understand that I must be employed by the Company on the day
the bonuses are distributed, or I shall not be eligible for any
bonus payment, in whole or in part, or any equivalent amount.
Any associate whose employment with the Company terminates for
any reason before the bonus distribution date is not eligible for
any bonus payment, in whole or in part, or any equivalent amount.
In order to realize a payout on any portion of the plan, the bank
debt repayment requirement of $6 million for the fiscal year
ending January 31, 1994 must be met. In addition, for a 30 day
period within the fiscal year, our bank revolver must be and
remain at a $0 balance. Achievement of less than 100% of the
debt repayment and/or not achieving the bank revolver balance for
the required time period will result in no bonus payment for
FY'94.
ACCEPTED AND AGREED:
_____________________________ _______________________
SIGNATURE SOCIAL SECURITY NO.
_____________________________
PRINT NAME
<TABLE>
<CAPTION>
Ratio of Earnings to Fixed Charges
Amounts in thousands except for ratio
For the For the Fiscal
Fiscal Years 4 Months 8 Months Year
-------------------------------- Ended Ended --------
FY 90 FY 91 FY 92 5/31/92 1/31/93 FY 94
Actual Actual Actual Actual Actual Actual
-------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Fixed charges
Interest expense 19,451 18,416 15,876 4,165 14,190 21,826
Amortization of
deferred financing
costs 1,465 1,620 2,176 763 1,513 1,699
-------- -------- -------- ------- -------- --------
Total interest expense 20,916 20,036 18,052 4,928 15,703 23,525
Interest portion of
rental expense 13,836 15,715 17,249 4,858 9,537 14,536
-------- -------- -------- ------- -------- --------
Total fixed charges 34,752 35,751 35,301 9,786 25,240 38,061
Earnings
Income from continuing
operations before
income tax (10,625) (3,978) 3,948 (3,835) (5,107) (61,136)
Total fixed charges 34,752 35,751 35,301 9,786 25,240 38,061
-------- -------- -------- ------- -------- --------
24,127 31,773 39,249 5,951 20,133 (23,075)
======== ======== ======== ======= ======== ========
Ratio of earnings to Inadequate Inadequate Inadequate Inadequate Inadequate
fixed charges Earnings Earnings 1.11 Earnings Earnings Earnings
======== ======== ======== ======= ========
Amount of coverage
deficiency 10,625 3,978 3,835 5,107 61,136
</TABLE>
<TABLE>
SUBSIDIARIES OF WEI HOLDINGS, INC.
<CAPTION>
STATE OF NAMES UNDER WHICH THE
SUBSIDIARY INCOPPORATION SUBSIDIARY DOES BUSINESS
- ---------- ------------- -------------------------
<S> <C> <C>
Wherehouse Entertainment, Inc. Delaware The Wherehouse
Wherehouse Entertainment
Record Shop
Paradise Music
Pegasus
Rocky Mountain Records
Leopolds
Odyssey
</TABLE>
SUBSIDIARIES OF WHEREHOUSE ENTERTAINMENT, INC.
None.
