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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO _______________
COMMISSION FILE NUMBER 0-14323
SPEC'S MUSIC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 59-1362127
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(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1666 N.W. 82ND AVENUE
MIAMI, FLORIDA 33126
- - - ----------------------------------- --------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (305) 592-7288
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
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(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to the Form 10-K. [X]
As of October 22, 1997, the aggregate market value of the common stock
held by non-affiliates of the registrant was approximately $3,689,675.
As of October 22, 1997 the number of shares of common stock of the
Registrant issued and outstanding was 5,300,319.
DOCUMENTS INCORPORATED BY REFERENCE
Part III--Definitive Proxy statement for the 1997 Annual Meeting of
Shareholders.
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<PAGE>
INDEX TO FORM 10-K
Item 1. Business .............................................. 3
Item 2. Properties ............................................ 9
Item 3. Legal Proceedings ..................................... 10
Item 4. Submission of Matters to a Vote of Security Holders.... 10
Executive Officers .................................... 11
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters ........................... 12
Item 6. Selected Financial Data ............................... 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................... 14
Item 7A. Quantitative and Qualitative Disclosures about
Market Risks .......................................... 19
Item 8. Financial Statements and Supplementary Data ........... 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................... 35
Item 10. Directors and Executive Officers of the
Registrant ............................................ 35
Item 11. Executive Compensation ................................ 35
Item 12. Security Ownership of Certain Beneficial Owners
and Management ....................................... 35
Item 13. Certain Relationships and Related Transactions ........ 35
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K ........................................... 36
<PAGE>
ITEM 1. BUSINESS
GENERAL
Spec's Music, Inc., founded in 1948 and headquartered in Miami, Florida
operates 45 stores in Florida and Puerto Rico. Spec's is among the
most highly recognized and largest retailers of specialty music in the
Miami/Ft. Lauderdale metropolitan area, and Florida's Gold Coast. Our
particular strength lies in the diversity of products we offer,
including audio compact discs (CD's); pre-recorded cassette tapes;
movies and music on VHS tapes, laser discs and digital video discs
(DVD's); blank audio and video tapes; a wide range of audio and video
accessories; and boutique items such as t-shirts, posters, and
collectibles. In addition, customers can rent video movies at one of
eight locations.
The Company re-opened one store and closed eight under performing stores
during the fiscal year. The overwhelming majority of our stores (41)
are located in Florida, with the remaining four located throughout the
island of Puerto Rico. The design and format of each of our stores has
been tailored specifically to best serve the needs of our customers in a
specific locale. At the end of fiscal 1997, we operated 17 stores in
enclosed traditional shopping malls and 28 stores in shopping centers
and free-standing downtown locations. Of these, 14 are "superstores",
which typically span 7,000-10,000 square feet of retail space.
Additionally, our "megastores" in Miami Beach and the Sawgrass Mills
Mall are comprised of more than 20,000 square feet each.
We are particularly proud of our diverse product mix, which offers a
wide variety of audio and video products to shoppers of every age and
taste. In Florida alone there are more than 25 million tourists
annually, in addition to the state's 14 million permanent residents.
Studies have shown that music preferences which tend to correlate with
the ethnic backgrounds of its listeners are highly fragmented among
segments of the population. This in turn creates both challenges and
opportunities for us to offer the best product mix -- store by store --
and to position ourselves in a number of specialty music categories.
Spec's is committed to maintaining its position as the dominant
specialty retailer of prerecorded music and music-related products and
offering the highest quality service to its customers. While all of
our stores maintain a comprehensive selection of diverse music
categories, our newest stores provide a unique opportunity for customers
to interact with our products. Specifically, they can sample music at
listening stations throughout the store and search on-line at
information kiosks for product listings throughout the Spec's network,
as well as accessibility to more than 130,000 titles available via
special order. We currently offer more than 87,000 active audio and
video titles.
During fiscal 1997, the Company refocused on its marketing and
merchandising. "Payback," the Company's new customer loyalty program,
was inaugurated in
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December 1996. The Company believes that the Payback program will
create incremental sales, increase the average purchase per transaction,
produce customer loyalty and provide our vendors the opportunity to
target the sale of specific product and music genres.
In May 1997, Spec's acquired the assets of three specialty Latin music
businesses. The new subsidiary of Spec's, known as "D S Latino,"
includes both a music distribution company and the easy-listening Latin
music record label "Hits Only" together with its recording studio. D S
Latino will maintain a broad-based inventory of pre-recorded music and
entertainment related products and accessories, including product
manufactured by the six major recording companies and by the majority of
the independent Latin labels. The Company believes that this
acquisition complements its existing business and will provide new
opportunities for growth in the world of Latin Music.
PRODUCTS
In fiscal 1997, the sale of audio products comprised approximately 84.4%
of total revenue. This represents a slight increase over fiscal 1996's
82% and fiscal 1995's 81%. Of that number 69% came from the sale of
compact discs as compared to 65% in fiscal 1996 and 61% in fiscal 1995.
Cassette tapes comprised 15% of total revenue in fiscal 1997, a decrease
over fiscal 1996's 17% and fiscal 1995's 20%. CD's in particular have
increased significantly as a percentage of total revenues. Conversely,
revenue from video product sales and rentals declined to 7% in fiscal
1997, down from 10% in fiscal 1996 and 11% in fiscal 1995. This trend
reflects Spec's decision to eliminate video rentals in all but 8 stores
for competitive reasons.
AUDIO PRODUCTS - Spec's sells prerecorded compact discs and cassette
tapes manufactured by leading domestic and foreign manufacturers, as
well as blank audio cassettes. Each of our stores carries a wide
assortment of CD's and cassettes of popular recording artists on such
prominent manufacturers as Sony Music, Warner/Elektra/Atlantic
(subsidiary of Time Warner), BMG Music (subsidiary of Bertelsman
Entertainment); Universal Music Distribution; PGD (subsidiary of
Philips) and EMI Music Distribution. We also offer a diverse range of
music including pop, rock, rap, country, jazz, classical, Latin, folk,
Broadway, children's, and many others.
VIDEO PRODUCTS - While Spec's has reduced the number of video rental
departments within its music stores, each store continues to sell
prerecorded video movies. Our broad selection of movies includes
popular feature films, children's films, classic movies, music videos,
educational titles, and sports-related titles. They range in price from
$9 to $99, with an average price of about $17 which include used copies
which were previously part of the rental inventory. Additionally, we
also sell prerecorded
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movies on laser disc format, with prices ranging from $20 to $94, with
an average price of roughly $39. Most recently, the newest video
format, Digital Video Disc, or DVD, is gaining consumer interest. A
good selection of titles, advanced technology and a moderate price of
approximately $25 promises to be a growing format.
OTHER PRODUCTS - Spec's offers numerous music-related accessories such
as storage and carrying cases for cassettes, CD's, and movies, as well
as cleaning and maintenance kits, songbooks, and sheet music. We also
carry other items such as posters, t-shirts, magazines, jewelry and post
cards.
SEASONALITY
The Company experiences higher sales volume during the second quarter
which includes the Holiday selling season. Revenues during the month of
December, as a percentage of annual revenues, were 14.3%, 15.7% and
16.7% in fiscal 1997, 1996 and 1995, respectively. The seasonality
decreases can be attributed to continued increased competition and heavy
sales promoting during the Holiday season.
ADVERTISING AND MARKETING
Spec's, through its marketing and advertising programs, is dedicated to
being a dominant music entertainment retailer in both Florida and Puerto
Rico. We are accomplishing this by highlighting our unsurpassed
selection and everyday value pricing.
Our traditional means of mass media advertising include radio,
television, print, and mass mailings, the majority of which is directed
toward radio. Radio advertising affords us the unique opportunity to
target specific niche listening audiences, such as those interested in
classical music, jazz, Latin music, alternative rock, and so forth.
Radio also enables us to advertise on short notice the availability of
new products and promotions. Further, in conjunction with major music
suppliers, we occasionally participate in special promotions for
appearances of prominent recording artists.
In December 1996, Spec's launched "Payback," a customer loyalty program.
Payback currently has over 70,000 members and is growing monthly. The
Payback database allows us to provide our customers with additional
value by awarding them with exclusive music, entertainment and special
promotions. We are committed to building a continuing relationship with
our customers so that we can better understand their needs and
preferences.
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<PAGE>
In fiscal 1996, Spec's introduced a unique new campaign. In this
program, we are buying back thousands of used CD's for $3 a piece in
"Spec's Bucks", which can be used to buy new products in our stores.
The used CD's, in turn, are resold to other customers.
PURCHASING AND INVENTORY
Almost all of our products are purchased under individual purchase
orders from manufacturers who deliver the merchandise within several
days after the order is placed. In order to remain competitive, we
purchase merchandise from more than 200 suppliers, although a large
majority of our orders are placed with the six largest vendors.
Roughly 95% of our merchandise is delivered directly to Spec's
distribution center in Miami. From there, individual store deliveries
are made via truck twice a week to stores in southeast Florida. We use
common carriers providing next-day service to our stores in Puerto Rico
and outside the southeast Florida truck delivery area. A certain amount
of merchandise is also directly shipped to stores by individual vendors.
We utilize recent store sales trends to determine the amount of
merchandise distributed to each individual store.
Current trade practices in the prerecorded music industry enable us to
return most of our unsold product to the manufacturers. The great
majority of these manufacturers do not have limits on the number of
these returns but rather impose a return penalty ranging from zero to
35% of the unit cost. Manufacturers of video movies limit the return
privilege to approximately 10-20% of purchases. During fiscal 1997, we
returned about 17% of our total purchases to manufacturers.
During fiscal 1997, a returns recycling system was developed in order to
minimize penalties and freight charges associated with returns. Product
returned from stores is processed through this system to determine if
there is a need in another store. Previously, all product returned from
stores was returned directly to the vendor.
STORE OPERATIONS AND PERSONNEL
Each of our stores is typically open seven days a week including
evenings. A manager and an assistant manager serve each store, paying
particular attention to a high level of customer service and ease of
store operation. Store managers are encouraged to reach performance
goals by the availability of a cash incentive program.
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<PAGE>
We recognize the importance to customers of a trained management and
sales staff, and we strive to hire experienced staff at all levels of
our organization.
At July 31, 1997, Spec's had approximately 322 full-time and 323 part-time
employees (associates). In order to provide the best in customer
service, we also add temporary associates during peak sales periods.
None of our associates are covered by collective bargaining agreements,
and we have never experienced a strike or work stoppage. We are very
proud of the continuing excellent working relationship we have with all
of our staff.
Spec's processes its sales transactions on point-of-sale (POS) cash
terminals. In fiscal 1997, about 66% of our sales were made by either
cash or check. The balance was transacted by any of a number of
national credit cards, for which we pay between 1.7% and 3% of sales as
a service charge.
MANAGEMENT INFORMATION SYSTEMS
Our automated inventory management and distribution system, which is bar
code-based, enables us to centrally purchase and manage our inventory,
control the quantity and mix of product in each store, and minimize
payroll and production costs. We also adjust our stock levels in
individual stores to correspond to recent sales trends in each market
area.
Our automated store transfer and product returns inventory handling
system allows us to routinely return non-selling merchandise, which is
scanned into a computer for tracking purposes. The computer then
decides whether the merchandise should be returned to regular warehouse
stock or to the vendor. This process has greatly increased both
accuracy and productivity in processing transfers and returns, and
enables us to replenish inventory between stores without ultimately
sending the product back to the vendor.
Our on-line customer service network has been very successful in
providing inventory status on special orders, transmitting special
orders to the distribution center, or communicating special orders
directly with specific vendors via Electronic Data Interchange (EDI).
We believe this customer service network is unique among music
retailers. The EDI program includes electronic transmission of purchase
orders directly to our vendors' computers, the electronic receipt of
vendor invoices, and direct shipment of products to our stores.
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<PAGE>
SERVICEMARKS
All of our stores operate under the "Spec's" name. The mark "Spec's"
and our company logo are servicemarks registered with the U.S. Patent
and Trademark Office. The Company has obtained registrations of the
trademarks "Payback, The Music Club From Spec's," "D S Latino," the D S
Latino logo, "Hits Only," "Tropical Sound Orchestra," "Oro Latino,"
"Epicentro Musical" and "Raiz Latina." We believe that the mark and
logo are important name recognition devices in advertising and
promotional activities. The "Spec's" name and logo are also registered
separately in the State of Florida.
COMPETITION
The retail music business is highly competitive. Among our competitors
are mass merchants, discount stores, video rental outlets, electronic
and computer stores, book stores, mail order clubs, warehouse outlets,
and specialty music stores. Many of these competitors are national in
scope and therefore have greater financial resources than Spec's. The
Company anticipates non-traditional retailers will continue to sell
music and video products at highly discounted prices. Also, we face
further entertainment-based competition from movies, concerts, video
games, and CD-ROM computers. Additionally, we compete with a broad
range of retail businesses for new store locations and for existing
locations when leases are up for renewal.
However, we believe that our certain competitive advantages include: 1)
our large number of stores afford us sufficient critical mass for
effective marketing programs while simultaneously allowing us to respond
quickly to shifts in the market; 2) after more than 50 years in the
business, our name recognition and customer loyalty is particularly
strong; and 3) we are sought out for our unsurpassed selection of both
Latin and classical music.
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<PAGE>
ITEM 2. PROPERTIES
Spec's leases 44 stores throughout Florida and Puerto Rico, and owns the
building which houses its Miami Beach "megastore." In addition, the
Company owns the building of a former store in Tampa, which is currently
being leased to another retailer. Our stores contain an average of
6,123 square feet of total space. At the end of fiscal 1997, we
operated 17 stores in enclosed traditional shopping malls and 28 stores
in shopping centers and free-standing downtown locations. Of these, 14
are "superstores", which typically span 7,000-10,000 square feet of
retail space. Additionally, our "megastores" in Miami Beach and
Sawgrass Mills Mall are comprised of more than 20,000 square feet each.
Store leases generally provide for fixed monthly rental payments and
require us to pay real estate taxes and certain other charges. Some
leases also subject us to escalation formulas and others to additional
rent based on a percentage of net sales -- often ranging from 3% to 7%.
The terms of our leases range from three to fifteen years, and many have
renewal options for longer terms. For the year ended July 31, 1997,
Spec's rental expense was approximately $8.4 million, including $71,000
in percentage rental. All of our stores are leased from unrelated
parties, except the Coral Gables store on South Dixie Highway and the
St. Petersburg store on 66th Street, which are leased from trusts; the
trustees and beneficiaries of these trusts include Ann S. Lieff,
president of Spec's, and Rosalind S. Zacks, vice president of the
Company. See Item 13, Certain Relationships and Related Transactions.
Spec's executive offices and distribution center comprise 46,000 square
feet of space at 1666 NW 82nd Avenue, Miami, Florida, near the Miami
International Airport.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings to which the Company is a
party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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<PAGE>
EXECUTIVE OFFICERS
All executive officers of the Company were elected to their present
offices at the Annual Meeting of the Board of Directors held on December
10, 1996 and will serve in such positions until the next annual meeting
of the Board of Directors. The following table sets forth, as of
October 1, 1997, certain information regarding the executive officers
of the Company.
<TABLE>
<CAPTION>
PRINCIPAL BUSINESS EXPERIENCE
NAME AGE DURING THE PAST FIVE YEARS
- - - ----- --- ---------------------------------
<S> <C> <C>
Martin W. Spector 92 Chairman Emeritus since 1996. Chairman
of the Board of Directors of the
Company 1980 - 1996; President and Chief
Executive Officer and Director of the
Company and its predecessors 1948-1980.
Ann S. Lieff 45 President and Chief Executive Officer
of the Company since 1980; Director
since 1979.
Donald A. Molta 37 Vice President and Chief Financial
Officer since 1996. Between February
1995 and December 1996, Mr. Molta,
served as Vice President and Chief
Financial Officer of All For A Dollar,
Inc., a publicly traded retail company
that had filed a voluntary petition
under the federal bankruptcy laws prior
to the time Mr. Molta joined the
Company. The company emerged from
bankruptcy and then filed a second
voluntary petition under the federal
bankruptcy laws in October 1996.
Between 1993 and 1994, Mr. Molta served
as Vice President of Finance for Bob's
Stores, Inc., a subsidiary of Melville,
Corporation.
Dorothy J. Spector 78 Secretary of the Company since
its incorporation in 1970.
Rosalind S. Zacks 47 Vice President since April 1993;
Executive Vice President and Treasurer
of the Company from 1981 to
1993; Director since 1979.
</TABLE>
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<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS.
STOCK PRICE INFORMATION
The Company's Common Stock is traded in the Nasdaq SmallCap Market
System under the symbol "SPEK." The following table shows high and low
bid price information as quoted by Nasdaq for each quarter during the
two most recent fiscal years. Such quotations reflect inter-dealer
prices, without retail mark-ups, markdowns or commissions, and may not
necessarily represent actual transactions.
1997 HIGH LOW 1996 HIGH LOW
First quarter 2 1 First quarter 4 1/8 2 1/2
Second quarter 1 5/16 5/8 Second quarter 3 1/8 1 1/4
Third quarter 1 3/16 5/8 Third quarter 2 5/8 1 3/4
Fourth quarter 15/16 1/2 Fourth quarter 2 1/8 1 3/8
The Company has not paid any cash dividends on its common stock during
the periods shown, and does not intend to pay dividends in the
foreseeable future.
On October 27, 1997, the Company had 5,300,319 shares of common stock
outstanding held by 341 stockholders of record, and approximately 1,300
beneficial owners.
SALES OF UNREGISTERED SECURITIES
On December 10, 1996, December 18, 1996, January 1, 1997, February 12,
1997 and June 1, 1997, the Company granted options to purchase an
aggregate of 427,000 shares of its common stock to its employees and
directors pursuant to the Company's 1993 Employee Stock Plan, its 1993
Non-Employee Director Plan and its 1996 Non-Employee Directors Plan in
partial consideration for services rendered by such persons. All such
options are exercisable at the fair market value of the common stock on
the date of grant. The grant of such options was exempt from
registration pursuant to section 4(2) of the Securities Act of 1933, as
amended (the "Act").
On September 30, 1996, December 31, 1996, March 31, 1997 and June 30,
1997, the Company contributed an aggregate of 48,721 shares of its
common stock to its 401(k) Plan in partial consideration for services
rendered by its employees. The issuance of such shares was exempt from
registration pursuant to section 4(2) of the Act.
On January 1, 1997, the Company granted options to purchase 50,000
shares of its common stock to Backus Turner International in partial
payment for advertising services. The options are exercisable at $1.00,
which was the fair market value of the common stock on the date of grant
of the options. The grant of such options was exempt from registration
pursuant to Section 4(2) of the Act.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
(In thousands, except per share and operating data)
Years Ended July 31, 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Revenues $68,536 $77,532 $79,603 $78,388 $72,733
Gross profit 22,258 26,090 28,406 28,590 26,664
Store operating, general and administrative expenses 28,036 29,065 26,338 24,136 22,834
Impairment of long-lived assets 1,500 -- -- -- --
Store closing expenses 898 3,251 -- -- --
Restructuring charge 215 -- -- -- 3,204
Interest (expense) and other income (905) (918) (410) 44 1,013
------ ------ ------ ------ ------
Earnings (loss) before income taxes (9,296) (7,144) 1,658 4,498 1,639
Provision (benefit) for income taxes (161) (2,651) 626 1,681 485
------ ------ ------ ------ ------
Net earnings (loss) $(9,135) $(4,493) $1,032 $2,817 $1,154
====== ====== ====== ====== ======
Cash flow from operating activities 3,253 4,671 380 2,319 4,223
====== ====== ====== ====== ======
Net earnings (loss) per common share $(1.74) $( .86) $ .20 $ .54 $ .22
====== ====== ====== ====== ======
Weighted average number of common shares outstanding 5,252 5,246 5,248 5,264 5,195
====== ====== ====== ====== ======
BALANCE SHEET DATA (AS OF JULY 31,):
Working capital $ 4,118 $10,822 $16,702 $12,117 $10,779
Total assets 29,253 42,125 46,497 37,364 31,155
Capital lease obligation and long term debt 6,696 9,654 11,435 67 97
Common stockholders' equity 9,609 18,647 23,168 22,000 18,971
Common stockholders' equity per share 1.83 3.55 4.41 4.22 3.66
Return on sales (13.3%) (5.8%) 1.3% 3.6% 1.6%
Return on average common stockholders' equity (64.7%) (21.5%) 4.6% 13.8% 6.2%
OPERATING DATA:
Number of stores (at July 31) 45 52 58 55 56
Weighted average revenue per store $1,444,000 $1,424,000 $1,385,000 $1,375,000 $1,198,000
Square feet of selling space (at July 31) 266,307 323,323 336,130 280,100 273,400
Weighted average revenue per square foot
of selling space $ 236 $ 227 $ 266 $ 279 $ 242
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following table sets forth, for the periods indicated, the relative
percentages that certain items in the Company's Consolidated Statements
of Operations bear to revenues and the percentage change in those items
from period to period.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
YEARS ENDED JULY 31, 1997 1996 1995
<S> <C> <C> <C>
Product sales 98.0% 98.0% 97.1%
Video rental 2.0 2.0 2.9
----- ----- -----
Total revenues 100.0 100.0 100.0
Gross profit - product sales 32.2 33.2 35.1
Gross profit - video rental 49.2 54.2 55.9
----- ----- -----
Total gross profit 32.5 33.7 35.7
Store operating, general and
administrative expenses 40.9 37.5 33.1
Store closing expenses 1.3 4.2 --
Impairment of long-lived assets 2.2 -- --
Other income (expense) (1.3) (1.2) (0.5)
----- ----- -----
Earnings (loss) before income taxes (13.6) (9.2) 2.1
Provision (benefit) for income taxes (0.3) (3.4) 0.8
----- ----- -----
Net earnings (loss) (13.3)% (5.8)% 1.3%
----- ----- -----
PERIOD TO PERIOD PERCENTAGE
INCREASE (DECREASE)
YEARS ENDED JULY 31, 1997 1996 1995
----- ----- -----
Product sales (11.2)% (1.7)% 3.5%
Video rental (30.5) (33.1) (38.0)
Total revenues (11.6) (2.6) 1.6
Gross profit - product sales (14.0) (6.9) 2.2
Gross profit - video rental (36.9) (35.2) (37.1)
Total gross profit (14.7) (8.2) (0.6)
Store operating, general and
administrative expenses (3.5) 10.4 9.1
Store closing expenses (72.4) 100.0 --
Impairment of long-lived assets 100.0 -- --
Other income (expense) (1.5) 123.9 n/m
Earnings (loss) before income taxes (30.1) (530.8) (63.1)
Provision (benefit) for income taxes (93.9) (523.6) (62.8)
NET EARNINGS (LOSS) (103.3) (535.2) (63.4)
</TABLE>
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The following is an analysis of the Company's results of operations,
liquidity and capital resources. To the extent that such analysis and
other information in this annual report contain statements which are not
of a historical nature, such statements are forward-looking statements,
which involve risks and uncertainties. These risks include changes in
the competitive environment for the Company's products, including the
entry or exit of non-traditional retailers of the Company's products to
or from its markets; the release by the music industry of an increased
or decreased number of "hit releases"; unfavorable developments with
respect to a lease; general economic factors in markets where the
Company's products are sold; and other factors discussed in the
Company's filings with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
REVENUES
Total revenues decreased by $8,995,000 or 11.6% from fiscal 1996 to
fiscal 1997. On a same-store basis (stores open more than one year)
revenues were flat against last year.
Revenue from product sales in fiscal 1997 decreased by 11.2% for the
chain as a whole and decreased by 0.5% on a same-store basis. Revenues
declined because the Company operated seven fewer stores than in fiscal
1996 and increased unit sales of compact discs were more than offset by
decreased unit sales of cassettes and video product. Same-store
revenues remained flat primarily because of fewer new hit release titles
which contribute not only to greater sales but to greater in-store
traffic. In addition, the Company has seen significant expansion of
competitive music retail space by non-traditional music retailers which
often sell compact discs near or at cost in certain markets, which
contributed to same-store sales remaining flat.
Video rental revenue in fiscal 1997 decreased by 30.5% for the chain as
a whole and by 25.1% on a same-store basis as compared to fiscal 1996.
The Company maintains video rental departments in a limited number of
stores based on customer demand and has not aggressively promoted this
business. The closing of three video rental departments since the
third quarter of fiscal 1996 and a lower demand for video rentals
contributed to lower rental revenues.
The Company plans to continue to review and adjust its prices and focus
its marketing and advertising campaign to differentiate its product
offering from price oriented mass merchants and discount electronics
stores. Nevertheless, the Company is likely to continue to experience
revenue declines due to non-traditional retailers' price reductions, and
the planned closure of additional under performing stores in fiscal
1998.
Total revenues decreased by $2,071,000 or 2.6% from fiscal 1995 to
fiscal 1996. On a same-store basis, revenues decreased by 5.7%.
During fiscal 1996, revenue from product sales decreased by 1.7% for the
chain as a whole and decreased by 5.4% on a same-store basis. Revenues
declined because increased unit sales of compact discs were more than
offset by decreased unit sales of cassettes and video product. Same-store
revenues declined primarily because of the lack of significant new
hit release titles which contribute not only to greater sales but to
greater in-store traffic.
Video rental revenue decreased by 33.1% for the chain as a whole and by
23.3% on a same-store basis during fiscal 1996 as compared to 1995. The
closing of three video rental departments during fiscal 1996, and lower
demand contributed to the decrease in revenue.
Weighted average revenue per store increased by 1.4% to $1,444,000 in
fiscal 1997 and increased by 2.8% in fiscal 1996. The weighted average
revenue per square foot of selling space increased to $236, or
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<PAGE>
3.9% in fiscal 1997 and decreased to $227, or 14.7% in fiscal 1996.
The increase in fiscal 1997 is due to the closing of eight under
performing stores. The decrease in fiscal 1996 reflects the addition of
two mega stores early in the year which tended to bring down the average
during the development period.
GROSS PROFIT
Gross profit for product sales, which is net of product management and
distribution costs, was 32.2%, 33.2% and 35.1% in fiscal 1997, 1996 and
1995, respectively. Gross profit as a percentage of revenue, decreased
in fiscal 1997 because of promotional markdowns and the continued shift
in sales mix to compact and laser discs, which have lower gross margins
than audio cassettes and VHS tapes.
Gross profit for video rentals was 49.2%, 54.2% and 55.9% in fiscal
1997, 1996 and 1995, respectively. Some fluctuations in gross profit
margins may be expected due to the fixed nature of the video rental
inventory being amortized on an accelerated method over a three year
period.
Total gross profit was 32.5%, 33.7% and 35.7% in fiscal 1997, 1996 and
1995, respectively. The Company expects gross profit as a percentage of
revenues to increase as a result of better buying practices combined
with an improvement in product mix. Some fluctuation in gross profit
margins may be expected due in part to the many factors that affect the
Company's cost of product for sale and in part to the Company's
promotional strategies.
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Store operating, general and administrative expenses were 40.9%, 37.5%
and 33.1% of revenues in fiscal 1997, 1996 and 1995, respectively.
Store operating expenses decreased due to operating seven fewer stores
compared to fiscal 1996. General and administrative expenses for fiscal
1997 increased slightly compared to fiscal 1996. However, as a
percentage of revenue, the increase of store operating, general and
administrative expenses was due to the significant decline in total
revenues.
STORE CLOSING EXPENSE
In fiscal 1997, the Company recorded $898,000 in store closing expenses
for costs associated with closing eight under performing stores.
In fiscal 1996, as part of its response to industry conditions, the
Company provided a charge of $3,251,000 to cover the costs of closing
unprofitable stores. During the year, the Company closed eight such
stores. The major portion of the store closing expense relates to costs
and writeoffs associated with the closing of the Coconut Grove
"megastore," which was unprofitable.
IMPAIRMENTS
During fiscal 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of." This
standard requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Based on projected future
cash flows of certain stores, the Company recorded an estimated write
down of $1,500,000 for the impairment of long lived assets.
INTEREST EXPENSE AND OTHER INCOME
The Company incurred interest expense of $952,000 in fiscal 1997,
$1,074,000 in fiscal 1996 and $442,000 in fiscal 1995. Interest
expense decreased in fiscal 1997 as a result of lower borrowing
requirements.
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<PAGE>
INCOME TAXES
The effective income tax rate as a percentage of earnings (loss) before
income taxes, was 1.7% due to the non recognition of any tax credits
from net operating loss carry forwards in fiscal 1997. The effective
income tax rate, as a percentage of earnings (loss) before income taxes,
was 37.1% and 37.8% in fiscal 1996 and 1995, respectively.
NET EARNINGS (LOSS)
The net loss for fiscal 1997 was $(9,135,000) or $(1.74) per share
compared to a net loss of $(4,493,000) or $(.86) per share in fiscal
1996. The fiscal 1997 loss resulted from lower gross margins due to
increased competition, store closing expense charges, and the impairment
of long-lived assets charge. Fiscal 1996 earnings decreased from
$1,032,000, or $.20 per share in fiscal 1995 because of lower same-store
sales resulting from increased competition, lower gross margins due to
product mix shifts and higher store operating, general and
administrative costs associated with new store openings and the store
closing expense charge.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $4.1 million, $10.8 million and $16.7 million at
July 31, 1997, 1996 and 1995, respectively. The decrease in working
capital in both fiscal 1997 and 1996 resulted from a reduction in the
Company's inventory levels as well as losses incurred during both years.
Cash flows from operating activities provided $3.3 million, $4.7 million
and $.4 million in fiscal 1997, 1996 and 1995, respectively. The
primary reason for the decline in cash flows from operating activities
for fiscal 1997 relates to an increase in the net loss. In fiscal 1996,
inventory reductions, obtained from just-in-time buying practices,
contributed $4.5 million to increased operating cash flows.
Cash flows used in investing activities decreased from $2.8 million in
fiscal 1996 to $.6 million in fiscal 1997. The primary reason for the
decline in cash flows used in investing activities relate to fewer
additions to property and equipment in fiscal 1997 compared to fiscal
1996.
At July 31, 1997, the Company had a $15 million secured revolving credit
agreement, expiring May 1998, which includes a $3,000,000 stand-by
letter of credit facility. Under the revolving credit agreement, the
Company may borrow up to the lesser of (a) $15,000,000, or (b) 60% of
the Company's eligible inventory (as defined in the credit agreement).
At July 31, 1997, the Company had an outstanding balance of $6,696,000
and an additional $338,000 was available under the terms of the
agreement. There were no borrowings under the stand-by letter of credit
during fiscal 1997.
On October 3, 1997, the Company obtained an extension to August 1, 1998
on its Revolving Credit Facility. Under this extended credit facility
the lender waived any defaults or events of default which had previously
arisen from violations of the original financial covenants. New
financial covenants have been set for the term of the agreement.
Additionally, the lender entered into a Subordination and Intercreditor
Agreement which is effective through August 1, 1998 and allows the
Company to borrow from another lender up to an additional $1 million
above the existing Revolving Credit Facility.
The Company is a specialty retailer in Florida and Puerto Rico of
prerecorded music and video products and is also engaged in the rental
of video tapes. This industry has experienced increased competition
during the past few years, which coupled with other business related
factors, has negatively impacted the Company's performance. The Company
anticipates the competitive conditions will continue into the
foreseeable future. The Company's return to profitable operations and
continuity into the future is dependent upon various factors including
improved sales and profit margins, reducing expenses, eliminating
unprofitable stores, the competitive environment, its ability to meet
its debt covenants, and the
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<PAGE>
availability of capital resources necessary to conduct its business.
Management believes that its cash flow from operations and availability
under its existing credit agreements should be adequate to cover the
Company's projected cash requirements during the year ending July 31,
1998. Operating results are, however, subject to various uncertainties
and contingencies, many of which are beyond the Company's control. The
Company's future profitability, or the lack thereof, could have a
substantial impact on its liquidity, its ability to meet its debt
covenants, and the availability of capital resources necessary to
conduct its business.
The Company plans capital investments in fiscal 1998 for store
remodeling and store fixture upgrades. The investment program will be
financed with cash from operating activities.
NEW ACCOUNTING PRONOUNCEMENTS
The Company will adopt the following statements of Financial Accounting
Standards ("SFAS") in the year ending July 31, 1998:
In February 1997, Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share," was issued. SFAS No. 128, which
supersedes Accounting Principles Board ("APB") Opinion No. 15, requires
a dual presentation of basic and diluted earnings per share on the face
of the income statement. Basic earnings per share excludes dilution and
is computed by dividing income or loss attributable to common
stockholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted
in the issuance of common stock that then shared in the earnings of the
entity. When adopted, all prior-period earnings per share data are
required to be restated. The Company believes SFAS No. 128 will not
significantly alter previously reported earnings per share data.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," was issued. SFAS No. 131 establishes
standards for the way that public companies report selected information
about operating segments in annual financial statements and requires
that those companies report selected information about segments in
interim financial reports issued to shareholders. Operating segments
are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. Generally, financial information is required to
be reported on the basis that it is used internally for evaluating
segment performance and deciding how to allocate resources to segments.
SFAS No. 131 requires that a public company report a measure of segment
profit or loss, certain specific revenue and expense items and segment
assets. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. The Company has not determined the
effects, if any, that SFAS No. 131 will have on the disclosures in its
consolidated financial statements.
INFLATION AND ECONOMIC TRENDS
The Company is affected by general economic trends, particularly in
Florida and Puerto Rico. The Company does not believe that inflation
has had a material effect on the results of its operations during the
past three fiscal years.
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<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company does not trade or conduct activities in derivative financial
instruments, other financial instruments or derivative commodity
instruments. The Company's trade accounts receivable are obligations of
domestic entities and thus do not subject the Company to any foreign
currency fluctuation risks. In addition, the amount of such trade
accounts receivable as of July 31, 1997 was approximately $192,000, and
represented an immaterial amount of the Company's approximately
$29,253,000 in assets. Accordingly, the Company believes that any
market risk with respect to such instruments is immaterial.
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Spec's Music, Inc. and Subsidiary
Miami, Florida
We have audited the accompanying consolidated balance sheets of Spec's
Music, Inc. and Subsidiary (the "Company") as of July 31, 1997 and 1996,
and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the
period ended July 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on the 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, such consolidated financial statements present fairly,
in all material respects, the financial position of Spec's Music, Inc.
and Subsidiary as of July 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the
period ended July 31, 1997 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
October 24, 1997
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<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
July 31, 1997 1996
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 59,397 $ 405,753
Trade receivables 192,286 293,681
Income tax receivable 1,890,498 1,236,641
Inventories 14,629,312 19,704,076
Prepaid expenses 294,373 589,984
Deferred tax asset -- 2,122,384
----------- -----------
Total current assets 17,065,866 24,352,519
Video rental inventory, net 369,734 489,649
Property and equipment, net 11,157,024 16,714,965
Other assets 659,911 567,892
----------- -----------
Total assets $29,252,535 $42,125,025
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 9,860,269 $ 8,408,500
Accrued expenses 2,437,332 2,262,378
Store closing reserve 650,000 2,859,289
----------- -----------
Total current liabilities 12,947,601 13,530,167
Long term debt 6,695,994 9,654,094
Deferred income taxes -- 293,663
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; 10,000,000
shares authorized; 5,300,319 and
5,319,269 shares issued at 1997
and 1996, respectively 53,004 53,194
Additional paid-in capital 3,551,326 3,700,043
Retained earnings 6,134,540 15,269,348
Less 25,879 and 74,600 shares
in treasury, at cost, in 1997
and 1996, respectively (129,930) (375,484)
----------- -----------
Total stockholders' equity 9,608,940 18,647,101
----------- -----------
Total liabilities and
stockholders' equity $29,252,535 $42,125,025
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended July 31, 1997 1996 1995
<S> <C> <C> <C>
REVENUES:
Product sales $ 67,469,876 $ 75,996,009 $ 77,306,250
Video rentals 1,066,566 1,535,652 2,296,892
------------ ------------ ------------
Total revenues 68,536,442 77,531,661 79,603,142
Cost of goods sold - product sales 45,736,342 50,737,316 50,182,698
Cost of goods sold - video rental 541,833 704,003 1,014,070
------------ ------------ ------------
Gross profit 22,258,267 26,090,342 28,406,374
Store operating, general and
administrative expenses 28,036,172 29,064,731 26,337,806
Restructuring charge 214,780 -- --
Store closing expenses 898,434 3,251,203 --
Impairment of long-lived assets 1,500,000 -- --
------------ ------------ ------------
Operating income (loss) (8,391,119) (6,225,592) 2,068,568
Other income (expense):
Interest income 3,698 58,986 --
Interest expense (951,517) (1,074,497) (441,527)
Other 43,270 96,769 31,230
------------ ------------ ------------
Total other income (expense) (904,549) (918,742) (410,297)
------------ ------------ ------------
Earnings (loss) before income taxes (9,295,668) (7,144,334) 1,658,271
Provision (benefit) for income taxes (160,860) (2,651,525) 626,000
------------ ------------ ------------
NET EARNINGS (LOSS) $ (9,134,808) $ (4,492,809) $ 1,032,271
============ ============ ============
NET EARNINGS (LOSS) PER COMMON SHARE $ (1.74) $ (.86) $ .20
============ ============ ============
Weighted average number of
common shares outstanding 5,252,000 5,246,000 5,248,000
============ ============ ============
See Notes to Consolidated Financial Statements.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
Additional
Common Stock Paid-in Retained Treasury Stock
Shares Amount Capital Earnings Shares Amount Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 31, 1994 5,355,158 $53,552 $3,918,256 $18,729,886 (139,391) $(702,044) $21,999,650
Net earnings -- -- -- 1,032,271 -- -- 1,032,271
Exercise of stock options -- -- 187 -- 1,334 6,737 6,924
Contributions to 401(K) Plan -- -- (9,006) -- 12,711 64,063 55,057
Cancellation of restricted
stock award (11,350) (113) (58,011) -- -- -- (58,124)
Restricted stock awards granted -- -- (15,822) -- 29,300 147,672 131,850
--------- ------- ---------- ---------- -------- --------- ----------
Balance, July 31, 1995 5,343,808 $53,439 $3,835,604 $19,762,157 (96,046) $(483,572) $23,167,628
Net loss -- -- -- (4,492,809) -- -- (4,492,809)
Contributions to 401(K) Plan -- -- (67,487) -- 21,446 108,088 40,601
Cancellation of restricted
stock award (24,539) (245) (105,055) -- -- -- (105,300)
Deferred compensation expense -- -- 36,981 -- -- -- 36,981
--------- ------- ---------- ---------- -------- --------- ----------
Balance, July 31, 1996 5,319,269 $53,194 $3,700,043 $15,269,348 (74,600) $(375,484) $18,647,101
Net loss -- -- -- (9,134,808) -- -- (9,134,808)
Contributions to 401(K) Plan -- -- (193,362) -- 48,721 245,554 52,192
Cancellation of restricted
stock award (18,950) (190) (95,511) -- -- -- (95,701)
Deferred compensation expense -- -- 140,156 -- -- -- 140,156
--------- ------- ---------- ---------- -------- --------- ----------
Balance, July 31, 1997 5,300,319 $53,004 $3,551,326 $6,134,540 (25,879) $(129,930) $9,608,940
========= ======= ========== ========== ======== ========= ==========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(9,134,808) $(4,492,809) $1,032,271
ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS)
TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Amortization of video rental inventory 541,833 704,003 1,176,621
Depreciation and amortization of property
and equipment 2,450,507 2,760,052 2,150,366
Amortization of preopening expenses 26,018 704,092 281,779
Loss on disposal of property and equipment 1,923,706 264,516 9,007
Gain on disposal of video rental inventory (7,705) (79,368) (192,840)
Amortization of intangibles 29,397 19,091 19,091
Deferred compensation expense 140,156 36,981 --
Impariment of long-lived assets 1,500,000 -- --
Changes in assets and liabilities:
(Increase) decrease in assets:
Trade receivables 101,395 429,264 (260,735)
Income tax receivable (653,857) (1,236,641) --
Inventories 5,074,764 4,760,914 (826,005)
Prepaid expenses 269,593 (276,370) (729,319)
Prepaid income taxes -- 280,000 (193,000)
Deferred tax asset 2,122,384 (1,146,384) 360,000
Other assets (306,521) (25,630) (336,221)
Increase (decrease) in liabilities:
Accounts payable 1,451,769 99,715 (2,089,607)
Accrued expenses 227,146 (448,834) 735,111
Store closing reserve (2,209,289) 2,859,289 --
Restructuring charge -- (251,203) (480,952)
Deferred income taxes (293,663) (289,337) (276,000)
---------- ---------- ----------
Net cash provided by operating activities 3,252,825 4,671,341 379,567
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of video rental inventory (513,133) (691,496) (1,114,239)
Disposition of video rental inventory 98,920 300,111 242,855
Additions to property and equipment (244,158) (2,883,518) (10,701,608)
Disposition of property and equipment 17,290 460,549 632,005
---------- ---------- ----------
Net cash (used in) investing activities (641,081) (2,814,354) (10,940,987)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 82,346,812 32,924,426 36,500,000
Repayments of borrowings and capital
lease (85,304,912) (34,705,064) (26,732,420)
Exercise of stock options -- -- 6,924
Payment of debt issue costs -- (222,820) --
---------- ---------- ----------
Net cash provided by (used in) financing
activities (2,958,100) (2,003,458) 9,774,504
---------- ---------- ----------
Net (decrease) in cash and equivalents (346,356) (146,471) (786,916)
Cash and equivalents at beginning of year 405,753 552,224 1,339,140
---------- ---------- ----------
Cash and equivalents at end of year $ 59,397 $ 405,753 $ 552,224
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A / SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS AND BUSINESS RISKS
The Company is a specialty retailer in Florida and Puerto Rico of
prerecorded music and video products and is also engaged in the rental
of video tapes. This industry has experienced increased competition
during the past few years, which coupled with other business related
factors, has negatively impacted the Company's performance. The Company
anticipates the competitive conditions will continue into the
foreseeable future. The Company's return to profitable operations and
continuity into the future is dependent upon various factors including
improved sales and profit margins, reducing expenses, eliminating
unprofitable stores, the competitive environment, its ability to meet
its debt covenants, and the availability of capital resources necessary
to conduct its business. Management believes that its cash flow from
operations and availability under its existing credit agreements should
be adequate to cover the Company's projected cash requirements during
the year ending July 31, 1998. Operating results are, however, subject
to various uncertainties and contingencies, many of which are beyond the
Company's control. The Company's future profitability or the lack
thereof, could have a substantial impact on its liquidity, its ability
to meet its debt covenants, and the availability of capital resources
necessary to conduct its business.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements
of the Company and its wholly-owned subsidiary. All material
intercompany transactions and balances have been eliminated.
CASH EQUIVALENTS
The Company considers all highly liquid short-term investments purchased
with a maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market.
VIDEO RENTAL INVENTORY
The cost of video rental inventory is being amortized in proportion to
the estimated rental income of the tapes without salvage value. All
video rental tapes are amortized on an accelerated method over a period
of three years. The cost and accumulated amortization of video tapes
which are sold or otherwise disposed are removed from their appropriate
accounts and the resulting gain or loss is reflected in gross profit.
PREOPENING EXPENSES
The Company defers certain expenses incurred in connection with the
opening of new stores. Such preopening expenses are included in prepaid
expenses and are amortized over the twelve-month period following the
opening of each store. Unamortized preopening expenses at July 31, 1997
and 1996 were $0 and $27,000, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on property and
equipment is provided by the straight-line method over their estimated
useful lives. Leasehold improvements are amortized on a straight-line
method over the life of the lease, including renewal options that are
probable of exercise, or the estimated useful lives of the assets,
whichever is shorter.
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<PAGE>
INCOME TAXES
Deferred income taxes are provided in amounts sufficient to give effect
to temporary differences between financial and tax reporting, in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes."
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expense
was $1,737,479, $843,845 and $752,506 for the years ended July 31, 1997,
1996 and 1995.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are computed based on net earnings (loss) for
the year, divided by the weighted average number of common shares and
equivalents outstanding during the respective years. Stock options have
been included in the earnings per share computation for the year ended
July 31, 1995. Stock options were antidilutive to the July 31, 1997 and
July 31, 1996 calculations and were therefore excluded.
NEW ACCOUNTING PRONOUNCEMENTS ADOPTED
SFAS NO. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF."
Long-lived assets and certain identifiable intangibles to be held
and used by a company are required to be reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Measurement
of an impairment loss for such long-lived assets and
identifiable intangibles should be based on the fair value of the
asset. Long-lived assets and certain identifiable intangibles
to be disposed of are required to be reported generally at the
lower of the carrying amount or fair value less the cost to sell.
The Company adopted SFAS No. 121 in fiscal 1997, (see Note E).
SFAS NO. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION."
SFAS No. 123 defines and encourages the use of the fair value
method of accounting for employee stock-based compensation.
Continuing use of the intrinsic value based method of accounting
prescribed in Accounting Principles Board Opinion No. 25 ("APB 25")
for measurement of employee stock-based compensation is allowed
with pro-forma disclosures of net income and earnings per share as
if the fair value method of accounting had been applied.
Transactions in which equity instruments are issued in exchange
for goods or services from non-employees must be accounted for
based on the fair value of the consideration received or of the
equity instrument issued, whichever is more reliably measurable.
The Company has continued to use the method of accounting
prescribed in APB 25 for measurement of employee stock-based
compensation.
NEW ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED
("SFAS") No. 128, "EARNINGS PER SHARE."
SFAS No. 128, which supersedes Accounting Principles Board
("APB") Opinion No. 15, requires a dual presentation of basic
and diluted earnings per share on the face of the income statement.
Basic earnings per share excludes dilution and is computed by
dividing income or loss attributable to common stockholders
by the weighted-average number of common shares outstanding for
the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in the
earnings of the entity. When adopted, all prior-period earnings
per share data are required to be restated. The Company believes
SFAS No. 128 will not significantly alter previously reported
earnings per share data.
SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION."
SFAS No. 131 establishes standards for the way that public
companies report selected information about operating segments
in annual financial statements and requires that those companies
report selected information about segments in interim financial
reports issued to shareholders. Operating segments are components
of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in
assessing
-26-
<PAGE>
performance. Generally, financial information is required to be
reported on the basis that it is used internally for evaluating
segment performance and deciding how to allocate resources to
segments. SFAS No. 131 requires that a public company report a
measure of segment profit or loss, certain specific revenue and
expense items, and segment assets. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997.
The Company has not determined the effects, if any, that SFAS No.
131 will have on the disclosures in its consolidated financial
statements.
B / FAIR VALUE OF FINANCIAL INSTRUMENTS:
In accordance with SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments," the Company has estimated the fair value of
financial instruments. The estimated fair value has been determined by
the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in
interpreting data to develop such estimates. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the
Company could realize in a current market exchange.
The following methods and assumptions were used to estimate the fair
value of the Company's financial instruments for which it was
practicable to estimate that value:
o The carrying amounts of cash and equivalents, receivables and
accounts payable approximate fair value due to their short term
nature; and
o Discounted cash flows using current interest rates for financial
instruments with similar characteristics and maturity were used
to determine the fair value of the long-term debt.
There were no significant differences as of July 31, 1997 and 1996 in
the carrying value and fair value of financial instruments.
C / SUPPLEMENTAL CASH FLOW INFORMATION:
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION FOR THE YEARS ENDED
JULY 31 IS AS FOLLOWS:
Cash paid during the year for: 1997 1996 1995
Interest $ 749,512 $1,013,000 $ 378,000
Income taxes 0 0 700,000
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES INFORMATION
The Company contributed approximately $52,000, $41,000 and $55,000 of
treasury stock to the Company's 401(k) Plan during the year ended July
31, 1997, 1996 and 1995, respectively.
During the fiscal years ended July 31, 1997, 1996 and 1995 the Company
canceled restricted stock awards totaling approximately $96,000,
$105,000 and $58,000, respectively.
During fiscal 1997 and 1996 no restricted stock awards were granted.
The Company granted 29,000 shares of treasury stock totaling
approximately $132,000 as restricted stock awards during fiscal 1995.
D / VIDEO RENTAL TAPES:
The following comprise cost and accumulated amortization of video rental
tapes at July 31:
-27-
<PAGE>
1997 1996
Cost $ 1,751,132 $ 2,056,098
Less accumulated amortization 1,381,398 1,566,449
---------- ----------
$ 369,734 $ 489,649
========== ==========
E / PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
The following comprise property and equipment at July 31:
Useful Lives 1997 1996
<S> <C> <C> <C>
Building 31 years $ 4,995,707 $ 4,991,505
Equipment, furniture and fixtures 5-8 years 9,281,906 11,424,206
Transportation equipment 2-5 years 141,981 131,089
Signs 1-10 years 1,155,341 1,857,114
Leasehold improvements 1-31 years 5,088,367 8,053,107
----------- -----------
20,663,302 26,457,021
Less accumulated depreciation
and amortization 9,506,278 9,742,056
----------- -----------
$11,157,024 $16,714,965
----------- -----------
</TABLE>
During fisal 1997, in accordance with Statement of Finacial Accounting
Standards ("SFAS") No. 121, "Accounting For The Impairment Of Long-lived
Assets and For Long-lived Assets To Be Disposed Of," the Company recorded
an estimated write down of $1,500,000 based on projected future cash
flows of certain stores.
F / LONG TERM DEBT:
In May 1996, the Company obtained a new 2 year credit agreement (the
"Revolving Credit Facility"), which includes a $3,000,000 stand-by
letter of credit facility, both of which expire in May 1998. Under
the Company's new Revolving Credit Facility, it may borrow up to the
lesser of (a) $15,000,000 or (b) 60% of the Company's eligible inventory
(as defined in the Credit Agreement). A commitment fee of % of the
unused portion is payable monthly. There were no borrowings under the
stand-by letter of credit during fiscal 1997.
The Revolving Credit Facility and all of the Company's obligations in
connection therewith are secured by a first-priority security interest
in substantially all of the Company's assets, and the Company may not
further pledge its assets without the prior approval of its lender. The
Company is also required to meet certain monthly financial covenants,
including, but not limited to minimum earnings, current ratio, fixed
charge coverage and tangible net worth levels. In addition, the Company
may not exceed certain capital expenditures and inventory cost levels.
The Revolving Credit Facility bears interest at a floating rate,
adjusted monthly, equal to the Index Rate (as defined below) plus
2.875%. The "Index Rate" is the last month-end published rate for 30-day
dealer-placed commercial paper sold through dealers by major
corporations as published in the Money Rates section of THE WALL STREET
JOURNAL. Accrued interest is payable monthly in arrears. The interest
rate at July 31, 1997 was 8.445%.
-28-
<PAGE>
The outstanding amount under the Revolving Credit Facility was
approximately $6.7 million as of July 31, 1997 and an additional
$338,000 was available under the terms of the agreement.
On October 3, 1997, the Company obtained an extension to August 1, 1998
on the Revolving Credit Facility. Under this extended credit facility
the lender waived any defaults or events of default which had previously
arisen from violations of the original financial covenants. New
financial covenants have been set for the term of the agreement.
Additionally, the lender entered into a Subordination and Intercreditor
Agreement, which is effective through August 1, 1998, which allows the
Company to borrow from another lender, up to an additional $1 million
above the existing Revolving Credit Facility. This facility bears
interest at a floating rate, adjusted monthly, equal to the Prime Rate
plus 8.25%.
The Agreements contain restrictions on the declaration and payment of
dividends.
G / INCOME TAXES:
Components of income taxes for the years ended July 31, consist of the
following:
1997 1996 1995
FEDERAL:
Current $(1,989,581) $(1,215,804) $ 463,000
Deferred 1,563,433 (1,170,120) 71,000
----------- ----------- ----------
(426,148) (2,385,924) 534,000
----------- ----------- ----------
STATE:
Current $ 0 $ 0 $ 79,000
Deferred 265,288 (265,601) 13,000
----------- ----------- ----------
265,288 (265,601) 92,000
----------- ----------- ----------
$ (160,860) $(2,651,525) $ 626,000
----------- ----------- ----------
The difference between the expected federal income tax rate and the
Company's effective tax rate for the years ended July 31, are as
follows:
1997 1996 1995
Expected federal tax rate 34.0% 34.0% (34.0)%
State income tax, net of federal
income tax effects (1.9) 3.1 (3.1)
Change in valuation allowance (42.1) -- --
Reversal of previously recorded
deferred tax liabilities 5.8 -- --
Other 5.9 -- (0.7)
------ ------ ------
1.7% 37.1% (37.8)%
------ ------ ------
The approximate tax effect of each type of temporary difference that
gave rise to the Company's deferred tax asset and liability on the
accompanying balance sheet is as follows:
-29-
<PAGE>
<TABLE>
<CAPTION>
July 31, 1997
---------------------------------
ASSETS LIABILITIES TOTAL
-------- ----------- -------
<S> <C> <C> <C>
Accelerated depreciation on property
and equipment for tax purposes $ 14,961 $ -- $ 14,961
Capitalization for tax purposes of
inventory related costs 238,498 -- 238,498
Accrued return authorization reserve 42,568 -- 42,568
Store closing reserve 297,461 -- 297,461
Accrued rent 59,121 -- 59,121
Accrued vacation 73,311 -- 73,311
Accrued insurance 3,528 -- 3,528
Deferred compensation 26,103 -- 26,103
Shrinkage reserve 38,629 -- 38,629
Impairment of assets 564,000 -- 564,000
Contributions 10,749 -- 10,749
Preopening expenses (15,872) (15,872)
Net operating loss carry forwards 2,562,969 -- 2,562,969
---------- ---------- ----------
3,931,898 (15,872) 3,916,026
Valuation Allowance (3,931,898) 15,872 (3,916,026)
---------- ---------- ----------
$ 0 $ 0 $ 0
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
July 31, 1996
-----------------------------------
ASSETS LIABILITIES TOTAL
--------- ----------- ---------
<S> <C> <C> <C>
Accelerated depreciation on property
and equipment for tax purposes $ -- $(283,538) $(283,538)
Capitalization for tax purposes of
inventory related costs 333,167 -- 333,167
Preopening expenses -- (10,125) (10,125)
Accrued return authorization reserve 95,194 -- 95,194
Store closing reserve 1,075,101 -- 1,075,101
Accrued rent 115,400 -- 115,400
Accrued vacation 60,022 -- 60,022
Accrued insurance 54,958 -- 54,958
Deferred compensation 26,103 -- 26,103
State net operating loss carry forward 229,311 -- 229,311
Shrinkage reserve 133,128 -- 133,128
--------- ----------- ---------
$2,122,384 $ (293,663) $1,828,721
--------- ----------- ---------
</TABLE>
In view of continuing losses from operations, the Company has recorded
in fiscal 1997 a valuation allowance on deferred asset amounts which may
not be recoverable through the future utiilization of operating losses.
The Company has received a $1,890,00 federal income tax refund in
October 1997 for the fiscal year ending July 31, 1997.
The Company has available federal net operating loss carryforwards
totaling approximately $6,005,892 which expire in 2012. In addition,
the Company has available state operating loss carryforwards totaling
approximately $14,351,667 expiring in years 2011 and 2012.
-30-
<PAGE>
H / PROFIT-SHARING PLAN:
The Company has a profit-sharing plan which includes a salary deferral
provision under section 401(k) of the Internal Revenue Code.
Participation in the plan is available to all full-time employees who
are over 20 1/2 years old and have completed six months of continuous
service. Contributions are determined annually by the Board of
Directors. For the years ended July 31, 1997, 1996 and 1995 the Company
provided approximately $66,000, $73,000 and $86,000 respectively, for
contribution to the 401(k) Plan. Approximately $52,000, $41,000 and
$55,000 of the contribution was made in the Company's common stock for
fiscal 1997, 1996 and 1995, respectively.
I / STOCKHOLDERS' EQUITY:
COMMON STOCK
During fiscal 1991, the Board of Directors authorized a common stock
repurchase program of up to 300,000 shares of the Company's common
stock. The Board of Directors authorized the purchase of an additional
300,000 shares of the Company's common stock during fiscal year 1993.
During fiscal 1997 and 1996 no shares were purchased. In connection
with contributions to the 401(k) Plan, grants of restricted stock awards
and the exercise of stock options, 48,721, 21,446 and 43,345 shares were
issued from treasury stock in 1997, 1996 and 1995, respectively. The
remaining shares are included in treasury stock at July 31, 1997.
STOCK OPTION PLANS
In May 1986, the Board of Directors approved the adoption of an
employee stock option plan. Under the plan, 500,000 shares of common
stock have been reserved for issuance. In fiscal 1987, the plan was
amended and restated as an incentive stock plan which includes stock
options, stock appreciation rights, restricted stock and performance
shares. As of May 1996, no additional grants of stock options can be
made under the plan.
On September 21, 1993, the Board of Directors created two new plans:
The 1993 Non-Employee Director Plan and the 1993 Employee Stock Option
Plan. The Company reserved 50,000 shares under the Director's plan and
granted 15,000 options. The Company reserved 500,000 shares for the
1993 Employee Stock Option Plan.
On December 10, 1996, the Shareholders approved the 1996 Non-Employee
Directors Stock Option Plan. The Company reserved 150,000 shares under
the Non-employee Directors Plan.
At July 31, 1997, the Company has two stock options plans, which are
described above. The Company applies Accounting Principle Board ("APB")
Opinion 25 and related interpretations in measuring compensation expense
for its plans. Accordingly, no compensation has been recognized for its
fixed stock option plans. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value
at the grant dates for awards under those plans, the Company's net loss
and loss per share would have been increased to the pro-forma amounts
indicated below:
1997 1996
Net loss
As reported ............... $ (9,134,808) $ (4,492,809)
Pro forma ................. (9,266,349) (4,536,692)
Loss per share
As reported ............... (1.74) (0.86)
Pro forma ................. (1.76) (0.86)
-31-
<PAGE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions for the grants:
1997 1996
Expected volatility ...................... 61% 44%
Expected lives ........................... 5 years 3 years
Dividend yield ........................... 0% 0%
Risk free interest rate .................. 5.88 - 6.50% 5.11%
Transactions and other information relating to stock options granted are
summarized as follows:
Number of Weighted Average
Shares Exercise Price
Outstanding, July 31, 1994 294,520 $5.14
Granted 119,000 $4.41
Exercised (1,334) $5.19
Canceled (68,312) $4.92
---------
Outstanding, July 31, 1995 343,874 $4.93
Granted 472,766 $1.21
Canceled (130,135) $4.80
---------
Outstanding, July 31, 1996 686,505 $2.39
---------
Granted 477,000 $0.78
Canceled (286,910) $2.28
---------
Outstanding, July 31, 1997 876,595 $1.55
---------
The weighted average fair values of options granted during the years
ended July 31, 1997 and 1996 were $.44 and $.85, respectively.
All stock options with the exception of those listed below were granted
with option prices that were equal to market value at the date of grant.
The term of the options granted may be no more than ten years from the
effective date of grant. During fiscal 1992 and 1993, the Company
extended the exercise period of the 1987 outstanding stock options from
September 1992 to September 1994. On September 14, 1994, the Company's
Board of Directors extended the current expiration dates on all
outstanding stock options to a nine year term. At July 31, 1997,
options to purchase 661,727 shares of common stock were exercisable.
During fiscal 1996, in connection with various consulting agreements,
the Company granted 469,766 compensatory stock options which do not
become effective until fiscal 1997. The options, granted at prices
below the fair market value at the date of grant of $254,604, vest over
the term of the agreements. Compensation expense is charged to
earnings on a pro-rata basis over the life of the consulting agreements.
On September 30, 1994, the Board of Directors granted 29,300 shares of
restricted stock to 86 management associates which vest as described
above. At July 31, 1997, 5,500 shares remain outstanding after
cancellations.
The following table summarizes information about the option plans as of
July 31, 1997:
-32-
<PAGE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Life Exercise Number Exercise
Exercise Prices Outstanding (in years) Price Exerciseable Price
- - - -------------- ----------- ---------------- -------- ------------ --------
$ 1.13 50,000 0.4 $ 1.13 50,000 1.13
1.13-1.31 279,595 2.0 1.23 279,595 1.23
4.50 16,000 2.2 4.50 16,000 4.50
4.75 18,000 3.2 4.75 18,000 4.75
1.00 2,000 3.4 1.00 -- 1.00
1.88 20,000 3.9 1.88 7,215 1.88
4.50 18,000 4.3 4.50 18,000 4.50
6.00 30,000 5.3 6.00 22,500 6.00
5.00 5,000 6.2 5.00 3,750 5.00
4.50 33,000 7.2 4.50 16,500 4.50
3.00 1,000 7.9 3.00 1,000 3.00
1.25 1,000 8.4 1.25 1,000 1.25
1.00 36,000 9.4 1.00 7,000 1.00
0.63 192,000 9.6 0.63 192,000 0.63
0.69 175,000 9.9 0.69 29,167 0.69
---- ------- ---- ------ ------- ------
$0.63-$6.00 876,595 5.9 $ 1.49 661,727 $ 1.55
=========== ======= ==== ====== ======= ======
</TABLE>
J / COMMITMENTS:
The Company leases certain facilities and equipment under noncancellable
operating leases which expire at various dates through fiscal 2010.
Future minimum lease payments under leases that have terms in excess of
one year are:
1998 ............................................. $ 6,211,187
1999 ............................................. 5,723,885
2000 ............................................. 4,961,589
2001 ............................................. 3,851,757
2002 ............................................. 3,167,831
Thereafter ....................................... 8,770,767
------------
$ 32,687,016
============
Base rent expenses, including real estate taxes, insurance, and related
common area repairs and maintenance, were approximately $8,400,000,
$10,080,000 and $8,542,000 for each of the years ended July 31, 1997,
1996 and 1995, respectively. Some leases include contingent rent based
on applying a specified percentage of sales in excess of a predetermined
base. Such contingent rent expense was approximately $71,000, $118,000
and $383,000 in each of the years ended July 31, 1997, 1996 and 1995,
respectively. Most leases contain renewal options.
K / RELATED-PARTY TRANSACTIONS:
The Company leases its store in Coral Gables, Florida from the Martin W.
Spector Irrevocable Trust, certain of whose trustees and beneficiaries
are officers and directors of the Company. Rental payments for each of
the three years ended July 31, 1997, 1996 and 1995 were approximately
$175,000, $163,000 and $154,000, respectively.
-33-
<PAGE>
The Company also leases a store located in St. Petersburg, Florida, from
the Lieff Family Trust and the Zacks Family Trust, whose trustees are
officers and directors of the Company. Rental payments for each of the
years ended July 31, 1997, 1996 and 1995 were approximately $169,000,
$164,000 and $157,000, respectively.
L / STORE CLOSING AND RESTRUCTURING RESERVES
In fiscal 1997 and 1996, the Company adopted a plan as part of its
response to industry conditions to close certain unprofitable store
locations. In connection therewith, the following was charged to
operations:
1997 1996
Loss on disposal of assets $431,000 $1,512,000
Lease expense 467,000 1,300,000
Other -- 439,000
--------- ----------
$ 898,000 $3,251,000
========= ==========
These charges are based on a series of estimates and final actual
results could vary from these estimates, depending on certain factors.
Additionally, in fiscal 1997, the Company recorded a $215,000
restructuring charge primarily for severance associated with eliminated
positions.
M / QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Summarized quarterly financial results for fiscal 1997 and 1996, are as
follows:
<TABLE>
<CAPTION>
(In thousands, except per share)
Weighted
Net Average Net Earnings
Gross Earnings Shares (Loss) Per
Revenues Profit (Loss) Outstanding Common Share
<S> <C> <C> <C> <C> <C>
1997:
First quarter $15,789 $5,414 $ (821) 5,247 $(0.16)
Second quarter 21,461 7,167 (370) 5,242 (0.07)
Third quarter 16,510 5,459 (2,057) 5,254 (0.39)
Fourth quarter 14,776 4,218 (5,886) 5,252 (1.12)
1996:
First quarter $17,973 $6,001 $(1,005) 5,248 $(0.19)
Second quarter 24,979 8,484 424 5,364 0.08
Third quarter 17,929 6,012 (812) 5,449 (0.15)
Fourth quarter 16,651 5,593 (3,100) 5,246 (0.59)
</TABLE>
-34-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning the directors of the Company set forth
under the caption "Election of Directors" in the definitive Proxy
Statement of the Company for its 1997 Annual Meeting of Shareholders
(the "1997 Proxy Statement") is incorporated herein by reference.
Information concerning the executive officers of the Company is
included in Part I herein under the caption "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth in the 1997 Proxy Statement under the
caption "Compensation of Officers" and "Board of Directors -
Compensation of Directors" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information set forth under the caption "Principal Stockholders
and Security Ownership of Management" in the 1997 Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Transactions with
Management and Others" in the 1997 Proxy Statement is incorporated
herein by reference.
-35-
<PAGE>
PART IV
ITEM 14. EXHIBITS. FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) 1. Financial Statements.
The following consolidated financial statements of the Company are
included herein:
Page
----
Independent Auditors' Report 20
Consolidated Balance Sheets as of July 31, 1997 and 1996 21
Consolidated Statements of Operations for each of the years
in the three year period ended July 31, 1997 22
Consolidated Statements of Changes in Stockholders' Equity
for each of the years in the three year period ended
July 31, 1997 23
Consolidated Statements of Cash Flows for each of the years
in the three year period ended July 31, 1997 24
Notes to Consolidated Financial Statements 25
(a) 2. Financial Statement Schedules.
No schedules required.
(a) 3. Exhibits.
*3.1 Articles of Incorporation of the Company (Exhibit 3.1 to
Registration Statement No. 33-00178-A).
*3.2 Bylaws of the Company (Exhibit 3.2 to Registration Statement
No. 33-00178-A).
*10.2 Shareholders' Agreement and Right of First Refusal, dated as
of September 5, 1985, between Ann S. Lieff and Rosalind S.
Zacks (formerly Rosalind S. Spooner) (Exhibit 10.4 to
Registration Statement No. 33-00178-A).
*10.3 Spec's Music, Inc. 1986 Incentive Stock Plan, as Amended
(Exhibit 28 to Registration Statement on Form S-8 No. 33-16778).
*10.4 Business Lease, effective August 1, 1991, between Lieff Family
1989 Trust, Rosalind S. Zacks Family 1989 Trust and the Company
(Exhibit 10.6 to 1991 Form 10-K No. 0-14323).
*10.7 Spec's Music, Inc. 1993 Incentive Stock Plan (Exhibit 10.7 to
1994 Form 10-K).
*10.8 Spec's Music, Inc. 1993 Non-Employee Directors Stock Option
Plan (Exhibit 10.8 to 1994 Form 10-K).
*10.10 Master Equipment Lease Agreement dated October 18, 1994
between the Company and AT&T Capital Corporation (Exhibit
10.10 to 1995 Form 10-K).
*10.14 Credit Agreement Dated as of May 22, 1996 between Spec's
Music, Inc. As Borrower and GENERAL ELECTRIC CAPITAL
CORPORATION as Lender (Exhibit 10.1 to Form 10-Q for the
quarter ended April 30, 1996).
*10.15 Business Lease, effective as of March 1, 1996, between the
Martin W. Spector Irrevocable Trust and the Company (Exhibit
10.15 to 1996 Form 10-K).
-36-
<PAGE>
10.16 First Modification of Credit Agreement, dated October 3,
1997 between Spec's Music, Inc. as Borrower and GENERAL
ELECTRIC CAPITAL CORPORATION as Lender.
10.17 Credit Agreement as of October 3, 1997 between Spec's Music,
Inc. as Borrower and MUSIC FUNDING I, LLC, as lender.
* 21 Subsidiaries of the Company (Exhibit 22 to 1988 Form 10-K No.
0-14323).
23 Consent of Independent Auditors relating to Registration
Statement on Form S-8 No. 33-16778.
24 Power of Attorney - see signature page of this report.
**27 Financial Data Schedule.
---------------------
* Incorporated by reference to indicated filings.
** Included only in electronic filing.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter
of fiscal 1997.
-37-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized, on this 28th day of October, 1997. The registrant and each
person whose signature appears below hereby authorizes and appoints Ann
S. Lieff as attorney-in-fact to sign and file on behalf of the regis-
trant and each such person, in each capacity below, any and all amend-
ments to this report.
SPEC'S MUSIC, INC.
By: /s/ Ann S. Lieff
---------------------------------
Ann S. Lieff, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
<S> <C> <C>
/s/ Ann S. Lieff President, Chief Executive October 28, 1997
- - - ------------------------- Officer and Director
Ann S. Lieff (Principal Executive Officer)
/s/ Donald A. Molta Vice President and Chief October 28, 1997
- - - ------------------------- Financial Officer (Principal
Donald A. Molta Financial and Accounting Officer)
/s/ Arthur H. Hertz Director October 28, 1997
- - - -------------------------
Arthur H. Hertz
/s/ Richard J. Lampen Director October 28, 1997
- - - -------------------------
Richard J. Lampen
/s/ Martin W. Spector Director October 28, 1997
- - - -------------------------
Martin W. Spector
/s/ Rosalind S. Zacks Director October 28, 1997
- - - -------------------------
Rosalind S. Zacks
</TABLE>
-38-
FIRST MODIFICATION OF CREDIT AGREEMENT
THIS MODIFICATION is made as of this 3rd day of October,
1997, by and between SPEC'S MUSIC, INC., a Florida corporation
("BORROWER"), and GENERAL ELECTRIC CAPITAL CORPORATION, a New
York corporation ("LENDER").
STATEMENT OF FACTS
Lender and Borrower are parties to that certain Credit
Agreement, dated as of May 22, 1996 (the "CREDIT AGREEMENT"),
pursuant to which Lender has agreed to make one or more loans
from time to time to the Borrower in accordance with the terms
and conditions thereof. Lender and Borrower desire to modify the
Credit Agreement in certain respects, and Lender desires to grant
certain consents and waivers to Borrower, all in accordance with
and subject to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises, the
covenants and agreements contained herein, and other good and
valuable consideration, the receipt and adequacy of which are
hereby acknowledged, Borrower and Lender do hereby agree that all
capitalized terms used herein shall have the meanings ascribed
thereto in the Credit Agreement as amended hereby (except as
otherwise expressly defined or limited herein) and do hereby
further agree as follows:
STATEMENT OF TERMS
1. AMENDMENTS OF CREDIT AGREEMENT. Subject to the
fulfillment of the conditions precedent to the effectiveness of
this Modification which are set forth below, the Credit Agreement
shall be amended from and after this date as follows:
(a) Section 1.8 of the Credit Agreement is hereby
amended by deleting reference to the phrase "11:00 a.m. (Eastern
Standard Time)" and by substituting in lieu thereof the phrase
"1.00 p.m. (Eastern Standard Time)". Notwithstanding anything in
the preceding sentence to the contrary, Revolving Credit Loan
advance requests pursuant to Section 1.1 of the Credit Agreement
will continue to be required to be given by no later than 11:00
a.m. (Eastern Standard Time) on the Business Day of the proposed
advance.
(b) Section 1.5 of the Credit Agreement shall be amended
by deleting the phrase "Inventory of Borrower" and by
substituting in lieu thereof the phrase "Inventory of Borrower or
D S Latino".
(c) Section 6.2 of the Credit Agreement shall be deleted
in its entirety and the following new Section 6.2 shall be
substituted in lieu thereof:
SECTION 6.2 INVESTMENTS; LOANS AND ADVANCES. No
Credit Party shall make any investment in, or make any
loans or advances of money to any Person, through the
direct or indirect holding of securities or otherwise,
except (i) to the extent permitted under Section 6.1
above, (ii)
<PAGE>
Borrower may make loans or advances from time
to time to any other Credit Party so long as no other
Default or Event of Default is caused thereby; provided,
however, that the sum of the aggregate outstanding
principal balance of all loans or advances made by
Borrower to D S Latino plus Borrower's initial $350,000
capital contribution to D S Latino shall not exceed
$750,000 at any one time, and (iii) Borrower may hold the
notes described on Schedule 2 to the Security Agreement.
(d) Section 8.1 shall be amended by adding thereto the
following clause (n), with the intent being that the occurrence
of any event specified in such clause (n) shall constitute an
"Event of Default" under the Credit Agreement:
(n) The occurrence of an Event of Default under
(and after giving effect to any notice and/or cure rights
expressly provided in) any of the other Loan Documents.
(e) Schedules 1.5, 3.9, 3.16, 3.17, 3.20, 4.1, 6.7
and 6.11 of the Credit Agreement are hereby deleted in their
entireties and the revised Schedules 1.5, 3.9, 3.16, 3.17, 3.20,
4.1, 6.7 and 6.11 attached hereto shall be substituted in lieu
thereof.
(f) The Credit Agreement shall be further modified
by adding to ANNEX A the following new definitions:
"Borrower Stock Pledge Agreement" shall mean the
Stock Pledge Agreement, dated as of May 7, 1997, executed
by Borrower in favor of Lender, with respect to the pledge
by Borrower of all of the issued and outstanding shares
of D S Latino owned by it, and all amendments,
modifications or replacements thereof or therefor.
"BORROWER TRADEMARK SECURITY AGREEMENT" shall mean
the Trademark Security Agreement, dated as of October 3,
1997, executed by Borrower in favor of Lender, and all
amendments, modifications or replacements thereof or
therefor.
"D S LATINO" shall mean D S Latino Inc., a Florida
corporation, and its successors and assigns.
"D S LATINO GUARANTY" shall mean the Guaranty
Agreement, dated as of May 7, 1997, executed by D S
Latino in favor of Lender, and all amendments,
modifications or replacements thereof or therefor.
"D S LATINO SECURITY AGREEMENT" shall mean the
Security Agreement, dated as of May 7, 1997, executed
by D S Latino in favor of Lender, and all amendments,
modifications or replacements thereof or therefor.
-2-
<PAGE>
"D S LATINO TRADEMARK SECURITY AGREEMENT" shall
mean the Trademark Security Agreement, dated as of
May 7, 1997, executed by D S Latino in favor of Lender,
and all amendments, modifications or replacements
thereof or therefor.
"INTERCREDITOR AGREEMENT" shall mean the
Subordination and Intercreditor Agreement, dated as
of October 3, 1997, among the Lender, the Borrower and
MF, as the same may be amended, supplemented or restated
from time to time.
"MF" shall mean Music Funding I, LLC, a North
Carolina limited liability company, and its successors
and assigns.
"MF CREDIT AGREEMENT" shall mean the Credit
Agreement, dated as of October 3, 1997, between MF
and Borrower, as the same may be amended, supplemented
or restated from time to time.
"MF DOCUMENTS" shall mean the MF Credit Agreement
and any and all notes, guaranties, security
agreements, assignments, mortgages, pledge
agreements, financing statements, fixture filings,
and other agreements, instruments or documents which
govern, evidence or guarantee any of the MF Obligations
or which grant or convey any of the MF Liens, and any
extensions, renewals or modifications thereof or
replacements therefor.
"MF LIENS" shall mean any and all of the Liens
on any or all of the Collateral which may be now or
hereafter granted to MF by any or all of the Credit
Parties pursuant to any of the MF Documents to secure
any or all of the MF Obligations.
"MF LOANS" shall mean any and all loans made by
MF to Borrower under the MF Credit Agreement.
"MF OBLIGATIONS" shall mean any and all
indebtedness, obligations or liabilities which may
be now or hereafter owing by any or all of the Credit
Parties to MF under any or all of the MF Documents,
whether direct, indirect, absolute or contingent, or
joint or several, and whether for principal, interest,
fees or other amounts.
"163rd STREET" shall mean Spec's Music - 163rd
Street, Inc., a Florida corporation.
"PLANNED 1998 STORE CLOSINGS" shall mean
Borrower's closing of stores during its Fiscal Year
ending July 31, 1998.
-3-
<PAGE>
"SELLERS" shall mean Digital Sound Distributors,
Inc., Hits Only, Inc. and Digital Sound Music
Publishing, Inc., all Florida corporations.
(g) ANNEX A to the Credit Agreement shall be amended by
deleting the proviso which appears at the end of the definition
therein of the term "Adjusted Tangible Net Worth" and
substituting the following proviso in lieu thereof:
; PROVIDED, however, that Borrower's Adjusted Tangible
Net Worth shall be computed without giving effect to
up to $1,500,000 of any restructuring charges incurred
by Borrower in its Fiscal Year ending July 31, 1997
and July 31, 1998 in connection with the Planning 1998
Store Closings.
(h) ANNEX A of the Credit Agreement is hereby amended by
deleting the first sentence of the definition of "Borrowing Base"
contained therein and by substituting in lieu thereof the
following
new first sentence of such definition:
"BORROWING BASE" shall mean at any time an amount
equal to the sum of (i) sixty percent (60%) of the
aggregate value of the Eligible Inventory of Borrower
available at such time less such reserves against
availability established by Lender from time to time
in its discretion PLUS (ii) sixty percent (60%) of the
aggregate value of the Eligible Inventory of D S Latino
available at such time less such reserves against
availability established by Lender from time to time
in its discretion; PROVIDED, however, that at no time
shall the Borrowing Base for purposes of this Agreement
exceed the Maximum Revolving Credit Loans.
The remainder of the definition of "Borrowing Base"
shall remain unchanged.
(I) ANNEX A of the Credit Agreement shall be further
modified by deleting the date "May 30, 1998" which appears in
clause (i) of the definition of the term "Commitment Termination
Date" and by substituting the date "August 1, 1998" in lieu
thereof. The remainder of such definition shall be unchanged.
(j) ANNEX A of the Credit Agreement shall be amended by
deleting the proviso which appears at the end of the definition
therein of the term "EBITDA" (and the semi-colon which
immediately precedes such proviso) and by substituting the
following in lieu thereof:
minus (iv) without duplication, any cash costs incurred in
such period in connection with the Planned 1998 Store
Closings.
(k) ANNEX A to the Credit Agreement shall be further
modified by deleting from ANNEX A the definitions of the terms
"Collateral Documents", "Current Ratio", "Pledge Agreement",
"Uncovered Leased Location", and "Unused Borrowing Availability"
and by substituting in lieu thereof the following new definitions
of such terms:
-4-
<PAGE>
"COLLATERAL DOCUMENTS" shall mean the Security
Agreement, the D S Latino Security Agreement, the
Factor's Liens, the Chattel Mortgages, the Mortgage
Notes, the Pledge Agreements, the Borrower Trademark
Security Agreement, the D S Latino Trademark Security
Agreement, the D S Latino Guaranty, any and other Loan
Documents under which Lender may have Liens on any of
the Collateral to secure any of the Obligations, and
such term also shall include the Intercreditor Agreement.
"CURRENT RATIO" shall mean, as of any date and with
respect to any Person, the ratio of such Person's current
assets (excluding cash, tax refunds and deferred taxes)
to such Person's current liabilities (excluding the
Revolving Credit Loans and the MF Loans), all as
determined as of such date on a consolidated basis.
"PLEDGE AGREEMENTS" shall mean (i) the Borrower
Pledge Agreement and (ii) the Pledge Agreement, in
substantially the form of EXHIBIT D-4 to the Agreement,
between Borrower and Lender, including all amendments,
modifications or replacements thereof or therefor.
"UNCOVERED LEASED LOCATIONS" shall mean any leased
location of Borrower or D S Latino for which such
Credit Party has not provided Lender with a Lessor
Subordination and Consent in the form of EXHIBIT F to
the Agreement (or in such other form as may be
acceptable to Lender). The Uncovered Leased Locations
as of the Closing Date are indicated on SCHEDULE 3.6
as initially attached to the Agreement.
"UNUSED BORROWING AVAILABILITY" shall mean, at
any one time, the amount (if any) by which the
Borrowing Base at such time exceeds the sum of (I)
the aggregate outstanding principal balance at such
time of the Revolving Credit Loan plus (ii) the aggregate
outstanding balance at such time of all Letter of
Credit Obligations incurred by Lender.
(l) Section 8.1(m) of the Credit Agreement shall be
deleted.
2. CONSENT TO MF TRANSACTIONS. Subject to the
fulfillment of the conditions precedent to the effectiveness of
this Modification which are set forth below, Lender hereby
consents to the incurrence by the Credit Party of the MF
Obligations and to the grant by the Credit Parties of the MF
Liens to secure the same provided that the MF Obligations and the
MF Liens shall be and remain subject to the terms and conditions
of the Intercreditor Agreement (which shall be executed and
delivered by the Lender, MF and the Borrower on the date of this
Modification).
3. WAIVER OF CERTAIN DEFAULTS, EVENTS OF DEFAULT AND
CONDITIONS. Subject to the fulfillment of the conditions
precedent to the effectiveness of this Modification which are set
forth below, the Lender does hereby: (i) waive any Defaults or
Events of Default which may have arisen from any violation of the
financial covenants in SCHEDULE 6.11 of the Credit Agreement for
-5-
<PAGE>
any fiscal period ending on or before August 31, 1997 (it being
understood and agreed that the revised financial covenants set
forth in revised SCHEDULE 6.11 attached to this Modification
shall apply, and Borrower shall be obligated to comply with the
same, for all fiscal periods ending on or after September 30,
1997); and (ii) waives compliance with any unfulfilled conditions
specified in paragraphs 1 through 5 of Lender's May 7, 1997
letter to Borrower regarding the Acquisition and Employment
Agreements relating to DS Latino described in such letter (it
being understood and agreed that the consequence of such waiver
shall be that Lender's consent to the Acquisition and the
Employment Agreements described in such letter shall be deemed
effective from and after May 7, 1997).
4. NO OTHER AMENDMENTS, WAIVERS OR CONSENTS. Except for
the amendments, waivers and consents expressly set forth and
referred to in SECTION 1, SECTION 2, and SECTION 3 above, the
Credit Agreement shall remain unchanged and in full force and
effect. Nothing in this Modification is intended, or shall be
construed, to constitute a novation or an accord and satisfaction
of any of the Borrower's indebtedness or other indebtedness to
the Lender under or in connection with the Credit Agreement
(collectively, the "OBLIGATIONS") or to modify, affect or impair
the perfection or continuity of Lender's security interests in,
security titles to or other liens on any collateral for the
Obligations.
5. REPRESENTATIONS AND WARRANTIES. To induce Lender to
enter into this Modification, the Borrower does hereby warrant,
represent and covenant to Lender that: (a) each representation or
warranty of the Borrower set forth in the Credit Agreement is
hereby restated and reaffirmed as true and correct on and as of
the date hereof as if such representation or warranty were made
on and as of the date hereof (except to the extent that any such
representation or warranty expressly relates to a prior specific
date or period), and no Default or Event of Default has occurred
and is continuing as of this date under the Credit Agreement as
amended by this Modification,; and (b) Borrower has the power and
is duly authorized to enter into, deliver and perform this
Modification and the Intercreditor Agreement, and each of this
Modification and the Intercreditor Agreement is the legal, valid
and binding obligation of Borrower enforceable against it in
accordance with its terms.
6. CONDITIONS PRECEDENT TO EFFECTIVENESS OF THIS
MODIFICATION. The effectiveness of this Modification and the
amendments, waivers and consents provided in SECTION 1, SECTION 2
and SECTION 3 above are subject to the truth and accuracy in all
material respects of the representations and warranties of the
Borrower contained in SECTION 5 above and to the fulfillment of
the following additional conditions precedent:
(a) Lender shall have received one or more counterparts
of this Modification and the Borrower Trademark Security
Agreement duly executed and delivered by the Borrower, and Lender
shall have received one or more counterparts of the Intercreditor
Agreement duly executed and delivered by Borrower and MF;
-6-
<PAGE>
(b) DS Latino, as guarantor of the Obligations, shall
have consented to the execution, delivery and performance of this
Modification and the Intercreditor Agreement and agreed to be
bound by signing one or more counterparts of this Modification in
the appropriate space indicated below and returning same to
Lender;
(C) Borrower shall have paid a modification fee of
$20,000 to Lender, which fee shall be deemed fully earned and
non-refundable upon the execution and delivery of this
Modification by Lender; and
(d) Borrower and MF shall have entered into the MF
Credit Agreement and the other MF Documents (all on terms and
conditions which are acceptable to Lender in all respects) and
all conditions precedent to the effectiveness of the MF Documents
shall have been fulfilled (other than the effectiveness of this
Modification) and MF shall have made the initial advance to
Borrower under the MF Credit Agreement in the amount of not less
than $500,000.
7. COUNTERPARTS. This Modification may be executed in
multiple counterparts), each of which shall be deemed to be an
original and all of which when taken together shall constitute
one and the same instrument.
8. ADDITIONAL PROVISIONS. (a) The Borrower (for itself
and on behalf of the other Credit Parties) hereby (i) releases,
acquits and forever discharges each of the Lender and its agents,
employees, officers, directors, representatives, attorneys,
Affiliates, successors and assigns (collectively, the "RELEASED
PARTIES") from any and all liabilities, claims, suits, debts,
Liens, losses, causes of action, demands, rights, damages, costs
and expenses of any kind, character or nature whatsoever, whether
known or unknown, or fixed or contingent, that the Borrower may
have or claim to have against such Released Party and which
arises out of or is connected with any action of commission or
omission of any Released Party existing or occurring prior to the
execution and delivery of this Modification (collectively, the
"RELEASED CLAIMS") and (ii) agrees forever to refrain (and to
cause the other Credit Parties to refrain) from commencing,
instituting or prosecuting any action or other proceeding against
any of the Released Parties with respect to the any of the
Released Claims. Notwithstanding anything in this Section to the
contrary, the Released Claims do not include the Lender's
obligations under the Credit Agreement as amended by this
Modification.
(b) Within thirty (30) days after the date of this
Agreement, Borrower shall cause 163rd Street to be dissolved and
its assets distributed to Borrower or Borrower shall cause 163rd
Street to be merged or consolidated with or into Borrower with
Borrower being the surviving corporation from such merger or
consolidation. Borrower represents and warrants to Lender that
163rd Street is an inactive Subsidiary and has no material assets
or income and 163rd Street does not own or have any other
interest in any of the inventory or equipment located at any of
Borrower's stores (including without limitation its store at 1277
N.E. 163rd Street, N. Miami Beach, Florida). Subject to the
fulfillment of the conditions precedent to the effectiveness of
this Modification which are set forth above, Lender hereby waives
any Default or Event of Default arising from Borrower's failure
prior to this date to disclose that 163rd Street is a Subsidiary
of Borrower.
-7-
<PAGE>
(C) Within seven (7) days after the date of this
Agreement, Borrower shall deliver to Lender a certificate of
insurance in form and substance satisfactory to Lender with
respect to the insurance coverage of D S Latino and showing
Lender as loss payee.
(d) Within thirty (30) days after the date of this
Agreement, Borrower shall cause to be delivered to Lender a
Blocked Account Agreement and Pledged Account Agreement with
respect to the D S Latino collection account and disbursement
account, respectively, each in form and substance satisfactory to
Lender.
9. GOVERNING LAW. THIS MODIFICATION SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE
STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN
SUCH STATE WITHOUT REGARD TO THE PRINCIPLES THEREOF REGARDING
CONFLICT OF LAWS.
IN WITNESS WHEREOF, the parties hereto have caused this
Modification to be duly executed and delivered as of the day and
year specified at the beginning hereof.
BORROWER:
SPEC'S MUSIC, INC.
By: /S/ Donald A. Molta
---------------------------
Title: VP/CFO
-------------------------
LENDER:
GENERAL ELECTRIC CAPITAL
CORPORATION
By: /S/ Timothy C. Huban
---------------------------
Duly Authorized Signatory
-8-
<PAGE>
CONSENT OF GUARANTOR
The undersigned guarantor does hereby consent to the
execution, delivery and performance of the within and foregoing
First Modification of Credit Agreement, authorizes and directs
Spec's Music, Inc. to enter into the Intercreditor Agreement
described therein on the undersigned guarantor's behalf, and
agrees to be bound by the terms and conditions of this
Modification (including without limitation Section 8 hereof) and
the Intercreditor Agreement.
IN WITNESS WHEREOF, the undersigned guarantor has executed
this Consent under seal as of the day and year first above set
forth.
D S LATINO INC.
By: /s/ Donald A. Molta
---------------------------------
Title: VP/SECRETARY/TREASURER
------------------------------
CHIEF FINANCIAL OFFICER
<PAGE>
REVISED SCHEDULE 1.5
to
CREDIT AGREEMENT
Dated as of May 22, 1996,
as amended as of October 3, 1997
ELIGIBLE INVENTORY
In determining whether Inventory of Borrower or D S Latino
constitutes Eligible Inventory, Lender shall not include
Inventory which:
(a) is not owned by such Credit Party free and
clear of all Liens and rights of others, except the
first-priority Liens in favor of Lender;
(b) is not located on premises owned or operated by
such Credit Party; PROVIDED, HOWEVER, that if the Inventory is
located on premises leased by such Credit Party, such Credit
Party shall use its best efforts to cause the lessor of such
premises to execute a Lessor Subordination and Consent in favor
of Lender substantially in the form of EXHIBIT F to the Credit
Agreement (or in such other form as is acceptable to Lender);
(C) is covered by a negotiable document of title unless
such document and evidence of acceptable insurance covering such
Inventory has been delivered to Lender;
(d) in Lender's good faith judgment, is obsolete,
unsalable, shopworn, damaged, or unfit;
(e) consists of raw materials, work in process,
supplies, repair parts, display items, packing and shipping
materials or goods which have been returned by buyer;
(f) consists of discontinued or slow-moving items,
finished goods of substandard quality or used items held for
resale;
(g) is placed by such Credit Party on consignment or is
held by such Credit Party on consignment by another Person;
(h) as to which Lender's Lien thereon is not a
first-priority and perfected security interest;
(i) is not of a type held for sale in the ordinary
course of such Credit Party's business;
SCHEDULE 1.5 - Page 1
<PAGE>
(j) does not consist of compact disk, laser disk, audio
cassette tape, video tape or other finished goods Inventory that
is acceptable to Lender; or
(k) is not otherwise acceptable to Lender in its
judgment.
SCHEDULE 1.5 - Page 2
<PAGE>
REVISED SCHEDULE 3.9
to
CREDIT AGREEMENT
Dated as of May 22, 1996,
as amended as of October 3, 1997
SUBSIDIARIES, JOINT VENTURES AND AFFILIATES;
OUTSTANDING STOCK AND INDEBTEDNESS
I. SUBSIDIARIES:
D S Latino Inc., a Florida corporation
Spec's Music - 163rd Street, a Florida corporation
II. JOINT VENTURES OR PARTNERSHIPS:
None.
III. AFFILIATES:
See Exhibit 1 attached hereto.
IV. OUTSTANDING INDEBTEDNESS OF BORROWER:
A. The Existing Indebtedness described on SCHEDULE 1.4;
B. The Obligations; and
C. The MF Obligations (but only if and for so long as
the Intercreditor Agreement is in effect).
V. ISSUED AND OUTSTANDING STOCK OF BORROWER:
5,300,319 shares of Common Stock issued and outstanding.
VI. ISSUED AND OUTSTANDING STOCK OF D S LATINO INC.:
850,000 shares of Common Stock issued and outstanding and
owned by Borrower.
SCHEDULE 3.9 - Page 1
<PAGE>
EXHIBIT 1
to
Revised Schedule 3.9
to
CREDIT AGREEMENT
Dated as of May 22, 1996,
as amended as of October 3, 1997
Spec's Music, Inc.
LIST OF AFFILIATES
OWNERS OF 5% OR MORE OF THE VOTING STOCK OF THE BORROWER:
NAME PERCENTAGE OF OWNERSHIP
Ann Spector Lieff 24.6%
Rosalind Spector Zacks 24.4%
Dimensional Fund Advisors, Inc. 9.8%
PERSONS THAT CONTROL, ARE CONTROLLED BY OR ARE UNDER COMMON
CONTROL WITH THE BORROWER:
None, other than the Subsidiaries shown in Part I of
Schedule 3.9
OFFICERS, DIRECTORS, JOINT VENTURERS AND PARTNERS:
A. DIRECTORS OF BORROWER
Martin W. Spector, Chair Emeritus
Ann Spector Lieff, Chairman
Arthur H. Hertz
Rosalind Spector Zacks
Richard J. Lampey
B. OFFICERS OF BORROWER
Ann Spector Lieff, President
Rosalind Spector Zacks, Vice President
Donald A. Molta, Vice President and CFO
Dorothy J. Spector, Secretary
EXHIBIT 1 TO SCHEDULE 3.9 - Page 1
<PAGE>
C. DIRECTORS OF D S LATINO INC.
Celso A. Ahumada
Ann Spector Lieff
Faustino M. Lopez
Melvin F. Noriega
D. OFFICERS OF D S LATINO INC.
Ann S. Lieff, Chairman
Melvin F. Noriega, President
Celso Ahumada, Vice President
Donald A. Molta, Vice President, Secretary, Treasurer
and Chief Financial Officer
EXHIBIT 1 TO SCHEDULE 3.9 - Page 2F
<PAGE>
REVISED SCHEDULE 3.16
to
CREDIT AGREEMENT
Dated as of May 22, 1996,
as amended as of October 3, 1997
EMPLOYMENT MATTERS
Spec's Music, Inc.: None.
DS Latino, Inc. is a party to an Employment Agreement, dated
May 8, 1997, with Melvin F. Noriega and an Employment Agreement,
dated May 8, 1997 with Celso A. Ahumada.
SCHEDULE 3.16 - Page 1
<PAGE>
REVISED SCHEDULE 3.17
to
CREDIT AGREEMENT
Dated as of May 22, 1996,
as amended as of October 3, 1997
PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES
<TABLE>
<CAPTION>
Registration Serial Registration Filing
Owner Trademark Number Number Country Date Date
<S> <C> <C> <C> <C> <C> <C>
Spec's Music Inc. Hits Only 75/271864 USA 4/9/97
Spec's Music Inc. D S Latino 75/271865 USA 4/9/97
Spec's Music Inc. Design 75/271866 USA 4/9/97
Spec's Music Inc. Design 75/271867 USA 4/9/97
Spec's Music Inc. Raiz Latina 75/271868 USA 4/9/97
Spec's Music Inc. Epicentro 75/271869 USA 4/9/97
Musical
Spec's Music Inc. Oro Latino 75/271870 USA 4/9/97
D S Latino Inc. Hits Only 2,004,927 USA 10/1/96
D S Latino Inc. Tropical Sound 2,011,206 USA 10/22/96
Orchestra
</TABLE>
SCHEDULE 3.17 - Page 1
<PAGE>
REVISED SCHEDULE 3.20
to
CREDIT AGREEMENT
Dated as of May 22, 1996,
as amended as of October 3, 1997
INSURANCE POLICIES
As described on the attached copy of Certificates of
Insurance issued on (i) April 8, 1997 by Great Northern Insurance
Co., (ii) April 6, 1997 by Universal Insurance Company and (iii)
October 2, 1997 by Great Northern Ins. Co.
I. BORROWER COVERAGE REQUIREMENTS. The insurance
policies maintained by Borrower provide for, without limitation,
the following insurance coverage:
(a) "ALL RISK" physical damage insurance on all of
Borrower's tangible real and personal property and assets,
wherever located, which insurance includes, without limitation,
fire and extended coverage, boiler and machinery coverage, flood,
hurricane, earthquake, theft, burglary, explosion and collapse
coverage, and coverage for all other hazards and risks ordinarily
insured against by similarly-situated owners or users of such
properties engaged in similar businesses. All policies of
insurance on such real and personal property of the Borrowers
contain an endorsement, in form and substance accepted to Lender
showing loss payable to Lender as its interests may appear. Each
such endorsement, or an independent instrument furnished to
Lender, provides that the insurance companies will give Lender at
least thirty (30) days' prior written notice before any such
policy or policies of insurance shall be altered or cancelled and
that no act or default of Borrower shall affect the right of
Lender to recover under such policy or policies of insurance in
case of loss or damage;
(b) comprehensive general liability insurance against
claims for personal injury, bodily injury and property damage
with a minimum limit of $1,000,000 per occurrence and $2,000,000
in the aggregate, which coverage includes, without limitation,
premises/operations, broad form contractual liability,
underground explosion and collapse hazard, independent
contractors, broad form property coverage, products and completed
operations liability;
(c) statutory limits of worker's compensation insurance
which includes employee's occupational disease and employer's
liability;
(d) automobile liability insurance for all owned,
non-owned or hired automobiles against claims for personal
injury, bodily injury and property damage with a minimum combined
single limit of $1,000,000 per occurrence; and
SCHEDULE 3.20 - Page 1
<PAGE>
(e) umbrella insurance of $4,000,000 per occurrence and
$4,000,000 in the aggregate.
All of such policies are in full force and effect and in form and
with insurers recognized as adequate by Lender and provide
coverage of such risks and for such amounts as is customarily
maintained for businesses of the scope and size of Borrower's and
as otherwise acceptable to Lender. Each insurance policy
contains a clause which provides that Lender's interest under
such policy shall not be invalidated by any act or omission of,
or any breach of warranty by, the insured, or by any change in
the title, ownership or possession of the insured property, or by
the use of the property for purposes more hazardous than is
permitted in such policy. Borrower has delivered to Lender a
certificate of insurance that evidences the existence of each
policy of insurance, payment of all premiums therefor and
compliance with all provisions of the Agreement.
II. SUMMARY OF TERMS OF BORROWER'S INSURANCE , ETC.
See attached certificate from the Borrower's insurer
(or such insurer's agent).
III. D S LATINO COVERAGE REQUIREMENTS. The insurance
policies maintained by D S Latino provide for, without
limitation, the same insurance coverage as the Borrower's
insurance coverage.
IV. SUMMARY OF TERMS OF D S LATINO'S INSURANCE
COVERAGE, ETC.
See attached Certificate of D S Latino's insurer (or
such insurer's agent).
SCHEDULE 3.20 - Page 2
<PAGE>
REVISED SCHEDULE 4.1
to
CREDIT AGREEMENT
Dated as of May 22, 1996,
as amended as of October 3, 1997
FINANCIAL STATEMENTS AND OTHER NOTICES
Each Credit Party shall provide, or shall cause to be
provided, the following to Lender at the expense of the Credit
Parties:
(a) On each Business Day of each week, a Borrowing Base
Certificate for Borrower and D S Latino Inc., accompanied by such
supporting detail and documentation as may be requested by Lender
(including an Inventory roll-forward);
(b) Within one (1) Business Day after any Credit Party
returns any Inventory to any of its vendors, such Credit Party
shall give, or cause to be given to Lender, written notice of the
amount of such returned Inventory, and within 45 days after the
end of each Fiscal Month a detailed list of the items returned
during such period with a comparison of original cost versus
return credit and a listing of any applicable penalties or
restocking fees;
(C) Within one (1) Business Day after any Credit Party's
receipt thereof, such Credit Party shall notify Lender of such
Credit Party's receipt of notification from (i) any of its
vendors that a particular compact disk, cassette tape or other
item of Inventory is no longer included in such vendor's current
catalogue (and thereafter such Credit Party shall return the
affected Inventory to such vendor by the deadline specified by
such vendor in its notice) or (ii) any of the Major Labels that
such vendor has made a material adverse change in its inventory
return policies or practices;
(d) (i) Within twenty (20) days after the end of each
succeeding Fiscal Month, financial and other information for each
Credit Party, certified by the chief financial officer of such
Credit Party, including, without limitation, (w)
internally-prepared consolidated and consolidating statements of
income and cash flow and balance sheets of the Credit Parties,
each of which providing comparisons to budget and the prior
year's equivalent period, as well as a detailed Inventory report
by product mix, a report of store-by-store operating results, a
detailed report of all taxes or other Charges owed (including
copies of all sales tax reports) and a detailed report of all
returns of Inventory to vendors made for such period, (x) the
certification of the chief executive officer or chief financial
officer of such Credit Party that all such financial statements
are complete and correct and present fairly in accordance with
GAAP (subject to normal year-end audit adjustments and the
absence of footnotes) the financial position, the results of
operations and the statements of cash flow of Borrower and its
Subsidiaries as at the
SCHEDULE 4.1 - Page 1
<PAGE>
end of such month and for the period then ended, and that there
was no Default or Event of Default in existence as of such time,
(y) a management discussion and analysis outlining financial
trends and significant events affecting the Credit Parties and
comparing such Credit Party's performance to budget for that
period and comparing such Credit Party's performance for that
period to the corresponding period from the prior year, and (z) a
certificate of such Credit Party's chief executive or financial
officer in reasonable detail showing the calculations used in
determining such Credit Party's compliance as of the end of such
month with the financial covenants set forth on SCHEDULE 6.11;
(ii) Within forty-five (45) days after the end of
each succeeding Fiscal Quarter, financial and other
information for each Credit Party, certified by the chief
financial officer of such Credit Party, including, without
limitation, (w) unaudited balance sheets as of the close of
such Fiscal Quarter and the related statements of income
and cash flow for that portion of the Fiscal Year ending as
the close of such Fiscal Quarter, (x) unaudited
statements of income and cash flows for such Fiscal Quarter,
in each case setting forth in comparative form the figures
for the corresponding period in the prior year and the figures
contained in the Projections for such Fiscal Year, all
prepared in accordance with GAAP (subject to normal year-end
adjustments), (y) a management discussion and analysis
outlining financial trends and significant events affecting
the Credit Parties and comparing such Credit Party's
performance to budget for that period and comparing
such Credit Party's performance for that period to the
corresponding period from the prior year, and (z) a
certificate of such Credit Party's chief executive or
financial officer in reasonable detail showing the
calculations used in determining such Credit Party's
compliance as of the end of such quarter with the
financial covenants set forth on SCHEDULE 6.11;
(e) Within thirty (30) days after the end of each
Fiscal Quarter, or more frequently upon Lender's request if a
Default or Event of Default has occurred and is continuing under
the Credit Agreement, updated Inventory valuations prepared by
Steve Buxbaum or such other independent appraiser of recognized
standing acceptable to Lender;
(f) Within ninety (90) days after the end of each
Fiscal Year, audited consolidated financial statements of
Borrower, consisting of balance sheets and statements of income
and retained earnings and cash flows, setting forth in
comparative form in each case the figures for the previous Fiscal
Year, which financial statements shall be prepared in accordance
with GAAP, certified (only with respect to the financial
statements) without qualification by a firm of independent
certified public accountants of recognized national standing
selected by Borrower and acceptable to Lender, and accompanied by
(i) a schedule in reasonable detail showing the calculations used
in determining Borrower's compliance with the financial covenants
set forth on SCHEDULE 6.11, (ii) a report from such accountants
to the effect that in connection with their audit examination,
nothing has come to their attention to cause them to believe that
a Default or Event of Default has occurred, (iii) the annual
letter from Borrower's
SCHEDULE 4.1 - Page 2
<PAGE>
chief executive or financial officer to such accountants in
connection with their audit examination detailing Borrower's and
its Subsidiaries' contingent liabilities and material litigation
matters involving Borrower or any of its Subsidiaries, and (iv) a
certification of the chief executive officer or chief financial
officer of Borrower that all such financial statements are
complete and correct and present fairly in accordance with GAAP
the financial position, the results of operations and the
statements of cash flow of Borrower and its Subsidiaries as at
the end of such year and for the period then ended and that there
was no Default or Event of Default in existence as of such time;
(g) Not less than thirty (30) days after the end of
each Fiscal Year, an operating plan for each Credit Party for the
following year as approved by its board of directors together
with a complete statement of the assumptions on which such plan
is based, and which plan shall include such Credit Party's
monthly balance sheet, income statement and cash flow statement;
(h) Not less than thirty (30) days' prior written
notice of the opening or closing of any store by any Credit
Party;
(i) As soon as practicable, but in any event within
two (2) Business Days after any Credit Party becomes aware of the
existence of any Default or Event of Default, or any development
or other information which could have or result in a Material
Adverse Effect, telephonic or telegraphic notice by such Credit
Party to Lender specifying the nature of such Default or Event of
Default or development or information, including the anticipated
effect thereof, which notice shall be promptly confirmed in
writing within five (5) days;
(j) Within five (5) days after the date of the filing
thereof, copies of all federal, state and local tax returns,
information returns and reports in respect of income, franchise
or other taxes on or measured by income (excluding sales, use or
like taxes) filed by Borrower or any of its Subsidiaries;
(k) As often as Lender may request, such statements
and schedules further identifying and describing the Collateral
and such other reports in connection therewith as Lender may
reasonably request, all in reasonable detail;
(l) Promptly upon learning thereof, Borrower and each
other Credit Party shall advise Lender in reasonable detail of
(i) any material Lien (other than as permitted under SECTION 6.7)
or attaching to or asserted against any of the Collateral, (ii)
any material change in the composition of the Collateral or (iii)
the occurrence of any other event which could have or result in a
Material Adverse Effect upon the Collateral and/or Lender's Liens
thereon;
(m) (i) By the fifth (5th) day of each calendar
month, a Rent Payment Certificate, duly completed and executed on
behalf of Borrower by the chief executive officer or
SCHEDULE 4.1 Page 3
<PAGE>
the chief financial officer of Borrower (or duly completed and
executed on behalf of D S Latino by the chief executive officer
or the chief financial officer of D S Latino, as the case may
be), certifying that, with respect to each of the Uncovered
Leased Locations shown on such certificate, such Credit Party has
sent to the lessor of such location (or its agent) a check for
the full rental payment due for such month and that either such
check has been paid or such Credit Party has adequate funds
available to pay such check when it is presented for payment, and
(ii) by the tenth (10th) day of each calendar month, a written
report (which may be faxed to Lender) from such Credit Party
confirming which of the rent checks for the Uncovered Leased
Locations for such month have been paid as of such date;
(n) Within ten (10) days after the end of each Fiscal
Month, a report on the Credit Parties' Inventory and accounts
payable as of the end of such period, including a reconciliation
of perpetual inventory to general ledger and to the Borrowing
Base, the results of monthly physical inventories, a detailed
report of Inventory by product line, a report of Inventory
turnover compared to the prior year and to budget (for the month
and for the year-to-date), a report of the value of Inventory by
location, a reconciliation of accounts payable to the general
ledger, an accounts payable roll-forward, and a report on
accounts payable turnover compared to the prior year and to
budget (for the month and the year-to-date).
(o) On the last Business Day of each calendar week,
an aging of the Credit Parties' accounts payable;
(p) Concurrently with the delivery thereof to MF, a
copy of each Borrowing Capacity Certificate and Inventory
valuation report delivered by Borrower under the MF Credit
Agreement;
(q) Promptly upon their becoming available, copies of
(i) all Financials, reports, notices and proxy statements made
publicly available by any Credit Party to its security holders;
and (ii) all regular and periodic reports and all registration
statements and prospectuses, if any, filed by any Credit Party
with any securities exchange or with the Securities and Exchange
Commission or any governmental or private regulatory authority;
and
(r) Such other information respecting Borrower's and
any other Credit Party's business, financial condition,
management, operations, licenses, permits, or prospects as Lender
may, from time to time, reasonably request.
SCHEDULE 4.1 - Page 4
<PAGE>
REVISED SCHEDULE 6.7
to
CREDIT AGREEMENT
Dated as of May 22, 1996,
as amended as of October 3, 1997
LIENS
<TABLE>
<CAPTION>
(a) The following financing statements and the Liens
perfected thereby:
FILING FILE DATE SECURED
OFFICE NO. FILED DEBTOR PARTY
<S> <C> <C> <C> <C>
Secretary of State 95-222633 November 1995 Spec's Music Inc. AT&T Credit Corp.
of Florida
Secretary of State 94-144051 July 18, 1994 Spec's Music Inc. NCR Credit Corp.
of Florida
Secretary of State 96000007828 April 30, 1996 Spec's Music Inc. General Electric
of Florida Capital Corp.
Secretary of State 970000103902 May 13, 1997 DS Latino Inc. General Electric
of Florida Capital Corp.
</TABLE>
(b) The MF Liens in favor of MF and filed against
Spec's Music, Inc. and D S Latino, Inc. to secure the MF
Obligations but only if and for so long as the Intercreditor
Agreement is in effect.
SCHEDULE 6.7
<PAGE>
REVISED SCHEDULE 6.11
to
CREDIT AGREEMENT
Dated as of May 22, 1996,
as amended as of October 3, 1997
FINANCIAL COVENANTS
Borrower shall not breach or fail to comply with any of
the following covenants, each of which shall be calculated on a
consolidated basis in accordance with GAAP consistently applied:
(a) MINIMUM EBITDA. Borrower's EBITDA for each
Fiscal Month ending on or after September 30, 1997
(measured on a cumulative basis from September 1, 1997
for each such Fiscal Month) shall be not less than the
amount shown below for such period:
FISCAL MONTH ENDING MINIMUM EBITDA
September 30, 1997 ($292,000)
October 31, 1997 (266,000)
November 30, 1997 (107,000)
December 31, 1997 1,068,000
January 31, 1998 1,305,000
February 28, 1998 1,415,000
March 31, 1998 1,624,000
April 30, 1998 1,694,000
May 31, 1998 1,772,000
June 30, 1998 1,814,000
July 31, 1998 1,880,000
(b) MINIMUM ADJUSTED TANGIBLE NET WORTH. Borrower's
Adjusted Tangible Net Worth as of the end of each Fiscal Month
ending on or after September 30, 1997 shall be not less than the
amount shown below for such month:
MINIMUM ADJUSTED
FISCAL MONTH ENDING TANGIBLE NET WORTH
September 30, 1997 $9,661,000
October 31, 1997 9,314,000
November 30, 1997 9,281,000
December 31, 1997 10,232,000
January 31, 1998 10,248,000
February 28, 1998 10,043,000
March 31, 1998 10,019,000
April 30, 1998 9,752,000
May 31, 1998 9,500,000
June 30, 1998 9,188,000
July 31, 1998 8,922,000
(C) MINIMUM FIXED CHARGE COVERAGE RATIO. Borrower shall
have a Fixed Charge Coverage Ratio for each Fiscal Month ending on
or after November 30, 1997 (measured on a cumulative basis from
September 1, 1997 for each such Fiscal Month) of not less than the
amount shown below for such period:
MINIMUM ADJUSTED FIXED
FISCAL MONTH ENDING CHARGED COVERAGE RATIO
November 30, 1997 0.1 to 1.0
December 31, 1997 or 1.5 to 1.0
thereafter
(d) MINIMUM CURRENT RATIO. Borrower shall have a Current
Ratio as of the end of each Fiscal Month ending on or after
September 30, 1997 of not less than the amount shown below for such
period:
FISCAL MONTH ENDING MINIMUM CURRENT RATIO
September 30, 1997 1.0 to 1.0
October 31, 1997 1.1 to 1.0
November 30, 1997 1.1 to 1.0
December 31, 1997 1.1 to 1.0
January 31, 1998 1.1 to 1.0
February 28, 1998 or 1.2 to 1.0
thereafter
(e) MAXIMUM CAPITAL EXPENDITURES. The Credit Parties shall
not make Capital Expenditures that exceed in aggregate amount the
sum of $150,000 for any Fiscal Quarter of Borrower ending on or
after October 31, 1997.
SCHEDULE 6.11
<PAGE>
(f) MAXIMUM FIFO INVENTORY. The Credit Parties' total
inventory (as determined on a first-in, first-out basis) as of the
end of any Fiscal Month ending on or after September 30, 1997 shall
not exceed the amount shown below for such period; PROVIDED,
however, that in the event any Credit Party closes any of its
stores, each such limit shall be reduced by the average of the 12
month-end inventory levels of such store commencing with the month-end
prior to Lender's receipt of notice from Borrower of the
closing of such store:
FISCAL MONTH ENDING MAXIMUM FIFO INVENTORY
September 30, 1997 $17,055,000
October 31, 1997 17,342,000
November 30, 1997 17,342,000
December 31, 1997 or 15,042,000
thereafter
(g) ADDITIONAL MAXIMUM INVENTORY COVENANT. The Credit
Parties' total inventory (as determined on a first-in, first-out
basis) as of the end of any Fiscal Month ending on or after
December 31, 1997 shall not exceed the sum of (i) the Credit
Parties' accounts payable as of such date plus (ii) the aggregate
outstanding principal balance as of such date of the Revolving
Credit Loans, the Letter of Credit Obligations and the MF Loans.
SCHEDULE 6.11
<PAGE>
CLOSING CERTIFICATE OF BORROWER
The undersigned officer of SPEC'S MUSIC, INC. (the
"Borrower"), a Florida corporation, hereby certifies and
covenants in his or her representative capacity on behalf of the
Borrower as follows:
1. Unless otherwise expressly defined herein, all
capitalized terms used herein shall have the meanings given such
terms in the Credit Agreement, dated as of May 22, 1996, as
amended, between Borrower and General Electric Capital
Corporation (the "CREDIT AGREEMENT"). This Certificate is being
executed and delivered pursuant to that certain First
Modification of Credit Agreement, dated as of October 3, 1997,
between General Electric Capital Corporation and Borrower (the
"MODIFICATION").
2. Each of the representations and warranties made by
the Borrower set forth in the Credit Agreement, the Modification
and the other Loan Documents executed by Borrower are true and
correct in all material respects on and as of the date of this
Certificate (except to the extent that any such representation or
warranty expressly relates to a prior specific date or period).
3. The Borrower is in compliance with all the terms and
provisions set forth in the Credit Agreement as amended by the
Modification on and as of the date of this Certificate.
4. No Default or Event of Default has occurred and is
continuing on and as of the date of this Certificate and after
giving effect to the Modification.
5. Except as disclosed on SCHEDULE 3.14 to the Credit
Agreement, there is no action or proceeding instituted or pending
before any court or governmental authority or, to the knowledge
of the Borrower, threatened (i) which reasonably could be
expected to have a Material Adverse Effect, or (ii) which seeks
to prohibit or restrict Borrower's ownership or operation of any
material portion of its business or assets or compel Borrower to
dispose of or hold separate all or any material portion of its
business or assets, and which reasonably could be expected to
have a Material Adverse Effect.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this
Certificate on behalf of the Borrower and affixed its corporate
seal hereto, all as of this _2nd_ day of October 1997.
(CORPORATE SEAL) /s/ DOROTHY J. SPECTOR
_________________________________________
Dorothy J. Spector, Secretary
The undersigned officer of the above-named Borrower hereby
further certifies in his or her representative capacity on behalf
of the Borrower as follows:
1. Attached hereto as EXHIBIT 1 is a true and correct
copy of resolutions of the Board of Directors of the Borrower
which were duly adopted as of October 2, 1997 (collectively, the
"RESOLUTIONS"), and which authorize the execution, delivery and
performance of the Modification, the Intercreditor Agreement and
the Borrower Trademark Security Agreement described therein. The
Resolutions were adopted in accordance with the Certificate or
Articles of Incorporation and By-laws of the Borrower. A true,
correct and complete copy of the Borrower's by-laws as in effect
on this date (collectively, the "BY-LAWS") is attached hereto as
EXHIBIT 2. A true, correct and complete copy of the Borrower's
Certificate or Articles of Incorporation as in effect on this
date (collectively, the "ARTICLES") is attached hereto as EXHIBIT
3. The Resolutions, the By-Laws and the Articles are in full
force and effect and have not been amended, altered or repealed
as of the date hereof except as shown on such Exhibits.
2. The persons named below are on the date hereof the
duly elected and qualified incumbents of the offices of the
Borrower set forth below next to their respective names, and the
signatures appearing at the right of their respective names below
are the genuine signatures of such officers:
NAME TITLE SIGNATURE
Ann S. Lieff President /s/ Ann S. Lieff
Chief Executive Officer
____________________ ____________________ ___________________
Donald A. Molta Vice President /s/ Donald A. Molta
Chief Financial Officer
Secretary
____________________ ____________________ ___________________
Dorothy J. Spector Secretary /s/ Dorothy J. Spector
____________________ ____________________ ___________________
Rosalind S. Zacks Vice President /s/ Rosalind S. Zacks
Treasurer, and Assistant
Secretary
___________________ ____________________ ____________________
3. The corporate seal affixed to this Certificate, the
Modification and the Intercreditor Agreement is the legally
adopted, proper and only official corporate seal of the Borrower.
IN WITNESS WHEROF, the undersigned has executed this
Certificate on behalf of the Borrower and affixed its corporate
seal hereto, all as of this _2nd_ day of October, 1997.
(CORPORATE SEAL) /s/ DOROTHY J. SPECTOR
___________________________________
Dorothy J. Spector, Secretary
<PAGE>
Exhibit 1
Board Resolutions Of
Spec's Music, Inc.
(the "CORPORATION")
Whereas, the Corporation has established certain loan
facilities for its benefit under a Credit Agreement (the "CREDIT
AGREEMENT"), dated as of May 22, 1996, between the Corporation
and General Electric Capital Corporation (the "LENDER"); and
WHEREAS, the Board of Directors of the Corporation
deems it to be in the best interest of the Corporation and its
shareholders that the Corporation enter into and execute the
Modification;
NOW, THEREFORE, BE IT RESOLVED, that the Modification,
together with all transactions contemplated thereby, is hereby
approved in its entirety; and
FURTHER RESOLVED, that the chairman, the president or
any vice president of the Corporation are each hereby severally
authorized and directed to execute and deliver the Modification,
which document shall be in substantially the same form as
reviewed by the Board of Directors of the Corporation, but with
such changes or additions thereto as any such officer shall deem
to be in the best interest of the Corporation (the chairman's,
the president's or any vice president's execution of the same
containing any such changes or additions being deemed to evidence
conclusively his or her decision that such changes or additions
are in the best interest of the Corporation); and
FURTHER RESOLVED, that the aforesaid officers of the
Corporation are each hereby severally authorized and directed to
do or to cause to be done all such other acts and things
(including without limitation the execution and delivery of such
intercreditor agreements, instruments, financing statements,
fixture filings, certificates and other agreements or documents)
as any such officer may deem necessary or desirable in order to
carry out and effectuate fully the purposes of the foregoing
resolutions.
<PAGE>
TRADEMARK SECURITY AGREEMENT
THIS AGREEMENT is made as of the 3rd day of October, 1997,
between SPEC'S MUSIC, INC., a Florida corporation, having a
mailing address at 1666 N.W. 82nd Avenue, Miami, Dade County,
Florida 33126 ("DEBTOR"), and GENERAL ELECTRIC CAPITAL
CORPORATION, a New York corporation having an office at Suite
600, 3379 Peachtree Road, N.E., Atlanta, Georgia 30326
("Lender").
STATEMENT OF FACTS
In order to induce Lender to extend credit and other
financial accommodations to Debtor under the Credit Agreement
dated as of May 22, 1996 between Debtor and Lender (as the same
may hereafter be amended, restated, supplemented or replaced from
time to time, the "CREDIT AGREEMENT"), Debtor has agreed to grant
to Lender a security interest in certain trademark rights and
related assets of Debtor in accordance with the terms of this
Agreement.
In consideration of the foregoing premises and other good
and valuable consideration, Debtor hereby agrees that all
capitalized terms used herein (and not otherwise expressly
defined herein) shall have the meanings given such terms in the
Credit Agreement and Debtor and Lender hereby further agree as
follows:
Statement of Terms
1. GRANT OF SECURITY INTEREST. To secure the complete
and timely satisfaction of all of Debtor's obligations hereunder,
as well as to secure all of the rights of Lender hereunder, and
to secure the payment and performance of any and all Obligations
(as such term is defined in the Credit Agreement) (all such
obligations being herein collectively called the "SECURED
OBLIGATIONS"), Debtor hereby grants to Lender a present and
continuing security interest in the entire right, title and
interest of Debtor in and to the trademark application(s),
trademark(s), service mark application(s) and service mark(s)
listed on SCHEDULE 1 attached hereto together with all goodwill
of Debtor's business relating thereto and all other assets of
Debtor necessary to produce the products for which such
applications will be or such trademarks are used, including
without limitation all proceeds thereof (such as, by way of
example, license royalties and proceeds of infringement suits),
the right to sue for past, present and future infringements, all
rights corresponding thereto throughout the world and all
renewals, extensions and other proceeds thereof (collectively
called the "TRADEMARKS").
2. REPRESENTATIONS AND WARRANTIES. Debtor represents and
warrants that as of the date hereof:
(a) The Trademarks are subsisting and have not been
adjudged invalid or unenforceable, in whole or in part, except
where the failure of any of the foregoing to be true could not
reasonably be expected to have a Material Adverse Effect;
<PAGE>
(b) Each of the Trademarks is valid and enforceable,
except where the failure of any of the foregoing to be true could
not reasonably be expected to have a Material Adverse Effect;
(c) Debtor is the sole and exclusive owner of the entire
and unencumbered right, title and interest in and to each of the
material Trademarks, free and clear of any liens, charges and
encumbrances, including without limitation licenses and covenants
by Debtor not to sue third persons, except for any Permitted
Encumbrances;
(d) Debtor has the unqualified right to enter into this
Agreement and perform its terms; and
(e) Except as set forth on SCHEDULE 1 attached hereto,
Debtor has no rights, titles or interests in any trademarks or
trademark applications.
3. NO INCONSISTENT LICENSES. Debtor agrees that, so
long as this Agreement is in effect, it will not enter into any
agreement (for example, a license or assignment agreement) which
is inconsistent with Debtor's obligations under this Agreement,
without Lender's prior written consent.
4. EVENT OF DEFAULT. The failure of Debtor to perform
any of its obligations hereunder, any breach in any material
respect of any representation or warranty of Debtor herein, or
the occurrence of any Event of Default under (and as such term is
defined in) the Credit Agreement will also constitute a default
by Debtor under this Agreement after giving effect to any
applicable cure periods expressly provided for in the Credit
Agreement (herein referred to as an "EVENT OF DEFAULT").
5. REMEDIES ON DEFAULT. If any Event of Default shall
have occurred and be continuing, Lender shall have, in addition
to all other rights and remedies given it by this Agreement,
those allowed by law and the rights and remedies of a secured
party under the Uniform Commercial Code as enacted in State of
New York and, without limiting the generality of the foregoing,
Lender may immediately, without demand of performance and without
other notice or demand whatsoever to Debtor, sell at public or
private sale or otherwise realize upon, the whole or from time to
time any part of the Trademarks, or any interest which Debtor may
have therein and, after deducting from the proceeds of sale or
other disposition of the Trademarks all expenses (including all
expenses for legal services) shall apply the residue of such
proceeds toward the payment of the Secured Obligations (which
application shall be made, first, to Lender's costs and expenses
of such collection, sale or other disposition, including
reasonable attorney's fees, and then to the payment of the other
Secured Obligations then due to Lender. Debtor shall be liable
for any deficiency remaining after the application of such
proceeds. Any remainder of the proceeds after payment in full of
the Secured Obligations shall be paid over to Debtor. If
required by applicable law, notice of any sale or other
disposition of the Trademarks shall be given to Debtor at least
ten (10) days before the time of any intended public or private
sale or other disposition of the Trademarks is to be made, which
Debtor hereby agrees shall be reasonable notice of such sale or
other disposition. At any such sale or other
-2-
<PAGE>
disposition Lender may, to the extent permissible under
applicable law, purchase the whole or any part of the Trademarks
sold, free from any right of redemption on the part of Debtor,
which right is hereby waived and released.
6. NO WAIVER. No course of dealing between Debtor and
Lender, nor any failure to exercise, nor any delay in exercising,
on the part of Lender, any right, power or privilege hereunder
shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, power or privilege hereunder
preclude any other or further exercise thereof or the exercise of
any other right, power or privilege.
7. SEVERABILITY. The provisions of this Agreement are
several, and if any clause or provision shall be held invalid and
unenforceable in whole or in part in any jurisdiction, then such
invalidity or unenforceability shall affect only such clause or
provision, or part thereof, in such jurisdiction, and shall not
in any manner affect such clause or provision in any other
jurisdiction, or any other clause or provision of this Agreement
in any jurisdiction.
8. Modification. This Agreement is subject to
modification only by a writing signed by Debtor and Lender.
9. BENEFIT OF AGREEMENT. The benefits and burdens of
this Agreement shall inure to the benefit of and be binding upon
the respective heirs, legal representatives, successors and
assigns of the parties.
10. COLLATERAL DOCUMENT. This Agreement is one of the
Collateral Documents (as such term is defined in the Credit
Agreement).
11. Governing Law. THE VALIDITY AND INTERPRETATION OF
THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE
TO CONTRACTS MADE AND PERFORMED IN SUCH STATE AND THE APPLICABLE
LAWS OF THE UNITED STATES OF AMERICA.
12. TERMINOLOGY; HEADINGS. All singular terms used
herein shall include the plural and vice versa, and all pronouns
used herein shall be deemed to cover all genders. All section
headings used herein are for convenience of reference only and do
not constitute a substantive part of this Agreement.
13. TERMINATION OF AGREEMENT. This Agreement and the
assignment and security interest conveyed hereunder shall remain
in full force and effect until such time as the Credit Agreement
is no longer in effect and no Secured Obligations for the payment
of money are outstanding.
14. EXECUTION IN COUNTERPARTS. This Agreement may be
executed in any number of counterparts, each of which
counterparts when so executed and delivered, shall be
-3-
<PAGE>
deemed to be an original, and all of which counterparts, taken
together, shall constitute one and the same Agreement.
15. EXPENSES; INDEMNITY. Debtor will promptly upon
demand pay to Lender the amount of any and all expenses,
including reasonable attorney's fees and fees of other experts,
which Lender may from time to time incur in connection with (i)
the administration of this Agreement, (ii) the preservation of or
the sale or other disposition of or other realization upon any of
the Trademarks, (iii) the exercise or enforcement of any of the
rights of Lender hereunder or (iv) the failure by Debtor to
perform or observe any of the provisions hereof. Debtor also
hereby agrees to indemnify Lender and holds Lender harmless from
and against any liability, loss, damage, suit, action or
proceeding ever suffered or incurred by Lender as a result of (i)
Debtor's failure to observe, perform or discharge Debtor's duties
hereunder or (ii) Lender's holding or administering this
Agreement or its rights, titles or interests in the Trademarks,
unless with respect to any of the above, Lender is determined to
have acted with gross negligence or to have engaged in willful
misconduct. The obligations of Debtor under this paragraph 15
shall survive the termination of this Agreement.
16. SECURITY AGREEMENT. Lender also has a Lien in the
Trademarks under the terms of the Security Agreement (as such
term is defined in the Credit Agreement), and this Agreement is
intended to supplement such Security Agreement, but in the event
of any inconsistency between the terms of this Agreement and
those of such Security Agreement, the terms of such Security
Agreement shall control, and Lender may elect to pursue its
rights and remedies with respect to the Trademarks under either
or both of this Agreement or such Security Agreement.
[Remainder of page intentionally left blank]
-4-
<PAGE>
WITNESS the execution hereof under seal as of the day and year
first above written.
(CORPORATE SEAL) DEBTOR:
SPEC'S MUSIC, INC.
By: /S/ Donald A. Molta
---------------------------------
Title: VP/CFO
----------------------------
LENDER:
GENERAL ELECTRIC CAPITAL
CORPORATION
By: /S/ Timothy C. Huban
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Authorized Signatory
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STATE OF GEORGIA
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COUNTY OF FULTON
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CERTIFICATE OF ACKNOWLEDGMENT
Before me, the undersigned, a Notary Public in and for the
state and aforesaid, on this 3rd of October, 1997, personally
appeared ____Donald A. Molta_____, to me known personally, and who,
being by me duly sworn, deposes and says that he is the ___Vice
President_____ of SPEC'S MUSIC, INC. and that the seal affixed to
the foregoing instrument is the corporate seal of said corporation,
and that said instrument was signed and sealed on behalf of said
corporation by authority of its Board of Directors, and said
officer acknowledged said instrument to be the free act and deed of
said corporation. He/She is personally known to me or has produced
a ____FL Driver's License_____ as identification.
/S/ Linda M. Butshen
--------------------------------
NOTARY PUBLIC
MY Commission expires:
[NOTARIAL SEAL]
<PAGE>
SCHEDULE 1 TO
TRADEMARK SECURITY AGREEMENT EXECUTED BY SPEC'S MUSIC, INC.
<TABLE>
Reg. Serial Reg. Filing
Trademark/Service Marks Number Number Country Date Date
<S> <C> <C> <C>
HITS ONLY 75/271864 USA 4/9/97
D S Latino 75/271865 USA 4/9/97
Design 75/271866 USA 4/9/97
Design 75/271867 USA 4/9/97
RAIZ LATINA 75/271868 USA 4/9/97
EPICENTRO MUSICAL 75/271869 USA 4/9/97
ORO LATINO 75/271870 USA 4/9/97
</TABLE>
<PAGE>
SUBORDINATION AND
INTERCREDITOR AGREEMENT
This agreement is made and entered into as of this 3rd day
of October, 1997, among GENERAL ELECTRIC CAPITAL CORPORATION, a
New York corporation ("GECC"), MUSIC FUNDING 1, LLC, a North
Carolina limited liability company ("MF"), and SPEC'S MUSIC, INC.
a Florida corporation (the "BORROWER").
In consideration of the mutual covenants set forth herein, the
sum of $10.00 in hand paid by each party hereto to the other
party hereto, and other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the
parties hereto agree as follows:
1. DEFINITIONS. (a) The following terms shall have the
following meanings as used in this Agreement:
"BORROWER" shall have the meaning set forth in the
preamble to this Agreement and shall include such person's
successors and permitted assigns and shall also include without
limitation the Borrower acting as a debtor-in-possession in any
Insolvency Proceeding.
"BUSINESS DAY" shall have the meaning given such term
in the GECC Credit Agreement.
"COLLATERAL" shall mean any and all of the real and
personal property of any and all of the Credit Parties, whether
now owned or hereafter acquired, whether tangible or intangible,
and wherever located, including, without limitation, any and all
accounts, general intangibles, inventory, equipment, fixtures,
documents, instruments, securities, and deposit accounts and
monies of any and all of the Credit Parties, together with any
and all Proceeds of any and all of the foregoing property.
"CREDIT DOCUMENTS" shall mean the MF Documents or the
GECC Documents, and in the case of each Creditor such term shall
include, without limitation, any supplemental or replacement
Credit Documents entered into or executed in connection with such
Creditor's provision of financing to any Credit Party in its
capacity as a debtor-in-possession in an Insolvency Proceeding.
"CREDIT PARTIES" shall mean the Borrower and its
Subsidiaries and shall also include without limitation any Credit
Party as a debtor-in-possession in any Insolvency Proceeding.
<PAGE>
"CREDITOR" and "CREDITORS" shall mean GECC and MF
individually and collectively, respectively, and shall include
each such person's respective successors and assigns.
"ENFORCEMENT ACTION" shall mean, collectively or
individually, for one or both of the Creditors: (i) to make
demand for payment of or accelerate the maturity of any
Indebtedness, (ii) take possession of or to collect any
Collateral or any Proceeds thereof (other than GECC's collection
of any Credit Party's accounts receivable prior to an Event of
Default through any blocked or lock box account which may be
contemplated by the GECC Documents), or (iii) commence the
enforcement (by judicial proceedings or otherwise) of any of the
rights and remedies with respect to any Collateral or the
Proceeds thereof existing upon any Event of Default under any of
the Credit Documents.
"EVENT OF DEFAULT" shall mean any Default or Event of
Default as any such term is defined or used in the MF Documents
or the GECC Documents.
"FEDERAL BANKRUPTCY CODE" shall mean the U.S.
Bankruptcy Code of 1978, as amended (11 U.S.C. Section 101 et
seq.).
"GECC" shall have the meaning given such term in the
preamble to this Agreement and shall include its successors and
assigns.
"GECC BORROWING BASE" shall mean the Borrowing Base (as
such term is defined in the GECC Credit Agreement).
"GECC CREDIT AGREEMENT" shall mean the Credit
Agreement, dated as of May 22, 1996, between the Borrower and
GECC, as the same may be amended. supplemented or restated from
time to time.
"GECC Documents" shall mean the GECC Credit Agreement
and any and all notes, guaranties, security agreements,
assignments, mortgages, pledge agreements, financing statements,
fixture filings and other agreements, instruments or documents
which govern, evidence or guaranty any of the GECC Indebtedness
or which grant or convey any of the GECC Liens, and any
extensions, renewals, or modifications of or replacements for any
of such documents.
"GECC INDEBTEDNESS" shall mean any and all
indebtedness, obligations or liabilities which may be now or
hereafter owing by any or all of the Credit Parties to GECC under
any and all of the GECC Documents, whether direct or indirect,
absolute or contingent, or joint or several, and whether for
principal, interest, fees or other amounts.
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"GECC INTERESTS" shall have the meaning given such term
in Section 7 hereof.
"GECC Liens" shall mean any and all Liens on any or all
of the Collateral which may be now or hereafter granted to GECC
by any or all of the Credit Parties pursuant to any of the GECC
Documents to secure any or all of the GECC Indebtedness.
"GECC OVERADVANCE" shall mean the amount, if any, by
which the outstanding principal balance of the GECC Indebtedness
shall at any time exceed the GECC Borrowing Base as in effect at
such time.
"GECC UNUSED BORROWING AVAILABILITY" shall mean the
Unused Borrowing Availability as such term is defined in the GECC
Credit Agreement.
"INDEBTEDNESS" shall mean the MF Indebtedness or the
GECC Indebtedness and, in the case of each Creditor, such term
shall include, without limitation, any interest which would
accrue on such Creditor's Indebtedness but for the filing by or
against any Credit Party of any petition in bankruptcy and all
other Indebtedness of any Credit Party to such Creditor which may
be incurred in any Insolvency Proceeding of such Credit Party
whether or not recoverable by such Creditor from such Credit
Party or its estate under 11 U.S.C. Section 506.
"INSOLVENCY PROCEEDING" shall mean any insolvency or
receivership proceeding, or any proceeding under the Federal
Bankruptcy Code, or any other proceeding under any other
bankruptcy or insolvency laws or other laws relating to the
relief of debtors or the readjustment, extension or composition
of debts, and which is brought by or against any Credit Party.
"LIEN" and "LIENS" shall have the meaning given such
terms in the GECC Credit Agreement.
"MAXIMUM GECC OVERADVANCE AMOUNT" shall mean, as of any
date, an amount equal to the following: (i) if at such time the
aggregate outstanding principal balance of the MF Indebtedness is
equal to or greater than $1,000,000, the Maximum GECC Overadvance
Amount shall be $700,000, or (ii) if at such time the aggregate
outstanding principal balance of the MF Indebtedness is less than
$1,000,000, the Maximum GECC Overadvance amount shall be equal to
the lesser of (x) $1,000,000 or (y) the sum of $700,000 plus the
amount (if any) by which the aggregate outstanding principal
balance of the MF Indebtedness at such time is less than
$1,000,000.
"MF" shall have the meaning given such term in the
preamble to this Agreement and shall include its successors and
assigns.
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<PAGE>
"MF CREDIT AGREEMENT" shall mean the Credit Agreement,
dated as of October 3, 1997, between MF and Borrower, as the same
may be amended, supplemented or restated from time to time.
"MF DOCUMENTS" shall mean the MF Credit Agreement and
any and all notes, guaranties, security agreements, assignments,
mortgages, pledge agreements, financing statements, fixture
filings and other agreements, instruments or documents which
govern, evidence or guaranty any of the MF Indebtedness or which
grant or convey any of the MF Liens, and any extensions,
renewals, or modifications thereof or replacements therefor.
"MF INDEBTEDNESS" shall mean any and all indebtedness,
obligations or liabilities which may be now or hereafter owing by
any or all of the Credit Parties to MF under any or all of the MF
Documents, whether direct, indirect, absolute or contingent, or
joint or several, and whether for principal, interest, fees or
other amounts.
"MF LIENS" shall mean any and all of the Liens on any
or all of the Collateral which may be now or hereafter granted to
MF by any or all of the Credit Parties pursuant to any of the MF
Documents to secure any or all of the MF Indebtedness.
"PERSON" shall have the meaning given such term in the
GECC Credit Agreement.
"PROCEEDS" shall mean, with respect to any particular
item or type of Collateral, whatever is received upon the sale,
exchange, collection or other disposition of such Collateral or
the Proceeds thereof as well as any amounts payable under any
policy of insurance on account of any loss of or damage to such
Collateral.
"SPECIFIED DEFAULT CONDITION" shall mean the occurrence
of any Default or Event of Default (as defined in the GECC Credit
Agreement) under Section 8.1(a), (b) (but only with respect to
Sections 1.7, 6.1, 6.2, 6.3, 6.6, 6.7, 6.8, 6.11, or Annex C of
or paragraphs (a) or (c) of Schedule 4.1 to the GECC Credit
Agreement), (f), (g) or (h) of the GECC Credit Agreement.
"SUBSIDIARY" shall have the meaning given such term in
the GECC Credit Agreement.
"TERMINATION DATE" shall have the meaning given such
term in the GECC Credit Agreement.
"TRIGGERING EVENT" shall mean the occurrence after the
date of this Agreement of any of the following events: (i) if a
GECC Overadvance of more than $500,000 shall occur; (ii) if
either the inventory advance rate used to calculate the GECC
Borrowing
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Base shall be increased by GECC by four percentage points (4.0%)
or more or if any lesser increase in such advance rate results in
an increase of the GECC Borrowing Base of more than $500,000;
(iii) if GECC expressly agrees in writing to increase the maximum
amount of credit available to the Borrower under the GECC Credit
Agreement to more than $15,000,000 in aggregate principal amount
at any one time; (iv) if GECC expressly waives in writing any
payment default under the GECC Credit Agreement; (v) if GECC
expressly agrees in writing to extend the due date of any
scheduled payment on the GECC Indebtedness or increase any
interest rates or fees payable under the GECC Documents; (vi) if
GECC expressly agrees in writing to forebear from taking any
Enforcement Action; (vii) if GECC expressly agrees in writing to
release any material portion of the Collateral (other than
inventory sold in the ordinary course of business or obsolete or
unnecessary equipment or fixtures sold by any Credit Party in
accordance with its historical business practices); (viii) if
GECC expressly agrees in writing to release any Credit Party from
liability for the GECC Indebtedness; (ix) if GECC elects to take
any Enforcement Action; (x) if in any Insolvency Proceeding of
any Credit Party GECC consents to the entry of an order for the
use of "cash collateral" by such Credit Party or if GECC enters
into a modification of the GECC Credit Agreement such that the
revolving credit facility provided by it to the Borrower
thereunder is converted to a debtor-in-possession financing
facility; or (xi) in any Insolvency Proceeding of any Credit
Party, GECC elects to vote in favor of or against any plan of
reorganization proposed by such Credit Party or any other Person
in such proceeding.
"TRIGGERING EVENT NOTICE" shall have the meaning given
such term in Section 7 hereof.
"UCC" shall mean the Uniform Commercial Code as in
effect on the date hereof in the state of the applicable
jurisdiction.
(b) All other undefined terms used in this
Agreement shall, unless the context otherwise dictates, have the
meanings given such terms in the UCC as in effect in the State of
New York to the extent the same are used or defined therein.
2. PAYMENT SUBORDINATION.
(a) From and after the date of this Agreement and
thereafter so long as this Agreement is in effect, and unless
GECC expressly consents in writing to the contrary, the MF
Indebtedness is not to be payable or prepayable, the maturity
date thereof is not to be accelerated, no other action may be
taken by MF to collect or enforce payment of the MF Indebtedness,
and no payment or prepayment on account of any principal of,
interest on, or other sums owing with respect to the MF
Indebtedness shall be made by the Borrower or received or
retained by MF; PROVIDED, however, that (i) regularly scheduled
payments of interest, fees or other amounts (other than
principal) on the MF Indebtedness may be made by the Borrower and
received and retained by MF if no Specified Default Condition has
occurred and is then continuing (and GECC shall honor the
Borrower's requests from time to time that GECC make advances on
behalf of the Borrower under the GECC Credit Agreement to fund
such scheduled payments subject to the
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<PAGE>
terms and conditions of the GECC Credit Agreement), (ii) payments
or prepayments of principal of the MF Indebtedness may be made by
the Borrower and received and retained by MF if no Default or
Event of Default has occurred and is then continuing, the
aggregate outstanding principal balance of the MF Indebtedness is
not less than $200,000 after giving effect to such payment or
prepayment and the GECC Unused Borrowing Availability is not less
than $1,250,000 after giving effect to such payment or
prepayment, and (iii) the maturity of the MF Indebtedness may be
accelerated upon the occurrence and during the continuation of
any Event of Default described in Section 8.1(g) or 8.1(h) of the
GECC Credit Agreement (but any such acceleration shall be subject
to all of the other terms and conditions of this Agreement,
including without limitation the payment subordination and turn-over
provisions set forth in paragraph (b) below).
(b) Should any payment or prepayment be received
by MF as prohibited in subsection (a) above, MF forthwith shall
deliver the same to GECC in precisely the form received (but with
the endorsement of MF, without recourse, where necessary for the
collection thereof by GECC) for application on the GECC
Indebtedness, and MF agrees that, until so delivered, the same
shall be deemed received by MF as agent and bailee for GECC and
such payment or prepayment shall be held in trust by MF as
property of GECC.
(C) No Creditor shall contest the validity,
enforceability or priority of any of the Indebtedness of the
other Creditor under its Credit Documents, provided that such
other Creditor's Indebtedness and the other Creditor's
enforcement thereof are consistent with the other terms and
conditions of this Agreement.
(d) Subject to the fulfillment of the closing
conditions for the MF Credit Agreement, MF agrees that its
initial advance to the Borrower thereunder shall be in the amount
of not less than $500,000, which initial advance may be repaid
subject to the provisions of paragraph (a) above.
3. LIEN SUBORDINATION.
(a) The relative priorities of the Creditors'
Liens which are set forth in paragraph (b) below shall apply: (i)
without regard to the time or order of creation, attachment or
perfection of such Liens (including, without limitation, the
order of filing of the Creditors' respective financing
statements, fixture filings or any other documents) or the time
or order of the execution and delivery of the Credit Documents;
and (ii) with respect to the relative priorities and the creation
or attachment of the Liens perfected by any party hereto on any
of the Collateral or with respect to the creation or attachment
of such Liens to the Proceeds of any of the Collateral or to the
Proceeds of the Proceeds of any of the Collateral,
notwithstanding anything to the contrary in the provisions of the
UCC, the Federal Bankruptcy Code, any other bankruptcy,
insolvency, or creditors' right law, or any other applicable law.
However, notwithstanding anything in this Agreement to the
contrary, the relative priorities specified in paragraph (b)
below are expressly conditioned upon the non-avoidability and
perfection of each Lien to which another Lien is subordinated
hereunder. If the Lien to which another Lien is subordinated
hereunder is not perfected or is avoidable for
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any reason, then the subordination and relative priority
provisions set forth in this Agreement shall not be effective as
to the particular item of property (and only as to such
particular item of property) which is the subject of such
unperfected or avoidable Lien.
(b) The GECC Liens on any or all of the
Collateral or the Proceeds thereof shall take priority over the
MF Liens on such property, and MF hereby agrees that the MF Liens
on any or all of the Collateral or the Proceeds thereof shall be
and are hereby rendered subordinate and inferior in priority to
the GECC Liens on such property.
(C) Except as expressly provided in this
Agreement, MF hereby agrees that GECC shall be entitled to manage
the Collateral in accordance with GECC's usual practices,
modified from time to time as it deems appropriate under the
circumstances, and without any obligation to give MF prior notice
thereof, and that GECC shall have no liability to MF for, and MF
hereby waives any claim which it may now or hereafter have
against GECC arising out of, any or all actions which GECC,
without violation of this Agreement, gross negligence or willful
misconduct on its part, takes or omits to take with respect to
the Collateral or any portion or Proceeds thereof (including,
without limitation, actions or inactions with respect to the
maintenance, preservation or insuring of any of the Collateral,
or the sale, exchange or the disposition of or foreclosure upon
any of the Collateral, or the collection, settlement or
compromise of any of the Collateral, or any customer dispute
pertaining thereto, or the settlement or adjustment of any
insurance claim with respect to any of the Collateral).
(d) Each Creditor hereby consents to the other
Creditor's receipt of a Lien in any or all of the Collateral
under such other Creditor's Credit Documents. No Creditor shall
contest the validity, perfection, priority or enforceability of
any Lien in any of the Collateral granted to the other Creditor
under its Credit Documents provided that such other Creditor's
Lien and the other Creditor's enforcement thereof are consistent
with the other terms and conditions of this Agreement.
(e) If any Creditor obtains possession of any
item of chattel paper, documents, instruments or certificated
securities evidencing or constituting any of the Collateral, such
Creditor shall hold the same as agent and bailee for the other
Creditor for purposes of perfecting such other Creditor's Liens
therein by such possession; provided that (i) such agency and
bailment shall not give rise to a fiduciary relationship between
such Creditors; (ii) if MF obtains possession of any such
Collateral prior to the Termination Date, MF shall promptly
delivery the same into the possession of GECC, and (iii) if GECC
has possession of any of such Collateral on the Termination Date,
GECC shall promptly delivery the same into the possession of MF
(but prior to such date, GECC may exercise its rights and
remedies with respect to such Collateral in accordance with the
GECC Documents including its right to sell or otherwise dispose
of such Collateral).
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(f) MF shall not assert or enforce any right it
may have to marshall the Collateral (or any part thereof or
Proceeds thereof) upon any foreclosure thereof by GECC. In any
Insolvency Proceeding of any Credit Party, MF agrees that it
shall not oppose any cash collateral order which GECC proposes to
consent to in such Insolvency Proceeding or any post-petition
financing which GECC proposes to provide such Credit Party in
such Insolvency Proceeding so long as such order or financing is
consented to or provided by GECC (as the case may be) pursuant to
and in compliance with Section 7(e) hereof.
4. INSOLVENCY, LIQUIDATION OR DISSOLUTION
PROCEEDINGS. (a) GECC shall have the right and is hereby
empowered to vote the full amount of the MF Indebtedness in any
Insolvency Proceeding of any Credit Party and at any meeting of
creditors of any Credit Party whether or not such meeting is held
in an Insolvency Proceeding of such Credit Party, provided that
such action is taken by GECC in a manner which is consistent with
the other terms and conditions of this Agreement. In any of the
foregoing proceedings or at any of the foregoing meetings, GECC
shall be entitled to vote the MF Indebtedness as GECC in its sole
discretion shall determine without regard to the interests of
anyone other than GECC, provided that such action is taken by
GECC in a manner which is consistent with the other terms and
conditions of this Agreement. In any Insolvency Proceeding of
any Credit Party, GECC shall be entitled to collect and enforce
the MF Indebtedness and to receive any distributions, dividends
or other payments upon the MF Indebtedness by filing such claim,
proof of debt or proof of claim as appropriate in the proceeding,
in GECC's name or MF's name, provided that such action is taken
by GECC in a manner which is consistent with the other terms and
conditions of this Agreement. GECC or any officer or employee
designated by GECC for such purpose is hereby constituted and
appointed attorney-in-fact for MF with full power (which power,
being coupled with an interest, shall be irrevocable so long as
this Agreement is in effect) to vote the MF Indebtedness in any
Insolvency Proceedings and at any meeting of any Credit Party's
creditors and to file any claim, proof of debt or proof of claim
in any such proceeding, and to endorse MF's name upon any
instruments given as a payment on or distribution in connection
with the MF Indebtedness, provided that such action is taken by
GECC in a manner which is consistent with the other terms and
conditions of this Agreement.
(b) In the event of any distribution, division or
application, partial or complete, voluntary or involuntary, by
operation of law or otherwise, of all or any part of the assets
of any Credit Party or the proceeds thereof, in whatever form, to
creditors of such Credit Party, or upon any indebtedness of such
Credit Party, by reason of the liquidation, dissolution or other
winding up of such Credit Party or such Credit Party's business,
or by reason of any Insolvency Proceeding, then and in any such
event, any payment or distribution of any kind or character,
either in cash, securities or other property, which shall be
payable or deliverable upon or with respect to any or all of the
MF Indebtedness (including without limitation any such payment or
distribution which may be payable or deliverable by virtue of the
provisions of any securities which are subordinate and junior in
right of payment to the MF Indebtedness) shall be paid or
delivered directly to GECC for application on the GECC
Indebtedness until the GECC Indebtedness shall first have been
fully paid and satisfied and before any payment is made on the MF
Indebtedness.
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5. CREDITOR DUE DILIGENCE. Each Creditor hereby
acknowledges that it will, independently and without reliance
upon the other Creditor and based upon such documents and
information as such Creditor deemed appropriate from time to
time, make and continue to make its own credit decisions in
connection with this Agreement, the Credit Parties, its Credit
Documents, its Obligation, its Liens, the Collateral and all
other aspects of its extensions of credit to the Credit Parties.
Without limiting the generality of the immediately preceding
sentence, it is contemplated that GECC may, from time to time and
upon MF's request, provide MF with copies of Borrowing Base
reports and GECC's adjustments thereto as well as certain other
Collateral reports prepared by Borrower or GECC for GECC's use in
administering its Indebtedness and Liens, and MF hereby
acknowledges and agrees that any such reports have been or will
be prepared or reviewed by GECC solely for its own benefit and
GECC shall make no representations or warranties to MF with
respect to and shall have no other responsibility to MF for the
accuracy or completeness of such reports.
6. ENFORCEMENT ACTIONS; NOTICE OF DEFAULTS. a) Except
as expressly provided in Section 7 below, GECC may, at its
option, take any Enforcement Action to foreclose or realize upon
or enforce any of its rights with respect to the Collateral or
any Proceeds thereof without the consent of or notice to MF and
MF hereby agrees that (i) any such Enforcement Action shall be
deemed to be "commercially reasonable" under the UCC, (to the
extent the UCC applies to the Collateral), so long as such
Enforcement Action is taken in good faith, without gross
negligence or willful misconduct, in accordance with the GECC
Credit Documents, and in an manner consistent with the other
terms and conditions of this Agreement, and (ii) MF shall not
take any Enforcement Action with respect to the Collateral or any
Proceeds thereof without GECC's prior written consent; PROVIDED,
however, that nothing contained herein shall be deemed to
prohibit MF from intervening or participating in any judicial or
bankruptcy proceeding to the extent necessary to preserve or
protect its interests.
(b) Each of the Creditors shall use its
reasonable efforts to provide the other Creditor with prompt
written notice of the occurrence of any Default or Event of
Default under the first Creditor's Credit Documents, but any
Creditor's failure to provide such notice to the other Creditor
shall not give rise to any liability on the part of the first
Creditor.
7. TRIGGERING EVENTS, PURCHASE OPTIONS, ETC.(a)
Promptly after GECC's acquiring actual knowledge of the
occurrence of any Triggering Event, GECC shall provide MF with
written notice of such occurrence (a "TRIGGERING EVENTS NOTICE"),
and subject to the terms and conditions hereof, MF thereafter
shall have the right (but not the obligation) to purchase all
(but not less than all) of GECC's rights, titles and interests
in, to and under the GECC Credit Documents, the GECC Indebtedness
and the GECC Liens (collectively, the "GECC INTERESTS") for a
purchase price, which shall be payable in United States dollars
by wire transfer of immediately available funds on the date of
such purchase, in an amount equal to the aggregate outstanding
balance of all of GECC's Indebtedness (including principal,
interest, fees and other amounts) as of the date of such
purchase. In the event MF elects to purchase the GECC Interests
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hereunder after its receipt of a Triggering Event Notice, MF
shall give GECC written notice of such election within ten (10)
Business Days after MF's receipt of such Triggering Event Notice
and such purchase shall be closed on the fifth (5th) Business Day
after GECC's receipt of such purchase notice from MF. At such
closing, upon payment of the purchase price by MF to GECC in the
manner and in the amount specified above, GECC shall deliver to
MF (or its designee) the executed originals of the GECC Credit
Documents then in GECC's possession together with (i) GECC's
endorsement (or assignment if requested by MF) without recourse
of any promissory note from the Borrower held by GECC as evidence
of the GECC Indebtedness, (ii) UCC financing statement
assignments duly executed by GECC in favor of MF (or its
designee) with respect to any and all financing statements or
fixture filings filed by GECC on any Credit Party in connection
with the perfection of the GECC Liens, (iii) a written assignment
of the GECC Interests, which assignment shall be in the form of
EXHIBIT A attached hereto, duly executed by GECC in favor of MF
(or its designee), and (iv) any of the Collateral in the form of
chattel paper or instruments (within the meaning of the UCC) that
may be then in the possession of GECC.
(b) Any purchase of the GECC Interests by MF from
GECC shall be made without recourse against GECC and without any
representations or warranties by GECC (except that GECC shall be
deemed to have represented and warranted to MF, or its designee,
that as of the closing of such purchase GECC will have good title
to the GECC Interests and will not have sold, assigned or
otherwise transferred any of the same to any person other than MF
or its designee), and MF shall purchase the GECC Interests from
GECC on an "AS IS" and "WHERE IS" basis. MF hereby acknowledges
that, in the event it elects to purchase the GECC Interests from
GECC hereunder, such purchase will be made by MF in reliance upon
its own independent investigation of the Credit Parties'
condition and creditworthiness, the Collateral's value, the GECC
Liens' perfection and priority, and the GECC Credit Documents'
validity and enforceability and not in reliance upon any
information, representations or advice provided by GECC.
(C) In the event MF (or its designee) purchases
the GECC Interests from GECC in accordance with and subject to
the terms and conditions of this Agreement, GECC shall from time
to time thereafter, upon reasonable request and at the expense of
MF (or its designee), execute such additional notices,
assignments and other similar documents as MF (or its designee)
may reasonably request in order to more fully effectuate such
purchase.
(d) MF will indemnify and hold GECC harmless from
and against any losses, damages or expenses (including attorney's
fees, court costs and other litigation expenses) which may be
incurred or suffered by GECC in its capacity as the former holder
of the GECC Interests as a result of any actions or omissions on
the part of MF (or its designee) which occur on or after the date
of the closing of the purchase of all of the GECC Interests from
GECC by MF (or its designee) pursuant to this Section 7 and which
relate to MF's (or its designees) receipt, administration,
modification, collection or other enforcement of any of the GECC
Interests; PROVIDED, HOWEVER, that GECC shall not be entitled to
any indemnification under this paragraph for any loss, damage or
expense such person incurs solely as a result of its own gross
negligence or willful misconduct. MF's indemnity obligations
under this paragraph shall survive any termination of this
Agreement.
-10-
<PAGE>
(e) Notwithstanding anything in this Agreement
to the contrary, GECC shall not, without the express prior
written consent of MF, (i) make any loan or other extensions of
credit to any Credit Parties other than under the revolving
credit facility provided under the GECC Credit Agreement or agree
to permit the maximum amount of credit available to the Borrower
under the Credit Agreement to be increased to more than
$15,000,000 in aggregate principal amount at any one time or
agree to permit a GECC Overadvance to occur at any time in an
amount which exceeds the Maximum GECC Overadvance Amount as then
in effect (except that (x) GECC shall not be required to obtain
MF's consent to GECC's converting such revolving credit facility
into a debtor-in-possession financing facility with any Credit
Party if there is no increase in the inventory advance rates for
or in the maximum credit available under such debtor-in-possession
financing facility and (y) GECC shall not be required
to obtain MF's consent to GECC's providing any loans or credit to
any Credit Party as a debtor-in-possession in an Insolvency
Proceeding, which loans may be made in such amounts and at such
inventory advance rates as may be acceptable to GECC, if GECC
determines in good faith that it needs to provide such financing
in order to prevent another lender from providing such financing
on terms which would result in such other lender having a lien on
the Collateral with priority over the GECC Liens thereon), or
(ii) expressly agree in writing to extend the final maturity date
of the GECC Indebtedness by more than ninety (90) days.
8. WAIVERS. Except as expressly provided in this
Agreement, each of the Creditors hereby expressly waives the
following on the part of the other Creditor: diligence in
protection or collection of any Collateral or Indebtedness;
presentment; demand; protest; notice to any and all persons of
protest; demand; default; nonpayment; the creation or existence
of any Indebtedness or any Collateral therefor; or of any
extensions of credit or indulgences to the Borrower; or of any
other matters or things whatsoever relating hereto or thereto.
9. EXERCISE OF RIGHTS. Except as expressly set forth
in Section 7 above, GECC may exercise all of its rights with
respect to any or all of the Collateral or the Proceeds thereof
without any obligation to MF until there has been full payment
and performance of the GECC Indebtedness and a termination of its
Liens on such property, GECC shall be entitled to manage and
supervise its Indebtedness and the Collateral and the Proceeds
thereof in accordance with applicable law and its practices in
effect from time to time without regard to the existence of the
MF Liens, and GECC shall have no liability to MF for (i) any and
all actions which GECC, in compliance with this Agreement and in
good faith, takes or omits to take with respect to its
Indebtedness or the Collateral or the Proceeds thereof (including
without limitation actions with respect to creation, perfection
or continuation of its Liens in any of the Collateral), the
occurrence of any default with respect to any such Indebtedness,
the foreclosure upon, sale, release or depreciation of, or any
failure to realize upon, any of the Collateral or the Proceeds
thereof, and the collection of any of its Indebtedness from any
Credit Party or any other party), and (ii) any election of the
application of Section 1111(b)(2) of the Federal Bankruptcy Code.
-11-
<PAGE>
10. PLEDGE OR TRANSFER OF MF INDEBTEDNESS. MF agrees
not to assign, transfer, pledge, or grant a security interest in
all or any part of the MF Indebtedness or the MF Liens unless (i)
such assignment, transfer, pledge or grant is made expressly
subject to this Agreement and (ii) MF's assignee, transferee,
pledgee or grantee expressly agrees in writing to assume MF's
obligations hereunder. MF shall place on any and all promissory
notes, agreements or other instruments or documents evidencing
the MF Indebtedness or granting the MF Liens a legend, in form
and substance satisfactory to GECC, stating that such notes,
agreements or other instruments or documents are subordinated
pursuant to this Agreement.
11. CONTINUING AGREEMENT AND TERMINATION.
(a) This Agreement is a continuing agreement and
this Agreement shall remain in full force and effect until the
Termination Date regardless of whether the GECC Indebtedness is
from time to time reduced and thereafter increased or entirely
extinguished and thereafter reincurred or incurred anew. This
Agreement shall remain in full force and effect and shall be
irrevocable until and shall terminate on the Termination Date.
No notice purporting to terminate this Agreement which is
received by GECC at any time prior to the Termination Date shall
be effective, in any manner or at any time whatsoever, to
terminate this Agreement.
(b) This Agreement shall be and remain absolute
and unconditional under any and all circumstances and, except as
expressly provided in Section 7 or Section 9 hereof, no act or
omission on the part of any Creditor shall affect or impair the
terms or conditions hereof. Without limiting the generality of
the foregoing, and except as expressly provided in Section 7 or
Section 9 above, GECC may change any of the terms of the GECC
Credit Agreement or any of the other GECC Documents, may grant
renewals, extensions or other indulgences of or with respect to
GECC Indebtedness or the Collateral or take any action for the
enforcement of, or waive any rights with respect to, any of the
GECC Indebtedness or the Collateral, all without any requirement
on GECC's part that it give notice of the same to MF or obtain
MF's consent thereto and all without affecting, impairing or
releasing any of MF's obligations under this Agreement.
(C) Notwithstanding anything in this Agreement
to the contrary, this Agreement shall terminate upon MF's (or its
designee's) purchase of all of the GECC Interests from GECC and
GECC's receipt of the purchase price therefor pursuant to Section
7 of this Agreement.
12. RIGHTS AGAINST OTHER CREDITORS. This Agreement
shall not modify, affect or impair in any way any of the rights
and priorities of the Creditors relative to any of the rights and
priorities of any other creditors (unsecured or secured) of any
or all of the Credit Parties.
13. CREDIT PARTIES' ACKNOWLEDGMENTS, CONSENTS AND
AGREEMENTS. The Borrower hereby acknowledges and consents (on
behalf of itself and all other Credit Parties) to the execution,
delivery and performance of this Agreement by MF and GECC and the
Borrower further agrees (on behalf of itself and all other Credit
Parties) to be bound by the provisions of this
-12-
<PAGE>
Agreement as they relate to the relative rights, remedies and
priorities of MF and GECC and the respective obligations of the
Credit Parties to them; PROVIDED, however that nothing in this
Agreement shall amend, modify, change or supersede the respective
terms of any of the GECC Indebtedness or the MF Indebtedness as
between the Credit Parties, on the one hand, and GECC or MF, on
the other hand, and in the event of any conflict or inconsistency
between the terms of this Agreement and those of any agreement,
note or other document evidencing or securing any of the GECC
Indebtedness, the MF Indebtedness or the Collateral, the
provisions of such other agreement, instrument or document shall
govern as between the Credit Parties, on the one hand, and GECC
or MF (as the case may be), on the other hand, and the Borrower
further agrees (on behalf of itself and the other Credit Parties)
that this Agreement shall not give any Credit Party any
substantive rights relative to GECC or MF and the Credit Parties
shall not be entitled to raise any actions or inactions on the
part of GECC or MF hereunder as a defense, counterclaim or other
claim against such party.
14. MISCELLANEOUS.
(a) Wherever possible, each provision of this
Agreement is to be interpreted in such manner as to be effective
and valid under applicable law, but if any provision hereof is
prohibited or invalid under such law, such provision is to be
ineffective only to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the
remaining provisions of this Agreement.
(b) This Agreement shall be binding upon and
shall inure to the benefit of GECC, MF, the Credit Parties and
their respective successors and assigns. Without limiting the
generality of the immediately preceding sentence, any person or
entity whose loans or advances to any Credit Party hereafter are
used to refinance in full the GECC Indebtedness or the MF
Indebtedness shall be deemed for purposes of this Agreement to be
the assignee of and successor to GECC or MF (as the case may be),
and from and after the date of any such refinancing in full of
GECC Indebtedness or the MF Indebtedness (as the case may be)
such person or entity shall be deemed a party hereto in the place
and stead of GECC or MF (as the case may be) as if such person or
entity had been the original signatory hereto and any and all
loans, advances, liabilities, covenants and duties at any time or
times owing by any or all of the Credit Parties to such successor
to GECC, whether direct or indirect, secured or unsecured, due or
to become due, or then existing or thereafter arising, shall be
deemed for all purposes hereunder to constitute and be the GECC
Indebtedness or the MF Indebtedness (as the case may be) and any
and all Liens on any of the Collateral granted to such successor
shall constitute and be the GECC Liens or the MF Liens (as the
case may be) hereunder.
(C) All singular terms used herein shall include
the plural, and any pronouns used herein shall include all
genders.
(d) This Agreement constitutes the sole and
entire agreement among the parties with respect to the subject
matter hereof and supersedes and replaces any and all prior or
concurrent agreements, understandings, negotiations or
correspondence between them with respect thereto.
-13-
<PAGE>
(e) Time is of the essence of this Agreement.
(f) No amendment or waiver of any provision of
this Agreement, nor consent to any departure therefrom, shall be
effective or binding upon any Creditor unless such Creditor shall
first have given its written consent thereto.
(g) This Agreement may be executed in one or
more counterparts and each such counterpart shall constitute an
original and all such counterparts together shall constitute one
and the same instrument.
(h) All sections headings herein are for
convenience of reference only and shall not limit or otherwise
affect the meaning or interpretation of this Agreement.
(i) All notices, demands and other
communications hereunder to any party shall be effective (i) if
given by telecopy, when such communication is transmitted to the
telecopy number set forth beneath such Person's signature below
(with such telecopy to be promptly confirmed by delivery of a
copy thereof by personal delivery or United States mail as
otherwise provided herein), (ii) if given by mail, three (3)
Business Days after such communication is deposited in the United
States mail with first class postage prepaid, return receipt
requested, and addressed to such Person at its address set forth
beneath its signature below, (iii) if sent for overnight delivery
by Federal Express, United Parcel Service or other reputable
national overnight delivery service, one (1) Business Day after
such communication is entrusted to such service for overnight
delivery and with recipient signature required, addressed as
aforesaid, or (iv) if given by any other written means, when
delivered at the address of such Person shown below. Any party
may designate a different address or telecopy number for its
receipt of such notices or other communications but no such
change shall be effective unless and until the other party
actually receives such written notice.
15. GOVERNING LAW. THIS AGREEMENT SHALL BE
GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND
PERFORMED IN SUCH STATE.
-14-
<PAGE>
16. JURY TRIAL WAIVER AND FORUM CONSENTS. EACH OF
THE PARTIES HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, ANY RIGHT SUCH PERSON MAY HAVE UNDER ANY
APPLICABLE LAW TO A TRIAL BY JURY WITH RESPECT TO ANY SUIT OR
LEGAL ACTION WHICH MAY BE COMMENCED BY OR AGAINST SUCH PERSON
CONCERNING THE INTERPRETATION, CONSTRUCTION, VALIDITY,
ENFORCEMENT OR PERFORMANCE OF THIS AGREEMENT. IN THE EVENT ANY
SUCH SUIT OR LEGAL ACTION IS COMMENCED BY GECC, EACH OF MF AND
THE CREDIT PARTIES HEREBY EXPRESSLY AGREES, CONSENTS AND SUBMITS
TO THE PERSONAL JURISDICTION OF ANY STATE OR FEDERAL COURT
SITTING IN FULTON COUNTY, GEORGIA, WITH RESPECT TO SUCH SUIT OR
LEGAL ACTION AND FURTHER EXPRESSLY CONSENTS AND SUBMITS TO AND
AGREES THAT VENUE IN ANY SUCH SUIT OR LEGAL ACTION IS PROPER IN
SAID COURTS AND FURTHER EXPRESSLY WAIVES ANY AND ALL PERSONAL
RIGHTS UNDER APPLICABLE LAW OR IN EQUITY TO OBJECT TO THE
JURISDICTION AND VENUE OF SAID COURTS. THE JURISDICTION AND
VENUE OF THE COURTS CONSENTED TO AND SUBMITTED TO AND AGREED UPON
IN THIS SECTION ARE NOT EXCLUSIVE BUT ARE CUMULATIVE AND IN
ADDITION TO THE JURISDICTION AND VENUE OF ANY OTHER COURT UNDER
ANY APPLICABLE LAW OR IN EQUITY.
IN WITNESS WHEREOF, the Creditors and the Borrower have
caused this Agreement to be executed and delivered by their
respective duly authorized officers, all as of the day and year
first above written.
General Electric Capital Corporation
By: /s/ Timothy C. Huban
----------------------------------
Duly Authorized Signatory
Address:
3379 Peachtree Road, NE
Suite 600
Atlanta, GA 30326
Telecopy: (404) 262-9032
-15-
<PAGE>
<PAGE>
MUSIC FUNDING 1, LLC
By: GENEVA ASSOCIATES, LLC, Its Manager
By: /s/ Thomas J. Minnick
-------------------------------------
Manager
Address:
c/o Geneva Associates, LLC
First Union Tower, Suite 2100
Greensboro, NC 27401
Telecopy: (910) 275 - 9155
SPEC'S MUSIC, INC. (for itself and on
behalf of the other Credit Parties)
By: /S/ Donald A. Molta
-------------------------------------
Title: VP/CFO
----------------------------------
Address:
1666 N.W. 92nd Avenue
Miami, FL 33126
Telecopy: (305) 592-0127
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<PAGE>
EXHIBIT A
ASSIGNMENTS OF INTERESTS
FOR VALUE RECEIVED, including without limitation the
payment in cash or immediately available funds on this date by
_____________________________, a______________________[Insert
Name of Purchaser] ("Assignee"), to General Electric Capital
Corporation, a New York corporation ("Assignor"), of the Purchase
Price payable under (and as such term is defined in) the
Subordination and Intercreditor Agreement, dated as of October
3, 1997, between Music Funding I, LLC and Assignor (the
"Agreement"), Assignor hereby sells, transfers and assigns to
Assignee, without recourse and without any representations or
warranties of any kind on the part of Assignor except in either
case as expressly provided in the Agreement, all of the
Assignor's rights, titles and interests in, to and under the
following documents, indebtedness and collateral:
[(a) That certain Credit Agreement, dated
as of May 22, 1996, between Spec's Music, Inc.,
a Florida corporation (the "Borrower") and the
Assignor (the "Credit Agreement");
(b) The certain Promissory Note, dated
as of ________________, ____, executed by the
Borrower in favor of Assignor in the original
stated principal amount of $__________ (the
"NOTE");
(C) The certain Security Agreement, dated
as of _________________, _____, executed by the
Borrower in favor of Assignor in the original
stated principal amount of $__________ (the
"SECURITY AGREEMENT");
(d) [Insert description of Puerto Rico Collateral
Documents (collectively, the "OTHER COLLATERAL
DOCUMENTS");
(e) Any and all Uniform Commercial Code financing
statements or fixture filings filed by the Assignor
on the Borrower in order to perfect Assignor's security
interests under the Credit Agreement or the Other
Collateral Documents;
(f) Any and all indebtedness or obligations
of the Borrower to the Assignor which now exist
under any of the Note, the Credit Agreement or
the Other Collateral Documents (collectively, the
"OBLIGATIONS"); and
<PAGE>
(g) Any and all real or personal property of the
Borrower which secures the Obligations pursuant to
the Credit Agreement or the Other Collateral
Documents (collectively, the "Collateral").]
This Assignment of Interests is executed and delivered
pursuant to, and is subject to all of the terms and conditions
of, the Agreement.
IN WITNESS WHEREOF, Assignor has executed and delivered this
Assignment of Interests, all as of this ______day of
_____________________, _____.
GENERAL ELECTRIC CAPITAL
CORPORATION
By:
-------------------------------------
Title:
----------------------------------
-2-
<PAGE>
- - - -----------------------------------------------------------------
CREDIT AGREEMENT
Dated as of October 3, 1997
between
SPEC'S MUSIC, INC.
as Borrower
and
MUSIC FUNDING I, LLC
as Lender
- - - -----------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
1. AMOUNT AND TERMS OF CREDIT.................................1
1.1 Revolving Credit Loans ...............................1
1.2 Use of Proceeds ......................................2
1.3 Single Obligation ....................................2
1.4 Interest .............................................2
1.5 Net Liquidation Value of Inventory ...................4
1.6 Fees .................................................4
1.7 Cash Management Systems ..............................5
1.8 Receipt of Payments ..................................5
1.9 Application and Allocation of Payments ...............5
1.10 Accounting ...........................................5
1.11 Indemnity ............................................5
1.12 Access ...............................................6
1.13 Taxes ................................................7
2. CONDITIONS PRECEDENT.......................................7
2.1 Conditions to the Initial Loans ......................7
2.2 Further Conditions to Each Loan ......................8
3. REPRESENTATIONS AND WARRANTIES ............................9
3.1 Corporate Existence; Compliance with Law .............9
3.2 Executive Office; Corporate or Other Names ...........9
3.3 Corporate Power; Authorization;
Enforceable Obligations .............................9
3.4 Financial Statements and Projections ................10
3.5 Material Adverse Change .............................10
3.6 Ownership of Property; Liens ........................10
3.7 Restrictions; No Default ............................11
3.8 Labor Matters .......................................11
3.9 Subsidiaries, Joint Ventures and Affiliates;
Outstanding Stock and Indebtedness .................11
3.10 Government Regulation ..............................11
3.11 Margin Regulations .................................12
3.12 Taxes ..............................................12
3.13 ERISA ..............................................12
3.14 No Litigation ......................................13
3.15 Brokers ............................................14
3.16 Employment Matters .................................14
3.17 Patents, Trademarks, Copyrights and Licenses .......14
3.18 Full Disclosure ....................................14
3.19 Hazardous Materials ................................14
3.20 Insurance Policies .................................14
3.21 Cash Management and Other Deposit Accounts .........15
3.22 Solvent Financial Condition ........................15
-i-
<PAGE>
4. FINANCIAL STATEMENTS AND INFORMATION .....................15
4.1 Reports and Notices .................................15
4.2 Communication with Accountants ......................15
5. AFFIRMATIVE COVENANTS ....................................15
5.1 Maintenance of Existence and Conduct of Business.....15
5.2 Payment of Obligations ..............................16
5.3 Books and Records ...................................16
5.4 Litigation ..........................................16
5.5 Insurance ...........................................16
5.6 Compliance with Laws ................................17
5.7 Agreements ..........................................17
5.8 Supplemental Disclosure .............................17
5.9 Employee Plans ......................................17
5.10 Environmental Matters ...............................18
5.11 Landlord's Agreements ...............................18
5.12 Confidentiality and Press Releases ..................18
6. NEGATIVE COVENANTS .......................................18
6.1 Mergers, Etc ........................................18
6.2 Investments; Loans and Advances .....................19
6.3 Indebtedness ........................................19
6.4 Transactions with Affiliates ........................19
6.5 Capital Structure and Business ......................19
6.6 Guaranteed Indebtedness .............................19
6.7 Liens ...............................................19
6.8 Sale of Assets ......................................20
6.9 Events of Default ...................................20
6.10 ERISA ...............................................20
6.11 Financial Covenants .................................20
6.12 Hazardous Materials .................................20
6.13 Sale-Leasebacks .....................................21
6.14 Cancellation of Indebtedness ........................21
6.15 Restricted Payments .................................21
7. TERM .....................................................21
7.1 Termination .........................................21
7.2 Survival of Obligations Upon Termination of
Financing Arrangement ..............................21
8. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ...................22
8.1 Events of Default ...................................22
8.2 Remedies ............................................23
8.3 Waivers by Borrower .................................24
-ii-
<PAGE>
9. SUCCESSORS AND ASSIGNS ...................................24
9.1 Successors and Assigns ..............................24
10. MISCELLANEOUS ............................................25
10.1 Complete Agreement; Modification of Agreement ......25
10.2 Fees and Expenses ..................................25
10.3 No Waiver ..........................................26
10.4 Remedies ...........................................26
10.5 Severability .......................................26
10.6 Conflict of Terms ..................................26
10.7 Authorized Signatures ..............................27
10.8 GOVERNING LAW ......................................27
10.9 Notices ............................................28
10.10 Section Titles .....................................28
10.11 Counterparts .......................................28
10.12 Time of Essence ....................................28
10.13 Waiver of Jury Trial ...............................28
-iii-
<PAGE>
INDEX OF EXHIBITS, SCHEDULES AND ANNEXES
Exhibit A - Forms of Notice of Revolving Credit Loan
Exhibit B - Form of Borrowing Capacity Certificate
Exhibit C - Form of Revolving Credit Note
Exhibit D - Forms of Collateral Documents
Exhibit E - Form of Telephone Instruction Letter
Exhibit F - Form of Lessor Subordination and Consent
Exhibit G - Forms of Cash Management Account Agreements
Exhibit H - Form of Accountant/Tax Adviser
Disclosure Letter
Exhibit I - Form of Closing Certificate
Exhibit J - Forms of Opinions of Borrower's Counsels
Exhibit K - Intentionally Left Blank
Exhibit L - Intentionally Left Blank
Exhibit M - Intentionally Left Blank
Exhibit N - Form of Rent Payment Certificate
Schedule 3.4 - Financial Statements and Projections
Schedule 3.6 - Real Estate and Leases
Schedule 3.9 - Subsidiaries, Joint Ventures, and Affiliates;
Outstanding Stock and Indebtedness
Schedule 3.12 - Tax Matters
Schedule 3.13 - ERISA Plans
Schedule 3.14 - Litigation
Schedule 3.16 - Employment Matters
Schedule 3.17 - Patents, Trademarks, Copyrights and Licenses
Schedule 3.19 - Hazardous Materials
Schedule 3.20 - Insurance Policies
Schedule 3.21 - Cash Management and Other Deposit Accounts
and Banks
Schedule 4.1 - Financial Statements and Other Notices
Schedule 6.7 - Liens
Schedule 6.11 - Financial Covenants
Schedule 10.7 - Authorized Signatures
Schedule 10.9 - Notice Addresses
Annex A - Definitions
Annex B - Cash Management System
Annex C - Schedule of Documents
-iv-
<PAGE>
THIS AGREEMENT IS SUBJECT TO A SUBORDINATION AND INTERCREDITOR
AGREEMENT (THE "SUBORDINATION AGREEMENT") DATED AS OF OCTOBER 3,
1997 AMONG GENERAL ELECTRIC CAPITAL CORPORATION, MUSIC FUNDING I,
LLC AND SPEC'S MUSIC, INC.
CREDIT AGREEMENT
THIS CREDIT AGREEMENT (this "AGREEMENT"), dated as of
October 3, 1997, is made by and between SPEC'S MUSIC, INC., a
Florida corporation ("BORROWER"), and MUSIC FUNDING I, LLC, a
North Carolina limited liability company ("LENDER").
RECITALS
A. Borrower desires to obtain up to a total of One
Million Dollars ($1,000,000) in credit from Lender, and Lender is
willing to extend such credit to Borrower of up to such total
amount at any one time, all upon the terms and conditions set
forth herein.
B. Capitalized terms used herein shall have the
meanings ascribed to them on ANNEX A to this Agreement. All
Schedules, Annexes and Exhibits hereto, or expressly identified
to this Agreement, are incorporated herein by reference, and
taken together, shall constitute but a single agreement. As used
herein, the plural shall include the singular, the singular shall
include the plural, and pronouns in any gender (masculine,
feminine or neuter) shall apply to all genders. These Recitals
shall be construed as part of this Agreement.
NOW, THEREFORE, in consideration of the premises and
the mutual covenants hereinafter contained, the parties hereto
agree as follows:
1. AMOUNT AND TERMS OF CREDIT
1.1 REVOLVING CREDIT LOANS. (a) Upon and subject to
the terms and conditions hereof, Lender agrees to make available,
from time to time prior to the Commitment Termination Date, for
Borrower's use and upon the request of Borrower therefor,
advances in $100,000 increments (each a "REVOLVING CREDIT LOAN")
against the Net Liquidation Value of Inventory in an amount up to
the Net Current Borrowing Capacity at such time; PROVIDED,
however, that Lender shall not be obligated hereunder to make any
Revolving Credit Loan to the Borrower at any time if and to the
extent that the sum of the aggregate outstanding balance at such
time of all Revolving Credit Loans made hereunder exceeds (or
would exceed with the making of such Revolving Credit Loan) the
Maximum Revolving Credit Loans. Until all amounts outstanding in
respect of the Borrower's Revolving Credit Loans shall become due
and payable on the Commitment Termination Date, Borrower may from
time to time borrow, repay and reborrow under this SECTION
1.1(a). Revolving Credit Loans shall not be made more frequently
than once a week. Each Revolving Credit Loan shall be made on
notice by Borrower to the Lender, given no later than 11:00 a.m.
(Eastern time) on the first Business Day of the week. Repayments
of Revolving Credit Loans shall not be made more frequently than
once a week and shall be made by 11:00 a.m. Eastern time on the
first Business Day of the week. Such notice (each a "NOTICE
<PAGE>
OF REVOLVING CREDIT LOAN") shall be substantially in the form of
EXHIBIT A-1 hereto, specifying therein the requested date, the
amount of such Revolving Credit Loan, and such other information
as may be required by Lender and shall be given in writing (by
telecopy, telex or cable) or by telephone confirmed immediately
in writing.
(b) The Revolving Credit Loans shall be evidenced
by a note dated the Closing Date and executed by Borrower in
favor of Lender substantially in the form of EXHIBIT C (the
"REVOLVING CREDIT NOTE"). The Revolving Credit Note shall
represent the obligation of Borrower to pay the amount of the
Maximum Revolving Credit Loans or, if less, the aggregate unpaid
principal amount of all Revolving Credit Loans made by Lender
with interest thereon as prescribed in SECTION 1.4. The date and
amount of each Revolving Credit Loan and each payment of
principal with respect thereto shall be recorded on the books and
records of Lender which books and records shall constitute PRIMA
FACIE evidence of the accuracy of the information therein
recorded. The entire unpaid balance of the Revolving Credit
Loans of Borrower shall be immediately due and payable in full on
the Commitment Termination Date.
(c) In the event that the outstanding balance of
the Revolving Credit Loans shall, at any time, exceed any of the
applicable limits set forth in SECTION 1.1(a) above, Borrower
shall immediately prepay Revolving Credit Loans by the amount of
such excess. If the unpaid principal balance of the Revolving
Credit Loans should at any time exceed any of the
above-referenced limits, the excess balance nevertheless shall
constitute Obligations of Borrower that are secured by the
Collateral and entitled to all of the benefits thereof and of the
other Loan Documents and shall be evidenced by the Revolving
Credit Note.
(d) Borrower shall have the right at any time on
ninety (90) days' prior written notice to Lender to prepay the
Revolving Credit Loans and terminate this Agreement, all without
premium or penalty except as expressly provided in this paragraph
or in SECTION 1.6(d) below, and upon such prepayment and
termination Borrower's rights to receive any further Revolving
Credit Loans shall simultaneously terminate. In the event
Borrower exercises its right under this paragraph to prepay the
Revolving Credit Loans, and terminate this Agreement, Borrower
agrees that such prepayment and termination shall be accompanied
by the payment by Borrower to Lender of all accrued and unpaid
interest and all Fees and other remaining Obligations.
1.2 USE OF PROCEEDS. Borrower shall utilize the
proceeds of the Revolving Credit Loans solely (I) for working
capital and to finance the general corporate needs of Borrower
and its Subsidiaries, and (ii) to finance the Fees payable to
Lender under any of the Loan Documents.
1.3 SINGLE OBLIGATION. The Loans and all of the
other Obligations of the Borrower arising under this Agreement
and the other Loan Documents shall constitute one general
obligation of the Borrower to Lender secured, until the
Termination Date, by all of the Collateral.
1.4 INTEREST. (a) Borrower shall pay interest on
the Loans to Lender in arrears on the first (1st) day of each
calendar month, commencing with the calendar month following the
calendar month in which the Closing Date occurs, and continuing
to be due on the first (1st) day of each succeeding calendar
month thereafter and on the Commitment Termination Date. If any
interest on any
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of the Loans accrues or remains payable after the Commitment
Termination Date, such interest shall be payable by Borrower upon
demand by Lender.
(b) Except as provided in paragraph (d) below,
Borrower shall be obligated to pay interest to Lender on the
outstanding principal balance of each Loan from the date such
Loan is made until such Loan is repaid in full at a floating rate
equal to the Prime Rate (as in effect for each calendar month
during the term hereof) PLUS eight and one quarter percentage
points (8.25%).
(c) All computations of interest hereunder or under
the other Loan Documents shall be made by Lender on the basis of
a three hundred and sixty (360) day year, in each case for the
actual number of days occurring in the period for which such
interest is payable. Each determination by Lender of an interest
rate hereunder shall be conclusive and binding for all purposes,
absent manifest error.
(d) So long as any Default or Event of Default shall
have occurred and be continuing, the interest rate applicable to
the Loans or other Obligations may be increased by Lender, at its
option, by two percentage points (2%) per annum above the rate
otherwise applicable (the "DEFAULT RATE").
(e) Notwithstanding anything to the contrary set
forth in this SECTION 1.4, if, at any time until payment in full
of all of the Obligations, the rate of interest payable hereunder
by Borrower exceeds the highest rate of interest permissible
under any law which a court of competent jurisdiction shall, in a
final determination, deem applicable hereto (the "MAXIMUM LAWFUL
RATE"), then in such event and so long as the Maximum Lawful Rate
would be so exceeded, the rate of interest payable hereunder by
Borrower shall be equal to the Maximum Lawful Rate; PROVIDED,
however, that if at any time thereafter the rate of interest
payable by Borrower hereunder is less than the Maximum Lawful
Rate, Borrower shall continue to pay interest hereunder at the
Maximum Lawful Rate until such time as the total interest
received by Lender from the making of advances hereunder to
Borrower is equal to the total interest which Lender would have
received had the interest rate payable hereunder by Borrower been
(but for the operation of this paragraph) the interest rate
payable since the Closing Date as otherwise provided in this
Agreement. Thereafter, the interest rate payable by Borrower
hereunder shall be the rate of interest otherwise provided in
this SECTION 1.4, unless and until the rate of interest again
exceeds the Maximum Lawful Rate, in which event this paragraph
shall again apply. In no event shall the total interest received
by Lender pursuant to the terms of this Agreement or any other
Loan Document exceed the amount which Lender could lawfully have
received had the interest due hereunder been calculated for the
full term hereof or thereof at the Maximum Lawful Rate. All
interest paid by, charged to or collected from Borrower hereunder
or under any other Loan Document shall, to the maximum extent
permitted by applicable law, be amortized, allocated
and spread throughout the full term of the Obligation on which it
accrued. In the event the Maximum Lawful Rate is calculated
pursuant to this paragraph, such interest shall be calculated at
a daily rate equal to the Maximum Lawful Rate divided by the
number of days in the year in which such calculation is made. In
the event that a court of competent jurisdiction, notwithstanding
the provisions of this SECTION 1.4(e), shall make a final
determination that Lender has received interest hereunder or
under any of the Loan Documents from Borrower in excess of the
Maximum Lawful Rate, Lender shall, to the extent permitted by
applicable law, promptly apply such excess first to any interest
due from Borrower and not yet paid hereunder, then
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to the outstanding principal of the Obligations of Borrower, then
to Fees and any other unpaid Obligations owed by Borrower and
thereafter shall refund any excess to Borrower or as a court of
competent jurisdiction may otherwise order.
1.5 NET LIQUIDATION VALUE OF INVENTORY. Based on
the most recent Borrowing Capacity Certificate delivered by
Borrower to Lender and on other information available to Lender,
Lender shall determine in accordance with Schedule A to the Form
of Borrowing Capacity Certificate attached hereto as EXHIBIT B
the Net Liquidation Value of Inventory for purposes of
determining the maximum amount of the Revolving Credit Loans, if
any, to be advanced or incurred by Lender hereunder.
1.6 FEES. (a) As additional compensation for
Lender's costs and risks in making the Revolving Credit Loans
available to Borrower during its initial term, Borrower agrees to
pay to Lender a non-refundable closing fee of $30,000 (the
"CLOSING FEE"). The Closing Fee shall be fully earned and shall
be due on the Closing Date and there shall be credited against
the Closing Fee, the unused balance (if any) of any underwriting
deposit heretofore paid by Borrower to Lender in connection with
the Loans.
(b) As additional compensation for Lender's costs
and risks in making the Revolving Credit Loans available to
Borrower, Borrower agrees to pay to Lender, in arrears for the
preceding month, on the first day of each calendar month prior to
the Commitment Termination Date and on the Commitment Termination
Date, a fee for Borrower's non-use of available funds (the
"NON-USE FEE") in an amount equal to one percent (1.0%) per annum
of the difference between the daily average for such month of (I)
the Maximum Revolving Credit Loans MINUS (ii) the aggregate
outstanding principal balance of the Revolving Credit Loans
during the period for which the Non-use Fee is due. The Non-use
Fee shall be computed on the basis of a 360-day year and the
actual days elapsed.
(c) As additional compensation for Lender's costs and
risks in making the Loans available to Borrower, Borrower also
agrees to pay to Lender an administrative fee (the
"ADMINISTRATIVE FEE") in the amount of $500.00 per month. The
initial Administrative Fee shall be fully earned and shall be due
on the Closing Date and each succeeding Administrative Fee shall
be fully earned and shall be due on each succeeding monthly
anniversary of the Closing Date up to and through the last
anniversary date which precedes the Commitment Termination Date.
(d) If this Agreement is terminated pursuant to
SECTION 1.1(d) above or SECTION 8.2 below at any time during the
period from the Closing Date until (but not including) August 1,
1998, Borrower shall pay to Lender, at the time of such early
termination, a fee (the "EARLY TERMINATION FEE") in an amount
equal to two and one-half percent (2.5%) of the amount of the
Maximum Revolving Credit Loans as then in effect. Borrower
acknowledges and agrees that (I) it would be difficult or
impractical to calculate Lender's actual damages from an early
termination of this Agreement, (ii) the Early Termination Fee is
intended to be a fair and reasonable approximation of such
damages, and (iii) the Early Termination Fee is not intended to
be a penalty.
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1.7 CASH MANAGEMENT SYSTEMS. On or prior to the
Closing Date, Borrower will establish, and Borrower will maintain
until the Termination Date, the Cash Management System described
on ANNEX B.
1.8 RECEIPT OF PAYMENTS. Borrower shall make each
payment owing by it hereunder not later than 11:00 a.m. (Eastern
time) on the day when due in lawful money of the United States of
America in immediately available funds.
1.9 APPLICATION AND ALLOCATION OF PAYMENTS.
Borrower irrevocably waives the right to direct the application
of any and all payments at any time or times hereafter received
from or on behalf of Borrower, and Borrower irrevocably agrees
that Lender shall have the continuing exclusive right to apply
any and all such payments against the then due and payable
Obligations as Lender may deem advisable. In the absence of a
specific determination by Lender with respect thereto, the same
shall be applied to the Obligations in the following order: (I)
then due and payable Fees and expenses; (ii) then due and payable
interest payments; (iii) Obligations other than Fees, expenses
and interest and principal payments; and (iv) then due and
payable principal payments on the Obligations. In the event
Lender applies any payment in any order other than that provided
in the immediately preceding sentence, Lender shall give written
notice thereof to Borrower promptly after such application.
Lender is authorized to, and at its option may, make or cause to
be made Revolving Credit Loans on behalf of Borrower for payment
of all Fees, expenses, Charges, costs, interest, or other
Obligations owing by Borrower under this Agreement or any of the
other Loan Documents if and to the extent such Obligations are
not paid as and when due.
1.10 ACCOUNTING. Lender will provide Borrower with a
monthly accounting of transactions relating to the Loans. Each
and every accounting shall (absent manifest error) be deemed
final, binding and conclusive upon Borrower in all respects as to
all matters reflected therein, unless Borrower, within 30 days
after the date any such accounting is rendered, shall notify
Lender in writing of any objection which Borrower may have to any
such accounting, describing the basis for such objection with
specificity. In that event, only those items expressly objected
to in such notice shall be deemed to be disputed by Borrower.
1.11 INDEMNITY. (a) Borrower shall indemnify and
hold Lender and Lender's Affiliates, managers, officers,
directors, employees, attorneys and agents (each an "INDEMNIFIED
PERSON"), harmless from and against any and all suits, actions,
proceedings, claims, damages, losses, liabilities and expenses
(including reasonable attorneys' fees and disbursements and other
costs of investigation or defense, including those incurred upon
any appeal) which may be instituted or asserted against or
incurred by such Indemnified Person as the result of credit
having been extended to Borrower under this Agreement or any of
the other Loan Documents or in connection with or arising out of
any of the transactions contemplated hereunder and thereunder,
including any claim, action, suit, proceeding, loss, cost,
damage, liability, deficiency, fine, penalty, punitive, exemplary
or consequential damage or expense (including reasonable
attorneys' and consultants' fees, investigation and laboratory
fees, court costs and litigation expenses), directly or
indirectly resulting from, arising out of, or based upon (I) the
presence, Release, use, manufacture, installation, generation,
discharge, storage or disposal, at any time, of any Hazardous
Materials on, under, in or about, or the transportation of any
such materials to or from, any of the Subject Property, or (ii)
the violation or alleged violation by Borrower or any other
Credit
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Party of any law, statute, ordinance, order, rule, regulation,
permit, judgment or license relating to the use, generation,
manufacture, installation, Release, discharge, storage or
disposal of Hazardous Materials to or from any of the Subject
Property; which indemnity shall include, without limitation, (A)
any damage, liability, fine, penalty, punitive, exemplary or
consequential damage, cost or expense arising from or out of any
claim, action, suit or proceeding for personal injury (including
sickness, disease, death, pain or suffering), tangible or
intangible property damage, compensation for lost wages, business
income, profits or other economic loss, damage to the natural
resources or the environment, nuisance, pollution, contamination,
leak, Release or other adverse effect on the environment, and (B)
the cost of any required or necessary repair, cleanup, treatment,
remediation or detoxification of any of the Subject Property and
the preparation and implementation of any closure, disposal,
remedial or other required actions in connection with any of the
Subject Property; PROVIDED, that Borrower shall not be liable for
any indemnification to such Indemnified Person to the extent that
any such suit, action, proceeding, claim, damage, loss, liability
or expense results from such Indemnified Person's gross
negligence or willful misconduct. NEITHER LENDER NOR ANY OTHER
INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO ANY OTHER
PARTY HERETO, ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY
OF SUCH PERSON OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY
THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR
CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT
HAVING BEEN EXTENDED UNDER THE LOAN DOCUMENTS.
(b) Borrower hereby acknowledges and agrees that
Lender (I) is not now, and has not ever been, in control of any
of the Subject Property or the affairs of Borrower or any of the
other Credit Parties, and (ii) does not have the capacity through
the provisions of the Loan Documents to influence Borrower's or
any other Credit Party's conduct with respect to the ownership,
operation or management of any of the Subject Property.
1.12 ACCESS. Borrower shall, upon advance notice
and at mutually convenient times (unless a Default or Event of
Default shall have occurred and be continuing, in which event no
notice shall be required and Lender shall have access at any and
all times), (I) provide access during normal business hours to
Lender and any of its officers, employees and agents, as
frequently as Lender determines to be appropriate, to the
properties and facilities of any Credit Party; (ii) permit Lender
and any of its officers, employees and agents to inspect, audit
and make extracts from any Credit Party's records, files and
books of account, and (iii) permit Lender to inspect, review and
evaluate such Credit Party's accounts and other records, at such
Credit Party's locations and at premises not owned by or leased
to such Credit Party. Borrower shall, make available to Lender
and its counsel, as quickly as practicable under the
circumstances, originals or copies of all books, records, board
minutes, contracts, insurance policies, environmental audits,
business plans, files, financial statements (actual and PRO
FORMA), filings with federal, state and local regulatory
agencies, and other instruments and documents which Lender may
request. Borrower shall, deliver any document or instrument
reasonably necessary for Lender, as it may from time to
time request, to obtain records from any service bureau or other
Person which maintains records for any Credit Party, and shall
maintain duplicate records or supporting documentation on media,
including, without limitation, computer tapes and discs owned by
any Credit Party. Borrower shall instruct its certified public
accountants and its banking and other financial institutions to
make available to Lender such information and records as Lender
may reasonably request.
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1.13 TAXES. (a) Any and all payments by Borrower
or any other Credit Party hereunder or under any Note or any
other Loan Document shall be made, in accordance with this
SECTION 1.13, free and clear of and without deduction for any and
all present or future Taxes. If Borrower shall be required by
law to deduct any Taxes from or in respect of any sum payable
hereunder or under any Note or any other Loan Document to Lender,
(I) the sum payable shall be increased as may be necessary so
that after making all required deductions (including deductions
applicable to additional sums payable under this SECTION 1.13)
Lender receives an amount equal to the sum it would have received
had no such deductions been made, (ii) Borrower shall make such
deductions, and (iii) Borrower shall pay the full amount deducted
to the relevant taxing or other authority in accordance with
applicable law.
(b) Borrower shall indemnify and pay, within 15 days
of demand therefor, Lender for the full amount of Taxes
(including without limitation, any Taxes imposed by any
jurisdiction on amounts payable under this SECTION 1.13) paid by
Lender and any liability (including penalties, interest and
expenses) arising therefrom or with respect thereto, whether or
not such Taxes were correctly or legally asserted.
(c) Within 30 days after the date of any payment of
Taxes by Borrower or Lender, Borrower or Lender (as the case may
be) shall furnish or cause to be furnished to the other, at its
address referred to in SECTION 10.9, the original or a certified
copy of a receipt evidencing payment thereof, but Lender's
failure to give any such notice to Borrower will not impair
Lender's indemnity rights under paragraph (b) above.
2. CONDITIONS PRECEDENT
2.1 CONDITIONS TO THE INITIAL LOANS.
Notwithstanding any other provision of this Agreement and without
affecting in any manner the rights of Lender hereunder, Lender
shall not be obligated hereunder to make the initial Loans or to
take, fulfill, or perform any other action hereunder, unless and
until each and every of the following conditions have been
satisfied, in Lender's sole discretion, or waived in writing by
Lender:
(a) This Agreement or counterparts thereof shall
have been duly executed by, and delivered to, Borrower and Lender
and Guarantor shall have consented to the execution, delivery and
performance of this Agreement and the Subordination Agreement and
agreed to be bound by signing one or more counterparts of this
Agreement in the appropriate space indicated below and returning
same to Lender.
(b) Lender shall have received such documents,
instruments and agreements as Lender shall request in connection
with the transactions contemplated by this Agreement, including
all documents, instruments, agreements listed in the Schedule of
Documents, each in form and substance satisfactory to Lender.
(c) Evidence satisfactory to Lender that Borrower's
only Indebtedness is that incurred or permitted under the GE
Capital Credit Agreement and that Borrower's only Liens on any of
the Collateral are limited to those held by GE Capital pursuant
to the GE Capital Credit Agreement or permitted by GE Capital
pursuant to the GE Capital Credit Agreement.
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(d) Evidence satisfactory to Lender that each
Credit Party has obtained consents and acknowledgments of all
Persons whose consents and acknowledgments may be required (if
any), including, but not limited to, all requisite Governmental
Authorities, to the terms, and to the execution and delivery, of
this Agreement and the other Loan Documents and the consummation
of the transactions contemplated hereby and thereby.
(e) Evidence satisfactory to Lender that the
insurance policies provided for in SECTION 3.20 are in full force
and effect, together with appropriate evidence showing loss
payable endorsements or clauses in favor of Lender and in form
and substance acceptable to Lender, and that Lender has been
named an additional insured under Borrower's liability policies,
all as required by SECTION 5.5(b) hereof.
(f) A duly completed and executed initial Borrowing
Capacity Certificate shall have been delivered to Lender by
Borrower demonstrating to Lender's satisfaction that the Net
Liquidation Value of Inventory of Borrower is sufficient to
support the initial Loans.
(g) Payment by Borrower of the Fees due on the
Closing Date as provided in SECTION 1.6 above together with all
reasonable fees, costs and expenses of closing incurred by Lender
(including the reasonable fees of consultants and special counsel
to Lender presented as of the Closing Date) to the extent
Borrower is obligated to reimburse Lender therefor pursuant to
SECTION 10.2 hereof.
2.2 FURTHER CONDITIONS TO EACH LOAN. It shall be a
further condition to the funding of the initial and each
subsequent Loan that each and every of the following statements
shall be true on the date of each such funding or incurrence, as
the case may be:
(a) All of the Credit Parties' representations and
warranties contained herein or in any of the other Loan Documents
shall be true and correct in all material respects on and as of
the Closing Date and the date on which each such Loan is made as
though made or incurred on and as of such date, except to the
extent that any such representation or warranty expressly relates
to an earlier date and except for changes therein expressly
permitted or expressly contemplated by this Agreement or such
other Loan Document.
(b) No event shall have occurred and be continuing,
or would result from the making of such Loan, which constitutes
or would constitute a Default or an Event of Default.
(c) After giving effect to the making of such Loan,
the aggregate principal amount of the Revolving Credit Loans
shall not exceed the maximum amount permitted by SECTION 1.1(a).
(d) Each of the conditions set forth in SECTION
2.1(a) through (e) shall continue to be satisfied by Borrower as
of such date.
(e) No action, proceeding, investigation, regulation
or legislation shall have been instituted, threatened or proposed
before any court, governmental agency or legislative body to
enjoin, restrain or prohibit, or to obtain damages in respect of,
or which is related to or arises out of this
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Agreement or any of the other Loan Documents or the consummation
of the transactions contemplated thereby and which, in Lender's
sole judgment, would make it inadvisable to consummate the
transactions contemplated by this Agreement or any of the other
Loan Documents.
Each request or acceptance by Borrower of the proceeds of any
Loan shall be deemed to constitute, as of the date of such
request or acceptance, (I) a representation and warranty by
Borrower that the conditions in this SECTION 2.2 have been
satisfied and (ii) a confirmation by Borrower of the granting and
continuance of Lender's Liens in the Collateral pursuant to the
Collateral Documents.
3. REPRESENTATIONS AND WARRANTIES
To induce Lender to make the Loans available to
Borrower, and to make Loans as herein provided for, Borrower
makes (as to itself and each other Credit Party) the following
representations and warranties to Lender, each and all of which
shall be true and correct as of the date of execution and
delivery of this Agreement and shall survive the execution and
delivery of this Agreement:
3.1 CORPORATE EXISTENCE; Compliance with Law. Each
Credit Party (I) is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction
of its incorporation or organization and is duly qualified to do
business and is in good standing in each other jurisdiction where
its ownership or lease of property or the conduct of its business
requires such qualification; (ii) has the requisite corporate
power and authority and the legal right to obtain credit, to own,
pledge,
mortgage or otherwise encumber and operate its properties, to
lease the property it operates under lease, and to conduct its
business as now, heretofore and proposed to be conducted; (iii)
has all licenses, permits, consents or approvals from or by, and
has made all filings with, and has given all notices to, all
Governmental Authorities having jurisdiction, to the extent
required for such ownership, operation and conduct; (iv) is in
compliance with its certificate or articles of incorporation and
by-laws; and (v) is in compliance with all applicable provisions
of law where the failure to comply could reasonably be expected
to result in a Material Adverse Effect.
3.2 EXECUTIVE OFFICE; CORPORATE OR OTHER NAMES. The
current location of the chief executive office and principal
place of business of Borrower are set forth on SCHEDULE III to
the Security Agreement. During the five-year period immediately
preceding the date of this Agreement, Borrower has not been known
as or used any corporate, fictitious or trade names except as
disclosed on SCHEDULE III to the Security Agreement executed by
the Borrower.
3.3 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE
OBLIGATIONS. The execution, delivery and performance by each
Credit Party of the Loan Documents executed by it and all
instruments and documents to be delivered by such Credit Party
hereunder and thereunder and the creation of all Liens provided
for herein and therein: (I) are within such Credit Party's
corporate power; (ii) have been duly authorized by all necessary
or proper corporate and shareholder action on its part; (iii) are
not in contravention of any provision of such Credit Party's
certificate or articles of incorporation or by-laws; (iv) will
not violate any law or regulation, or any order or decree of any
court or governmental instrumentality; (v) will not conflict with
or result in the breach or termination of, constitute a default
under or accelerate any performance required by, any indenture,
mortgage, deed of trust, lease, agreement or other instrument to
which such Credit Party is a party or by which any such
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Person or any of its property is bound; (vi) will not result in
the creation or imposition of any Lien upon any of the property
of any Credit Party other than those in favor of Lender, all
pursuant to the Loan Documents; and (vii) do not require the
consent or approval of any Governmental Authority or any other
Person, except those referred to in SECTION 2.1(d), all of which
will have been duly obtained, made or complied with prior to the
Closing Date. At or prior to the Closing Date, each of the Loan
Documents shall have been duly executed and delivered for the
benefit of or on behalf of the Credit Party which executed it and
each shall then constitute a legal, valid and binding obligation
of such Credit Party, enforceable against it in accordance with
its terms.
3.4 FINANCIAL STATEMENTS AND PROJECTIONS. Borrower
has delivered the financial statements and projections identified
on SCHEDULE 3.4, and each such financial statement complies with
the description thereof contained on SCHEDULE 3.4.
3.5 MATERIAL ADVERSE CHANGE. Neither Borrower nor
any other Credit Party, as of July 31, 1997, had any obligations,
contingent liabilities, or liabilities for Charges, long-term
leases or unusual forward or long-term commitments which are not
reflected in the financial statements (including footnotes) of
the Credit Parties as of and for the period ending with such date
which were heretofore delivered by them to Lender and which could
reasonably be expected, alone or in the aggregate, to have or
result in a Material Adverse Effect. Between July 31, 1997 and
the Closing Date, no Restricted Payments were made by Borrower,
no material increase in the liabilities (liquidated or
contingent) of the Borrower occurred, and no material decrease on
the assets of the Borrower occurred. There has been no material
adverse change in the business, assets, operations, prospects or
financial or other condition of the Credit Parties taken as a
whole since July 31, 1997.
3.6 Ownership of Property; Liens. (a) Except as
described on SCHEDULE 3.6, the real estate listed on SCHEDULE 3.6
constitute all of the real property owned, leased, or used by any
Credit Party in its business. Each such Credit Party owns:
(I)good fee simple title to all of such Person's real estate, and
valid leasehold interests in all of such Person's Leases (both as
lessor and lessee, sublessee or assignee), all as described on
SCHEDULE 3.6, and (ii) good title to, or valid leasehold
interests in, all of its other properties and assets, and none of
the properties and assets of such Person are subject to any
Liens, except Permitted Encumbrances; and each such Credit Party
has received all deeds, assignments, waivers, consents,
non-disturbance and recognition or similar agreements, bills of
sale and other documents, and duly effected all recordings,
filings and other actions necessary to establish, protect and
perfect such Person's right, title and interest in and to all
such real estate and other assets or property. Except as
described on SCHEDULE 3.6, (I) neither any Credit Party nor any
other party to any such Lease described on SCHEDULE 3.6 is in
default of its obligations thereunder or has delivered or
received any notice of default under any such Lease,
and no event has occurred which, with the giving of notice, the
passage of time or both, would constitute a default under any
such Lease; (ii) no Credit Party owns or holds, or is obligated
under or a party to, any option, right of first refusal or any
other contractual right to purchase, acquire, sell, assign or
dispose of any real property owned or leased by such Person
except as set forth therein; and (iii) no portion of any real
property owned or leased by any Credit Party has suffered any
material damage by fire or other casualty loss or a Release which
has not heretofore been completely repaired and restored to its
original condition or is being remedied. All permits required to
have been issued or appropriate to enable all real property owned
or leased by any Credit Party to be
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lawfully occupied and used for all of the purposes for which it
is currently occupied and used, has been lawfully issued and is,
as of the date hereof, in full force and effect.
3.7 RESTRICTIONS; NO DEFAULT. No contract, lease,
agreement or other instrument to which any Credit Party is a
party or by which any such Person or any of its properties or
assets is bound or affected and no provision of applicable law or
governmental regulation has or results in a Material Adverse
Effect, or insofar as any Credit Party can reasonably foresee
could have or result in a Material Adverse Effect. Except as
disclosed on SCHEDULE 3.14, no Credit Party is in default, and to
Borrower's knowledge no third party is in default, under or with
respect to any material contract, agreement, lease or other
instrument to which any such Credit Party is a party. No Default
or Event of Default has occurred and is continuing.
3.8 LABOR MATTERS. There are no strikes or other
labor disputes against any Credit Party that is pending or, to
Borrower's knowledge, threatened which could have or result in a
Material Adverse Effect. Hours worked by and payments made to
employees of each Credit Party have not been in violation of the
Fair Labor Standards Act or any other applicable law dealing with
such matters which could have or result in a Material Adverse
Effect. All payments due from each Credit Party on account of
employee health and welfare insurance which could reasonably be
expected to have or result in a Material Adverse Effect if not
paid have been paid or accrued as a liability on the books of
such Credit Party. No Credit Party has any obligation under any
collective bargaining agreement or any employment agreement.
There is no organizing activity involving any Credit Party
pending or threatened by any labor union or group of employees.
There are no representation proceedings involving employees of
any Credit Party pending or threatened with the National Labor
Relations Board, and no labor organization or group of employees
of any Credit Party have made a pending demand for recognition.
There are no complaints or charges against any Credit Party
pending or threatened to be filed with any federal, state, local
or foreign court, governmental agency or arbitrator based on,
arising out of, in connection with, or otherwise relating to the
employment or termination of employment by such Credit Party of
any individual.
3.9 SUBSIDIARIES, JOINT VENTURES AND AFFILIATES;
OUTSTANDING STOCK AND INDEBTEDNESS. (a) Except as set forth on
Schedule 3.9, the Borrower has no Subsidiaries. Except as set
forth on SCHEDULE 3.9, neither the Borrower nor any of its
Subsidiaries, is engaged in any joint venture or partnership with
any other Person, or is an Affiliate of any other Person. All
outstanding Stock and Indebtedness of Borrower and its
Subsidiaries are described on SCHEDULE 3.9.
(b) Within thirty (30) days after the date of this
Agreement, Borrower shall cause 163rd Street to be dissolved and
its assets distributed to Borrower or Borrower shall cause 163rd
Street to be merged or consolidated with or into Borrower with
Borrower being the surviving corporation from such merger or
consolidated. Borrower represents and warrants to Lender that
163rd Street is an inactive Subsidiary and has no material assets
or income and 163rd Street does not own or have any other
interest in any of the inventory or equipment located at any of
Borrower's stores (including without limitation its store at 1277
N.E. 163rd Street, N. Miami Beach, Florida).
3.10 GOVERNMENT REGULATION. No Credit Party is an
"investment company" or an "affiliated person" of, or "promoter"
or "principal underwriter" for, an "investment company," as such
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terms are defined in the Investment Company Act of 1940 as
amended. No Credit Party is subject to regulation under the
Public Utility Holding Company Act of 1935, the Federal Power
Act, the Interstate Commerce Act or any other federal or state
statute that restricts or limits such Person's ability to incur
Indebtedness, pledge its assets or to perform its obligations
hereunder or under any other Loan Document and the making of any
Loans by Lender, the application of the proceeds of any such
advances and repayment thereof by Borrower or the other Credit
Parties and the consummation of the transactions contemplated by
this Agreement and the other Loan Documents will not violate any
provision of any such statute or any rule, regulation or order
issued by the Securities and Exchange Commission.
3.11 MARGIN REGULATIONS. None of the Credit Parties
owns any "margin security," as that term is defined in
Regulations G and U of the Board of Governors of the Federal
Reserve System (the "FEDERAL RESERVE BOARD"), and none of the
proceeds of any of the Loans will be used, directly or
indirectly, for the purpose of purchasing or carrying any margin
security, for the purpose of reducing or retiring any
indebtedness which was originally incurred to purchase or carry
any margin security or for any other purpose which might cause
any of the loans or other extensions of credit under this
Agreement to be considered a "purpose credit" within the
meaning of Regulation G, T, U or X of the Federal Reserve Board.
Borrower will not take or permit to be taken any action which
might cause this Agreement or any document or instrument
delivered pursuant hereto to violate any regulation of the
Federal Reserve Board.
3.12 TAXES. All federal, state, local and foreign tax
returns, reports and statements required to be filed by any
Credit Party has been filed with the appropriate Governmental
Authority and all Charges and other impositions shown thereon to
be due and payable have been paid prior to the date on which any
fine, penalty, interest or late charge may be added thereto for
nonpayment thereof, or any such fine, penalty, interest, late
charge or loss has been paid. Each Credit Party has paid when
due and payable all Charges required to be paid by it. Proper
and accurate amounts have been withheld by each Credit Party from
its respective employees for all periods in full and complete
compliance with the tax, social security and unemployment
withholding provisions of applicable federal, state, local and
foreign law and such withholdings have been timely paid to the
respective Governmental Authorities. SCHEDULE 3.12 sets forth
those taxable years for which any Credit Party's tax returns are
being audited by the IRS or any other applicable Governmental
Authority and any assessments or threatened assessments in
connection with such audit or which are otherwise outstanding.
Except as described on SCHEDULE 3.12, none of the Credit Parties
has (I)executed or filed with the IRS or any other Governmental
Authority any agreement or other document extending, or having
the effect of extending, the period for assessment or collection
of any Charges, (ii)filed a consent pursuant to IRC Section
341(f) or agreed to have IRC Section 341(f) (2) apply to any
dispositions of subsection (f) assets (as such term is defined in
IRC Section 341(f)(4)), or (iii) agreed to make any adjustment
under IRC Section 481(a) by reason of a change in accounting
method or otherwise. None of the Credit Parties has any
obligations under any tax sharing agreement except as disclosed
on SCHEDULE 3.12.
3.13 ERISA. (a) SCHEDULE 3.13 lists all Plans
maintained or contributed to by any Credit Party and all
Qualified Plans maintained or contributed to by any other ERISA
Affiliate, and separately identifies the Title IV Plans,
Multiemployer Plans, any multiple employer plans subject to
Section 4064 of ERISA, unfunded Pension Plans, Welfare Plans and
Retiree Welfare Plans. Each Qualified Plan has been determined
by the IRS to qualify under Section 401 of the IRC, and the
trusts
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created thereunder have been determined to be exempt from tax
under the provisions of Section 501 of the IRC, and to the best
knowledge of Borrower nothing has occurred which would cause the
loss of such qualification or tax-exempt status. Each Plan is in
compliance with the applicable provisions of ERISA and the IRC,
including the filing of reports required under the IRC or ERISA
which are true and correct as of the date filed, and with respect
to each Plan, other than a Qualified Plan, all required
contributions and benefits have been paid in accordance with the
provisions of each such Plan. Neither any Credit Party nor any
other ERISA Affiliate, with respect to any Qualified Plan, has
failed to make any contribution or pay any amount due as required
by Section 412 of the IRC or Section 302 of ERISA or the terms of
any such Plan. None of the Credit Parties has been engaged in a
prohibited transaction, as defined in Section 4975 of the IRC or
Section 406 of ERISA, in connection with any Plan, which would
subject any or all of the Credit Parties (after giving effect to
any exemption) to a material tax on prohibited transactions
imposed by Section 4975 of the IRC or any other material
liability.
(b) Except as set forth on SCHEDULE 3.13: (I) no
Title IV Plan has any Unfunded Pension Liability; (ii) No ERISA
Event or event described in Section 4062(e) of ERISA with respect
to any Title IV Plan has occurred or is reasonably expected to
occur; (iii) there are no pending, or to the knowledge of
Borrower, threatened claims, actions or lawsuits (other than
claims for benefits in the normal course), asserted or instituted
against (x) any Plan or its assets, (y) any fiduciary with
respect to any Plan or (z) any Credit Party or any other ERISA
Affiliate with respect to any Plan; (iv) neither any Credit Party
nor any other ERISA Affiliate has incurred or reasonably expects
to incur any Withdrawal Liability (and no event has occurred
which, with the giving of notice under Section 4219 of ERISA,
would result in such liability) under Section 4201 of ERISA as a
result of a complete or partial withdrawal from a Multiemployer
Plan; (v) within the last five years, neither Credit Party nor or
any other ERISA Affiliate has engaged in a transaction which
resulted in a Title IV Plan with Unfunded Pension Liabilities
being transferred outside of the "controlled group" (within the
meaning of Section 4001(a)(14) of ERISA) of any such entity; (vi)
no plan which is a Retiree Welfare Plan provides for continuing
benefits or coverage for any participant or any beneficiary of a
participant after such participant's termination of employment
for reasons other than retirement (except as may be required by
Section 4980B of the IRC and at the sole expense of the
participant or the beneficiary of the participant); (vii) the
Credit Parties and the other ERISA Affiliates have complied with
the notice and continuation coverage requirements of Section
4980B of the IRC and the regulations thereunder except where the
failure to comply could not reasonably be expected have or result
in any Material Adverse Effect; and (viii) no liability under any
Plan has been funded, nor has such obligation been satisfied,
with the purchase of a contract from an insurance company that is
not rated AAA by the Standard & Poor's Corporation and the
equivalent by each other nationally recognized rating agency.
3.14 NO LITIGATION. Except as set forth on
SCHEDULE 3.14, no action, claim or proceeding is now pending or,
to the knowledge of Borrower, threatened against any Credit Party
at law, in equity or otherwise, before any court, board,
commission, agency or instrumentality of any federal, state, or
local government or of any agency or subdivision thereof, or
before any arbitrator or panel of arbitrators, (I) which
challenges any Credit Party's right, power or competence to enter
into or perform any of its obligations under any Loan Document,
or the validity or enforceability of any Loan Document or any
action hereunder or thereunder or (ii) which if determined
adversely, could reasonably be expected to have or result in a
Material Adverse Effect, nor to the knowledge of Borrower does a
state of facts exist which is reasonably likely to give rise to
such proceedings.
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3.15 BROKERS. No broker or finder acting on behalf
of Borrower or any other Credit Party brought about the
obtaining, making or closing of the loans made pursuant to this
Agreement or the other credit transactions contemplated by the
Loan Documents and none of the Credit Parties has any obligation
to any Person in respect of any finder's or brokerage fees in
connection therewith.
3.16 EMPLOYMENT MATTERS. Except as set forth on
SCHEDULE 3.16, there are no (I) employment, consulting or
management agreements covering management of any or all of the
Credit Parties, or (ii) collective bargaining agreements or other
labor agreements covering any employee of any Credit Party. A
true and complete copy of each such agreement has been furnished
to Lender by Borrower.
3.17 PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES.
Except as otherwise set forth on SCHEDULE 3.17, each Credit Party
owns all material licenses, patents, patent applications,
copyrights, service marks, trademarks, trademark applications,
and trade names necessary to continue to conduct its business as
heretofore conducted by it, now conducted by it and proposed to
be conducted by it, each of which is listed, together with Patent
and Trademark Office application or registration numbers, where
applicable, on SCHEDULE 3.17. SCHEDULE 3.17 lists all tradenames
or other names under which each Credit Party conducts business.
Each Credit Party conducts its business without infringement or
claim of infringement of any license, patent, copyright, service
mark, trademark, trade name, trade secret or other intellectual
property right of others, except where such infringement or claim
of infringement could not have or result in a Material Adverse
Effect. To the Borrower's knowledge there is no infringement or
claim of infringement by others of any material license, patent,
copyright, service mark, trademark, trade name, trade secret or
other intellectual property right of any Credit Party.
3.18 FULL DISCLOSURE. No information contained in
this Agreement, the other Loan Documents, the Projections, the
Financial Statements or any written statement furnished by or on
behalf of any Credit Party pursuant to the terms of this
Agreement, which has previously been delivered to Lender,
contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements contained
herein or therein not misleading in light of the circumstances
under which they were made. No event has occurred since July 31,
1997 and is continuing which has had or could reasonably be
expected to have or result in a Material Adverse Effect.
3.19 HAZARDOUS MATERIALS. To the Borrower's
knowledge the Subject Property is free of any material
contamination from any Hazardous Material. In addition, SCHEDULE
3.19 discloses potential material environmental liabilities of
any Credit Party of which the Borrower has knowledge (I) related
to noncompliance with the Environmental Laws or (ii) associated
with the Subject Property. Except as set forth on SCHEDULE 3.19,
none of the Credit Parties has caused or suffered to occur any
material Release of any Hazardous Material at, under, above or
within any of the Subject Property.
3.20 INSURANCE POLICIES. SCHEDULE 3.20 PART II lists
all insurance of any nature maintained for current occurrences by
the Credit Parties, as well as a summary of the terms of such
insurance. Borrower covenants that such Insurance complies with
and shall at all times comply with the standards set forth on
SCHEDULE 3.20, PART I. Within seven (7) days after the date of
this Agreement Borrower shall deliver to Lender a Certificate of
Insurance in form and substance satisfactory to Lender with
respect to the insurance coverage of Guarantor and showing Lender
as loss payee.
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3.21 CASH MANAGEMENT AND OTHER DEPOSIT ACCOUNTS.
SCHEDULE 3.21 lists all banks at which Borrower maintains any
deposit and/or other such accounts, including, without
limitation, the Cash Management Accounts, and such Schedule
correctly identifies the name, address and telephone number of
each such bank, the name in which each such account is held at
such bank, a description of the purpose of each such account, and
the complete account number for each such account. Borrower
shall not establish or maintain (or permit any of its
Subsidiaries to establish or maintain) any other deposit accounts
with any bank or other financial institution.
3.22 SOLVENT FINANCIAL CONDITION. On the date of this
Agreement and after giving effect to the initial loans hereunder,
after giving effect to each subsequent Loan made hereunder,
Borrower is and will be Solvent.
4. FINANCIAL STATEMENTS AND INFORMATION
4.1 REPORTS AND NOTICES. Borrower covenants and
agrees that from and after the Closing Date and until the
Termination Date, it shall deliver or cause to be delivered to
Lender the Financial Statements, notices and Projections at the
times and in the manner set forth on SCHEDULE 4.1 and Borrower
shall comply with all other covenants set forth on such schedule.
4.2 COMMUNCATION WITH ACCOUNTANTS. Borrower
authorizes (and shall cause each of the other Credit Parties to
authorize) Lender to communicate directly with its and the other
Credit Parties' independent certified public accountants and tax
advisors and authorizes those accountants to disclose to Lender
any and all financial statements and other supporting financial
documents and schedules including copies of any management letter
with respect to the business, financial condition and other
affairs of Borrower. At or before the Closing Date, Borrower
shall (and shall cause each of the other Credit Parties to)
deliver a letter addressed to such accountants and tax advisors
instructing them to comply with the provisions of this SECTION
4.2 and authorizing Lender to rely on the certified financial
statements prepared by such accountants. Each such letter shall
be in the form of EXHIBIT H or in such other form as may be
acceptable to Lender.
5. AFFIRMATIVE COVENANTS
Borrower covenants and agrees (for itself and the other
Credit Parties) that, unless Lender shall otherwise consent in
writing, from and after the date hereof and until the Termination
Date:
5.1 MAINTENANCE OF EXISTENCE AND CONDUCT OF BUSINESS.
Borrower shall, and shall cause each of the other Credit Parties
to, (a) do or cause to be done all things necessary to preserve
and keep in full force and effect such Person's corporate
existence and its rights and franchises; (b) continue to conduct
such Person's business substantially as now conducted or as
otherwise permitted hereunder (without limiting the generality of
this clause (b), Borrower shall not make any material change in
the mix or quality of its Inventory); (c) at all times maintain,
preserve and protect all of such Person's trademarks, trade names
and all other intellectual property and rights as licensee or
licensor thereof, and preserve all the remainder of such Person's
property, in use or useful in the conduct of its business, and
keep the same in good repair, working order and condition (taking
into consideration ordinary wear and tear) and from time to time
make, or cause to be made, all necessary or appropriate repairs,
replacements
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and improvements thereto consistent with industry practices, so
that the business carried on in connection therewith may be
properly and advantageously conducted at all times; and (d) in
the case of each such Credit Party, transact business only in its
corporate name or such fictitious or trade names as are expressly
disclosed in the Security Agreement executed by such Credit
Party.
5.2 PAYMENT OF OBLIGATIONS. (a) Borrower shall, and
shall cause each of the other Credit Parties to, (I) pay and
discharge or cause to be paid and discharged all such Person's
Obligations, and (ii) prior to an Event of Default, pay and
discharge, or cause to be paid and discharged, such Person's
Indebtedness other than the Obligations, and, subject to SECTION
5.2(b), pay and discharge all (A) Charges imposed upon such
Person, its income and profits, or any of its property (real,
personal or mixed), and (B) lawful claims for labor, materials,
supplies and services or otherwise, before any thereof shall
become in default.
(b) Any Credit Party may in good faith contest, by
proper legal actions or proceedings, the validity or amount of
any Charges or claims arising under SECTION 5.2(a)(ii); PROVIDED,
that at the time of commencement of any such action or
proceeding, and during the pendency thereof (I) no Default or
Event of Default shall have occurred, (ii) adequate reserves with
respect thereto are maintained on the books of the contesting
Person in accordance with GAAP, (iii) such contest operates to
suspend collection of the contested Charges or claims and such
contest is maintained and prosecuted continuously and with
diligence, (iv) none of the Collateral would be subject to
forfeiture or loss or any Lien by reason of the institution or
prosecution of such contest, (v) no Lien shall exist, be imposed
or be attempted to be imposed for such Charges or claims during
such action or proceeding, (vi) the contesting Person shall
promptly pay or discharge such contested Charges and all
additional charges, interest, penalties and expenses, if any, and
shall deliver to Lender evidence acceptable to Lender of such
compliance, payment or discharge, if such contest is terminated
or discontinued adversely to the contesting Person, and (vii)
Lender has not advised Borrower in writing that Lender reasonably
believes that nonpayment or nondischarge thereof could reasonably
be expected to have or result in a Material Adverse Effect.
5.3 BOOKS AND RECORDS. Borrower shall, and shall
cause each of the other Credit Parties to, keep adequate records
and books of account with respect to such Person's business
activities, in which proper entries, reflecting all of its
financial transactions, are made in accordance with GAAP and on a
basis consistent with the Financial Statements.
5.4 LITIGATION. Borrower shall notify Lender in
writing, promptly upon learning thereof, of any litigation
commenced or threatened against Borrower or any other Credit
Party, and of the institution against Borrower or any other
Credit Party of any suit or administrative proceeding, that (a)
may involve an amount in excess of $50,000 or (b) could
reasonably be expected to have or result in a Material Adverse
Effect if adversely determined.
5.5 INSURANCE. (a) Borrower shall, at its cost and
expense, maintain or cause to be maintained the policies of
insurance described on SCHEDULE 3.20 in form and with insurers
recognized as adequate by Lender. Such polices shall be in such
amounts as are set forth on SCHEDULE 3.20. Borrower shall notify
Lender promptly of any occurrence causing a material loss or
decline in value of any of its real or personal property and the
estimated (or actual, if available) amount of such loss or
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decline. In the event Borrower at any time or times hereafter
shall fail to obtain or maintain (or cause to be obtained or
maintained) any of the policies of insurance required above or to
pay (or cause to be paid) any premium in whole or in part
relating thereto, Lender, without waiving or releasing any
Obligations or Default or Event of Default hereunder, may at any
time or times thereafter (but shall not be obligated to) obtain
and maintain such policies of insurance and pay such premium and
take any other action with respect thereto which Lender deems
advisable. All sums so disbursed, including reasonable
attorneys' fees, court costs and other charges related thereto,
shall be payable, on demand, by Borrower to Lender and shall be
additional Obligations hereunder secured by the Collateral,
PROVIDED, that if and to the extent Borrower fail to promptly pay
any of such sums upon Lender's demand therefor, Lender is
authorized to, and at its option may, make or cause to be made
Revolving Credit Loans on behalf of Borrower for payment thereof.
(b) Borrower shall deliver to Lender endorsements to
all of its general liability and other liability policies naming
Lender an additional insured.
5.6 COMPLIANCE WITH LAWS. (a) Borrower shall, and
shall cause each of the other Credit Parties to, comply in all
material respects with all federal, state, local and foreign laws
and regulations applicable to each such Credit Party and its
assets and operations, including, without limitation, those
relating to licensing, environmental, occupational safety,
transportation, ERISA, and labor matters.
5.7 AGREEMENTS. Borrower shall, and shall cause each
of the other Credit Parties to, perform within all required time
periods (after giving effect to any applicable grace periods) all
of such Person's obligations and enforce all of such Person's
rights under each agreement to which such Person is a party,
including, without limitation, any lease and customer contracts
to which such Person is a party where the failure to so perform
and enforce could have or result in a Material Adverse Effect.
Borrower shall not, and shall not permit any other Credit Party
to, terminate or modify any provision of any agreement to which
such Person is a party which termination or modification could
reasonably be expected to have or result in a Material Adverse
Effect.
5.8 SUPPLEMENTAL DISCLOSURE. On the request of Lender
(in the event that such information is not otherwise delivered by
Borrower to Lender pursuant to this Agreement), so long as there
are Obligations outstanding hereunder, Borrower will supplement
(or cause to be supplemented) each schedule or representation
herein or in the other Loan Documents with respect to any matter
hereafter arising which, if existing or occurring at the date of
this Agreement, would have been required to be set forth or
described in such schedule or as an exception to such
representation or which is necessary to correct any information
in such schedule or representation which has been rendered
inaccurate or misleading thereby; PROVIDED, however, that such
supplement to such schedule or representation shall not be deemed
an amendment thereof unless and until expressly consented to by
Lender in writing, and no such amendments, except as the same may
be consented to by Lender in a writing which expressly includes a
waiver, shall be or be deemed a waiver by Lender of any Default
or Event of Default disclosed therein.
5.9 EMPLOYEE PLANS. Borrower shall notify Lender of
(I) any and all claims, actions, or lawsuits asserted or
instituted, and of any threatened litigation or claims, against
any Credit Party or
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any other ERISA Affiliate in connection with any Plan maintained,
at any time, by any such Person or to which any such Person has
or had at any time any obligation to contribute, or/and against
any such Plan itself, or against any fiduciary of or service
provided to any such Plan, and (ii) the occurrence of any
"Reportable Event" with respect to any Pension Plan of any Credit
Party or any other ERISA Affiliate.
5.10 ENVIRONMENTAL MATTERS. Borrower shall, and
shall cause each of the other Credit Parties to, (I) comply in
all material respects with the Environmental Laws applicable to
such Person, (ii) notify Lender promptly after such Person
becomes aware of any material Release upon any premises owned or
occupied by such Person, and (iii) promptly forward to Lender a
copy of any order, notice, permit, application, or any
communication or report received by such Person in connection
with any such material Release or any other matter relating to
the Environmental Laws that may materially and adversely affect
such premises. The provisions of this SECTION 5.10 shall apply
whether or not the Environmental Protection Agency, any other
federal agency or any state or local environmental agency has
taken or threatened any action in connection with any Release or
the presence of any Hazardous Materials.
5.11 LANDLORD'S AGREEMENTS. Upon the occurrence of an
Event of Default hereunder, and if Lender so requests, Borrower
shall use its best efforts to obtain a landlord's agreement in
substantially the form of EXHIBIT F (or in such other form as may
be acceptable to Lender) from the lessor of each leased premises
currently being used by any Credit Party (except those lessors
from whom Borrower was unable to obtain a landlord's agreement
for GE Capital) and the lessor of any new leased premises,
subject to such exceptions as may be expressly approved in
writing by Lender in its discretion.
5.12 CONFIDENTIALITY AND PRESS RELEASES. Lender and
Borrower agree that the terms and conditions of this Agreement
are confidential. Borrower shall not use the name of or refer
to Music Funding I, LLC (or any Affiliate thereof) or "Music
Funding," or issue any press release regarding or make other
public disclosure of the existence of this Agreement or its
terms, without the prior written consent of Lender, except as may
be required by law; PROVIDED, that to the extent required by law,
Borrower may make such disclosures, but only if Borrower shall
first have afforded Lender a reasonable opportunity to review and
comment upon any such legally required disclosure, press release,
or use of such name.
6. NEGATIVE COVENANTS
Borrower covenants and agrees (for itself and the other
Credit Parties) that, without Lender's prior written consent,
from and after the date hereof until the Termination Date:
6.1 MERGERS, ETC. No Credit Party shall directly or
indirectly, by operation of law or otherwise, merge with,
consolidate with, acquire all or substantially all of the assets
or capital stock of, or otherwise combine with, any Person or
form any Subsidiary; PROVIDED, however, that any Subsidiary of
Borrower may merge, consolidate or otherwise combine with or sell
its assets to Borrower or another wholly-owned Subsidiary of
Borrower so long as Borrower or such other wholly-owned
Subsidiary is the surviving or acquiring entity in each such case
and no other Default or Event of Default is caused thereby.
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6.2 INVESTMENTS; LOANS AND ADVANCES. No Credit Party
shall make any investment in, or make any loans or advances of
money to any Person, through the direct or indirect holding of
securities or otherwise, except (I) to the extent permitted under
SECTION 6.1 above, (ii) Borrower may make loans or advances from
time to time to any other Credit Party so long as no other
Default or Event of Default is caused thereby; PROVIDED, however,
that the sum of the aggregate outstanding principal balance of
all loans or advances made by Borrower to Guarantor plus
Borrower's initial $350,000 capital contribution to Guarantor
shall not exceed $750,000 at any one time, and (iii) Borrower may
hold the notes described on SCHEDULE 2 to the Security Agreement.
6.3 INDEBTEDNESS. No Credit Party shall create,
incur, assume or permit to exist any Indebtedness, except (I) the
Obligations, (ii) the Obligations as defined in the GE Capital
Credit Agreement (iii) any other Indebtedness secured by Liens
permitted under SECTION 6.7, (iv) all deferred taxes, (v) any
Indebtedness of any Subsidiary to Borrower to the extent
permitted under SECTION 6.2 above, (vi) Purchase Money
Indebtedness to the extent such Indebtedness does not exceed
$25,000 in aggregate outstanding principal amount at any one
time, and (vii) any other Indebtedness set forth on SCHEDULE 3.9.
6.4 TRANSACTIONS WITH AFFILIATES. No Credit Party
shall directly or indirectly purchase, acquire or lease any
property from or sell, transfer or lease any property to, or
render any service to or obtain any service from, or otherwise
deal with, in the ordinary course of business or otherwise, any
Affiliate of such Credit Party except upon terms which are no
less favorable to such Credit Party than if the relationship of
Affiliate did not exist.
6.5 CAPITAL STRUCTURE AND BUSINESS. None of the
Credit Parties shall: (I) make any changes in any of its business
objectives, purposes, or operations which could materially and
adversely affect the repayment of the Obligations or have or
result in a Material Adverse Effect, (ii) make any change in
their respective capital structures as described on SCHEDULE 3.9
(including, without limitation, the issuance of any shares of
stock, warrants, or other securities convertible into stock or
any revision of the terms of its outstanding Stock; (iii) amend
their respective certificates or articles of incorporation (or
other charter instruments) or by-laws; or (iv) form or acquire
any Subsidiaries after the date of this Agreement. None of the
Credit Parties shall engage in any business other than the
respective business currently engaged in by each such Credit
Party.
6.6 GUARANTEED INDEBTEDNESS. None of the Credit
Parties shall incur any Guaranteed Indebtedness except by
endorsement of instruments or items of payment for deposit or
collection in the ordinary course of business.
6.7 LIENS. None of the Credit Parties shall create or
permit to exist any Lien on any of such Person's properties or
assets (including without limitation such Person's real property
assets) except (I) presently existing or hereafter created Liens
in favor of Lender, (ii) Liens set forth on SCHEDULE 6.7, (iii)
Purchase Money Liens securing Purchase Money Indebtedness to the
extent permitted under SECTION 6.3 above, (iv) Borrower may
obtain a loan of up to $3,500,000 in principal amount to
refinance its Miami Beach, Florida store and Borrower may grant a
Lien on such store to secure such loan PROVIDED that (x) such
Lien does not attach to any of Borrower's Inventory in such
store, (y) the proceeds of such loan are used to repay any
Revolving Credit Loans as defined in the GE Capital Credit
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Agreement which may be then outstanding, and (z) if such loan is
not more than $2,000,000 in original principal amount, Borrower
shall cause the lender thereof to agree in writing to give Lender
prior written notice of any foreclosure of such Lien (but such
lender's right to conduct such foreclosure shall not be impaired
if it fails to give such notice to Lender), and (v) other
Permitted Encumbrances. Borrower also shall defend, and shall
cause each of the other Credit Parties to defend, the right,
title and interest of Lender and Borrower's or such other Credit
Party's rights, titles and interest in, to and under the
Collateral and the Proceeds thereof against the claims and
demands of all Persons whomsoever.
6.8 SALE OF ASSETS. None of the Credit Parties shall
sell, transfer, convey, assign or otherwise dispose of any such
Person's assets or properties, including, without limitation, its
Accounts; PROVIDED, however, that the foregoing shall not
prohibit (I) the sale of Inventory in the ordinary course of
business, (ii) any sale of obsolete, unnecessary or scrap
Equipment in the ordinary course of business and in accordance
with the past practices of such Credit Party, (iii) any other
sale of other assets expressly permitted by SECTION 6.1, (iv) any
Lien expressly permitted under SECTION 6.7, or (v) any sale of
such Person's own Stock provided no other Default or Event of
Default is caused thereby.
6.9 EVENTS OF DEFAULT. Borrower shall not, and shall
not permit any other Credit Party to, take any action or omit to
take any action, which act or omission would constitute (a) a
Default or an Event of Default pursuant to, or noncompliance with
any of, the terms of any of the Loan Documents or (b) a material
default or an event of default pursuant to, or noncompliance
with, any other contract, lease, mortgage, deed of trust or
instrument to which such Person is a party or by which it or any
of its property is bound, or any document creating a Lien.
6.10 ERISA. Neither any Credit Party nor any other
ERISA Affiliate shall without Lender's prior written consent
acquire any new ERISA Affiliate that maintains or has an
obligation to contribute to a Pension Plan that has either an
accumulated funding deficiency, as defined in Section 302 of
ERISA, or any "unfunded vested benefits," as defined in Section
4006(a)(3)(e)(iii) of ERISA, in the case of any plan other than a
Multiemployer Plan, and in Section 4211 of ERISA in the case of a
Multiemployer Plan. Additionally, neither any Credit Party nor
any other ERISA Affiliate shall, without Lender's prior written
consent, terminate any Pension Plan that is subject to Title IV
of ERISA where such termination could reasonably be anticipated
to result in liability to any such Person; permit any accumulated
funding deficiency, as defined in Section 302(a)(2) of ERISA, to
be incurred with respect to any Pension Plan; fail to make any
contributions or fail to pay any amounts due and owing as
required by the terms of any Plan before such contributions or
amounts become delinquent; make a complete or partial withdrawal
(within the meaning of Section 4201 of ERISA) from any
Multiemployer Plan; or at any time fail to provide Lender with
copies of any Plan documents or governmental reports or filings,
if reasonably requested by Lender.
6.11 FINANCIAL COVENANTS. Borrower shall not breach
or fail to comply with any of the Financial Covenants (the
"FINANCIAL COVENANTS") set forth on SCHEDULE 6.11.
6.12 HAZARDOUS MATERIALS. Borrower shall not, and
shall not permit any other Credit Party to, cause or permit any
material Release or the presence, use, generation, manufacture,
installation, Release, discharge, storage or disposal of any
Hazardous Materials on, under, in, above, or about any of the
Subject Property or the transportation of any Hazardous Materials
to or from any of the Subject
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Property where such Release or presence, use, generation,
manufacture, installation, discharge, storage or disposal would
violate any Environmental Laws in any material respects.
6.13 SALE-LEASEBACKS. None of the Credit Parties
shall engage in any sale-leaseback or similar transaction
involving any of such Person's assets.
6.14 CANCELLATION OF INDEBTEDNESS. None of the Credit
Parties shall cancel any claim or debt owing to such Person,
except for reasonable consideration and in the ordinary course of
its business.
6.15 RESTRICTED PAYMENTS. Borrower shall not make any
Restricted Payment.
7. TERM.
7.1 TERMINATION. The financing arrangements
contemplated hereby shall be in effect until the Commitment
Termination Date; PROVIDED, HOWEVER, that in the event of a
prepayment of any part of the Obligations prior to the Commitment
Termination Date with funds borrowed from any Person other than
Lender or GE Capital, pursuant to this Agreement, all of the
Revolving Credit Loans shall immediately become due and payable
in full and Borrower shall simultaneously therewith pay to
Lender, in full, in immediately available funds, all current and
liquidated Obligations arising under any of the Loan Documents
and provide for payment of all other Obligations in a manner
satisfactory to Lender.
7.2 SURVIVAL OF OBLIGATIONS UPON TERMINATION OF
FINANCING ARRANGEMENT. Except as otherwise expressly provided for
in the Loan Documents, no termination or cancellation (regardless
or cause or procedure) of any financing arrangements under this
Agreement shall in any way affect or impair the obligations,
duties and liabilities of Borrower or any other Credit Party or
the rights of Lender relating to any unpaid Obligations, due or
not due, liquidated, contingent or unliquidated or any
transaction or event occurring prior to such termination, or any
transaction or event, the performance of which is not required
until after the Commitment Termination Date. Except as otherwise
expressly provided herein or in any other Loan Document, all
undertakings, agreements, covenants, warranties and
representations of or binding upon the Borrower and the other
Credit Parties, and all rights and Liens of Lender, all as
contained in the Loan Documents shall not terminate
or expire, but rather shall survive such termination or
cancellation and shall continue in full force and effect until
such time as all of the Obligations have been indefeasibly paid
in full in accordance with the terms of the agreements creating
such Obligations.
8. EVENTS OF DEFAULT; RIGHTS AND REMEDIES
8.1 EVENTS OF DEFAULT. The occurrence of any one or
more of the following events (regardless of the reason therefor)
shall constitute an "Event of Default" hereunder:
(a) Borrower shall fail to make any payment in
respect of any Obligations hereunder or under any of the other
Loan Documents when due and payable or declared due and payable,
including, without limitation, any payment of principal of, or
interest on, the Revolving Credit
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Loans or any payment of any Fees, and, in the case of any failure
to make any payment of interest or Fees, the continuation of such
failure for five (5) days after the due date of such payment.
(b) Borrower shall fail or neglect to perform, keep
or observe any of the provisions of SECTION 1.7, or SECTION 6,
including, without limitation, any of the provisions set forth on
ANNEX B and SCHEDULE 6.11, respectively, or Borrower shall fail
to deliver when due any of the notices or other documents
required by paragraphs (a), (b), (c), (e), (h) or (I) of SCHEDULE
4.1.
(c) Borrower shall fail or neglect to perform, keep
or observe any term or provision of this Agreement (other than
any such term or provision referred to in PARAGRAPHS (a) or (b)
above), and the same shall remain unremedied for a period ending
on the first to occur of ten (10) days after Borrower shall
receive written notice of any such failure from Lender or ten
(10) days after Borrower shall become aware thereof.
(d) A default shall occur in the payment of any
amount (whether principal, interest or otherwise) payable on any
Indebtedness of any Credit Party (other than the Obligations) or
a default shall occur in the performance of any other agreement,
term or covenant contained in any agreement, instrument or other
document under which any of such Indebtedness is created,
evidenced, secured or guaranteed if the effect of such default is
to entitle (after giving effect to any applicable notice and/or
cure rights) the holder or holders of such Indebtedness (or any
trustee therefor) to cause such Indebtedness to become due at or
prior to its stated maturity or to otherwise demand payment
thereof; PROVIDED, however, that in the case of any Indebtedness
noted above, the aggregate then outstanding balance of such
Indebtedness must equal or exceed $25,000.
(e) Any representation or warranty of Borrower or any
other Credit Party made herein or in any other Loan Document or
in any written statement delivered pursuant thereto or hereto or
in any report, financial statement or certificate made or
delivered to Lender by Borrower or any other Credit Party
pursuant thereto or hereto shall be untrue or incorrect in any
material respect as of the date when made or deemed made
(including those made or deemed made pursuant to SECTION 2.2).
(f) Any of the assets of any or all of Credit Parties
having an individual or aggregate value (based on the higher of
book value or fair market value) of $25,000 or more shall be
attached, seized, levied upon or subjected to a writ or distress
warrant, or come within the possession of any receiver, trustee,
custodian or assignee for the benefit of creditors of such Person
and such matter shall remain unstayed or undismissed for thirty
(30) consecutive days; or any Person other than a Credit Party
shall apply for the appointment of a receiver, trustee or
custodian for any Credit Party's assets and such matter shall
remain unstayed or undismissed for thirty (30) consecutive days;
or any Credit Party shall have concealed removed or permitted to
be concealed or removed, any part of such Person's property, with
intent to hinder delay or defraud its creditors or any of them or
made or suffered a transfer of any of its property or the
incurring of an obligation which may be fraudulent under any
bankruptcy, fraudulent conveyance or other similar law.
(g) A case or proceeding shall have been commenced
against any Credit Party in a court having competent jurisdiction
seeking a decree or order (I) under Title 11 of the United States
Code, as now constituted or hereafter amended, or any other
applicable federal, state or foreign
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bankruptcy, insolvency, moratorium or other similar law, (ii)
appointing a custodian, receiver, liquidator, assignee, trustee
or sequestrator (or similar official) for such Credit Party or of
any substantial part of its or their properties, or (iii)
ordering the winding up or liquidation of the affairs of such
Credit Party and such case or proceeding shall remain undismissed
or unstayed for thirty (30) consecutive days or such court shall
enter a decree or order granting the relief sought in such case
or proceeding.
(h) Any Credit Party shall (I) file a petition
seeking relief under Title 11 of the United States Code, as now
constituted or hereafter amended, or any other applicable
federal, state or foreign bankruptcy, insolvency, moratorium or
other similar law, (ii) consent to the institution of proceedings
thereunder or to the filing of any such petition or to the
appointment of or taking possession by a custodian, receiver,
liquidator, assignee, trustee or sequestrator (or similar
official) of such Credit Party or of any substantial part of such
Person's properties, (iii) fail generally pay its debts as such
debts become due, or (iv) take any corporate action in
furtherance of any such action.
(i) Final judgment or judgments (after the expiration
of all times to appeal therefrom) for the payment or money in
excess of $25,000 in the aggregate shall be rendered against any
or all of the Credit Parties unless the same shall be (I) fully
covered by insurance in accordance with SECTION 5.5 or (ii)
vacated, stayed, bonded, paid or discharged within a period of
thirty (30) days from the date of such judgment.
(j) Any other event shall have occurred (including
without limitation any material adverse changes by any Major
Label in its inventory return practices or policy) which has had
or could reasonably be expected to have a Material Adverse Effect
and Lender shall have given the Borrower notice thereof.
(k) Any provisions of any Collateral Document, after
delivery thereof pursuant to SECTION 2.1, shall for any reason
cease to be valid, binding and enforceable in accordance with its
terms, or any Lien created under any Collateral Document shall
cease to be valid and perfected Lien having the first priority
(or other priority if and as expressly permitted under the
Collateral Document establishing such Lien) in any of the
Collateral purported to be covered thereby.
(l) The acquisition after the date of this Agreement
by any Person or by any two or more such Persons acting in
concert of beneficial ownership (within the meaning of Rule 13d-3
of the Securities and Exchange Commission) of twenty percent
(20%) or more of the outstanding Voting Stock of Borrower.
(m) The occurrence of an Event of Default under (and
after giving effect to any notice and/or cure rights expressly
provided in) any of the other Loan Documents.
8.2 REMEDIES. If any Event of Default shall have
occurred and be continuing, Lender may, without notice, take any
one or more of the following actions: (a) increase the rate of
interest applicable to the Loans to the Default Rate, all as
provided in SECTION 1.4; or (b) terminate this facility with
respect to further Loans, whereupon any further Loans shall be
made or incurred solely in Lender's sole discretion. If any
Event of Default shall have occurred and be continuing, Lender
also may, without notice, (I) declare all or any portion of the
Obligations to be forthwith due and payable,
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whereupon such Obligations shall become and be due and payable,
without presentment, demand, protest or further notice of any
kind, all of which are expressly waived by Borrower; and (ii)
exercise any rights and remedies provided to Lender under any or
all of the Loan Documents and/or at law or equity, including all
remedies provided under the Code; PROVIDED, however, that upon
the occurrence of an Event of Default specified in SECTIONS
8.1(f), (g) or (h), the Obligations shall become immediately due
and payable and any obligation on Lender's part to make any
further Loans shall immediately terminate, all without
declaration, notice or demand by Lender.
8.3 WAIVERS BY BORROWER. Except as otherwise provided
for in this Agreement and applicable law, Borrower hereby waives
(I) presentment, demand and protest and notice of presentment,
dishonor, notice of intent to accelerate, notice of acceleration,
protest, default, nonpayment, maturity, release, compromise,
settlement, extension or renewal of any or all commercial paper,
accounts, contract rights, documents, instruments, chattel paper
and guaranties at any time held by Lender on which Borrower may
in any way be liable, and hereby ratifies and confirms whatever
Lender may do in this regard, (ii) all rights to notice and a
hearing prior to Lender's taking possession or control of, or to
Lender's replevy, attachment or levy upon, the Collateral or any
bond or security which might be required by any court prior to
allowing Lender to exercise any of its remedies, and (iii) the
benefit of all valuation, appraisal and exemption laws. Borrower
acknowledges that each of it and the other Credit Parties has
been advised by counsel of such Person's choice with respect to
this Agreement, the other Loan Documents and the transactions
evidenced by this Agreement and the other Loan Documents.
9. SUCCESSORS AND ASSIGNS
9.1 SUCCESSORS AND ASSIGNS. This Agreement and the
other Loan Documents shall be binding on and shall inure to the
benefit of Borrower, Lender, and their respective successors and
assigns, except as otherwise provided herein or therein.
Borrower may not assign, transfer, hypothecate or otherwise
convey any of its rights, benefits, obligations or duties
hereunder or under any of the other Loan Documents without the
prior express written consent of Lender. Any such purported
assignment, transfer, hypothecation or other conveyance by
Borrower without the prior express written consent of Lender
shall be void. Lender will have the right to resell (through
syndication, assignment or participation) debt provided by Lender
to Borrower under the Loan Documents, subject to the written
approval by Borrower (not to be unreasonably withheld), but such
prior approval requirement shall not apply if any Default or
Event of Default then exists. Subject to customary
confidentiality conditions for transactions of this
type, the Borrower shall assist Lender in whatever manner that
Lender deems necessary or desirable in order to effectuate any
such resale or syndication, including, but not limited to, the
preparation of any offering materials and the participation of
relevant members of Borrower's management in any meetings
connected therewith with the correctness, completeness and
accuracy of all information provided by, or relating to, Borrower
and included in such offering materials certified by the
appropriate officers of Borrower. The terms and provisions of
this Agreement and the other Loan Documents are for the purpose
of defining the relative rights and obligations of the Credit
Parties and Lender with respect to the transactions contemplated
hereby and there shall be no third party beneficiaries of any of
the terms and provisions of this Agreement or any of the other
Loan Documents.
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10. MISCELLANEOUS
10.1 COMPLETE AGREEMENT; MODIFICATION OF AGREEMENT.
The Loan Documents, together with the Subordination Agreement,
constitute the complete agreement between the parties with
respect to the subject matter thereof, supersede all prior
agreements, understandings, correspondence, negotiations or
inducements (whether express or implied, or oral or written), and
may not be modified, altered or amended except by an agreement in
writing signed by Borrower and Lender. Without limiting the
generality of the immediately preceding sentence, any term sheet,
letter of interest, letter of intent or commitment letter from
Lender to Borrower or any of its affiliates predating this
Agreement and relating to a financing of substantially similar
form, purpose or effect shall be merged with and into and
superseded by this Agreement.
10.2 FEES AND EXPENSES. Borrower agrees to reimburse
Lender for all reasonable out-of-pocket expenses incurred by
Lender in connection with (x) the organization of Music Funding
(including the reasonable fees and expenses of all of Lender's
attorneys and consultants retained in connection with the
organization of Music Funding and advice in connection
therewith), (y) the preparation, negotiation or consummation of
the Loan Documents (including the reasonable fees and expenses of
all of Lender's attorneys and consultants retained in connection
with the Loan Documents and the transactions contemplated thereby
and advice in connection therewith) and (z) wire transfers to the
account of the Borrower. Borrower agrees to reimburse Lender for
all reasonable fees, costs and expenses incurred by Lender,
including, without limitation, the reasonable fees, costs and
expenses of counsel or other consultants, for advice, assistance,
or other representation in connection with:
(i) the forwarding to Borrower or any other Person on
behalf of Borrower by Lender of the proceeds of
any Loans;
(ii) any amendment, modification, termination or waiver
of, or consent with respect to, any of the Loan
Documents or advice in connection with
the administration of the Loans made or
other credit extended pursuant hereto or its
rights hereunder or thereunder;
(iii) any litigation, contest, dispute, suit,
proceeding or action (whether instituted by
Lender, Borrower or any other Person) in any
way relating to the Collateral, any of the
Loan Documents, or any other agreement to be
executed or delivered in connection therewith
or herewith, whether as party, witness,
or otherwise, including any litigation,
contest, dispute, suit, case, proceeding or
action, and any appeal or review thereof, in
connection with a case commenced by or
against Borrower or any other Person that
may be obligated to Lender by virtue of the
Loan Documents, but excluding any such
litigation, suit, case, proceeding or other
court action in which the Borrower is the
prevailing party;
(iv) any attempt to enforce any rights of Lender
against Borrower or any other Person that may
be obligated to Lender by virtue of any of the
Loan Documents;
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(v) any attempt to (I) monitor the Obligations or
the Collateral, (ii) evaluate, observe, or
assess any Credit Party or its affairs, and
(iii) verify, protect, evaluate, assess,
appraise, collect, sell, liquidate or
otherwise dispose of any of the Collateral;
including, without limitation, the reasonable
attorneys' and other professional and
service providers' fees arising from such
services, including those in connection with
any appellate proceedings; and all expenses,
costs, charges and other fees incurred by such
counsel and others in any way or respect arising
in connection with or relating to any of the
events or actions described in this SECTION 10.2
shall be payable, on demand, by Borrower to
Lender and shall constitute part of the
Obligations.
Without limiting the generality of the foregoing, the
aforesaid expenses, costs, charges and fees may include: fees,
costs and expenses of accountants, appraisers, investment
bankers, management and other consultants and paralegals; court
costs and expenses; photocopying and duplication expenses; court
reporter fees, costs and expenses; long distance telephone
charges; air express charges; telegram charges, secretarial
overtime charges; and expenses for travel, lodging and food paid
or incurred in connection with the performance of such legal or
other advisory services.
10.3 NO WAIVER. Lender's failure, at any time or
times, to require strict performance by Borrower or any other
Credit Party of any provision of this Agreement or any of the
other Loan Documents shall not waive, affect or diminish any
right of Lender thereafter to demand strict compliance and
performance therewith. Any suspension or waiver of any Default
or Event of Default under the Loan Documents shall not suspend,
waive or affect any other Default or Event of Default under this
Agreement or any of the other Loan Documents whether the same is
prior or subsequent thereto and whether of the same or of a
different type. None of the undertakings, agreements,
warranties, covenants and representations of Borrower or any
other Credit Party contained in this Agreement or any of the
other Loan Documents and no Default or Event of Default by
Borrower under this Agreement and no defaults by Borrower or any
other Credit Party under any of the other Loan Documents shall be
deemed to have been suspended or waived by Lender, unless such
waiver or suspension is by an instrument in writing signed by an
officer of or other authorized employee of Lender and directed to
a Credit Party specifying such suspension or waiver.
10.4 REMEDIES. Lender's rights and remedies under
this Agreement shall be cumulative and nonexclusive of any other
rights and remedies which Lender may have under any other
agreement, including without limitation, the Loan Documents, by
operation of law or otherwise. Recourse to any of the Collateral
by Lender shall not be required.
10.5 SEVERABILITY. Wherever possible, each provision
of this Agreement shall be interpreted in such a manner as to be
effective and valid under applicable law, but if any provision of
this Agreement shall be prohibited by or invalid under applicable
law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
10.6 CONFLICT OF TERMS. Except as otherwise provided
in this Agreement, or any of the other Loan Documents by specific
reference to the applicable provisions of this Agreement, if any
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provision contained in this Agreement is in conflict with, or
inconsistent with, any provision in any of the other Loan
Documents, the provision contained in this Agreement shall govern
and control.
10.7 AUTHORIZED SIGNATURES. Until Lender shall be
notified by Borrower to the contrary, the signature upon any
document or instrument delivered pursuant hereto of an officer of
Borrower listed on SCHEDULE 10.7 shall bind Borrower and be
deemed to be the duly authorized act of Borrower affixed pursuant
to and in accordance with resolutions duly adopted by Borrower's
Board of Directors.
10.8 GOVERNING LAW. EXCEPT AS OTHERWISE EXPRESSLY
PROVIDED IN ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING
ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS AND THE OBLIGATIONS
ARISING HEREUNDER OR THEREUNDER SHALL BE GOVERNED BY, AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE
OF NORTH CAROLINA APPLICABLE TO CONTRACTS MADE AND PERFORMED IN
SUCH STATE, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF
AMERICA. BORROWER HEREBY CONSENTS AND AGREES THAT THE STATE OR
FEDERAL COURTS LOCATED IN GREENSBORO, NORTH CAROLINA, SHALL HAVE
EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR
DISPUTES BETWEEN BORROWER AND LENDER PERTAINING TO THIS AGREEMENT
OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY MATTER ARISING OUT
OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN
DOCUMENTS, PROVIDED, THAT LENDER AND BORROWER ACKNOWLEDGES THAT
ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT
LOCATED OUTSIDE OF GREENSBORO, NORTH CAROLINA AND, PROVIDED,
FURTHER, THAT NOTHING IN THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENTS SHALL BE DEEMED OR OPERATE TO PRECLUDE LENDER FROM
BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER
JURISDICTION TO COLLECT THE OBLIGATIONS, REALIZE ON THE
COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO
ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF LENDER.
BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO
JURISDICTION IN THE STATE OR FEDERAL COURTS LOCATED IN
GREENSBORO, NORTH CAROLINA, IN ANY ACTION OR SUIT COMMENCED IN
ANY SUCH COURT, AND BORROWER HEREBY WAIVES ANY OBJECTION WHICH
BORROWER MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION,
IMPROPER VENUE OR FORUM NON CONVENIENS IN THE STATE OR FEDERAL
COURTS LOCATED IN GREENSBORO, NORTH CAROLINA. BORROWER ALSO
HEREBY WAIVES PERSONAL SERVICE UPON IT OF THE SUMMONS, COMPLAINT
AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES
THAT SERVICE OF SUCH SUMMONS, COMPLAINTS AND OTHER PROCESS
MAY BE MADE UPON IT BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO
BORROWER AT ITS ADDRESS SET FORTH ON SCHEDULE 10.9 OF THIS
AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON
THE EARLIER OF BORROWER'S ACTUAL RECEIPT THEREOF OR THREE (3)
BUSINESS DAYS AFTER DEPOSIT IN THE U.S. MAILS, ADDRESSED AS
AFORESAID, AND PROPER POSTAGE PREPAID.
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10.9 NOTICES. Except as otherwise provided herein,
whenever it is provided herein that any notice, demand, request,
consent, approval, declaration or other communication shall or
may be given to or served upon any of the parties by any other
party, or whenever any of the parties desires to give or serve
upon any other party any communication with respect to this
Agreement, each such notice, demand, request, consent, approval,
declaration or other communication shall be in writing and shall
be deemed to have been validly served, given or delivered (I)
upon the earlier of actual receipt and three (3) Business Days
after deposit in the United States Mail, registered or certified
mail, return receipt requested, with proper postage prepaid, (ii)
upon transmission, when sent by telecopy or other similar
facsimile transmission (with such telecopy or facsimile promptly
confirmed by delivery of a copy by personal delivery or United
States Mail as otherwise provided in this SECTION 10.9), (iii)
one (1) Business Day after deposit with a reputable overnight
courier with all charges prepaid or (iv) when delivered, if
hand-delivered by messenger, all of which shall be addressed to
the party to be notified and sent to the address or facsimile
number indicated on SCHEDULE 10.9 or to such other address (or
facsimile number) as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be
waived in writing by the party entitled to receive such notice.
Failure or delay in delivering any copies of any notice, demand,
request, consent, approval, declaration or other communication to
any Person (other than Borrower or Lender) designated on SCHEDULE
10.9 to receive copies shall in no way adversely affect the
effectiveness of such notice, demand, request, consent, approval,
declaration or other communication.
10.10 SECTION TITLES. The Section titles and Table
of Contents contained in this Agreement are and shall be without
substantive meaning or content of any kind whatsoever and are not
a part of the agreement between the parties hereto.
10.11 COUNTERPARTS. This Agreement may be executed
in any number of separate counterparts, each of which shall
collectively and separately constitute one agreement.
10.12 TIME OF ESSENCE. Time is of the essence of this
Agreement and each of the other Loan Documents.
10.13 WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING
IN CONNECTION WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST
QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND EXPERT
PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL LAWS TO
APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT
THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE
LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS
OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO
WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, OR
PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER SOUNDING IN
CONTRACT, TORT, OR OTHERWISE, BETWEEN LENDER AND BORROWER ARISING
OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH, THIS
AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS
RELATED HERETO OR THERETO.
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IN WITNESS WHEREOF, this Agreement has been duly
executed as of the date first written above.
BORROWER:
SPEC'S MUSIC, INC.
By: /s/ Donald A. Molta
--------------------------------
Name: Donald A. Molta
Title: Chief Financial Officer
LENDER:
MUSIC FUNDING I, LLC
By: Geneva Associates, LLC,
Its Manager
By: /s/ Thomas L. Minick
--------------------------------
Thomas L. Minick, Manager
-29-
<PAGE>
CONSENT OF GUARANTOR
The undersigned guarantor does hereby consent to the
execution, delivery and performance of the within and foregoing
Credit Agreement, authorizes and directs Spec's Music, Inc. to
enter into the Subordination Agreement described therein on the
undersigned guarantor's behalf, and agrees to be bound by the
terms and conditions of this Agreement and the Subordination
Agreement.
IN WITNESS WHEREOF, the undersigned guarantor has executed
this Consent under seal as of the day and year first above set
forth.
D S LATINO INC.
By: /s/ Donald A. Molta
--------------------------------
Name: Donald A. Molta
Title: VP/Secretary/Treasurer
Chief Financial Officer
[CORPORATE SEAL]
-30-
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration
Statement No. 33-16778 of Spec's Music, Inc. on Form S-8 of our
report dated October 24, 1997 appearing in the Annual Report on
Form 10-K of Spec's Music, Inc. for the year ended July 31, 1997.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
October 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JUL-31-1997
<CASH> 59,397
<SECURITIES> 0
<RECEIVABLES> 192,286
<ALLOWANCES> 0
<INVENTORY> 14,629,312
<CURRENT-ASSETS> 17,065,866
<PP&E> 20,663,302
<DEPRECIATION> (9,506,278)
<TOTAL-ASSETS> 29,252,535
<CURRENT-LIABILITIES> 12,947,601
<BONDS> 6,695,994
0
0
<COMMON> 53,004
<OTHER-SE> 9,555,936
<TOTAL-LIABILITY-AND-EQUITY> 29,252,535
<SALES> 67,469,876
<TOTAL-REVENUES> 68,536,442
<CGS> 45,736,342
<TOTAL-COSTS> 46,278,175
<OTHER-EXPENSES> 30,649,386
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 951,517
<INCOME-PRETAX> (9,295,668)
<INCOME-TAX> (160,860)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,134,808)
<EPS-PRIMARY> (1.74)
<EPS-DILUTED> (1.74)
</TABLE>
