Document:

Exhibit
10.18

 

AGENCY
AGREEMENT

 

by
and between

 

a
joint venture composed of

 

TRANS
WORLD ENTERTAINMENT CORPORATION,

 

HILCO
MERCHANT RESOURCES, LLC,

 

HILCO
REAL ESTATE, LLC

 

GORDON
BROTHERS RETAIL PARTNERS, LLC

 

and

 

THE
OZER GROUP LLC

 

As
Agent

 

and

 

WHEREHOUSE
ENTERTAINMENT, INC.,

 

As
Merchant

 

Dated
as of September 19, 2003

 

 

TABLE OF CONTENTS

 

	
  Section 1.

  	
  Defined Terms

  	
   

  
	
  Section 2.

  	
  Appointment of Agent

  	
   

  
	
  Section 3.

  	
  Assets to be Sold to TWEC or by Agent

  	
   

  
	
  3.1

  	
  Assets

  	
   

  
	
  3.2

  	
  Excluded
  Assets

  	
   

  
	
  3.3

  	
  Assumed Liabilities

  	
   

  
	
  Section 4.

  	
  Consideration to Merchant

  	
   

  
	
  4.1

  	
  Payments to Merchant

  	
   

  
	
  4.2

  	
  Time
  of Payment

  	
   

  
	
  4.3

  	
  Additional Merchandise

  	
   

  
	
  4.4

  	
  Adjustments to Guaranteed Amount

  	
   

  
	
  Section 5.

  	
  Sale and Assignment of Properties or Assets

  	
   

  
	
  5.1

  	
  Leased Properties

  	
   

  
	
  5.2

  	
  Covenants
  of Merchant Regarding Sale of Properties

  	
   

  
	
  5.3

  	
  Assets

  	
   

  
	
  5.4

  	
  Transfers to TWEC

  	
   

  
	
  5.5

  	
  Other
  Closing Date Transfers

  	
   

  
	
  5.6

  	
  Executory
  Contracts

  	
   

  
	
  Section 6.

  	
  Deliveries

  	
   

  
	
  Section 7.

  	
  Expenses of the Sale

  	
   

  
	
  7.1

  	
  Expenses

  	
   

  
	
  7.2

  	
  Central Office Expense

  	
   

  
	
  7.3

  	
  Other Expenses of the Sale

  	
   

  
	
  Section 8.

  	
  Expenses with Respect to Properties

  	
   

  
	
  8.1

  	
  Marketing
  Period Costs - Leases.

  	
   

  
	
  8.2

  	
  Limitation
  on Marketing Period Costs

  	
   

  
	
  8.3

  	
  Occupancy
  Expense Letter of Credit

  	
   

  
	
  Section 9.

  	
  Inventory Taking and Valuation.

  	
   

  
	
  9.1

  	
  Inventory Taking

  	
   

  
	
  9.2

  	
  Merchandise.

  	
   

  
	
  9.3

  	
  Valuation

  	
   

  

 

i

 

	
  Section 10.

  	
  Store Closing Sale Term; Marketing Period
  for Properties.

  	
   

  
	
  10.1

  	
  Term

  	
   

  
	
  10.2

  	
  Vacating the Stores

  	
   

  
	
  10.3

  	
  Marketing Period.

  	
   

  
	
  10.4

  	
  Gross Rings

  	
   

  
	
  Section 11.

  	
  Sale Proceeds.

  	
   

  
	
  11.1

  	
  Sale
  Proceeds

  	
   

  
	
  11.2

  	
  Deposit
  of Proceeds

  	
   

  
	
  Section 12.

  	
  Conduct of the Store Closing Sale.

  	
   

  
	
  12.1

  	
  Rights of Agent

  	
   

  
	
  12.2

  	
  Sales at TWEC Stores

  	
   

  
	
  12.3

  	
  Terms of Sales to Customers

  	
   

  
	
  12.4

  	
  Sales Taxes

  	
   

  
	
  12.5

  	
  Supplies

  	
   

  
	
  12.6

  	
  No Returns of Merchandise

  	
   

  
	
  Section 13.

  	
  Sale Reconciliation

  	
   

  
	
  Section 14.

  	
  Employee Matters.

  	
   

  
	
  14.1

  	
  Merchant’s Employees at Stores other than TWEC Stores

  	
   

  
	
  14.2

  	
  Termination of Retained Employees

  	
   

  
	
  14.3

  	
  Payroll
  Matters

  	
   

  
	
  14.4

  	
  Employee Retention Bonuses

  	
   

  
	
  14.5

  	
  Merchant’s
  Employees at TWEC Stores

  	
   

  
	
  Section 15.

  	
  Representations, Warranties, Covenants and
  Agreements.

  	
   

  
	
  15.1

  	
  Representations,
  Warranties, Covenants and Agreements of Merchant.

  	
   

  
	
  15.2

  	
  Representations, Warranties and Covenants of Agent

  	
   

  
	
  Section 16.

  	
  Covenants of the Merchant

  	
   

  
	
  16.1

  	
  Operations Prior to Closing Date

  	
   

  
	
  16.2

  	
  Operation of Business From and After Closing Date

  	
   

  
	
  Section 17.

  	
  Conditions Precedent to Effectiveness

  	
   

  
	
  17.1

  	
  Conditions Precedent to Obligations of Both Merchant and Agent

  	
   

  
	
  17.2

  	
  Additional Conditions Precedent to
  Obligations of Agent

  	
   

  
	
  Section 18.

  	
  Insurance; Risk of Loss.

  	
   

  
	
  18.1

  	
  Merchant’s Liability Insurance

  	
   

  

 

ii

 

	
  18.2

  	
  Merchant’s Property Casualty Insurance

  	
   

  
	
  18.3

  	
  Agent’s
  Insurance

  	
   

  
	
  18.4

  	
  Worker’s
  Compensation Insurance

  	
   

  
	
  18.5

  	
  Risk
  of Loss

  	
   

  
	
  18.6

  	
  Force
  Majeure

  	
   

  
	
  18.7

  	
  Non-Assumption of Liability

  	
   

  
	
  Section 19.

  	
  Indemnification.

  	
   

  
	
  19.1

  	
  Merchant Indemnification

  	
   

  
	
  19.2

  	
  Agent Indemnification

  	
   

  
	
  Section 20.

  	
  Events of Default and Remedies.

  	
   

  
	
  20.1

  	
  Events of Default

  	
   

  
	
  20.2

  	
  Remedies

  	
   

  
	
  Section 21.

  	
  Miscellaneous.

  	
   

  
	
  21.1

  	
  Notices

  	
   

  
	
  21.2

  	
  Governing
  Law; Consent to Jurisdiction

  	
   

  
	
  21.3

  	
  Entire
  Agreement

  	
   

  
	
  21.4

  	
  Amendments
  and Waivers

  	
   

  
	
  21.5

  	
  No Waiver

  	
   

  
	
  21.6

  	
  Successors
  and Assigns

  	
   

  
	
  21.7

  	
  Execution in Counterparts; Facsimile Signatures

  	
   

  
	
  21.8

  	
  Section Headings

  	
   

  
	
  21.9

  	
  Survival

  	
   

  
	
  21.10

  	
  Third Party Beneficiaries

  	
   

  
	
  21.11

  	
  Security Interest

  	
   

  
	
  21.12

  	
  Further Assurances; Power of Attorney

  	
   

  
	
  21.13

  	
  Joint and Several Liability of Partners

  	
   

  
	
  21.14

  	
  Authorized Representative of Partners

  	
   

  

 

iii

 

LIST OF EXHIBITS

 

	
  EXHIBIT 3.1

  	
   

  	
  Leases

  	
   

  
	
  EXHIBIT 5.3(a)

  	
   

  	
  TWEC Use Clause

  	
   

  
	
  EXHIBIT 5.4

  	
   

  	
  TWEC Stores

  	
   

  
	
  EXHIBIT 8.2

  	
   

  	
  Occupency Expenses

  	
   

  
	
  EXHIBIT 9.1

  	
   

  	
  Inventory Taking

  	
   

  
	
  EXHIBIT 14.3

  	
   

  	
  Payroll Matters

  	
   

  
	
  EXHIBIT
  15.1(i)

  	
   

  	
  Historic
  Sales

  	
   

  
	
  EXHIBIT
  15.1(j)

  	
   

  	
  Inventory
  Report

  	
   

  
	
  EXHIBIT
  15.1(r)

  	
   

  	
  Legal
  Proceedingst

  	
   

  
	
  EXHIBIT 16.1.

  	
   

  	
  Promotional Calendar

  	
   

  
	
  EXHIBIT
  17.1(a)

  	
   

  	
  Order

  	
   

  
	
  EXHIBIT 17.3

  	
   

  	
  Agent’s Insurance

  	
   

  

 

iv

 

AGENCY
AGREEMENT

 

This Agency Agreement (this “Agreement”) is made and entered
into as of this 19th day of September, 2003, by and between a joint
venture composed of Trans World Entertainment Corporation (“TWEC”),
Hilco Merchant Resources, LLC, Hilco Real Estate, LLC, Gordon Brothers Retail
Partners, LLC, and The Ozer Group LLC (collectively, the “Agent”), on
the one hand, and Wherehouse Entertainment Inc., its debtor affiliates and
their respective chapter 11 estates (jointly and severally, the “Merchant”),
on the other hand.

 

RECITALS

 

WHEREAS, Merchant is a specialty retailer in the business of the retail
distribution of pre-recorded music and other home entertainment products;

 

WHEREAS, on January 21, 2003 (the “Filing Date”), Merchant
filed voluntary petitions (collectively, the “Petition”) for relief
under chapter 11 of Title 11, United States Code (the “Bankruptcy Code”),
in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy
Court”) where the Merchant’s case (the “Case”) is currently pending;

 

WHEREAS, TWEC intends to assume certain of the Leases (as defined
below), receive the inventory located at the stores covered by such Leases, and
continue to operate such stores as going concerns;

 

WHEREAS, Agent seeks to act as the exclusive agent to Merchant in
connection with the disposition of the Assets other than those conveyed to TWEC
(as further described below, the “Sale”), including, without limitation,
the conduct of a going-out-of-business, store closing, or similar sales (as
further described below, the “Store Closing Sale”); and

 

WHEREAS, subject to the prior approval of the Bankruptcy Court, in the
manner provided for herein, Merchant desires that the Agent act as Merchant’s
exclusive agent in connection with the disposition of the Assets (other than
those to be conveyed to TWEC) and other matters as specified herein.

 

NOW THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, and for other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, Agent and Merchant hereby
agree as follows:

 

Section 1.                            Defined Terms.  Each of the terms set forth below is defined
in the referenced section of this Agreement set forth opposite such term
below.

 

	
  Defined
  Term

  	
   

  	
  Section Reference

  
	
  Additional
  Merchandise

  	
   

  	
  4.3

  
	
  Agency Accounts

  	
   

  	
  11.2(a)

  
	
  Agency Documents

  	
   

  	
  15.1(c)

  
	
  Agent

  	
   

  	
  Preamble

  
	
  Agent Claim

  	
   

  	
  18.5

  
	
  Agent Indemnified
  Parties

  	
   

  	
  19.1

  
	
  Agreement

  	
   

  	
  Preamble

  

 

1

 

	
  Approval Order

  	
   

  	
  5.3(a)

  
	
  Assets

  	
   

  	
  3.1

  
	
  Assumed
  Liabilities

  	
   

  	
  3.3

  
	
  Bankruptcy Code

  	
   

  	
  Recitals

  
	
  Bankruptcy Court

  	
   

  	
  Recitals

  
	
  Benefits Cap

  	
   

  	
  7.1(a)(iii)

  
	
  Case

  	
   

  	
  Recitals

  
	
  Central Office

  	
   

  	
  3.1(a)

  
	
  Closing Date

  	
   

  	
  17.1(c)

  
	
  Cost Value

  	
   

  	
  9.3

  
	
  Defective
  Merchandise

  	
   

  	
  9.2(a)

  
	
  Display
  Merchandise

  	
   

  	
  9.2(a)

  
	
  Dropout Notice

  	
   

  	
  5.2(f)

  
	
  Events of Default

  	
   

  	
  20.1

  
	
  Excluded Assets

  	
   

  	
  3.2

  
	
  Excluded Benefits

  	
   

  	
  7.1(j)

  
	
  Expenses

  	
   

  	
  7.1

  
	
  Filing Date

  	
   

  	
  Recitals

  
	
  Gross Rings

  	
   

  	
  10.4

  
	
  Guaranteed Amount

  	
   

  	
  4.1(a)

  
	
  Inventory

  	
   

  	
  4.4

  
	
  Inventory Date

  	
   

  	
  9.1(a)

  
	
  Inventory Taking

  	
   

  	
  9.1(a)

  
	
  Lease Assumption
  Notice

  	
   

  	
  5.2(b)

  
	
  Leased Property
  Designee

  	
   

  	
  5.2(b)

  
	
  Leased Property
  Termination Date

  	
   

  	
  10.3(c)

  
	
  Leases

  	
   

  	
  3.1(c)

  
	
  Liens

  	
   

  	
  15.1(x)

  
	
  Marketing Period

  	
   

  	
  10.3(a)

  
	
  Merchandise

  	
   

  	
  9.2

  
	
  Merchant

  	
   

  	
  Preamble

  
	
  Motion

  	
   

  	
  16.1(a)

  
	
  Occupancy Expenses

  	
   

  	
  7.1(a)(x))

  
	
  Out-of-Date
  Merchandise

  	
   

  	
  9.2(a)

  
	
  Order

  	
   

  	
  17.1(b)

  
	
  Property

  	
   

  	
  5

  
	
  Property Sale
  Agreement

  	
   

  	
  5.3(a)

  
	
  Property Closing

  	
   

  	
  5.3(e)

  
	
  Property Closing
  Conditions

  	
   

  	
  5.2(f)

  
	
  Property Closing
  Date

  	
   

  	
  5.3(e)

  

 

2

 

	
  REA 

  	
   

  	
  5.3(a)

  
	
  Rental Merchandise

  	
   

  	
  9.2(a)

  
	
  Retention Bonuses

  	
   

  	
  14.4

  
	
  Retained Employee

  	
   

  	
  14.1

  
	
  Revocation Notice

  	
   

  	
  8.2(b)

  
	
  Sale

  	
   

  	
  Recitals

  
	
  Sale Proceeds

  	
   

  	
  11.1

  
	
  Sales Taxes

  	
   

  	
  12.4

  
	
  Sale Commencement
  Date

  	
   

  	
  10.1

  
	
  Sale Term

  	
   

  	
  10.1

  
	
  Sale Termination
  Date

  	
   

  	
  10.1

  
	
  SC Stores

  	
   

  	
  7.1(a)

  
	
  Store Closing Sale

  	
   

  	
  Recitals

  
	
  Store Inventory
  Taking

  	
   

  	
  9.1(a)

  
	
  Stores

  	
   

  	
  3.1(a)

  
	
  Supplies

  	
   

  	
  12.5

  
	
  TWEC

  	
   

  	
  Recitals

  
	
  TWEC Store
  Employees

  	
   

  	
  14.5

  
	
  TWEC Stores

  	
   

  	
  5.5

  
	
  Warehouse

  	
   

  	
  3.1(a)

  
	
  Warehouse
  Inventory Taking

  	
   

  	
  9.1(b)

  
	
  Warn Act

  	
   

  	
  14.1

  

 

Section 2.                            Appointment
of Agent

 

(a)  Merchant hereby appoints
Agent, and Agent hereby agrees to serve, as Merchant’s exclusive agent for the
limited purpose of conducting the Sale in accordance with the terms and
conditions of this Agreement and exercising Agent’s other rights, duties and
obligations under this Agreement.

 

(b)  Merchant hereby appoints
Agent, and Agent hereby agrees to serve, as Merchant’s exclusive agent for the
disposition of Merchant’s Leases.

 

Section 3.                            Assets
to be Sold to TWEC or by Agent.

 

3.1                   Assets.  The
assets (collectively, the “Assets”), which shall be conveyed to TWEC, pursuant
to Section 5.5, or, at the direction of the Agent, in Agent’s sole
discretion, to third parties or Agent’s designee free and clear of all liens,
claims, and encumbrances in accordance with the terms and conditions of this
Agreement and the Order, shall consist of all of Merchant’s right, title and
interest in the following:

 

(a)  The inventory, signage, Supplies, parts,
machinery, equipment, vehicles, and goods located at any of the retail business
locations of Merchant (the “Stores”), Merchant’s

 

3

 

central office facility (the “Central Office”),
and Merchant’s warehouse (the “Warehouse”), as well as in transit
thereto or therefrom (other than return inventory to vendor in transit);

 

(b)  The leases for the Stores and Warehouse as
set forth on Exhibit 3.1 (the “Leases”), including, without limitation,
any deposits or other security given or made in respect of the Leases and any
other rights granted under such Leases (including, without limitation, purchase
options, reconveyance rights and expansion rights), which shall be assumed and
assigned or rejected at the direction of the Agent pursuant to section 365
of the Bankruptcy Code in accordance with Section 5 hereof.   The Leases shall include all subleases and
similar agreements for use of space within premises leased by Merchant under a
Lease where Merchant is a lessor, sublessor or licensor.  Any amounts received by Merchant as
consideration for the assignment of any Leases assigned after the date hereof
shall be credited against the Guaranteed Amount;

 

(c)  All furniture, store fixtures and improvements
located at or related to the Stores, Warehouse, distribution centers and
Central Office, as well as all other fixtures;

 

(d)  All other personal property, tangible or
intangible, wherever located, including all intellectual property;

 

(e)  All intellectual property, including,
without limitation, know-how, trademarks, service marks, trade names, designs,
logos, art work, copyrights, patents, licenses, developments, research data,
designs, technology, test procedures, marketing plans, processes, confidential
information and all other intellectual and intangible property rights,
inventions (whether of not patentable), discoveries, business methods, and
trade secrets of Merchant whatsoever (and applications for, and extensions and
reissuances of, any of the foregoing and rights therein);

 

(f)  All transferable guarantees, warranties,
licenses and other transferable governmental permits, approvals and permissions
related to the Assets;

 

(g)  All prepaid expenses, deposits, credits,
notes, and utility deposits relating to the Stores or Leases;

 

(h)  Other than as set forth in
Section 3.2(ii), causes of action related to the Assets;

 

(i)  Any investment, equity interest, or
ownership in (x) Echo and (y) Artemis Records;

 

(j)  Any customer lists, and websites operated by
or for Merchant, including any server, software, or other equipment or program
associated with such websites; and

 

(k)  To the extent Agent is entitled to the
proceeds, rights, or benefit of the following hereunder: all liability
insurance policies, contracts, and insurance arrangements, together with all
rights and incidents thereunder, and any claim, action or other right the
Merchant may have for insurance coverage under such policies, contracts, and
arrangements.

 

4

 

3.2                   Excluded Assets.  The Assets shall not include (i) accounts receivable (inclusive
of tax refunds); (ii) all cash and cash equivalents (including all negotiable
instruments, marketable securities and cash and cash equivalents maintained in
accounts with banks, brokerage firms and other financial institutions) and all
cash retainers held by any professional retained by the Bankruptcy Court (other
than deposits defined as Assets pursuant to section 3.1(h) hereof); and
(iii) causes of action that do not relate to Assets, including any claims of
Merchant for avoidance of transfers, obligations, or liens arising under
Chapter 5 of the Bankruptcy Code or Merchant’s claims in the class action suit
relating to compact disc pricing; (iv) except as otherwise provided herein, all
liability insurance policies, contracts, and insurance arrangements, together
with all rights and incidents thereunder, and any claim, action or other right
the Merchant may have for insurance coverage under such policies, contracts,
and arrangements, (iv) any real property owned by Merchant, and (v) any
executory contracts of Merchant (other than the Leases), and the foregoing
shall be deemed “Excluded Assets,” which Agent shall not acquire any rights
thereto.

 

3.3                   Assumed Liabilities.  Agent shall assume as of the Closing Date
the following obligations and liabilities of Sellers relating to the Assets
(all such liabilities and obligations herein called the “Assumed Liabilities”):
(i) all amounts (subject to the provisions of Section 5.1(d)) necessary to
cure defaults existing under the Leases to be assumed and assigned pursuant to
this Agreement; (iii) liabilities arising out of or relating to gift cards,
store credits, or gift certificates sold by Merchant on or subsequent to the
Filing Date in an aggregate amount not to exceed $1.4 million, provided that
such gift cards, store credits, or gift certificates need only be accepted at
TWEC Stores (and Agent shall have no obligation to accept gift cards, store
credits, or gift certificates at SC Stores); (iv) liabilities relating to the
accrued vacation pay of the Merchant’s employees at the Stores and Warehouse as
of the Closing Date; and (v) Merchant’s employees retained liabilities relating
to Merchant’s employee payroll and other employee benefits of Merchant’s
employees in an aggregate amount not to exceed $1.1 million.

 

Section 4.                            Consideration
to Merchant.

 

4.1                   Payments to Merchant.

 

(a)  Subject to the adjustments of the Guaranteed
Amount described in section 4.4 below, as a guaranty of Agent’s
performance hereunder, Merchant shall receive from Agent the sum of the
$35,600,000 (the “Guaranteed Amount”).

 

(b)  Agent shall pay to Merchant the Guaranteed
Amount in the manner and at the times specified in Section 4.2 below.

 

4.2                   Time of Payment.

 

(a)  Payment of Merchandise Guaranteed Amount.  No later than two (2) business days after
entry of the Order, Agent shall (i) pay 75% of the Guaranteed Amount (less any
deposit posted by Agent) in cash; (ii) deliver to Merchant an irrevocable
standby letter of credit, in form and substance satisfactory, to Merchant in
the original face amount of 25% of the Guaranteed Amount; (iii) deliver to
Merchant the letter of credit specified in Section 8.3; and (iv) pay to
Merchant the difference between $1.1 million and the liabilities assumed by
Agent pursuant to Section 3.3(v) to the extent that the liabilities
assumed pursuant to Section 3.3(iv) are

 

5

 

less
than $1.1 million.  Subject to the
adjustments of the Guaranteed Amount described in section 4.4 below, Agent
shall pay the unpaid and undisputed balance of the Guaranteed Amount in cash to
Merchant no later than two (2) business days following the reconciliation by
Merchant and Agent of the Inventory Taking. 
If Merchant and Agent disagree as to the amount of the unpaid Guaranteed
Amount, Merchant and Agent shall attempt to resolve such dispute, in good
faith, within thirty (30) days of the date on which the dispute arises.  If Merchant and Agent are unable to resolve
such dispute within such thirty (30) day period, then the Merchant and Agent
agree to bring such dispute before the exclusive jurisdiction of the Bankruptcy
Court.  Upon payment of the Guaranteed
Amount, Merchant shall cooperate with Agent in order to terminate the letter of
credit required to be posted under clause (ii) of this paragraph.  To the extent that the amount paid pursuant
to clause (i) above is in excess of the Guaranteed Amount (after adjustment
pursuant to section 4.4 herein), Merchant shall pay to Agent such excess
within two (2) business days following the reconciliation by Merchant and Agent
of the Inventory Taking.

 

4.3                   Additional Merchandise.  Agent shall be permitted to supplement the
Store Closing Sales at Stores (hereinafter defined) at Stores other than TWEC
Stores with additional inventory from parties other than Merchant (“Additional
Merchandise”).  Any proceeds of the sale
of Additional Merchandise shall be treated as Sales Proceeds, provided, however,
that Merchant shall receive (i) two percent (2%) of any Proceeds of Additional
Merchandise comprised of catalogue goods or new releases and (ii) five percent
(5%) of any Proceeds of all other Additional Merchandise (for the avoidance of
doubt, these amounts are above and separate from the Guaranteed Amount.  Any expenses associated with the purchase or
sale of Additional Merchandise shall be treated as Expenses paid by Agent
hereunder.  At the request of Merchant,
Agent shall provide to Merchant and permit Merchant’s independent accountants
to review and verify, an accounting of all purchases and dispositions of
Additional Merchandise.

 

4.4                   Adjustments to Guaranteed Amount.  The parties hereto have agreed upon the
Guaranteed Amount based upon the assumption that as of the Closing Date, Cost
Value (defined in section 9.1 hereof) of the Merchant’s inventory (the
“Inventory”) physically located at the Stores or the Warehouse or in transit to
or from there (other than returns to vendor of Inventory in transit) that is
salable in the ordinary course shall be no less than $60 million.  In the event that the Cost Value of the
Inventory is less than $60 million, then the Guaranteed Amount will be reduced
by an amount equal to 64% of the difference between the Cost Value and $60
million.  In the event that the Cost
Value of the Inventory is greater than $60 million, then the Guaranteed Amount
will be increased by an amount equal to 64% of the difference between the Cost
Value and $60 million.  Any adjustment
to the Guaranteed Amount shall be paid in the manner described in
Section 4.2 hereof.

 

For purposes of calculating such adjustments, the Cost Value of the
Inventory will be calculated, pursuant to Section 9 hereof, based upon the
final certified report of the Inventory Taking Service less the amount of Gross
Rings from the completion of Inventory Taking to the Closing Date at each Store
plus the amount of Merchandise (valued in accordance with Section 9.3 of
the Agreement) that is delivered to a Store or the Warehouse subsequent to the
Inventory Taking but prior to the Closing Date, after verification and
reconciliation by Merchant and Agent.

 

6

 

Section 5.                            Sale
and Assignment of Properties or Assets. 
On the terms and conditions set forth in this Agreement and the Order,
on the Closing Date, subject to the transfers contemplated on the Closing Date
to TWEC as set forth in Section 5.5 below, Agent shall purchase from
Merchant, and Merchant shall sell, transfer and deliver to Agent pursuant to
Sections 105, 363, 365 and 1146(c) of the Bankruptcy Code, the exclusive right,
in the exercise of its sole and absolute discretion, to market and attempt to
sell all of Merchant’s right, title and interest in and to the Assets, including,
without limitation, the Leases, free and clear of all liens of any kind
whatsoever.  As used herein, the terms
“Property” and “Properties” shall mean, individually and collectively, the
parcels of real property in which Merchant has a leasehold interest pursuant to
the Leases along with the tenant improvements located thereon (to the extent
owned or leased by Merchant) and the rights of Merchant under the Lease
relating thereto.

 

5.1                   Leased Properties.

 

(a)  During the Marketing Period for each Lease,
unless otherwise mutually agreed by the parties, Agent shall use its reasonable
commercial efforts to market and attempt to assign the Leases.

 

(b)  Subject to the limitations set forth in
Section 10.3(c) hereof, at any time prior to the expiration of the
Marketing Period for Leases, Agent shall have the right, which right may be
exercised at any time and from time to time in Agent’s sole and absolute
discretion, to provide notice to Merchant (each such notice, a “Lease
Assumption Notice”) of Agent’s election to require Merchant to seek
approval from the Bankruptcy Court to assume and assign one or more Leases to
any such party as Agent shall designate, including Agent, an affiliate of
Agent, or TWEC (each, a “Leased Property Designee”).  Each Lease Assumption Notice shall include
such information relating to the proposed designee, its proposed use of the
Property and such other information or documentation relating to “adequate
assurance of future performance” as shall be reasonably required in connection
with the filing by Merchant of the Approval Motion, provided, that Agent or
Agent’s designee shall be solely responsible for providing evidence of adequate
assurance of future performance.  To the
extent that the representation in Section 15.2(e) has not been met prior
to the last day of the Marketing Period, Agent shall the next day notify
Merchant of its assumption of sufficient leases to cause such representation to
be met by the last day of the Marketing Period.

 

(c)  Within five (5) business days following the
date upon which Merchant receives a Lease Assumption Notice from Agent, or on
such longer term as Agent may designate in its sole discretion, Merchant shall
file an Approval Motion (as defined below) with the Bankruptcy Court and
Merchant shall thereafter use reasonable commercial efforts to obtain an
Approval Order (as defined below).  As
used in this Section 5.1(c), “reasonable commercial efforts” shall require
Merchant to pay any and all costs and expenses for the payment of attorneys and
other professionals whose services may reasonably be required in connection
with the prosecution of the Approval Motion and to otherwise proceed in
accordance with Section 5.2(a) and (b) below.

 

7

 

(d)  In the event Agent notifies Merchant to
assume and assign any Lease, Agent shall be solely responsible for and shall
pay any and all cure amounts with respect to such Lease arising under
section 365(b)(1) of the Bankruptcy Code; provided, however, that
Agent shall not be obligated to pay cure amounts arising prior to the Closing
Date that, in the aggregate, exceed $2.4 million in respect of all Leases
assumed and assigned, and Merchant shall be solely responsible for any cure
amounts relating to the Leases that arose on or prior to the Closing Date in
excess of $2.4 million.  Merchant shall
be solely responsible for any and all costs of preparing or obtaining the
Approval Motion and Approval Order and any agreements, motions or Bankruptcy
Court orders necessary to implement the assumption and assignment of any Lease
which Agent notifies Merchant to assume and assign.  The Leased Property Designee shall be responsible for and shall
pay all amounts, liabilities, and obligations under such Lease from and after
the Property Closing Date.

 

(e)  Agent shall have the right to direct the
Merchant to seek Bankruptcy Court approval to assume and assign any of the
Leases to Agent, any affiliate of Agent, or TWEC subject to the procedures and
limitations set forth above as if the Agent, such affiliate, or TWEC was a
Leased Property Designee.  If a
Bankruptcy Court order is entered assuming and assigning any Lease to Agent,
any affiliate of Agent, or TWEC, Agent, such affiliate, or TWEC shall be solely
responsible for and shall pay all amounts, liabilities and obligations arising
under such Lease from and after the Property Closing Date.

 

(f)  At any time prior to the expiration of the
Marketing Period for any Lease, Agent shall have the right, which right may be
exercised at any time and from time to time in Agent’s sole and absolute
discretion, to provide notice to Merchant (each such notice, a “Dropout
Notice”) of Agent’s election to discontinue its efforts to market and
attempt to sell such Lease; provided that the delivery of such Dropout Notice
shall not make Agent’s performance of the representation of
Section 15.2(e) impossible.  A
Dropout Notice may be delivered with respect to a property for which a Lease
Assumption Notice shall have been previously delivered in the event that a
condition to the closing of the transfer of the Lease to the proposed designee
shall not have been satisfied.  The
Guaranteed Amount shall not be reduced by such exclusion of properties unless
the exclusion was a result of, or based upon, the failure by Merchant to
execute and deliver such closing documents or otherwise take such actions as
are required to be delivered and taken under this Agreement (the “Property
Closing Conditions”) to the proposed designee, in which case the Guaranteed
Amount shall be reduced by the reasonable value of the applicable Lease, as
reasonably determined by the parties (with any disputes to be adjudicated by
the Bankruptcy Court).  Agent agrees to
deliver any Dropout Notice no later than fifteen (15) days prior to the 1st
day of any month.  As of the Leased
Property Termination Date with respect to any Lease, Agent shall have no
further obligation or liability with respect thereto and Merchant shall be
solely responsible for all amounts payable or other obligations or liabilities
that may be owed in connection with such Lease (including, without limitation,
any damages resulting from the rejection of the Lease applicable to any such
Lease under section 365 of the Bankruptcy Code or otherwise).  Notwithstanding anything herein to the
contrary, regardless of whether Agent directs Merchant to reject any one or
more Leases at any time, the cost and expenses of the rejection at any time of
any one or more Leases, including the filing and prosecuting of any motions or
other papers with respect to the same, shall be borne solely by Merchant and
paid for solely by Merchant.

 

8

 

5.2                   Covenants of Merchant Regarding Sale of
Properties.

 

(a)  An “Approval Motion” shall mean a
motion served upon all affected parties (including, without limitation,
landlords under Leases and any parties to reciprocal easement agreements or
other similar agreements (each, an “REA”) affecting the applicable
Property) for an order of the Bankruptcy Court (an “Approval Order”) (i)
approving of the assumption and assignment of the applicable Lease to the
proposed designee, (ii) confirming that the assumption and assignment of the
Lease to the proposed designee shall be free and clear of any claims of
defaults; (iii) ruling that, in accordance with the provisions of
Section 363 of the Bankruptcy Code, the Lease shall be transferred and
assigned to the proposed designee free and clear of all liens, claims,
mortgages and encumbrances (with same to attach to the proceeds of the sale,
transfer and assignment); (iv) permitting the proposed designee to perform
alterations and remodeling to the extent necessary to operate its retail
operations, and to replace and modify existing signage notwithstanding any
provision in the Lease, any REA or local law to the contrary, (v) ordering that
any extension or renewal option in the Lease or in any REA which purports to be
“personal” only to Merchant or to be exercisable only by Merchant is an
unenforceable restriction on assignment and, in fact, may be freely exercised
by the proposed designee to its full extent, (vi) allowing Agent’s proposed
designee to remain “dark” with respect to properties for up to an additional
twelve (12) months after assignment despite any Lease restriction, REA
restriction or local law to the contrary, (vii) ordering that if no objection
to the assumption and assignment of a Lease is timely made and filed with the
Bankruptcy Court prior to the expiration of the applicable objection period, or
such objection involves a “cure issue” (with it being deemed that any such
objection regarding a “cure issue” will not affect the assumption and
assignment), the assumption and assignment shall be deemed effective and
binding upon the applicable affected parties and shall require no further order
of the Bankruptcy Court to take place, (viii) ordering that any provisions
contained in the Lease or any REAs which are, or would have the effect of
being, provisions which restrict “going dark”, recapture provisions, provisions
which impose a fee or a penalty or a profit sharing upon assignment, provisions
which seek to increase the rent or impose a penalty or to modify or terminate a
Lease or a REA as a result of going dark or upon assignment, provisions which
directly or indirectly limit or condition or prohibit assignment, continuous
operating covenants, and similar provisions contained in the Leases or REAs
shall not restrict, limit or prohibit the sale and assumption and assignment of
the Lease the proposed designee and are deemed and are found to be
unenforceable anti-assignment provisions within the meaning of Sections 365(f)
and (l) of the Bankruptcy Code,  (ix)
approving the proposed designee’s contemplated use of the Store governed by the
Lease irrespective of whether such use is prohibited by the Lease, including,
without limitation, in the case of any Lease transferred to TWEC, the use
clause attached hereto as Exhibit 5.3(a), (x) approving the tradename(s)
that the proposed designee intends to utilize at the Store covered by such
Lease, including, without limitation, in the case of any Lease transferred to
TWEC, the following tradenames: Coconuts, Strawberries, Second Spin, FYE (For
Your Entertainment), Planet Music, and Spec’s; and (xi) finding that the
proposed designee has provided adequate assurance of future performance.  If the hearing date of any Approval Motion
is scheduled to be heard on a date that is later than six (6) months following
the Closing Date, such Approval Motion may request that in the event that such Approval
Motion is denied, the applicable Lease is rejected pursuant to section 365
of the Bankruptcy Code.

 

9

 

(b)  If a written objection to an Approval Motion
is filed prior to the expiration of the applicable objection period, which is
an objection which would prohibit or otherwise prevent a Property Closing (as
defined below) from occurring pursuant to the terms of this Agreement and the
Order, Merchant shall use commercially reasonable efforts to cause the
Bankruptcy Court to hold a hearing on the next scheduled omnibus date (or such
earlier date as may be reasonably practicable) and rule on the objection.  Merchant and Agent shall use commercially
reasonable efforts to have such objection overruled and to obtain a finding
that Agent’s designee’s proposed use will not breach the provisions of any
Lease or REA, provided, however, that each party hereto shall bear their own
respective legal fees, costs and expenses of responding to any objection, and
any appeal thereof and of litigating and/or settling any objections.  If the objection is overruled or withdrawn,
the Property Closing Date (as defined below) shall occur.  If the objection is upheld by the Bankruptcy
Court, Agent shall retain its marketing rights under this Section 5 to
such Property and the Guaranteed Amount shall not be reduced (unless the
failure to obtain such order was due to a failure by Merchant to satisfy any of
the Property Closing Conditions, or due to any action of Merchant which caused
any of the Property Closing Conditions not to be satisfied, and not due to any
failure on the part of Agent, including the inability of a designee to satisfy
the “adequate assurance” requirement of the Bankruptcy Code).

 

(c)  Following the delivery of a Lease Assumption
Notice (with respect to Leases) to Merchant, Merchant shall execute and deliver
the documents described in Section 5.2(f).

 

(d)  Following the Closing Date, Merchant agrees
to cooperate with Agent to arrange for the assumption and assignment of the
Leases as provided in this Agreement. 
Without limiting the generality of the foregoing, Merchant agrees (i) to
provide Agent with all such diligence materials and information in Merchant’s
possession as Agent shall reasonably request in connection with its efforts to
market and attempt to assume and assign the Leases (including, without
limitation, existing real property surveys, environmental reports, real estate
tax and utility records and complete copies of the Leases and all
communications with lessors thereunder) and (ii) to cooperate with Agent, its
agents and any potential assignees of Leases to provide reasonable access to
properties covered by the Leases.  In
the event Merchant receives any written offer or letter of intent for the Leases,
Merchant shall provide Agent with a copy of such offer or letter of intent.

 

(e)  The consummation of the sale and assignment
of each Property (a “Property Closing”) shall take place on (i) with
respect to assignments of the Leases to the designees as to which no objection
to the Approval Motion has been filed with the Bankruptcy Court prior to the
expiration of the applicable objection period (or where an objection has been
timely filed but has been consensually resolved or withdrawn or which is an objection
which does not prohibit or otherwise prevent a Property Closing from occurring
in accordance with the terms of this Agreement, the Order and the Approval
Order), as soon as reasonably practicable on or after the first (1st)
business day following the expiration of the applicable objection period, but
not later than the fifth (5th) day (which must include not less than
three (3) business days) following the expiration of the applicable objection
period (or such other date as may be agreed to by Merchant and Agent), provided
that no stay pending appeal or other injunction against the applicable Property
Closing is in effect, and (ii) with respect to assignments of the Leases to
designees as to which an objection to the Approval Motion has been filed with
the Bankruptcy Court prior to the expiration of the applicable objection period
and such objection is an objection which prohibits

 

10

 

or
otherwise prevents a Property Closing from occurring in accordance with the
terms of this Agreement and the Order and such objection is not consensually
resolved or withdrawn, as soon as reasonably practicable on or after the first
(1st) business day following the date that the Approval Order approving such
assignment has been entered provided that the Approval Order contains
protections and findings under Section 363(m) of the Bankruptcy Code for
the benefit of the designee(s) and no stay of the Approval Order is in effect,
but not later than the fifth (5th) day (which must include not less
than three (3) business days) following the entry of such Approval Order (or
such other date as Merchant and Agent may agree) (as applicable, the “Property
Closing Date”).  Each Property
Closing shall be subject to the Property Closing Conditions for such
Property.  Merchant and Agent shall each
use commercially reasonable efforts to cause all of the Property Closing
Conditions to be satisfied as of the Property Closing Date.  To the extent that Agent seeks to appeal the
denial of an Approval Motion, Agent shall pay all costs (including attorneys
fees) and expenses in connection with such appeal.

 

(f)  At each Property Closing, Merchant shall
deliver to Agent or its designees the following, as applicable:  (i) an executed assumption and assignment
agreement for the applicable Lease being assigned (and to the extent
applicable, any subleases not rejected by Merchant as contemplated by this
Agreement), which may be the Approval Order, (ii) if the applicable Lease being
assigned is a ground lease, an executed quit claim deed conveying Merchant’s
right, title and interest in the improvements located on the applicable leased
premises, (iii) an executed bill of sale conveying title to any tenant
improvements or fixtures owned by Merchant and located at the applicable
Property as of the Property Closing Date, (iv) any applicable local or state
transfer tax forms, (v) evidence of the termination or rejection, as
applicable, of any Subleases which Merchant is required to terminate or reject
pursuant to Section 3.1(d) of this Agreement, and (vi) all other documents
(including assignments of operating agreements affecting the Properties),
affidavits, instruments and writings reasonably required to be executed by
Merchant at or prior to the Property Closing Date pursuant to this Agreement or
otherwise required by law, or reasonably requested by Agent in connection
herewith.  Until such time as Agent has
the amounts paid pursuant to this sentence exceed $2.4 million in the
aggregate, at each Property Closing Agent shall pay Merchant the cure amount,
if any, specified in the Approval Order approving such assignment.

 

(g)  Agent shall prepare (and deliver to Merchant
for execution by Merchant) the assignments, bills of sale, deeds, transfer tax
declarations and other closing documents to be delivered in connection with
each Property Closing, all in form reasonably acceptable to Merchant, provided,
however, that Merchant shall reasonably cooperate with Agent in such
preparation.  All costs associated with
the Property Closing and transactions contemplated under the Agreement shall be
allocated as set forth in Section 7.1 below or elsewhere in the Agreement.

 

(h)  As contemplated by Section 8 below, all
Occupancy Costs (as defined below) other than cure amounts payable by Agent
hereunder which arise or are attributable to the period prior to the Closing
Date whether the same are due and payable before or after the applicable
Property Closing shall be the responsibility of Merchant and shall be prorated
at the applicable Property Closing.  All
Occupancy Costs which arise or are attributable to the period on or after the
Closing Date whether the same are due and payable before or after the
applicable Property Closing shall be the responsibility of Agent (or Agent’s designee)
and shall be prorated at the

 

11

 

applicable
Property Closing (subject to Agent’s obligations under Section 8 below
with respect to carrying costs during the Marketing Period).

 

(i)  From the date hereof through and until the
Leased Property Termination Date (with respect to Leases), Merchant shall not
enter into, extend, reject or otherwise terminate any material agreement with
respect to a Lease, or grant any party a lien or security interest in any or
all of the Leases, in each case without the prior written consent of Agent,
which consent shall not be unreasonably withheld.  Without the prior written consent of Agent, absent delivery of a
Dropout Notice, Merchant will not cancel any insurance policy relating to any
Property and shall use its reasonable commercial efforts to extend or renew
comparable coverage if any such policy should expire prior to the applicable
Property Closing Date with respect to such Property, provided, however, that
after the end of the Marketing Period, Merchant may permit any such insurance
to expire unless the applicable costs of renewal are paid to Merchant by Agent.

 

(j)  At Agent’s request, with respect to
identified mortgagees and/or fee owners, Merchant shall use commercially
reasonable efforts (and at Agent’s sole cost) to obtain executed
Non-Disturbance Agreements, in a form reasonably acceptable to Agent, from any
such fee owner or mortgage holder who holds a fee interest or a mortgage which
encumbers the fee interest, as the case may be, relating to a Lease to be
assigned or its designees hereunder. 
The failure to obtain any Non-Disturbance Agreement requested by Agent
shall not result in a reduction of the Guaranteed Amount or constitute a breach
of this Agreement.

 

(k)  Merchant and Agent will execute and deliver
such further instruments of conveyance and transfer and take such additional
action as Agent may reasonably request to effect, consummate, confirm or
evidence the assignment of Leases to Agent’s designees.  This Section 5.2(k) shall survive for
six (6) months following each respective Property Closing contemplated by this
Agreement.

 

5.3                   Assets.  In
addition to the foregoing, during the term of this Agreement, Agent, in its
sole discretion, may, without further Bankruptcy Court approval, undertake
those actions it deems appropriate in order to facilitate the sale and maximize
the value of the Assets, including, without limitation, conducting and
consummating auction sales or private sales that may or may not be subject to
higher and better offers.  During the
term of this Agreement, Merchant shall cooperate with Agent in its efforts to
sell the Assets, including seeking Bankruptcy Court approval of those
procedures Agent deems appropriate to implement any sale of any of the Assets
that the Agent, in its sole discretion, determines to pursue.

 

5.4                   Transfers to TWEC. 
On the Closing Date, or from time to time hereafter, without further
order of the Bankruptcy Court, Merchant shall transfer all right, title and
interest of Merchant to TWEC or any of TWEC’s designees the following Assets:

 

(a)  The inventory, signage, Supplies, parts,
machinery, equipment, vehicles, and goods located at any of the Stores
identified on Exhibit 5.4 attached hereto (the “TWEC Stores”),
Central Office, or the Warehouse, as well as in transit thereto or
therefrom;  and

 

(b)  All furniture, store fixtures and
improvements located at or related to the TWEC Stores, the Warehouse, and the
Central Office;

 

12

 

(c)  All personal property, tangible and
intangible, located at the TWEC Stores;

 

(d)  All intellectual property, including,
without limitation, know-how, trademarks, service marks, trade names, designs,
logos, art work, copyrights, patents, licenses, developments, research data,
designs, technology, test procedures, marketing plans, processes, confidential
information and all other intellectual and intangible property rights,
inventions (whether of not patentable), discoveries, business methods, and
trade secrets of Merchant whatsoever (and applications for, and extensions and
reissuances of, any of the foregoing and rights therein);

 

(e)  Any investment, equity interest, or
ownership in (x) Echo and (y) Artemis Records; and

 

(f)  Any customer lists, and all websites
operated by or for Merchant, including any server, software, or other equipment
or program associated with such websites; and

 

(g)  All transferable guarantees, warranties,
licenses and other transferable governmental permits, approvals and permissions
related to the Assets set forth in paragraphs (a) – (f) above.

 

5.5                   Other Closing Date Transfers.  Prior to the Closing Date, Agent shall have
the right to further direct the Merchant, on the Closing Date, to transfer
directly to other third parties all right, title and interest in any Assets in
the manner contemplated herein in accordance with Section 6.

 

5.6                   Executory Contracts. Prior to the completion of
the Sale, Agent shall have the right to further direct the Merchant to seek
assignment and assumption of any executory contract which has not been directed
so long as Agent bears all costs (other than Merchants’ attorneys fees and
costs) related to such assignment and assumption, including any cure amounts.

 

13

 

Section 6.                            Deliveries.  The transfer and sale of any of the Assets
shall be effected by delivery by Merchant TWEC or to the designee of Agent at
any time Agent so directs of such agreements, deeds, bills of sale, endorsements,
assignments, and other good and sufficient instruments of sale, transfer,
assignment, conveyance, and warrant and all consents of third parties necessary
thereto as are required, pursuant to Court order under Section 363 and 365
of the Bankruptcy Code and other applicable bankruptcy law, to vest in the
designee of Agent good title to the Assets, free and clear of all liens,
claims, encumbrances for borrowed money indebtedness and security interests of
any nature or kind whatsoever.  In
addition, if requested to do so by Agent, Merchant will seek Bankruptcy Court
approval or authority to effectuate any and all of the foregoing, including,
without limitation, seeking court approval of further auction or sale
proceedings.  The provisions of this
Section 6 are subject to any more specific provisions set forth in
Section 5 above.  In addition,
notwithstanding the foregoing, (i) Merchant shall not be required to pay in
order to obtain any third party consents, (ii) nothing in this Section 6
shall relieve Agent of its assumption of the Assumed Liabilities, and (iii)
sales of Merchandise shall be subject to the requirements of Section 12.3.

 

Section 7.                            Expenses
of the Sale.

 

7.1                   Expenses. 
On a weekly basis in accordance with the Sale Reconciliation
contemplated under Section 13 hereof, Agent shall be responsible for and
shall pay, from the Sale Proceeds, all Expenses incurred in conducting the
Sale.  “Expenses” are limited to the
following:

 

(a)  The following Store level operating Expenses
of the Store Closing Sale which arise during the Sale Term at the Stores that
are not TWEC Stores (the “SC Stores”) on a per Store per diem basis:

 

(i)                                     base
payroll for Retained Employees for actual days/hours worked in the conduct of
the Store Closing Sale at the Stores;

 

(ii)                                  Merchant’s
actual costs and expenses incurred in respect of third party payroll processing
services for Retained Employees at the Stores;

 

(iii)                               amounts actually payable
in respect of FICA, unemployment taxes, worker’s compensation (including the
cost of maintaining worker’s compensation insurance), Merchant’s 401(k)
matching contribution, holiday pay, vacation days or vacation pay, and health
care insurance benefits for Retained Employees (excluding sick days or sick
leave, maternity leave or other leaves of absence, termination or severance
pay, union dues, pension benefits, ERISA coverage and similar contributions),
in an amount not to exceed 14% of base payroll for all Retained Employees in
the aggregate during the term of the Sale (the “Benefits Cap”);

 

(iv)                              costs
of security personnel in the Stores;

 

(v)                                 a
pro-rata portion of Merchant’s casualty insurance premiums attributable to the
inventory;

 

(vi)                              costs
and expenses of additional Supplies;

 

14

 

(vii)                           the costs and expenses of
providing such additional goods and services in connection with the Store
Closing Sale which the Agent in its sole discretion deems appropriate;

 

(viii)                        local and long distance
telephone expenses in connection with the Sale;

 

(ix)                                costs
of advertising, signage, and direct mailings relating to the Sale, including,
without limitation, postage, courier and overnight mail charges (at Merchant’s
contract rates, if available)(Agent acknowledges that Merchant shall not be
obligated to advertise or mail materials for any purpose not directly
attributable to the Sale); and

 

(x)                                   bank
service charges and fees for bank accounts, credit cards and bank cards,
chargebacks and discounts, existing or new, used in connection with the Sale
(at Merchant’s contract rates, if available);

 

(b)  costs of transfers of inventory and
Additional Merchandise during the Sale Term to the Stores;

 

(c)  costs of armored car services;

 

(d)  any collection fees, commissions, auction
fees, brokerage fees or other similar fee, expense or cost incurred with
respect to the Sale;

 

(e)  property insurance attributable to the
Assets for which Agent is responsible during the Marketing Period pursuant to
Section 8.1 hereof;

 

(f)  Agent’s cost of capital and letter of credit
fees;

 

(g)  Agent’s legal fees and expenses;

 

(h)  Agent’s supervision fees and expenses,
including, without limitation, fees, travel costs and bonuses;

 

(i)  any other reasonable and necessary expense
incurred directly by Agent in connection with the sale, collection or
monetization of the Assets; and

 

(j)  claims, liabilities, expenses, damages or
other costs (including costs of defense and investigation) arising from or
related to the operation, ownership, use, condition or pollution of or from the
TWEC Stores or Warehouse after the Closing Date.

 

“Expenses”
shall not include:  (i) Excluded
Benefits; (ii) any rent or occupancy expenses related to the SC Stores in
excess of the Occupancy Expenses as described in Exhibit 8.1; (iii)
attorneys’ fees and costs and other expenses of Merchant in connection with
preparing or obtaining any agreements, motions or Bankruptcy Court orders to
effectuate any sale of any Properties or other Assets, (iv) any and all
amounts due to release any liens on the Properties, all of which shall be the
sole responsibility of Merchant and shall be paid by Merchant when due; and (v)
Central Office expenses other than as set forth herein.

 

15

 

As used
herein, the following terms have the following respective meanings:

 

“Excluded Benefits” means (i) sick days or sick leave, maternity
leave or other leaves of absence, termination or severance pay, union dues,
pension benefits, ERISA coverage and similar contributions (except for
Merchant’s matching 401(k) contribution), and (ii) payroll taxes, worker’s
compensation and health insurance benefits in excess of the Benefits Cap.

 

7.2                   Central Office Expense.  Prior to the Closing Date, Agent and Merchant shall mutually
agree on a budget to reimburse Merchant for those services provided by Merchant
at the Central Office for up to ninety (90) days following the Closing Date in
order to support the Sale and certain other transition matters.

 

7.3                   Other Expenses of the Sale.  All expenses required for Merchant and Agent to perform their
respective obligations hereunder other than the Expenses and Occupancy
Expenses, and Central Office expenses (as described herein), including, without
limitation, the items expressly excluded from the definition of “Expenses” in
Section 7.1 and “Occupancy Expenses” in Section 8.1 shall be borne by
Merchant and paid by Merchant when due.

 

Section 8.                            Expenses
with Respect to Properties.

 

8.1                   Marketing Period Costs - Leases.

 

(a)  During the Marketing Period with respect to
each Lease covering a SC Store, Agent shall reimburse Merchant, within five (5)
Business Days, for all Occupancy Expenses accruing during the Marketing Period,
limited to those amounts and categories as described in Exhibit 8.1
attached hereto.  “Occupancy Expenses”
means base rent, percentage rent, HVAC, utilities, CAM, real estate and use
taxes, merchant’s association dues, trash removal and building insurance, in
all case limited to those amounts and categories as described in Exhibit
8.1.  Exhibit 8.1 shall be
mutually agreed upon by Agent and Merchant as of the Closing Date.

 

(b)  During the Marketing Period with respect to
each Lease covering a TWEC Store or the Warehouse, Agent shall reimburse
Merchant, within five (5) Business Days, for all base rent, percentage rent,
HVAC, utilities, CAM, real estate and use taxes, merchant’s association dues,
trash removal, building and insurance, and other obligations under such Lease.

 

(c)  Subject to the limitation set forth in
Section 10.3(c) hereof, if Agent fails to reimburse or advance to Merchant
any such costs on a timely basis, then following the expiration of a five (5)
day cure period after receipt by Agent of notice of such failure to reimburse
or advance, provided that the basis for non-payment is not subject to a bona
fide dispute, in addition to all of its other rights at law and equity,
Merchant shall be entitled to revoke Agent’s right to use, to occupy and to
market and attempt to sell Merchant’s right, title and interest in and to such
Leases and may reject the Leases.  Such
revocation shall be effective upon Agent’s receipt of written notification from
Merchant (each, a “Revocation Notice”).

 

8.2                   Limitation on Marketing Period Costs.  During the Marketing Period, Merchant shall
not make any extraordinary or structural maintenance repairs without the prior
written consent of Agent, which consent shall not be unreasonably withheld or
delayed.

 

16

 

8.3                   Occupancy Expense Letter of Credit.  Within two (2) business days from the entry
of the Order, Agent will provide Merchant an irrevocable standby letter of
credit in form and substance satisfactory to Merchant in the face amount of one
and a half months of Occupancy Expenses for Leases and upon which Merchant may
draw upon for any undisputed Occupancy Expenses not timely paid by Agent.  The letter of credit will allow for partial
draws.  Upon termination of the
Marketing Period for the Leases, and provided that Agent has paid all amounts
due under this Agreement with respect to the Leases, Merchant shall cooperate
with Agent to terminate the letter of credit described in this
Section 8.3.

 

Section 9.                            Inventory
Taking and Valuation.

 

9.1                   Inventory Taking

 

(a)  Inventory Taking.  Merchant and Agent shall cause to be taken a
Cost Value physical inventory of the Merchandise (the “Inventory Taking”)
at the Stores and the Warehouse, commencing on the day that the Order is
entered.  The Inventory Taking shall be
completed prior to the Closing Date. 
The date of the Inventory Taking at each Store and the Warehouse shall
be the “Inventory Date” for such Store or the Warehouse (as the case may
be).

 

(b)  Cost and Procedures.  Prior to the Inventory Taking, Merchant and
Agent shall jointly employ a mutually acceptable inventory taking service to
conduct the Inventory Taking and mutually agree on the written directions to be
given to such service regarding the conduct of the Inventory Taking.  The Agent and Merchant shall each be responsible
for 50% of the costs and fees of the inventory taking service.  Except as provided in the immediately
preceding sentence, Merchant and Agent shall bear their respective costs and
expenses relative to the Inventory Taking. 
Merchant and Agent shall each have representatives present during the
Inventory Taking, and shall each have the right to review and verify the
listing and tabulation of the inventory taking service.  Merchant agrees that during the conduct of
the Inventory Taking at each Store such Store shall be closed to the public and
no sales or other transactions shall be conducted.  The procedures to be used in the conduct of the Inventory Taking
and its verifications are set forth on Exhibit 9.1 attached hereto.  In order to facilitate the Inventory Taking,
Merchant agrees to make its cost files and related computer hardware and
software available to Agent and the inventory taking service commencing prior
to the Inventory Date.

 

9.2                   Merchandise.

 

(a)  As used in this Agreement the following
terms have the respective meanings set forth below:

 

“Merchandise”
means Inventory that is saleable in the ordinary course of business.

 

“Defective
Merchandise” means any item of Merchandise other than used CDs, DVDs, and
videogames saleable in the ordinary course that is defective or otherwise not saleable
in the ordinary course because it is worn, scratched, broken, faded, torn,
mismatched, tailored or affected by other or similar defects rendering it not
first quality, including, but not limited to, such items of inventory
segregated by Merchant and marked “out of stock” in the ordinary course of
business.  Any items that have been
segregated to return to vendor because such items

 

17

 

are damaged or, according to
historic practices, should have been so segregated shall be deemed to be
Defective Merchandise.  Items that have
been segregated to return to vendor on account of a return allowance or,
according to historic practices, should have been so segregated shall not be
deemed to be Defective Merchandise. 
Display Merchandise shall not per se be deemed to be Defective
Merchandise.

 

“Display Merchandise” shall mean any item of Merchandise that is
removed from its packaging, or installed, affixed or modified for purposes of a
sample, display or of demonstrating its function or design.

 

“Out-of-Date Merchandise” means any Merchandise that will have
expired or be past its expiration date within thirty (30) days of the Closing
Date.

 

“Rental Merchandise” means any item of Merchandise, including
dvds, videos, and games that are rented to the public in the ordinary course of
business.

 

9.3                   Valuation. 
For purposes of this Agreement “Cost Value” of Merchandise shall mean
the weighted average cost of Merchandise using methods and assumptions
historically applied by Merchant in calculating its inventory value for
financial reporting purposes as reflected on document provided to Agent on September 5, 2003 with the inventory
filename “Inventory as of 073103.mdb” except that (a) the Cost Value of
Rental Merchandise shall be determined as follows: DVDs at $5 per unit, VHS
cassettes at $3 per unit, and videogames at $6 per unit; and (b) the Cost Value
of Defective Merchandise, Display Merchandise, and Out-Of-Date Merchandise
shall be the price mutually agreed upon by Merchant and Agent, provided that
any adjustment to the Cost Value of the Merchandise on account of Defective
Merchandise, Display Merchandise, or Out-of-Date Merchandise shall not exceed
$500,000.

 

Section 10.                     Store
Closing Sale Term; Marketing Period for Properties.

 

10.1             Term.  Subject
to the satisfaction of the conditions precedent set forth in Section 16
hereof, the Store Closing Sale shall commence on the Closing Date (the “Sale
Commencement Date”).  The Agent shall
complete the Store Closing Sale within ninety (90) days of the Sale
Commencement Date, unless terminated earlier in accordance with the last
sentence of this Section 10.1 (the “Sale Termination Date”; the period
from the Sale Commencement Date to the Sale Termination Date as to each Store
being the “Sale Term”).  The Agent may,
in its discretion, terminate the Store Closing Sale at any Store at any time
within the Sale Term (i) upon the occurrence of an Event of Default by
Merchant, or (ii) upon not less than five (15) days’ prior written notice to
Merchant.

 

10.2             Vacating the Stores. 
At the conclusion of each Store Closing Sale and/or at the end of the
Marketing Period for any Lease, Agent agrees to relinquish possession,
including

 

18

 

returning
any keys to Merchant, of the applicable Store or Warehouse, and leave such
Stores in “broom clean” condition, ordinary wear and tear excepted, except for
remaining Supplies and unsold items of FF&E, which remaining Supplies and
unsold items of FF&E may be abandoned by Agent at the conclusion of each
Store Closing Sale.

 

10.3             Marketing Period.

 

(a)  For each Lease, the period commencing on the
Closing Date and ending on the Leased Property Termination Date shall be known
as the “Marketing Period” for such Lease.

 

(b)  With respect to each Lease, the “Leased
Property Termination Date” shall be (a) if a Lease Assumption Notice is
delivered with respect to a Lease, the later to occur of (x) the closing date
of the assignment of the Lease or (y) the date that the Court denies the
applicable Approval Motion (if the date of entry of such order denying such
Approval Order is more than six months following the Closing Date), or (b) for
Leases that are not the subject of a Lease Assumption Notice, the later to occur
of (x) the last day of the month in which Agent provides a Dropout Notice in
accordance with the terms of this Agreement, and (y) the date that is six
months following the Closing Date. 
Notwithstanding anything set forth herein to the contrary, Merchant may
not deliver a Revocation Notice pursuant to Section 8.1(c) with respect to
any Lease during a Store Closing Sale at the Store covered by such Lease.

 

10.4                           Gross
Rings.  From the Inventory
Taking until the Closing Date, at such Store, Agent and Merchant shall jointly
keep (i) a strict count of gross register receipts less applicable Sales Taxes
(“Gross Rings”), and (ii) cash reports of sales within such Store.  Gross Rings shall be converted to Cost Value
in accordance with Section 9.3 hereof. 
All such records and reports shall be made available to Agent and
Merchant during regular business hours upon reasonable notice.

 

Section 11.                     Sale
Proceeds.

 

11.1             Sale Proceeds. 
For purposes of this Agreement, “Sale Proceeds” shall mean the aggregate
of (a) the total amount (in dollars) of all sales, collections, liquidations,
designations, licensing, transfers, assignments, dispositions and other
monetization of or on account of Assets subsequent to the Closing Date,
exclusive of Sales Taxes, including, without limitation, all proceeds from the
Store Closing Sales; (b) all proceeds of Merchant’s insurance for loss or
damage to the Assets or loss of cash arising from events occurring after the
Closing Date; (c) all proceeds from the sale of Additional Merchandise; and (d)
all interest actually earned on such amounts. 
Except as outlined in Section 4.3, all Sale Proceeds shall be
retained by or paid to the Agent.

 

11.2             Deposit of Proceeds.

 

(a)  Merchandise Agency Account.  From and after the Closing Date, all Sale Proceeds
and amounts collected in respect of Sales Taxes shall be deposited by Agent in
agency accounts established by Agent (the “Agency Accounts”).  Agent may, in its discretion, designate new
or existing accounts of Agent or Merchant as the Agency Accounts, provided that
such accounts are dedicated solely to the deposit of Sale Proceeds and the
disbursement of amounts payable by Agent hereunder.  Agent shall exercise sole signatory authority and control with
respect to the Agency Accounts. 
Merchant shall promptly upon Agent’s request execute and deliver all
necessary documents to open and maintain the Agency Accounts.  To the extent that Agent shall elect to use
existing accounts of Merchant as the Agency Accounts, (a) all Sale Proceeds
deposited in such accounts will constitute the property of Agent and shall be
held in trust by Merchant for Agent, (b) commencing on the first business day
following the Closing Date, and on each business day thereafter, Merchant shall
pay to Agent by wire funds transfer all collected funds constituting Sale
Proceeds deposited in such accounts, and (c) upon request,

 

19

 

Merchant
shall deliver to Agent copies of all bank statements and other information
relating to such accounts.  Merchant
shall not be responsible for and Agent shall pay as an Expense hereunder, all
bank fees and charges, including wire transfer charges, related to the Agency
Accounts, whether received during or after the Sale Term.

 

(b)  Credit Card Sale Proceeds.  Agent shall have the right (but not the
obligation) to use Merchant’s credit card facilities (including Merchant’s
credit card terminals and processor(s), credit card processor coding, merchant
identification number(s) and existing bank accounts) for credit card Sale
Proceeds.  In the event that Agent
elects so to use Merchant’s credit card facilities, Merchant shall process
credit card transactions on behalf of Agent and for Agent’s account, applying
customary practices and procedures. 
Without limiting the foregoing, Merchant shall cooperate with Agent to
down-load data from all credit card terminals each day during the Sale Term and
to effect settlement with Merchant’s credit card processor(s), and shall take
such other actions necessary to process credit card transactions on behalf of
Agent under Merchant’s merchant identification number(s).  All credit card Sale Proceeds will
constitute the property of the Agent and shall be held by Merchant in trust for
Agent.  Merchant shall deposit all
credit card Sale Proceeds into a designated account and shall transfer such
Sale Proceeds to Agent daily (on the date received by Merchant if received
prior to 12:00 noon, or otherwise within one business day) by wire transfer of
immediately available funds.  At Agent’s
request, Merchant shall cooperate with Agent to establish merchant
identification numbers under Agent’s name to enable Agent to process all credit
card Sale Proceeds for Agent’s account. 
Merchant shall not be responsible for and Agent shall pay as an Expense
hereunder, all credit card fees, charges, and chargebacks related to the Sale,
whether received during or after the Sale Term.

 

Section 12.                     Conduct of
the Store Closing Sale.

 

12.1             Rights of Agent. 
From and after the Closing Date, Agent shall conduct the Sale in the
name of and on behalf of Merchant in a commercially reasonable manner and in
compliance with (i) the terms of this Agreement and (ii) the Order.  In connection therewith and as provided in
the Order, Agent shall be permitted to operate the Stores on any promotional or
non-promotional basis and to conduct the Store Closing Sale as a “store
closing,” “going out of business” or similar sale throughout the Sale
Term.  Except as is not permitted by the
Order, from and after the Closing Date, Agent, in the exercise of its sole
discretion, shall have the right:

 

(a)  to establish and implement advertising,
signage, and promotion programs that Agent deems appropriate, including
advertising, signage and promotion programs consistent with a “store closing”
or “going out of business” theme (including, without limitation, by means of
media advertising, banners, A-frame, and similar interior and exterior signs);

 

(b)  to establish Merchandise prices and Store
hours;

 

(c)  unless otherwise specifically set forth in
this Agreement, to use without charge all FF&E, motor vehicles, advertising
materials, bank accounts, Store-level customer lists and mailing lists,
computer hardware and software, Supplies, intangible assets (including
Merchant’s name, logo and tax identification numbers), Store keys, case keys,
security codes, and safe and lock combinations required to gain access to and
operate the Stores, and any other assets of Merchant located at the Stores
(whether owned, leased, or licensed);

 

20

 

(d)  to transfer Merchandise between Stores
and/or between the Stores and the Warehouse, provided, however that no transfer
of Merchandise from the Warehouse shall occur prior to the date of the
Warehouse Inventory Taking; and

 

(e)  to the extent provided in Section 7.2
of the Agreement, to use (i) Merchant’s central office facilities, POS systems,
central and administrative services and personnel to process payroll, perform
MIS services, sales audit and cash reconciliation, and provide other central
office services, necessary for the Sale, and (ii) one office located at
Merchant’s central office facility.

 

12.2             Sales at TWEC Stores.  Nothing contained herein shall prohibit TWEC from operating the
TWEC Stores as a going concern from and after the Closing Date.  At any time prior to the expiration of the
Leased Property Termination Date with respect to any Lease covering a TWEC
Store, TWEC may direct Agent to commence a Store Closing Sale at such TWEC
Store and the provisions of the Order and this Agreement relating to the Store
Closing Sales generally shall apply to such Store Closing Sale.

 

12.3             Terms of Sales to Customers.  All sales of Merchandise will be “final
sales” and “as is,” and all advertisements and sales receipts will reflect the
same.  All sales will be made only for
cash, by approved check, and by bank credit cards currently accepted by
Merchant.

 

12.4             Sales Taxes. 
From and after the Closing Date, all sales, excise, gross receipts and
other taxes (other than taxes on income) attributable to sales of Merchandise
at the SC Stores payable to any taxing authority having jurisdiction
(collectively, “Sales Taxes”) shall be added to the sales price of Merchandise
at the SC Stores and collected by Agent at the time of sale.  The Agent shall draw checks on the Agency
Accounts payable to the applicable taxing authorities in the amount so
collected, which shall be delivered together with accompanying schedules to
Merchant on a timely basis for payment of taxes when due.  Merchant shall promptly pay all Sales Taxes
and file all applicable reports and documents required by the applicable taxing
authorities.  Merchant will be given
access to the computation of gross receipts for verification of all such tax
collections.

 

12.5             Supplies. 
Agent shall have the right to use, without charge, all existing supplies
located at the Stores, including, without limitation, boxes, bags, paper, twine
and similar sales materials (collectively, “Supplies”).  In the event that additional Supplies are
available in Merchant’s chain, Agent shall have the right to use such
additional Supplies.

 

12.6             No Returns of Merchandise.  Notwithstanding Merchant’s current or prior practices and as is
consistent with the Order, Agent shall not be required to and shall not accept
returns of goods sold by Merchant from the Stores prior to the Closing Date.

 

21

 

Section 13.                     Sale
Reconciliation.  On each Wednesday
during the Sale Term, commencing on the second Wednesday after the Closing
Date, Agent and Merchant shall cooperate to reconcile Expenses associated with
the Store Closing Sales, Gross Rings, and Sale Proceeds associated with
Additional Merchandise, in each case for the prior week or partial week (i.e.,
Sunday through Saturday), all pursuant to procedures agreed upon by Merchant
and Agent.  Within thirty (30) days
after the end of the Sale Term with respect to all Stores, Agent and Merchant
shall complete a final reconciliation of the Store Closing Sale, the written
results of which shall be certified by Merchant and Agent as a final settlement
of accounts between Merchant and Agent. 
In addition, on each Wednesday during the period from the Closing Date
until the end of the Marketing Period with respect to all Properties,
commencing on the second Wednesday after the Closing Date, Agent and Merchant
shall cooperate to reconcile Expenses not associated with the Store Closing
Sale and such other Sale-related items as either party shall reasonably request,
in each case for the prior week or partial week (i.e., Sunday through
Saturday), all pursuant to procedures agreed upon by Merchant and Agent.  Within thirty (30) days after the end of the
Marketing Period with respect to all Properties, Agent and Merchant shall
complete a final reconciliation of the Sale, the written results of which shall
be certified by representatives of each of Merchant and Agent as a final
settlement of all accounts between Merchant and Agent.

 

Section 14.                     Employee
Matters.

 

14.1             Merchant’s Employees at Stores other than
TWEC Stores.  On the Closing Date, in
connection with the Store Closing Sales, Agent will use those Merchant’s
store-level employees employed at Stores other than TWEC Stores (each such
employee, a “Retained Employee”). 
Merchant shall not be obligated to pay bonuses or increase compensation
of any employee in order to retain employees and both parties acknowledge that
Merchant may not be able to retain employees that Agent wishes to use as
Retained Employees.  Retained Employees
shall at all times remain employees of Merchant, and shall not be considered or
deemed to be employees of Agent. 
Merchant and Agent agree that except to the extent that wages and
benefits of Retained Employees constitute Expenses hereunder, nothing contained
in this Agreement and none of Agent’s actions taken in respect of the Sale
shall be deemed to constitute an assumption by Agent of any of Merchant’s
obligations relating to any of Merchant’s employees including, without
limitation, Excluded Benefits, Worker Adjustment Retraining Notification Act
(“WARN Act”) claims and other termination type claims and obligations, or any
other amounts required to be paid by statute or law; nor shall Agent become
liable under any collective bargaining or employment agreement or be deemed a
joint or successor employer with respect to such employees.  Other than with respect to existing plans,
which plans will be solely the obligation of Merchant, Merchant shall not, without
Agent’s prior written consent, raise the salary or wages or increase the
benefits for, or pay any bonuses or make any other extraordinary payments to,
any of its employees on or after the date of this Agreement.

 

14.2             Termination of Retained Employees.  Agent may elect, in its sole discretion,
stop using any Retained Employee prior to the completion of the Sale.  In the event of such election for any
Retained Employee, Agent will notify Merchant at least five (5) days prior
thereto, except for an election made “for cause” (such as dishonesty, fraud or
breach of employee duties), in which event no prior notice to Merchant shall be
required, provided Agent shall notify

 

22

 

Merchant as
soon as practicable after such election. 
From and after the date of this Agreement and until the Closing Date,
Merchant shall not transfer or dismiss employees of the SC Stores except “for
cause” without Agent’s prior consent, which consent shall not be unreasonably
withheld.  Without limiting the
foregoing, Merchant has not distributed, and shall not distribute any notice to
its SC Store employees under the WARN Act without Agent’s prior written
consent.  Agent shall not be liable for
expenses relating to Retained Employees arising from and after the 5th
day after giving notice of a termination election.

 

14.3             Payroll Matters.  Merchant shall process the base payroll for all Retained
Employees.  Attached hereto as Exhibit
14.3 is a description of Merchant’s base payroll, related payroll taxes, worker’s
compensation and employee benefits, which Merchant represents is true and
accurate as of the date hereof.

 

14.4             Employee Retention Bonuses.  In Agent’s sole discretion, Agent at its
sole cost may pay retention bonuses (“Retention Bonuses”) to Retained Employees
who do not voluntarily leave employment and are not terminated “for
cause.”  Such Retention Bonuses shall be
advanced by Agent to Merchant prior to the date payable and shall be processed
through Merchant’s payroll system.

 

14.5             Merchant’s Employees at TWEC Stores.  On the Closing Date, Merchant shall
terminate those employees (“TWEC Store Employees”) employed at the TWEC Stores
and Warehouse.  TWEC, in its sole and
complete discretion, shall offer employment to the TWEC Store Employees on
terms and conditions substantially similar to those that existed as of the
Closing Date.

 

Section 15.                     Representations,
Warranties, Covenants and Agreements.

 

15.1             Representations, Warranties, Covenants and
Agreements of Merchant.  Merchant
hereby represents, warrants, covenants and agrees in favor of Agent, unless
otherwise specified in this Section 15, as of the date of this Agreement
and as of the Closing Date, as follows:

 

(a)  Good Standing.  Merchant (i) is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its organization; (ii) has all requisite power and authority to own, lease and
operate its assets and properties and to carry on its business as presently
conducted; and (iii) is and until the end of the Marketing Period with respect
to all Properties will continue to be, duly authorized and qualified to do
business and in good standing in each jurisdiction where the nature of its
business or properties requires such qualification, including all jurisdictions
in which the Stores are located.

 

(b)  Motion.  Merchant shall use its reasonable commercial efforts to obtain
the entry of the Order (as defined below) and the consummation of the
transactions contemplated hereby.

 

(c)  Due Authorization; Binding Agreement.  Subject to entry of the Order, the Merchant
has the right, power and authority to execute and deliver this Agreement and
each other document and agreement contemplated hereby (collectively, together
with this Agreement, the “Agency Documents”) and to perform fully its
obligations thereunder.  Subject to
entry of the Order and compliance (if required) with the Hart-Scott-Rodino
Antitrust Improvements Act of

 

23

 

1976, as amended, Merchant has
taken all necessary actions required to authorize the execution, delivery and
performance of the Agency Documents, and no further consent or approval is
required for Merchant to enter into and deliver the Agency Documents, to
perform its obligations thereunder, and to consummate the Sale.  Each of the Agency Documents has been duly
executed and delivered by Merchant and constitutes the legal, valid and binding
obligation of Merchant enforceable in accordance with its terms.  Except for the Order, no court order or
decree of any federal, state or local governmental authority or regulatory body
is in effect that would prevent or impair, or is required for the Merchant’s
consummation of, the transactions contemplated by this Agreement, and no
consent of any third party which will not be obtained prior to the Closing Date is required
therefor.  No contract or other
agreement to which the Merchant is a party or by which the Merchant is
otherwise bound will prevent or impair the consummation of the Sale and the
transactions contemplated by this Agreement.

 

(d)  Cost and Retail Price Files.  Merchant has maintained its cost and retail
price files in the ordinary course of business.  All cost and retail price files and records since July 25,
2003 relative to the Merchandise have been made available to Agent.  All cost and retail price files and records
are true and accurate in all material respects as to Merchant’s actual landed
cost.

 

(e)  Markdowns.  Except as set forth on the Promotions Schedule (as defined
hereafter), as of the Closing Date, all normal course permanent markdowns on
inventory will have been taken on a basis consistent with Merchant’s historical
practices and policies.

 

(f)  Price Increases.  Except as set forth on the Promotions
Schedule, since July 25, 2003 through the Closing Date, other than in the
ordinary course of business, Merchant has not increased, marked up or raised
the price of any items of inventory, or removed or altered any tickets or any
indicia of clearance merchandise, including the elimination of point of sale discounts.

 

(g)  Shelf Pricing.  Except as set forth on the Promotions
Schedule, to the best of Merchant’s knowledge and belief, Merchant has shelf
priced or otherwise marked all items of inventory received at the Stores prior
to the Closing Date, in a manner consistent with similar inventory located at
the Stores and in accordance with Merchant’s historic practices and policies
relative to the pricing and marking of inventory.

 

(h)  Transfers of Inventory.  Merchant has not purchased or transferred
any inventory outside the ordinary course of business.

 

(i)  Historic Sales and Inventory.  Exhibit 15.1(i) attached hereto sets
forth historic sales at the Stores for the 4 months ending August 31,
2003.

 

(j)  Inventory Replenishment and Mix as of
Closing Date.  Merchant has
replenished its inventory in a manner sufficient to maintain an inventory mix
that is substantially similar to the inventory mix as represented by the
Inventory Report dated as of August 31, 2003, which is attached hereto as Exhibit
15.1(j).

 

(k)  Use and Occupancy.  As of the Closing Date, no event of default
or event which with the giving of notice, the passage of time, or both has
occurred on the part of the Merchant under any lease, reciprocal easement
agreement or other occupancy agreement which

 

24

 

would
have a material adverse effect on the Sale other than defaults that may be
cured in accordance with § 365 of the Bankruptcy Code.  From and after the Closing Date, so long as
the requirements of § 365 of the Bankruptcy Code are satisfied, the Agent
shall have the right to the unencumbered use and occupancy of, and peaceful and
quiet possession of, each of the Stores, the Assets currently located at the
Stores and the utilities and other services provided at the Stores.

 

(l)  Physical Plant.  To the best of Merchant’s knowledge and
belief, Merchant has maintained all cash registers, heating systems, air
conditioning systems, elevators, escalators, Store alarm systems, and all other
mechanical devices used in the ordinary course of operation of the Stores.

 

(m)  Required Merchant Payments.  Since the Filing Date, Merchant has paid and
is current in the payment of (i) all post-petition self-insured or Merchant
funded employee benefit programs for employees, including health and medical
benefits, worker’s compensation and insurance and all proper claims made or to
be made in accordance with such programs, (ii) all post-petition casualty,
liability and other insurance premiums, (iii) all post-petition utilities
provided to the Stores, and (iv) all post-petition applicable taxes, which are
not subject to a current or pending bona fide dispute.

 

(n)  Increased Costs.  Since July 25, 2003 through the Closing
Date, Merchant has not and shall not take any actions outside the ordinary
course of business the result of which is to materially increase the cost of
operating the Sale, including, without limitation, increasing salaries or other
amounts payable to employees

 

(o)  Labor Matters.  As of the Closing Date, (i) Merchant is not
a party to any collective bargaining agreements with its employees, (ii) no
labor unions represent Merchant’s employees at the Stores, and (iii) there are
currently no strikes, work stoppages or other material labor disturbances affecting
the Stores or the Warehouse.

 

(p)  Advertising.  As of the date of this Agreement, Merchant
is current in the payment of all undisputed advertising liabilities incurred
subsequent to the Filing Date.  Merchant
agrees that in the event that Agent receives notice that any such liability is
overdue or unpaid, or Agent is unable to advertise the Sale with any
newspapers, magazines, radio or television stations or other media providers
which target or serve the market areas of the Stores or is unable to obtain
Merchant’s contract rate with any such provider as a result of the Merchant’s
failure to pay its postpetition undisputed outstanding balances with such
providers, Merchant shall immediately pay such applicable balances in full.

 

(q)  Title.

 

(i)             Merchant owns and
will own at all times until sold pursuant to the terms of this Agreement, good
and marketable title to all of the Assets and Merchant shall convey the Assets
to Agent or its designee in accordance with the terms of this Agreement free
and clear of all liens, claims and encumbrances. From the date hereof, Merchant
shall not create, incur, assume or suffer to exist any security interest, lien
or other charge or

 

25

 

encumbrance upon or with
respect to any of the Assets or the Sale Proceeds.

 

(ii)          After entry of the
Order, there shall be no liens, claims, or encumbrances relating to borrowed
money indebtedness on any Assets.  To
the best of Merchant’s knowledge and belief, there are no pending or threatened
condemnation proceedings affecting any of the Properties.

 

(r)  Relationship with Agent.  Merchant’s relationship with Agent is
intended to be solely that of agent and principal, not that of joint venturers
or partners.

 

(s)  Legal Proceedings.  Other than the Petition, matters of record
in Merchant’s chapter 11 cases, of as set forth on Exhibit 15.2(r),
since the Filing Date, no action, arbitration, suit, notice, or legal,
administrative or other proceeding before any court or governmental body has
been instituted by or against Merchant or any Property, or has been settled or
resolved, or has been threatened against or affects Merchant or any Assets,
which if adversely determined, would give rise to a lien or other encumbrance
on any Property, or have a material adverse effect, taken as a whole, upon the
Properties or upon Merchant’s ability to perform its obligations under this
Agreement or the conduct of the Sale.

 

(t)  Governmental Consents and Permits.  Other than the Order and for compliance, if
applicable, with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, no consent, approval, license, permit, authorization, declaration,
filing, registration or other document with any government or regulatory
authority is required to be made or obtained by the Merchant in connection with
the execution, delivery and performance of this Agreement or the sale,
collection, liquidation, designation, license, transfer, assignment,
disposition and other monetization of or on account of Assets.  Furthermore, to the best of Merchant’s
knowledge and belief, any consent, approval, license, permit, authorization,
declaration, filing, registration or other document with any government or
regulatory authority currently held by Merchant or Merchant’s estate for use in
the sale, collection, liquidation, designation, license, transfer, assignment,
disposition and other monetization of or on account of Assets remains valid and
in force and effect.  Finally, Merchant
has not received any notice to the effect that, or otherwise been advised that,
Merchant is not in compliance with any consent, approval, license, permit,
authorization, declaration, filing, registration or other document with any
government or regulatory authority, which non-compliance would have the effect
of materially interrupting, hindering or creating an obstacle to the sale,
collection, liquidation, designation, license, transfer, assignment,
disposition and other monetization of or on account of Assets except for such
failures to comply as are not material.

 

(u)  Leased Property.

 

(i)  Subject to entry of the Order by the
Bankruptcy Court, Merchant has, with respect to the Leases, leasehold title,
and valid leases as to all of the Properties, free and clear of all Liens.

 

(ii)  Complete and correct copies of the Leases
and any subleases have been delivered to or made available for inspection by
Agent and none of the Leases or subleases have been modified in any material
respect except to the

 

26

 

extent that such
modifications are disclosed by the copies delivered to or made available for
inspection by Purchaser.

 

(v)  Wages and Salary of TWEC Store Employees.  Since July 25, 2003, Merchant has not
materially increased the wages or salaries, taking into consideration the
provision of any employee benefit, of any TWEC Store Employee other than in the
ordinary course of business.

 

(w)  Vacation Accrual.  Merchant’s employees at the Stores and the
Warehouse have accrued vacation in the ordinary course of business and as of
the Closing Date, the amount of accrued vacation pay of Merchant’s employees at
the Stores and the Warehouse is approximately $680,000.

 

15.2             Representations, Warranties and Covenants of
Agent.  Agent hereby represents,
warrants and covenants in favor of the Merchant as follows:

 

(a)  Good Standing.  Each member of Agent (i) is a corporation or
limited liability company duly organized, validly existing and in good standing
under the laws of the state of organization; (ii) has all requisite power and
authority under its charter and bylaws to consummate the transactions
contemplated hereby; and (iii) is and during the Sale Term will continue to be,
duly authorized and qualified to do business and in good standing in each
jurisdiction where the nature of its business or properties requires such
qualification.

 

(b)  Due Authorization.  Agent has the right, power and authority to
execute and deliver each of the Agency Documents to which it is a party and to
perform fully its obligations thereunder. 
Agent has taken all necessary actions required under its operating
agreement to authorize the execution, delivery, and performance of the Agency
Documents.  Each of the Agency Documents
has been duly executed and delivered by Agent and constitutes the legal, valid
and binding obligation of Agent enforceable in accordance with its terms.  No contract or other agreement to which
Agent is a party or by which Agent is otherwise bound will prevent or impair
the consummation of the transactions contemplated by this Agreement.

 

(c)  Legal Proceedings.  No action, arbitration, suit, notice, or
legal, administrative or other proceeding before any court or governmental body
has been instituted by or against Agent, or has been settled or resolved, or to
Agent’s knowledge, has been threatened against or affects Agent, which
questions the validity of this Agreement or any action taken or to be taken by
Agent in connection with this Agreement, or which if adversely determined,
would have a material adverse effect upon Agent’s ability to perform its
obligations under this Agreement.

 

(d)  Relationship with Merchant.  The relationship between Merchant and Agent
is solely that of agent and principal, not that of joint venturers or partners.

 

(e)  Required Number of Lease Assumptions.  On or prior to the date that is six (6)
months following the Closing Date, not less than seventy (70) of the Leases
shall be assumed and assigned to Leased Property Designees.

 

(f)  Compliance with Law.  Agent shall, and cause of all of its
employees, agents and consultants to, use the Assets, perform the Sale, and
operate the TWEC Stores in accordance with the terms of all applicable law, the
Order, and any other order of the Bankruptcy Court.

 

27

 

(g)  Use of Assets located at Central Office.  Agent agrees to provide Merchant and its
employees and agents and representatives reasonable access to and use of the
Assets located at the Central Office for no cost until such time as the lease
covering the Central Office is rejected.

 

(h)  No Merchant Liability for Gift Cards,
Gift Certificates, or Store Credits. 
Agent agrees that with respect to gift cards, gift certificates, or
store credits, Agent will not seek compensation, reimbursement, indemnification,
or other right of payment from Merchant for purported liabilities relating to
gift cards, gift certificates, or store credits.

 

(i)  Petty Cash.  In connection with the Inventory Taking at a Store, a
determination of all cash located at the Stores as of the Closing Date will be
taken and at such time, Agent will pay to Merchant such amount.

 

Section 16.                     Covenants
of the Merchant

 

16.1    Operations Prior to Closing Date.

 

From August 15, 2003
through the Closing Date, the Merchant has operated and will operate in the
ordinary course of business.  Without
limiting the foregoing, from August 15, 2003 through the Closing Date, (i)
Merchant has not conducted and will not conduct any promotions or advertised
sales at the Stores except for promotions contained in newspapers or mailers or
radio for goods that may be replenished at the Store level, all as described in
the Promotional Calendar on Exhibit 16.1 attached hereto; (ii) Merchant
has replenished its Store inventories in the ordinary course, including
specifically with respect to top-50 and other category goods; (iii) all rack
jobbers and service vendors have continued and will continue to service
Merchant in the ordinary course; (iv) Merchant has not and will not return
inventory to vendors other than in the ordinary course of business; (v) 
Merchant has not and will not make any management personnel moves or changes
that would be reasonably likely to materially affect the transactions
contemplated hereby; provided that, Agent acknowledges that Merchant’s
employees may terminate their employment and Merchant shall have no liability
to Agent for any voluntary termination; and (vi) Merchant has not and will not
enter into real estate contracts, renew Leases, enter into Leases, terminate
Leases, reject Leases, amend Leases, consent to the assignment of Leases or
grant or terminate any other interests in any Assets without Agent’s prior
written consent, which consent shall not be unreasonably withheld or delayed.

 

16.2             Operation of Business From and After
Closing Date.

 

After the Closing Date, the Merchant shall
operate its business in accordance with the terms of this Agreement.  Specifically, unless otherwise expressly
permitted by this Agreement, Merchant shall not, without the prior written
consent of Agent (i) order any inventory, (ii) sell any Assets, (iii) grant any
security interests or liens on the Assets or proceeds thereof; or (iv) abandon
any of the Assets.  Merchant shall not
reject or cause the rejection of any Lease except in accordance with the terms
of this Agreement.

 

Section 17.                     Conditions
Precedent to Effectiveness

 

17.1             Conditions Precedent to Obligations of
Both Merchant and Agent.  Merchant or
Agent may terminate this Agreement if any of the following conditions precedent
are not satisfied at the times or during the periods indicated and the
termination of this Agreement

 

28

 

pursuant to this Section 17.1 shall not result in
any liability to Agent and shall not result in any liability of Merchant,
provided, however, that if the failure or non-occurrence of any of the
following conditions are the fault or a result of either party’s non-action or
a failure to take any reasonable action, such party may not rely on this
section in order to terminate this Agreement:

 

(a)  Order.  On or prior to September 30, 2003, the Court shall have
entered an order (the “Order”) substantially in the form attached hereto
as Exhibit 17.1(a) approving this Agreement, which Order shall not have been
reversed, stayed, modified or amended and as to which (a) the time to appeal or
seek review, reargument or rehearing has expired and as to which no appeal or
petition for certiorari, review or rehearing is pending, or (b) if appeal,
review, reargument, rehearing or certiorari of such order has been sought, such
order has been affirmed and the request for further review, reargument,
rehearing or certiorari has expired, as a result of which such order has become
final and nonappealable in accordance with applicable law.  Notwithstanding the foregoing clause, Agent,
in its sole discretion, may close the transactions contemplated herein prior to
the Order becoming final; provided that the Court enters an order in form and
substance satisfactory to Agent approving this Agreement and authorizing the
Merchant to consummate the transactions contemplated hereby, in which order the
Court finds that the transactions contemplated by this Agreement were
negotiated at arms-length and in good faith and Agent acted in good faith in
all respects, and such order is not stayed pending appeal.

 

(b)  Extension of 365(d)(4) Deadline.  The terms of the Order shall extend the time
within which Merchant may assume or reject those executory contracts or
unexpired leases of real property that are Assets hereunder to a date no
earlier than six months following the Closing Date.

 

(c)  Closing Date.  The date on which the closing of this
Agreement occurs is referred to herein as the “Closing Date.”  The Closing Date shall occur as of 12:01
a.m. (prevailing eastern time) on October 2, 2002 if the Order is
unstayed; otherwise, the Closing Date shall occur as of 12:01 a.m. (prevailing
eastern time) on the first Business Day the Order is entered and unstayed,
provided, however, that, in all respects, the Closing Date shall occur and be
effective on or before October 9, 2003.

 

17.2             Additional Conditions Precedent to
Obligations of Agent.  Agent may
terminate this Agreement if any of the following conditions precedent are not
satisfied at the times or during the periods indicated and the termination of
this Agreement by Agent pursuant to this Section 16.2 shall not result in
any liability to Agent:

 

(a)  Agent Access.  Prior to the Closing Date, Merchant shall
have provided Agent reasonable access to all pricing and cost files, computer
hardware, software and data files, inter-Store transfer logs, markdown
schedules, invoices, style runs and all other documents relative to the price,
mix and quantities of inventory located at the Stores.

 

(b)  Agent Inspection.  Prior to the Closing Date, Merchant shall
have provided Agent reasonable access to the Stores, the Warehouse and the
inventory on the date immediately preceding the Inventory Date.

 

(c)  No Breach or Default.  All representations and warranties of
Merchant hereunder shall be true and correct in all material respects and no
Event of Default by Merchant

 

29

 

shall have occurred at and as of the date, unless such
breach or Event of Default would not have a material adverse effect on the
transaction.

 

Section 18.                     Insurance;
Risk of Loss.

 

18.1             Merchant’s Liability Insurance.  As of the Closing Date, TWEC shall provide
(and Merchant shall have no obligation to provide) liability insurance policies
including, but not limited to, products liability, comprehensive public
liability, auto liability and umbrella liability insurance, covering injuries
to persons and property in, or in connection with, the operation of the Stores
or Warehouse, and shall cause Agent and Merchant to be named an additional
named insured with respect to all such policies.

 

18.2             Merchant’s Property Casualty Insurance.  Merchant will provide until the end of the
Sale, fire, flood, theft and extended coverage casualty insurance covering the
unsold Assets (other than Assets conveyed to TWEC) in a total amount equal to
no less than the appraised value therof. 
From and after the Closing Date until the end of the Sale, all such
policies will name Agent as loss payee. 
In the event of a loss to the Assets on or after the date of this
Agreement, the proceeds of such insurance attributable to the Assets plus any
self insurance amounts and the amount of any deductible (which amounts shall be
paid by Merchant), shall constitute Sale Proceeds hereunder.  In the event of such a loss Agent shall have
the sole right to adjust the loss with the insurer.  Within two (2) days after the Closing Date, Merchant shall
deliver to Agent certificates evidencing such insurance setting forth the
duration thereof and naming the Agent as loss payee, in form and substance
reasonably satisfactory to Agent.  All
such policies shall require at least thirty (30) days prior notice to the Agent
of cancellation, non-renewal or material change.  Merchant shall not make any change in the amount of any
deductibles or self insurance amounts prior to the end of the Sale for all of
the Properties without Agent’s prior written consent.

 

18.3             Agent’s Insurance.  Agent shall maintain at Agent’s cost and expense, until the end
of the Marketing Period for all of the Properties, in such amounts as it
currently has in effect, comprehensive public liability and automobile
liability insurance policies covering injuries to persons and property in or in
connection with Agent’s agency at the Stores, and shall cause Merchant to be
named an additional insured with respect to such policies.  Exhibit 17.3 attached hereto contains a
description of all such policies.  Prior
to the Closing Date, Agent shall deliver to Merchant certificates evidencing
such insurance policies setting forth the duration thereof and naming Merchant
as an additional insured, in form and substance reasonably satisfactory to
Merchant.  In the event of a claim under
any such policies Agent shall be responsible for the payment of all deductibles,
retentions or self-insured amounts thereunder if such claims are directly
attributable to the negligence of Agent.

 

18.4             Worker’s Compensation Insurance.  Merchant shall at all times maintain
worker’s compensation insurance (including employer liability insurance)
covering all Retained Employees in compliance with all statutory
requirements.  Prior to the Closing
Date, Merchant shall deliver to Agent a certificate of Merchant’s insurance
broker or carrier evidencing such insurance.

 

18.5             Risk of Loss. 
Without limiting any other provision of this Agreement, Merchant
acknowledges that Agent is conducting the Sale on behalf of Merchant solely in
the capacity of

 

30

 

an agent, and that in such capacity (i) Agent shall
not be deemed to be in possession or control of the Stores or the assets
located therein or associated therewith, or of Merchant’s employees located at
the Stores, and (ii) except as expressly provided in this Agreement, Agent does
not assume any of Merchant’s obligations or liabilities with respect to any of
the foregoing.  Merchant and Agent agree
that Merchant shall bear all responsibility for liability claims of customers,
employees and other persons arising from events occurring at the Stores during
and after the Sale Term, except to the extent any such claim arises directly
from the acts or omissions of Agent, or its supervisors or employees located at
the Stores (an “Agent Claim”).  In the
event of any such liability claim other than an Agent Claim, Merchant shall
administer such claim and shall present such claim to Merchant’s liability
insurance carrier in accordance with Merchant’s historic policies and
procedures, and shall provide a copy of the initial documentation relating to
such claim to Agent.  To the extent that
Merchant and Agent agree that a claim constitutes an Agent Claim, Agent shall
administer such claim and shall present such claim to its liability insurance
carrier, and shall provide a copy of the initial documentation relating to such
claim to Merchant.  In the event that
Merchant and Agent cannot agree whether a claim constitutes an Agent Claim,
each party shall present the claim to its own liability insurance carrier, and
a copy of the initial claim documentation shall be delivered to the other
party.

 

18.6             Force Majeure. 
If any casualty or act of God or act of terrorism prevents or
substantially inhibits the conduct of business in the ordinary course at any
Store, such Store and the Merchandise located at such Store shall, in Agent’s
discretion, be eliminated from the transfer to TWEC or the Sale and considered
to be deleted from this Agreement as of the date of such event, and Agent and
Merchant shall have no further rights or obligations hereunder with respect
thereto; provided, however, that (i) the proceeds of any insurance attributable
to such Store, such Merchandise and any other Assets located at such Store
shall constitute Sale Proceeds hereunder, and (ii) the Guaranteed Amount shall
be reduced to account for any Assets eliminated from the from the transfer to
TWEC or the Sale which is not the subject of insurance proceeds, and Merchant
shall reimburse Agent for the amount the Guaranteed Amount is so reduced upon
demand by Agent.

 

18.7             Non-Assumption of Liability.  Agent shall not assume any debt, liability
or obligation of Merchant, except as expressly agreed to herein.  Even with respect to such expressly assumed
debts, liabilities and obligations, Agent’s only liability for such amounts
shall be its obligations to Merchant hereunder.  Under no circumstances shall Agent have any direct liability to
any third party by virtue of this Agreement, specifically Agent shall not have
any liability whatsoever arising out of any claims or currently pending actions
regarding claims of Merchant’s employees concerning overtime wages on or prior
to the Closing Date.

 

Section 19.                     Indemnification.

 

19.1             Merchant Indemnification.  Provided that Agent makes a written demand
on Merchant for indemnification within one year following the Closing Date,
Merchant shall indemnify and hold Agent and the Agent and its officers,
directors, employees, agents and representatives (collectively, “Agent
Indemnified Parties”) harmless from and against all claims, demands, penalties,
losses, liability or damage, including, without limitation, reasonable
attorneys’ fees and expenses, directly or indirectly asserted against,
resulting from, or related to:

 

31

 

(a)  Merchant’s material breach of or failure to
comply with any of its agreements, covenants, representations or warranties
contained in any Agency Document;

 

(b)  any failure of Merchant to pay to its
employees any wages, salaries or benefits due to such employees during the Sale
Term;

 

(c)  subject to Agent’s compliance with its
obligations under Section 12.3 hereof, any failure by Merchant to pay any
Sales Taxes to the proper taxing authorities or to properly file with any
taxing authorities any reports or documents required by applicable law to be
filed in respect thereof;

 

(d)  any consumer warranty or products liability
claims relating to Merchandise;

 

(e)  any liability or other claims asserted by
customers (except with any claims relating to gift cards, gift certificates, or
store credit), any of Merchant’s employees, or any other person against any
Agent Indemnified Party (including, without limitation, claims by employees
arising under collective bargaining agreements, worker’s compensation or under
the WARN Act), except for Agent Claims; and

 

(f)  the gross negligence or willful misconduct
of Merchant or any of its officers, directors, employees, agents or
representatives.

 

19.2             Agent Indemnification.  Provided that Merchant makes a written
demand on Agent for indemnification within one year following the Closing Date,
Agent shall indemnify and hold Merchant and its officers, directors, employees,
agents and representatives harmless from and against all claims, demands,
penalties, losses, liability or damage, including, without limitation, reasonable
attorneys’ fees and expenses, directly or indirectly asserted against,
resulting from, or related to:

 

(a)  Agent’s material breach of or failure to
comply with any of its agreements, covenants, representations or warranties
contained in any Agency Document;

 

(b)  any harassment or any other unlawful,
tortious or otherwise actionable treatment of any employees or agents of
Merchant by Agent or any of its representatives;

 

(c)  any claims by any party engaged by Agent as
an employee or independent contractor arising out of such employment;

 

(d)  any Agent Claims;

 

(e)  the Assumed Liabilities;

 

(f)  the gross negligence or willful misconduct
of Agent or the Agent or any of its officer, directors, employees, agents or
representatives; and

 

(g)  with respect to TWEC Stores only, any claims
or other liabilities arising from or related to the ownership, use, condition,
or pollution (on or from) any Assets on or after the Closing Date.

 

32

 

Section 20.                     Events of
Default and Remedies.

 

20.1             Events of Default. 
The following shall constitute “Events of Default” hereunder:

 

(a)  Merchant’s or Agent’s failure to perform any
of their respective material obligations hereunder;

 

(b)  The breach of any representation or warranty
made by Merchant or Agent proves untrue in any material respect as of the date
made or the breach of any covenant at any time;

 

(c)  prior to entry of the Order, the entry of an
order of the Bankruptcy Court in any of the Merchant’s chapter 11 cases (i)
appointing a trustee under chapter 7 or chapter 11 of the Bankruptcy Code, (ii)
appointing an examiner with enlarged powers relating to the operation of the
Merchant’s business under Section 1106(b) of the Bankruptcy Code, (iii)
dismissing any of the Merchant’s chapter 11 cases, (iv) converting any of the
Merchant’s chapter 11 cases to chapter 7 cases or (v) confirming a plan of
reorganization or liquidation in any of the Merchant’s chapter 11 cases; or

 

(d)  the occurrence and continuance of a breach,
default or event of default by Merchant under any Property Sale Agreement after
the expiration of any applicable cure period set forth therein.

 

20.2             Remedies. 
Upon the occurrence of an Event of Default, the non-defaulting party
(or, in the case of an Event of Default under Sections 20.1(c) or 20.1(d),
Agent) may, in its discretion, upon five (5) days written notice to the other
party (unless such other party cures within such 5-day period), (x) elect to
terminate this Agreement and all other Agency Documents without liability and
(y) exercise any and all other rights and remedies at law and equity.  In the event that the Merchant fails to
implement, as required under this Agreement, the transfer of any Asset or Lease
at Agent’s direction, Agent will suffer material and irreparable damage for
which there is no adequate remedy at law, and Agent shall be entitled to the
remedies of injunction, specific performance and other equitable relief.

 

Section 21.                     Miscellaneous.

 

21.1             Notices.  All
notices and communications provided for pursuant to this Agreement shall be in
writing, and sent by hand, by facsimile, or a recognized overnight delivery
service, as follows:

 

33

 

	
  If to Agent:

  	
   

  	
  Trans World
  Entertainment Corporation

  38 Corporate Circle

  Albany, NY 12203

  Attn:  John Sullivan

  Telecopy No. (518) 452-1242

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Hilco
  Merchant Resources, LLC

  One Northbrook Place

  5 Revere Drive, Suite 206

  Northbrook, IL  60062

  Attn:  Jeffrey Linstrom

  Telecopy No. (847) 509-1150

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Gordon
  Brothers Retail Partners, LLC
40 Broad Street

  Boston, MA 02109

  Attn:  Bradley Snyder

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  The Ozer
  Group LLC

  75 Second Avenue

  Needham, MA 02494

  Attn:  David Peress

  Telecopy No. (781) 707-4255

  
	
   

  	
   

  	
   

  
	
  With a copy
  to:

  	
   

  	
  Skadden,
  Arps, Slate, Meagher & Flom (Illinois)

  333 West Wacker Drive

  Chicago, IL  60106

  Attn:  Timothy R. Pohl

  Telecopy No. (312) 407-0411

  

 

34

 

	
  
If to Merchant:  

  	
   

  	
  Wherehouse
  Entertainment, Inc.

  19701 Hamilton Avenue

  Torrance, CA 90502

  Attn:  Charles Fuertsch

  Telecopy No. (650) 965-8300

  
	
   

  	
   

  	
   

  
	
  With a copy
  to:

  	
   

  	
  O’Melveny
  & Myers LLP

  400 South Hope Street

  Los Angeles, CA 90071

  Attn:  Ben Logan

  Telecopy No. (213) 430-6407

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  O’Melveny
  & Myers LLP

  610 Newport Center Drive

  Newport Beach, CA 90071

  Attn:  Suzzanne Uhland

  Vicki Nash

  Telecopy No.
  (949) 823-6994

  

 

21.2             Governing Law; Consent to Jurisdiction.  This Agreement shall be governed and
construed in accordance with the laws of the State of Delaware without regard
to conflict of laws principles thereof. 
The parties hereto agree that any legal action or proceeding arising out
of or in connection with this Agreement shall be adjudicated by the Bankruptcy
Court, and by execution of this Agreement each party hereby irrevocably accepts
and submits to the jurisdiction of the Bankruptcy Court with respect to any
such action or proceeding.

 

21.3             Entire Agreement.  This Agreement and the Exhibits hereto contains the entire
agreement between the parties hereto with respect to the transactions contemplated
hereby and supersedes and cancels all prior agreements, including, but not
limited to, all proposals, letters of intent or representations, written or
oral, with respect thereto.

 

21.4             Amendments and Waivers.  No amendment, modification, termination or
waiver of any provision of this Agreement or any other Agency Document shall be
effective unless in a written instrument executed by each of the parties
hereto.

 

21.5             No Waiver. 
No consent or waiver by any party, express or implied, to or of any breach
or default by the other in the performance of its obligations hereunder shall
be deemed or construed to be a consent or waiver to or of any other breach or
default in the performance by such other party of the same or any other
obligation of such party.  Failure on
the part of any party to complain of any act or failure to act by the other
party or to declare the other party in default, irrespective of how long such
failure continues, shall not constitute a waiver by such party of its rights
hereunder.

 

21.6             Successors and Assigns.  This Agreement shall inure to the benefit of and be binding upon
Agent, the Agent, and Merchant, and their respective successors and assigns,
including, without limitation, any liquidating trustee or post-confirmation
committee in Merchant’s chapter 11 case, or any succeeding chapter 11 or
chapter 7 case.

 

35

 

21.7             Execution in Counterparts; Facsimile
Signatures.  This Agreement may be
executed in two (2) or more counterparts, each of which shall be deemed an
original and all of which together shall constitute but one agreement.  This Agreement may be executed by facsimile,
and each such facsimile signature shall be treated as an original signature for
all purposes.

 

21.8             Section Headings.  The headings of sections of this Agreement are inserted for
convenience only and shall not be considered for the purpose of determining the
meaning or legal effect of any provisions hereof.

 

21.9             Survival. 
All representations and warranties made by the parties hereto shall be
continuing, shall be considered to have been relied upon by the parties and
shall survive the execution, delivery and performance of this Agreement for a
period not to exceed seven (7) months following the Closing Date at which point
such representations and warranties shall have no further force and effect.

 

21.10       Third Party
Beneficiaries.  This Agreement is solely
for the benefit of the parties hereto, and nothing in this Agreement, whether
express or implied, is intended to confer any rights or remedies on any person
or entity other than Merchant, Agent, and Agent.

 

21.11       Security
Interest.  As of the Closing Date,
Merchant shall grant, pursuant to the Order, Agent a first priority security
interest in the Assets to secure Merchant’s obligations hereunder.

 

21.12       Further Assurances;
Power of Attorney.  Merchant hereby
agrees to use all reasonable efforts and to proceed with due diligence to cause
the conditions to the obligations herein set forth to be satisfied.  Merchant hereby agrees to execute and
deliver any and all further agreements, documents or instruments reasonably
necessary to effectuate this Agreement. 
Immediately upon the filing of any motion or request to dismiss Merchant’s
chapter 11 case or any subsequent case or any request for confirmation of a
plan of reorganization or liquidation (a) Merchant shall provide notice of the
hearing thereon to Agent and (b) Merchant shall be deemed to have granted to
Agent a power of attorney to take all actions and sign all documents on
Merchant’s behalf that are necessary or desirable to perfect Agent’s security
interest granted herein under applicable state law.  All powers conferred upon Agent pursuant to the preceding
sentence, being coupled with an interest, shall be irrevocable until the
termination of the Marketing Period for all Properties.

 

21.13       Joint and Several
Liability of Partners .  The undersigned
members of the Agent, jointly and severally, guarantee the prompt payment by
and performance of the obligations of, the Agent set forth in this Agreement.

 

21.14       Authorized
Representative of Partners.  Anton
Caracciolo is hereby designated as an authorized representative of the Agent
and the Merchant and its personnel are hereby authorized to rely on such
authorized representative or such other individuals as the authorized
representative may indicate in writing.

 

[Signature Page
Follows]

 

36

 

IN WITNESS WHEREOF, Agent and
Merchant hereby execute this Agreement by their duly authorized representatives
as of the day and year first written above.

 

	
   

  	
  WHEREHOUSE
  ENTERTAINMENT, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Its:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  TRANS WORLD
  ENTERTAINMENT

  CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Its:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  HILCO
  MERCHANT RESOURCES, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Its:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  HILCO REAL
  ESTATE, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Its:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  GORDON
  BROTHERS RETAIL PARTNERS,

  LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Its:

  	
   

  	
   

  

 

37

 

	
   

  	
  THE OZER
  GROUP LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Its:

  	
   

  	
   

  

 

38

 

EXHIBIT 5.3(a)

TWEC Use Clause

 

Permitted Use:
Only for the retail sale or rental of new and used:

 

(a)          pre-recorded entertainment products, now
known or hereafter developed, including, but not limited to pre-recorded music,
video and sound, records, pre-recorded and blank audio and video tapes and
video discs, compact discs, cassettes, music-related CD ROMs, music-related
digital software and digital downloads and other forms of recorded music, video
and sound, compact disc and record care products, and video recordings; and

 

(b)         the display and sale at retail of audio/video
equipment and devices, now known or hereafter developed for the display,
transmission, interception and reproduction of visual images and/or sound,
accessories and/or component parts such as headphones, jacks and wires; video
and computer game hardware and software; musical instruments and synthesizers;
sheet music and music books; tickets for entertainment events; and other
entertainment and related products sold in substantially all of Tenant’s stores
operated under the same trade name used by Tenant for its business operations
in the Leased Premises.  In addition,
Tenant shall be permitted to display and sell, at retail, audio/video equipment
including but not limited to tape players, compact disc players and stereos
provided, that, said audio/video equipment is sold in substantially all of
Tenant’s other stores operated under the same trade name used by Tenant for its
business operations in the Leased Premises; and

 

(c)          the display and sale at retail of related
products including, but not limited to, computer hardware, software, wireless
phones, soft drink coolers, posters, pictures, buttons, stickers, books,
magazines, stationary, cards, games, note pads, stuffed animals, decorated
wearing apparel, costume jewelry, sunglasses, key rings and lighters provided
that the related products are associated with the records, tapes, discs and
video recordings sold or rented from the Leased Premises; and any legal use not
prohibited.Exhibit 10.19

 

FIRST AMENDMENT TO

AGENCY AGREEMENT

 

This FIRST AMENDMENT TO AGENCY AGREEMENT (this “Amendment”)
is dated as of October 1, 2003 and entered into by and among , by and between a
joint venture composed of Trans World Entertainment Corporation (“TWEC”),
Hilco Merchant Resources, LLC, Hilco Real Estate, LLC, Gordon Brothers Retail
Partners, LLC, and The Ozer Group LLC (collectively, the “Agent”), on
the one hand, and Wherehouse Entertainment Inc., its debtor affiliates and
their respective chapter 11 estates (jointly and severally, the “Merchant”),
on the other hand.

 

This Amendment
is made with reference to that certain Agency Agreement dated September 19,
2003 between Agent and Merchant (the “Agency Agreement”).  Capitalized terms used herein without
definition shall have the same meanings herein as set forth in the Agency
Agreement.

 

RECITALS

 

WHEREAS, the Parties
wish to amend the Agency Agreement (i) to make clear that Rental
Merchandise will result in a payment separate from the adjustment in Section
4.4 based upon certain agreed upon values, (ii) to set forth the
arrangement that the parties have agreed to with respect to the Central Office
Expenses set forth in Section 7.2, (iii) to amend the timing of the
Inventory Taking set forth in Section 9.1 with respect to the Warehouse, and
(iv) to replace one Store currently designated as a TWEC Store with a Store
currently designated as a SC Store; and

 

WHEREAS, in
connection with the foregoing the Parties wish to attach updated Exhibits to
the Agency Agreement.

 

NOW, THEREFORE,
in consideration of the premises and the agreements, provisions and covenants
herein contained, the Parties hereto agree as follows:

 

Section 1.              AMENDMENTS TO THE
AGENCY AGREEMENT

 

1.1          Amendments to Section
4: Consideration to Merchant.

 

A.    Section
4.2(a) of the Agency Agreement is hereby replaced in its entirety with the
following:

 

“Payment of Merchandise Guaranteed Amount.  On the Closing Date, Agent shall (i) pay 75%
of the Guaranteed Amount (less any deposit posted by Agent) in cash; (ii)
deliver to Merchant an irrevocable standby letter of credit, in form and
substance satisfactory, to Merchant in the original face amount of 25% of the
Guaranteed Amount; (iii) deliver to Merchant the letter of credit specified in
Section 8.3; (iv) pay to Merchant the difference between $1.1 million and
the liabilities assumed by Agent pursuant to Section 3.3(v) to the extent that
the liabilities assumed pursuant to Section 3.3(v) are less than $1.1 million
and (v) an

 

 

amount equal to the value of the Rental Inventory as valued in Section
9.3.  Subject to the adjustments of the
Guaranteed Amount described in Section 4.4 below, Agent shall pay the unpaid
and undisputed balance of the Guaranteed Amount in cash to Merchant no later
than two (2) business days following the reconciliation by Merchant and Agent
of the Inventory Taking.  If Merchant
and Agent disagree as to the amount of the unpaid Guaranteed Amount, Merchant
and Agent shall attempt to resolve such dispute, in good faith, within thirty
(30) days of the date on which the dispute arises.  If Merchant and Agent are unable to resolve such dispute within
such thirty (30) day period, then the Merchant and Agent agree to bring such
dispute before the exclusive jurisdiction of the Bankruptcy Court.  Upon payment of the Guaranteed Amount,
Merchant shall cooperate with Agent in order to terminate the letter of credit
required to be posted under clause (ii) of this paragraph.  To the extent that the amount paid pursuant
to clause (i) above is in excess of the Guaranteed Amount (after adjustment
pursuant to section 4.4 herein), Merchant shall pay to Agent such excess within
two (2) business days following the reconciliation by Merchant and Agent of the
Inventory Taking.”

 

1.2          Amendments to Section
7: Expenses of the Sale.

 

A.    Section
7.2 of the Agency Agreement is hereby replaced in its entirety with the
following:

 

“Central Office Expense. 
Attached hereto as Exhibit 7.2 is a budget for transition
services to be provided by Merchant for up to 90 days after the Closing
Date.  Merchant and Agent agree that
Merchant shall be reimbursed for 75% of actual expenses incurred in connection
with rendering such services but shall not be reimbursed for amounts beyond 75%
of the amounts set forth in Exhibit 7.2; provided, however, that Agent
shall not be obligated for any expenses related to a transition services on the
fourteenth (14th) day following notice from Agent to Merchant that
Agent no longer requires such transition services.  Merchant shall not be required to provide such services beyond 90
days after the Closing Date or to the extent that it would result in costs
beyond the amounts set forth in Exhibit 7.2. 
As the parties gain experience with providing such Central Office
services, Merchant and Agent agree to work in good faith to reduce the actual
expenses to the amount practicable.”

 

1.3          Amendments to Section
9: Inventory Taking and Valuation.

 

A.    Section
9.1(a) of the Agency Agreement is hereby replaced in its entirety with the
following:

 

“Inventory Taking. 
Merchant and Agent shall cause to be taken a Cost Value physical
inventory of the Merchandise (the “Inventory Taking”) at the Stores and
the Warehouse, commencing on the day that the Order is entered.  The Inventory Taking for each Store shall be
completed prior to the Closing Date and the Inventory Taking for the Warehouse
shall be completed as soon as commercially

 

2

 

practicable after the Closing Date. 
The date of the Inventory Taking at each Store and the Warehouse shall
be the “Inventory Date” for such Store or the Warehouse (as the case may
be).”

 

B.    Section
9.3 of the Agency Agreement is hereby replaced in its entirety with the
following:

 

“Valuation.  For purposes
of this Agreement “Cost Value” of Merchandise shall mean the weighted
average cost of Merchandise using methods and assumptions historically applied
by Merchant in calculating its inventory value for financial reporting purposes
as reflected on document provided to Agent on September 5, 2003 with the inventory filename
“Inventory as of 073103.mdb” except that the Cost Value of
Defective Merchandise, Display Merchandise, and Out-Of-Date Merchandise shall
be the price mutually agreed upon by Merchant and Agent, provided that any
adjustment to the Cost Value of the Merchandise on account of Defective
Merchandise, Display Merchandise, or Out-of-Date Merchandise shall not exceed
$500,000.  Rental Inventory will not
count as Merchandise whose Cost Value is applied towards the Cost Value of
Inventory for purposes of the adjustment to the Guaranteed Amount set forth in
Section 4.4. Instead, Rental Inventory will result in the payment set forth in
Section 4.2(a)(v) with Rental Inventory being valued as follows: DVDs at $5 per
unit, VHS cassettes at $3 per unit, and videogames at $6 per unit.”

 

1.4          Amendments to Section
15: Representations, Warranties, Covenants and Agrements.

 

A.    The
reference to an exhibit in 15.1(s) is hereby changed to Exhibit 15.1(s).

 

1.5          Amendments to Section
17: Conditions Precedent to Effectiveness

 

A.    The
Closing Date is hereby changed to October 2, 2003.

 

1.6          Amendments to Section
18: Insurance; Risk of Loss

 

A.    The
reference to an exhibit in Section 18.3 is hereby changed to Exhibit 18.3.

 

3

 

1.7          Modification of
Schedules

 

A.    Exhibit
5.4 to the Agency Agreement is replaced in its entirety with the Exhibit
attached as Exhibit A to this Amendment.

 

B.    A
new Exhibit 7.2 to the Agency Agreement is hereby added with the Exhibit
attached as Exhibit B to this Amendment.

 

C.    Exhibit
8.1 to the Agency Agreement is replaced in its entirety with the Exhibit
attached as Exhibit C to this Amendment.

 

Section 2.              MISCELLANEOUS

 

A.    Notices. 
All notices and communications provided for pursuant to this
Amendment shall be in writing, and sent by hand, by facsimile, or a recognized
overnight delivery service, as follows:

 

	
  If to Agent:

  	
   

  	
  Trans World Entertainment Corporation

  38 Corporate Circle

  Albany, NY 12203

  Attn:  John Sullivan

  Telecopy No. (518) 452-1242

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Hilco Merchant Resources, LLC

  One Northbrook Place

  5 Revere Drive, Suite 206

  Northbrook, IL  60062

  Attn:  Jeffrey Linstrom

  Telecopy No. (847) 509-1150

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Gordon Brothers Retail Partners, LLC
40 Broad Street

  Boston, MA 02109
Attn: Bradley Snyder

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  The Ozer Group LLC

  75 Second Avenue

  Needham, MA 02494

  Attn: David Peress

  Telecopy No. (781) 707-4255

  

 

4

 

	
  
With a copy to:

  	
   

  	
  Skadden, Arps, Slate, Meagher

  & Flom (Illinois)

  333 West Wacker Drive

  Chicago, IL  60106

  Attn:  Timothy R. Pohl

  Telecopy No. (312) 407-0411

  
	
   

  	
   

  	
   

  
	
  
If to Merchant:

  	
   

  	
  Wherehouse Entertainment, Inc.

  19701 Hamilton Avenue

  Torrance, CA 90502

  Attn: Charles Fuertsch

  Telecopy No. (650) 965-8300

  
	
   

  	
   

  	
   

  
	
  
With a copy to:

  	
   

  	
  O’Melveny & Myers LLP

  400 South Hope Street

  Los Angeles, CA 90071

  Attn: Ben Logan

  Telecopy No. (213) 430-6407

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  O’Melveny & Myers LLP

  610 Newport Center Drive

  Newport Beach, CA 90071

  Attn: Suzzanne Uhland

  Vicki Nash

  Telecopy No. (949) 823-6994

  

 

B.    Successors and Assigns.  This Amendment shall inure to the
benefit of and be binding upon Agent, the Agent, and Merchant, and their
respective successors and assigns, including, without limitation, any
liquidating trustee or post-confirmation committee in Merchant’s chapter 11
case, or any succeeding chapter 11 or chapter 7 case.

 

C.    Governing Law; Consent to Jurisdiction.  This Amendment shall be governed
and construed in accordance with the laws of the State of Delaware without
regard to conflict of laws principles thereof. 
The parties hereto agree that any legal action or proceeding arising out
of or in connection with this Amendment shall be adjudicated by the Bankruptcy
Court, and by execution of this Amendment each party hereby irrevocably accepts
and submits to the jurisdiction of the Bankruptcy Court with respect to any
such action or proceeding.

 

D.    Execution in Counterparts; Facsimile
Signatures.  This Amendment
may be executed in two (2) or more counterparts, each of which shall be
deemed an original and all of which together shall constitute but one
agreement.  This Amendment may be
executed by facsimile, and each such facsimile signature shall be treated as an
original signature for all purposes.

 

5

 

E.     Section Headings.  The headings of sections of this Amendment are
inserted for convenience only and shall not be considered for the purpose of
determining the meaning or legal effect of any provisions hereof.

 

[Remainder
of page intentionally left blank; signature pages to follow]

 

6

 

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.

 

	
   

  	
  WHEREHOUSE
  ENTERTAINMENT, 

  INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Its:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Anton Caracciolo, as Authorized

  Representative of the AGENT

  

 

S-1

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