-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V0HEkKWpzymn1y9LEL6vQ6XiggXP75GnUMh2+HGOjp785+RxrvTrsT5fdhIoa36u xJikl5+Ip4ovCIn+/dS3uA== 0000795212-96-000024.txt : 19960918 0000795212-96-000024.hdr.sgml : 19960918 ACCESSION NUMBER: 0000795212-96-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960917 FILED AS OF DATE: 19960917 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANS WORLD ENTERTAINMENT CORP CENTRAL INDEX KEY: 0000795212 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL- COMPUTER & PRERECORDED TAPE STORES [5735] IRS NUMBER: 141541629 STATE OF INCORPORATION: NY FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14818 FILM NUMBER: 96631157 BUSINESS ADDRESS: STREET 1: 38 CORPORATE CIRCLE CITY: ALBANY STATE: NY ZIP: 12203 BUSINESS PHONE: 5184521242 FORMER COMPANY: FORMER CONFORMED NAME: TRANS WORLD MUSIC CORP DATE OF NAME CHANGE: 19920703 10-Q 1 SECOND QUARTER FILING ON FORM 10-Q - ----------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ___ SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 3, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ___ SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 0-14818 TRANS WORLD ENTERTAINMENT CORPORATION (Exact name of registrant as specified in its charter) New York 14-1541629 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 38 Corporate Circle Albany, New York 12203 (Address of principal executive offices, including zip code) (518) 452-1242 (Registrant's telephone number, including area code) Indicate by a check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value, 9,740,314 shares outstanding as of September 7, 1996 - ----------------------------------------------------------------------------- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q TABLE OF CONTENTS PART I FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets -- August 3, 1996, February 3, 1996 and July 29, 1995 3 Condensed Consolidated Statements of Income -- Thirteen Weeks and Twenty-Six Weeks Ended August 3, 1996 and July 29, 1995 4 Condensed Consolidated Statements of Cash Flows -- Twenty-Six Weeks Ended August 3, 1996 and July 29, 1995 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 12 Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURES 13 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) (unaudited)
August 3, February 3, July 29, 1996 1996 1995 -------- ----------- -------- ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $ 7,783 $ 86,938 $ 8,248 Merchandise inventory 168,718 194,577 207,640 Refundable income taxes --- 8,308 --- Deferred tax asset 8,465 8,465 9,596 Other current assets 12,069 11,008 12,635 -------- -------- -------- Total current assets 197,035 309,296 238,119 -------- -------- -------- VIDEOCASSETTE RENTAL INVENTORY, NET 7,163 6,722 7,762 DEFERRED TAX ASSET 430 430 505 FIXED ASSETS: Property, plant and equipment 169,273 171,716 176,137 Less: Fixed asset write-off reserve 10,430 12,324 6,934 Accumulated depreciation and amortization 93,401 89,391 88,041 -------- -------- -------- 65,442 70,001 81,162 -------- -------- -------- OTHER ASSETS 3,525 3,882 4,025 -------- -------- -------- TOTAL ASSETS $273,595 $390,331 $331,573 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Accounts payable $ 76,517 $131,302 $ 70,778 Notes payable 19,813 65,260 65,214 Accrued expenses and other 7,686 6,266 5,360 Store closing reserve 17,152 24,275 5,374 Current portion of long-term debt and capital leases 5,465 3,420 4,183 -------- -------- -------- Total current liabilities 126,633 230,523 150,909 -------- -------- -------- LONG-TERM DEBT, less current portion 46,024 53,770 59,716 CAPITAL LEASE OBLIGATIONS, less current portion 6,553 6,594 6,611 OTHER LIABILITIES 5,300 5,340 5,075 -------- -------- -------- TOTAL LIABILITIES 184,510 296,227 222,311 -------- -------- -------- SHAREHOLDERS' EQUITY Common stock ($.01 par value; 20,000,000 shares authorized; 9,781,708, 9,731,208 and 9,731,208 issued, respectively) 98 97 97 Additional paid-in capital 24,413 24,236 24,236 Treasury stock, at cost (41,394, 48,394 & 48,394 shares, respectively) (407) (503) (503) Unearned compensation - restricted stock (162) --- --- Retained earnings 65,143 70,274 85,432 -------- -------- -------- Total shareholders' equity 89,085 94,104 109,262 -------- -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $273,595 $390,331 $331,573 ======== ======== ======== See Notes to Condensed Consolidated Financial Statements.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) (unaudited)
Thirteen Weeks Ended ---------------------- August 3, July 29, 1996 1995 -------- -------- Sales $96,717 $104,292 Cost of sales 62,101 68,977 -------- -------- Gross profit 34,616 35,315 Selling, general and administrative expenses 31,666 37,558 Depreciation and amortization 3,527 4,110 -------- -------- Loss from operations (577) (6,353) Interest expense 3,106 3,845 -------- -------- Loss before income tax benefit (3,683) (10,198) Income tax benefit (1,291) (4,069) -------- -------- NET LOSS ($2,392) ($6,129) ======== ======== LOSS PER SHARE ($0.25) ($0.63) ======== ======== Weighted average number of common shares outstanding 9,739 9,733 ======== ======== Twenty-Six Weeks Ended ----------------------- August 3, July 29, 1996 1995 -------- -------- Sales $203,339 $216,204 Cost of sales 131,554 141,235 -------- -------- Gross profit 71,785 74,969 Selling, general and administrative expenses 66,363 76,291 Depreciation and amortization 7,180 8,355 -------- -------- Loss from operations (1,758) (9,677) Interest expense 6,143 7,319 -------- -------- Loss before income tax benefit (7,901) (16,996) Income tax benefit (2,770) (6,781) -------- -------- NET LOSS ($5,131) ($10,215) ======== ======== LOSS PER SHARE ($0.53) ($1.05) ======== ======== Weighted average number of common shares outstanding 9,737 9,726 ======== ======== See Notes to Condensed Consolidated Financial Statements.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Twenty-Six Weeks Ended ----------------------- August 3, July 29, 1996 1995 -------- -------- NET CASH USED BY OPERATING ACTIVITIES ($26,812) ($65,513) ------- ------- INVESTING ACTIVITIES: Acquisition of property and equipment (2,951) (3,758) Purchases of videocassette rental inventory, net of amortization (441) (290) ------- ------- Net cash used by investing activities (3,392) (4,048) ------- ------- FINANCING ACTIVITIES: Net increase (decrease) in revolving line of credit (45,447) (9,733) Payments of long-term debt and capital lease obligations (3,520) (2,549) Other 16 --- ------- ------- Net cash used by financing activities (48,951) (12,282) ------- ------- Net decrease in cash and cash equivalents (79,155) (81,843) Cash and cash equivalents, beginning of period 86,938 90,091 ------- ------- Cash and cash equivalents, end of period $ 7,783 $ 8,248 ======= ======= See Notes to Condensed Consolidated Financial Statements.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements consist of Trans World Entertainment Corporation and its subsidiaries (the "Company"), all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated. Joint venture investments, none of which were material, are accounted for using the equity method. The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished in these consolidated financial statements reflects all normal, recurring adjustments which, in the opinion of management, are necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to rules and regulations applicable to interim financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended February 3, 1996. Note 2. Restructuring Reserve The Company recorded a pre-tax restructuring charge of $35 million in 1995 to reflect the anticipated costs associated with a program to close 163 stores through the first quarter of 1997. This charge is in addition to a $21 million restructuring charge recorded in fiscal 1994 to reflect the costs associated with the closing of 179 stores (versus a plan of 143). The restructuring charge includes the write-down of fixed assets, estimated cash payments to landlords for early termination of operating leases and the cost of returning product to the Company's distribution center and vendors. The charge also includes estimated legal, lender, and consulting fees, including those that the Company was obligated to pay on behalf of its lenders while it worked to renegotiate its credit agreements.
Total costs charged to the restructuring reserves during the first half of 1996 are summarized as follows: First First Second Second Quarter Quarter Quarter Quarter Beginning Charges Charges Ending Reserve Against Against Reserve Balance Reserve Reserve Balance ------------------------------------------- (in thousands) Non-cash write-offs $13,906 $ 1,810 $ 1,139 $10,957 Cash outflows 22,693 2,300 3,768 16,625 ------------------------------------------ Total $36,599 $ 4,110 $ 4,907 $27,582 ==========================================
Note 3. Seasonality The Company's business is seasonal in nature, with the highest sales and earnings occurring in the fourth fiscal quarter. In the past three fiscal years, the fourth quarter has represented substantially all of the Company's net income for the year. Note 4. Earnings (Loss) Per Share Earnings (Loss) per share is based on the weighted average number of common shares outstanding during each fiscal period. Common stock equivalents, which relate to employee stock options, are excluded from the calculations, as their inclusion would have an anti-dilutive impact on the loss per share. TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is an analysis of the Company's results of operations, liquidity and capital resources. To the extent that such analysis contains statements which are not of a historical nature, such statements are forward-looking statements, which involve risks and uncertainties. These risks include, but are not limited to, changes in the competitive environment for the Company's products, including the entry or exit of non-traditional retailers of the Company's products to or from its markets; the release by the music industry of an increased or decreased number of "hit releases"; general economic factors in markets where the Company's products are sold; and other factors discussed in the Company's filings with the Securities and Exchange Commission. RESULTS OF OPERATIONS Thirteen Weeks Ended August 3, 1996 (Second Quarter 1996) Compared to Thirteen Weeks Ended July 29, 1995 (Second Quarter 1995) - ------------------------------------------------------------------------------ Sales. The Company's total sales declined $7.6 million or 7.3% for the second quarter ended August 3, 1996 compared to the second quarter ended July 29, 1995. The decrease in sales is due to the Company operating approximately 20% fewer stores offset by a comparable store sales increase of 3.4%. During the past 12 months, the Company opened 2 stores and closed 119 stores, resulting in a 347,000 net decrease in square footage to 2.0 million square feet in operation. Comparable store sales in the mall division increased 1.9% and comparable store sales in the non-mall division increased 8.0%. The Company's video rental stores had a 1.0% comparable sales decline. Gross Profit. Gross profit as a percentage of sales increased to 35.8% in the second quarter ended August 3, 1996, from 33.9% in the second quarter ended July 29, 1995. The increase in the gross margin rate is due to an improved merchandise mix, offset in part by increased merchandise shrink. Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") as a percentage of sales decreased to 32.7% in the second quarter of 1996, from 36.0% in the second quarter of 1995. The increase in comparable store sales, closing of underperforming stores and receipt of $2.5 million upon the termination of a business development agreement led to the $5.9 million decrease in SG&A expenses. Interest Expense. Interest expense decreased $0.7 million in the second quarter ended August 3, 1996 compared to the second quarter ended July 29, 1995 due to a decrease in the weighted average outstanding borrowings partially offset by an increase in the Company's weighted average interest rates. Net Loss. The $2.4 million net loss for the second quarter ended August 3, 1996 compares to a $6.1 million net loss in the second quarter ended July 29, 1995. The $3.7 million reduction in the loss for the quarter is due to the comparable store sales increase, higher gross margin rate, lower SG&A expenses and lower interest expense. Twenty-Six Weeks Ended August 3, 1996 Compared to Twenty-Six Weeks Ended July 29, 1995 - ------------------------------------------------------------------------------ Sales. The Company's sales decreased by $12.9 million or 6.0% in the first half of 1996 compared to the first half of 1995 while the Company operated approximately 20% fewer stores. During the first half of the year, comparable store sales increased 4.8%. Gross Profit. Gross profit as a percentage of sales increased to 35.3% in the second quarter ended August 3, 1996, from 34.7% in the second quarter ended July 29, 1995. The increase in the gross margin rate is due to an improved merchandise mix, offset in part by increased merchandise shrink. Selling, General and Administrative Expenses. SG&A as a percentage of sales decreased to 32.6% in the first half of 1996 from 35.3% in the first half of 1995. The $9.9 million decrease in SG&A was due to the increase in comparable store sales, closing of underperforming stores and receipt of $2.5 million upon the termination of a business development agreement. Interest Expense. Interest expense decreased $1.2 million in the first half of 1996 compared to the first half of 1995. The decrease was due to a decrease in the weighted average outstanding borrowings partially offset by an increase in the Company's weighted average interest rates. Net Loss. The $5.1 million net loss for the first half of 1996 compares to a $10.2 million net loss in the first half of 1995. The $5.1 million reduction in the loss for the first half is due to the comparable store sales increase, higher gross margin rate, lower SG&A expenses and lower interest expense. TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) LIQUIDITY AND CAPITAL RESOURCES Liquidity and Sources of Capital. Cash used by operating and investing activities in the first half of the fiscal year were financed through borrowings under the Company's revolving credit facilities, which permit aggregate borrowings of up to $61.2 million. The Company's cash flow from operating activities typically decreases significantly during the second quarter and year-to-date periods due to repayments of accounts payable and lower sales volume at this time of year. During the first half of 1996 the Company's cash flow used by operations was $26.8 million, compared to $65.5 million in the first half of 1995. The most significant uses of cash in the period were the $54.8 million in normal reductions of accounts payable and $6.1 million of expenditures relating to the Company's underperforming store closing program. Cash flow from the reduction of merchandise inventory was $25.9 million in the first half of 1996. The level of the revolving credit facilities is considered adequate to finance the seasonally higher inventory requirements in the second half of the year. At fiscal year end 1996 and through the first half of fiscal 1997, inventory reduction will continue due to the additional store closings. The Company is currently in compliance with all covenants under its credit and long-term note agreements as of and for the period ended August 3, 1996. CAPITAL EXPENDITURES During the second quarter of 1996, the Company had capital expenditures of $2.2 million. Total capital expenditures for the first half of 1996 were $3.0 million out of a planned fiscal 1996 capital expenditure budget of approximately $12.0 million, net of construction allowances. During the first half of 1996 two stores were relocated and no new stores were opened. Capital expenditures and new store growth will continue to be curtailed throughout 1996 while management's strategy continues to be focused on closing underperforming stores and reducing outstanding debt. PROVISION FOR BUSINESS RESTRUCTURING During the fourth quarter of 1995 the Company undertook a comprehensive examination of store profitability and adopted a second business restructuring plan which when combined with the 1994 restructuring charge included closing over 300 stores out of 700 stores in operation during 1994. Management concluded that select retail entertainment markets had begun to reflect an overcapacity of retail outlets, and large discount-priced electroncis stores and other superstores were having an adverse impact on certain of the Company's retail stores. This resulted in the Company recording a $35 million pre-tax restructuring charge in 1995. The components of the restructuring charge included approximately $24 million in reserves for future cash outlays and approximately $11 million in asset writedowns. The cash outflows will be financed from operating cash flows and liquidation of merchandise inventory from the stores identified for closure. The timing of the store closures will depend on the Company's ability to negotiate reasonable lease termination agreements. Management will continually review the opportunity to accelerate the closing of underperforming stores. Twenty-six stores were closed in the second quarter of 1996, bringing the total number of closures to 222 through the end of the second quarter of 1996. Annual sales associated with the stores closed in the second quarter of 1996 totaled $13.1 million in 1995. Because the remaining store closures will be phased out over 1996 and 1997, the Company will not receive most of the earnings or cash flow benefits from the restructuring program until fiscal 1997. TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES PART II: OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. ---------------------------------------------------- The Company's 1996 Annual Meeting of Shareholders was held on June 5, 1996. At the meeting, all of management's nominees for directors were elected to the Board of Directors. Item 6. Exhibits and Reports on Form 8-K. --------------------------------- (A) Exhibits Exhibit No. Description Page No. ----------- ----------- -------- 4.1 Amended and Restated Note Agreement among the Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Oaktree Capital Management, LLC, as agent and on behalf of certain funds and accounts, Fernwood Associates, L.P., Fernwood Restructuring, Ltd. and Internationale Nederlanden (U.S.) Capital Corporation 4.2 Amended and Restated Note Agreement among the Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated 4.3 Form of Amended and Restated Revolving Credit Agreement entered into among the Company and each of NBD Bank, Bear, Stearns & Co., Inc., Banco Santander Trust & Banking Corporation (Bahamas) Ltd. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (B) Reports on Form 8-K - None. Omitted from this Part II are items which are not applicable or to which the answer is negative for the periods covered. TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TRANS WORLD ENTERTAINMENT CORPORATION September 17, 1996 By: /s/ ROBERT J. HIGGINS --------------------- Robert J. Higgins President and Director (Principal Executive Officer) September 17, 1996 By: /s/ JOHN J. SULLIVAN -------------------- John J. Sullivan Senior Vice President - Finance Chief Financial Officer (Chief Financial and Accounting Officer) EX-4.1 2 AMENDED AND RESTATED NOTE AGREEMENT TRANS WORLD ENTERTAINMENT CORPORATION and RECORD TOWN, INC. AMENDED AND RESTATED NOTE AGREEMENT Dated as of July 26, 1996 $41,331,412.90 Variable Rate Senior Notes, Series A, Due July 31, 1998 TABLE OF CONTENTS Page 1. THE NOTES 1 1.1 Background. 1 1.2 Authorization of Amendment and Restatement. 2 1.3 Amendment and Restatement. 3 1.4 Acquisition for Investment. 3 1.5 Failure of Conditions. 3 1.6 Expenses; Issue Taxes. 4 1.7 Restructuring Fee 5 2. WARRANTIES AND REPRESENTATIONS 5 2.1 Subsidiaries. 5 2.2 Corporate Organization and Authority. 5 2.3 Business, Property, Debt, Liens and Restrictions. 6 2.4 Financial Statements; Material Adverse Change. 6 2.5 Full Disclosure. 7 2.6 Pending Litigation; Compliance with Law. 7 2.7 Title to Properties. 7 2.8 Patents and Trademarks. 7 2.9 Sale of Notes is Legal and Authorized; Obligations are Enforceable. 8 2.10 No Defaults. 8 2.11 Governmental Consent. 8 2.12 Taxes. 9 2.13 Margin Securities. 9 2.14 ERISA. 9 2.15 Company Actions. 9 2.16 Restated Credit Agreement; Restated Series B Note Agreement 10 2.17 Movies Plus, Inc 10 3. CLOSING CONDITIONS 10 3.1 Opinions of Counsel. 11 3.2 Compliance with this Agreement. 11 3.3 Private Placement Number. 11 3.4 Execution and Delivery of this Agreement and the Notes. 11 3.5 Restated Credit Agreement. 11 3.6 Restated Series B Note Agreement. 12 3.7 Intercreditor Agreement. 12 3.8 Restructuring Fee. 12 3.9 Expenses. 12 3.10 Interest on Existing Notes. 12 3.11 Subsidiary Guaranties. 13 3.12 Collateral Trust Indenture and Other Security Documents. 13 3.13 Movies Plus Subordination 13 3.14 Representations And Warranties True 14 3.15 Authorization of Transactions 14 3.16 Proceedings Satisfactory 14 4. DIRECT PAYMENT 14 5. REPAYMENTS 14 5.1 Mandatory Early Repayments. 14 5.2 Early Repayment Option. 15 5.3 Notice of Optional Repayment. 16 5.4 Repayment Upon Change of Control. 16 5.5 Repayment Upon Material Asset Sale or Tax Refund. 16 5.6 Repayment from Excess EBITDA 17 5.7 Partial Early Payments To Be Pro Rata 18 6. REGISTRATION; SUBSTITUTION OF NOTES 18 6.1 Registration of Notes. 18 6.2 Exchange of Notes. 18 6.3 Replacement of Notes. 19 7. COMPANY BUSINESS COVENANTS 19 7.1 Payment of Taxes and Claims. 19 7.2 Maintenance of Properties and Corporate Existence. 19 7.3 Maintenance of Office. 20 7.4 Liens and Encumbrances. 20 7.5 Limitations On Debt Incurrence; Prepayments and Amendments. 22 7.6 Subsidiary Debt. 23 7.7 Current Ratio. 23 7.8 Maintenance of Ownership. 23 7.9 Fixed Charge Ratio. 23 7.10 Tangible Net Worth. 24 7.11 Tangible Net Worth of Record Town 24 7.12 Distributions and Investments. 24 7.13 Sale of Property and Subsidiary Stock. 25 7.14 Merger and Consolidation. 25 7.15 Guaranties. 25 7.16 ERISA Compliance. 25 7.17 Transactions with Affiliates. 26 7.18 Tax Consolidation. 26 7.19 Acquisition of Notes. 26 7.20 Lines of Business. 26 7.21 Required Subsidiary Guaranties. 26 7.22 Limitations on Preferred Stock. 26 7.23 Limitation on Inventory Turnover 27 7.24 Maintenance of Consolidated EBITDA. 27 7.25 Limitation on Capital Expenditures 27 7.26 Limitation on Leases 27 7.27 Limitation on Sale and Leaseback 27 7.28 Limitation on Changes in Fiscal Year 28 7.29 Limitation on Debt to Consolidated Tangible Net Worth. 28 7.30 Store Openings. 28 7.31 No Amendment of Debt Instruments; Maintenance of Accounts 28 7.32 Revolver Sweep 29 7.33 Foreign Subsidiaries 29 8. INFORMATION AS TO COMPANY 29 8.1 Financial and Business Information. 29 8.2 Officers' Certificates. 32 8.3 Accountants' Certificates. 32 8.4 Inspection. 32 8.5 Quarterly Meetings. 33 8.6 Monthly Monitoring Reports. 33 8.7 Excess EBITDA. 33 8.8 Tax Reserve. 33 8.9 Additional Financial Information 33 9. EVENTS OF DEFAULT. 34 9.1 Nature of Events. 34 9.2 Default Remedies. 35 9.3 Annulment of Acceleration of Notes. 36 10. INTERPRETATION OF THIS AGREEMENT 36 10.1 Terms Defined. 36 10.2 Accounting Principles. 46 10.3 Directly or Indirectly. 46 10.4 Section Headings and Table of Contents; Independent Construction. 46 10.5 Governing Law. 47 11. MISCELLANEOUS 47 11.1 Notices. 47 11.2 Reproduction of Documents. 48 11.3 Survival. 48 11.4 Successors and Assigns. 48 11.5 Amendment and Waiver. 48 11.6 Duplicate Originals. 49 11.7 Waiver and Release. 49 11.8 Indemnification. 51 ANNEX 1 -- Purchaser Information EXHIBIT A -- Form of Note EXHIBIT B -- Disclosure Schedules EXHIBIT C-1 -- Form of Matthew H. Mataraso Legal Opinion EXHIBIT C-2 -- Form of Jones, Day, Reavis & Pogue Legal Opinion EXHIBIT D -- Form of Intercreditor Agreement EXHIBIT E -- Form of Subsidiary Guaranty EXHIBIT F -- Form of Collateral Trust Indenture EXHIBIT G -- Form of Security Agreement EXHIBIT H -- Form of Trademark Security Agreement EXHIBIT I -- Form of Pledge Agreement EXHIBIT J -- Form of Concentration Bank Account Agreement EXHIBIT K -- Form of Movies Plus Subordination Agreement EXHIBIT L -- Contents of Monthly Report TRANS WORLD ENTERTAINMENT CORPORATION RECORD TOWN, INC. 38 Corporate Circle Albany, New York 12203 AMENDED AND RESTATED NOTE AGREEMENT $41,331,412.90 Variable Rate Senior Notes, Series A, Due July 31, 1998 Dated as of July 26, 1996 TO EACH OF THE PURCHASERS LISTED ON ANNEX 1 Dear Purchasers: Trans World Entertainment Corporation (formerly Trans World Music Corp., the "Company"), a New York corporation, and Record Town, Inc. ("Record Town"), a New York corporation and a Wholly-Owned Subsidiary of the Company, hereby jointly and severally agree with the Purchasers as follows: 1. THE NOTES 1.1 Background. Pursuant to an Amended and Restated Note Agreement dated as of June 29, 1995 (the "Existing Note Agreement"), the Company and Record Town issued Forty-Seven Million Five Hundred Thousand Dollars ($47,500,000) in aggregate principal amount of their joint and several Variable Rate Senior Notes due July 31, 1996 (the "Existing Notes"). The Existing Notes are substantially in the form of Exhibit B attached to the Existing Note Agreement. The aggregate principal amount of Existing Notes presently outstanding is $41,331,412.90. Certain Events of Default have occurred under the Existing Note Agreement and are currently the subject of the Waiver Agreement. The Company and Record Town have requested an extension of the maturity date of the Existing Notes and the modification of certain covenants and other provisions contained in the Existing Note Agreement. The Purchasers have, subject to the satisfaction of the conditions precedent set forth in Section 3 of this Agreement, consented to certain of such requests in consideration of an increased rate of interest and other modifications. The mutual agreement of the parties as to such matters is set forth in the amendment and restatement of the Existing Note Agreement and the Existing Notes provided for in this Agreement. 1.2 Authorization of Amendment and Restatement. Each of the Company and Record Town hereby authorizes, agrees and consents to the Amendment and Restatement in their entirety of the Existing Note Agreement and the Existing Notes as provided for herein. The Existing Notes, as amended and restated by Exhibit A to this Agreement, shall be hereinafter referred to individually as a "Note" and, collectively, as the "Notes". The obligations of the Company and Record Town under the Notes and this Agreement shall be guaranteed on a senior basis by all Required Guarantors. The Company and Record Town hereby authorize the execution and delivery to the Purchasers of the Notes, which Notes shall: (a) be substituted in the place of the Existing Notes; (b) be dated the Effective Date; (c) mature on July 31, 1998; (d) bear interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal balance thereof at a rate equal to: (i) prior to June 30, 1998, the greater of eleven and one-half percent (11.50%) per annum or two and one-half percent (2.50%) per annum over the Prime Rate, and (ii) from and after June 30, 1998, the greater of fourteen percent (14%) per annum or five percent (5.0%) per annum over the Prime Rate, but in no event at a rate which exceeds the highest rate allowed by applicable law, payable monthly (in arrears) on the final day of each calendar month in each year, commencing on July 31, 1996 until the principal amount thereof shall be due and payable; (e) bear interest, payable on demand, on any overdue principal (including any overdue prepayment of principal) and (to the extent permitted by applicable law) on any overdue installment of interest, at a rate equal to the lesser of (i) one percent (1.0%) per annum over the rate otherwise applicable thereto, or (ii) the highest rate allowed by applicable law; and (f) be in the form of the Note set out in Exhibit A hereto. The term "Notes" as used herein shall include each Note delivered pursuant to any provision of this Agreement, and each Note delivered in substitution or exchange for any such Note. Whether or not specifically provided in any particular Section of this Agreement, Record Town will be jointly and severally liable with the Company for all obligations under the Notes and this Agreement. 1.3 Amendment and Restatement. Subject to the satisfaction of the conditions precedent set forth in Section 3 of this Agreement, each Purchaser, by its execution of this Agreement, hereby agrees and consents to the Amendment and Restatement in its entirety of the Existing Note Agreement by this Agreement and the termination of the Waiver Agreement, and, upon the satisfaction of such conditions precedent, the Existing Note Agreement and the Waiver Agreement shall be deemed so amended and restated or terminated, as the case may be. Subject to the satisfaction of the conditions precedent set forth in Section 3 of this Agreement, each Purchaser, by its execution of this Agreement, hereby agrees and consents to the Amendment and Restatement in their entirety of the Existing Notes and the substitution of the Notes therefor. On the Effective Date, the Company agrees, subject to the satisfaction of the conditions precedent set forth in Section 3 of this Agreement, to execute and deliver to each Purchaser the aggregate principal amount of Notes set forth opposite its name on the schedule attached to this Agreement as Annex 1, in replacement of its Existing Notes. Contemporaneously with the receipt by each Purchaser of such Notes, such Purchaser hereby agrees to re-deliver to the Company for cancellation the Existing Notes held by it. All amounts owing under and evidenced by the Existing Notes as of the Effective Date shall continue to be outstanding under, and shall after the Effective Date be evidenced by, the Notes, and shall be payable in accordance with this Agreement. 1.4 Acquisition for Investment. Each Purchaser represents to the Company and Record Town, and by agreeing to the amendment and restatement of the Existing Note Agreement and the substitution of the Notes for the Existing Notes it is specifically understood and agreed, that it is acquiring the Notes for investment for its own account or the account of its affiliated entities and with no present intention of distributing or reselling the Notes or any part thereof to anyone other than an affiliated entity, but without prejudice to its right at all times to: (a) sell or otherwise dispose of all or any part of the Notes under a registration statement filed under the Securities Act, or in a transaction exempt from the registration requirements of the Securities Act; (b) have control over the disposition of all of its assets to the fullest extent required by any applicable insurance law. It is understood that, in making the representations set out in Sections 2.9 and 2.11 hereof, the Company and Record Town are relying, to the extent applicable, upon the representation in the immediately preceding sentence. 1.5 Failure of Conditions. If the conditions specified in Section 3 hereof have not been fulfilled on or prior to June 30, 1996, this Agreement shall terminate, and the Existing Note Agreement and the Existing Notes shall continue to be in full force and effect. 1.6 Expenses; Issue Taxes. (a) Generally. Whether or not the transactions contemplated by this Agreement are consummated, the Company will promptly (and in any event within thirty (30) days of receiving any statement or invoice therefor) pay all expenses relating to this Agreement, including but not limited to: (i) the cost of reproducing this Agreement and the other Financing Documents; (ii) the reasonable fees and disbursements of the Purchasers' special counsel, the Purchasers' financial advisor, and the Security Trustee. (iii) the Purchasers' out-of-pocket expenses; (iv) all expenses relating to any Guaranty Agreement; (v) all expenses relating to any amendments or waivers pursuant to the provisions of this Agreement or "workouts" with respect hereto, including, without limitation, all out-of-pocket fees, costs and expenses paid or incurred by any holder of any Note or any security trustee acting on behalf of any such holder in connection with the negotiation, preparation, drafting, implementation, amendment, modification, administration and enforcement of this Agreement, the Notes or any other Financing Document, or for auditing, appraising, evaluating or otherwise monitoring the Collateral or other credit support for the Notes; and (vi) all costs and expenses, including attorneys' fees, incurred by the holder of any Note in attending any meeting held pursuant to Section 8.5 or enforcing any rights under this Agreement or in the Notes or in responding to any subpoena or other legal process issued in connection with this Agreement or the transactions contemplated hereby, including without limitation, costs and expenses incurred in any bankruptcy case. The Company will also pay all taxes in connection with the issuance and sale of the Notes and in connection with any modification of the Notes and will save each of the Purchasers harmless against any and all liabilities with respect to such taxes. (b) Special Counsel and Financial Advisor. Without limiting the generality of the foregoing, it is agreed and understood that the Company will pay, on the Effective Date, the fees and disbursements of the Purchasers' special counsel and financial advisor which are reflected in the statements delivered by such Persons on or before the Effective Date. (c) Survival. The obligations of the Company under this Section 1.6 shall survive the payment of the Notes and the termination of this Agreement. 1.7 Restructuring Fee. In consideration of the Purchasers' willingness to enter into the transactions contemplated hereby, the Company shall pay to the Purchasers, on a pro rata basis, a restructuring fee as described below. A portion of said fee equal to one percent (1.0%) of the principal amount of Notes held by the Purchasers on the Effective Date shall be payable on the Effective Date in accordance with Section 3.8. A portion of said fee equal to one half of one percent (0.50%) of the principal amount of the Notes held by the Purchasers on July 31, 1997 shall be payable to the Purchasers on July 31, 1997, but said amount shall not be payable (and the Company and Record Town shall not be liable therefor) if the Notes are paid in full prior to July 31, 1997. A portion of said restructuring fee equal to $1,696,429 shall be payable on the earlier of August 1, 1998 or the acceleration of the Notes pursuant to Section 9.2, but said amount shall not be payable (and the Company and Record Town shall not be liable therefor) if the N otes are paid in full prior to the earlier of August 1, 1998 or such acceleration. 2. WARRANTIES AND REPRESENTATIONS To induce each of the Purchasers to enter into this Agreement, the Company and Record Town jointly and severally warrant and represent to each Purchaser that as of the Effective Date each of the following statements will be true and correct: 2.1 Subsidiaries. Part 2.1 of Exhibit B to this Agreement correctly identifies: (a) each of the Company's Subsidiaries, its jurisdiction of incorporation and the percentage of its Voting Stock owned by the Company and by each other Subsidiary, and (b) each of the Company's Affiliates (other than Subsidiaries) and the nature of their affiliation. The Company and each Subsidiary is the legal and beneficial owner of all of the shares of Voting Stock it purports to own of each Subsidiary, free and clear in each case of any Lien. All such shares have been duly issued and are fully paid and nonassessable. 2.2 Corporate Organization and Authority. The Company, and each Subsidiary, (a) is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, (b) has all requisite power and authority and all necessary licenses, permits, franchises and other governmental authorizations to own and operate its Properties and to carry on its business as now conducted and as presently proposed to be conducted, and (c) has duly qualified and is authorized to do business and is in good standing as a foreign corporation in each jurisdiction where the character of its Properties or the nature of its activities makes such qualification necessary. 2.3 Business, Property, Debt, Liens and Restrictions. (a) The Company's Annual Report on Form 10-K for the fiscal year ended February 3, 1996 filed by the Company with the Securities and Exchange Commission and previously delivered to the Purchasers correctly describes the general nature of the business and principal Properties of the Company and its Subsidiaries. (b) Part 2.3(b) of Exhibit B to this Agreement correctly lists all outstanding Debt of (including all Guaranties of the Company and the Subsidiaries of such Debt), and all Liens (other than those permitted by Clauses (1) - (6) of Section 7.4(a)) on Property of, the Company and its Subsidiaries. Neither the Company nor any Subsidiary has agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its Property, whether now owned or hereafter acquired, to be subject to a Lien not permitted by Section 7.4(a). (c) Neither the Company nor any Subsidiary is a party to any agreement, or subject to any charter or other corporate restriction, which restricts its right or ability to incur Debt, other than this Agreement, the Restated Series B Note Agreement and the Restated Credit Agreement. 2.4 Financial Statements; Material Adverse Change. (a) (i) The consolidated balance sheets of the Company and its Subsidiaries as of February 3, 1996 and January 28, 1995, and the related statements of income, retained earnings and changes in cash flows for the fiscal years ended on such dates, all accompanied by reports thereon containing opinions without qualification, by KPMG Peat Marwick LLP, independent certified public accountants, and (ii) the consolidated balance sheets of the Company and its Subsidiaries as of January 29, 1994, January 30, 1993 and February 1, 1992 and the related statements of income, retained earnings and changes in cash flows for the fiscal years ended on such dates, all accompanied by reports thereon containing opinions without qualification, by Ernst & Young LLP, independent certified public accountants, copies of which have been delivered to the Purchasers, have been prepared in accordance with generally accepted accounting principles consistently applied, and present fairly the financial position of the Company and its Subsi diaries as of such dates and the results of their operations for such periods. Such consolidated financial statements include the accounts of all Subsidiaries for all periods during which a subsidiary relationship has existed. (b) Since February 3, 1996, there have been no materially adverse changes in the Properties, business, prospects, operating results or condition (financial or otherwise) of Record Town, the Company and the Subsidiaries, taken as a whole. 2.5 Full Disclosure. The financial statements referred to in Section 2.4 do not, nor does this Agreement or any written statement furnished by or on behalf of the Company or Record Town to the Purchasers in connection with this Agreement, contain any untrue statement of a material fact or omit a material fact necessary to make the statements contained therein or herein not misleading, in light of the circumstances under which they were made. There is no agreement, restriction or other factual matter which the Company has not disclosed to the Purchasers in writing which materially affects adversely nor, so far as the Company can now reasonably foresee, will materially affect adversely the Properties, business, prospects, operating results or condition (financial or otherwise) of Record Town, the Company and the Subsidiaries, taken as a whole, or the ability of the Company or Record Town to perform this Agreement, the Notes and the other Financing Documents. 2.6 Pending Litigation; Compliance with Law. There are no proceedings or investigations pending, or to the knowledge of the Company or Record Town threatened, against or affecting the Company or any Subsidiary in or before any court, governmental authority or agency or arbitration board or tribunal which, individually or in the aggregate, might materially and adversely affect the Properties, business, prospects, operating results or condition (financial or otherwise) of Record Town, the Company and the Subsidiaries, taken as a whole, or the ability of Record Town or the Company to perform this Agreement, the Notes and the other Financing Documents. Neither the Company nor any Subsidiary is in default with respect to any order, decree or judgment of any court, governmental authority or agency or arbitration board or tribunal, or in violation of any laws or governmental rules or regulations where such default or violation might materially and adversely affect the Properties, business, prospects, operating results or condition (financial or otherwise) of Record Town, the Company and the Subsidiaries, taken as a whole, or the ability of the Company or Record Town to perform this Agreement, the Notes and the other Financing Documents. 2.7 Title to Properties. The Company, and each Subsidiary, has good and marketable title in fee simple (or its equivalent under applicable law) to all the real Property, and has good title to all the other Property, it purports to own, including that reflected in the most recent balance sheet referred to in Section 2.4 (except as sold or otherwise disposed of in the ordinary course of business), free from Liens not permitted by Section 7.4(a). 2.8 Patents and Trademarks. The Company, and each Subsidiary, owns or possesses all the patents, trademarks, service marks, trade names, copyrights, licenses and rights with respect to the foregoing necessary for the present and planned future conduct of its business, without any known conflict with the rights of others. Part 2.8 of Exhibit B to this Agreement correctly sets forth all of the trademarks, service marks, trade names, copyrights, licenses and related rights owned by the Company or any Subsidiary. 2.9 Sale of Notes is Legal and Authorized; Obligations are Enforceable. (a) Sale of Notes is Legal and Authorized. Each of the issuance, sale and delivery of the Notes by the Company and Record Town, the execution and delivery of this Agreement, the Notes and the other Financing Documents by each of the Company, Record Town and the Subsidiaries, and compliance by each of the Company, Record Town and each of the Subsidiaries with all of the provisions of each Financing Document to which it is a party: (i) is within the corporate powers of the Company, Record Town and each such Subsidiary, respectively; and (ii) is legal and does not conflict with, result in any breach of any of the provisions of, constitute a default under, or result in the creation of any Lien upon any Property of the Company or any Subsidiary under the provisions of, any agreement, charter instrument, bylaw, or other instrument to which the Company or any Subsidiary is a party or by which any of them or their respective Properties may be bound. (b) Obligations are Enforceable. Assuming the due execution and delivery by the Purchasers of this Agreement, each of this Agreement, the Notes and each other Financing Document has been duly authorized by all necessary action on the part of each of the Company, Record Town and each Subsidiary party thereto; has been executed and delivered by duly authorized officers of each of the Company, Record Town and each Subsidiary party thereto; and constitutes the legal, valid and binding obligation of each of the Company, Record Town and each Subsidiary party thereto, enforceable in accordance with its terms, except that the enforceability of this Agreement, the Notes and each other Financing Document may be: (i) limited by applicable bankruptcy, reorganization, arrangement, insolvency, moratorium or other similar laws affecting the enforceability of creditors' rights generally; and (ii) subject to the availability of equitable remedies. 2.10 No Defaults. No event has occurred and no condition exists which, upon the issuance of the Notes and the execution and delivery of this Agreement and each other Financing Document, would constitute a Default or an Event of Default. Neither the Company nor any Subsidiary is in violation in any respect of any term of any charter instrument, by-law or other instrument to which it is a party or by which it or any of its Property may be bound. 2.11 Governmental Consent. Neither the nature of the Company or of any Subsidiary, or of any of their respective businesses or Properties, nor any relationship between the Company or any Subsidiary and any other Person, nor any circumstance in connection with the offer, issue, sale or delivery of the Notes or the execution, delivery and performance of this Agreement and the other Financing Documents is such as to require a consent, approval or authorization of, or filing, registration or qualification with, any governmental authority on the part of the Company or any Subsidiary. 2.12 Taxes. (a) All tax returns required to be filed by the Company or any Subsidiary in any jurisdiction have in fact been filed, and all taxes, assessments, fees and other governmental charges upon the Company or any Subsidiary, or upon any of their respective Properties, income or franchises, which are due and payable have been paid. Neither the Company nor any Subsidiary knows of any proposed additional tax assessment against it. Federal income tax returns of the Company and its Subsidiaries have been audited by the Internal Revenue Service or the statute of limitations has run for all years to and including the fiscal year ending February 1, 1992 and there is no liability for such tax asserted against the Company or any Subsidiary for that or any prior year. (b) The provisions for taxes on the books of the Company and each Subsidiary are adequate for all open years, and for its current fiscal period. The amount of the reserve for Federal income taxes reflected in the consolidated balance sheet of the Company and its Subsidiaries as of February 3, 1996 is an adequate provision for such Federal income taxes, if any, as may be payable by the Company and its Subsidiaries for the fiscal years 1992 through 1995, the only open years. 2.13 Margin Securities. None of the transactions contemplated in this Agreement will violate or result in a violation of Section 7 of the Exchange Act or any regulations issued pursuant thereto, including, without limitation, Regulations G, T and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II or require that any filing be made under any thereof. Neither the Company nor any Subsidiary owns or intends to carry or purchase any "margin stock" within the meaning of said Regulation G, including margin stock originally issued by it. 2.14 ERISA. Neither the Company nor any Related Person of the Company now maintains any "employee pension benefit plan", as such term is defined in Section 3 of ERISA (herein referred to as a "Pension Plan"), nor has the Company nor any Related Person maintained a Pension Plan in the past. No employee of the Company or of any of its Related Persons is entitled, as the result of current employment by the Company or any Subsidiary, to participate in any "multiemployer pension plan" as such term is defined in Section 4001(a)(3) of ERISA. 2.15 Company Actions. Neither the Company, Record Town nor any other Subsidiary has taken any action or permitted any condition to exist which would have been prohibited by Section 7 if such Section had been binding and effective at all times during the period from February 3, 1996 to and including the Effective Date. 2.16 Restated Credit Agreement; Restated Series B Note Agreement. (a) The Company has delivered to the Purchasers true, complete and correct copies of each of the Restated Credit Agreement and the Restated Series B Note Agreement (together, the "Other Restructuring Documents"), together with all exhibits, schedules and disclosure letters referred to therein or delivered pursuant thereto, and all amendments thereto, waivers relating thereto and other side letters or agreements affecting the terms thereof. None of such documents and agreements has been amended or supplemented, nor have any of the provisions thereof been waived, except pursuant to a written agreement or instrument which has heretofore been consented to by each of the Purchasers and no consent or waiver has been granted by the Company or any Subsidiaries thereunder. Each of the Other Restructuring Documents has been duly executed and delivered by the Company, and, to the best of the Company's knowledge, by each other party thereto and is a legal, valid and binding obligation of the Company, and, to the best of the Company's knowledge, of each other party thereto, enforceable, in all material respects, in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or other similar laws affecting the rights of creditors generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). (b) The representations and warranties of the Company, any Subsidiary and each other party to the Other Restructuring Documents are, to the best of the Company's knowledge, true and correct in all material respects on the Effective Date as if made on and as of such date. Such representations and warranties, together with the definitions of all defined terms used therein, are by this reference deemed incorporated herein mutatis mutandis, and each Purchaser is entitled to rely on the accuracy of such representations and warranties. (c) To the best of the Company's knowledge, each party to the Other Restructuring Documents has complied in all material respects with all terms and provisions contained therein on its part to be observed. 2.17 Movies Plus, Inc. Except for (i) Debt owed to the Company, Record Town or a Subsidiary, and (ii) each of (A) its Guaranty Agreements and (B) its guarantee, in favor of the Banks, of the obligations of the Company and Record Town under the Restated Bank Agreement, the liabilities of Movies Plus, Inc., no portion of which constitutes Debt, do not exceed $500,000 in the aggregate. 3. CLOSING CONDITIONS The amendment and restatement of the Existing Note Agreement and the Existing Notes, and the substitution of the Notes for the Existing Notes are subject to the satisfaction of the following conditions precedent: 3.1 Opinions of Counsel. The Purchasers shall have received from (a) Matthew H. Mataraso, counsel for the Company and Record Town, and (b) Jones, Day, Reavis & Pogue, special counsel for the Company and Record Town, closing opinions, each dated as of the Effective Date, substantially in the respective forms set forth in Exhibits C-1 and C-2 hereto and as to such other matters as they may reasonably request. This Section 3.1 shall constitute direction by the Company to such counsel to deliver such closing opinions to the Purchasers. 3.2 Compliance with this Agreement. The Company and Record Town shall have performed and complied with all agreements and conditions contained herein which are required to be performed or complied with by the Company and Record Town, respectively, on or prior to the Effective Date, and such performance and compliance shall remain in effect on the Effective Date. Each Purchaser shall have received a certificate, dated the Effective Date and signed by a duly authorized officer of each of the Company and Record Town, certifying that all of the agreements and conditions specified in the immediately preceding sentence have been satisfied. 3.3 Private Placement Number. The Company shall have obtained from Standard & Poor's Corporation and furnished to the Purchasers a private placement number for the Notes. 3.4 Execution and Delivery of this Agreement and the Notes. The Company, Record Town and each Purchaser shall have entered into this Agreement and each party hereto shall be prepared to perform its respective obligations hereunder. Each of the Company, Record Town and the other Purchasers shall have executed and delivered a counterpart of this Agreement to each other party hereto. Each of the Purchasers shall have received one or more Notes (in the amount(s) and bearing the registration number(s) set forth below its name on Annex 1), dated the Effective Date and duly executed and delivered by each of the Company and Record Town, in replacement of the Existing Notes held by such Purchaser. 3.5 Restated Credit Agreement. The Company, Record Town and the Banks shall have entered into the Restated Credit Agreement, which agreement and all documents and instruments executed and delivered in connection therewith shall be in form and substance satisfactory to the Purchasers. The Company shall have delivered to each Purchaser true, correct and complete copies of the Restated Credit Agreement and all such documents and instruments, including all waivers relating thereto and all side letters or agreements affecting the terms thereof. 3.6 Restated Series B Note Agreement. The Company, Record Town and the Series B Noteholder shall have entered into an agreement amending and restating the Existing Series B Note Agreement, which agreement and all documents and instruments executed and delivered in connection therewith shall be in form and substance satisfactory to the Purchasers. 3.7 Intercreditor Agreement. The Purchasers, the Series B Noteholder and the Banks shall have executed and delivered an Intercreditor Agreement in the form of Exhibit D (the "Intercreditor Agreement"), and such Intercreditor Agreement and all documents and instruments executed and delivered in connection therewith shall be in form and substance satisfactory to all parties thereto, and such Intercreditor Agreement shall have been accepted and agreed to by each of the Company, Record Town and the Security Trustee, and shall be in full force and effect. 3.8 Restructuring Fee. The Company and Record Town shall have paid to each Purchaser, and each Purchaser shall have received, a portion of the restructuring fee described in Section 1.7 equal to the product of: (a) one percent (1.0%); times (b) the outstanding principal amount of the Notes held by such Purchaser on the Effective Date. Such payment shall be made by wire transfer of immediately available funds to the account of each Purchaser to which the Company and Record Town are obligated to make payments of interest in respect of such Purchaser's Notes. 3.9 Expenses. All fees and disbursements required to be paid pursuant to Section 1.6(a)(ii), Section 1.6(a)(iii) and Section 1.6(b) hereof shall have been paid in full. 3.10 Interest on Existing Notes. The Company shall have paid to each of the Purchasers all accrued interest on the Existing Notes held by such Purchaser to (but not including) the Effective Date at the rate of 10.50% per annum, and additional interest on such Purchaser's Existing Notes for the period from May 1, 1996 to (but not including) the Effective Date at a rate equal to the excess, if any, of the rate which would have been payable on the Notes pursuant to Section 1.2(d) if the Notes had been outstanding at all times from and after May 1, 1996 over 10.50% per annum. 3.11 Subsidiary Guaranties. Each Subsidiary (other than Record Town) shall have executed and delivered an agreement in the form of Exhibit E (collectively, the "Guaranty Agreement") unconditionally guarantying payment of the Notes. 3.12 Collateral Trust Indenture and Other Security Documents. (a) Each of the Company, Record Town, the Guarantors and the Security Trustee shall have executed and delivered to each of the Purchasers an original counterpart of a Collateral Trust Indenture, in the form of Exhibit F (the "Collateral Trust Indenture"), and the Collateral Trust Indenture shall be in full force and effect. (b) Each of the Company, Record Town, the Guarantors and the Security Trustee shall have executed and delivered to each of the Purchasers an original counterpart of a Security Agreement, in the form of Exhibit G (collectively the "Security Agreement"), and the Security Agreement shall be in full force and effect. (c) The Security Trustee and each of the Company, Record Town and the Guarantors shall have executed and delivered to each of the Purchasers an original counterpart of a Trademark Security Agreement, in the form of Exhibit H (collectively, the "Trademark Security Agreement"), and the Trademark Security Agreement shall be in full force and effect. (d) The Security Trustee and Record Town shall have executed and delivered to each if the Purchasers an original counterpart of a Pledge Agreement, in the form of Exhibit I (the "Pledge Agreement"), and the Pledge Agreement shall be in full force and effect. (e) The Company, the concentration account bank named therein and the Security Trustee shall have executed and delivered to each of the Purchasers an original counterpart of a Depository Bank Agreement in the form of Exhibit J (the "Concentration Bank Account Agreement"), and the Concentration Bank Account Agreement shall be in full force and effect. (f) The foregoing agreements shall secure the Notes and all of the obligations under this agreement pari passu with the obligations due under the Restated Series B Note Agreement and the Restated Credit Agreement; and each of the Purchasers shall have received evidence satisfactory to it that the Liens created by the foregoing agreements are valid and perfected Liens senior to all other Liens upon the Collateral. 3.13 Movies Plus Subordination. Each of the Company, Record Town and the Subsidiaries (other than Movies Plus, Inc.) shall have executed and delivered a subordination agreement in the form of Exhibit K (collectively, the "Movies Plus Subordination Agreement"), and the Movies Plus Subordination Agreement shall be in full force and effect. 3.14 Representations And Warranties True. The warranties and representations set forth in Section 2 hereof shall be true and correct as of the Effective Date. 3.15 Authorization of Transactions. Each of the Company and Record Town shall have authorized, by all necessary corporate action, the execution and delivery of this Agreement, the Notes and each of the other documents and instruments executed and delivered in connection herewith and the performance of all obligations of, and the satisfaction of all conditions precedent pursuant to this Section 3 by, and the consummation of all transactions contemplated by this Agreement by, the Company and Record Town. The Purchasers shall have received a certificate from each of the Company and Record Town, in form and substance satisfactory to the Purchasers and their special counsel, certifying the adoption of resolutions of the board of directors of the Company and Record Town, as the case may be, authorizing such execution, delivery, performance, satisfaction and consummation, which resolutions shall be attached to such certificate and shall be in full force and effect. Each such certificate shall indicate that there has been no resolution passed by suc h board of directors which conflicts with, amends or rescinds such resolutions. 3.16 Proceedings Satisfactory. All proceedings taken in connection with the issuance of the Notes and all documents and papers relating thereto shall be satisfactory to each of the Purchasers and their special counsel. The Purchasers and their special counsel shall have received copies of such documents and papers as they may reasonably request in connection therewith, all in form and substance satisfactory to them. 4. DIRECT PAYMENT The Company agrees that, notwithstanding any provision in this Agreement or the Notes to the contrary, it will pay all sums becoming due to any institutional holder of Notes in the manner provided in Annex 1 or in any other manner as any institutional holder may designate to the Company in writing (without presentment of or notation on the Notes). 5. REPAYMENTS 5.1 Mandatory Early Repayments. (a) In addition to paying the entire remaining principal amount and interest due on the Notes at maturity, the Company and Record Town agree on a joint and several basis to repay, and there shall become due and payable on each of the dates set out below, the principal amount of Notes set forth opposite such date: Payment Date Principal Amount 08/30/96 1,526,785.71 11/30/96 678,571.43 02/28/97 5,089,285.71 05/30/97 678,571.43 08/30/97 678,571.43 11/30/97 678,571.43 02/28/98 1,357,142.86 05/30/98 678,571.43 Each such repayment shall be at one hundred percent (100%) of the principal amount repaid, together with interest accrued thereon to the date of repayment. In certain circumstances the amount of one or more of the foregoing required repayments shall be deemed to have been reduced pursuant to Section 5.1(b) or Section 5.6. (b) Except as set forth in Section 5.6, the early repayment of any of the Notes pursuant to Section 5.2, Section 5.5 or Section 5.6 or the acquisition of the Notes by the Company or any Subsidiary shall not reduce or otherwise affect the obligations of the Company and Record Town to make any repayment required by Section 5.1(a); provided that if such early repayment is made with the proceeds of a tax refund from a period prior to the Effective Date (a "Tax Refund") or the proceeds of a sale of the stock or assets of Movies Plus, Inc., ("Movies Plus Proceeds") such early repayment shall reduce the next maturing repayments due under Section 5.1(a). If at any time one or more holders of the Notes shall be repaid in whole pursuant to Section 5.4 (each such repayment herein called an "Extraordinary Repayment"), then the principal amount of the Notes required to be repaid pursuant to Section 5.1(a) on each principal payment date following such Extraordinary Repayment shall be automatically reduced to an amount w hich equals the product of (i) the principal amount of the Notes required to be repaid on such date multiplied by (ii) a fraction (A) the numerator of which shall equal $41,331,412.90 minus the cumulative aggregate principal amount repaid pursuant to Section 5.4 after giving effect to such Extraordinary Repayment and (B) the denominator of which shall equal $41,331,412.90. 5.2 Early Repayment Option. Subject to Section 7.5(b) of this Agreement, the Company and Record Town may pay the Notes, in whole or in part, at any time at a price equal to the principal amount to be repaid together with interest on the principal amount so repaid accrued to the early repayment date. 5.3 Notice of Optional Repayment. The Company will give notice of any optional repayment of the Notes to each holder of the Notes not less than ten (10) days nor more than sixty (60) days before the date fixed for repayment, specifying: (a) such date; (b) the principal amount of the Notes and of such holder's Notes to be repaid on such date; and (c) the accrued interest applicable to the repayment. Notice of repayment having been so given, the principal amount of the Notes specified in such notice, together with the accrued interest thereon, shall become due and payable on the repayment date. 5.4 Repayment Upon Change of Control. The Company and Record Town will repay, and there shall be due and payable on the forty-fifth (45th) day following notice by the Company to the holders of Notes of a proposed Change of Control pursuant to Section 8.1(i) (or on the next succeeding Business Day if such forty-fifth (45th) day is not a Business Day), all of the Notes held by each holder of Notes; provided, that a holder of any Note may give notice to the Company on or before the thirtieth (30th) day following receipt by such holder of such notice from the Company, that such holder elects to forego such repayment pursuant to this Section 5.4, of the Notes held by it. Any such repayment must be effective prior to the effective time of any proposed Change of Control. The amount required to be paid to such holder shall be equal to one hundred percent (100%) of the principal amount of the Notes so repaid, together with interest accrued thereon to the date of repayment. If the Company shall fail to provide the notice required by Section 8.1(i), any holder of the Notes upon acquisition of knowledge of the failure by the Company to comply with the notice requirements of Section 8.1(i) may give notice to the Company of such failure. The Company shall immediately provide a copy of such notice to each other holder of the Notes and for purposes of the foregoing provisions of this Section 5.4, the date upon which such notice was given by such holder to the Company shall be deemed to be the date of notice by the Company of such proposed Change of Control. 5.5 Repayment Upon Material Asset Sale or Tax Refund. (a) Material Asset Sale. Not more than two Business Days following the consummation of any sale of (x) any Property (other than Collateral) of the Company or its Subsidiaries in one transaction or a series of related transactions, other than a sale of inventory in the ordinary course of the Company's business or in connection with store closings, which sale results in proceeds equal to or greater than $500,000, or (y) any Collateral, the Company and Record Town shall, subject to Section 5.5(c), pay (or cause the selling Subsidiary to pay) to the holders of the Notes an amount of principal equal to the product of (i) the Net Asset Sale Proceeds attributable to such sale multiplied by (ii) the Noteholders' Percentage. Nothing in this Section 5.5 shall be deemed to permit such an asset sale without the consent of the holders of the Notes obtained in accordance with Sections 7.13 and 11.5 of this Agreement. (b) Tax Refunds. Not more than two Business Days following the receipt of any Tax Refund, the Company and Record Town shall, subject to Section 5.5(c), pay to the holders of the Notes an amount of principal equal to the product of (i) the amount of such Tax Refund multiplied by (ii) the Noteholders' Percentage. (c) Certain Credits. Notwithstanding anything in Section 5.5(a) or Section 5.5(b) to the contrary and so long as no Default or Event of Default exists, no principal payment shall be due with respect to Movies Plus Proceeds or the proceeds of any Tax Refund under either of such Sections at any time, except to the extent that the aggregate amount of Movies Plus Proceeds and proceeds from Tax Refunds received by the Company or Record Town at or prior to such time exceeds the aggregate amount of principal payments actually made pursuant to Section 5.1(a) at or prior to such time. 5.6 Repayment from Excess EBITDA. In addition to all other payments of principal required by this Section 5, on each Payment Date the Company and Record Town will pay to the holders of the Notes a principal amount of Notes equal to the Noteholders' Percentage of forty-five percent (45%) of Excess EBITDA for the then current fiscal year (or, in the case of a February Payment Date, the fiscal year then most recently ended). For purposes of this Agreement, "Excess EBITDA" for any fiscal year shall mean the amount, if any, by which Consolidated EBITDA for such fiscal year (calculated as of the end of the most recently ended fiscal quarter) exceeds the EBITDA Cushion as of the end of such fiscal quarter. If immediately prior to the August or November Payment Date in any fiscal year the aggregate principal payments made with respect to such fiscal year pursuant to this Section 5.6 (exclusive of amounts deemed to have reduced payments due under Section 5.1(a)) are greater than the Noteholders' Percentage of forty-five percent (45%) of Excess EBITDA for such fiscal year, the amount of the next required payment due pursuant to Section 5.1(a) shall be deemed reduced by the amount of such overage (the "Cumulative EBITDA Overage"). The Cumulative EBITDA Overage, if any, existing immediately prior to a February Payment Date, shall in no event be deemed to reduce the payment required by Section 5.1(a) on such February Payment Date, but shall instead be applied to the principal payments due on the Notes in inverse order of maturity. If there is Excess EBITDA for a fiscal year, the Company and Record Town, not later than ninety (90) days after the end of such fiscal year, shall multiply the amount of Excess EBITDA for such fiscal year by a fraction the numerator of which shall be the aggregate amount of all federal, state, and local income tax liabilities shown as payable on consolidated tax returns filed or to be filed by the Company for such fiscal year, and the denominator of which shall be the amount of Consolidated EBITDA for such fiscal year. If the resulting number (the "Resulting Number") is less than forty percent (40%) of such Excess EBITDA, the Company shall immediately make a principal payment to the Noteholders in an amount equal to the Noteholders' Percentage multiplied by a number equal to the remainder of (i) forty percent (40%) of such Excess EBITDA, minus (ii) the Resulting Number. Payments made pursuant to the preceding sentence shall be applied to the principal payments due on the Notes in inverse order of maturity . If the Resulting Number is greater than forty percent (40%) of such Excess EBITDA and the Company and Record Town have made all payments of principal and interest required to have been made with respect to such fiscal year under this Section 5.6, the next principal payment required by Section 5.1(a) shall be deemed reduced by an amount equal to the Noteholders' Percentage multiplied by the remainder of the Resulting Number minus forty percent (40%) of such Excess EBITDA. 5.7 Partial Early Payments To Be Pro Rata. If there is more than one holder of the Notes, the aggregate principal amount of each required or optional partial payment (except a payment pursuant to Section 5.4, which shall be made as therein provided) of the Notes shall be allocated in units of One Thousand Dollars ($1,000) or multiples thereof among the holders of the Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid amounts of the Notes held by each such holder. 6. REGISTRATION; SUBSTITUTION OF NOTES 6.1 Registration of Notes. The Company will cause to be kept at its office maintained pursuant to Section 7.3, a register for the registration and transfer of the Notes. The names and addresses of the holders of the Notes, the transfer thereof and the names and addresses of the transferees of any of the Notes will be registered in the register. The Person in whose name any Note is registered shall be deemed and treated as the owner and holder thereof for all purposes of this Agreement, and the Company shall not be affected by any notice or knowledge to the contrary. 6.2 Exchange of Notes. Upon surrender of any Note to the Company at its office maintained pursuant to Section 7.3, the Company, upon request, will execute and deliver, at its expense (except as provided below), new Notes in exchange therefor, in denominations of at least One Hundred Thousand Dollars ($100,000) (except as may be necessary to reflect any principal amount not evenly divisible by One Hundred Thousand Dollars ($100,000)), in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note (a) shall be payable to such Person as the surrendering holder may request and (b) shall be dated and bear interest from the date to which interest has been paid on the surrendered Note or dated the date of the surrendered Note if no interest has been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any transfer. 6.3 Replacement of Notes. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note and (a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided, if the holder of the Note is an institutional investor, its own agreement of indemnity shall be deemed to be satisfactory), or (b) in the case of mutilation, upon surrender and cancellation of the Note, the Company at its expense will execute and deliver a new Note of like tenor, dated and bearing interest from the date to which interest has been paid on the lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest has been paid thereon. 7. COMPANY BUSINESS COVENANTS The Company and Record Town covenant that on and after the date of this Agreement until the Notes are paid in full: 7.1 Payment of Taxes and Claims. The Company, and each Subsidiary, will pay, before they become delinquent, (a) all taxes, assessments and governmental charges or levies imposed upon it or its Property other than deficiencies which arise in the ordinary course and are identified through audits and with respect to which (i) adequate book reserves have been established with respect thereto and (ii) such amounts due are paid by the Company or such Subsidiary immediately upon final determination that such amounts are due, and (b) all claims or demands of any kind (including but not limited to those of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons) which, if unpaid, might result in the creation of a Lien upon its Property; provided, that items in clauses (a) and (b) above need not be paid while being contested in good faith and by appropriate proceedings, if and for so long as (i) adequate book reserves have been established with respect thereto and (ii) the owning Person's title to its Property is not materially adversely affected and its use of the Property in the ordinary course of its business is not materially interfered with. 7.2 Maintenance of Properties and Corporate Existence. The Company will, and will cause each Subsidiary to: (a) Property. Maintain its Property in good condition, subject to ordinary wear and tear, and make all necessary renewals, replacements, additions, betterments and improvements thereto; provided that nothing contained in this Section 7.2 shall prevent the Company from closing any specific store location pursuant to Section 7.13 hereof; (b) Insurance. Maintain, with financially sound and reputable insurers, insurance with respect to its Properties and business against such casualties and contingencies, of such types (including public liability, larceny, embezzlement or other criminal misappropriation insurance) as is customary in the case of corporations of established reputations engaged in the same or a similar business and similarly situated, and in amounts acceptable to the holders of the Notes. (c) Financial Records. Keep accurate books of records and accounts in which full and correct entries will be made of all its business transactions, and will reflect in its financial statements adequate accruals and appropriations to reserves, all in accordance with generally accepted accounting principles; (d) Corporate Existence and Rights. Do or cause to be done all things necessary (i) to preserve and keep in full force and effect its existence, rights and franchises and (ii) to maintain each Subsidiary as a Subsidiary, except as otherwise permitted by Sections 7.13 and 7.14; and (e) Compliance with Law. Not be in violation of any laws, ordinances, orders, judgments or decrees or governmental rules and regulations to which it is subject and will not fail to maintain any licenses, permits, franchises or other governmental authorizations necessary to the ownership of its Properties or to the conduct of its business, if such violation or failure to maintain might reasonably be expected to materially adversely affect the Properties, business, prospects, operating results or condition (financial or otherwise) of Record Town or the Company and its Subsidiaries, taken as a whole. 7.3 Maintenance of Office. The Company and Record Town each will maintain an office in the State of New York where notices, presentations and demands in respect of this Agreement or the Notes may be made upon it. Such offices shall be maintained at 38 Corporate Circle, Albany, New York 12203 until such time as the Company shall notify the holders of the Notes of a change of location. 7.4 Liens and Encumbrances. (a) Negative Pledge. Neither the Company nor any Subsidiary will (1) cause or permit or (2) agree or consent to cause or permit in the future (upon the happening of a contingency or otherwise), any of its Property, whether now owned or hereafter acquired, to be subject to a Lien except: (1) Liens securing the payment of taxes, assessments, governmental charges or levies, or the claims or demands of mechanics, carriers, warehousemen, landlords and other like Persons, provided, that (A) they do not in the aggregate materially reduce the value of any Properties subject to such Liens or materially interfere with their use in the ordinary course of business and (B) if appropriate, all claims which such Liens secure are being actively contested in good faith and by appropriate proceedings; (2) Liens incurred or deposits made in the ordinary course of business (A) in connection with worker's compensation, unemployment insurance, social security and other like laws, or (B) to secure the performance of bids, tenders, sales contracts, leases, statutory obligations, surety, appeal and performance bonds and other similar obligations in each case not incurred in connection with the borrowing of money, the obtaining of advances or the payment of the deferred purchase price of Property; (3) Liens on Property of a Subsidiary, provided, they secure only obligations owing to the Company or another Subsidiary; (4) Liens created by or resulting from any litigation or proceedings that are being contested in good faith, and Liens arising out of judgments or awards against the Company or any Subsidiary, provided, that (A) the Company or such Subsidiary is in good faith prosecuting an appeal or proceedings for review of such Liens incurred by the Company or any Subsidiary for the purpose of obtaining a stay or discharge in the course of any legal proceeding to which the Company or such Subsidiary is a party, so long as the Company has set aside adequate accounting reserves; and (B) such Liens do not in the aggregate materially reduce the value of any of the Properties subject to the Liens or materially interfere with their use in the ordinary conduct of the owning company's business; (5) Liens or deposits in connection with leases, subleases, easements, rights of way, restrictions and other similar encumbrances granted to others in the ordinary course of business so long as they do not in the aggregate materially reduce the value of any Properties subject to the Liens; (6) Easements, rights-of-way, or restrictions and other similar encumbrances incurred in the ordinary course of business and not interfering with the ordinary conduct of the business of the Company or any Subsidiary; (7) Purchase Money Mortgages or conditional sale, finance lease or other title retention agreements or other Liens incurred, taken subject to or assumed in connection with the purchase, lease, improvement or construction of Property or to secure indebtedness incurred solely for the purpose of financing the acquisition, lease, construction or improvement of any of such Property to be subject to such mortgages, agreements or other Liens, provided, however, that such Purchase Money Mortgages (A) shall be permitted by Section 7.5(a)(iv) or Section 7.5(a)(v), and (B) shall not encumber any assets of the Company other than the Property so purchased; (8) Liens arising by operation of law and in the ordinary course of business in the form of rights of setoff, appropriation and application against the deposits and credits of the Company or any Subsidiary in favor of the banks where such deposits or credits are located, and including any rights arising pursuant to a participation or similar contractual agreement among any such bank and other banks which are members of a group providing credit to the Company whereby such bank agrees to share such rights of setoff with other banks which are members of such group; (9) Liens upon the Collateral created by one or more of the Security Documents; (10) Deposits in an aggregate amount not to exceed Five Hundred Thousand Dollars ($500,000) to secure the reimbursement obligations of the Company and/or Record Town in respect of standby or commercial letters of credit issued for the account of the Company and/or Record Town by parties other than the Banks; and (11) Liens set forth on Part 2.3(b) of Exhibit B hereto, provided, however, that such Liens shall not spread to cover other or additional Debt or Property of the Company or any Subsidiary. (b) Equal and Ratable Lien; Equitable Lien. In case any Property is subjected to a Lien in violation of Section 7.4(a), the Company will make or cause to be made provision whereby the Notes will be secured equally and ratably with all other obligations secured thereby, and in any case the Notes shall have the benefit, to the full extent that, and with such priority as, the holders may be entitled thereto under applicable law, of an equitable Lien on such Property securing the Notes. Such violation of Section 7.4(a) shall constitute an Event of Default hereunder, whether or not any such provision is made pursuant to this Section 7.4(b). 7.5 Limitations On Debt Incurrence; Prepayments and Amendments. Neither the Company nor any Subsidiary will: (a) be or become liable for any Adjusted Funded Debt other than: (i) the Notes; (ii) the Series B Notes; (iii) indebtedness not to exceed $65,260,126.26 in aggregate principal amount (the "Credit Agreement Debt") outstanding under the Restated Credit Agreement; (iv) indebtedness to others incurred for the purpose of purchasing equipment (other than computers, cash registers and related equipment referred to in clause (v) below), used or useful in the ordinary course of business of the Company or its Subsidiaries (provided that the aggregate amount of all such indebtedness shall not exceed $2,000,000 in any fiscal year); (v) indebtedness incurred by the Company upon reasonable and customary terms to replace and upgrade its (A) existing AS400 computer hardware and related equipment in an amount not to exceed Four Million Dollars ($4,000,000) in the aggregate and (B) existing POS cash register system in an amount not to exceed Six Million Dollars ($6,000,000) in the aggregate; (vi) reimbursement obligations i n an aggregate amount not to exceed Five Hundred Thousand Dollars ($500,000) secured by Liens permitted under Section 7.4(a)(10) and incurred in respect of standby or commercial letters of credit issued by parties other than the Banks for the account of the Company and/or Record Town; and (vii) other indebtedness outstanding on the Effective Date and reflected on Exhibit B; (b) make any optional prepayment of any Debt or consent to any optional reduction of the Commitment if, as a result thereof, the amount of the Commitment and the outstanding principal amounts of the Notes and of the Series B Notes do not bear the same relative proportion to one another as was the case on the Effective Date; or (c) amend any agreement governing or evidencing any Debt. Nothing in this Section 7.5 shall permit an expenditure not permitted by Section 7.25. 7.6 Subsidiary Debt. No Subsidiary, except for Record Town, will become liable for, have outstanding, or permit its Property to be subject to, any Prior Indebtedness. Movies Plus, Inc. shall have no Debt other than Debt which is (i) owing to the Company, Record Town, or a Guarantor and (ii) subject to the Movies Plus Subordination Agreement. 7.7 Current Ratio. As of the last day of the first, second and fourth fiscal quarters of the Company during each fiscal year, Consolidated Current Assets shall be not less than 150% of Consolidated Current Liabilities. As of the last day of the third fiscal quarter of the Company during each fiscal year, Consolidated Current Assets shall be not less than 135% of Consolidated Current Liabilities. For purposes of computations made to determine compliance with this Section 7.7, the actual cash balance of the Company and the Subsidiaries shall be deemed to be reduced by the amount thereof in excess of the product of $10,000 multiplied by the number of retail stores of the Company and the Subsidiaries actually open for business on the date of such computation, and any such excess shall be deemed to reduce accounts payable. 7.8 Maintenance of Ownership. The Company shall at all times directly or indirectly own, free and clear of all Liens (except as otherwise permitted by Section 7.4(a)(4) and Section 7.4(a)(9)), 100% of the outstanding capital stock of Record Town and each other Subsidiary; provided, however, that Record Town may contract for and consummate a sale of all or substantially all of the capital stock of Movies Plus, Inc. in accordance with Section 5.1(b). 7.9 Fixed Charge Ratio. On the final day of the first and second fiscal quarter of each fiscal year, Consolidated Income Available for Fixed Charges shall be not less than 100% of Consolidated Fixed Charges for the period of four (4) fiscal quarters ended on such dates. On the final day of the third fiscal quarter of each fiscal year and the fourth fiscal quarter of the 1996 fiscal year, Consolidated Income Available for Fixed Charges shall be not less than 110% of Consolidated Fixed Charges for the period of four (4) fiscal quarters ended on such dates. On the final day of the 1997 fiscal year, Consolidated Income Available for Fixed Charges shall be not less than 115% of Consolidated Fixed Charges for the fiscal year ended on such date. 7.10 Tangible Net Worth. As of the final day of each fiscal quarter set forth below, the Company will maintain Consolidated Tangible Net Worth of not less than the amount set forth opposite such fiscal quarter: Fiscal Quarter Amount 1st Quarter 1996 $75,000,000 2nd Quarter 1996 $75,000,000 3rd Quarter 1996 $75,000,000 4th Quarter 1996 $85,000,000 1st Quarter 1997 $80,000,000 2nd Quarter 1997 $80,000,000 3rd Quarter 1997 $80,000,000 4th Quarter 1997 $90,000,000 1st Quarter 1998 $80,000,000 7.11 Tangible Net Worth of Record Town. As of the final day of each fiscal quarter set forth below, Record Town will maintain Tangible Net Worth of not less than the amount set forth opposite such fiscal quarter: Fiscal Quarter Amount 1st Quarter 1996 $25,000,000 2nd Quarter 1996 $25,000,000 3rd Quarter 1996 $25,000,000 4th Quarter 1996 $35,000,000 1st Quarter 1997 $30,000,000 2nd Quarter 1997 $30,000,000 3rd Quarter 1997 $30,000,000 4th Quarter 1997 $40,000,000 1st Quarter 1998 $30,000,000 7.12 Distributions and Investments. Neither the Company nor any Subsidiary will declare, make or become obligated to make any Distribution or make or become obligated to make any Restricted Investment. 7.13 Sale of Property and Subsidiary Stock. Neither the Company nor any Subsidiary will (x) sell, lease, or otherwise transfer any of its Property (including, without limitation, the sale or discount of accounts receivable or notes receivable), or (y) permit any Subsidiary to issue or transfer any shares of its stock or any other Securities exchangeable or convertible into its stock (such stock and other Securities being called "Subsidiary Stock"), if the effect would be to reduce the direct or indirect proportionate interest of the Company in the outstanding Subsidiary Stock of the Subsidiary whose shares are the subject of the transaction, provided that these restrictions do not apply to: (1) the issue of directors' qualifying shares; (2) the transfer of Property (other than Subsidiary Stock) in the ordinary course of business; and (3) the transfer of Property by Movies Plus, Inc. or the transfer of the stock of Movies Plus, Inc., in each case, made in accordance with Section 5.1(b). 7.14 Merger and Consolidation. The Company will not, and will not permit any Subsidiary to, be a party to any merger or consolidation or sell, lease or otherwise transfer all or substantially all of its Property. 7.15 Guaranties. Neither the Company nor any Subsidiary will become liable for any Guaranty (except a Guaranty of any indebtedness, dividend or other obligation as to which the Company or a Subsidiary of which the Company enjoys at least 80% of the Economic Benefit is the primary obligor), unless (i) such Guaranty is permitted by Sections 7.5, 7.6 and 7.7, to the extent applicable, and (ii) the maximum amount of indebtedness, dividend or other obligation being guaranteed can be mathematically determined at the time the Guaranty is issued. 7.16 ERISA Compliance. Neither the Company nor any Related Person will at any time permit any Pension Plan maintained by it to: (i) engage in any "prohibited transaction" as such term is defined in Section 4975 of the Internal Revenue Code of 1986, as amended, or described in Section 406 of ERISA; (ii) incur any "accumulated funding deficiency" as such term is defined in Section 302 of ERISA, whether or not waived; or (iii) terminate under circumstances which could result in the imposition of a Lien on the Property of the Company or any Subsidiary pursuant to Section 4068 of ERISA. 7.17 Transactions with Affiliates. Neither the Company nor any Subsidiary will enter into any transaction, including, without limitation, the purchase, sale or exchange of Property or the rendering of any service, with any Affiliate except upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtained in a comparable arm's-length transaction with a Person not an Affiliate. 7.18 Tax Consolidation. The Company will not file or consent to the filing of any consolidated income tax return with any Person other than a Subsidiary. 7.19 Acquisition of Notes. Neither the Company nor any Subsidiary nor any Affiliate will, directly or indirectly, acquire or make any offer to acquire any Notes unless the Company or such Subsidiary or Affiliate has offered to acquire Notes, pro rata, from all holders of the Notes and upon the same terms. In case the Company acquires any Notes, such Notes shall thereafter be cancelled and no Notes shall be issued in substitution therefor. 7.20 Lines of Business. Neither the Company nor any Subsidiary will engage in any line of business if as a result thereof the business of the Company and its Subsidiaries taken as a whole would not be substantially the same as what it was at January 28, 1995 as described in the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1995. 7.21 Required Subsidiary Guaranties. The Company shall cause each of its Subsidiaries other than Record Town, on or before the later of the Effective Date or the tenth (10th) day after the acquisition of such Subsidiary, to enter into a guaranty of the Notes pursuant to an agreement to the effect and substantially in the form of Exhibit E hereto. Each Subsidiary required to execute a Guaranty Agreement pursuant to the provisions of Section 3.11 or this Section 7.21 shall be a "Required Guarantor". The Company shall cause each Required Guarantor to deliver an original executed copy of such Guaranty to each holder of Notes, together with certified copies of the resolutions of the board of directors of such Required Guarantor authorizing the execution, delivery and performance thereof, with appropriate shareholder consents or approvals attached. 7.22 Limitations on Preferred Stock. Neither the Company, Record Town nor any other Subsidiary will issue (i) any Preferred Stock which by its terms (or by the terms of any Security into which it is convertible or for which it is exchangeable) is exchangeable for Debt at the option of the holder thereof on or prior to July 31, 2000 or (ii) any Special Preferred Stock unless the issuance of such Special Preferred Stock is permitted at such time pursuant to Section 7.5. 7.23 Limitation on Inventory Turnover. The Company will not permit Inventory Turnover to fall below the following amounts at the end of the following fiscal quarters of each fiscal year: Fiscal Quarter Amount First .3 Second .6 Third .7 Fourth 1.5 7.24 Maintenance of Consolidated EBITDA. Consolidated EBITDA for each of the first three quarters of each fiscal year shall be not less than ($2,000,000). Consolidated EBITDA for the fourth fiscal quarter of 1996 shall be not less than $24,000,000. Consolidated EBITDA for the fourth fiscal quarter of 1997 shall be not less than $27,000,000. 7.25 Limitation on Capital Expenditures. The Company and the Subsidiaries shall not make capital expenditures which, in the aggregate, exceed the following amounts in the following fiscal years: Fiscal Year Beginning Amount 1996 $12,000,000 1997 $12,000,000 1998 (through July 31) $6,000,000 7.26 Limitation on Leases. Neither the Company nor any Subsidiary shall be or become liable under any agreement for the lease, hire or use of any personal property if the sum of (a) the aggregate maximum amount of all obligations of the Company and its Subsidiaries pursuant to all such agreements in the current or any future fiscal year plus (b) the aggregate outstanding indebtedness permitted under Section 7.5(a)(iv) hereof would exceed $2,000,000. Anything contained in this Section to the contrary notwithstanding, this provision shall not apply to a Financing Lease. 7.27 Limitation on Sale and Leaseback. Neither the Company nor any Subsidiary shall enter into any arrangement with any Person whereby the Company or any Subsidiary shall sell or transfer any Property, whether now owned or hereafter acquired, and thereafter rent or lease such Property or other Property which the Company or such Subsidiary intends to use for substantially the same purpose or purposes as the Property being sold or transferred. 7.28 Limitation on Changes in Fiscal Year. The Company shall not permit its fiscal year or the fiscal year of any Subsidiary to end on a day other than the Saturday closest to the last day of January, or change the method of determining fiscal quarters. 7.29 Limitation on Debt to Consolidated Tangible Net Worth. As of the final day of each fiscal quarter set forth below, the Company shall not permit the ratio of (a) total liabilities of the Company and its Subsidiaries to (b) Consolidated Tangible Net Worth, to exceed the amount set forth opposite such fiscal quarter: Fiscal Quarter Ratio 1st Quarter 1996 2.30 to 1 2nd Quarter 1996 2.50 to 1 3rd Quarter 1996 3.00 to 1 4th Quarter 1996 2.10 to 1 1st Quarter 1997 2.10 to 1 2nd Quarter 1997 2.30 to 1 3rd Quarter 1997 2.80 to 1 4th Quarter 1997 1.90 to 1 1st Quarter 1998 2.10 to 1 For purposes of computations made to determine compliance with this Section 7.29, (x) Consolidated Tangible Net Worth shall be deemed to be reduced by the amount (the "Excess") by which cash on hand or cash equivalents as reflected on the Company's balance sheet exceeds the product of $10,000 multiplied by the number of retail stores of the Company and the Subsidiaries actually open for business on the date of computation, and (y) the Excess shall be deemed to reduce total liabilities dollar for dollar. 7.30 Store Openings. The Company shall not, and shall not permit any Subsidiary to, (i) open any new store other than relocations or (ii) enter into any lease in connection with or for the purpose of opening any new store if, after giving effect to the opening of such store or the entering into of such lease, a default under Section 7.25 would exist; provided, however, that in the ordinary course of business the Company and Record Town may enter into renewals of existing store leases. 7.31 No Amendment of Debt Instruments; Maintenance of Accounts. The Company shall not, without the prior written consent of all holders of the Notes: (a) amend, modify or supplement any of the terms of the Other Restructuring Documents (other than any such amendment, modification or change which would extend the maturity or reduce the amount of any payment of principal thereof or which would reduce the rate or extend the date for payment of interest thereon); or (b) maintain any cash balances or cash management accounts other than at one or more of the Banks or any other financial institution that has executed a valid Concentration Bank Account Agreement satisfactory to the Security Trustee; provided, however, that the Company may continue to maintain, in a manner consistent with its past practices, existing store accounts at one or more other banks whether or not such banks execute any such agency agreement. 7.32 Revolver Sweep. If on any date prior to the termination of the Commitment the aggregate cash balances of the Company, Record Town and the Subsidiaries (including cash on deposit and cash on hand) exceed the product of $15,000 multiplied by the number of retail stores then being operated by the Company, Record Town and the Subsidiaries, the Company shall, within one Business Day, cause the amount of such excess to be applied, first, to a non-permanent reduction of the outstanding indebtedness under the Restated Credit Agreement, and second, to cash collateralize the letters of credit outstanding under the Restated Credit Agreement. 7.33 Foreign Subsidiaries. The Company shall not, and shall not permit any Subsidiary to, create or permit to be created any Subsidiary under the laws of any jurisdiction other than the United States of America or a jurisdiction thereof. 8. INFORMATION AS TO COMPANY 8.1 Financial and Business Information. The Company will deliver to each Purchaser, and to each other institutional holder of outstanding Notes, and, in the case of Section 8.1(b) below, to the National Association of Insurance Commissioners, Securities Valuation Office, 195 Broadway, 19th Floor, New York, New York 10007: (a) Quarterly Statements. Within sixty (60) days after the end of each of the first three quarterly fiscal periods in each fiscal year of the Company, two copies of: (i) a consolidated balance sheet of the Company and its consolidated subsidiaries and of the Company and its Subsidiaries as at the end of that quarter, and (ii) consolidated statements of income, retained earnings and cash flows of the Company and its consolidated subsidiaries, and of the Company and its Subsidiaries, for that quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with that quarter, setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail and certified by a principal financial officer of the Company as presenting fairly the financial condition of the companies being reported upon and as having been prepared in accordance with generally accepted accounting principles consistently applied; (b) Annual Statements. Within ninety (90) days after the end of each fiscal year of the Company, two copies of: (i) a consolidated balance sheet of the Company and its consolidated subsidiaries, and of the Company and its Subsidiaries, as at the end of that year, and (ii) consolidated statements of income, retained earnings and cash flows of the Company and its consolidated subsidiaries, and of the Company and its Subsidiaries, for that year, setting forth in each case in comparative form the figures for the previous fiscal year, and, in the case of such consolidated financial statements, accompanied by an opinion of independent certified public accountants of recognized national standing stating that such financial statements fairly present the financial condition of the companies being reported upon and have been prepared in accordance with generally accepted accounting principles consistently applied (except for changes in application in which such accountants concur), and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as were considered necessary in the circumstances; (c) Audit Reports. Promptly upon receipt thereof, one copy of each other report submitted to the Company or any Subsidiary by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company or any Subsidiary; (d) SEC and Other Reports. Promptly upon their becoming available one copy of each report, notice or proxy statement sent by the Company to stockholders generally, and of each periodic report and any registration statement, prospectus or written communication (other than transmittal letters) in respect thereof filed by the Company with, or received by the Company in connection therewith from, any securities exchange or the Securities and Exchange Commission or any successor agency; (e) ERISA. Immediately upon becoming aware of the occurrence of any (i) "reportable event" as such term is defined in Section 4043 of ERISA, or (ii) "accumulated funding deficiency" as such term is defined in Section 302 of ERISA, or (iii) "prohibited transaction", as such term is defined in Section 4975 of the Internal Revenue Code of 1986, as amended, or described in Section 406 of ERISA, in connection with any Pension Plan or any trust created thereunder, a notice specifying the nature thereof, what action the Company or a Related Person is taking or proposes to take with respect thereto, and, when known, any action taken by the Internal Revenue Service with respect thereto; (f) Notice of Default or Event of Default. Immediately upon becoming aware of the existence of any Default or Event of Default hereunder or a Default or Event of Default under the Restated Credit Agreement (as defined therein), or a Default or Event of Default under the Restated Series B Note Agreement (as defined therein), a notice describing its nature and the action the Company is taking with respect thereto; (g) Notice of Claimed Default. Immediately upon becoming aware that the holder of any Note or of any Debt or Security of the Company or any Subsidiary has given notice or taken any other action with respect to a claimed default or Event of Default, a notice specifying the notice given or action taken by such holder, the nature of the claimed default or Event of Default and the action the Company is taking with respect thereto; (h) Report on Proceedings. Within fifteen (15) days after the Company obtains knowledge thereof, notice of any litigation (provided, that notice need not be given of any litigation fully covered by insurance and with respect to which such coverage is not disputed) or any governmental proceeding pending against the Company or any Subsidiary in which the damages sought exceed Five Hundred Thousand Dollars ($500,000) or which might otherwise materially adversely affect the Properties, business, prospects, operating results or condition (financial or otherwise) of Record Town or of the Company and its Subsidiaries, taken as a whole, or of any Guarantor; (i) Change of Control. Not later than two (2) Business Days after knowledge that a Change of Control is proposed to occur, a notice specifying (1) the date on which such proposed Change of Control is expected to occur and describing such Change of Control in detail, and (2) that each holder of Notes shall be repaid in full at par pursuant to Section 5.4 unless the Company receives a notice from the holder within thirty (30) days of such holder's receipt of the Company's notice, or as otherwise provided in Section 5.4, indicating that such holder elects to forego the Section 5.4 repayment; (j) Monthly Information. Within thirty (30) days after the end of each month, a report containing the information contemplated by Exhibit L hereto. Such report shall be signed by the President, the Chief Financial Officer or the Treasurer of the Company; (k) Identity of Banks. Within fifteen (15) days after the Company obtains knowledge of any transfer or other change in the ownership of any of the Bank Notes, or, with reasonable promptness after a request therefor, the Company shall deliver a notice to each holder of Notes setting forth the names and addresses of each of the Banks and the respective Commitment of, and the principal amount of the Loans (as defined in the Restated Credit Agreement) owing to, each Bank at such time; and (l) Requested Information. With reasonable promptness, such other data and information as from time to time may be reasonably requested. 8.2 Officers' Certificates. Each set of financial statements delivered pursuant to Section 8.1(a) or 8.1(b) will be accompanied by a certificate of the President or a Vice President and the Treasurer or an Assistant Treasurer of the Company setting forth: (a) Covenant Compliance -- the information (including detailed calculations) required in order to establish compliance with the requirements of Section 7 during the period covered by the income statements being furnished; and (b) Event of Default -- a statement that the signers have reviewed the relevant terms of this Agreement and have made, or caused to be made, under their supervision, a review of the transactions and condition of the Company and its Subsidiaries from the beginning of the period covered by the income statements being furnished and that the review has not disclosed the existence during such period of any Default or Event of Default or, if any such Default or Event of Default existed or exists, describing its nature and the action the Company has taken with respect thereto. 8.3 Accountants' Certificates. Each set of annual financial statements delivered pursuant to Section 8.1(b) will be accompanied by a certificate of the accountants who certify such financial statements, stating that they have reviewed this Agreement and whether, in making their audit, they have become aware of any Default or Event of Default, and, if any Default or Event of Default then exists, describing its nature. 8.4 Inspection. The Company will permit representatives of each Purchaser and the representatives of each other institutional holder of the Notes, at the Company's expense, to visit and inspect any of the Properties of the Company or any Subsidiary, to examine and make copies and abstracts of all their books of account, records, and other papers, and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants (and by this provision the Company authorizes said accountants to discuss the finances and affairs of the Company and its Subsidiaries) all at reasonable times and as often as may be reasonably requested. All nonpublic information furnished to each Purchaser pursuant to this Agreement shall be treated as confidential information by such Purchaser. Each Purchaser agrees to use reasonable efforts to refrain from disclosing such information to any other Person (excluding any of the Purchasers' officers, employees, agents or counsel), except (1) in connection with selling or otherwise realizing upon such Purchaser's interest in the Notes, (2) as may be necessary or desirable in connection with a request by governmental agency, regulatory or supervisory authority or court having or claiming jurisdiction over such Purchaser, including, without limitation, the National Association of Insurance Commissioners, (3) information obtained from a third party which is not subject to the provisions of this Section 8.4, (4) information that is otherwise publicly available, (5) in connection with the enforcement of such Purchaser's rights hereunder or under the Notes and (6) disclosures to other Purchasers or any subsequent holders of the Notes. 8.5 Quarterly Meetings. Within thirty (30) days after the end of each fiscal quarter of the Company, Robert J. Higgins, and such other representatives of the Company as the holders of the Notes may request, shall make themselves available at a reasonably convenient location to meet with representatives of the holders of the Notes to discuss the Company's budget, Business Plan and other finances and affairs of the Company, provided, however, that this requirement may be waived with respect to any quarter by the holders of not less than seventy-five percent (75%) of the outstanding principal amount of the Notes. 8.6 Monthly Monitoring Reports. The Company and Record Town shall pay up to $5,000.00 per month of the fees and expenses of Policano & Manzo, L.L.C. (or other financial consultant acceptable to the Banks, the holders of the Series B Notes and the holders of the Notes) incurred to produce monthly monitoring reports of the type heretofore furnished. The Company and Record Town shall give such financial consultant such access to its books and records as is necessary to permit such consultant to produce such reports on a timely basis. 8.7 Excess EBITDA. As soon as possible and in any event at least three (3) days before each Payment Date, the Company shall furnish to each holder of Notes a statement, certified by the chief financial officer of the Company, setting forth in reasonable detail the computation of (a) Consolidated EBITDA, (b) Excess EBITDA and (c) the Cumulative EBITDA Overage for the relevant fiscal period then most recently ended, and the resulting principal payment, if any, required by Section 5.6. 8.8 Tax Reserve. As soon as possible and in any event no later than ninety (90) days after the end of each fiscal year, the Company shall furnish to each holder of Notes a statement, certified by the chief financial officer of the Company, setting forth in reasonable detail the computations required by the third paragraph of Section 5.6 of this Agreement, including, as appropriate, the amount of any payment due to the holders of Notes pursuant to such paragraph or the amount by which the next payment required by Section 5.1(a) shall be reduced pursuant to such paragraph. 8.9 Additional Financial Information. The Company shall promptly deliver monthly unaudited financial statements (substantially consistent with the requirements of Part I, Item 1 of Form 10-Q under the Securities Exchange Act of 1934, as amended) to each holder of Notes. 9. EVENTS OF DEFAULT. 9.1 Nature of Events. An "Event of Default" shall exist if any of the following occurs and is continuing: (a) Principal Payments. Failure to make any payments of principal on any Note on or before the date such payment is due; (b) Interest Payments. Failure to pay interest or any other amount on any Note on or before the fifth (5th) day after the date such payment is due; (c) Particular Covenant Defaults. Failure to comply with any covenant contained in Sections 7.2, 7.4 through 7.32, or 8.1 or to make any payment required by Section 1.7; (d) Other Defaults. Failure to comply with any other provision of this Agreement or any other Financing Document, which failure continues for a period of thirty (30) days or more; (e) Warranties or Representations. Any warranty or representation by or on behalf of the Company or Record Town contained herein, in any Financing Document or in any instrument delivered in compliance with or in reference hereto or thereto shall prove to have been false or misleading in any material respect, or any warranty or representation by or on behalf of any Subsidiary contained in a Guaranty Agreement or any Financing Document shall prove to have been false or misleading in any material respect; (f) Default on Other Debt. Failure by the Company or any Subsidiary, to make any payment due on any other Debt or Security which individually or in the aggregate and including the face amount thereof plus accrued interest thereon, exceeds Five Hundred Thousand Dollars ($500,000), or any event shall occur or any condition shall exist, the effect of which is to cause (or permit any holder of such other Debt or Security or a trustee to cause) such other Debt or Security, or a portion thereof, to become due prior to its stated maturity or prior to its regularly scheduled dates of payment; (g) Involuntary Bankruptcy Proceedings. A custodian, receiver, liquidator or trustee of the Company or any Subsidiary, or of any of the Property of either, is appointed or takes possession and such appointment or possession remains in effect for more than sixty (60) days; or the Company, or any Subsidiary, is adjudicated bankrupt or insolvent; or an order for relief is entered under the Federal Bankruptcy Code against the Company or any Subsidiary; or any of the Property of either is sequestered by court order and the order remains in effect for more than sixty (60) days; or a petition is filed against the Company or any Subsidiary under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, and is not dismissed within sixty (60) days after filing; (h) Voluntary Petitions. The Company, or any Subsidiary, files a petition in voluntary bankruptcy or seeking relief under any provision of any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, or consents to the filing of any petition against it under any such law; (i) Assignments for Benefit of Creditors, etc. The Company or a Subsidiary makes an assignment for the benefit of its creditors, or generally fails to pay its debts as they become due, or consents to the appointment of or taking possession by a custodian, receiver, liquidator or trustee of the Company, or a Subsidiary, or of all or any part of the Property of either; (j) Undischarged Final Judgments. Final judgment or judgments for the payment of money aggregating in excess of Five Hundred Thousand Dollars ($500,000) is or are outstanding against one or more of the Company and its Subsidiaries and any one of such judgments has been outstanding for more than thirty (30) days from the date of its entry and has not been discharged in full or stayed; or (k) Other Restructuring Documents. Failure to comply with any provision under the Other Restructuring Documents such that an Event of Default (as defined therein) shall occur, whether or not such Event of Default is waived by the holders of the Series B Notes or the Banks. 9.2 Default Remedies. (a) If an Event of Default described in Sections 9.1(g) through 9.1(i) occurs, the entire outstanding principal amount of the Notes automatically shall become immediately due and payable, without the taking of any action on the part of any holder of the Notes or any other Person and without the giving of any notice with respect thereto. If an Event of Default described in Section 9.1(a) or 9.1(b) exists, any holder of Notes may, at its option, exercise any right, power or remedy permitted by law, including but not limited to the right by notice to the Company to declare the Notes held by such holder to be immediately due and payable. The Company shall notify each holder of its receipt of any such notice from any other and of the contents such notice. If any other Event of Default exists, the holder or holders of at least fifty-one percent (51%) in outstanding principal amount of the Notes (exclusive of Notes owned by the Company, Subsidiaries and Affiliates) may exercise any right, power or remedy permit ted by law, including but not limited to the right by notice to the Company to declare all the outstanding Notes immediately due and payable. Upon any acceleration the principal of the Notes declared due or automatically becoming due shall become immediately due and payable together with all interest accrued thereon without any presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, and the Company will immediately pay the entire principal of and interest accrued on such Notes. (b) No course of dealing or delay or failure on the part of any holder of the Notes to exercise any right shall operate as a waiver of such right or otherwise prejudice such holder's rights, powers and remedies. The Company will pay or reimburse the holders of the Notes, to the extent permitted by law, for all costs and expenses, including but not limited to reasonable attorneys' fees, incurred by them in collecting any sums due on the Notes or in otherwise enforcing any of their rights. 9.3 Annulment of Acceleration of Notes. If a declaration is made pursuant to Section 9.2(a), the holders of at least seventy-five percent (75%) of the outstanding principal amount of the Notes (exclusive of Notes owned by the Company, Subsidiaries and Affiliates) may annul such declaration and the consequences thereof if no judgment or decree has been entered for the payment of any monies due pursuant to such declaration and if all sums payable under the Notes and this Agreement (except principal or interest which has become due solely by reason of such declaration) have been duly paid. No such annulment shall extend to or waive any subsequent Default or Event of Default. 10. INTERPRETATION OF THIS AGREEMENT 10.1 Terms Defined. As used in this Agreement (including Exhibits), the following terms have the respective meanings set forth below or in the Section indicated: Adjusted Funded Debt -- with respect to any Person, means, without duplication: (1) liabilities for borrowed money, other than Current Debt; (2) liabilities secured by any Lien existing on Property owned by the Person (whether or not those liabilities have been assumed), other than Current Debt; (3) the aggregate amount of Guaranties by the Person, other than Guaranties of Current Liabilities of other Persons; (4) the aggregate Redemption Price of all outstanding Special Preferred Stock of such Person; and (5) any other obligations (other than deferred taxes), including without limitation, Financing Leases, which are required by generally accepted accounting principles to be shown as liabilities on its balance sheet and which are payable or which are unpaid more than one year from their creation. Adjusted Tangible Assets -- all assets except the following: (1) deferred assets, other than prepaid insurance, prepaid supplies and prepaid taxes; (2) patents, copyrights, trademarks, tradenames, franchises, good will, experimental or research and development expense and other similar intangibles; (3) Restricted Investments; (4) unamortized debt discount and expense; (5) assets located and notes and receivables due from obligors domiciled outside the United States, Puerto Rico or Canada; and (6) interests in any Person in which the Company owns less than 49% of the Voting Stock. Aetna -- means Aetna Life Insurance Company. Affiliate -- a Person (other than a Subsidiary) (1) which, directly or indirectly, controls, or is controlled by, or is under common control with, the Company, (2) which owns 5% or more of the Voting Stock of the Company or (3) 5% or more of the Voting Stock (or in the case of a Person which is not a corporation, 5% or more of the equity interest) of which is owned by the Company or a Subsidiary. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Bank Notes -- the promissory notes issued to evidence indebtedness under the Restated Credit Agreement. Banks -- at any time, means and includes each of the holders of Bank Notes at such time. Business Day -- any day other than a Saturday, Sunday or other day on which commercial banking institutions in the State of New York are authorized or obligated by law or executive order to be closed. Business Plan -- means the Company's Three Year Strategic Business Plan, dated as of December 12, 1995, as updated and supplied by the Company to the holders of the Notes prior to the Effective Date. Change of Control -- any of the following (1) a Person or group of Persons acting in concert (other than a Permitted Holder) becoming the beneficial owner of more than 50% (by number of votes) of the Voting Stock of the Company; or (2) a majority of the board of directors of the Company is replaced within any two-year period, excluding replacements due to resignations initiated by the incumbent board of directors or resignations due to the death or disability of any members of the incumbent board of directors. Collateral -- has the meaning ascribed to such term in the Collateral Trust Indenture. Collateral Trust Indenture -- Section 3.12. Commitment -- the obligation of the Banks to make loans and extend letters of credit pursuant to the Restated Credit Agreement. Company -- the introductory sentence hereof. Consolidated Current Assets -- at any date, means the amount at which the current assets of the Company and all Subsidiaries would be shown on a consolidated balance sheet of such Persons at such date, after eliminating inter-company items, in accordance with generally accepted accounting principles. Consolidated Current Liabilities -- at any date, means the amount at which the current liabilities of the Company and all Subsidiaries (excluding, for purposes of computing current liabilities, indebtedness under the Notes and the Series B Notes) would be shown on a consolidated balance sheet of such Persons at such date, plus (without duplication) the aggregate amount of their Guaranties of current liabilities of other Persons outstanding at such date. Consolidated EBITDA -- with respect to any period means, Consolidated Net Income for such period plus, to the extent deducted in determining Consolidated Net Income, depreciation and amortization expenses, interest expenses with respect to Debt and all federal, state and foreign income taxes. Consolidated Fixed Charges -- with respect to the Company and its Subsidiaries means for any period the sum of: (1) interest expenses with respect to their liabilities for borrowed money for such period, (2) imputed interest expenses on capitalized lease obligations for such period, and (3) fixed minimum rental expenses of real estate leases for such period, in each case determined on a consolidated basis. Consolidated Income Available For Fixed Charges -- with respect to the Company and all Subsidiaries, means on any date the sum of (1) Consolidated EBITDA, and (2) all fixed minimum rent expenses with respect to leases of real property, in each case determined on a consolidated basis for the period of four fiscal quarters ended on such date. Consolidated Net Income -- for any period, means net earnings after income taxes of the Company and each Subsidiary (only for the period during which it is a Subsidiary) determined on a consolidated basis, provided that there shall be excluded therefrom after giving effect to any related tax effect: (1) any gain arising from any write-up of assets; (2) any net gain or loss arising from the sale or disposition of capital assets (or reserves relating thereto); (3) items classified as extraordinary or nonrecurring (including any restructuring reserves); (4) any writeoff of deferred financing costs; and (5) the cumulative effect of changes in accounting principles in the year of adoption of such change. Consolidated Tangible Net Worth -- at any date means, the excess of (i) all amounts that would in conformity with GAAP be included in shareholders' equity on a consolidated balance sheet of the Company prepared as of such date, over (ii) the aggregate amount carried as of such date as consolidated assets on the books of the Company consisting of (x) goodwill, licenses, patents, trademarks, unamortized debt discount and expense, and other intangibles, (y) the cost of investments in excess of the net asset value thereof at the time of acquisition by the Company, and (z) writeups in the value of assets of the Company subsequent to the Effective Date. Credit Agreement Debt -- Section 7.5. Cumulative EBITDA Overage -- Section 5.6. Current Debt -- with respect to any Person means all its liabilities for borrowed money and all liabilities secured by any Lien existing on Property owned by that Person (whether or not those liabilities have been assumed) which, in either case, are payable on demand or within one year from their creation, plus the aggregate amount of all Guaranties by that Person of such liabilities of other Persons, but specifically excluding at all times all of the debt (whenever due) classified as long term debt on the consolidated balance sheet of the Company as of February 3, 1996. Current Liabilities -- at any date, means the amount at which the current liabilities of a Person would be shown on a balance sheet at such date, plus (without duplication) the aggregate amount of their Guaranties of current liabilities of other Persons outstanding at such date after eliminating intercompany items, in accordance with generally accepted accounting principles. Debt -- with respect to any Person, means its Current Debt and Adjusted Funded Debt. Default -- an event or condition which will, with the lapse of time or the giving of notice or both, become an Event of Default. Disqualified Preferred Stock -- means, with respect to any Person, any Preferred Stock of such Person which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is redeemable or is exchangeable for Debt, in whole or in part, on or prior to July 31, 2000. Distribution -- means and includes: (1) dividends or other distributions in respect of capital stock of the Company (except distributions of such stock pursuant to a stock split or stock dividend; provided that no stock dividend shall be paid in any capital stock of the Company other than its common stock); and (2) the redemption or acquisition of such stock or of warrants, rights or other options to purchase such stock (except when solely in exchange for such stock) unless made, contemporaneously, from the net proceeds of a sale of such stock. Any Distribution of Property other than cash shall be valued at fair market value. EBITDA Cushion -- with respect to any fiscal quarter end shall mean the amount set forth in the table below opposite the date of such quarter end. Quarter End EBITDA Level April 1996 $ 5,574,000 July 1996 $ 5,518,000 October 1996 $ 8,382,000 January 1997 $36,418,000 April 1997 $ 8,610,000 July 1997 $10,446,000 October 1997 $14,424,000 January 1998 $46,431,000 April 1998 $10,000,000 Economic Benefit -- with respect to Section 7.15 shall mean all rights, of whatever nature and with respect to all classes of capital stock of, or equity interests in, an entity to participate in any distribution with respect to such capital stock or equity interests, whether in the form of dividends, upon liquidation or otherwise. Effective Date -- means the date upon which all of the conditions set forth in Section 3 shall have been satisfied. ERISA -- means the Employee Retirement Income Security Act of 1974, as amended from time to time. Event of Default -- Section 9.1. Excess -- Section 7.29. Excess EBITDA -- Section 5.6 Excess Tax Reserve -- Section 5.6 Exchange Act -- means the Securities Exchange Act of 1934, as amended. Existing Note Agreement -- Section 1.1. Existing Notes -- Section 1.1. Existing Series B Note Agreement -- means that certain Amended and Restated Note Agreement, dated as of June 29, 1995, among the Company, Record Town and Aetna. Extraordinary Repayment -- Section 5.1(b). Financing Documents-- means the Restated Credit Agreement and the notes issued pursuant thereto, the Restated Series B Note Agreement, the Series B Notes, this Agreement, the Notes, the Guaranty Agreements, the Security Documents, the Intercreditor Agreement and the Collateral Trust Indenture. Financing Lease -- any lease which is shown or is required to be shown in accordance with generally accepted accounting principles as a liability on a balance sheet of the lessee thereunder. GAAP -- means generally accepted accounting principles in effect in the United States of America, at the time of the applicable report, applied in a manner consistent with that employed in the preparation of the financial statements described in Section 8.1. Guarantor -- means, at any time, Media Logic, Inc., Trans World Fixture Company, Inc., Saturday Matinee, Inc., Movies Plus, Inc., and each other direct or indirect Subsidiary, if any, of the Company meeting the requirements of Section 7.21. Guaranty -- by any Person means all obligations of such Person guaranteeing or in effect guaranteeing any indebtedness, dividend or other obligation of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including obligations incurred through an agreement, contingent or otherwise, by such Person: (i) to purchase such indebtedness or obligation or any Property or assets constituting security therefor, (ii) to advance or supply funds (1) for the purchase or payment of such indebtedness or obligation, or (2) to maintain working capital or any balance sheet or income statement condition; (iii) to lease Property, or to purchase Securities or other Property or services, primarily for the purpose of assuring the owner of such indebtedness or obligation of the ability of the primary obligor to make payment of the indebtedness or obligation; or (iv) otherwise to assure the owner of the indebtedness or obligation against loss; but excluding endorsements in the ordinary course of business of negotiable instruments for deposit or collection. The amount of any Guaranty shall be deemed to be the maximum amount for which such Person may be liable as guarantor, upon the occurrence of any contingency or otherwise, under or by virtue of its Guaranty. Guaranty Agreements -- Section 3.11 Intercreditor Agreement -- Section 3.7. Inventory Turnover -- means, at a particular date, the "Cost of Sales" as disclosed on the Company's year-to-date consolidated statements of income divided by the "Merchandise Inventory" amount set forth on the Company's consolidated balance sheets for such date. Lien -- any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether the interest is based on common law, statute or contract, and including but not limited to the security interest lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purposes of this Agreement, the Company or a Subsidiary shall be deemed to be the owner of any Property which it has acquired or holds subject to a Financing Lease or a conditional sale agreement or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes, and such retention or vesting shall be deemed to create a Lien on the Property. Movies Plus Proceeds -- Section 5.1(b). Noteholders' Percentage -- shall mean a fraction the numerator of which is 47.5 and the denominator of which is 140. Net Asset Sale Proceeds -- means, with respect to any asset sale, the fair market value of the aggregate amount of consideration received by the Company or any Subsidiary, as the case may be, from such asset sale, after, (a) provision for all income or other taxes payable as a result of such asset sale and (b) payment of brokerage commissions and other reasonable fees and expenses related to such asset sale. For purposes of this definition, the board of directors of the Company shall determine in good faith the fair market value of non-cash consideration. Notes -- Section 1.2. Other Restructuring Documents -- Section 2.16. Payment Date -- the final day of each February, May, August and November in each year. Pension Plan -- Section 2.15. Permitted Holder -- means collectively Robert J. Higgins and his estate, spouse, children, heirs, legatees, and legal representatives, and any bona fide trust of which one or more of the foregoing are the sole beneficiaries or the grantors thereof and over which trust one or more of the foregoing acts as trustee and possesses the power to direct the management thereof. Person -- an individual, partnership, sole proprietorship, corporation, business trust, limited liability company, joint stock company, unincorporated organization, joint venture, governmental authority or other entity of whatever nature. Pledge Agreement -- Section 3.12. Preferred Stock -- means, with respect to any Person, any class or classes of capital stock (however designated) which is preferred as to the payment of dividends or distributions or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over any other class of capital stock of such Person. Prime Rate -- means, at any time, the prime rate of interest that is charged to the Company and Record Town by the Banks at such time with respect to borrowings under the Restated Credit Agreement. Prior Indebtedness -- means without duplication: (1) unsecured Adjusted Funded Debt and Current Debt of Subsidiaries, other than Record Town (except for debt to the Company or a Subsidiary); (2) Adjusted Funded Debt and Current Debt of the Company and its Subsidiaries, other than Record Town (except for debt to the Company or a Subsidiary), secured by any Lien on the Property of the Company or any Subsidiary; and (3) the redemption or liquidation value (whichever is greater) of all equity Securities of Subsidiaries (other than common stock) which are not legally and beneficially owned by the Company and its Subsidiaries. For purposes of this definition only, Adjusted Funded Debt and Current Debt of Subsidiaries shall not include the Guaranties by the Subsidiaries of the obligations of the Company under this Agreement. Property -- any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. Purchase Money Mortgage -- any Lien on Property existing at the time of the original acquisition by the Company or a Subsidiary of such Property or granted or retained in connection with the acquisition or improvement by the Company or a Subsidiary of such Property in order to permit or facilitate the financing of such acquisition or improvement. Purchasers -- shall mean the purchasers listed on Annex 1 attached hereto. Record Town -- the introductory sentence hereof. Redemption Price -- with respect to any Special Preferred Stock, the highest aggregate price at which such Special Preferred Stock is redeemable at any time or under any circumstance on or prior to July 31, 2000. Related Person -- any Person (whether or not incorporated) which is under common control with the Company within the meaning of Section 414(c) of the Internal Revenue Code of 1986, as amended, or of Section 4001(b) of ERISA. Required Guarantor -- Section 7.21. Restated Credit Agreement -- means, collectively, those certain Amended and Restated Revolving Credit Agreements, each dated as of the date hereof, among the Company, Record Town and each of NBD Bank, Bear Stearns & Co., Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Banco Santander Trust & Banking Corporation (Bahamas) Ltd. Restated Series B Note Agreement -- means that certain Amended and Restated Note Agreement, dated as of the date hereof, among the Company, Record Town and the Series B Noteholder, pursuant to which the Company and Record Town have issued the Series B Notes. Restricted Investments -- all Property, including all investments in any Person, whether by acquisition of stock, indebtedness, other obligation or security, or by loan, advance, capital contribution, or otherwise, except: (1) investments in one or more Subsidiaries or any corporation which concurrently with such investment becomes a Subsidiary; (2) Property to be used in the ordinary course of business; (3) current assets arising from the sale of goods and services in the ordinary course of business; (4) advances to and guaranties of loans to employees for expenses incurred in the ordinary course of business; (5) investments in direct obligations of the United States with final maturities not in excess of one year from the date of acquisition; (6) investments in certificates of deposit maturing within one year from the date of acquisition issued by a bank organized under the laws of the United States having capital, surplus, and undivided profits, aggregating at least $100,000,000; (7) investments in commercial paper issued by any corporation organized under the laws of the United States rated in the highest category by Moody's Investors Service, Inc. or Standard & Poor's Corporation; (8) investments in money market funds registered under the Investment Company Act of 1940 which invest in securities which are permitted under clause (5), (6), or (7) above; (9) investments in tax-exempt municipal bonds maturing not more than one year from the date of issue and which have at least a "MIG-1" rating from Moody's Investors Services, Inc. or an "SP-1" rating from Standard and Poor's Corporation; (10) guaranties by the Company of long-term leases of Subsidiaries; and (11) investments in licensed departments or retail (including, without limitation, retail mail order) joint ventures in the music, video, or entertainment businesses. Securities Act -- means the Securities Act of 1933, as amended. Security -- shall have the same meaning as in Section 2(1) of the Securities Act of 1933, as amended. Security Agreement -- Section 3.12. Security Documents -- means the Collateral Trust Indenture, the Security Agreement, the Pledge Agreement, the Concentration Bank Account Agreement, the Trademark Security Agreement and the Movies Plus Subordination Agreement, as the same may be amended from time to time. Security Trustee -- IBJ Schroder Bank & Trust Company, in its capacity as Security Trustee under the Collateral Trust Indenture, and its successors in such capacity. Series B Noteholder -- at any time, means: (a) if such time is prior to the Effective Date, the holder or holders of the promissory notes issued and outstanding at such time under the Existing Series B Note Agreement; and (b) if such time is on or after the Effective Date, the holder or holders of the Series B Notes issued and outstanding at such time. Series B Notes -- means and includes each of the joint and several Variable Rate Senior Notes, Series B, Due July 31, 1998, issued by the Company and Record Town in the aggregate principal amount of $15,227,362.80 pursuant to the Restated Series B Note Agreement. Special Preferred Stock -- any Preferred Stock which by its terms (or by the terms of any Security into which it is convertible or for which it is exchangeable) is either redeemable at the option of the holder thereof or is automatically redeemable upon the happening of any event (other than the occurrence of a stated specific date of mandatory redemption thereof). Subsidiary -- a corporation, partnership or entity of which at least 50% of the outstanding Voting Stock is at the time, directly or indirectly, owned or controlled by the Company. Subsidiary Stock -- Section 7.13. Tangible Net Worth -- at any time means the shareholders' equity of any company (including Preferred Stock, but not including Disqualified Preferred Stock), excluding any patents, copyrights, trademarks, tradenames, franchises, goodwill, experimental expense and other similar intangible assets. Tax Refund -- Section 5.1(b). Tax Reserve Deficiency -- Section 5.6 Trademark Security Agreement -- Section 3.12. Voting Stock -- Securities or other interests the holders of which are ordinarily, in the absence of contingencies, entitled to elect the corporate directors (or Persons performing similar functions). Waiver Agreement -- means the letter agreement dated as of March 11, 1996, as amended, among the Company, Record Town and the Purchasers. Wholly-Owned Subsidiary -- any Subsidiary, all of the equity Securities (except directors' qualifying shares) of which are owned by the Company and/or the Company's other Wholly-Owned Subsidiaries. 10.2 Accounting Principles. Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made under this Agreement, this shall be done in accordance with generally accepted accounting principles at the time in effect, to the extent applicable, except where such principles are inconsistent with the requirements of this Agreement. 10.3 Directly or Indirectly. Where any provision in this Agreement refers to any action which a Person is prohibited from taking, the provision shall be applicable whether such action is taken directly or indirectly by such Person, including actions taken by or on behalf of any partnership in which such Person is a general partner and all liabilities of such partnerships shall be considered liabilities of such Person for purposes of this Agreement. 10.4 Section Headings and Table of Contents; Independent Construction. (a) Section Headings and Table of Contents, etc. The titles of the Sections of this Agreement and the Table of Contents of this Agreement appear as a matter of convenience only, do not constitute a part hereof and shall not affect the construction hereof. The words "herein," "hereof," "hereunder" and "hereto" refer to this Agreement as a whole and not to any particular Section or other subdivision. References to Sections are, unless otherwise specified, references to Sections of this Agreement. References to Annexes and Exhibits are, unless otherwise specified, references to Exhibits and Annexes attached to this Agreement. (b) Independent Construction. Each covenant contained herein shall be construed (absent an express contrary provision herein) as being independent of each other covenant contained herein, and compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with one or more other covenants. 10.5 Governing Law. This Agreement and the Notes shall be governed by and construed in accordance with New York law. 11. MISCELLANEOUS 11.1 Notices. (a) Method; Address. All communications hereunder or under the Notes shall be in writing, shall be delivered by (i) nationwide overnight courier, and (ii) facsimile transmission, and shall be addressed, if to the Company and/or Record Town, at the address and telecopy number of the Company, as follows: Trans World Entertainment Corp. 38 Corporate Circle Albany, New York 12203 Attention: Robert J. Higgins Telecopy No.: (518) 869-4819 with a copy to: Jones, Day, Reavis & Pogue 77 West Wacker Chicago, Illinois 60601-1692 Attention: David S. Kurtz Telecopy No.: (312) 782-8585 and if to any of the holders of the Notes, (A) if such holder is a Purchaser, at the address set forth on Annex 1 for such holder, and further including any parties referred to on such Annex 1 which are required to receive notices in addition to such holder, and (B) if such holder is not a Purchaser, at the address and telecopy number set forth in the register for the registration and transfer of Notes maintained pursuant to Section 6.1 for such holder, or to any such party at such other address as such party may designate by notice duly given in accordance with this Section 11.1. (b) When Given. Any communication addressed and delivered as herein provided shall be deemed to be received when actually delivered to the address of the addressee (whether or not delivery is accepted) or received by the telecopy machine of the recipient. Any communication not so addressed and delivered shall be ineffective. 11.2 Reproduction of Documents. This Agreement and all documents relating hereto, including, without limitation, (a) consents, waivers and modifications which may hereafter be executed, (b) documents received by any of the Purchasers at the closing hereunder (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to any of the Purchasers, may be reproduced by any Purchaser by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process and such Purchaser may destroy any original document so reproduced. The Company agrees and stipulates that any such reproduction shall, to the extent permitted by applicable law, be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by such Purchaser in the regular course of business) and that any enlargement, facsimile or further reproduction of such reproduction s hall likewise be admissible in evidence. 11.3 Survival. All warranties, representations, and covenants made by the Company or Record Town herein or on any certificate or other instrument delivered by it or on its behalf under or in reference to this Agreement shall be considered to have been relied upon by each Purchaser and shall survive the delivery to each of the Purchasers of the Notes regardless of any investigation made by any of the Purchasers or on any of the Purchasers' behalf. All statements in any such certificate or other instrument shall constitute warranties and representations by the Company and Record Town hereunder. 11.4 Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, except that neither the Company nor Record Town may transfer or assign any of their rights or interests hereunder without the prior written consent of the holders of the Notes. The provisions of this Agreement are intended to be for the benefit of all holders, from time to time, of the Notes, and shall be enforceable by any holder, whether or not an express assignment to such holder of rights under this Agreement has been made by any Purchaser or any Purchaser's successor or assign. 11.5 Amendment and Waiver. This Agreement may be amended, and the observance of any term of this Agreement may be waived, with (and only with) the written consent of the Company, Record Town and the holders of at least seventy-five percent (75%) of the outstanding principal amount of the Notes (exclusive of Notes owned by the Company, Subsidiaries and Affiliates); provided, that no such amendment or waiver of any of the provisions of Sections 1 through 4 shall be effective as to any Purchaser unless consented to by such Purchaser in writing; and provided further, that no such amendment or waiver shall, without the written consent of the holders of all the outstanding Notes, (i) subject to Section 9.3, change the amount or time of any repayment or payment of principal or the rate or time of payment of interest, (ii) amend Section 7.21, (iii) amend Section 9, or (iv) amend this Section 11.5. Executed or true and correct copies of any amendment or waiver effected pursuant to the provisions of this Section 11.5 shall be delivered by the Company to each holder of outstanding Notes promptly following the date on which the same shall become effective. No such amendment or waiver shall extend to or affect any provision or obligation not expressly amended or waived. 11.6 Duplicate Originals. Two or more duplicate originals of this Agreement may be signed by the parties, each of which shall be an original but all of which together shall constitute one and the same instrument. 11.7 Waiver and Release. For and in consideration of the agreements contained in this Agreement and the Notes, and other good and valuable consideration, the receipt and sufficiency of all of which are hereby acknowledged, each of the Company and Record Town (the Company and Record Town being collectively referred to in this Section 11.7 as the "Releasors") does hereby jointly and severally fully RELEASE, REMISE, ACQUIT, IRREVOCABLY WAIVE and FOREVER DISCHARGE each of the Purchasers, together with their respective predecessors, successors, assigns, subsidiaries, affiliates and agents and all of their respective past, present and future officers, directors, shareholders, employees, contractors and attorneys, and the predecessors, heirs, successors and assigns of each of them (the Purchasers and all of the foregoing being collectively referred to in this Section 11.7 as the "Released Parties"), from and with respect to any and all Claims (as defined below). As used in this Section 11.7, the term "Claims" shall mean and include any and all, and all manner of, action and actions, cause and causes of action, suits, disputes, controversies, claims, debts, sums of money, offset rights, defenses to payment, agreements, promises, notes, bonds, bills, covenants, losses, damages, judgments, executions and demands of whatever nature, known or unknown, whether in contract, in tort or otherwise, at law or in equity, for money damages or dues, recovery of property, or specific performance, or any other redress or recompense which have accrued or may ever accrue, may have been had, may be now possessed, or may or shall be possessed in the future by or on behalf of any one or more of the Releasors against any one or more of the Released Parties for, upon, by reason of, on account of, or arising from or out of, or by virtue of, any transaction, event or occurrence, duty or obligation, indemnification, agreement, promise, warranty, covenant or representation, breach of fiduciar y duty, breach of any duty of fair dealing, breach of confidence, breach of funding commitment, undue influence, duress, economic coercion, conflict of interest, negligence, bad faith, malpractice, violations of federal or state securities laws or the Racketeer Influenced and Corrupt Organizations Act, intentional or negligent infliction of mental distress, tortious interference with contractual relations, tortious interference with corporate governance or prospective business advantage, breach of contract, deceptive trade practices, libel, slander, usury, conspiracy, wrongful acceleration of any indebtedness, wrongful foreclosure or attempt to foreclose on any collateral relating to any indebtedness, action or inaction, relationship or activity, service rendered, matter, cause or thing, whatsoever, express or implied, transpiring, entered into, created or existing from the beginning of time to the date of the execution of this Agreement in respect of the Existing Notes or the Existing Note Agreement, and sha ll include, but not be limited to, any and all Claims in connection with, as a result of, by reason of, or in any way related to or arising from the existence of any relationships or communications by and between the Releasors and the Released Parties with respect to the Existing Notes, the agreements pursuant to which the Existing Notes were issued, and all agreements, documents and instruments related thereto, as presently constituted and as the same may from time to time be amended. The Releasors acknowledge that they may hereafter discover facts different from or in addition to those they now know or believe to be true with respect to the Claims herein released. Notwithstanding the foregoing, the Releasors agree that this Section 11.7 shall survive the termination hereof and shall remain effective in all respects and waive the right to make any new, different or additional claim on account of such different or additional facts. The Releasors acknowledge that no representation or warranty of any kind or character has been made to the Releasors by any one or more of the Released Parties or any agent, representative or attorney of the Released Parties to induce the execution of this Agreement containing this Section 11.7. The Releasors hereby represent and warrant unto the Released Parties that (a) the Releasors have the full right, power, and authority to execute and deliver this Agreement containing this Section 11.7 without the necessity of obtaining the consent of any other party; (b) the Releasors have received independent legal advice from attorneys of their choice with respect to the advisability of granting the release provided herein, and with respect to the advisability of executing this Agreement containing this Section 11.7; (c) the Releasors have not relied upon any statements, representations or promises of any of the Released Parties in executing this Agreement containing this Section 11.7, or in granting the release provided herein; (d) the Releasors have not entered into any other agreements or understandings relating to the Claims; (e) the terms of this Section 11.7 are contractual, not a mere recital, and are the result of negotiation among all the parties; and (f) this Section 11.7 has been carefully read by, and the contents hereof are known and understood by, and it is signed freely by the Releasors. The Releasors covenant and agree not to bring any claim, action, suit or proceeding regarding or related in any manner to the matters released hereby, and the Releasors further covenant and agree that this Section 11.7 is a bar to any such claim, action, suit or proceeding. All prior discussions and negotiations regarding the Claims have been and are merged and integrated into, and are superseded by, this Section 11.7. The Releasors understand, agree and expressly assume the risk of any fact not recited, contained or embodied in this Section 11.7 which may hereafter turn out to be other than, different from, or contrary to, the facts now known to the Releasors or believed by the Releasors to be true, and further agree that this Section 11.7 shall not be subject to termination, modification, or rescission, by reason of any such difference in facts. 11.8 Indemnification. The Company and Record Town agree to indemnify the Purchasers and their respective directors, officers, employees, agents and attorneys from, and hold each of them harmless against, any and all losses, liabilities, claims, damages or expenses incurred by any of them arising out of or by reason of any investigation or litigation or other proceedings (including any threatened investigation, litigation or other proceedings) relating to, or in connection with, the Notes including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation, litigation or other proceedings (but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified). If this Agreement is satisfactory to each Purchaser, please so indicate by signing the acceptance at the foot of a counterpart of this Agreement and return such counterpart to the Company, whereupon this Agreement will become binding between us in accordance with its terms. Very truly yours, TRANS WORLD ENTERTAINMENT CORPORATION By /s/Robert J. Higgins -------------------- Name: Robert J. Higgins Title: President RECORD TOWN, INC. By /s/Robert J. Higgins -------------------- Name: Robert J. Higgins Title: President Accepted: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By /s/Victor Khosla ---------------- Name: Victor Khosla Title: Managing Director OAKTREE CAPITAL MANAGEMENT, LLC, as agent and on behalf of certain funds and accounts By /s/Bruce A. Karsh ----------------- Name: Bruce A. Karsh Title: President By /s/Kenneth Liang ---------------- Name: Kenneth Liang Title: Managing Director & General Counsel FERNWOOD ASSOCIATES, L.P. By /s/Ian R. MacKenzie ------------------- Name: Ian R. MacKenzie Title: General Partner FERNWOOD RESTRUCTURINGS LTD. By /s/Ian R. MacKenzie ------------------- Name: Ian R. MacKenzie Title: General Partner INTERNATIONALE NEDERLANDEN (U.S.) CAPITAL CORPORATION By /s/Joan M. Chiappe ------------------ Name: Joan M. Chiappe Title: Vice President EX-4.2 3 AMENDED AND RESTATED NOTE AGREEMENT TRANS WORLD ENTERTAINMENT CORPORATION and RECORD TOWN, INC. AMENDED AND RESTATED NOTE AGREEMENT Dated as of July 26, 1996 $15,227,362.80 Variable Rate Senior Notes, Series B, Due July 31, 1998 TABLE OF CONTENTS Page 1. THE NOTES 1 1.1 Background. 1 1.2 Authorization of Amendment and Restatement. 2 1.3 Amendment and Restatement. 3 1.4 Acquisition for Investment. 3 1.5 Failure of Conditions. 3 1.6 Expenses; Issue Taxes. 4 1.7 Restructuring Fee 5 2. WARRANTIES AND REPRESENTATIONS 5 2.1 Subsidiaries. 5 2.2 Corporate Organization and Authority. 5 2.3 Business, Property, Debt, Liens and Restrictions. 6 2.4 Financial Statements; Material Adverse Change. 6 2.5 Full Disclosure. 7 2.6 Pending Litigation; Compliance with Law. 7 2.7 Title to Properties. 7 2.8 Patents and Trademarks. 7 2.9 Sale of Notes is Legal and Authorized; Obligations are Enforceable. 8 2.10 No Defaults. 8 2.11 Governmental Consent. 8 2.12 Taxes. 9 2.13 Margin Securities. 9 2.14 ERISA. 9 2.15 Company Actions. 9 2.16 Restated Credit Agreement; Restated Series A Note Agreement 10 2.17 Movies Plus, Inc 10 3. CLOSING CONDITIONS 10 3.1 Opinions of Counsel. 11 3.2 Compliance with this Agreement. 11 3.3 Private Placement Number. 11 3.4 Execution and Delivery of this Agreement and the Notes 11 3.5 Restated Credit Agreement. 11 3.6 Restated Series A Note Agreement. 12 3.7 Intercreditor Agreement. 12 3.8 Restructuring Fee. 12 3.9 Expenses. 12 3.10 Interest on Existing Notes. 12 3.11 Subsidiary Guaranties. 13 3.12 Collateral Trust Indenture and Other Security Documents. 13 3.13 Movies Plus Subordination 13 3.14 Representations And Warranties True 14 3.15 Authorization of Transactions 14 3.16 Proceedings Satisfactory 14 4. DIRECT PAYMENT 14 5. REPAYMENTS 14 5.1 Mandatory Early Repayments. 14 5.2 Early Repayment Option. 15 5.3 Notice of Optional Repayment. 16 5.4 Repayment Upon Change of Control. 16 5.5 Repayment Upon Material Asset Sale or Tax Refund. 16 5.6 Repayment from Excess EBITDA 17 5.7 Partial Early Payments To Be Pro Rata 18 6. REGISTRATION; SUBSTITUTION OF NOTES 18 6.1 Registration of Notes. 18 6.2 Exchange of Notes. 18 6.3 Replacement of Notes. 18 7. COMPANY BUSINESS COVENANTS 19 7.1 Payment of Taxes and Claims. 19 7.2 Maintenance of Properties and Corporate Existence. 19 7.3 Maintenance of Office. 20 7.4 Liens and Encumbrances. 20 7.5 Limitations On Debt Incurrence; Prepayments and Amendments. 22 7.6 Subsidiary Debt. 23 7.7 Current Ratio. 23 7.8 Maintenance of Ownership. 23 7.9 Fixed Charge Ratio. 23 7.10 Tangible Net Worth. 24 7.11 Tangible Net Worth of Record Town 24 7.12 Distributions and Investments. 24 7.13 Sale of Property and Subsidiary Stock. 24 7.14 Merger and Consolidation. 25 7.15 Guaranties. 25 7.16 ERISA Compliance. 25 7.17 Transactions with Affiliates. 25 7.18 Tax Consolidation. 26 7.19 Acquisition of Notes. 26 7.20 Lines of Business. 26 7.21 Required Subsidiary Guaranties. 26 7.22 Limitations on Preferred Stock. 26 7.23 Limitation on Inventory Turnover 26 7.24 Maintenance of Consolidated EBITDA. 27 7.25 Limitation on Capital Expenditures 27 7.26 Limitation on Leases 27 7.27 Limitation on Sale and Leaseback 27 7.28 Limitation on Changes in Fiscal Year 27 7.29 Limitation on Debt to Consolidated Tangible Net Worth. 28 7.30 Store Openings. 28 7.31 No Amendment of Debt Instruments; Maintenance of Accounts 28 7.32 Revolver Sweep 29 7.33 Foreign Subsidiaries 29 8. INFORMATION AS TO COMPANY 29 8.1 Financial and Business Information. 29 8.2 Officers' Certificates. 32 8.3 Accountants' Certificates. 32 8.4 Inspection. 32 8.5 Quarterly Meetings. 33 8.6 Monthly Monitoring Reports. 33 8.7 Excess EBITDA. 33 8.8 Tax Reserve. 33 8.9 Additional Financial Information 33 9. EVENTS OF DEFAULT. 34 9.1 Nature of Events. 34 9.2 Default Remedies. 35 9.3 Annulment of Acceleration of Notes. 36 10. INTERPRETATION OF THIS AGREEMENT 36 10.1 Terms Defined. 36 10.2 Accounting Principles. 46 10.3 Directly or Indirectly. 46 10.4 Section Headings and Table of Contents; Independent Construction. 46 10.5 Governing Law. 47 11. MISCELLANEOUS 47 11.1 Notices. 47 11.2 Reproduction of Documents. 48 11.3 Survival. 48 11.4 Successors and Assigns. 48 11.5 Amendment and Waiver. 48 11.6 Duplicate Originals. 49 11.7 Waiver and Release. 49 11.8 Indemnification. 51 ANNEX 1 -- Purchaser Information EXHIBIT A -- Form of Note EXHIBIT B -- Disclosure Schedules EXHIBIT C-1 -- Form of Matthew H. Mataraso Legal Opinion EXHIBIT C-2 -- Form of Jones, Day, Reavis & Pogue Legal Opinion EXHIBIT D -- Form of Intercreditor Agreement EXHIBIT E -- Form of Subsidiary Guaranty EXHIBIT F -- Form of Collateral Trust Indenture EXHIBIT G -- Form of Security Agreement EXHIBIT H -- Form of Trademark Security Agreement EXHIBIT I -- Form of Pledge Agreement EXHIBIT J -- Form of Concentration Bank Account Agreement EXHIBIT K -- Form of Movies Plus Subordination Agreement EXHIBIT L -- Contents of Monthly Report TRANS WORLD ENTERTAINMENT CORPORATION RECORD TOWN, INC. 38 Corporate Circle Albany, New York 12203 AMENDED AND RESTATED NOTE AGREEMENT $15,227,362.80 Variable Rate Senior Notes, Series B, Due July 31, 1998 Dated as of July 26, 1996 TO THE PURCHASER LISTED ON ANNEX 1 Dear Purchaser: Trans World Entertainment Corporation (formerly Trans World Music Corp., the "Company"), a New York corporation, and Record Town, Inc. ("Record Town"), a New York corporation and a Wholly-Owned Subsidiary of the Company, hereby jointly and severally agree with the Purchaser as follows: 1. THE NOTES 1.1 Background. Pursuant to an Amended and Restated Note Agreement dated as of June 29, 1995 (the "Existing Note Agreement"), the Company and Record Town issued Seventeen Million Five Hundred Thousand Dollars ($17,500,000) in aggregate principal amount of their joint and several Variable Rate Senior Notes due July 31, 1996 (the "Existing Notes"). The Existing Notes are substantially in the form of Exhibit B attached to the Existing Note Agreement. The aggregate principal amount of Existing Notes presently outstanding is $15,227,362.80. Certain Events of Default have occurred under the Existing Note Agreement and are currently the subject of the Waiver Agreement. The Company and Record Town have requested an extension of the maturity date of the Existing Notes and the modification of certain covenants and other provisions contained in the Existing Note Agreement. The Purchasers have, subject to the satisfaction of the conditions precedent set forth in Section 3 of this Agreement, consented to certain of such requests in consideration of an increased rate of interest and other modifications. The mutual agreement of the parties as to such matters is set forth in the amendment and restatement of the Existing Note Agreement and the Existing Notes provided for in this Agreement. 1.2 Authorization of Amendment and Restatement. Each of the Company and Record Town hereby authorizes, agrees and consents to the Amendment and Restatement in their entirety of the Existing Note Agreement and the Existing Notes as provided for herein. The Existing Notes, as amended and restated by Exhibit A to this Agreement, shall be hereinafter referred to individually as a "Note" and, collectively, as the "Notes". The obligations of the Company and Record Town under the Notes and this Agreement shall be guaranteed on a senior basis by all Required Guarantors. The Company and Record Town hereby authorize the execution and delivery to the Purchaser of the Notes, which Notes shall: (a) be substituted in the place of the Existing Notes; (b) be dated the Effective Date; (c) mature on July 31, 1998; (d) bear interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal balance thereof at a rate equal to: (i) prior to June 30, 1998, the greater of eleven and one-half percent (11.50%) per annum or two and one-half percent (2.50%) per annum over the Prime Rate, and (ii) from and after June 30, 1998, the greater of fourteen percent (14%) per annum or five percent (5.0%) per annum over the Prime Rate, but in no event at a rate which exceeds the highest rate allowed by applicable law, payable monthly (in arrears) on the final day of each calendar month in each year, commencing on July 31, 1996 until the principal amount thereof shall be due and payable; (e) bear interest, payable on demand, on any overdue principal (including any overdue prepayment of principal) and (to the extent permitted by applicable law) on any overdue installment of interest, at a rate equal to the lesser of (i) one and one-half percent (1.50%) per annum over the rate otherwise applicable thereto, or (ii) the highest rate allowed by applicable law; and (f) be in the form of the Note set out in Exhibit A hereto. The term "Notes" as used herein shall include each Note delivered pursuant to any provision of this Agreement, and each Note delivered in substitution or exchange for any such Note. Whether or not specifically provided in any particular Section of this Agreement, Record Town will be jointly and severally liable with the Company for all obligations under the Notes and this Agreement. 1.3 Amendment and Restatement. Subject to the satisfaction of the conditions precedent set forth in Section 3 of this Agreement, the Purchaser, by its execution of this Agreement, hereby agrees and consents to the Amendment and Restatement in its entirety of the Existing Note Agreement by this Agreement and the termination of the Waiver Agreement, and, upon the satisfaction of such conditions precedent, the Existing Note Agreement and the Waiver Agreement shall be deemed so amended and restated or terminated, as the case may be. Subject to the satisfaction of the conditions precedent set forth in Section 3 of this Agreement, the Purchaser, by its execution of this Agreement, hereby agrees and consents to the Amendment and Restatement in their entirety of the Existing Notes and the substitution of the Notes therefor. On the Effective Date, the Company agrees, subject to the satisfaction of the conditions precedent set forth in Section 3 of this Agreement, to execute and deliver to the Purchaser the aggregate principal amount of Notes set forth opposite its name on the schedule attached to this Agreement as Annex 1, in replacement of its Existing Notes. Contemporaneously with the receipt by the Purchaser of such Notes, the Purchaser hereby agrees to re-deliver to the Company for cancellation the Existing Notes held by it. All amounts owing under and evidenced by the Existing Notes as of the Effective Date shall continue to be outstanding under, and shall after the Effective Date be evidenced by, the Notes, and shall be payable in accordance with this Agreement. 1.4 Acquisition for Investment. The Purchaser represents to the Company and Record Town, and by agreeing to the amendment and restatement of the Existing Note Agreement and the substitution of the Notes for the Existing Notes it is specifically understood and agreed, that it is acquiring the Notes for investment for its own account or the account of its affiliated entities and with no present intention of distributing or reselling the Notes or any part thereof to anyone other than an affiliated entity, but without prejudice to its right at all times to: (a) sell or otherwise dispose of all or any part of the Notes under a registration statement filed under the Securities Act, or in a transaction exempt from the registration requirements of the Securities Act; (b) have control over the disposition of all of its assets to the fullest extent required by any applicable insurance law. It is understood that, in making the representations set out in Sections 2.9 and 2.11 hereof, the Company and Record Town are relying, to the extent applicable, upon the representation in the immediately preceding sentence. 1.5 Failure of Conditions. If the conditions specified in Section 3 hereof have not been fulfilled on or prior to June 30, 1996, this Agreement shall terminate, and the Existing Note Agreement and the Existing Notes shall continue to be in full force and effect. 1.6 Expenses; Issue Taxes. (a) Generally. Whether or not the transactions contemplated by this Agreement are consummated, the Company will promptly (and in any event within thirty (30) days of receiving any statement or invoice therefor) pay all expenses relating to this Agreement, including but not limited to: (i) the cost of reproducing this Agreement and the other Financing Documents; (ii) the reasonable fees and disbursements of the Purchaser's special counsel, the Purchaser's financial advisor, and the Security Trustee. (iii) the Purchaser's out-of-pocket expenses; (iv) all expenses relating to any Guaranty Agreement; (v) all expenses relating to any amendments or waivers pursuant to the provisions of this Agreement or "workouts" with respect hereto, including, without limitation, all out-of-pocket fees, costs and expenses paid or incurred by any holder of any Note or any security trustee acting on behalf of any such holder in connection with the negotiation, preparation, drafting, implementation, amendment, modification, administration and enforcement of this Agreement, the Notes or any other Financing Document, or for auditing, appraising, evaluating or otherwise monitoring the Collateral or other credit support for the Notes; and (vi) all costs and expenses, including attorneys' fees, incurred by the holder of any Note in attending any meeting held pursuant to Section 8.5 or enforcing any rights under this Agreement or in the Notes or in responding to any subpoena or other legal process issued in connection with this Agreement or the transactions contemplated hereby, including without limitation, costs and expenses incurred in any bankruptcy case. The Company will also pay all taxes in connection with the issuance and sale of the Notes and in connection with any modification of the Notes and will save the Purchaser harmless against any and all liabilities with respect to such taxes. (b) Special Counsel and Financial Advisor. Without limiting the generality of the foregoing, it is agreed and understood that the Company will pay, on the Effective Date, the fees and disbursements of the Purchaser's special counsel and financial advisor which are reflected in the statements delivered by such Persons on or before the Effective Date. (c) Survival. The obligations of the Company under this Section 1.6 shall survive the payment of the Notes and the termination of this Agreement. 1.7 Restructuring Fee. In consideration of the Purchaser's willingness to enter into the transactions contemplated hereby, the Company shall pay to the Purchaser, on a pro rata basis, a restructuring fee as described below. A portion of said fee equal to one percent (1.0%) of the principal amount of Notes held by the Purchasers on the Effective Date shall be payable on the Effective Date in accordance with Section 3.8. A portion of said fee equal to one half of one percent (0.50%) of the principal amount of the Notes held by the Purchasers on July 31, 1997 shall be payable to the Purchasers on July 31, 1997, but said amount shall not be payable (and the Company and Record Town shall not be liable therefor) if the Notes are paid in full prior to July 31, 1997. A portion of said restructuring fee equal to $625,000 shall be payable on the earlier of August 1, 1998 or the acceleration of the Notes pursuant to Section 9.2, but said amount shall not be payable (and the Company and Record Town shall not be liable therefor) if the Note s are paid in full prior to the earlier of August 1, 1998 or such acceleration. 2. WARRANTIES AND REPRESENTATIONS To induce the Purchaser to enter into this Agreement, the Company and Record Town jointly and severally warrant and represent to the Purchaser that as of the Effective Date each of the following statements will be true and correct: 2.1 Subsidiaries. Part 2.1 of Exhibit B to this Agreement correctly identifies: (a) each of the Company's Subsidiaries, its jurisdiction of incorporation and the percentage of its Voting Stock owned by the Company and by each other Subsidiary, and (b) each of the Company's Affiliates (other than Subsidiaries) and the nature of their affiliation. The Company and each Subsidiary is the legal and beneficial owner of all of the shares of Voting Stock it purports to own of each Subsidiary, free and clear in each case of any Lien. All such shares have been duly issued and are fully paid and nonassessable. 2.2 Corporate Organization and Authority. The Company, and each Subsidiary, (a) is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, (b) has all requisite power and authority and all necessary licenses, permits, franchises and other governmental authorizations to own and operate its Properties and to carry on its business as now conducted and as presently proposed to be conducted, and (c) has duly qualified and is authorized to do business and is in good standing as a foreign corporation in each jurisdiction where the character of its Properties or the nature of its activities makes such qualification necessary. 2.3 Business, Property, Debt, Liens and Restrictions. (a) The Company's Annual Report on Form 10-K for the fiscal year ended February 3, 1996 filed by the Company with the Securities and Exchange Commission and previously delivered to the Purchaser correctly describes the general nature of the business and principal Properties of the Company and its Subsidiaries. (b) Part 2.3(b) of Exhibit B to this Agreement correctly lists all outstanding Debt of (including all Guaranties of the Company and the Subsidiaries of such Debt), and all Liens (other than those permitted by Clauses (1) - (6) of Section 7.4(a)) on Property of, the Company and its Subsidiaries. Neither the Company nor any Subsidiary has agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its Property, whether now owned or hereafter acquired, to be subject to a Lien not permitted by Section 7.4(a). (c) Neither the Company nor any Subsidiary is a party to any agreement, or subject to any charter or other corporate restriction, which restricts its right or ability to incur Debt, other than this Agreement, the Restated Series A Note Agreement and the Restated Credit Agreement. 2.4 Financial Statements; Material Adverse Change. (a) (i) The consolidated balance sheets of the Company and its Subsidiaries as of February 3, 1996 and January 28, 1995 and the related statements of income, retained earnings and changes in cash flows for the fiscal years ended on such dates, all accompanied by reports thereon containing opinions without qualification, by KPMG Peat Marwick LLP, independent certified public accountants, and (ii) the consolidated balance sheets of the Company and its Subsidiaries as of January 29, 1994, January 30, 1993 and February 1, 1992 and the related statements of income, retained earnings and changes in cash flows for the fiscal years ended on such dates, all accompanied by reports thereon containing opinions without qualification, by Ernst & Young LLP, independent certified public accountants, copies of which have been delivered to the Purchaser, have been prepared in accordance with generally accepted accounting principles consistently applied, and present fairly the financial position of the Company and its Subsidi aries as of such dates and the results of their operations for such periods. Such consolidated financial statements include the accounts of all Subsidiaries for all periods during which a subsidiary relationship has existed. (b) Since February 3, 1996, there have been no materially adverse changes in the Properties, business, prospects, operating results or condition (financial or otherwise) of Record Town, the Company and the Subsidiaries, taken as a whole. 2.5 Full Disclosure. The financial statements referred to in Section 2.4 do not, nor does this Agreement or any written statement furnished by or on behalf of the Company or Record Town to the Purchaser in connection with this Agreement, contain any untrue statement of a material fact or omit a material fact necessary to make the statements contained therein or herein not misleading, in light of the circumstances under which they were made. There is no agreement, restriction or other factual matter which the Company has not disclosed to the Purchaser in writing which materially affects adversely nor, so far as the Company can now reasonably foresee, will materially affect adversely the Properties, business, prospects, operating results or condition (financial or otherwise) of Record Town, the Company and the Subsidiaries, taken as a whole, or the ability of the Company or Record Town to perform this Agreement, the Notes and the other Financing Documents. 2.6 Pending Litigation; Compliance with Law. There are no proceedings or investigations pending, or to the knowledge of the Company or Record Town threatened, against or affecting the Company or any Subsidiary in or before any court, governmental authority or agency or arbitration board or tribunal which, individually or in the aggregate, might materially and adversely affect the Properties, business, prospects, operating results or condition (financial or otherwise) of Record Town, the Company and the Subsidiaries, taken as a whole, or the ability of Record Town or the Company to perform this Agreement, the Notes and the other Financing Documents. Neither the Company nor any Subsidiary is in default with respect to any order, decree or judgment of any court, governmental authority or agency or arbitration board or tribunal, or in violation of any laws or governmental rules or regulations where such default or violation might materially and adversely affect the Properties, business, prospects, operating results or condition (financial or otherwise) of Record Town, the Company and the Subsidiaries, taken as a whole, or the ability of the Company or Record Town to perform this Agreement, the Notes and the other Financing Documents. 2.7 Title to Properties. The Company, and each Subsidiary, has good and marketable title in fee simple (or its equivalent under applicable law) to all the real Property, and has good title to all the other Property, it purports to own, including that reflected in the most recent balance sheet referred to in Section 2.4 (except as sold or otherwise disposed of in the ordinary course of business), free from Liens not permitted by Section 7.4(a). 2.8 Patents and Trademarks. The Company, and each Subsidiary, owns or possesses all the patents, trademarks, service marks, trade names, copyrights, licenses and rights with respect to the foregoing necessary for the present and planned future conduct of its business, without any known conflict with the rights of others. Part 2.8 of Exhibit B to this Agreement correctly sets forth all of the trademarks, service marks, trade names, copyrights, licenses and related rights owned by the Company or any Subsidiary. 2.9 Sale of Notes is Legal and Authorized; Obligations are Enforceable. (a) Sale of Notes is Legal and Authorized. Each of the issuance, sale and delivery of the Notes by the Company and Record Town, the execution and delivery of this Agreement, the Notes and the other Financing Documents by each of the Company, Record Town and the Subsidiaries, and compliance by each of the Company, Record Town and each of the Subsidiaries with all of the provisions of each Financing Document to which it is a party: (i) is within the corporate powers of the Company, Record Town and each such Subsidiary, respectively; and (ii) is legal and does not conflict with, result in any breach of any of the provisions of, constitute a default under, or result in the creation of any Lien upon any Property of the Company or any Subsidiary under the provisions of, any agreement, charter instrument, bylaw, or other instrument to which the Company or any Subsidiary is a party or by which any of them or their respective Properties may be bound. (b) Obligations are Enforceable. Assuming the due execution and delivery by the Purchaser of this Agreement, each of this Agreement, the Notes and each other Financing Document has been duly authorized by all necessary action on the part of each of the Company, Record Town and each Subsidiary party thereto; has been executed and delivered by duly authorized officers of each of the Company, Record Town and each Subsidiary party thereto; and constitutes the legal, valid and binding obligation of each of the Company, Record Town and each Subsidiary party thereto, enforceable in accordance with its terms, except that the enforceability of this Agreement, the Notes and each other Financing Document may be: (i) limited by applicable bankruptcy, reorganization, arrangement, insolvency, moratorium or other similar laws affecting the enforceability of creditors' rights generally; and (ii) subject to the availability of equitable remedies. 2.10 No Defaults. No event has occurred and no condition exists which, upon the issuance of the Notes and the execution and delivery of this Agreement and each other Financing Document, would constitute a Default or an Event of Default. Neither the Company nor any Subsidiary is in violation in any respect of any term of any charter instrument, by-law or other instrument to which it is a party or by which it or any of its Property may be bound. 2.11 Governmental Consent. Neither the nature of the Company or of any Subsidiary, or of any of their respective businesses or Properties, nor any relationship between the Company or any Subsidiary and any other Person, nor any circumstance in connection with the offer, issue, sale or delivery of the Notes or the execution, delivery and performance of this Agreement and the other Financing Documents is such as to require a consent, approval or authorization of, or filing, registration or qualification with, any governmental authority on the part of the Company or any Subsidiary. 2.12 Taxes. (a) All tax returns required to be filed by the Company or any Subsidiary in any jurisdiction have in fact been filed, and all taxes, assessments, fees and other governmental charges upon the Company or any Subsidiary, or upon any of their respective Properties, income or franchises, which are due and payable have been paid. Neither the Company nor any Subsidiary knows of any proposed additional tax assessment against it. Federal income tax returns of the Company and its Subsidiaries have been audited by the Internal Revenue Service or the statute of limitations has run for all years to and including the fiscal year ending February 1, 1992 and there is no liability for such tax asserted against the Company or any Subsidiary for that or any prior year. (b) The provisions for taxes on the books of the Company and each Subsidiary are adequate for all open years, and for its current fiscal period. The amount of the reserve for Federal income taxes reflected in the consolidated balance sheet of the Company and its Subsidiaries as of February 3, 1996 is an adequate provision for such Federal income taxes, if any, as may be payable by the Company and its Subsidiaries for the fiscal years 1992 through 1995, the only open years. 2.13 Margin Securities. None of the transactions contemplated in this Agreement will violate or result in a violation of Section 7 of the Exchange Act or any regulations issued pursuant thereto, including, without limitation, Regulations G, T and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II or require that any filing be made under any thereof. Neither the Company nor any Subsidiary owns or intends to carry or purchase any "margin stock" within the meaning of said Regulation G, including margin stock originally issued by it. 2.14 ERISA. Neither the Company nor any Related Person of the Company now maintains any "employee pension benefit plan", as such term is defined in Section 3 of ERISA (herein referred to as a "Pension Plan"), nor has the Company nor any Related Person maintained a Pension Plan in the past. No employee of the Company or of any of its Related Persons is entitled, as the result of current employment by the Company or any Subsidiary, to participate in any "multiemployer pension plan" as such term is defined in Section 4001(a)(3) of ERISA. 2.15 Company Actions. Neither the Company, Record Town nor any other Subsidiary has taken any action or permitted any condition to exist which would have been prohibited by Section 7 if such Section had been binding and effective at all times during the period from February 3, 1996 to and including the Effective Date. 2.16 Restated Credit Agreement; Restated Series A Note Agreement. (a) The Company has delivered to the Purchaser true, complete and correct copies of each of the Restated Credit Agreement and the Restated Series A Note Agreement (together, the "Other Restructuring Documents"), together with all exhibits, schedules and disclosure letters referred to therein or delivered pursuant thereto, and all amendments thereto, waivers relating thereto and other side letters or agreements affecting the terms thereof. None of such documents and agreements has been amended or supplemented, nor have any of the provisions thereof been waived, except pursuant to a written agreement or instrument which has heretofore been consented to by the Purchaser and no consent or waiver has been granted by the Company or any Subsidiaries thereunder. Each of the Other Restructuring Documents has been duly executed and delivered by the Company, and, to the best of the Company's knowledge, by each other party thereto and is a legal, valid and binding obligation of the Company, and, to the best of the Co mpany's knowledge, of each other party thereto, enforceable, in all material respects, in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or other similar laws affecting the rights of creditors generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). (b) The representations and warranties of the Company, any Subsidiary and each other party to the Other Restructuring Documents are, to the best of the Company's knowledge, true and correct in all material respects on the Effective Date as if made on and as of such date. Such representations and warranties, together with the definitions of all defined terms used therein, are by this reference deemed incorporated herein mutatis mutandis, and the Purchaser is entitled to rely on the accuracy of such representations and warranties. (c) To the best of the Company's knowledge, each party to the Other Restructuring Documents has complied in all material respects with all terms and provisions contained therein on its part to be observed. 2.17 Movies Plus, Inc. Except for (i) Debt owed to the Company, Record Town or a Subsidiary, and (ii) each of (A) its Guaranty Agreements and (B) its guarantee, in favor of the Banks, of the obligations of the Company and Record Town under the Restated Bank Agreement, the liabilities of Movies Plus, Inc., no portion of which constitutes Debt, do not exceed $500,000 in the aggregate. 3. CLOSING CONDITIONS The amendment and restatement of the Existing Note Agreement and the Existing Notes, and the substitution of the Notes for the Existing Notes are subject to the satisfaction of the following conditions precedent: 3.1 Opinions of Counsel. The Purchaser shall have received from (a) Matthew H. Mataraso, counsel for the Company and Record Town, and (b) Jones, Day, Reavis & Pogue, special counsel for the Company and Record Town, closing opinions, each dated as of the Effective Date, substantially in the respective forms set forth in Exhibits C-1 and C-2 hereto and as to such other matters as they may reasonably request. This Section 3.1 shall constitute direction by the Company to such counsel to deliver such closing opinions to the Purchaser. 3.2 Compliance with this Agreement. The Company and Record Town shall have performed and complied with all agreements and conditions contained herein which are required to be performed or complied with by the Company and Record Town, respectively, on or prior to the Effective Date, and such performance and compliance shall remain in effect on the Effective Date. The Purchaser shall have received a certificate, dated the Effective Date and signed by a duly authorized officer of each of the Company and Record Town, certifying that all of the agreements and conditions specified in the immediately preceding sentence have been satisfied. 3.3 Private Placement Number. The Company shall have obtained from Standard & Poor's Corporation and furnished to the Purchaser a private placement number for the Notes. 3.4 Execution and Delivery of this Agreement and the Notes The Company, Record Town and the Purchaser shall have entered into this Agreement and each party hereto shall be prepared to perform its respective obligations hereunder. Each of the Company, Record Town and the Purchaser shall have executed and delivered a counterpart of this Agreement to each other party hereto. The Purchaser shall have received one or more Notes (in the amount(s) and bearing the registration number(s) set forth below its name on Annex 1), dated the Effective Date and duly executed and delivered by each of the Company and Record Town, in replacement of the Existing Notes held by the Purchaser. 3.5 Restated Credit Agreement. The Company, Record Town and the Banks shall have entered into the Restated Credit Agreement, which agreement and all documents and instruments executed and delivered in connection therewith shall be in form and substance satisfactory to the Purchaser. The Company shall have delivered to the Purchaser true, correct and complete copies of the Restated Credit Agreement and all such documents and instruments, including all waivers relating thereto and all side letters or agreements affecting the terms thereof. 3.6 Restated Series A Note Agreement. The Company, Record Town and each of the Series A Noteholders shall have entered into an agreement amending and restating the Existing Series A Note Agreement, which agreement and all documents and instruments executed and delivered in connection therewith shall be in form and substance satisfactory to the Purchaser. 3.7 Intercreditor Agreement. The Purchaser, each of the Series A Noteholders and the Banks shall have executed and delivered an Intercreditor Agreement in the form of Exhibit D (the "Intercreditor Agreement"), and such Intercreditor Agreement and all documents and instruments executed and delivered in connection therewith shall be in form and substance satisfactory to all parties thereto, and such Intercreditor Agreement shall have been accepted and agreed to by each of the Company, Record Town and the Security Trustee, and shall be in full force and effect. 3.8 Restructuring Fee. The Company and Record Town shall have paid to the Purchaser, and the Purchaser shall have received, a portion of the restructuring fee described in Section 1.7 equal to the product of: (a) one percent (1.0%); times (b) the outstanding principal amount of the Notes held by the Purchaser on the Effective Date. Such payment shall be made by wire transfer of immediately available funds to the account of the Purchaser to which the Company and Record Town are obligated to make payments of interest in respect of the Purchaser's Notes. 3.9 Expenses. All fees and disbursements required to be paid pursuant to Section 1.6(a)(ii), Section 1.6(a)(iii) and Section 1.6(b) hereof shall have been paid in full. 3.10 Interest on Existing Notes. The Company shall have paid to the Purchaser all accrued interest on the Existing Notes held by the Purchaser to (but not including) the Effective Date at the rate of 10.50% per annum, and additional interest on the Purchaser's Existing Notes for the period from May 1, 1996 to (but not including) the Effective Date at a rate equal to the excess, if any, of the rate which would have been payable on the Notes pursuant to Section 1.2(d) if the Notes had been outstanding at all times from and after May 1, 1996 over 10.50% per annum. 3.11 Subsidiary Guaranties. Each Subsidiary (other than Record Town) shall have executed and delivered an agreement in the form of Exhibit E (collectively, the "Guaranty Agreement") unconditionally guarantying payment of the Notes. 3.12 Collateral Trust Indenture and Other Security Documents. (a) Each of the Company, Record Town, the Guarantors and the Security Trustee shall have executed and delivered to the Purchaser an original counterpart of a Collateral Trust Indenture, in the form of Exhibit F (the "Collateral Trust Indenture"), and the Collateral Trust Indenture shall be in full force and effect. (b) Each of the Company, Record Town, the Guarantors and the Security Trustee shall have executed and delivered to the Purchaser an original counterpart of a Security Agreement, in the form of Exhibit G (collectively the "Security Agreement"), and the Security Agreement shall be in full force and effect. (c) The Security Trustee and each of the Company, Record Town and the Guarantors shall have executed and delivered to the Purchaser an original counterpart of a Trademark Security Agreement, in the form of Exhibit H (collectively, the "Trademark Security Agreement"), and the Trademark Security Agreement shall be in full force and effect. (d) The Security Trustee and Record Town shall have executed and delivered to the Purchaser an original counterpart of a Pledge Agreement, in the form of Exhibit I (the "Pledge Agreement"), and the Pledge Agreement shall be in full force and effect. (e) The Company, the concentration account bank named therein and the Security Trustee shall have executed and delivered to the Purchaser an original counterpart of a Depository Bank Agreement in the form of Exhibit J (the "Concentration Bank Account Agreement"), and the Concentration Bank Account Agreement shall be in full force and effect. (f) The foregoing agreements shall secure the Notes and all of the obligations under this agreement pari passu with the obligations due under the Restated Series A Note Agreement and the Restated Credit Agreement; and the Purchaser shall have received evidence satisfactory to it that the Liens created by the foregoing agreements are valid and perfected Liens senior to all other Liens upon the Collateral. 3.13 Movies Plus Subordination. Each of the Company, Record Town and the Subsidiaries (other than Movies Plus, Inc.) shall have executed and delivered a subordination agreement in the form of Exhibit K (collectively, the "Movies Plus Subordination Agreement"), and the Movies Plus Subordination Agreement shall be in full force and effect. 3.14 Representations And Warranties True. The warranties and representations set forth in Section 2 hereof shall be true and correct as of the Effective Date. 3.15 Authorization of Transactions. Each of the Company and Record Town shall have authorized, by all necessary corporate action, the execution and delivery of this Agreement, the Notes and each of the other documents and instruments executed and delivered in connection herewith and the performance of all obligations of, and the satisfaction of all conditions precedent pursuant to this Section 3 by, and the consummation of all transactions contemplated by this Agreement by, the Company and Record Town. The Purchaser shall have received a certificate from each of the Company and Record Town, in form and substance satisfactory to the Purchaser and its special counsel, certifying the adoption of resolutions of the board of directors of the Company and Record Town, as the case may be, authorizing such execution, delivery, performance, satisfaction and consummation, which resolutions shall be attached to such certificate and shall be in full force and effect. Each such certificate shall indicate that there has been no resolution passed by such bo ard of directors which conflicts with, amends or rescinds such resolutions. 3.16 Proceedings Satisfactory. All proceedings taken in connection with the issuance of the Notes and all documents and papers relating thereto shall be satisfactory to the Purchaser and its special counsel. The Purchaser and its special counsel shall have received copies of such documents and papers as they may reasonably request in connection therewith, all in form and substance satisfactory to them. 4. DIRECT PAYMENT The Company agrees that, notwithstanding any provision in this Agreement or the Notes to the contrary, it will pay all sums becoming due to any institutional holder of Notes in the manner provided in Annex 1 or in any other manner as any institutional holder may designate to the Company in writing (without presentment of or notation on the Notes). 5. REPAYMENTS 5.1 Mandatory Early Repayments. (a) In addition to paying the entire remaining principal amount and interest due on the Notes at maturity, the Company and Record Town agree on a joint and several basis to repay, and there shall become due and payable on each of the dates set out below, the principal amount of Notes set forth opposite such date: Payment Date Principal Amount 08/30/96 $562,500.00 11/30/96 $250,000.00 02/28/97 $1,875,000.00 05/30/97 $250,000.00 08/30/97 $250,000.00 11/30/97 $250,000.00 02/28/98 $500,000.00 05/30/98 $250,000.00 Each such repayment shall be at one hundred percent (100%) of the principal amount repaid, together with interest accrued thereon to the date of repayment. In certain circumstances the amount of one or more of the foregoing required repayments shall be deemed to have been reduced pursuant to Section 5.1(b) or Section 5.6. (b) Except as set forth in Section 5.6, the early repayment of any of the Notes pursuant to Section 5.2, Section 5.5 or Section 5.6 or the acquisition of the Notes by the Company or any Subsidiary shall not reduce or otherwise affect the obligations of the Company and Record Town to make any repayment required by Section 5.1(a); provided that if such early repayment is made with the proceeds of a tax refund from a period prior to the Effective Date (a "Tax Refund") or the proceeds of a sale of the stock or assets of Movies Plus, Inc., ("Movies Plus Proceeds") such early repayment shall reduce the next maturing repayments due under Section 5.1(a). If at any time one or more holders of the Notes shall be repaid in whole pursuant to Section 5.4 (each such repayment herein called an "Extraordinary Repayment"), then the principal amount of the Notes required to be repaid pursuant to Section 5.1(a) on each principal payment date following such Extraordinary Repayment shall be automatically reduced to an amount w hich equals the product of (i) the principal amount of the Notes required to be repaid on such date multiplied by (ii) a fraction (A) the numerator of which shall equal $15,227,362.80 minus the cumulative aggregate principal amount repaid pursuant to Section 5.4 after giving effect to such Extraordinary Repayment and (B) the denominator of which shall equal $15,227,362.80. 5.2 Early Repayment Option. Subject to Section 7.5(b) of this Agreement, the Company and Record Town may pay the Notes, in whole or in part, at any time at a price equal to the principal amount to be repaid together with interest on the principal amount so repaid accrued to the early repayment date. 5.3 Notice of Optional Repayment. The Company will give notice of any optional repayment of the Notes to each holder of the Notes not less than ten (10) days nor more than sixty (60) days before the date fixed for repayment, specifying: (a) such date; (b) the principal amount of the Notes and of such holder's Notes to be repaid on such date; and (c) the accrued interest applicable to the repayment. Notice of repayment having been so given, the principal amount of the Notes specified in such notice, together with the accrued interest thereon, shall become due and payable on the repayment date. 5.4 Repayment Upon Change of Control. The Company and Record Town will repay, and there shall be due and payable on the forty-fifth (45th) day following notice by the Company to the holders of Notes of a proposed Change of Control pursuant to Section 8.1(i) (or on the next succeeding Business Day if such forty-fifth (45th) day is not a Business Day), all of the Notes held by each holder of Notes; provided, that a holder of any Note may give notice to the Company on or before the thirtieth (30th) day following receipt by such holder of such notice from the Company, that such holder elects to forego such repayment pursuant to this Section 5.4, of the Notes held by it. Any such repayment must be effective prior to the effective time of any proposed Change of Control. The amount required to be paid to such holder shall be equal to one hundred percent (100%) of the principal amount of the Notes so repaid, together with interest accrued thereon to the date of repayment. If the Company shall fail to provide the notice required by Section 8.1(i), any holder of the Notes upon acquisition of knowledge of the failure by the Company to comply with the notice requirements of Section 8.1(i) may give notice to the Company of such failure. The Company shall immediately provide a copy of such notice to each other holder of the Notes and for purposes of the foregoing provisions of this Section 5.4, the date upon which such notice was given by such holder to the Company shall be deemed to be the date of notice by the Company of such proposed Change of Control. 5.5 Repayment Upon Material Asset Sale or Tax Refund. (a) Material Asset Sale. Not more than two Business Days following the consummation of any sale of (x) any Property (other than Collateral) of the Company or its Subsidiaries in one transaction or a series of related transactions, other than a sale of inventory in the ordinary course of the Company's business or in connection with store closings, which sale results in proceeds equal to or greater than $500,000, or (y) any Collateral, the Company and Record Town shall, subject to Section 5.5(c), pay (or cause the selling Subsidiary to pay) to the holders of the Notes an amount of principal equal to the product of (i) the Net Asset Sale Proceeds attributable to such sale multiplied by (ii) the Noteholders' Percentage. Nothing in this Section 5.5 shall be deemed to permit such an asset sale without the consent of the holders of the Notes obtained in accordance with Sections 7.13 and 11.5 of this Agreement. (b) Tax Refunds. Not more than two Business Days following the receipt of any Tax Refund, the Company and Record Town shall, subject to Section 5.5(c), pay to the holders of the Notes an amount of principal equal to the product of (i) the amount of such Tax Refund multiplied by (ii) the Noteholders' Percentage. (c) Certain Credits. Notwithstanding anything in Section 5.5(a) or Section 5.5(b) to the contrary and so long as no Default or Event of Default exists, no principal payment shall be due with respect to Movies Plus Proceeds or the proceeds of any Tax Refund under either of such Sections at any time, except to the extent that the aggregate amount of Movies Plus Proceeds and proceeds from Tax Refunds received by the Company or Record Town at or prior to such time exceeds the aggregate amount of principal payments actually made pursuant to Section 5.1(a) at or prior to such time. 5.6 Repayment from Excess EBITDA. In addition to all other payments of principal required by this Section 5, on each Payment Date the Company and Record Town will pay to the holders of the Notes a principal amount of Notes equal to the Noteholders' Percentage of forty-five percent (45%) of Excess EBITDA for the then current fiscal year (or, in the case of a February Payment Date, the fiscal year then most recently ended). For purposes of this Agreement, "Excess EBITDA" for any fiscal year shall mean the amount, if any, by which Consolidated EBITDA for such fiscal year (calculated as of the end of the most recently ended fiscal quarter) exceeds the EBITDA Cushion as of the end of such fiscal quarter. If immediately prior to the August or November Payment Date in any fiscal year the aggregate principal payments made with respect to such fiscal year pursuant to this Section 5.6 (exclusive of amounts deemed to have reduced payments due under Section 5.1(a)) are greater than the Noteholders' Percentage of forty-five percent (45%) of Excess EBITDA for such fiscal year, the amount of the next required payment due pursuant to Section 5.1(a) shall be deemed reduced by the amount of such overage (the "Cumulative EBITDA Overage"). The Cumulative EBITDA Overage, if any, existing immediately prior to a February Payment Date, shall in no event be deemed to reduce the payment required by Section 5.1(a) on such February Payment Date, but shall instead be applied to the principal payments due on the Notes in inverse order of maturity. If there is Excess EBITDA for a fiscal year, the Company and Record Town, not later than ninety (90) days after the end of such fiscal year, shall multiply the amount of Excess EBITDA for such fiscal year by a fraction the numerator of which shall be the aggregate amount of all federal, state, and local income tax liabilities shown as payable on consolidated tax returns filed or to be filed by the Company for such fiscal year, and the denominator of which shall be the amount of Consolidated EBITDA for such fiscal year. If the resulting number (the "Resulting Number") is less than forty percent (40%) of such Excess EBITDA, the Company shall immediately make a principal payment to the Noteholders in an amount equal to the Noteholders' Percentage multiplied by a number equal to the remainder of (i) forty percent (40%) of such Excess EBITDA, minus (ii) the Resulting Number. Payments made pursuant to the preceding sentence shall be applied to the principal payments due on the Notes in inverse order of maturity . If the Resulting Number is greater than forty percent (40%) of such Excess EBITDA and the Company and Record Town have made all payments of principal and interest required to have been made with respect to such fiscal year under this Section 5.6, the next principal payment required by Section 5.1(a) shall be deemed reduced by an amount equal to the Noteholders' Percentage multiplied by the remainder of the Resulting Number minus forty percent (40%) of such Excess EBITDA. 5.7 Partial Early Payments To Be Pro Rata. If there is more than one holder of the Notes, the aggregate principal amount of each required or optional partial payment (except a payment pursuant to Section 5.4, which shall be made as therein provided) of the Notes shall be allocated in units of One Thousand Dollars ($1,000) or multiples thereof among the holders of the Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid amounts of the Notes held by each such holder. 6. REGISTRATION; SUBSTITUTION OF NOTES 6.1 Registration of Notes. The Company will cause to be kept at its office maintained pursuant to Section 7.3, a register for the registration and transfer of the Notes. The names and addresses of the holders of the Notes, the transfer thereof and the names and addresses of the transferees of any of the Notes will be registered in the register. The Person in whose name any Note is registered shall be deemed and treated as the owner and holder thereof for all purposes of this Agreement, and the Company shall not be affected by any notice or knowledge to the contrary. 6.2 Exchange of Notes. Upon surrender of any Note to the Company at its office maintained pursuant to Section 7.3, the Company, upon request, will execute and deliver, at its expense (except as provided below), new Notes in exchange therefor, in denominations of at least One Hundred Thousand Dollars ($100,000) (except as may be necessary to reflect any principal amount not evenly divisible by One Hundred Thousand Dollars ($100,000)), in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note (a) shall be payable to such Person as the surrendering holder may request and (b) shall be dated and bear interest from the date to which interest has been paid on the surrendered Note or dated the date of the surrendered Note if no interest has been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any transfer. 6.3 Replacement of Notes. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note and (a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided, if the holder of the Note is an institutional investor, its own agreement of indemnity shall be deemed to be satisfactory), or (b) in the case of mutilation, upon surrender and cancellation of the Note, the Company at its expense will execute and deliver a new Note of like tenor, dated and bearing interest from the date to which interest has been paid on the lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest has been paid thereon. 7. COMPANY BUSINESS COVENANTS The Company and Record Town covenant that on and after the date of this Agreement until the Notes are paid in full: 7.1 Payment of Taxes and Claims. The Company, and each Subsidiary, will pay, before they become delinquent, (a) all taxes, assessments and governmental charges or levies imposed upon it or its Property other than deficiencies which arise in the ordinary course and are identified through audits and with respect to which (i) adequate book reserves have been established with respect thereto and (ii) such amounts due are paid by the Company or such Subsidiary immediately upon final determination that such amounts are due, and (b) all claims or demands of any kind (including but not limited to those of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons) which, if unpaid, might result in the creation of a Lien upon its Property; provided, that items in clauses (a) and (b) above need not be paid while being contested in good faith and by appropriate proceedings, if and for so long as (i) adequate book reserves have been established with respect thereto and (ii) the owning Person's title to its Property is not materially adversely affected and its use of the Property in the ordinary course of its business is not materially interfered with. 7.2 Maintenance of Properties and Corporate Existence. The Company will, and will cause each Subsidiary to: (a) Property. Maintain its Property in good condition, subject to ordinary wear and tear, and make all necessary renewals, replacements, additions, betterments and improvements thereto; provided that nothing contained in this Section 7.2 shall prevent the Company from closing any specific store location pursuant to Section 7.13 hereof; (b) Insurance. Maintain, with financially sound and reputable insurers, insurance with respect to its Properties and business against such casualties and contingencies, of such types (including public liability, larceny, embezzlement or other criminal misappropriation insurance) as is customary in the case of corporations of established reputations engaged in the same or a similar business and similarly situated, and in amounts acceptable to the holders of the Notes. (c) Financial Records. Keep accurate books of records and accounts in which full and correct entries will be made of all its business transactions, and will reflect in its financial statements adequate accruals and appropriations to reserves, all in accordance with generally accepted accounting principles; (d) Corporate Existence and Rights. Do or cause to be done all things necessary (i) to preserve and keep in full force and effect its existence, rights and franchises and (ii) to maintain each Subsidiary as a Subsidiary, except as otherwise permitted by Sections 7.13 and 7.14; and (e) Compliance with Law. Not be in violation of any laws, ordinances, orders, judgments or decrees or governmental rules and regulations to which it is subject and will not fail to maintain any licenses, permits, franchises or other governmental authorizations necessary to the ownership of its Properties or to the conduct of its business, if such violation or failure to maintain might reasonably be expected to materially adversely affect the Properties, business, prospects, operating results or condition (financial or otherwise) of Record Town or the Company and its Subsidiaries, taken as a whole. 7.3 Maintenance of Office. The Company and Record Town each will maintain an office in the State of New York where notices, presentations and demands in respect of this Agreement or the Notes may be made upon it. Such offices shall be maintained at 38 Corporate Circle, Albany, New York 12203 until such time as the Company shall notify the holders of the Notes of a change of location. 7.4 Liens and Encumbrances. (a) Negative Pledge. Neither the Company nor any Subsidiary will (1) cause or permit or (2) agree or consent to cause or permit in the future (upon the happening of a contingency or otherwise), any of its Property, whether now owned or hereafter acquired, to be subject to a Lien except: (1) Liens securing the payment of taxes, assessments, governmental charges or levies, or the claims or demands of mechanics, carriers, warehousemen, landlords and other like Persons, provided, that (A) they do not in the aggregate materially reduce the value of any Properties subject to such Liens or materially interfere with their use in the ordinary course of business and (B) if appropriate, all claims which such Liens secure are being actively contested in good faith and by appropriate proceedings; (2) Liens incurred or deposits made in the ordinary course of business (A) in connection with worker's compensation, unemployment insurance, social security and other like laws, or (B) to secure the performance of bids, tenders, sales contracts, leases, statutory obligations, surety, appeal and performance bonds and other similar obligations in each case not incurred in connection with the borrowing of money, the obtaining of advances or the payment of the deferred purchase price of Property; (3) Liens on Property of a Subsidiary, provided, they secure only obligations owing to the Company or another Subsidiary; (4) Liens created by or resulting from any litigation or proceedings that are being contested in good faith, and Liens arising out of judgments or awards against the Company or any Subsidiary, provided, that (A) the Company or such Subsidiary is in good faith prosecuting an appeal or proceedings for review of such Liens incurred by the Company or any Subsidiary for the purpose of obtaining a stay or discharge in the course of any legal proceeding to which the Company or such Subsidiary is a party, so long as the Company has set aside adequate accounting reserves; and (B) such Liens do not in the aggregate materially reduce the value of any of the Properties subject to the Liens or materially interfere with their use in the ordinary conduct of the owning company's business; (5) Liens or deposits in connection with leases, subleases, easements, rights of way, restrictions and other similar encumbrances granted to others in the ordinary course of business so long as they do not in the aggregate materially reduce the value of any Properties subject to the Liens; (6) Easements, rights-of-way, or restrictions and other similar encumbrances incurred in the ordinary course of business and not interfering with the ordinary conduct of the business of the Company or any Subsidiary; (7) Purchase Money Mortgages or conditional sale, finance lease or other title retention agreements or other Liens incurred, taken subject to or assumed in connection with the purchase, lease, improvement or construction of Property or to secure indebtedness incurred solely for the purpose of financing the acquisition, lease, construction or improvement of any of such Property to be subject to such mortgages, agreements or other Liens, provided, however, that such Purchase Money Mortgages (A) shall be permitted by Section 7.5(a)(iv) or Section 7.5(a)(v), and (B) shall not encumber any assets of the Company other than the Property so purchased; (8) Liens arising by operation of law and in the ordinary course of business in the form of rights of setoff, appropriation and application against the deposits and credits of the Company or any Subsidiary in favor of the banks where such deposits or credits are located, and including any rights arising pursuant to a participation or similar contractual agreement among any such bank and other banks which are members of a group providing credit to the Company whereby such bank agrees to share such rights of setoff with other banks which are members of such group; (9) Liens upon the Collateral created by one or more of the Security Documents; (10) Deposits in an aggregate amount not to exceed Five Hundred Thousand Dollars ($500,000) to secure the reimbursement obligations of the Company and/or Record Town in respect of standby or commercial letters of credit issued for the account of the Company and/or Record Town by parties other than the Banks; and (11) Liens set forth on Part 2.3(b) of Exhibit B hereto, provided, however, that such Liens shall not spread to cover other or additional Debt or Property of the Company or any Subsidiary. (b) Equal and Ratable Lien; Equitable Lien. In case any Property is subjected to a Lien in violation of Section 7.4(a), the Company will make or cause to be made provision whereby the Notes will be secured equally and ratably with all other obligations secured thereby, and in any case the Notes shall have the benefit, to the full extent that, and with such priority as, the holders may be entitled thereto under applicable law, of an equitable Lien on such Property securing the Notes. Such violation of Section 7.4(a) shall constitute an Event of Default hereunder, whether or not any such provision is made pursuant to this Section 7.4(b). 7.5 Limitations On Debt Incurrence; Prepayments and Amendments. Neither the Company nor any Subsidiary will: (a) be or become liable for any Adjusted Funded Debt other than: (i) the Notes; (ii) the Series A Notes; (iii) indebtedness not to exceed $65,260,126.26 in aggregate principal amount (the "Credit Agreement Debt") outstanding under the Restated Credit Agreement; (iv) indebtedness to others incurred for the purpose of purchasing equipment (other than computers, cash registers and related equipment referred to in clause (v) below), used or useful in the ordinary course of business of the Company or its Subsidiaries (provided that the aggregate amount of all such indebtedness shall not exceed $2,000,000 in any fiscal year); (v) indebtedness incurred by the Company upon reasonable and customary terms to replace and upgrade its (A) existing AS400 computer hardware and related equipment in an amount not to exceed Four Million Dollars ($4,000,000) in the aggregate and (B) existing POS cash register system in an amount not to exceed Six Million Dollars ($6,000,000) in the aggregate; (vi) reimbursement obligations i n an aggregate amount not to exceed Five Hundred Thousand Dollars ($500,000) secured by Liens permitted under Section 7.4(a)(10) and incurred in respect of standby or commercial letters of credit issued by parties other than the Banks for the account of the Company and/or Record Town; and (vii) other indebtedness outstanding on the Effective Date and reflected on Exhibit B; (b) make any optional prepayment of any Debt or consent to any optional reduction of the Commitment if, as a result thereof, the amount of the Commitment and the outstanding principal amounts of the Notes and of the Series A Notes do not bear the same relative proportion to one another as was the case on the Effective Date; or (c) amend any agreement governing or evidencing any Debt. Nothing in this Section 7.5 shall permit an expenditure not permitted by Section 7.25. 7.6 Subsidiary Debt. No Subsidiary, except for Record Town, will become liable for, have outstanding, or permit its Property to be subject to, any Prior Indebtedness. Movies Plus, Inc. shall have no Debt other than Debt which is (i) owing to the Company, Record Town, or a Guarantor and (ii) subject to the Movies Plus Subordination Agreement. 7.7 Current Ratio. As of the last day of the first, second and fourth fiscal quarters of the Company during each fiscal year, Consolidated Current Assets shall be not less than 150% of Consolidated Current Liabilities. As of the last day of the third fiscal quarter of the Company during each fiscal year, Consolidated Current Assets shall be not less than 135% of Consolidated Current Liabilities. For purposes of computations made to determine compliance with this Section 7.7, the actual cash balance of the Company and the Subsidiaries shall be deemed to be reduced by the amount thereof in excess of the product of $10,000 multiplied by the number of retail stores of the Company and the Subsidiaries actually open for business on the date of such computation, and any such excess shall be deemed to reduce accounts payable. 7.8 Maintenance of Ownership. The Company shall at all times directly or indirectly own, free and clear of all Liens (except as otherwise permitted by Section 7.4(a)(4) and Section 7.4(a)(9)), 100% of the outstanding capital stock of Record Town and each other Subsidiary; provided, however, that Record Town may contract for and consummate a sale of all or substantially all of the capital stock of Movies Plus, Inc. in accordance with Section 5.1(b). 7.9 Fixed Charge Ratio. On the final day of the first and second fiscal quarter of each fiscal year, Consolidated Income Available for Fixed Charges shall be not less than 100% of Consolidated Fixed Charges for the period of four (4) fiscal quarters ended on such dates. On the final day of the third fiscal quarter of each fiscal year and the fourth fiscal quarter of the 1996 fiscal year, Consolidated Income Available for Fixed Charges shall be not less than 110% of Consolidated Fixed Charges for the period of four (4) fiscal quarters ended on such dates. On the final day of the 1997 fiscal year, Consolidated Income Available for Fixed Charges shall be not less than 115% of Consolidated Fixed Charges for the fiscal year ended on such date. 7.10 Tangible Net Worth. As of the final day of each fiscal quarter set forth below, the Company will maintain Consolidated Tangible Net Worth of not less than the amount set forth opposite such fiscal quarter: Fiscal Quarter Amount 1st Quarter 1996 $75,000,000 2nd Quarter 1996 $75,000,000 3rd Quarter 1996 $75,000,000 4th Quarter 1996 $85,000,000 1st Quarter 1997 $80,000,000 2nd Quarter 1997 $80,000,000 3rd Quarter 1997 $80,000,000 4th Quarter 1997 $90,000,000 1st Quarter 1998 $80,000,000 7.11 Tangible Net Worth of Record Town. As of the final day of each fiscal quarter set forth below, Record Town will maintain Tangible Net Worth of not less than the amount set forth opposite such fiscal quarter: Fiscal Quarter Amount 1st Quarter 1996 $25,000,000 2nd Quarter 1996 $25,000,000 3rd Quarter 1996 $25,000,000 4th Quarter 1996 $35,000,000 1st Quarter 1997 $30,000,000 2nd Quarter 1997 $30,000,000 3rd Quarter 1997 $30,000,000 4th Quarter 1997 $40,000,000 1st Quarter 1998 $30,000,000 7.12 Distributions and Investments. Neither the Company nor any Subsidiary will declare, make or become obligated to make any Distribution or make or become obligated to make any Restricted Investment. 7.13 Sale of Property and Subsidiary Stock. Neither the Company nor any Subsidiary will (x) sell, lease, or otherwise transfer any of its Property (including, without limitation, the sale or discount of accounts receivable or notes receivable), or (y) permit any Subsidiary to issue or transfer any shares of its stock or any other Securities exchangeable or convertible into its stock (such stock and other Securities being called "Subsidiary Stock"), if the effect would be to reduce the direct or indirect proportionate interest of the Company in the outstanding Subsidiary Stock of the Subsidiary whose shares are the subject of the transaction, provided that these restrictions do not apply to: (1) the issue of directors' qualifying shares; (2) the transfer of Property (other than Subsidiary Stock) in the ordinary course of business; and (3) the transfer of Property by Movies Plus, Inc. or the transfer of the stock of Movies Plus, Inc., in each case, made in accordance with Section 5.1(b). 7.14 Merger and Consolidation. The Company will not, and will not permit any Subsidiary to, be a party to any merger or consolidation or sell, lease or otherwise transfer all or substantially all of its Property. 7.15 Guaranties. Neither the Company nor any Subsidiary will become liable for any Guaranty (except a Guaranty of any indebtedness, dividend or other obligation as to which the Company or a Subsidiary of which the Company enjoys at least 80% of the Economic Benefit is the primary obligor), unless (i) such Guaranty is permitted by Sections 7.5, 7.6 and 7.7, to the extent applicable, and (ii) the maximum amount of indebtedness, dividend or other obligation being guaranteed can be mathematically determined at the time the Guaranty is issued. 7.16 ERISA Compliance. Neither the Company nor any Related Person will at any time permit any Pension Plan maintained by it to: (i) engage in any "prohibited transaction" as such term is defined in Section 4975 of the Internal Revenue Code of 1986, as amended, or described in Section 406 of ERISA; (ii) incur any "accumulated funding deficiency" as such term is defined in Section 302 of ERISA, whether or not waived; or (iii) terminate under circumstances which could result in the imposition of a Lien on the Property of the Company or any Subsidiary pursuant to Section 4068 of ERISA. 7.17 Transactions with Affiliates. Neither the Company nor any Subsidiary will enter into any transaction, including, without limitation, the purchase, sale or exchange of Property or the rendering of any service, with any Affiliate except upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtained in a comparable arm's-length transaction with a Person not an Affiliate. 7.18 Tax Consolidation. The Company will not file or consent to the filing of any consolidated income tax return with any Person other than a Subsidiary. 7.19 Acquisition of Notes. Neither the Company nor any Subsidiary nor any Affiliate will, directly or indirectly, acquire or make any offer to acquire any Notes unless the Company or such Subsidiary or Affiliate has offered to acquire Notes, pro rata, from all holders of the Notes and upon the same terms. In case the Company acquires any Notes, such Notes shall thereafter be cancelled and no Notes shall be issued in substitution therefor. 7.20 Lines of Business. Neither the Company nor any Subsidiary will engage in any line of business if as a result thereof the business of the Company and its Subsidiaries taken as a whole would not be substantially the same as what it was at January 28, 1995 as described in the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1995. 7.21 Required Subsidiary Guaranties. The Company shall cause each of its Subsidiaries other than Record Town, on or before the later of the Effective Date or the tenth (10th) day after the acquisition of such Subsidiary, to enter into a guaranty of the Notes pursuant to an agreement to the effect and substantially in the form of Exhibit E hereto. Each Subsidiary required to execute a Guaranty Agreement pursuant to the provisions of Section 3.11 or this Section 7.21 shall be a "Required Guarantor". The Company shall cause each Required Guarantor to deliver an original executed copy of such Guaranty to each holder of Notes, together with certified copies of the resolutions of the board of directors of such Required Guarantor authorizing the execution, delivery and performance thereof, with appropriate shareholder consents or approvals attached. 7.22 Limitations on Preferred Stock. Neither the Company, Record Town nor any other Subsidiary will issue (i) any Preferred Stock which by its terms (or by the terms of any Security into which it is convertible or for which it is exchangeable) is exchangeable for Debt at the option of the holder thereof on or prior to July 31, 2000 or (ii) any Special Preferred Stock unless the issuance of such Special Preferred Stock is permitted at such time pursuant to Section 7.5. 7.23 Limitation on Inventory Turnover. The Company will not permit Inventory Turnover to fall below the following amounts at the end of the following fiscal quarters of each fiscal year: Fiscal Quarter Amount First .3 Second .6 Third .7 Fourth 1.5 7.24 Maintenance of Consolidated EBITDA. Consolidated EBITDA for each of the first three quarters of each fiscal year shall be not less than ($2,000,000). Consolidated EBITDA for the fourth fiscal quarter of 1996 shall be not less than $24,000,000. Consolidated EBITDA for the fourth fiscal quarter of 1997 shall be not less than $27,000,000. 7.25 Limitation on Capital Expenditures. The Company and the Subsidiaries shall not make capital expenditures which, in the aggregate, exceed the following amounts in the following fiscal years: Fiscal Year Beginning Amount 1996 $12,000,000 1997 $12,000,000 1998 (through July 31) $ 6,000,000 7.26 Limitation on Leases. Neither the Company nor any Subsidiary shall be or become liable under any agreement for the lease, hire or use of any personal property if the sum of (a) the aggregate maximum amount of all obligations of the Company and its Subsidiaries pursuant to all such agreements in the current or any future fiscal year plus (b) the aggregate outstanding indebtedness permitted under Section 7.5(a)(iv) hereof would exceed $2,000,000. Anything contained in this Section to the contrary notwithstanding, this provision shall not apply to a Financing Lease. 7.27 Limitation on Sale and Leaseback. Neither the Company nor any Subsidiary shall enter into any arrangement with any Person whereby the Company or any Subsidiary shall sell or transfer any Property, whether now owned or hereafter acquired, and thereafter rent or lease such Property or other Property which the Company or such Subsidiary intends to use for substantially the same purpose or purposes as the Property being sold or transferred. 7.28 Limitation on Changes in Fiscal Year. The Company shall not permit its fiscal year or the fiscal year of any Subsidiary to end on a day other than the Saturday closest to the last day of January, or change the method of determining fiscal quarters. 7.29 Limitation on Debt to Consolidated Tangible Net Worth. As of the final day of each fiscal quarter set forth below, the Company shall not permit the ratio of (a) total liabilities of the Company and its Subsidiaries to (b) Consolidated Tangible Net Worth, to exceed the amount set forth opposite such fiscal quarter: Fiscal Quarter Ratio 1st Quarter 1996 2.30 to 1 2nd Quarter 1996 2.50 to 1 3rd Quarter 1996 3.00 to 1 4th Quarter 1996 2.10 to 1 1st Quarter 1997 2.10 to 1 2nd Quarter 1997 2.30 to 1 3rd Quarter 1997 2.80 to 1 4th Quarter 1997 1.90 to 1 1st Quarter 1998 2.00 to 1 2nd Quarter 1998 2.10 to 1 For purposes of computations made to determine compliance with this Section 7.29, (x) Consolidated Tangible Net Worth shall be deemed to be reduced by the amount (the "Excess") by which cash on hand or cash equivalents as reflected on the Company's balance sheet exceeds the product of $10,000 multiplied by the number of retail stores of the Company and the Subsidiaries actually open for business on the date of computation, and (y) the Excess shall be deemed to reduce total liabilities dollar for dollar. 7.30 Store Openings. The Company shall not, and shall not permit any Subsidiary to, (i) open any new store other than relocations or (ii) enter into any lease in connection with or for the purpose of opening any new store if, after giving effect to the opening of such store or the entering into of such lease, a default under Section 7.25 would exist; provided, however, that in the ordinary course of business the Company and Record Town may enter into renewals of existing store leases. 7.31 No Amendment of Debt Instruments; Maintenance of Accounts. The Company shall not, without the prior written consent of all holders of the Notes: (a) amend, modify or supplement any of the terms of the Other Restructuring Documents (other than any such amendment, modification or change which would extend the maturity or reduce the amount of any payment of principal thereof or which would reduce the rate or extend the date for payment of interest thereon); or (b) maintain any cash balances or cash management accounts other than at one or more of the Banks or any other financial institution that has executed a valid Concentration Bank Account Agreement satisfactory to the Security Trustee; provided, however, that the Company may continue to maintain, in a manner consistent with its past practices, existing store accounts at one or more other banks whether or not such banks execute any such agency agreement. 7.32 Revolver Sweep. If on any date prior to the termination of the Commitment the aggregate cash balances of the Company, Record Town and the Subsidiaries (including cash on deposit and cash on hand) exceed the product of $15,000 multiplied by the number of retail stores then being operated by the Company, Record Town and the Subsidiaries, the Company shall, within one Business Day, cause the amount of such excess to be applied, first, to a non-permanent reduction of the outstanding indebtedness under the Restated Credit Agreement, and second, to cash collateralize the letters of credit outstanding under the Restated Credit Agreement. 7.33 Foreign Subsidiaries. The Company shall not, and shall not permit any Subsidiary to, create or permit to be created any Subsidiary under the laws of any jurisdiction other than the United States of America or a jurisdiction thereof. 8. INFORMATION AS TO COMPANY 8.1 Financial and Business Information. The Company will deliver to the Purchaser, and to each other institutional holder of outstanding Notes, and, in the case of Section 8.1(b) below, to the National Association of Insurance Commissioners, Securities Valuation Office, 195 Broadway, 19th Floor, New York, New York 10007: (a) Quarterly Statements. Within sixty (60) days after the end of each of the first three quarterly fiscal periods in each fiscal year of the Company, two copies of: (i) a consolidated balance sheet of the Company and its consolidated subsidiaries and of the Company and its Subsidiaries as at the end of that quarter, and (ii) consolidated statements of income, retained earnings and cash flows of the Company and its consolidated subsidiaries, and of the Company and its Subsidiaries, for that quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with that quarter, setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail and certified by a principal financial officer of the Company as presenting fairly the financial condition of the companies being reported upon and as having been prepared in accordance with generally accepted accounting principles consistently applied; (b) Annual Statements. Within ninety (90) days after the end of each fiscal year of the Company, two copies of: (i) a consolidated balance sheet of the Company and its consolidated subsidiaries, and of the Company and its Subsidiaries, as at the end of that year, and (ii) consolidated statements of income, retained earnings and cash flows of the Company and its consolidated subsidiaries, and of the Company and its Subsidiaries, for that year, setting forth in each case in comparative form the figures for the previous fiscal year, and, in the case of such consolidated financial statements, accompanied by an opinion of independent certified public accountants of recognized national standing stating that such financial statements fairly present the financial condition of the companies being reported upon and have been prepared in accordance with generally accepted accounting principles consistently applied (except for changes in application in which such accountants concur), and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as were considered necessary in the circumstances; (c) Audit Reports. Promptly upon receipt thereof, one copy of each other report submitted to the Company or any Subsidiary by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company or any Subsidiary; (d) SEC and Other Reports. Promptly upon their becoming available one copy of each report, notice or proxy statement sent by the Company to stockholders generally, and of each periodic report and any registration statement, prospectus or written communication (other than transmittal letters) in respect thereof filed by the Company with, or received by the Company in connection therewith from, any securities exchange or the Securities and Exchange Commission or any successor agency; (e) ERISA. Immediately upon becoming aware of the occurrence of any (i) "reportable event" as such term is defined in Section 4043 of ERISA, or (ii) "accumulated funding deficiency" as such term is defined in Section 302 of ERISA, or (iii) "prohibited transaction", as such term is defined in Section 4975 of the Internal Revenue Code of 1986, as amended, or described in Section 406 of ERISA, in connection with any Pension Plan or any trust created thereunder, a notice specifying the nature thereof, what action the Company or a Related Person is taking or proposes to take with respect thereto, and, when known, any action taken by the Internal Revenue Service with respect thereto; (f) Notice of Default or Event of Default. Immediately upon becoming aware of the existence of any Default or Event of Default hereunder or a Default or Event of Default under the Restated Credit Agreement (as defined therein), or a Default or Event of Default under the Restated Series A Note Agreement (as defined therein), a notice describing its nature and the action the Company is taking with respect thereto; (g) Notice of Claimed Default. Immediately upon becoming aware that the holder of any Note or of any Debt or Security of the Company or any Subsidiary has given notice or taken any other action with respect to a claimed default or Event of Default, a notice specifying the notice given or action taken by such holder, the nature of the claimed default or Event of Default and the action the Company is taking with respect thereto; (h) Report on Proceedings. Within fifteen (15) days after the Company obtains knowledge thereof, notice of any litigation (provided, that notice need not be given of any litigation fully covered by insurance and with respect to which such coverage is not disputed) or any governmental proceeding pending against the Company or any Subsidiary in which the damages sought exceed Five Hundred Thousand Dollars ($500,000) or which might otherwise materially adversely affect the Properties, business, prospects, operating results or condition (financial or otherwise) of Record Town or of the Company and its Subsidiaries, taken as a whole, or of any Guarantor; (i) Change of Control. Not later than two (2) Business Days after knowledge that a Change of Control is proposed to occur, a notice specifying (1) the date on which such proposed Change of Control is expected to occur and describing such Change of Control in detail, and (2) that each holder of Notes shall be repaid in full at par pursuant to Section 5.4 unless the Company receives a notice from the holder within thirty (30) days of such holder's receipt of the Company's notice, or as otherwise provided in Section 5.4, indicating that such holder elects to forego the Section 5.4 repayment; (j) Monthly Information. Within thirty (30) days after the end of each month, a report containing the information contemplated by Exhibit L hereto. Such report shall be signed by the President, the Chief Financial Officer or the Treasurer of the Company; (k) Identity of Banks. Within fifteen (15) days after the Company obtains knowledge of any transfer or other change in the ownership of any of the Bank Notes, or, with reasonable promptness after a request therefor, the Company shall deliver a notice to each holder of Notes setting forth the names and addresses of each of the Banks and the respective Commitment of, and the principal amount of the Loans (as defined in the Restated Credit Agreement) owing to, each Bank at such time; and (l) Requested Information. With reasonable promptness, such other data and information as from time to time may be reasonably requested. 8.2 Officers' Certificates. Each set of financial statements delivered pursuant to Section 8.1(a) or 8.1(b) will be accompanied by a certificate of the President or a Vice President and the Treasurer or an Assistant Treasurer of the Company setting forth: (a) Covenant Compliance -- the information (including detailed calculations) required in order to establish compliance with the requirements of Section 7 during the period covered by the income statements being furnished; and (b) Event of Default -- a statement that the signers have reviewed the relevant terms of this Agreement and have made, or caused to be made, under their supervision, a review of the transactions and condition of the Company and its Subsidiaries from the beginning of the period covered by the income statements being furnished and that the review has not disclosed the existence during such period of any Default or Event of Default or, if any such Default or Event of Default existed or exists, describing its nature and the action the Company has taken with respect thereto. 8.3 Accountants' Certificates. Each set of annual financial statements delivered pursuant to Section 8.1(b) will be accompanied by a certificate of the accountants who certify such financial statements, stating that they have reviewed this Agreement and whether, in making their audit, they have become aware of any Default or Event of Default, and, if any Default or Event of Default then exists, describing its nature. 8.4 Inspection. The Company will permit representatives of the Purchaser and the representatives of each other institutional holder of the Notes, at the Company's expense, to visit and inspect any of the Properties of the Company or any Subsidiary, to examine and make copies and abstracts of all their books of account, records, and other papers, and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants (and by this provision the Company authorizes said accountants to discuss the finances and affairs of the Company and its Subsidiaries) all at reasonable times and as often as may be reasonably requested. All nonpublic information furnished to the Purchaser pursuant to this Agreement shall be treated as confidential information by the Purchaser. The Purchaser agrees to use reasonable efforts to refrain from disclosing such information to any other Person (excluding any of the Purchaser's officers, employees, agents or counsel), except (1) in c onnection with selling or otherwise realizing upon the Purchaser's interest in the Notes, (2) as may be necessary or desirable in connection with a request by governmental agency, regulatory or supervisory authority or court having or claiming jurisdiction over the Purchaser, including, without limitation, the National Association of Insurance Commissioners, (3) information obtained from a third party which is not subject to the provisions of this Section 8.4, (4) information that is otherwise publicly available, (5) in connection with the enforcement of the Purchaser's rights hereunder or under the Notes and (6) disclosures to any subsequent holders of the Notes. 8.5 Quarterly Meetings. Within thirty (30) days after the end of each fiscal quarter of the Company, Robert J. Higgins, and such other representatives of the Company as the holders of the Notes may request, shall make themselves available at a reasonably convenient location to meet with representatives of the holders of the Notes to discuss the Company's budget, Business Plan and other finances and affairs of the Company, provided, however, that this requirement may be waived with respect to any quarter by the holders of not less than seventy-five percent (75%) of the outstanding principal amount of the Notes. 8.6 Monthly Monitoring Reports. The Company and Record Town shall pay up to $5,000.00 per month of the fees and expenses of Policano & Manzo, L.L.C. (or other financial consultant acceptable to the Banks, the holders of the Series A Notes and the holders of the Notes) incurred to produce monthly monitoring reports of the type heretofore furnished. The Company and Record Town shall give such financial consultant such access to its books and records as is necessary to permit such consultant to produce such reports on a timely basis. 8.7 Excess EBITDA. As soon as possible and in any event at least three (3) days before each Payment Date, the Company shall furnish to each holder of Notes a statement, certified by the chief financial officer of the Company, setting forth in reasonable detail the computation of (a) Consolidated EBITDA, (b) Excess EBITDA and (c) the Cumulative EBITDA Overage for the relevant fiscal period then most recently ended, and the resulting principal payment, if any, required by Section 5.6. 8.8 Tax Reserve. As soon as possible and in any event no later than ninety (90) days after the end of each fiscal year, the Company shall furnish to each holder of Notes a statement, certified by the chief financial officer of the Company, setting forth in reasonable detail the computations required by the third paragraph of Section 5.6 of this Agreement, including, as appropriate, the amount of any payment due to the holders of Notes pursuant to such paragraph or the amount by which the next payment required by Section 5.1(a) shall be reduced pursuant to such paragraph. 8.9 Additional Financial Information. The Company shall promptly deliver monthly unaudited financial statements (substantially consistent with the requirements of Part I, Item 1 of Form 10-Q under the Securities Exchange Act of 1934, as amended) to each holder of Notes. 9. EVENTS OF DEFAULT. 9.1 Nature of Events. An "Event of Default" shall exist if any of the following occurs and is continuing: (a) Principal Payments. Failure to make any payments of principal on any Note on or before the date such payment is due; (b) Interest Payments. Failure to pay interest or any other amount on any Note on or before the fifth (5th) day after the date such payment is due; (c) Particular Covenant Defaults. Failure to comply with any covenant contained in Sections 7.2, 7.4 through 7.32, or 8.1 or to make any payment required by Section 1.7; (d) Other Defaults. Failure to comply with any other provision of this Agreement or any other Financing Document, which failure continues for a period of thirty (30) days or more; (e) Warranties or Representations. Any warranty or representation by or on behalf of the Company or Record Town contained herein, in any Financing Document or in any instrument delivered in compliance with or in reference hereto or thereto shall prove to have been false or misleading in any material respect, or any warranty or representation by or on behalf of any Subsidiary contained in a Guaranty Agreement or any Financing Document shall prove to have been false or misleading in any material respect; (f) Default on Other Debt. Failure by the Company or any Subsidiary, to make any payment due on any other Debt or Security which individually or in the aggregate and including the face amount thereof plus accrued interest thereon, exceeds Five Hundred Thousand Dollars ($500,000), or any event shall occur or any condition shall exist, the effect of which is to cause (or permit any holder of such other Debt or Security or a trustee to cause) such other Debt or Security, or a portion thereof, to become due prior to its stated maturity or prior to its regularly scheduled dates of payment; (g) Involuntary Bankruptcy Proceedings. A custodian, receiver, liquidator or trustee of the Company or any Subsidiary, or of any of the Property of either, is appointed or takes possession and such appointment or possession remains in effect for more than sixty (60) days; or the Company, or any Subsidiary, is adjudicated bankrupt or insolvent; or an order for relief is entered under the Federal Bankruptcy Code against the Company or any Subsidiary; or any of the Property of either is sequestered by court order and the order remains in effect for more than sixty (60) days; or a petition is filed against the Company or any Subsidiary under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, and is not dismissed within sixty (60) days after filing; (h) Voluntary Petitions. The Company, or any Subsidiary, files a petition in voluntary bankruptcy or seeking relief under any provision of any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, or consents to the filing of any petition against it under any such law; (i) Assignments for Benefit of Creditors, etc. The Company or a Subsidiary makes an assignment for the benefit of its creditors, or generally fails to pay its debts as they become due, or consents to the appointment of or taking possession by a custodian, receiver, liquidator or trustee of the Company, or a Subsidiary, or of all or any part of the Property of either; (j) Undischarged Final Judgments. Final judgment or judgments for the payment of money aggregating in excess of Five Hundred Thousand Dollars ($500,000) is or are outstanding against one or more of the Company and its Subsidiaries and any one of such judgments has been outstanding for more than thirty (30) days from the date of its entry and has not been discharged in full or stayed; or (k) Other Restructuring Documents. Failure to comply with any provision under the Other Restructuring Documents such that an Event of Default (as defined therein) shall occur, whether or not such Event of Default is waived by the holders of the Series A Notes or the Banks. 9.2 Default Remedies. (a) If an Event of Default described in Sections 9.1(g) through 9.1(i) occurs, the entire outstanding principal amount of the Notes automatically shall become immediately due and payable, without the taking of any action on the part of any holder of the Notes or any other Person and without the giving of any notice with respect thereto. If an Event of Default described in Section 9.1(a) or 9.1(b) exists, any holder of Notes may, at its option, exercise any right, power or remedy permitted by law, including but not limited to the right by notice to the Company to declare the Notes held by such holder to be immediately due and payable. The Company shall notify each holder of its receipt of any such notice from any other and of the contents such notice. If any other Event of Default exists, the holder or holders of at least fifty-one percent (51%) in outstanding principal amount of the Notes (exclusive of Notes owned by the Company, Subsidiaries and Affiliates) may exercise any right, power or remedy permit ted by law, including but not limited to the right by notice to the Company to declare all the outstanding Notes immediately due and payable. Upon any acceleration the principal of the Notes declared due or automatically becoming due shall become immediately due and payable together with all interest accrued thereon without any presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, and the Company will immediately pay the entire principal of and interest accrued on such Notes. (b) No course of dealing or delay or failure on the part of any holder of the Notes to exercise any right shall operate as a waiver of such right or otherwise prejudice such holder's rights, powers and remedies. The Company will pay or reimburse the holders of the Notes, to the extent permitted by law, for all costs and expenses, including but not limited to reasonable attorneys' fees, incurred by them in collecting any sums due on the Notes or in otherwise enforcing any of their rights. 9.3 Annulment of Acceleration of Notes. If a declaration is made pursuant to Section 9.2(a), the holders of at least seventy-five percent (75%) of the outstanding principal amount of the Notes (exclusive of Notes owned by the Company, Subsidiaries and Affiliates) may annul such declaration and the consequences thereof if no judgment or decree has been entered for the payment of any monies due pursuant to such declaration and if all sums payable under the Notes and this Agreement (except principal or interest which has become due solely by reason of such declaration) have been duly paid. No such annulment shall extend to or waive any subsequent Default or Event of Default. 10. INTERPRETATION OF THIS AGREEMENT 10.1 Terms Defined. As used in this Agreement (including Exhibits), the following terms have the respective meanings set forth below or in the Section indicated: Adjusted Funded Debt -- with respect to any Person, means, without duplication: (1) liabilities for borrowed money, other than Current Debt; (2) liabilities secured by any Lien existing on Property owned by the Person (whether or not those liabilities have been assumed), other than Current Debt; (3) the aggregate amount of Guaranties by the Person, other than Guaranties of Current Liabilities of other Persons; (4) the aggregate Redemption Price of all outstanding Special Preferred Stock of such Person; and (5) any other obligations (other than deferred taxes), including without limitation, Financing Leases, which are required by generally accepted accounting principles to be shown as liabilities on its balance sheet and which are payable or which are unpaid more than one year from their creation. Adjusted Tangible Assets -- all assets except the following: (1) deferred assets, other than prepaid insurance, prepaid supplies and prepaid taxes; (2) patents, copyrights, trademarks, tradenames, franchises, good will, experimental or research and development expense and other similar intangibles; (3) Restricted Investments; (4) unamortized debt discount and expense; (5) assets located and notes and receivables due from obligors domiciled outside the United States, Puerto Rico or Canada; and (6) interests in any Person in which the Company owns less than 49% of the Voting Stock. Affiliate -- a Person (other than a Subsidiary) (1) which, directly or indirectly, controls, or is controlled by, or is under common control with, the Company, (2) which owns 5% or more of the Voting Stock of the Company or (3) 5% or more of the Voting Stock (or in the case of a Person which is not a corporation, 5% or more of the equity interest) of which is owned by the Company or a Subsidiary. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Bank Notes -- the promissory notes issued to evidence indebtedness under the Restated Credit Agreement. Banks -- at any time, means and includes each of the holders of Bank Notes at such time. Business Day -- any day other than a Saturday, Sunday or other day on which commercial banking institutions in the State of New York are authorized or obligated by law or executive order to be closed. Business Plan -- means the Company's Three Year Strategic Business Plan, dated as of December 12, 1995, as updated and supplied by the Company to the holders of the Notes prior to the Effective Date. Change of Control -- any of the following (1) a Person or group of Persons acting in concert (other than a Permitted Holder) becoming the beneficial owner of more than 50% (by number of votes) of the Voting Stock of the Company; or (2) a majority of the board of directors of the Company is replaced within any two-year period, excluding replacements due to resignations initiated by the incumbent board of directors or resignations due to the death or disability of any members of the incumbent board of directors. Collateral -- has the meaning ascribed to such term in the Collateral Trust Indenture. Collateral Trust Indenture -- Section 3.12. Commitment -- the obligation of the Banks to make loans and extend letters of credit pursuant to the Restated Credit Agreement. Company -- the introductory sentence hereof. Consolidated Current Assets -- at any date, means the amount at which the current assets of the Company and all Subsidiaries would be shown on a consolidated balance sheet of such Persons at such date, after eliminating inter-company items, in accordance with generally accepted accounting principles. Consolidated Current Liabilities -- at any date, means the amount at which the current liabilities of the Company and all Subsidiaries (excluding, for purposes of computing current liabilities, indebtedness under the Notes and the Series A Notes) would be shown on a consolidated balance sheet of such Persons at such date, plus (without duplication) the aggregate amount of their Guaranties of current liabilities of other Persons outstanding at such date. Consolidated EBITDA -- with respect to any period means, Consolidated Net Income for such period plus, to the extent deducted in determining Consolidated Net Income, depreciation and amortization expenses, interest expenses with respect to Debt and all federal, state and foreign income taxes. Consolidated Fixed Charges -- with respect to the Company and its Subsidiaries means for any period the sum of: (1) interest expenses with respect to their liabilities for borrowed money for such period, (2) imputed interest expenses on capitalized lease obligations for such period, and (3) fixed minimum rental expenses of real estate leases for such period, in each case determined on a consolidated basis. Consolidated Income Available For Fixed Charges -- with respect to the Company and all Subsidiaries, means on any date the sum of (1) Consolidated EBITDA, and (2) all fixed minimum rent expenses with respect to leases of real property, in each case determined on a consolidated basis for the period of four fiscal quarters ended on such date. Consolidated Net Income -- for any period, means net earnings after income taxes of the Company and each Subsidiary (only for the period during which it is a Subsidiary) determined on a consolidated basis, provided that there shall be excluded therefrom after giving effect to any related tax effect: (1) any gain arising from any write-up of assets; (2) any net gain or loss arising from the sale or disposition of capital assets (or reserves relating thereto); (3) items classified as extraordinary or nonrecurring (including any restructuring reserves); (4) any writeoff of deferred financing costs; and (5) the cumulative effect of changes in accounting principles in the year of adoption of such change. Consolidated Tangible Net Worth -- at any date means, the excess of (i) all amounts that would in conformity with GAAP be included in shareholders' equity on a consolidated balance sheet of the Company prepared as of such date, over (ii) the aggregate amount carried as of such date as consolidated assets on the books of the Company consisting of (x) goodwill, licenses, patents, trademarks, unamortized debt discount and expense, and other intangibles, (y) the cost of investments in excess of the net asset value thereof at the time of acquisition by the Company, and (z) writeups in the value of assets of the Company subsequent to the Effective Date. Credit Agreement Debt -- Section 7.5. Cumulative EBITDA Overage -- Section 5.6. Current Debt -- with respect to any Person means all its liabilities for borrowed money and all liabilities secured by any Lien existing on Property owned by that Person (whether or not those liabilities have been assumed) which, in either case, are payable on demand or within one year from their creation, plus the aggregate amount of all Guaranties by that Person of such liabilities of other Persons, but specifically excluding at all times all of the debt (whenever due) classified as long term debt on the consolidated balance sheet of the Company as of February 3, 1996. Current Liabilities -- at any date, means the amount at which the current liabilities of a Person would be shown on a balance sheet at such date, plus (without duplication) the aggregate amount of their Guaranties of current liabilities of other Persons outstanding at such date after eliminating intercompany items, in accordance with generally accepted accounting principles. Debt -- with respect to any Person, means its Current Debt and Adjusted Funded Debt. Default -- an event or condition which will, with the lapse of time or the giving of notice or both, become an Event of Default. Disqualified Preferred Stock -- means, with respect to any Person, any Preferred Stock of such Person which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is redeemable or is exchangeable for Debt, in whole or in part, on or prior to July 31, 2000. Distribution -- means and includes: (1) dividends or other distributions in respect of capital stock of the Company (except distributions of such stock pursuant to a stock split or stock dividend; provided that no stock dividend shall be paid in any capital stock of the Company other than its common stock); and (2) the redemption or acquisition of such stock or of warrants, rights or other options to purchase such stock (except when solely in exchange for such stock) unless made, contemporaneously, from the net proceeds of a sale of such stock. Any Distribution of Property other than cash shall be valued at fair market value. EBITDA Cushion -- with respect to any fiscal quarter end shall mean the amount set forth in the table below opposite the date of such quarter end. Quarter End EBITDA Level April 1996 $ 5,574,000 July 1996 $ 5,518,000 October 1996 $ 8,382,000 January 1997 $36,418,000 April 1997 $ 8,610,000 July 1997 $10,446,000 October 1997 $14,424,000 January 1998 $46,431,000 April 1998 $10,000,000 Economic Benefit -- with respect to Section 7.15 shall mean all rights, of whatever nature and with respect to all classes of capital stock of, or equity interests in, an entity to participate in any distribution with respect to such capital stock or equity interests, whether in the form of dividends, upon liquidation or otherwise. Effective Date -- means the date upon which all of the conditions set forth in Section 3 shall have been satisfied. ERISA -- means the Employee Retirement Income Security Act of 1974, as amended from time to time. Event of Default -- Section 9.1. Excess -- Section 7.29. Excess EBITDA -- Section 5.6 Excess Tax Reserve -- Section 5.6 Exchange Act -- means the Securities Exchange Act of 1934, as amended. Existing Note Agreement -- Section 1.1. Existing Notes -- Section 1.1. Existing Series A Note Agreement -- means that certain Amended and Restated Note Agreement, dated as of June 29, 1995, among the Company, Record Town and the Series A Noteholders. Extraordinary Repayment -- Section 5.1(b). Financing Documents-- means the Restated Credit Agreement and the notes issued pursuant thereto, the Restated Series B Note Agreement, the Series B Notes, this Agreement, the Notes, the Guaranty Agreements, the Security Documents, the Intercreditor Agreement and the Collateral Trust Indenture. Financing Lease -- any lease which is shown or is required to be shown in accordance with generally accepted accounting principles as a liability on a balance sheet of the lessee thereunder. GAAP -- means generally accepted accounting principles in effect in the United States of America, at the time of the applicable report, applied in a manner consistent with that employed in the preparation of the financial statements described in Section 8.1. Guarantor -- means, at any time, Media Logic, Inc., Trans World Fixture Company, Inc., Saturday Matinee, Inc., Movies Plus, Inc., and each other direct or indirect Subsidiary, if any, of the Company meeting the requirements of Section 7.21. Guaranty -- by any Person means all obligations of such Person guaranteeing or in effect guaranteeing any indebtedness, dividend or other obligation of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including obligations incurred through an agreement, contingent or otherwise, by such Person: (i) to purchase such indebtedness or obligation or any Property or assets constituting security therefor, (ii) to advance or supply funds (1) for the purchase or payment of such indebtedness or obligation, or (2) to maintain working capital or any balance sheet or income statement condition; (iii) to lease Property, or to purchase Securities or other Property or services, primarily for the purpose of assuring the owner of such indebtedness or obligation of the ability of the primary obligor to make payment of the indebtedness or obligation; or (iv) otherwise to assure the owner of the indebtedness or obligation against loss; but excluding endorsements in the ordinary course of business of negotiable instruments for deposit or collection. The amount of any Guaranty shall be deemed to be the maximum amount for which such Person may be liable as guarantor, upon the occurrence of any contingency or otherwise, under or by virtue of its Guaranty. Guaranty Agreements -- Section 3.11 Intercreditor Agreement -- Section 3.7. Inventory Turnover -- means, at a particular date, the "Cost of Sales" as disclosed on the Company's year-to-date consolidated statements of income divided by the "Merchandise Inventory" amount set forth on the Company's consolidated balance sheets for such date. Lien -- any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether the interest is based on common law, statute or contract, and including but not limited to the security interest lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purposes of this Agreement, the Company or a Subsidiary shall be deemed to be the owner of any Property which it has acquired or holds subject to a Financing Lease or a conditional sale agreement or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes, and such retention or vesting shall be deemed to create a Lien on the Property. Movies Plus Proceeds -- Section 5.1(b). Net Asset Sale Proceeds -- means, with respect to any asset sale, the fair market value of the aggregate amount of consideration received by the Company or any Subsidiary, as the case may be, from such asset sale, after, (a) provision for all income or other taxes payable as a result of such asset sale and (b) payment of brokerage commissions and other reasonable fees and expenses related to such asset sale. For purposes of this definition, the board of directors of the Company shall determine in good faith the fair market value of non-cash consideration. Noteholders' Percentage -- shall mean a fraction the numerator of which is 17.5 and the denominator of which is 140. Notes -- Section 1.2. Other Restructuring Documents -- Section 2.16. Payment Date -- the final day of each February, May, August and November in each year. Pension Plan -- Section 2.15. Permitted Holder -- means collectively Robert J. Higgins and his estate, spouse, children, heirs, legatees, and legal representatives, and any bona fide trust of which one or more of the foregoing are the sole beneficiaries or the grantors thereof and over which trust one or more of the foregoing acts as trustee and possesses the power to direct the management thereof. Person -- an individual, partnership, sole proprietorship, corporation, business trust, limited liability company, joint stock company, unincorporated organization, joint venture, governmental authority or other entity of whatever nature. Pledge Agreement -- Section 3.12. Preferred Stock -- means, with respect to any Person, any class or classes of capital stock (however designated) which is preferred as to the payment of dividends or distributions or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over any other class of capital stock of such Person. Prime Rate -- means, at any time, the prime rate of interest that is charged to the Company and Record Town by the Banks at such time with respect to borrowings under the Restated Credit Agreement. Prior Indebtedness -- means without duplication: (1) unsecured Adjusted Funded Debt and Current Debt of Subsidiaries, other than Record Town (except for debt to the Company or a Subsidiary); (2) Adjusted Funded Debt and Current Debt of the Company and its Subsidiaries, other than Record Town (except for debt to the Company or a Subsidiary), secured by any Lien on the Property of the Company or any Subsidiary; and (3) the redemption or liquidation value (whichever is greater) of all equity Securities of Subsidiaries (other than common stock) which are not legally and beneficially owned by the Company and its Subsidiaries. For purposes of this definition only, Adjusted Funded Debt and Current Debt of Subsidiaries shall not include the Guaranties by the Subsidiaries of the obligations of the Company under this Agreement. Property -- any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. Purchase Money Mortgage -- any Lien on Property existing at the time of the original acquisition by the Company or a Subsidiary of such Property or granted or retained in connection with the acquisition or improvement by the Company or a Subsidiary of such Property in order to permit or facilitate the financing of such acquisition or improvement. Purchaser -- shall mean the purchaser listed on Annex 1 attached hereto. Record Town -- the introductory sentence hereof. Redemption Price -- with respect to any Special Preferred Stock, the highest aggregate price at which such Special Preferred Stock is redeemable at any time or under any circumstance on or prior to July 31, 2000. Related Person -- any Person (whether or not incorporated) which is under common control with the Company within the meaning of Section 414(c) of the Internal Revenue Code of 1986, as amended, or of Section 4001(b) of ERISA. Required Guarantor -- Section 7.21. Restated Credit Agreement -- means, collectively, those certain Amended and Restated Revolving Credit Agreements, each dated as of the date hereof, among the Company, Record Town and each of NBD Bank, Bear Stearns & Co., Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Banco Santander Trust & Banking Corporation (Bahamas) Ltd. Restated Series A Note Agreement -- means that certain Amended and Restated Note Agreement, dated as of the date hereof, among the Company, Record Town and the Series A Noteholders, pursuant to which the Company and Record Town have issued the Series A Notes. Restricted Investments -- all Property, including all investments in any Person, whether by acquisition of stock, indebtedness, other obligation or security, or by loan, advance, capital contribution, or otherwise, except: (1) investments in one or more Subsidiaries or any corporation which concurrently with such investment becomes a Subsidiary; (2) Property to be used in the ordinary course of business; (3) current assets arising from the sale of goods and services in the ordinary course of business; (4) advances to and guaranties of loans to employees for expenses incurred in the ordinary course of business; (5) investments in direct obligations of the United States with final maturities not in excess of one year from the date of acquisition; (6) investments in certificates of deposit maturing within one year from the date of acquisition issued by a bank organized under the laws of the United States having capital, surplus, and undivided profits, aggregating at least $100,000,000; (7) investments in commercial paper issued by any corporation organized under the laws of the United States rated in the highest category by Moody's Investors Service, Inc. or Standard & Poor's Corporation; (8) investments in money market funds registered under the Investment Company Act of 1940 which invest in securities which are permitted under clause (5), (6), or (7) above; (9) investments in tax-exempt municipal bonds maturing not more than one year from the date of issue and which have at least a "MIG-1" rating from Moody's Investors Services, Inc. or an "SP-1" rating from Standard and Poor's Corporation; (10) guaranties by the Company of long-term leases of Subsidiaries; and (11) investments in licensed departments or retail (including, without limitation, retail mail order) joint ventures in the music, video, or entertainment businesses. Securities Act -- means the Securities Act of 1933, as amended. Security -- shall have the same meaning as in Section 2(1) of the Securities Act of 1933, as amended. Security Agreement -- Section 3.12. Security Documents -- means the Collateral Trust Indenture, the Security Agreement, the Pledge Agreement, the Concentration Bank Account Agreement, the Trademark Security Agreement and the Movies Plus Subordination Agreement, as the same may be amended from time to time. Security Trustee -- IBJ Schroder Bank & Trust Company, in its capacity as Security Trustee under the Collateral Trust Indenture, and its successors in such capacity. Series A Noteholders -- at any time, means: (a) if such time is prior to the Effective Date, the holders of the promissory notes issued and outstanding at such time under the Existing Series B Note Agreement; and (b) if such time is on or after the Effective Date, the holder or holders of the Series B Notes issued and outstanding at such time. Series A Notes -- means and includes each of the joint and several Variable Rate Senior Notes, Series A, Due July 31, 1998, issued by the Company and Record Town in the aggregate principal amount of $41,331,412.90 pursuant to the Restated Series A Note Agreement. Special Preferred Stock -- any Preferred Stock which by its terms (or by the terms of any Security into which it is convertible or for which it is exchangeable) is either redeemable at the option of the holder thereof or is automatically redeemable upon the happening of any event (other than the occurrence of a stated specific date of mandatory redemption thereof). Subsidiary -- a corporation, partnership or entity of which at least 50% of the outstanding Voting Stock is at the time, directly or indirectly, owned or controlled by the Company. Subsidiary Stock -- Section 7.13. Tangible Net Worth -- at any time means the shareholders' equity of any company (including Preferred Stock, but not including Disqualified Preferred Stock), excluding any patents, copyrights, trademarks, tradenames, franchises, goodwill, experimental expense and other similar intangible assets. Tax Refund -- Section 5.1(b). Tax Reserve Deficiency -- Section 5.6 Trademark Security Agreement -- Section 3.12. Voting Stock -- Securities or other interests the holders of which are ordinarily, in the absence of contingencies, entitled to elect the corporate directors (or Persons performing similar functions). Waiver Agreement -- means the letter agreement dated as of March 11, 1996, as amended, among the Company, Record Town and the Purchaser. Wholly-Owned Subsidiary -- any Subsidiary, all of the equity Securities (except directors' qualifying shares) of which are owned by the Company and/or the Company's other Wholly-Owned Subsidiaries. 10.2 Accounting Principles. Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made under this Agreement, this shall be done in accordance with generally accepted accounting principles at the time in effect, to the extent applicable, except where such principles are inconsistent with the requirements of this Agreement. 10.3 Directly or Indirectly. Where any provision in this Agreement refers to any action which a Person is prohibited from taking, the provision shall be applicable whether such action is taken directly or indirectly by such Person, including actions taken by or on behalf of any partnership in which such Person is a general partner and all liabilities of such partnerships shall be considered liabilities of such Person for purposes of this Agreement. 10.4 Section Headings and Table of Contents; Independent Construction. (a) Section Headings and Table of Contents, etc. The titles of the Sections of this Agreement and the Table of Contents of this Agreement appear as a matter of convenience only, do not constitute a part hereof and shall not affect the construction hereof. The words "herein," "hereof," "hereunder" and "hereto" refer to this Agreement as a whole and not to any particular Section or other subdivision. References to Sections are, unless otherwise specified, references to Sections of this Agreement. References to Annexes and Exhibits are, unless otherwise specified, references to Exhibits and Annexes attached to this Agreement. (b) Independent Construction. Each covenant contained herein shall be construed (absent an express contrary provision herein) as being independent of each other covenant contained herein, and compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with one or more other covenants. 10.5 Governing Law. This Agreement and the Notes shall be governed by and construed in accordance with New York law. 11. MISCELLANEOUS 11.1 Notices. (a) Method; Address. All communications hereunder or under the Notes shall be in writing, shall be delivered by (i) nationwide overnight courier, and (ii) facsimile transmission, and shall be addressed, if to the Company and/or Record Town, at the address and telecopy number of the Company, as follows: Trans World Entertainment Corp. 38 Corporate Circle Albany, New York 12203 Attention: Robert J. Higgins Telecopy No.: (518) 869-4819 with a copy to: Jones, Day, Reavis & Pogue 77 West Wacker Chicago, Illinois 60601-1692 Attention: David S. Kurtz Telecopy No.: (312) 782-8585 and if to any of the holders of the Notes, (A) if such holder is the Purchaser, at the address set forth on Annex 1 for such holder, and further including any parties referred to on such Annex 1 which are required to receive notices in addition to such holder, and (B) if such holder is not the Purchaser, at the address and telecopy number set forth in the register for the registration and transfer of Notes maintained pursuant to Section 6.1 for such holder, or to any such party at such other address as such party may designate by notice duly given in accordance with this Section 11.1. (b) When Given. Any communication addressed and delivered as herein provided shall be deemed to be received when actually delivered to the address of the addressee (whether or not delivery is accepted) or received by the telecopy machine of the recipient. Any communication not so addressed and delivered shall be ineffective. 11.2 Reproduction of Documents. This Agreement and all documents relating hereto, including, without limitation, (a) consents, waivers and modifications which may hereafter be executed, (b) documents received by the Purchaser at the closing hereunder (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to the Purchaser, may be reproduced by the Purchaser by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process and the Purchaser may destroy any original document so reproduced. The Company agrees and stipulates that any such reproduction shall, to the extent permitted by applicable law, be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by the Purchaser in the regular course of business) and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be a dmissible in evidence. 11.3 Survival. All warranties, representations, and covenants made by the Company or Record Town herein or on any certificate or other instrument delivered by it or on its behalf under or in reference to this Agreement shall be considered to have been relied upon by the Purchaser and shall survive the delivery to the Purchaser of the Notes regardless of any investigation made by the Purchaser or on the Purchaser's behalf. All statements in any such certificate or other instrument shall constitute warranties and representations by the Company and Record Town hereunder. 11.4 Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, except that neither the Company nor Record Town may transfer or assign any of their rights or interests hereunder without the prior written consent of the holders of the Notes. The provisions of this Agreement are intended to be for the benefit of all holders, from time to time, of the Notes, and shall be enforceable by any holder, whether or not an express assignment to such holder of rights under this Agreement has been made by the Purchaser or the Purchaser's successor or assign. 11.5 Amendment and Waiver. This Agreement may be amended, and the observance of any term of this Agreement may be waived, with (and only with) the written consent of the Company, Record Town and the holders of at least seventy-five percent (75%) of the outstanding principal amount of the Notes (exclusive of Notes owned by the Company, Subsidiaries and Affiliates); provided, that no such amendment or waiver of any of the provisions of Sections 1 through 4 shall be effective as to the Purchaser unless consented to by the Purchaser in writing; and provided further, that no such amendment or waiver shall, without the written consent of the holders of all the outstanding Notes, (i) subject to Section 9.3, change the amount or time of any repayment or payment of principal or the rate or time of payment of interest, (ii) amend Section 7.21, (iii) amend Section 9, or (iv) amend this Section 11.5. Executed or true and correct copies of any amendment or waiver effected pursuant to the provisions of this Section 11.5 shall be delivered by the C ompany to each holder of outstanding Notes promptly following the date on which the same shall become effective. No such amendment or waiver shall extend to or affect any provision or obligation not expressly amended or waived. 11.6 Duplicate Originals. Two or more duplicate originals of this Agreement may be signed by the parties, each of which shall be an original but all of which together shall constitute one and the same instrument. 11.7 Waiver and Release. For and in consideration of the agreements contained in this Agreement and the Notes, and other good and valuable consideration, the receipt and sufficiency of all of which are hereby acknowledged, each of the Company and Record Town (the Company and Record Town being collectively referred to in this Section 11.7 as the "Releasors") does hereby jointly and severally fully RELEASE, REMISE, ACQUIT, IRREVOCABLY WAIVE and FOREVER DISCHARGE the Purchaser, together with its predecessors, successors, assigns, subsidiaries, affiliates and agents and all of their past, present and future officers, directors, shareholders, employees, contractors and attorneys, and the predecessors, heirs, successors and assigns of each of them (the Purchaser and all of the foregoing being collectively referred to in this Section 11.7 as the "Released Parties"), from and with respect to any and all Claims (as defined below). As used in this Section 11.7, the term "Claims" shall mean and include any and all, and all manner of, action and actions, cause and causes of action, suits, disputes, controversies, claims, debts, sums of money, offset rights, defenses to payment, agreements, promises, notes, bonds, bills, covenants, losses, damages, judgments, executions and demands of whatever nature, known or unknown, whether in contract, in tort or otherwise, at law or in equity, for money damages or dues, recovery of property, or specific performance, or any other redress or recompense which have accrued or may ever accrue, may have been had, may be now possessed, or may or shall be possessed in the future by or on behalf of any one or more of the Releasors against any one or more of the Released Parties for, upon, by reason of, on account of, or arising from or out of, or by virtue of, any transaction, event or occurrence, duty or obligation, indemnification, agreement, promise, warranty, covenant or representation, breach of fiduciar y duty, breach of any duty of fair dealing, breach of confidence, breach of funding commitment, undue influence, duress, economic coercion, conflict of interest, negligence, bad faith, malpractice, violations of federal or state securities laws or the Racketeer Influenced and Corrupt Organizations Act, intentional or negligent infliction of mental distress, tortious interference with contractual relations, tortious interference with corporate governance or prospective business advantage, breach of contract, deceptive trade practices, libel, slander, usury, conspiracy, wrongful acceleration of any indebtedness, wrongful foreclosure or attempt to foreclose on any collateral relating to any indebtedness, action or inaction, relationship or activity, service rendered, matter, cause or thing, whatsoever, express or implied, transpiring, entered into, created or existing from the beginning of time to the date of the execution of this Agreement in respect of the Existing Notes or the Existing Note Agreement, and sha ll include, but not be limited to, any and all Claims in connection with, as a result of, by reason of, or in any way related to or arising from the existence of any relationships or communications by and between the Releasors and the Released Parties with respect to the Existing Notes, the agreements pursuant to which the Existing Notes were issued, and all agreements, documents and instruments related thereto, as presently constituted and as the same may from time to time be amended. The Releasors acknowledge that they may hereafter discover facts different from or in addition to those they now know or believe to be true with respect to the Claims herein released. Notwithstanding the foregoing, the Releasors agree that this Section 11.7 shall survive the termination hereof and shall remain effective in all respects and waive the right to make any new, different or additional claim on account of such different or additional facts. The Releasors acknowledge that no representation or warranty of any kind or character has been made to the Releasors by any one or more of the Released Parties or any agent, representative or attorney of the Released Parties to induce the execution of this Agreement containing this Section 11.7. The Releasors hereby represent and warrant unto the Released Parties that (a) the Releasors have the full right, power, and authority to execute and deliver this Agreement containing this Section 11.7 without the necessity of obtaining the consent of any other party; (b) the Releasors have received independent legal advice from attorneys of their choice with respect to the advisability of granting the release provided herein, and with respect to the advisability of executing this Agreement containing this Section 11.7; (c) the Releasors have not relied upon any statements, representations or promises of any of the Released Parties in executing this Agreement containing this Section 11.7, or in granting the release provided herein; (d) the Releasors have not entered into any other agreements or understandings relating to the Claims; (e) the terms of this Section 11.7 are contractual, not a mere recital, and are the result of negotiation among all the parties; and (f) this Section 11.7 has been carefully read by, and the contents hereof are known and understood by, and it is signed freely by the Releasors. The Releasors covenant and agree not to bring any claim, action, suit or proceeding regarding or related in any manner to the matters released hereby, and the Releasors further covenant and agree that this Section 11.7 is a bar to any such claim, action, suit or proceeding. All prior discussions and negotiations regarding the Claims have been and are merged and integrated into, and are superseded by, this Section 11.7. The Releasors understand, agree and expressly assume the risk of any fact not recited, contained or embodied in this Section 11.7 which may hereafter turn out to be other than, different from, or contrary to, the facts now known to the Releasors or believed by the Releasors to be true, and further agree that this Section 11.7 shall not be subject to termination, modification, or rescission, by reason of any such difference in facts. 11.8 Indemnification. The Company and Record Town agree to indemnify the Purchaser and its directors, officers, employees, agents and attorneys from, and hold each of them harmless against, any and all losses, liabilities, claims, damages or expenses incurred by any of them arising out of or by reason of any investigation or litigation or other proceedings (including any threatened investigation, litigation or other proceedings) relating to, or in connection with, the Notes including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation, litigation or other proceedings (but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified). If this Agreement is satisfactory to the Purchaser, please so indicate by signing the acceptance at the foot of a counterpart of this Agreement and return such counterpart to the Company, whereupon this Agreement will become binding between us in accordance with its terms. Very truly yours, TRANS WORLD ENTERTAINMENT CORPORATION By /s/Robert J. Higgins -------------------- Name: Robert J. Higgins Title: President RECORD TOWN, INC. By /s/Robert J. Higgins -------------------- Name: Robert J. Higgins Title: President Accepted: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By /s/Victor Khosla ---------------- Name: Victor Khosla Title: Managing Director EX-4.3 4 FORM OF AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT TRANS WORLD ENTERTAINMENT CORPORATION RECORD TOWN, INC. and NBD Bank, DATED AS OF July 26, 1996 TABLE OF CONTENTS Page ---- SECTION 1. DEFINITIONS 2 Section 1.1 Defined Terms 2 Section 1.2 Use of Defined Terms 22 Section 1.3 Accounting Terms 22 SECTION 2. AMOUNT AND TERMS OF CREDIT 22 Section 2.1 The Commitment 22 Section 2.2 The Notes; Interest 23 Section 2.3 Letters of Credit 24 Section 2.4 Notice of Borrowing 27 Section 2.5 Fees 28 Section 2.6 Termination or Reduction of Commitment 29 Section 2.7 Prepayments 34 Section 2.8 Computation of Interest and Commitment Fee 35 Section 2.9 Requirements of Law 36 Section 2.10 Pro Rata Treatment and Payments; Use of Proceeds 39 SECTION 3. CONDITIONS OF BORROWING 41 Section 3.1 Conditions of Effectiveness 41 Section 3.2 Conditions of All Loans 46 SECTION 4. REPRESENTATIONS AND WARRANTIES 47 Section 4.1 Corporate Existence 47 Section 4.2 Corporate Power and Authorization 47 Section 4.3 No Legal Bar to Loans 49 Section 4.4 No Material Litigation 49 Section 4.5 No Default 50 Section 4.6 Ownership of Properties; Liens 50 Section 4.7 Taxes 50 Section 4.8 Financial Condition 51 Section 4.9 Filing of Statements and Reports 51 Section 4.10 ERISA 52 Section 4.11 Environmental Matters 53 Section 4.12 Insurance 54 Section 4.13 Institutional Investor Debt Restructuring Documents 54 Section 4.14 Accuracy and Completeness of Information 56 Section 4.15 Labor Matters 57 Section 4.16 Leaseholds, Permits, etc. 57 Section 4.17 Subsidiaries 58 Section 4.18 Existing Indebtedness 59 Section 4.19 Company Actions 59 Section 4.20 Security Documents 59 Section 4.21 Patents and Trademarks 60 Section 4.22 Movies Plus, Inc. 60 SECTION 5. AFFIRMATIVE COVENANTS 60 Section 5.1 Financial Statements 61 Section 5.2 Payment of Obligations 65 Section 5.3 Maintenance of Properties; Insurance 65 Section 5.4 Notices 65 Section 5.5 Conduct of Business and Maintenance of Existence 67 Section 5.6 Inspection of Property, Books and Records 67 Section 5.7 Hazardous Material 68 Section 5.8 Subsidiary Guarantees 68 Section 5.9 Compliance with Law 69 Section 5.10 Maintenance of Office 69 Section 5.11 Quarterly Meetings 69 Section 5.12 Monthly Monitoring Reports 70 SECTION 6. NEGATIVE COVENANTS 70 Section 6.1 Limitation of Indebtedness 70 Section 6.2 Limitation on Liens 72 Section 6.3 Limitation on Contingent Obligations 74 Section 6.4 Limitation on Capital Expenditures 74 Section 6.5 Prohibition of Fundamental Changes 75 Section 6.6 Limitations on Dividends and Stock Acquisitions 76 Section 6.7 Limitation on Investments, Loans and Advances 76 Section 6.8 Prohibition of Certain Prepayments 78 Section 6.9 Limitation on Leases 78 Section 6.10 Limitation on Sale and Leaseback 79 Section 6.11 Maintenance of Current Ratio 79 Section 6.12 Maintenance of Consolidated Tangible Net Worth 79 Section 6.13 Limitation on Debt to Consolidated Tangible Net Worth 80 Section 6.14 Maintenance of Inventory Turnover 81 Section 6.15 No Amendment of Debt Instruments 82 Section 6.16 Maintenance of Accounts 82 Section 6.17 Limitation on Transactions with Affiliates 83 Section 6.18 Limitation on Changes in Fiscal Year 83 Section 6.19 Limitation on Lines of Business 83 Section 6.20 Minimum Consolidated EBITDA 84 Section 6.21 Limitation on Material Asset Sales. 84 Section 6.22 Maintenance of Ownership 85 Section 6.23 Maintenance of Tangible Net Worth of Record Town 85 Section 6.24 Tax Consolidation 85 Section 6.25 Limitations on Preferred Stock 86 Section 6.26 New Stores and Leases 86 Section 6.27 Maintenance of Fixed Charges Ratio 86 Section 6.28 Foreign Subsidiaries 87 SECTION 7. EVENTS OF DEFAULT 87 Section 7.1 Events of Default 87 SECTION 8. MISCELLANEOUS 94 Section 8.1 Limited Role of the Bank 94 Section 8.2 Choice of Law Construction 95 Section 8.3 Consent to Jurisdiction 95 Section 8.4 WAIVER OF JURY TRIAL 96 Section 8.5 Notices 96 Section 8.6 Entire Agreement; No Waiver; Cumulative Remedies; Amendments; Setoff; Counterparts 98 Section 8.7 Reference to Subsidiaries and Guarantors 100 Section 8.8 Captions 100 Section 8.9 Exhibits and Schedules 100 Section 8.10 Expenses; Indemnity 101 Section 8.11 Survival of Agreements 103 Section 8.12 Successors and Assigns 103 Section 8.13 Interest 106 Section 8.14 Waiver and Release 107 Execution 112 Schedule I Commitments and Commitment Percentages Schedule II Liens Schedule III Subsidiaries Schedule IV Existing Indebtedness Schedule V UCC Filing Offices Exhibit A Form of Note Exhibit B Form of Guarantee Exhibit C Monthly Reports Exhibit D Form of Movie Plus Subordination Agreement Exhibit E Form of Amended and Restated Intercreditor Agreement Exhibit F Form of Bank Depository Agreement Exhibit G Form of Collateral Trust Indenture Exhibit H Form of Security Agreement Exhibit I Form of Trademark Security Agreement Exhibit J Form of Pledge Agreement CREDIT AGREEMENT AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT, dated as of July 26, 1996, between TRANS WORLD ENTERTAINMENT CORP. (formerly Trans World Music Corp.), a New York corporation (herein called the "Company"), RECORD TOWN, INC., a New York corporation ("Record Town" and together with the Company, the "Companies"), and NBD Bank (collectively with its successors and assigns, the "Bank"). WHEREAS, the Companies are parties to separate identical amended and restated credit agreements (collectively, the "Existing Credit Agreements") dated as of June 29, 1995, as amended, with each of the Banks or their predecessors in interest; WHEREAS, the Companies are parties to (i) the Series A Note Agreement (as defined below) and (ii) the Series B Note Agreement (as defined below); WHEREAS the Noteholders parties to the Series A Note Agreement and the Series B Note Agreement, together with their respective successors and assigns, are referred to herein collectively as the "Noteholders"; WHEREAS, as part of a global restructuring of the Companies' funded indebtedness, the Companies and each of the Banks and Noteholders have agreed to amend and restate the Existing Credit Agreements in the form of the Credit Agreements and to enter into the Institutional Investor Debt Restructuring Documents (as defined below). NOW THEREFORE, in consideration of the mutual premises and covenants contained herein, the parties hereby agree as follows: SECTION 1. DEFINITIONS Section 1.1 Defined Terms. As used in this Agreement, the following terms have the following meanings, unless the context otherwise requires: "Accumulated Funding Deficiency" has the meaning set forth in Section 302 of ERISA. "Adjusted Tangible Assets" means, at any date, all assets of the Company, whether owned directly or indirectly, as reported on its consolidated balance sheets, less reserves for depreciation, obsolescence, amortization, valuation and other appropriate reserves required by GAAP, except: (i) deferred assets, other than prepaid insurance and prepaid taxes; (ii) patents, copyrights, trademarks, trade names, franchises, good will, experimental expense, and other similar intangibles; (iii) investments permitted pursuant to Section 6.7 of this Agreement; (iv) unamortized debt discount and expense; (v) assets located and notes and receivables due from obligors domiciled outside the United States of America, Puerto Rico or Canada; and (vi) interests in any Person in which the Company owns less than 49% of the Voting Stock. "Affiliate" means any Person that, directly or indirectly, controls, is controlled by, or is under common control with, the Company or any Subsidiary. For purposes of this definition, "control" of a Person means the power, directly or indirectly, either to (a) vote 5% or more of the Voting Stock of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. "Agreement" means this Amended and Restated Credit Agreement and any amendments or supplements hereto. "Application(s)" means any commercial Letter of Credit applications and standby Letter of Credit applications requesting the Bank to open a Letter of Credit or Subsidiary Letter of Credit. "Assignee" has the meaning set forth in Section 8.12(c). "Bank Depository Agreement" means an agreement dated as of the date hereof in the form attached as Exhibit F-1 or F-2 hereto. "Bank Outstandings" means the aggregate amount of Loans and Letter of Credit Outstandings (as each term is defined in the applicable Credit Agreement) under the Credit Agreements. "Banks" means, collectively, the Bank and the lenders parties to the other Credit Agreements and each of their successors and assigns. "Banks' Percentage" means 53.571%. "Bank's Pro Rata Share" of any sum or amount means the product of such sum or amount multiplied by the Bank's Commitment Percentage. "Business Day" means a day other than a Saturday, Sunday or other day on which the Bank is authorized or required to close under the laws of the State of New York. "Change of Control" means either of the following: (1) a Person or group of Persons acting in concert (other than a Permitted Holder) becoming the beneficial owner of more than 50% (by number of votes) of the Voting Stock of either of the Companies; or (2) a majority of the board of directors of the Company is replaced within any two-year period, excluding replacements due to resignations initiated by the incumbent board of directors or resignations due to the death or disability of any members of the incumbent board of directors. "Cleanup Laws" has the meaning given in Section 5.7. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Collateral" has the meaning set forth in the Collateral Trust Indenture. "Collateral Proceeds" has the meaning given in Section 2.6(f). "Collateral Trust Indenture" means the Collateral Trust Indenture dated as of the date hereof, in the form attached hereto as Exhibit G, as the same may be amended, modified and supplemented from time to time. "Commitment" means, with respect to any Bank, the Commitment amount set forth opposite such Bank's name on Schedule I, as such amount may be reduced from time to time in accordance with this Agreement and the other Credit Agreements. Unless otherwise specified, as used herein Commitment shall refer to the Bank's Commitment. "Commitment Percentage" means, with respect to each Bank, the percentage set forth opposite such Bank's name on Schedule I. Schedule I shall be deemed amended from time to time to reflect the assignment by any Bank of all or any portion of its Commitment. "Commitment Period" means the period from and including the date hereof to but not including the Termination Date, or such earlier date as the Commitment terminates as provided herein. "Commonly Controlled Entity" means an entity, whether or not incorporated, which is under common control with the Company within the meaning of Section 4001 of ERISA. "Consolidated EBITDA" means, with respect to the Company and its Subsidiaries for any period, the Consolidated Net Income for such period plus, to the extent deducted in determining such Consolidated Net Income, depreciation and amortization expense, interest expenses with respect to the Company's liabilities for borrowed money and capitalized leases, and all federal, state and foreign income taxes. "Consolidated Fixed Charges" means, with respect to the Company and its Subsidiaries for any period, the sum of: (1) interest expenses for such period in respect of liabilities for borrowed money, (2) imputed interest expense for such period on capitalized lease obligations and (3) all fixed minimum rent expenses for such period in respect of real estate leases, in each case determined on a consolidated basis. "Consolidated Income Available for Fixed Charges" means, with respect to the Company and its Subsidiaries for any period, the sum of: (1) Consolidated EBITDA for such period and (2) all fixed minimum rent expenses for such period in respect of real estate leases, in each case determined on a consolidated basis. "Consolidated Net Income" means for any period, the aggregate net income of the Company and its Subsidiaries for such period on a consolidated basis, determined in accordance with GAAP, provided that there shall be excluded therefrom after giving effect to any related tax effect, (1) gains and losses from sales of assets or reserves relating thereto, (2) items classified as extraordinary or non-recurring (including any restructuring reserves), (3) the write-off of deferred financing costs and (4) the cumulative effect of changes in accounting principles in the year of adoption of such change. "Consolidated Tangible Net Worth" means, at any time, the amount by which (x) all amounts that would, in conformity with GAAP, be included in shareholders' equity on the consolidated balance sheets of the Company and its Subsidiaries, exceeds (y) the aggregate amount carried as assets on the books of the Company and its Subsidiaries for goodwill, licenses, patents, trademarks, unamortized debt discount and expense, and other intangibles as determined in conformity with GAAP, for cost of investments in excess of net assets at the time of acquisition by the Company or any Subsidiary, and for any write-up in the book value of any assets of the Company or any Subsidiary resulting from reevaluation thereof subsequent to the date hereof. "Core Stores" means the stores of the Companies and the Subsidiaries other than the Non-Core Stores. "Credit Agreements" means, collectively, this Agreement and the other substantially identical amended and restated revolving credit agreements, dated as of even date herewith between the Companies and the lenders parties thereto. "Cumulative EBITDA Overage" has the meaning given in Section 2.6(e). "Default" means any of the events specified in Section 7 hereof, whether or not any requirement for the giving of notice or the lapse of time or both or any other condition has been satisfied. "Depository Bank" means, at any time, any bank or other financial institution party at such time to a valid Bank Depository Agreement with the Company and the Security Trustee. "Effective Date" means the date that each condition set forth in Section 3.1 has been either satisfied or waived by the Bank. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "Estimated Net Excess Cash Flow," for any period, means the product of (i) Excess Cash Flow for such period multiplied by (ii) .60. "Event of Default" means any of the events specified in Section 7 hereof, provided that any requirement for the giving of notice or the lapse of time or both has been satisfied. "Excess Cash Flow" means, for any period set forth below, the excess of (x) Consolidated EBITDA for such period over (y) the amount set forth below for such period: Period Amount For the period from February 4, 1996 to May 4, 1996 $5,574,000 For the period from February 4, 1996 to August 4, 1996 $5,518,000 For the period from February 4, 1996 to November 4, 1996 $8,382,000 For the period from February 4, 1996 to February 1, 1997 $36,418,000 For the period from February 2, 1997 to May 2, 1997 $8,610,000 For the period from February 2, 1997 to August 2, 1997 $10,446,000 For the period from February 2, 1997 to November 2, 1997 $14,424,000 For the period from February 2, 1997 to January 31, 1998 $46,431,000 For the period from February 1, 1998 to May 1, 1998 $10,000,000 "Existing Credit Agreements" has the meaning set forth in the first Recital. "Fiscal Year" means the fiscal year of the Company which ends on the Saturday closest to January 31. "Fixed Charges Ratio" means, for any period, the ratio of Consolidated Income Available for Fixed Charges for such period to Consolidated Fixed Charges for such period. "GAAP" means generally accepted accounting principles in effect in the United States of America, at the time of the applicable report, applied in a manner consistent with that employed in the preparation of the financial statements described in Section 4.8. "Guarantee" means any guarantee referred to in Sections 3.1(c), 3.1(d) and 5.8. "Guarantor" means any guarantors required pursuant to Sections 3.1(c), 3.1(d) or 5.8. "Insolvency" means, with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning given in Section 4245 of ERISA. "Institutional Investor Debt" means, collectively, the Series A Debt and the Series B Debt and any refinancing of such Debt in whole or in part, provided, however, that no such refinancing of any Institutional Investor Debt shall provide for or result in (i) a greater principal amount of indebtedness than the amount of such indebtedness outstanding immediately prior to such refinancing, (ii) a higher interest rate on borrowed amounts or (iii) greater mandatory amortization of the Institutional Investor Debt prior to the Termination Date than that required as of the date hereof under the terms of the Institutional Investor Debt Restructuring Documents. "Institutional Investor Debt Restructuring Documents" means the Series A Note Agreement and Series B Note Agreement. "Intercreditor Agreement" means the Amended and Restated Intercreditor Agreement dated as of the date hereof among the Banks and the Noteholders. "Inventory Turnover" means, at a particular date, the "Cost of Sales" as disclosed on the Company's year-to-date consolidated statements of income divided by the "Merchandise Inventory" amount set forth on the Company's consolidated balance sheets for such date. "Letter of Credit Outstandings" means, at a particular time, the sum of the amount then available to be drawn under any Letters of Credit then outstanding plus the amounts of any drawings on any Letters of Credit honored by the Bank prior to such time that have not been reimbursed by the Companies. "Letter of Credit Termination Date" means the first Business Day which falls on or after the date which is 30 days prior to the Termination Date. "Letters of Credit" means any and all commercial letters of credit and standby letters of credit, including any and all Subsidiary Letters of Credit, issued by the Bank for the account of the Companies hereunder under the terms of any Application. "Lien" means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge or other security interest or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement and any financing lease having substantially the same economic effect as any of the foregoing and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction). "Loans" means any advance made by the Bank to or for the benefit of the Companies under the terms and conditions of this Agreement including the amounts of any drawings on any Letters of Credit honored by the Bank that have not been reimbursed by the Companies. "Loan Documents" means any and all of the Agreement, the Notes, the Security Documents, the Guarantees, any Application, any agreements or documents referred to in Section 3 and all other documents and instruments executed in connection herewith. "Material Asset Sale" means a sale of (x) any Property of the Company or its Subsidiaries in one or more of a series of related transactions, other than sales of inventory in the ordinary course of the Company's business or in connection with store closings, resulting in Net Asset Sale Proceeds equal to or greater than $500,000.00 or (y) any Collateral. "Measurement Period" has the meaning given in Section 2.6(e). "Movie Plus" means Movie Plus, Inc., a New York corporation and wholly-owned subsidiary of Record Town. "Movie Plus Assets" means collectively the stock of Movie Plus pledged under the Pledge Agreement and the assets of Movie Plus. "Movie Plus Subordination Agreement" has the meaning given in Section 3.1(j). "Multiemployer Plan" means a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Net Asset Sale Proceeds" means, with respect to any asset sale, the fair market value of the aggregate amount of consideration received by the Company or any Subsidiary, as the case may be, from such asset sale, after (x) provision for all income or other taxes payable as a result of such asset sale and (y) payment of all brokerage commissions and other reasonable fees and expenses related to such asset sale. For purposes of this definition, the Board of Directors of the Company shall determine in good faith the fair market value of non-cash consideration. "Non-Core Stores" means, at any time, stores the Company has scheduled at such time to close. "Note" means the promissory note and all attachments thereto described in Section 2.2. "Noteholders" has the meaning set forth in the third Recital. "Participants" has the meaning set forth in Section 8.12(b). "PBGC" means the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA. "Permitted Holder" means Robert J. Higgins, his spouse, any of his children and his estate, heirs and legal representatives, and any bona fide trust of which one or more of the foregoing are the sole beneficiaries and over which one or more of the foregoing acts as trustee and possesses the power to direct the management thereof. "Permitted Liens" has the meaning given in Section 6.2(a). "Person" means an individual, sole proprietorship, partnership, corporation, business trust, limited liability company, joint stock company, unincorporated organization, joint venture, government authority or other entity of whatever nature. "Plan" means at any particular time, any employee benefit plan covered by ERISA and in respect of which the Company or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Pledge Agreement" means the Pledge Agreement dated the date hereof in the form attached hereto as Exhibit J. "Preferred Stock" means, with respect to any Person, any class or classes of capital stock (however designated) preferred as to the payment of dividends or distributions or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over any other class of capital stock of such Person. "Prime Rate" means the fluctuating rate of interest identified in the Wall Street Journal from time to time as the Prime Rate. "Property" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Real Property" has the meaning set forth in Section 4.11(a). "Reorganization" means, with respect to any Multiemployer Plan, the condition that such Plan is in reorganization within the meaning of Section 4241 of ERISA. "Reportable Event" means any of the events set forth in Section 4043(b) of ERISA, other than those events as to which the 30-day notice period is waived under subsection .13, .14, .16, .18, .19 or .20 of PBGC Reg. e 2615. "Responsible Officer" means, with respect to any certificate, report or notice to be delivered or given hereunder or knowledge of any Default or Event of Default hereunder, unless the context otherwise requires, the president, chief executive officer, chief financial officer, principal accounting officer or treasurer of the Company or Record Town or other executive officer of the Company or Record Town who in the normal performance of his or her operational duties would have knowledge of the subject matter relating to such certificate, report or notice. "Restructuring Fee" has the meaning given in Section 2.5(d). "Resulting Number" has the meaning set forth in Section 2.6(e)(ii). "Scheduled Reduction" has the meaning given in Section 2.6(b). "Scheduled Reduction Date" has the meaning given in Section 2.6(b). "Security Agreement" means the Security Agreement dated as of the date hereof in the form attached hereto as Exhibit H. "Security Documents" means, collectively, the Security Agreement, the Movies Plus Subordination Agreement, the Collateral Trust Indenture, the Bank Depository Agreement, the Pledge Agreement and the Trademark Security Agreement. "Security Trustee" means IBJ Schroder Bank & Trust Company in its capacity as Security Trustee under the Collateral Trust Indenture. "Series A Debt" means the indebtedness outstanding, not to exceed $41,331,413, in respect of the Series A Note Agreement. "Series A Note Agreement" means that certain Amended and Restated Note Agreement, dated as of even date herewith, among the Companies and the institutional investors listed as purchasers on Annex 1 thereto, pursuant to which the Companies have issued their Variable Rate Senior Notes, Series A, due July 31, 1998. "Series B Debt" means the indebtedness outstanding, not to exceed $15,227,363, in respect of the Series B Note Agreement. "Series B Note Agreement" means the Amended and Restated Note Agreement dated as of even date herewith, between the Companies and the Person listed as the purchaser on Annex 1 thereto, pursuant to which the Companies have issued the Variable Rate Senior Notes, Series B, due July 31, 1998. "Significant Subsidiary" means any Subsidiary that has, as of the balance sheet date for the Company's most recent fiscal quarter, in excess of $500,000 in Adjusted Tangible Assets. "Single Employer Plan" means any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan. "Subsidiary" means, as of any date, any Person more than 50% of whose issued and outstanding Voting Stock (except directors' qualifying shares, if required by law) on such date is owned by the Company, directly or through one or more Subsidiaries. "Subsidiary Letter of Credit" means any commercial letters of credit or standby letters of credit issued by the Bank for the account of any Subsidiary. "Tangible Net Worth" of any Person means, at any time, the amount by which (x) all amounts that would, in conformity with GAAP, be included in shareholders' equity on the balance sheets of such Person, exceeds (y) the aggregate amount carried as assets on the books of such Person for (1) goodwill, licenses, patents, trademarks, unamortized debt discount and expense, and other intangibles as determined in conformity with GAAP, (2) cost of investments in excess of net assets acquired at the time of acquisition by such Person, and (3) any write-up in the book value of any assets of such Person resulting from reevaluation thereof subsequent to the date hereof. "Tax Refund" means all rights of the Companies to any refunds of any federal, state, local or foreign income taxes paid by the Companies prior to the Effective Date. "Termination Date" means July 31, 1998. "Trademark Security Agreement" means the Trademark Security Agreement, dated as of the date hereof, in the form attached hereto as Exhibit I. "Variable Rate" means (i) during the period commencing May 1, 1996, through and including June 29, 1998, the rate equal to the sum of (x) the Prime Rate plus (y) 2%; and (ii) for the period from and after June 30, 1998, the sum of (x) the Prime Rate plus (y) 5%. "Voting Stock" means the shares of capital stock and any other securities of any Person entitled to vote generally for the election of directors of such Person or any other securities (including, without limitation, rights and options), convertible into, exchangeable into or exercisable for, any of the foregoing (whether or not presently exercisable, convertible or exchangeable). Section 1.2 Use of Defined Terms. All terms defined in this Agreement have the defined meanings when used in the Notes, certificates, reports or other documents made or delivered pursuant to this Agreement unless the context requires otherwise. Section 1.3 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. SECTION 2. AMOUNT AND TERMS OF CREDIT Section 2.1 The Commitment. (a) Subject to the terms and conditions of this Agreement and the Intercreditor Agreement, the Bank will make Loans to the Companies, at any time and from time to time during the Commitment Period, in an aggregate principal amount equal to the excess of the Bank's Commitment at such time over the Bank's Pro Rata Share of the Bank Outstandings at such time. During the Commitment Period, the Companies may use the Commitment by borrowing, repaying and reborrowing and by having Letters of Credit issued on their behalf, or Subsidiary Letters of Credit issued on behalf of a Subsidiary, all in accordance with the terms and conditions of this Agreement. Notwithstanding anything to the contrary contained herein, all Loans made under this Agreement mature and become due and payable on the Termination Date. (b) As of the date of this Agreement, the Existing Credit Agreement dated as of June 29, 1995, between the Companies and the Bank or its predecessor in interest, is hereby amended and restated in its entirety as provided herein. Section 2.2 The Notes; Interest. The Companies shall execute and deliver to the Bank a Note, substantially in the form annexed hereto as Exhibit "A" (the "Note"), with appropriate insertions therein. The Note will evidence the borrowings, repayments and reborrowings hereunder, and each Loan by the Bank to the Companies and each repayment made on account of the principal amount of such Loans will be recorded by the Bank on its books and Schedule I to the Note, provided that the failure of the Bank to make any such recordation shall not affect the Loans or the obligation of the Companies to make a payment when due of any amounts owing hereunder or under the Note in respect of the Loans evidenced by the Note. Interest will accrue on outstanding Loans as follows: (a) During the time periods set forth below, each Loan shall bear interest at the higher of (x) the Variable Rate in effect at such time and (y) the following rates: Time Period Minimum Rate Prior to May 1, 1996 10.5% From May 1, 1996, through and 11.0% including June 29, 1998 From and after June 30, 1998 14.0% Interest on Loans shall be payable monthly on the first Business Day of each month and upon payment or prepayment in full of the unpaid principal amount thereof. (b) If an Event of Default occurs and for so long as such Event of Default continues, interest will accrue on the principal amount of Loans then outstanding at a rate per annum 2% above the rate otherwise applicable pursuant to Section 2.2(a). Section 2.3 Letters of Credit. (a) If the Company executes and delivers to the Bank an appropriate Application for issuance of any Letter of Credit or Subsidiary Letter of Credit with appropriate insertions therein (hereafter "Application"), the Bank, in its sole and absolute discretion, may, but is not required to, issue a commercial Letter of Credit or standby Letter of Credit or Subsidiary Letter of Credit, as the case may be, on behalf of the designated beneficiary for the account of the Company with the requested face amount and expiration date. (b) Each Letter of Credit and Subsidiary Letter of Credit will expire no later than the Letter of Credit Termination Date. (c) Notwithstanding anything to the contrary contained herein, (x) the sum, without duplication, of (i) the aggregate outstanding principal amount of the Loans plus (ii) the aggregate Letter of Credit Outstandings shall not exceed (y) the Bank's Pro Rata Share of the Bank Outstandings. (d) The reimbursement obligations of the Company with respect to any Letter of Credit are unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation, the following: (i) the existence of any claim, set-off, defense or other right which the Company or any Subsidiary may have at any time against any beneficiary, or any transferee, of any Letter of Credit or any Subsidiary Letter of Credit (or any Persons for whom any such beneficiary or any such transferee may be acting), the Bank or any other Person, whether in connection with this Agreement, the other Credit Agreements transactions contemplated herein, or any unrelated transaction; (ii) any statement or any other document presented under any Letter of Credit or Subsidiary Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iii) payment by the Bank unde r any Letter of Credit or Subsidiary Letter of Credit against presentation of a draft or certificate which does not comply with the terms of such Letter of Credit or Subsidiary Letter of Credit or any other circumstances or happening whatsoever, whether or not similar to any of the foregoing (unless such payment, circumstance or happening constitutes gross negligence or willful misconduct of the Issuer). (e) The expiration of an undrawn Letter of Credit shall be deemed a repayment of Loans in an amount equal to the face amount of such expired Letter of Credit. If there is no Default in existence at the time of such Letter of Credit expiration, the Company shall adjust its immediately following borrowings or repayments under the Credit Agreements to ensure that the share of the Bank Outstandings of each Bank and its respective assigns shall equal the percentage set forth on Schedule I hereto opposite such Bank's name. Whenever a Default exists under this Agreement, the Bank shall be obligated to purchase from each of the other Banks and their respective assigns participations in loans outstanding under each such Bank's respective Credit Agreement in the amount necessary to ensure that after such purchases, the Banks' and their respective assigns respective shares of the Bank Outstandings equal the percentage set forth on Schedule I hereto opposite such Bank's name. The Bank hereby agrees that upon the e xpiration of undrawn letters of credit issued by any of the other Banks at such time as a default is continuing under such Bank's Credit Agreement, the Bank will sell participations in the Loans to the other Banks and their respective assigns to the extent necessary to ensure that the respective share of the Bank Outstandings at such time of each Bank and its respective assigns shall equal the applicable percentage set forth on Schedule I hereto. (f) The payment by the Bank of a draft drawn under any Letter of Credit or Subsidiary Letter of Credit shall constitute for all purposes of this Agreement the making of a Loan, in the amount of such draft. Section 2.4 Notice of Borrowing. The Company shall give the Bank prior telephonic notice of the date and the amount of each borrowing pursuant to the Commitment no later than 12:00 noon New York City time on the borrowing date. Each borrowing from the Bank pursuant to the Commitment must be in an aggregate principal amount of $100,000 or any whole multiple thereof. On the date specified in such notice from the Company, subject to the terms and conditions of this Agreement, the Bank will make the amount of such borrowing available to the Companies by credit to an account of the Companies maintained with a Depository Bank in immediately available funds. Section 2.5 Fees. (a) The Company shall pay to the Bank, a commitment fee for the period from and including the date hereof to and including the Termination Date, computed at the rate of 3/4 of 1% per annum on the average daily unused portion of the Commitment in effect during the period for which payment is made; all Letter of Credit Outstandings shall be included in calculating the used portion of the Commitment. The Company shall pay such commitment fee to the Bank on the first Business Day of each August, November, February and May of each year, commencing on August 1, 1996, and on the Termination Date. (b) The Company shall pay to the Bank all fees and customary and usual charges arising in connection with the Letters of Credit as required under the Applications. (c) On July 31, 1997, the Company shall pay to the Bank a fee equal to 1% of the Commitment in effect as of such date. (d) On the Termination Date or such earlier date as the Commitment is terminated and the Loans are due and payable (as the result of an Event of Default or otherwise), the Company shall pay to the Bank a restructuring fee (the "Restructuring Fee") equal to the Bank's Pro Rata Share of $2,678,571. If the Company repays in full all amounts owing in respect of the Bank Outstandings and the Institutional Investor Debt and terminates the Commitments on or before the Termination Date or such earlier date as the Loans have become due and payable, the Restructuring Fee is waived. Section 2.6 Termination or Reduction of Commitment. (a) Upon not less than three (3) Business Days prior written notice to the Bank, the Company has the right to terminate the Commitment in whole at any time, or to reduce the Commitment in part from time to time, or to accelerate the Termination Date. Upon any termination of the Commitment, the Companies must pay the unpaid principal amount of the Note in full, together with accrued interest thereon and any commitment fee then accrued hereunder. Upon any acceleration of the Termination Date, the Companies must also deposit cash with the Bank in an amount equal to 105% of the aggregate then undrawn and unexpired amount of Letters of Credit. The Bank shall use all cash so deposited to reimburse amounts due under any Letter of Credit drawn upon after the Termination Date. Any partial reduction in the Commitment must be in an aggregate principal amount of $500,000 or a multiple thereof and will reduce permanently the Commitment then in effect hereunder. (b) Subject to the adjustments described in Section 2.6(e)(i), on the dates set forth below (each a "Scheduled Reduction Date"), the Commitment will automatically reduce (each such reduction, a "Scheduled Reduction") by the Bank's Pro Rata Share of the following amounts: Scheduled Reduction Scheduled Date Reduction August 30, 1996 $2,410,714.29 November 30, 1996 $1,071,428.57 February 28, 1997 $8,035,714.29 May 30, 1997 $1,071,428.57 August 30, 1997 $1,071.428.57 November 30, 1997 $1,071,428.57 February 28, 1998 $2,142,857.14 May 30, 1998 $1,071,428.57 The Commitment will reduce to zero on the Termination Date. (c) Except as otherwise provided in Section 2.6(f), not more than two Business Days following the consummation of a Material Asset Sale, the Commitment will automatically reduce in an amount equal to the Bank's Pro Rata Share of the product of (i) the Net Asset Sale Proceeds of such sale multiplied by (ii) the Banks' Percentage. (d) In addition to, but without duplication of, the Commitment reductions described in subsections (b), (c), (e) and (f) of this Section 2.6, simultaneously with any payment of Institutional Investor Debt made by or on behalf of either or both of the Companies (other than payments required by the terms of the Institutional Investor Debt Restructuring Documents as in effect as of the date hereof), the Commitment will automatically reduce in an amount equal to the Bank's Pro Rata Share of the product of (i) the aggregate amount of such payment of Institutional Investor Debt multiplied by (ii) a fraction, the numerator of which is 75 and the denominator of which is 65. (e) (i) In addition to all other Commitment reductions required by this Section 2.6, on each Scheduled Reduction Date, the Commitment will further reduce automatically by an amount equal to the Bank's Pro Rata Share of the Banks' Percentage of forty-five percent (45%) of Excess Cash Flow for the most recently ended period described in the definition of "Excess Cash Flow" (in each case, the "Measurement Period"). If, immediately prior to the August or November Scheduled Reduction Date in any Fiscal Year, the aggregate amount of Commitment reductions made pursuant to this Section 2.6(e) during such Fiscal Year (exclusive of any reductions which have previously decreased Scheduled Commitment Reductions) is greater than the Bank's Pro Rata Share of the Banks' Percentage of forty-five percent (45%) of Excess Cash Flow for the relevant Measurement Period, the amount of the next Scheduled Commitment Reduction will decrease by the amount of such overage (the "Cumulative EBITDA Overage"). The Cumulative EBITDA Overage, if any, existing immediately prior to a February Scheduled Reduction Date will not decrease the amount of the Scheduled Commitment Reduction on such date, but instead will decrease Scheduled Commitment Reductions in the inverse order of such reductions. (ii) If the Company has Excess Cash Flow for a Fiscal Year, then, not later than the date 90 days after the end of such Fiscal Year, the Company shall multiply the amount of such Excess Cash Flow by a fraction, the numerator of which shall be the aggregate of all federal, state and local income tax liabilities shown as payable on consolidated tax returns filed or to be filed by the Company for such Fiscal Year, and the denominator of which shall be the amount of Consolidated EBITDA for such Fiscal Year. If the resulting number (the "Resulting Number") is less than forty percent (40%) of Excess Cash Flow for such Fiscal Year, the Commitment will automatically reduce by the Bank's Pro Rata Share of the Banks' Percentage of the remainder of (i) forty percent (40%) of such Excess Cash Flow minus (ii) the Resulting Number. No such reduction of the Commitment described in the immediately preceding sentence will affect the amount of any Scheduled Reduction. If such Resulting Number is greater than forty perce nt (40%) of such Excess Cash Flow, and the Companies have made all required payments with respect to such Fiscal Year as a result of Commitment reductions made under this Section 2.6(e), the August Scheduled Reduction will be decreased by the Bank's Pro Rata Share of the Banks' Percentage of the remainder of (i) Resulting Number minus (ii) forty percent (40%) of such Excess Cash Flow. (f) The Commitment will reduce automatically by an amount equal to the Bank's Pro Rata Share of the Banks' Percentage of (i) all proceeds of Tax Refunds the Company receives and (ii) all Net Asset Sale Proceeds the Company or its Subsidiaries receives in respect of the Movies Plus Assets (collectively, the "Collateral Proceeds"). So long as no Default or Event of Default has occurred, the Commitment reduction described in the immediately preceding sentence will occur at any time only to the extent that the aggregate amount of Collateral Proceeds the Company has received at or prior to such time exceeds the aggregate amount of Scheduled Commitment Reductions that have occurred at or prior to such time. Each Commitment reduction described in this subsection (f) will decrease the amount of the next Scheduled Reduction on a dollar for dollar basis until reduced to zero. (g) The Commitment once terminated or reduced may not be reinstated or increased. (h) All reductions and terminations of the Commitment and the respective Commitments of the other Banks shall be made concurrently such that the reduction of the Commitment shall be equal to the Bank's Pro Rata Share of the aggregate reduction of all the Banks' respective Commitments made at such time. Section 2.7 Prepayments. (a) The Company may prepay any Loan without premium or penalty in whole at any time or in any part from time to time. Optional partial prepayments of the Note must be made in the aggregate principal amount of $100,000 or multiples thereof together with payment of accrued interest thereon to the date of the prepayment. (b) The Company shall notify the Bank of any prepayment no later than 12:00 noon on the date thereof, specifying the date and amount of the prepayment. If the Company gives such notice, the amount specified in the notice is due and payable on the date specified therein, together with accrued interest to such date on the amount repaid. (c) Whether before or after giving effect to any termination or reduction of the Commitment pursuant to Section 2.6, the Company shall promptly pay or prepay Loans and, to the extent the Loans are repaid in full, cash collateralize outstanding Letters of Credit, in an aggregate principal amount, together with interest thereon accrued to the date of such payment or prepayment, equal to the excess at any time of (x) the sum, without duplication, of (i) the outstanding aggregate principal amount of the Loans and (ii) the Letter of Credit Outstandings over (y) the lesser of (i) the Commitment and (ii) the Bank's Pro Rata Share of the Bank Outstandings. (d) At the end of each Business Day the Company shall apply all cash and cash equivalents in excess of $15,000 per open store on such date to pay or cash collateralize the Bank Outstandings. (e) For a period of not less than 15 consecutive days during the period commencing on December 25 and ending on the last day of each Fiscal Year, the aggregate outstanding principal amount of Bank Outstandings shall be reduced to zero and any outstanding Letters of Credit shall be fully cash collateralized, provided, that subsequent to the last day of the Fiscal Year the Company may reborrow all amounts so used to cash collateralize outstanding Letters of Credit. Section 2.8 Computation of Interest and Commitment Fee Payments. (a) Commitment fees, if any, and interest shall be calculated on the basis of a 360 day year for the actual days elapsed. If a change in the Prime Rate causes a change in the interest rate applicable to Bank Outstandings, the change will be effective as of the opening of business on the day the change in the Prime Rate becomes effective. If any payment on a Loan becomes due and payable on a day other than a Business Day, the maturity thereof will be extended to the next succeeding Business Day and the Company shall pay interest thereon at the then applicable rate during such extension. The Company hereby authorizes the Bank to charge any account of the Company maintained at any office of the Bank with the amount of any such commitment fee, interest or principal when the same becomes due and payable under the terms of this Agreement, the Notes, the Applications or any other Loan Document. (b) The Companies shall make all payments (including prepayments) on account of principal of, interest on, and fees owing in respect of the Loans to the Bank at the following account/office: Section 2.9 Requirements of Law. (a) (i) The Companies shall promptly pay to the Bank, upon its demand, any and all additional amounts necessary to compensate the Bank for any additional cost or reduced amount receivable in respect of this Agreement, the Note, any Letters of Credit issued hereunder or the Loans made hereunder which the Bank deems to be material resulting from a change, after the date hereof, in any law, regulation, treaty or directive or in the interpretation or application thereof or compliance by the Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority, agency or instrumentality which: (x) (1) does or will subject the Bank to any tax of any kind whatsoever with respect to this Agreement, the Note, the Applications or any Loans made hereunder, or changes the basis of taxation of payments to the Bank of principal, commitment fee, interest or any other amount payable hereunder (except for changes in the rate of any tax presently imposed on the Bank); or (2) does or will impose on the Bank any other condition; and (y) increases the cost to the Bank of issuing or maintaining any Letter of Credit or Subsidiary Letter of Credit or increases the cost to the Bank of making, renewing (or maintaining) advances or extensions of credit to the Companies or to reduce any amount receivable from the Companies thereunder. (ii) If the Bank becomes entitled to claim any additional amounts pursuant to this Section 2.9(a), it shall promptly notify the Companies of the event by reason of which it has become so entitled together with a certificate setting forth calculations as to any additional amounts payable pursuant to the foregoing sentence. Any such calculations submitted by the Bank to the Companies will be conclusive in the absence of manifest error. (b) If after the date hereof, the Bank determines that the adoption or amendment of or change to or in any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank with any request or directive regarding capital adequacy (whether or not having the force of law) or any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the Bank's capital as a consequence of its obligations hereunder to a level below that which the Bank could have achieved but for such adoption, change or compliance (taking into consideration the Bank's policies with respect to capital adequacy) by an amount deemed by the Bank to be material, then from time to time, within 15 days after demand by the Bank, the Companies shall pay to the Bank su ch additional amount or amounts as will compensate the Bank for such reduction. The Bank will promptly notify the Companies of any event of which it has knowledge, occurring after the date hereof, which entitles the Bank to compensation pursuant to this Section 2.9(b). The Companies will not be liable in respect of any reduced amount or any sum received or receivable by the Bank pursuant to this Section 2.9(b) with respect to any sums or fees payable hereunder or accrued by the Bank prior to the date that is 60 calendar days following the date of the notice to the Companies that is required hereunder, regardless of when such interest or fees are payable. Section 2.10 Pro Rata Treatment and Payments; Use of Proceeds. (a) Each borrowing by the Companies from the Banks under the Credit Agreements, each payment by the Company on account of any commitment fee or any other fee payable under the Credit Agreements and any reduction of the Commitments of the Banks shall be made pro rata according to the Commitment Percentages of the Banks. Each payment (including each prepayment) by the Companies on account of principal of and interest on the Loans shall be made pro rata according to the respective outstanding principal amounts of the Loans then held by the Banks. All payments (including prepayments) to be made by the Companies hereunder and under the Note, whether on account of principal, interest, fees or otherwise, shall be made without setoff or counterclaim and shall be made prior to 12:00 Noon, New York City time, on the due date thereof to the Bank, at the office specified in Section 2.8(b), in United States dollars and in immediately available funds. (b) Neither of the Companies is engaged principally, nor as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any "margin stock" as such term or terms of similar purport and effect shall be defined in Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect. No part of the proceeds of any borrowing hereunder will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock. If requested by the Bank, the Company will furnish a statement in conformity with the requirements of Federal Reserve Form U-1 referred to in said Regulation U and to the foregoing effect. No part of the proceeds of the Loans hereunder will be used for any purpose which violates, or which is inconsistent with, the provisions of Regulation X of said Board of Governors. (c) The proceeds of the Loans shall be used for general corporate purposes of the Companies. SECTION 3. CONDITIONS OF BORROWING Section 3.1 Conditions of Effectiveness. The effectiveness of this Agreement and the obligation of the Bank to make the initial Loan hereunder is subject to the prior or concurrent fulfillment of the following conditions: (a) Legal Opinions. The Companies shall have caused to be delivered to the Bank (i) an opinion of Matthew H. Mataraso, Esq., counsel to the Companies, in form and substance reasonably satisfactory to the Bank, dated the date hereof, to the same effect as Sections 4.1, 4.2, 4.3, 4.4 and 4.5 and to the further effect that this Agreement, the Guarantees, the Security Documents and the Note have been duly authorized, executed and delivered by a duly authorized officer of the Companies and the Guarantors respectively, and (ii) an opinion of Jones, Day, Reavis & Pogue, special counsel to the Companies, in form and substance reasonably satisfactory to the Bank, dated the date hereof, to the same effect as Section 4.20 and to the further effect that this Agreement, the Guarantees, the Security Documents and the Note constitute valid obligations of the Companies and the Guarantors respectively, are legally binding upon them and enforceable (except as may be limited by any applicable bankruptcy, reorganization, inso lvency, moratorium or other similar law affecting creditors' rights generally and general equitable principles) in accordance with their terms. (b) Corporate Proceedings. Each of the Companies shall have furnished to the Bank (in form and substance satisfactory to the Bank) a copy, certified by an appropriate officer of each of the Companies on such date, of the resolutions of the Board of Directors of each of the Companies authorizing all borrowings herein provided for and the execution, delivery and performance of this Agreement, the Security Documents, the Note and any other documents required to be executed in connection herewith. (c) Subsidiary Guarantee. Each Subsidiary shall have executed and delivered to the Bank a Guarantee of the prompt and unconditional payment of all present and future obligations and liabilities of the Companies to the Bank, substantially in the form of Exhibit "B" annexed hereto and made a part hereof. Each Guarantee will be accompanied by a copy (in form and substance satisfactory to the Bank) of the resolutions of the Board of Directors of such Guarantor and certified by an appropriate officer of such Guarantor, authorizing the execution, delivery and performance by such Guarantor of the Guarantee and of the delivery of the same to the Bank. (d) Other Credit Agreements. The Companies shall have entered into the other Credit Agreements in form and substance satisfactory to the Bank and such agreements shall be in full force and effect. (e) Institutional Investor Debt Restructuring Documents. The Companies shall have entered into the Institutional Investor Debt Restructuring Documents in form and substance satisfactory to the Bank and such agreements shall be in full force and effect. (f) Payment of Fees and Expenses. The Company shall have paid to the Bank in immediately available funds a fee in an amount equal to the Bank's Pro Rata Share of $978,901.90 and all expenses incurred by the Bank in connection herewith including, without limitation, the reasonable fees and expenses of Wachtell, Lipton, Rosen & Katz and Policano and Manzo, all other out-of-pocket fees, costs and expenses paid or incurred by the Bank in connection with the negotiation, preparation, drafting, implementation, amendment, modification, administration and enforcement of this Agreement, the Note and the Security Documents, or for auditing, appraising, evaluating or otherwise monitoring the Collateral or other credit support for the Note. (g) Interest on Existing Notes. The Company shall have paid to the Bank all accrued interest on amounts outstanding under the Existing Credit Agreements to (but not including) the Effective Date calculated at the rate specified in Section 2.2(a). (h) Intercreditor Agreement. The Noteholders and the Banks shall have executed and delivered the Intercreditor Agreement, and such Intercreditor Agreement and all documents and instruments executed and delivered in connection therewith shall be in form and substance satisfactory to all parties thereto, and such Intercreditor Agreement shall be in full force and effect. (i) Collateral Trust Indenture and Other Security Documents. (i) Each of the Company, Record Town, the Guarantors, the Security Trustee, the Banks and the Noteholders shall have executed and delivered to the Bank an original counterpart of the Collateral Trust Indenture, and the Collateral Trust Indenture shall be in full force and effect. (ii) Each of the Company, Record Town, the Guarantors and the Security Trustee shall have executed and delivered to the Bank an original counterpart of the Security Agreement, and the Security Agreement shall be in full force and effect. (iii) The Security Trustee and each of the Company, Record Town and the Guarantors shall have executed and delivered to the Bank an original counterpart of the Trademark Security Agreement, and the Trademark Security Agreement shall be in full force and effect. (iv) The Security Trustee and the Company shall have executed and delivered to the Bank an original counterpart of the Pledge Agreement, and the Pledge Agreement shall be in full force and effect. (v) The Company, the Security Trustee and each financial institution with whom the Company maintains a cash management account listed on Annex 1 to the Security Agreement shall have executed and delivered to the Bank an original counterpart of a Bank Depository Agreement, and each such Bank Depository Agreement shall be in full force and effect. (vi) The foregoing agreements shall secure the Note and all of the obligations under this Agreement pari passu with the obligations due under the other Credit Agreements and the Institutional Investor Debt Restructuring Documents; and the Bank shall have received evidence satisfactory to it that the Liens created by the foregoing agreements are valid and perfected Liens senior to all other Liens upon the Collateral. (j) Movies Plus Subordination. Each of the Company, Record Town and the Subsidiaries (other than Movies Plus) shall have executed and delivered to the Bank a subordination agreement in the form of Exhibit D (collectively, the "Movies Plus Subordination Agreement"), and the Movies Plus Subordination Agreement shall be in full force and effect. Section 3.2 Conditions of All Loans. The obligation of the Bank to make any Loan is subject to the following conditions precedent: (a) Representations and Warranties; No Default. The representations and warranties contained in Section 4 are true and correct on the date of the making of such Loans or issuing of such Letters of Credit, and no Default or Event of Default has occurred and is continuing on such date. Each borrowing by the Companies or issuance of a Letter of Credit or Subsidiary Letter of Credit hereunder constitutes a representation by the Companies as of the date of each such borrowing that the conditions contained in the foregoing sentence have been satisfied and that neither of the Companies is aware of any condition which, after notice or lapse of time or both, could become a Default or Event of Default. (b) Legal Matters. All other instruments and legal and corporate proceedings in connection with the transactions contemplated by this Agreement are satisfactory, in form and substance to the Bank and its counsel, and counsel to the Bank has received copies of all documents which it may have reasonably requested in connection therewith. SECTION 4. REPRESENTATIONS AND WARRANTIES In order to induce the Bank to enter into this Agreement and to make the Loans and issue the Letters of Credit herein provided for, each of the Companies hereby represents and warrants to the Bank that: Section 4.1 Corporate Existence. Each of the Companies and each Subsidiary is organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has the corporate power to own its assets and to transact the business in which it is presently engaged, and is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification. Section 4.2 Corporate Power and Authorization. The Companies have the corporate power, authority and legal right to make, deliver and perform this Agreement, the Security Documents, the Applications and the Note and to borrow hereunder and have taken all necessary corporate action to authorize the borrowings on the terms and conditions of this Agreement, the Security Documents, the Applications and the Note. No consent of any other party (including stockholders of the Companies), and no consent, license, approval or authorization of, or registration or declaration with, any governmental authority, bureau or agency is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement, the Security Documents, the Applications or the Note with respect to the Companies. This Agreement is, and the Note when delivered hereunder will be, legal, valid and binding obligations of the Companies enforceable against the Companies in accordance with their respective terms. Section 4.3 No Legal Bar to Loans. The execution, delivery and performance of this Agreement, the Security Documents, the Applications and the Note by the Companies, does not violate any provision of any existing law or regulation or of any order or decree of any court or governmental instrumentality, or of the respective Certificates of Incorporation or By-Laws of the Companies, or of any mortgage, indenture, contract or other agreement to which either of the Companies is a party or by which the Companies or any of their properties or assets may be bound, and does not result in the creation or imposition of any lien, charge or encumbrance on, or security interest in, any of its properties pursuant to the provisions of such mortgage, indenture, contract or other agreement. Section 4.4 No Material Litigation. No litigation or administrative proceedings of or before any court, tribunal or governmental body is presently pending, or, to the knowledge of the Companies, threatened against the Company or any Subsidiary or any of its or their properties or with respect to this Agreement, the Security Documents, the Applications or the Note, which, if adversely determined, would, in the opinion of the Company, have a material adverse effect on the business, assets or financial condition of the Company or such Subsidiary. Section 4.5 No Default. The Companies are not in default in any material manner in the payment or performance of any of their respective obligations or in the performance of any material contract, agreement or other instrument to which either is a party or by which either of the Companies or any of their assets may be bound, and no Default hereunder has occurred and is continuing. Section 4.6 Ownership of Properties; Liens. Each of the Companies and each Subsidiary has good and marketable title to all of their respective properties and assets, real and personal, and none of such properties and assets is subject to any mortgage, lien, pledge, charge, encumbrance, security interest or title retention or other security agreement or arrangement of any nature whatsoever other than Permitted Liens and except as listed on Schedule II hereto. Section 4.7 Taxes. The Company and each Subsidiary has filed or caused to be filed all tax returns which to the best knowledge of the Companies are required to be filed, and has paid all taxes shown to be due and payable on said returns or on any assessments made against them (other than those being contested in good faith by appropriate proceedings for which adequate reserves have been provided on the books of the Company or its Subsidiary, as the case may be), and no tax liens have been filed and, to the best knowledge of the Companies, no material claims are being asserted with respect to any taxes. Section 4.8 Financial Condition. The consolidated balance sheet of the Company and its Subsidiaries as of February 3, 1996 and the related statements of income, retained earnings and cash flow for the fiscal period ended on said date, heretofore furnished to the Bank, present fairly the consolidated financial condition of the Company and its Subsidiaries, taken as a whole, as of the date of said balance sheet, and the consolidated results of their operations for such period. All such financial statements have been prepared in accordance with GAAP applied on a basis consistent with that of the preceding year, and since the date of the financial statement mentioned above, there has been no material adverse change in the condition, financial or otherwise, of the Company and such Subsidiaries, taken as a whole, from that shown by said statement as of said date. Neither the Company nor any of its Subsidiaries had any material obligation, liability or commitment, direct or contingent, which is required by GA AP to be disclosed and is not reflected in the foregoing consolidated statements (and the related notes thereto) as of said date. Section 4.9 Filing of Statements and Reports. The Company and each Subsidiary has filed copies of all statements and reports which, to the best knowledge of the Companies, are required to be filed with any governmental authority, agency, commission, board or bureau. Section 4.10 ERISA. No Reportable Event has occurred during the immediately preceding six-year period with respect to any Plan, and each Plan has complied and has been administered in all material respects with applicable provisions of ERISA and the Code. The present value of all benefits vested under each Single Employer Plan maintained by the Company or any Commonly Controlled Entity (based on those assumptions used to fund such Plan) did not, as of the last annual valuation date applicable thereto, exceed the value of the assets of such Plan allocable to such vested benefits. Neither the Company nor any Commonly Controlled Entity has during the immediately preceding six-year period had a complete or partial withdrawal liability from any Multiemployer Plan and neither the Company nor any Commonly Controlled Entity would become subject to any liability under ERISA if the Company or any Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the most recent valuation d ate applicable thereto. Neither the Company nor any Commonly Controlled Entity has received notice that any Multiemployer Plan is in Reorganization or Insolvent nor, to the best knowledge of the Company, is any such Reorganization or Insolvency reasonably likely to occur. The present value (determined using actuarial and other assumptions which are reasonable in respect of the benefits provided and the employees participating) of the liability of the Company and each Commonly Controlled Entity for post retirement benefits to be provided to their current and former employees under Plans which are welfare benefit plans (as defined in Section (1) of ERISA) does not, in the aggregate, exceed the assets under all such Plans allocable to such benefits. Section 4.11 Environmental Matters. (a) To the best knowledge of the Company, none of the real property owned by the Company or any Subsidiary or leased by the Company at 38 Corporate Circle, Albany, New York (such Property, the "Real Property"), contains, or has previously contained, any hazardous or toxic waste or substances or underground storage tanks. (b) To the best knowledge of the Company, the Real Property is in compliance with all applicable federal, state and local environmental standards and requirements affecting such Real Property, and there are no environmental conditions which could interfere with the continued use of the Real Property. (c) Neither the Company nor any Subsidiary has received any notices of violations or advisory action by regulatory agencies regarding environmental control matters or permit compliance. (d) Hazardous waste has not been transferred from any of the Real Property to any other location which is not in compliance with all applicable environmental laws, regulations or permit requirements. (e) With respect to the Real Property, there are no proceedings, governmental administrative actions or judicial proceedings pending or, to the best knowledge of the Company or any Subsidiary, contemplated under any federal, state or local law regulating the discharge of hazardous or toxic materials or substances into the environment, to which the Company or any Subsidiary is named as a party. Section 4.12 Insurance. All policies of insurance of any kind or nature maintained by or issued to the Company or to any Subsidiaries, including, without limitation, policies of life, fire, theft, product liability, public liability, property damage, other casualty, employee fidelity, worker's compensation, employee health and welfare, title, property and liability insurance, are in full force and effect in all material respects and are of a nature and provide such coverage as is sufficient and as is customarily carried by companies of similar size and character. Section 4.13 Institutional Investor Debt Restructuring Documents. (a) The Company has delivered to the Bank true, complete and correct copies of each of the Institutional Investor Debt Restructuring Documents (including all exhibits, schedules and disclosure letters referred to therein or delivered pursuant thereto, if any) and all waivers relating thereto and otherside letters or agreements affecting the terms thereof. None of such documents and agreements has been amended or supplemented, nor have any of the provisions thereof been waived, except pursuant to a written agreement or instrument which has heretofore been consented to by the Bank and no consent or waiver has been granted by the Company or any Subsidiaries thereunder. Each of the Institutional Investor Debt Restructuring Documents has been duly executed and delivered by the Companies and, to the best of the Companies' knowledge, by each other party thereto and is a legal, valid and binding obligation of the Companies, and, to the best of the Company's knowledge, of each other party thereto, enforceable, in all material respects, in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or other similar laws affecting the rights of creditors generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). (b) The representations and warranties of the Company, any Subsidiary and each other party to the Institutional Investor Debt Restructuring Documents are, to the best of the Companies' knowledge, true and correct in all material respects on the date hereof as if made on and as of such date. Such representations and warranties, together with the definitions of all defined terms used therein, are by this reference deemed incorporated herein mutatis mutandis, and the Bank is entitled to rely on the accuracy of such representations and warranties. (c) To the best of the Companies' knowledge, each party to the Institutional Investor Debt Restructuring Documents has complied in all material respects with all terms and provisions contained therein on its part to be observed. Section 4.14 Accuracy and Completeness of Information. All information, reports and other papers and data with respect to the Company and the Subsidiaries furnished to the Bank by the Companies, or on behalf of the Companies, were, at the time so furnished, complete and correct in all material respects, or have been subsequently supplemented by other information, reports or other papers or data, to the extent necessary to give the Bank true and accurate knowledge of the subject matter in all material respects. All projections with respect to the Company and the Subsidiaries were prepared and presented in good faith by the Company based upon facts and assumptions that the Company believes to be reasonable in light of current and foreseeable conditions, it being recognized by the Bank that such projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such projections may differ from the projected results. No document furnished or sta tement made in writing to the Bank by or on behalf of the Company in connection with the negotiation, preparation or execution of this Agreement contains any untrue statement of a material fact, or omits to state any such material fact necessary in order to make the statements contained therein not misleading, in either case which has not been corrected, supplemented or remedied by subsequent documents furnished or statements made in writing to the Bank. Section 4.15 Labor Matters. There are no strikes pending or, to the best of the Companies' knowledge, threatened against the Company or any of the Subsidiaries which, individually or in the aggregate, could reasonably be expected to have a material adverse effect on the Company's business taken as a whole. The hours worked and payments made to employees of the Company and the Subsidiaries have not been in violation of the Fair Labor Standards Act or any other applicable requirement of law. All material payments due from the Company and the Subsidiaries, on account of wages and employee health and welfare insurance and other benefits have been paid or accrued as a liability on the books of the Company or such Subsidiary. Section 4.16 Leaseholds, Permits, etc. Each of the Companies and the Subsidiaries possesses or has the right to use, all leaseholds, easements, franchises and permits and all authorizations and other rights which are material to and necessary for the conduct of its business. Except for such noncompliance with the foregoing which could not reasonably be expected to have a material adverse effect on the Company's business taken as a whole, all the foregoing are in full force and effect, and each of the Company and the Subsidiaries, as the case may be, is in substantial compliance with the foregoing without any known conflict with the valid rights of others. No event has occurred which permits, or after notice or lapse of time or both would permit, the revocation or termination of any such leasehold, easement, franchise, license or other right, which termination or revocation, considered as a whole, could reasonably be expected to have a material adverse effect on the Company's business taken as a whole. Section 4.17 Subsidiaries. Schedule III to this Agreement correctly identifies: (a) each Subsidiary, its jurisdiction of incorporation and the percentage of its Voting Stock owned by the Company and by each other Subsidiary, and (b) each of the Company's Affiliates (other than Subsidiaries) and the nature of their affiliation. The Company and each Subsidiary is the legal and beneficial owner of all of the shares of Voting Stock it purports to own of each Subsidiary, free and clear in each case of any Lien other than any such Lien created by the Security Documents. All such shares have been duly issued and are fully paid and nonassessable. Section 4.18 Existing Indebtedness. Schedule IV hereto correctly lists indebtedness for borrowed money of the Company and the Subsidiaries existing on the date hereof including all guarantees of the Company and the Subsidiaries of such indebtedness. Section 4.19 Company Actions. Neither the Company, Record Town nor any other Subsidiary has taken any action or permitted any condition to exist which would have been prohibited by Section 6 if such Section had been binding and effective at all times during the period from February 3, 1996 to and including the date hereof. Section 4.20 Security Documents. Each of the Security Documents is effective to create in favor of the Security Trustee, for the ratable benefit of the Banks and the Noteholders, legal, valid and enforceable security interests in the Collateral described therein and the proceeds thereof, and when financing statements in appropriate form are filed in the offices specified on Schedule V hereof, each such security interest will constitute a fully perfected Lien on, and security interest in, all right, title and interest of the Companies in such Collateral and the proceeds thereof, as security for the Secured Obligations (as defined in the relevant Security Document), in each case prior and superior in right to any other Person. Section 4.21 Patents and Trademarks. The Company, and each Subsidiary, owns or possesses all the patents, trademarks, service marks, trade names, copyrights, licenses and rights with respect to the foregoing necessary for the present and planned future conduct of its business, without any known conflict with the rights of others. Section 4.22 Movies Plus, Inc. The liabilities of Movies Plus do not exceed $500,000 in the aggregate except for (i) indebtedness owed to the Company, Record Town or a Subsidiary (all of which is subject to the Movie Plus Subordination Agreement) and (ii) the Guarantee. SECTION 5. AFFIRMATIVE COVENANTS The Companies hereby covenant that so long as the Note, or any amounts owed in connection with any Letters of Credit or otherwise remain outstanding and unpaid or so long as the Commitment remains unterminated, the Companies shall, unless otherwise consented to in writing by the Bank: Section 5.1 Financial Statements. Furnish to the Bank: (a) as soon as available, but in any event not later than 90 days after the close of each Fiscal Year, a copy of the annual audit report for such year for the Company and its Subsidiaries, including therein consolidated balance sheets of the Company and its Subsidiaries as of the end of such Fiscal Year, and related consolidated statements of income, retained earnings and cash flow of the Company and its Subsidiaries for such Fiscal Year, setting forth in each case, in comparative form, the corresponding figures for the preceding Fiscal Year, all in reasonable detail, prepared in accordance with GAAP and certified by independent certified public accountants of recognized standing selected by the Company, and delivered by such accountants without qualification of any kind; (b) as soon as available, but in any event not later than 60 days after the end of each of the first three quarterly periods of each Fiscal Year, unaudited consolidated balance sheets of the Company and its Subsidiaries as at the end of such fiscal quarter, and unaudited consolidated statements of income, retained earnings and cash flow of the Company and its Subsidiaries for such fiscal quarters and for the period from the beginning of such Fiscal Year to the end of such fiscal quarter, setting forth in each case, in comparative form, the corresponding figures for the preceding Fiscal Year, all in reasonable detail, prepared in accordance with GAAP and certified by the chief financial officer of the Company (subject to normal year-end audit adjustment); (c) concurrently with the delivery of the financial statements referred to in clause (a) above, the accountant's management letter and a certificate of such independent certified public accountants stating that in making the examination necessary for certifying such financial statements no knowledge was obtained of any Events of Default or Defaults hereunder, except as specifically indicated; (d) concurrently with the delivery of the financial statements referred to in clauses (a) and (b) above, a certificate of the chief financial officer of the Company certifying, to the best of his knowledge, that there are no Events of Default or Defaults thereunder except as specifically indicated, together with a computation by such chief financial officer (which shall be in reasonable detail) that substantiates compliance with Sections 6.11, 6.12, 6.13, 6.14, 6.20, 6.23 and 6.27 of this Agreement; (e) promptly after the same are sent, copies of all financial statements and reports the Company sends to its stockholders, and promptly after the same are filed, notification of all financial statements and reports the Company may make to, or file with, any governmental authority, agency, commission board or bureau and thereafter copies of such statements and reports as the Bank reasonably requests; (f) a certificate of the chief financial officer of the Company setting forth the details thereof and the action that the Company or the Commonly Controlled Entity proposes to take with respect thereto as soon as possible and in any event within 30 days after the Company knows or has reason to know of the following events: (i) the occurrence or expected occurrence of any Reportable Event with respect to any Plan or any withdrawal from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan to which the Company has an obligation to continue or (ii) the institution of proceedings or the taking of any other action by the PBGC, the Company or any Commonly Controlled Entity, or any Multiemployer Plan with respect to the withdrawal from, or the terminating, Reorganization or Insolvency of, any Plan; (g) promptly, such additional financial information as the Bank may from time to time reasonably request; (h) the monthly reports and other information listed on Exhibit C hereto; (i) as soon as possible and in any event at least three days before each Scheduled Reduction Date, a statement, certified by the chief financial officer of the Company, setting forth in reasonable detail the computation, calculated in accordance with GAAP, of Excess Cash Flow for the relevant period most recently ended and the resulting Commitment reduction, if any, required by Section 2.6(e)(i); and (j) as soon as possible and in any event no later than 90 days after the end of each Fiscal Year, a statement, certified by the chief financial officer of the Company, setting forth in reasonable detail the computation, calculated in accordance with GAAP, of each of the following: (i) the tax liabilities incurred in respect of Excess Cash Flow for such Fiscal Year, (ii) the Resulting Number for such Fiscal Year and (iii) the adjustment to the Commitment or the next Scheduled Reduction, if any, required by Section 2.6(e)(ii). Section 5.2 Payment of Obligations. Pay and discharge, and cause the Subsidiaries to pay and discharge, at or before maturity, all of their respective material obligations and liabilities, in accordance with normal business practices, including without limitation tax liabilities, except where the same may be contested in good faith, and will maintain, and cause the Subsidiaries to maintain, in accordance with GAAP, reserves for the accrual of any of the same. Section 5.3 Maintenance of Properties; Insurance. Keep, and cause the Subsidiaries to keep, all properties useful and necessary in the business of the Company and the Subsidiaries in good working order and condition; maintain, and cause the Subsidiaries to maintain, with financially sound insurance companies, insurance on all of their respective properties in such amounts, acceptable to the Bank, as the Companies deem proper in accordance with business practices against such risks as are usually insured in the same general area and by companies engaged in the same or similar business; and furnish to the Bank, upon written request, all information as to the insurance carried. Section 5.4 Notices. Within five Business Days after a Responsible Officer obtains knowledge thereof, give notice in writing to the Bank of (a) the existence of any Default or default under the Institutional Investor Debt Restructuring Documents, the other Credit Agreements, the other Loan Documents or under any other material instrument or agreement of the Company or any Subsidiary or the existence of any fact or circumstance which, after notice or lapse of time or both, could become a Default or an Event of Default, (b) any notice delivered to either or both of the Companies, or any other action taken by, any of the Banks or the Noteholders with respect to a claimed default or event of default under any of the other Credit Agreements or the Institutional Investor Debt Restructuring Documents, (c) any litigation, proceeding, investigation or dispute which may exist at any time between the Company or any Subsidiary and any governmental regulatory body which might substantially interfere with the normal b usiness operations of the Company or any Subsidiary, (d) all litigation and proceedings affecting the Company or any Subsidiary in which the amount involved is $500,000 or more and not covered by insurance or any litigation in which injunctive or similar relief is sought, (e) any material change in the credit and payment terms provided to the Company and the Subsidiaries by their principal suppliers, (f) a proposed Change of Control which the Company reasonably expects to occur, (g) the identity of any assignee of any Noteholder or any other Bank and (h) the proposed closing date of each Material Asset Sale, provided, however, that in no event shall such notice be provided less than 10 Business Days prior to the actual consummation thereof. Section 5.5 Conduct of Business and Maintenance of Existence. Continue, and cause the Subsidiaries to continue, to engage in business of the same general type as now conducted by the Company and the Subsidiaries, and preserve, renew and keep in full force and effect their corporate existence and take all reasonable action to maintain their rights, privileges and franchises necessary or desirable in the normal conduct of business; provided that nothing herein contained shall prevent the Company or any Subsidiary from discontinuing a part of its business which is not a substantial part of the business of the Company or such Subsidiary, if such discontinuance is, in the opinion of the Board of Directors of the Company, in the interest of the Company and not disadvantageous to the Bank. Section 5.6 Inspection of Property, Books and Records. Permit, and cause the Subsidiaries to permit, any representatives of the Bank to (a) visit and inspect any of their respective properties, (b) conduct an environmental audit of any of their respective properties and (c) examine and make abstracts from any of the books and records of the Company and any Subsidiary at any reasonable time and as often as may reasonably be desired. Section 5.7 Hazardous Material. Indemnify the Bank against any liability, loss, cost, damage, or expense (including, without limitation, reasonable attorneys' fees) arising from (a) the imposition or recording of a Lien by any local, state, or federal government or governmental agency or authority pursuant to any federal, state or local statute or regulation relating to hazardous or toxic wastes or substances or the removal thereof ("Cleanup Laws"); (b) claims of any private parties regarding violations of Cleanup Laws; and (c) costs and expenses (including, without limitation, reasonable attorneys' fees and fees incidental to the securing of repayment of such costs and expenses) incurred by the Bank in connection with the removal of any such Lien or in connection with compliance by the Bank with any statute, regulation or other rule issued pursuant to any Cleanup Laws by any local, state or federal government or governmental agency or authority. Section 5.8 Subsidiary Guarantees. Subject to the terms of Section 3.1(d), cause any Subsidiary acquired after the date hereof to execute and deliver to the Bank a guarantee substantially in the form of the Guarantee annexed hereto as Exhibit "B," within ten days after the acquisition thereof, together with certified copies of the resolutions of the Board of Directors of such Subsidiary authorizing the execution, delivery and performance thereof with appropriate shareholder consents or approvals attached. Section 5.9 Compliance with Law. Comply with all laws, ordinances, orders, judgments or decrees or governmental rules and regulations to which it is subject and maintain all licenses, permits, franchises or other governmental authorizations necessary to the ownership of its Properties or to the conduct of its business, if the failure to do so might reasonably be expected to materially adversely affect the Properties, business, prospects, operating results or condition (financial or otherwise) of Record Town or the Company and its Subsidiaries, taken as a whole. Section 5.10 Maintenance of Office. Maintain an office in the State of New York where notices, presentations and demands in respect of this Agreement or the Notes may be made upon it. The Companies shall maintain such office at 38 Corporate Circle, Albany, New York 12203 until such time as the Company notifies the Bank and the Security Trustee of a change of location. Section 5.11 Quarterly Meetings. Within 30 days after the end of each fiscal quarter of the Company, Robert J. Higgins, and such other representatives of the Company as the Banks may request, shall make themselves available at a reasonably convenient location to meet with representatives of the Banks to discuss the Company's budget, business plan and other finances and affairs of the Company, provided, however, that this requirement may be waived with respect to any quarter by the Banks holding not less than seventy-five percent (75%) of the aggregate Commitment of all the Banks. Section 5.12 Monthly Monitoring Reports. The Company and Record Town shall pay up to $5,000 per month of the fees and expenses of Policano & Manzo, L.L.C. (or other financial consultant acceptable to the Banks and the Noteholders) incurred to produce monitoring reports of the type heretofore furnished. The Company and Record Town shall give such financial consultant such access to its books and records as is necessary to permit such consultant to produce such reports on a timely basis. SECTION 6. NEGATIVE COVENANTS The Companies hereby covenant that so long as the Note or any amounts owing in connection with the Letters of Credit or otherwise remain outstanding and unpaid or so long as the Commitment remains unterminated, the Companies shall not, and shall not permit any Subsidiary to, directly or indirectly, without the prior written consent of the Bank: Section 6.1 Limitation of Indebtedness. Create, incur, assume or suffer to exist, any indebtedness for borrowed money, or any indebtedness which constitutes the deferred purchase price of any property or assets, except (a) the Bank Outstandings; (b) accounts payable (other than for borrowed money) incurred in the ordinary course of business as presently conducted provided that the same shall not be overdue or, if overdue, are being contested in good faith and by appropriate proceedings; (c) indebtedness between wholly-owned Subsidiaries that are Guarantors and between any wholly-owned Subsidiary that is a Guarantor and the Company provided, however, that in the case of Movie Plus solely to the extent such Indebtedness is subject to the Movie Plus Subordination Agreement; (d) other indebtedness owing by the Company or any Subsidiary on the date of this Agreement and reflected on the balance sheet referred to in Section 4.8 hereof; (e) indebtedness to others incurred for the purpose of purchasing equipment , to the extent permitted by Section 6.4, used or useful in the ordinary course of the business of the Company or its Subsidiaries (provided that the aggregate amount of all such indebtedness shall not exceed $2,000,000 in any Fiscal Year); (f) indebtedness incurred by the Company upon reasonable and customary terms to replace and upgrade its (i) existing AS400 computer hardware and related equipment in an amount not to exceed $4 million dollars in the aggregate and (ii) existing POS cash register system in an amount not to exceed $6 million dollars in the aggregate, (g) reimbursement obligations in an aggregate amount not to exceed $500,000 secured by Liens permitted under Section 6.2(ix) and incurred in respect of standby or commercial letters of credit issued by parties other than the Banks for the account of the Companies and (h) the Institutional Investor Debt. Nothing contained in this Section 6.1 permits an expenditure not otherwise permitted by Section 6.4. Section 6.2 Limitation on Liens. (a) Create, incur, assume or suffer to exist, any Lien upon any of their respective property or assets, income or profits, whether now owned or hereafter acquired, except (i) the Liens existing as of the date of this Agreement referred to in the financial statements referred to in Section 4.8 hereof, provided, however, that such Liens shall not spread to cover other or additional indebtedness or property of the Companies or any of the Subsidiaries; (ii) Liens for taxes not yet due or which are being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of the Company or such Subsidiary, as the case may be, in accordance with GAAP; (iii) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business for sums which are not overdue for a period of more than 30 days or which are being contested in good faith and by appropriate proceedings; ( iv) pledges or deposits in connection with worker's compensation, unemployment insurance and other social security legislation; (v) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (vi) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the Property subject thereto or interfere with the ordinary conduct of the business of the Companies or the Subsidiaries; (vii) purchase money Liens securing indebtedness permitted by Section 6.1(e) hereof, provided, however, that such Liens shall not encumber any assets of the Companies or the Subsidiaries other than the equipment so purchased; (viii) any rights of set off available to the Bank; (ix) deposits in an aggregate amount not to exceed $500,000 to secure the Companies' reimbursement obligations in respect of standby or commercial letters of credit issued for the account of the Companies by parties other than the Banks and (x) Liens granted to the Security Trustee pursuant to the Security Documents (the Liens described in clauses (i)-(x) above, collectively, the "Permitted Liens"). (b) In case any Property is subjected to a Lien in violation of Section 6.2(a), the Company shall make or cause to be made provision whereby the Note will be secured equally and ratably with all other obligations secured thereby, and in any case the Note will have the benefit, to the full extent that, and with such priority as, the holders may be entitled thereto under applicable law, or an equitable Lien on such Property securing the Note. Any violation of Section 6.2(a) will constitute an Event of Default, whether or not any such provision is made pursuant to this Section 6.2(b). Section 6.3 Limitation on Contingent Obligations. Assume, guarantee, indorse or otherwise in any way be or become responsible or liable for the obligations of any Person (all such transactions being herein called "guarantees"), whether by agreement to purchase or repurchase obligations, or by agreement to supply funds for the purpose of paying, or enabling such entity to pay, any obligations (whether through purchasing stock, making a loan, advance or capital contribution or by means of agreeing to maintain or cause such entity to maintain, a minimum working capital or net worth of any such entity, or otherwise), except (a) guarantees by indorsement of instruments for deposit or collection in the ordinary course of business; (b) guarantees of the Companies' indebtedness outstanding in respect of this Agreement and the Institutional Investor Debt Restructuring Documents; (c) existing guarantees in respect of existing indebtedness of the Subsidiaries, provided that the indebtedness in respect of which such guarantees are given is permitted by Section 6.1 hereof; and (d) guarantees of the obligations of the Subsidiaries (other than Record Town) under operating leases for retail locations used by the Company or any Subsidiary in the ordinary course of business provided that the aggregate exposure under such guarantees shall not exceed $1,000,000 at any time. Section 6.4 Limitation on Capital Expenditures. Subject to Section 6.9 hereof, make capital expenditures that exceed in the aggregate the following amounts in the following fiscal years: Fiscal Year Amount 1996 $12,000,000 1997 $12,000,000 1998 (through Termination Date) $6,000,000 Section 6.5 Prohibition of Fundamental Changes. Enter into any transaction of merger or consolidation or liquidate or dissolve itself (or suffer any liquidation or dissolution) or convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of related transactions, all or a substantial part of its property, business, or assets, including its accounts receivable, or stock or securities convertible into stock of any Subsidiary, except that: (a) any Subsidiary may be voluntarily liquidated, dissolved or merged into, or consolidated with, the Company (but the Company must be the continuing or surviving corporation) or with or into any one or more wholly-owned Subsidiaries (but a wholly-owned Subsidiary must be the continuing or surviving corporation and must continue to be wholly-owned by the Company), and (b) any Subsidiary may sell, lease, transfer or otherwise dispose of any of its assets to the Company or to a wholly-owned Subsidiary. Section 6.6 Limitations on Dividends and Stock Acquisitions. Declare or pay any dividends or make any other distribution (whether in cash or property) on any shares of its capital stock now or hereafter outstanding, or purchase, redeem, retire or otherwise acquire for value any shares of its capital stock or warrants or options therefor now or hereafter outstanding (all such dividends, distributions, purchases and other actions being hereinafter collectively called "Stock Payments") except that (a) a Subsidiary may make Stock Payments and (b) the Company may declare stock splits and pay dividends payable solely in shares of any class of its capital stock. Section 6.7 Limitation on Investments, Loans and Advances. Make or suffer to exist any advances or loans to, or investments (by way of transfers of property, contributions to capital, acquisitions of stock, or securities or evidences of indebtedness, acquisitions of businesses or acquisitions of assets other than in the ordinary course of business, or otherwise) in, any person, firm, corporation or other business entity, except (a) investments in certificates of deposit issued by any of the Banks, provided, however, that such certificates of deposit must have a maturity of one year or less from the date of purchase; (b) at such times as no Loans are outstanding under this Agreement and all Letters of Credit are fully cash collateralized, investments in direct obligations of the United States of America or any agency thereof, or marketable obligations directly and fully guaranteed by the United States of America, or commercial paper, provided, however, that any such obligations or commercial paper must ha ve a maturity date of one year or less from the date of purchase and any such commercial paper must be rated "A-1" by Standard & Poors Corporation (or must have a similar rating by any similar nationally recognized organization which rates commercial paper); (c) at such times as no Loans are outstanding under this Agreement and all Letters of Credit are fully cash collateralized, investments in money market funds registered under the Investment Company Act of 1940 which invest in securities which are permitted under clause (b) above; (d) loans and advances by the Company to, and investments by the Company in the stock of, any existing Subsidiary outstanding or in effect on the date hereof as set forth on Schedule III; (e) stock or obligations issued in settlement of claims against any other person by reason of an event of bankruptcy or composition or readjustment of debt or reorganization of any debtor of the Company or any Subsidiary; and (f) investments of new capital in licensed operations and joint ventu res in specialty retailing in an aggregate amount not to exceed the sum of such investments made prior to June 29, 1995 plus $5,000,000. Section 6.8 Prohibition of Certain Prepayments. Make any payments in any Fiscal Year in respect of the principal of any debt, with a maturity of more than one year from the date of such payment, for borrowed money or for the deferred purchase price of property or services, except in respect of the Bank Outstandings and at the stated maturity of the Institutional Investor Debt or as required by mandatory prepayment provisions relating thereto; provided, however, that the Company may make additional prepayments of the Institutional Investor Debt but only to the extent that any such payment of the Institutional Investor Debt is accompanied by a reduction of the Commitment as provided in Section 2.6(d) hereof. Section 6.9 Limitation on Leases. Enter into any agreement, or be or become liable under any agreement, for the lease, hire or use of any personal property entered into in the ordinary course of business which would cause (a) the sum of (x) the aggregate maximum amount of all obligations of the Company and its Subsidiaries pursuant to such agreements plus (y) the aggregate outstanding indebtedness permitted under Section 6.1(e) hereof to exceed (b) $2,000,000 in any Fiscal Year. Anything contained in this Section 6.9 to the contrary notwithstanding, this provision does not apply to retail store leases or leases required to be capitalized under GAAP. Section 6.10 Limitation on Sale and Leaseback. Enter into any arrangement with any Person whereby the Company or any Subsidiary sells or transfers any personal property, whether now owned or hereafter acquired, and thereafter rents or leases such property or other property which the Company or such Subsidiary intends to use for substantially the same purpose or purposes as the property being sold or transferred. Section 6.11 Maintenance of Current Ratio. Permit the ratio of current assets of the Company and the Subsidiaries to current liabilities of the Company and the Subsidiaries, in each case on a consolidated basis, to be less than 1.5 to 1.0 at the end of each of the first, second and fourth quarterly periods of each Fiscal Year and 1.35 to 1.0 at the end of the third quarterly period of each Fiscal Year, excluding for purposes of such computation of current liabilities, the Institutional Investor Debt. For all calculations herein, the actual cash balance of the Company will be reduced by the amount in excess of $10,000 per retail store actually open for business on the date of such computation. Such excess will be applied to reduce accounts payable in the pro forma computation of the current ratio under this Section 6.11. Section 6.12 Maintenance of Consolidated Tangible Net Worth. Permit the Consolidated Tangible Net Worth to be less than the following amounts at the end of the following quarterly periods: Period/Fiscal Year Amount 1st Q 1996 $75,000,000 2nd Q 1996 $75,000,000 3rd Q 1996 $75,000,000 4th Q 1996 $85,000,000 1st Q 1997 $80,000,000 2nd Q 1997 $80,000,000 3rd Q 1997 $80,000,000 4th Q 1997 $90,000,000 1st Q 1998 $80,000,000 Section 6.13 Limitation on Debt to Consolidated Tangible Net Worth. Permit the ratio of (a) total liabilities of the Company and the Subsidiaries on a consolidated basis to (b) Consolidated Tangible Net Worth to exceed the following amounts as of the end of the following quarterly periods: Period/Fiscal Year Ratio 1st Q 1996 2.30 2nd Q 1996 2.50 3rd Q 1996 3.00 4th Q 1996 2.10 1st Q 1997 2.10 2nd Q 1997 2.30 3rd Q 1997 2.80 4th Q 1997 1.90 1st Q 1998 2.10 For all calculations in this Section 6.13, the actual cash balance of the Company will be reduced by the amount in excess of $10,000 per retail store actually open for business on the date of such computation. Such excess will be applied to reduce accounts payable in the pro forma computation of liabilities to Consolidated Tangible Net Worth under this Section 6.13. Section 6.14 Maintenance of Inventory Turnover. Permit Inventory Turnover to fall below the following amounts as of the end of the following quarterly periods: Period/Fiscal Year Turns Per Year 1st Q 1996 .30 2nd Q 1996 .60 3rd Q 1996 .70 4th Q 1996 1.50 1st Q 1997 .30 2nd Q 1997 .60 3rd Q 1997 .70 4th Q 1997 1.50 1st Q 1998 .30 Section 6.15 No Amendment of Debt Instruments. Amend, modify or supplement or permit or consent to any amendment, modification or supplement of any of the terms of the other Credit Agreements or the Institutional Investor Debt Restructuring Documents (other than any such amendment, modification or change which would extend the maturity or reduce the amount of any payment of principal thereof or which would reduce the rate or extend the date for payment of interest thereon). Section 6.16 Maintenance of Accounts. Maintain any cash balances or cash management accounts other than at one or more of the Banks or any other financial institution that has executed a valid Bank Depository Agreement satisfactory to the Security Trustee, provided, however, that the Company may continue to maintain, in a manner consistent with past practices, existing store accounts at one or more other banks whether or not such banks execute any such agency agreement. Section 6.17 Limitation on Transactions with Affiliates. Enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate (other than the Company or any wholly-owned Subsidiary) unless such transaction is (a) otherwise permitted under this Agreement, (b) in the ordinary course of the Company's or such Subsidiary's business and (c) upon fair and reasonable terms no less favorable to the Company or such Subsidiary, as the case may be, than it would obtain in a comparable arm's length transaction with a Person that is not an Affiliate. Section 6.18 Limitation on Changes in Fiscal Year. Permit the Fiscal Year of the Company to end on a day other than the Saturday closest to the last day of January or change the Company's method of determining fiscal quarters. Section 6.19 Limitation on Lines of Business. Enter into any business, either directly or through any Subsidiary, except for those businesses in which the Company and its Subsidiaries are engaged on the date of this Agreement or which are reasonably related thereto. Section 6.20 Minimum Consolidated EBITDA. Permit Consolidated EBITDA to be less than the following amounts for any of the following periods: Period Amount For the period from February 4, 1996 to May 4, 1996 ($2,000,000) For the period from February 4, 1996 to August 4, 1996 ($2,000,000) For the period from February 4, 1996 to November 4, 1996 ($2,000,000) For the period from February 4, 1996 to February 1, 1997 $24,000,000 For the period from February 2, 1997 to May 2, 1997 ($2,000,000) For the period from February 2, 1997 to August 2, 1997 ($2,000,000) For the period from February 2, 1997 to November 2, 1997 ($2,000,000) For the period from February 2, 1997 to January 31, 1998 $27,000,000 For the period from February 1, 1998 to May 1, 1998 ($2,000,000) Section 6.21 Limitation on Material Asset Sales. Enter into a contract for or consummate a Material Asset Sale except that the Company may contract for and consummate the sale of all or substantially all of the Movie Plus Assets for a cash purchase price not less than the fair market value thereof as determined in good faith by the board of directors of the Company. If such a sale is consummated, the Commitment will reduce as provided in Section 2.6. Section 6.22 Maintenance of Ownership. At any time fail to directly or indirectly own, free and clear of all Liens (except as otherwise permitted by Section 6.2(a)), 100% of the outstanding capital stock of Record Town. Section 6.23 Maintenance of Tangible Net Worth of Record Town. Permit Record Town and Record Town's subsidiaries to maintain Tangible Net Worth of less than the following amounts as of the end of the following fiscal quarters: Period/Fiscal Year Amount 1st Q 1996 $25,000,000 2nd Q 1996 $25,000,000 3rd Q 1996 $25,000,000 4th Q 1996 $35,000,000 1st Q 1997 $30,000,000 2nd Q 1997 $30,000,000 3rd Q 1997 $30,000,000 4th Q 1997 $40,000,000 1st Q 1998 $30,000,000 Section 6.24 Tax Consolidation. File or consent to the filing of any consolidated income tax return with any Person other than a Subsidiary. Section 6.25 Limitations on Preferred Stock. Issue, or permit Record Town or any other Subsidiary to issue, any Preferred Stock which by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable) is exchangeable for debt at the option of the holder thereof on or prior to July 31, 2000. Section 6.26 New Stores and Leases. (i) Open or permit any Subsidiary to open, any new store other than relocations, or (ii) enter or permit any Subsidiary to enter into any lease in connection with or for the purpose of opening any new store if, after giving effect to the opening of such store or the entering into of such lease, a default under Section 6.4 would exist. Section 6.27 Maintenance of Fixed Charges Ratio. Permit the Fixed Charges Ratio for the period of four fiscal quarters ended as of the last day of each of the following fiscal quarters to be less than the amounts set forth opposite such fiscal quarters: Period/Fiscal Year Amount 1st Q 1996 1.00 2nd Q 1996 1.00 3rd Q 1996 1.10 4th Q 1996 1.10 1st Q 1997 1.00 2nd Q 1997 1.00 3rd Q 1997 1.10 4th Q 1997 1.15 1st Q 1998 1.00 Section 6.28 Foreign Subsidiaries. Create or permit to be created any Subsidiary under the laws of any jurisdiction other than the United States or a jurisdiction thereof. SECTION 7. EVENTS OF DEFAULT Section 7.1 Events of Default. Upon the occurrence of any of the following: (a) failure by the Companies to pay the principal of the Note or the principal amount of any obligations of the Companies in respect of any Letters of Credit when due, or failure to pay any interest on the Note or any fee within five Business Days after any such interest or fee becomes due or failure to pay any other obligation of the Companies to the Bank within five Business Days of the date when due inclusive of any applicable grace or other cure period; (b) if any representation or warranty made by the Companies in this Agreement or in any certificate, financial or other statement furnished at any time under or in connection with this Agreement shall prove to have been incorrect, untrue or misleading in any material respect when made; (c) default by the Company in the observance or performance of any covenant or agreement contained in Section 5.1, Section 5.3, Section 5.4, Section 5.5, Section 5.8, or Section 6 of this Agreement; (d) default by the Company in the observance or performance of any other covenant or agreement contained in this Agreement or any other Loan Document (except to the extent a shorter time period is provided for in the applicable Loan Document) and the continuance of the same for 30 days after notice of such default is given the Company by the Bank; (e) if the Company or any Subsidiary (i) defaults in the payment of principal or interest on any obligation for borrowed money that has an outstanding balance of over $500,000 (other than the Note), or for the deferred purchase price of property that has an outstanding balance of over $500,000, in each case beyond the period of grace, if any, provided with respect thereto; (ii) defaults in the payment of principal or interest on any obligations for borrowed money or for the deferred purchase price of property, in each case beyond the period of grace, if any, if the aggregate principal amount of such obligations in default at any one time exceeds $2,000,000; or (iii) defaults in the performance or observance of any other term, condition or agreement contained in any such obligation or in any agreement relating thereto if the effect thereof is to cause or permit the holder or holders of such obligation (or a trustee on behalf of such holder or holders) to cause, such obligation to become due prior to its stated maturity; (f) (i) the Company or any of its Significant Subsidiaries commences any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property, or the Company or any of its Significant Subsidiaries shall make a general assignment for the benefit of its creditors; or (ii) there is commenced against the Company or any of its Significant Subsidiaries any case, proceeding or other action of a nature referred to in clause (i) above or seeking issuance of a warrant of attachment, execution, distraint or s imilar process against all or any substantial part of its property, which case, proceeding or other action (x) results in the entry of any order for relief or (y) remains undismissed, undischarged or unbonded for a period of 45 days; or (iii) the Company or any of its Significant Subsidiaries takes any action indicating its consent to, approval of, or acquiescence in, or in furtherance of, any of the acts set forth in its clause (i) or (ii) above; or (iv) the Company or any of its Significant Subsidiaries generally does not, or is unable to, pay its debts as they become due or admits in writing its inability to pay its debts; (g) (i) any Person engages in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, exists with respect to any Plan, (iii) a Reportable Event occurs with respect to, or proceedings commence to have a trustee appointed, or a trustee is appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Bank, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan terminates for purposes of Title IV of ERISA, (v) the Company or any Commonly Controlled Entity incurs or, in the reasonable opinion of the Bank, is likely to incur, any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition occurs or exists with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could subject the Company or any of its Subsidiaries to any tax, penalty or other liabilities in the aggregate material in relation to the business, operations, property or financial or other condition of the Company; (h) final judgment for the payment of money in excess of $500,000 (other than the insured claims) is rendered against the Company or any Significant Subsidiary and the same remains undischarged or unbonded for the period of 30 days during which execution of such judgment is not effectively stayed; (i) default by any Guarantor upon its Guarantee of the Note pursuant to the terms thereof or if any such Guarantee ceases to be in full force and effect or is declared to be null and void; (j) an Event of Default under any one or more of the other Credit Agreements or the Institutional Investor Debt Restructuring Documents whether or not such Event of Default is waived by the applicable Banks or Noteholders; or (k) a Change of Control; then (i) if such event is an event specified in paragraph (f) above, the Commitment shall immediately terminate and the Note and all obligations of the Companies with respect to the Letters of Credit, together with accrued interest thereon, shall be immediately due and payable without notice or demand and (ii) if such event is any other such event specified above, the Bank may, by notice to the Companies, declare the Commitment immediately terminated and the Note, and all obligations of the Companies with respect to the Letters of Credit, to be forthwith due and payable, whereupon the Commitment shall be immediately terminated and the principal amount of the Note and all obligations of the Companies with respect to the Letters of Credit, together with accrued interest thereon and accrued fees, shall become immediately due and payable without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived, anything contained herein, in the Note, or the Applications to the contrary notwithstanding. With respect to all Letters of Credit not previously presented for drawing at the time of an acceleration pursuant to this paragraph, the Company shall at such time deposit in a cash collateral account opened by the Bank an amount equal to 105% of the aggregate then undrawn and unexpired amount of such Letters of Credit. The Bank shall apply amounts held in such cash collateral account to the payment of drafts drawn under such Letters of Credit, and the unused portion thereof after all such Letters of Credit have expired or been fully drawn upon, if any, to repay other obligations of the Companies hereunder and under the other Loan Documents, the other Credit Agreements and the Institutional Investor Debt Restructuring Documents. After all such Letters of Credit have expired or been fully drawn upon, the principal and interest outstanding in respect of the Notes have been satisfied and all other obligations of the Company hereunder and under the other Loan Documents, the other Cre dit Agreements and the Institutional Investor Debt Restructuring Documents have been paid in full, the Bank shall return the balance, if any, in such cash collateral account to the Companies (or such other Person as may be lawfully entitled thereto). The Bank may exercise and enforce any and all other rights and remedies available to it, whether arising under this Agreement or the Note or under applicable law, in any manner deemed appropriate by the Bank, including suit in equity, action at law, or other appropriate proceedings, whether for the specific performance (to the extent permitted by law) of any covenant or agreement contained in this Agreement or in the Note or in aid of the exercise of any power granted in this Agreement or the Note. SECTION 8. MISCELLANEOUS Section 8.1 Limited Role of the Bank. The relationship between the Companies and the Bank is solely that of borrowers and lender, respectively. The Bank has no fiduciary responsibilities to the Companies under the Loan Documents and no joint venture exists between the Companies and the Bank. The Companies and the Bank each hereby severally acknowledges that there are no representations, warranties, covenants, undertakings or agreements by the parties hereto as to the Loan Documents except as specifically provided herein and therein. Section 8.2 Choice of Law Construction. The Loan Documents (other than those containing a contrary express choice of law provision) will be construed in accordance with the internal laws (without reference to the law of conflicts) of the State of New York. If any provision of the Loan Documents is or becomes unenforceable or illegal under any applicable law, the other provisions will remain in full force and effect. Section 8.3 Consent to Jurisdiction. (a) The Companies hereby irrevocably submit to the nonexclusive jurisdiction of any United States federal or New York State court sitting in New York City or Albany, New York in any action or proceedings arising out of or relating to any Loan or Loan Documents and all claims in respect of such action or proceedings may be heard and determined in any such court and the Companies hereby irrevocably waive any objection either may now or hereafter have as to the venue of any such action or proceeding brought in such a court or the fact that such court is an inconvenient forum. (b) The Companies irrevocably and unconditionally consent to the service of process in any such action or proceedings in any of the aforesaid courts by the mailing of copies of such process to it, by certified or registered mail at the address specified in Section 8.5. Section 8.4 WAIVER OF JURY TRIAL. THE BANK AND THE COMPANIES, AFTER CONSULTING WITH COUNSEL, KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY RELATED INSTRUMENT OR AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY COURSE OF CONDUCT, DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF ANY OF THEM. NONE OF THE BANK OR THE COMPANIES WILL SEEK TO CONSOLIDATE, BY COUNTERCLAIM OR OTHERWISE, ANY SUCH ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THESE PROVISIONS WILL NOT BE DEEMED MODIFIED IN ANY RESPECT OR RELINQUISHED BY THE BANK OR THE COMPANIES EXCEPT BY A WRITTEN INSTRUMENT EXECUTED BY EACH OF THEM. Section 8.5 Notices. (a) Except as otherwise provided in Section 2.4 hereof, all notices and other communications hereunder must be in writing and must be delivered or sent to the Companies at: 38 Corporate Circle Albany, New York 12203 Facsimile No.: (518) 869-4819 Attention: Robert J. Higgins with a copy to Matthew H. Mataraso 111 Washington Avenue Albany, New York 12210 Facsimile No.: (518) 449-5812 - and - Jones, Day, Reavis & Pogue 77 West Wacker Chicago, Illinois 60601 Facsimile No.: (312) 782-8585 Attention: David S. Kurtz and to the Bank at: NBD Bank with a copy to Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, New York 10019 Attention: Chaim J. Fortgang or to such other address as may be designated by the Companies or the Bank by notice to the other parties hereto. All notices and other communications will be deemed to have been given at the time of actual delivery thereof to such address, or if sent by certified or registered mail, postage prepaid, to such address, on the third Business Day after the date of mailing, or, if sent by Federal Express or other recognized overnight delivery service, prepaid, to such address, on the Business Day following the date of deposit with such delivery service prior to such service's next day delivery deadline. (b) Notice by the Companies to the Bank with respect to terminations or reductions of the Commitment pursuant to Section 2.6, requests for Loans pursuant to Section 2.4, and notices of prepayment pursuant to Section 2.7 will be irrevocable and binding on the Companies. (c) Any notice given by the Companies to the Bank pursuant to Section 2.4 may be given by telephone and all such notices must be confirmed in writing in the manner provided in Section 8.5(a). Any such confirmation may be communicated to the Bank via facsimile at the number set forth in Section 8.5(a). Any such notice given by telephone will be effective upon receipt thereof by the party to whom such notice is to be given. Section 8.6 Entire Agreement; No Waiver; Cumulative Remedies; Amendments; Setoff; Counterparts. (a) This Agreement and the other Loan Documents constitute the entire agreement among the parties hereto and thereto as to the subject matter hereof and thereof and supersede any previous agreement, oral or written, as to such subject matter. (b) No failure to exercise and no delay in exercising, on the part of the Bank, any right, power or privilege hereunder or under the Note, will operate as a waiver thereof; nor will any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law. No modification, or waiver of any provision of this Agreement, the Applications, or the Note, nor consent to any departure by the Companies from the provisions hereof or thereof, will be effective unless the same is in writing from the Bank and then such waiver or consent will be effective only in the specific instance and for the purpose for which it is given. No notice to the Companies will entitle the Companies to any other or further notice in other or similar circumstances unless expressly provided for herein. No course of dealing between the Companies and the Bank can or will constitute a waiver of any of the rights of the Bank under this Agreement or the other Loan Documents. (c) In addition to any rights or remedies of the Bank provided by law, upon the occurrence of any Event of Default, the Bank is hereby authorized, without notice to the Companies, to setoff and appropriate and apply all deposits (general and special) and other indebtedness at any time held or owing by the Bank to or for the credit or the account of the Companies against and on account of all obligations, liabilities and claims of the Companies to the Bank, and in such amounts as the Bank may elect, although such obligations, liabilities and claims may be contingent or unmatured. (d) This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. Section 8.7 Reference to Subsidiaries and Guarantors. If the Company has no Subsidiaries, and/or if there are no Guarantors, then the provisions of this Agreement relating to Subsidiaries and/or Guarantors will be deemed surplusage without affecting the applicability of the provisions of this Agreement to the Company alone. Section 8.8 Captions. The captions of the various sections and subsections of this Agreement have been inserted only for the purposes of convenience, and in no manner modify, explain, enlarge or restrict any of the provisions of this Agreement. Section 8.9 Exhibits and Schedules. The exhibits and Schedules hereto constitute integral parts of this Agreement. Section 8.10 Expenses; Indemnity. (a) The Companies are obligated, jointly and severally, to pay all reasonable out-of-pocket expenses incurred by the Bank in connection with the preparation and administration of this Agreement and the other Loan Documents or in connection with any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions hereby or thereby contemplated shall be consummated) or incurred by the Bank in connection with the enforcement or protection of its rights in connection with this Agreement and the other Loan Documents or in connection with the Loans made or Letters of Credit issued hereunder, including the fees, charges and disbursements of Wachtell, Lipton, Rosen & Katz, counsel for the Bank and Policano & Manzo LLC, financial consultant to the Bank. (b) The Companies hereby, jointly and severally, indemnify the Bank, each Affiliate of the Bank and each of their respective directors, officers, employees and agents (each such person being called an "Indemnitee") against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable counsel fees, charges and disbursements, incurred by or asserted against any Indemnitee arising out of, in any way connected with, or as a result of (i) the execution and delivery of this Agreement or any other Loan Document or any agreement or instrument contemplated thereby, the performance by the parties thereto of their respective obligations thereunder or the consummation of the transactions contemplated thereby, (ii) the use of proceeds of the Loans or the issuance of Letters of Credit, (iii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto, or (iv) any actual or alle ged presence or release of hazardous materials on any property owned or operated by the Companies or any of the Subsidiaries, or any environmental claim related in any way to the companies or the Subsidiaries; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. (c) The provisions of this Section 8.10 will remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the expiration of the Commitment, the expiration of any Letter of Credit, the invalidity or unenforceability of any term or provision of this Agreement or any other Loan Document, or any investigation made by or on behalf of the Bank. All amounts due under this Section 8.10 shall be payable on written demand therefor. Section 8.11 Survival of Agreements. All agreements, representations and warranties made herein and in any certificates delivered pursuant hereto will survive the execution and delivery of this Agreement, the Note, and the making and renewal of Loans hereunder, and will continue in full force and effect until such indebtedness of the Companies under the Note has been paid in full. Section 8.12 Successors and Assigns. (a) This Agreement is binding upon and inures to the benefit of the Companies, and the Bank and their respective successors and assigns, except that the Companies may not transfer or assign any of their rights or interests hereunder without the prior written consent of the Bank. (b) The Bank may, without the consent of the Companies or the other Banks, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time sell to one or more banks or other entities ("Participants") participating interests in the Loans, the Note, the Commitment or any other interest of such Bank hereunder and under the other Loan Documents ("Participations"); provided that (i) any such sale of participating interests must be in a minimum amount equal to the lesser of (A) $1,000,000 and (B) the Commitment then in effect, and (ii) after giving effect to any such sale, the Bank must have either (x) retained at least $1,000,000 of its Commitment not subject to any participating interests or (y) sold participating interests to Participants (or assignments to Assignees) in 100% of its Loans and Commitment. If the Bank sells a participation, the Bank's obligations under this Agreement to the other parties to this Agreement will remain unchanged, the Bank will remain s olely responsible for the performance thereof, the Bank will remain the holder of the Note for all purposes under this Agreement and the other Loan Documents, and the Companies shall continue to deal solely and directly with the Bank in connection with its rights and obligations under this Agreement and the other Loan Documents. If amounts outstanding under this Agreement and the Note are due or unpaid, or have been declared or have become due and payable upon the occurrence of an Event of Default, each Participant will have the right of setoff in respect of its participating interest in amounts owing under this Agreement and the Note to the same extent as if the amount of its Participation were owing directly to it as the Bank under this Agreement or the Note. Each Participant is entitled to the benefits of Section 2.9 with respect to its Participation in the Commitment and the Loans outstanding from time to time as if it were the Bank; provided, that no Participant is entitled to receive any greater amount pursuant to such Section than the participating Bank would have been entitled to receive in respect of the amount of the Participation transferred to such Participant had not such transfer occurred. (c) The Bank may, in the ordinary course of its business and in accordance with applicable law, at any time and from time to time, assign to either (1) any other bank or financial institution having capital surplus of at least $300,000,000 or (2) with the consent of the Company and each of the other Banks, which consent shall not be unreasonably withheld or delayed, to any other Person (in each case, an "Assignee") all or any part of the Commitment, the Loans, its rights and obligations under this Agreement and the Note; provided that (i) any such assignment must be in a minimum amount equal to the lesser of (x) $1,000,000 and (y) the Commitment, and (ii) after giving effect to any such assignment, the Bank must have either (x) sold all its rights and obligations hereunder and under the Note or (y) retained at least $1,000,000 of the Commitment. Notwithstanding the foregoing, the consent of the Company is not required for an assignment made when a Default has occurred and is continuing. The Bank shall no tify the Companies of each assignment and the identity of each Assignee. Upon notification to the Companies of an assignment, from and after the effective date of such assignment, (1) the Assignee thereunder will be a party hereto and have the rights and obligations of the Bank hereunder with a Commitment as set forth herein and (2) the Bank will, to the extent provided in such assignment, be released from its obligations under this Agreement (and, in the case of an assignment covering all or the remaining portion of the Bank's rights and obligations under this Agreement, the Bank will cease to be a party hereto except that the provisions of Section 2.9 and Section 8.6 will continue to benefit the Bank to the extent required by such Sections). (d) Each of the Companies authorizes the Bank to disclose to any Participant or Assignee (each, a "Transferee") and any prospective Transferee, any and all financial information in the Bank's possession concerning the Companies and their respective Affiliates which has been delivered to the Bank by or on behalf of the Companies pursuant to this Agreement or which has been delivered to the Bank by or on behalf of the Companies in connection with the Bank's credit evaluation of the Companies and their respective Affiliates prior to becoming a party to this Agreement. (e) Nothing herein prohibits the Bank from pledging or assigning the Note to any Federal Reserve Bank in accordance with applicable law. Section 8.13 Interest. Anything in this Agreement or in the Note to the contrary notwithstanding, the Bank shall not charge, take or receive, and the Companies will not be obligated to pay, interest in excess of the maximum rate from time to time permitted by applicable law. Section 8.14 Waiver and Release. (a) For and in consideration of the agreements contained in this Agreement, and other good and valuable consideration, the receipt and sufficiency of all of which are hereby acknowledged, each of the Company and Record Town (the Company and Record Town being collectively referred to in this Section 8.14 as the "Releasors") does hereby jointly and severally fully RELEASE, REMISE, ACQUIT, IRREVOCABLY WAIVE and FOREVER DISCHARGE the Bank, together with its predecessors, successors, assigns, subsidiaries, Affiliates and agents and all of its past, present and future officers, directors, shareholders, employees, contractors and attorneys, and the predecessors, heirs, successors and assigns of each of them (the Bank and all of the foregoing being collectively referred to in this Section 8.14 as the "Released Parties"), from and with respect to any and all Claims (as defined below). (b) As used in this Section 8.14, the term "Claims" means and includes any and all, and all manner of, action and actions, cause and causes of action, suits, disputes, controversies, claims, debts, sums of money, offset rights, defenses to payment, agreements, promises, notes, bonds, bills, covenants, losses, damages, judgments, executions and demands of whatever nature, known or unknown, whether in contract, in tort or otherwise, at law or in equity, for money damages or dues, recovery of property, or specific performance, or any other redress or recompense which have accrued or may ever accrue, may have been had, may be now possessed, or may or shall be possessed in the future by or on behalf of any one or more of the Releasors against any one or more of the Released Parties for, upon, by reason of, on account of, or arising from or out of, or by virtue of, any transaction, event or occurrence, duty or obligation, indemnification, agreement, promise, warranty, covenant or representation, breach of fiducia ry duty, breach of any duty of fair dealing, breach of confidence, breach of funding commitment, undue influence, duress, economic coercion, conflict of interest, negligence, bad faith, malpractice, violations of federal or state securities laws or the Racketeer Influenced and Corrupt Organizations Act, intentional or negligent infliction of mental distress, tortious interference with contractual relations, tortious interference with corporate governance or prospective business advantage, breach of contract, deceptive trade practices, libel, slander, usury, conspiracy, wrongful acceleration of any indebtedness, wrongful foreclosure or attempt to foreclose on any collateral relating to any indebtedness, action or inaction, relationship or activity, service rendered, matter, cause or thing, whatsoever, express or implied, transpiring, entered into, created or existing from the beginning of time to the date of the execution of this Agreement in respect of the Existing Credit Agreement, and shall include, but no t be limited to, any and all Claims in connection with, as a result of, by reason of, or in any way related to or arising from the existence of any relationships or communications by and between the Releasors and the Released Parties with respect to the Existing Credit Agreement, and all agreements, documents and instruments related thereto, as presently constituted and as the same may from time to time be amended. (c) The Releasors acknowledge that they may hereafter discover facts different from or in addition to those they now know or believe to be true with respect to the Claims herein released. Notwithstanding the foregoing, the Releasors agree that this Section 8.14 will survive the termination hereof and will remain effective in all respects and waive the right to make any new, different or additional claim on account of such different or additional facts. The Releasors acknowledge that no representation or warranty of any kind or character has been made to the Releasors by any one or more of the Released Parties or any agent, representative or attorney of the Released Parties to induce the execution of this Agreement containing this Section 8.14. (d) The Releasors hereby represent and warrant unto the Released Parties that (i) the Releasors have the full right, power, and authority to execute and deliver this Agreement containing this Section 8.14 without the necessity of obtaining the consent of any other party; (ii) the Releasors have received independent legal advice from attorneys of their choice with respect to the advisability of granting the release provided herein, and with respect to the advisability of executing this Agreement containing this Section 8.14; (iii) the Releasors have not relied upon any statements, representations or promises of any of the Released Parties in executing this Agreement containing this Section 8.14, or in granting the release provided herein; (iv) the Releasors have not entered into any other agreements or understandings relating to the Claims; (v) the terms of this Section 8.14 are contractual, not a mere recital, and are the result of negotiation among all the parties; and (vi) this Section 8.14 has been carefully read by, and the contents hereof are known and understood by, and it is signed freely by the Releasors. (e) The Releasors covenant and agree not to bring any claim, action, suit or proceeding regarding or related in any manner to the matters released hereby, and the Releasors further covenant and agree that this Section 8.14 is a bar to any such claim, action, suit or proceeding. (f) All prior discussions and negotiations regarding the Claims have been and are merged and integrated into, and are superseded by, this Section 8.14. The Releasors understand, agree and expressly assume the risk of any fact not recited, contained or embodied in this Section 8.14 which may hereafter turn out to be other than, different from, or contrary to, the fact now known to the Releasors or believed by the Releasors to be true, and further agree that this Section 9.15 is not subject to termination, modification, or rescission, by reason of any such difference in facts. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. TRANS WORLD ENTERTAINMENT CORP. By: /s/ Robert J. Higgins -------------------- Robert J. Higgins, President RECORD TOWN, INC. By: /s/ Robert J. Higgins -------------------- Robert J. Higgins, President NBD Bank By: /s/ Phillip D. Martin -------------------- Phillip D. Martin Vice President EX-27 5 ART. 5 FDS FOR QUARTERLY REPORT ON FORM 10-Q
5 THIS SCHEDULE CONTAINS DATA EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS, AND THE CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000795212 TRANS WORLD ENTERTAINMENT CORPORATION 1,000
Amount Item Description (in thousands, except per share data) - ----------------- ------------------------------------- FEB-1-1997 FEB-4-1996 AUG-3-1996 6-MOS 7,783 0 0 0 168,718 197,035 169,273 93,401 273,595 126,633 52,577 0 0 98 88,987 273,595 203,339 203,339 131,554 131,554 73,543 0 6,143 (7,901) (2,770) 0 0 0 0 (5,131) (0.53) (0.53)
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