10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	FOR THE QUARTERLY PERIOD ENDED NOVEMBER 1, 2003

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
	FOR THE TRANSITION PERIOD FROM              TO

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 incorporation or organization)	(I.R.S. Employer 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 such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý  No o

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,

36,192,014 shares outstanding as of December 1, 2003

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

PART 1. FINANCIAL INFORMATION

Item 1 - Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except share amounts)

	November 1, 2003			February 1, 2003			November 2, 2002
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	19,840		$	197,050		$	20,558
Merchandise inventory	509,360			378,005			464,082
Deferred taxes	8,898			4,977			15,374
Other current assets	16,472			15,673			15,144
Total current assets	554,570			595,705			515,158
NET FIXED ASSETS	135,452			155,417			159,856
DEFERRED TAXES	36,267			40,667			28,429
GOODWILL	—			—			40,914
OTHER ASSETS	12,160			11,607			16,012
TOTAL ASSETS	$	738,449		$	803,396		$	760,369
LIABILITIES
CURRENT LIABILITIES:
Accounts payable	$	277,293		$	326,959		$	263,974
Borrowings under line of credit	12,108			—			26,314
Income taxes payable	—			13,418			—
Accrued expenses and other	51,291			35,060			32,187
Current portion of capital lease obligations	409			1,640			2,338
Total current liabilities	341,101			377,077			324,813
CAPITAL LEASE OBLIGATIONS, less current portion	7,568			7,860			7,976
OTHER LIABILITIES	25,563			26,355			26,681
TOTAL LIABILITIES	374,232			411,292			359,470
SHAREHOLDERS’ EQUITY
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued)	—			—			—
Common stock ($0.01 par value; 200,000,000 shares authorized;  54,235,873, 54,046,595 and 54,046,005 shares issued,  respectively)	542			540			541
Additional paid-in capital	288,382			287,402			287,179
Unearned compensation – restricted stock	(303		)	(116		)	(157		)
Treasury stock at cost (17,835,149, 15,105,432 and 13,985,291 shares, respectively)	(143,874		)	(129,103		)	(124,877		)
Retained earnings	219,470			233,381			238,213
TOTAL SHAREHOLDERS’ EQUITY	364,217			392,104			400,899
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	738,449		$	803,396		$	760,369

See Notes to Condensed Consolidated Financial Statements.

3

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	November 1, 2003			November 2, 2002			November 1, 2003			November 2, 2002
Sales	$	268,506		$	251,171		$	788,654		$	798,180
Cost of sales	172,199			160,075			498,239			504,857
Gross profit	96,307			91,096			290,415			293,323
Selling, general and administrative expenses	109,203			117,909			319,799			340,777
Loss from operations	(12,896		)	(26,813		)	(29,384		)	(47,454		)
Interest expense, net	549			455			1,051			817
Loss before income taxes, cumulative effect of change in accounting principle and extraordinary gain	(13,445		)	(27,268		)	(30,435		)	(48,271		)
Income tax benefit	(5,342		)	(12,507		)	(14,334		)	(21,317		)
Loss before cumulative effect of change in accounting principle and extraordinary gain	(8,103		)	(14,761		)	(16,101		)	(26,954		)
Cumulative effect of change in accounting principle, net of income taxes of $8,950	—			—			—			(13,684		)
Extraordinary gain – unallocated negative goodwill, net of income taxes of $1,797	2,191			—			2,191			—
Net loss	$	(5,912	)	$	(14,761	)	$	(13,910	)	$	(40,638	)
BASIC LOSS PER SHARE
Loss per share before cumulative effect of change in accounting principle and extraordinary gain	$	(0.22	)	$	(0.37	)	$	(0.43	)	$	(0.67	)
Cumulative effect of change in accounting principle, net of income taxes of $8,950	—			—			—			$	(0.34	)
Extraordinary gain – unallocated negative goodwill, net of income taxes of $1,797	$	0.06		—			$	0.06		—
Basic loss per share	$	(0.16	)	$	(0.37	)	$	(0.37	)	$	(1.01	)
Weighted average number of common shares outstanding – basic	36,625			40,139			37,838			40,470
DILUTED LOSS PER SHARE
Loss per share before cumulative effect of change in accounting principle and extraordinary gain	$	(0.22	)	$	(0.37	)	$	(0.43	)	$	(0.67	)
Cumulative effect of change in accounting principle, net of income taxes of $8,950	—			—			—			$	(0.34	)
Extraordinary gain – unallocated negative goodwill, net of income taxes of $1,797	$	0.06		—			$	0.06		—
Diluted loss per share	$	(0.16	)	$	(0.37	)	$	(0.37	)	$	(1.01	)
Weighted average number of common shares outstanding – diluted	36,625			40,139			37,838			40,470

See Notes to Condensed Consolidated Financial Statements.

4

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)

	Thirty-nine Weeks Ended
	November 1, 2003			November 2, 2002
Net cash used by Operating Activities	$	(136,013	)	$	(216,731	)
Cash Flows from Investing Activities:
Purchases of fixed assets	(12,156		)	(32,370		)
Purchase of investments in unconsolidated affiliates	—			(891		)
Acquisition of businesses	(25,600		)	—
Net cash used by Investing Activities	(37,756		)	(33,261		)
Cash Flows from Financing Activities:
Borrowings under line of credit	12,108			26,314
Payments of capital lease obligations	(1,523		)	(3,897		)
Purchases of treasury stock	(14,771		)	(7,066		)
Exercise of stock options	745			256
Net cash used by Financing Activities	(3,441		)	15,607
Net decrease in cash and cash equivalents	(177,210		)	(234,385		)
Cash and cash equivalents, beginning of year	197,050			254,943
Cash and cash equivalents, end of period	19,840			$	20,558
Supplemental disclosure of non-cash investing and financing activities:
Income tax benefit resulting from exercises of stock options	$	377		$	602
Issuance of treasury stock under incentive stock programs	—			8
Issuance of restricted shares under restricted stock plan	315			—

See Notes to Condensed Consolidated Financial Statements.

5

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

November 1, 2003 and November 2, 2002 (unaudited)

Note 1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements consist of Trans World Entertainment Corporation, its wholly owned subsidiary Record Town, Inc. (“Record Town”), Record Town’s subsidiaries, all of which are wholly owned and Second Spin, Inc., which is majority owned (“Company”).   All significant inter-company accounts and transactions have been eliminated.

The 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 condensed consolidated financial statements reflects all normal, recurring adjustments which, in the opinion of management, are necessary for the fair presentation of such financial statements.  Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to rules and regulations applicable to interim financial statements.

The information presented in the accompanying unaudited condensed consolidated balance sheet as of February 1, 2003 has been derived from the Company’s February 1, 2003 audited consolidated financial statements. All other information has been derived from the Company’s unaudited consolidated financial statements as of and for the thirteen week and thirty-nine week periods ended November 1, 2003 and November 2, 2002.   Certain amounts in previously issued condensed consolidated financial statements were reclassified to conform to fiscal 2003 presentation.  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 1, 2003.

Note 2. Seasonality

The Company’s business is seasonal in nature, with the highest sales and earnings occurring in the fourth fiscal quarter.

Note 3. Stock Based Compensation

The Company has elected to account for its stock-based compensation plans under the intrinsic value-based method of accounting as permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock Based Compensation, and as prescribed by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation – An Interpretation of APB No. 25, in accounting for its fixed stock option plans.

Under this method, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Unearned compensation recognized for restricted stock awards is shown as a separate component of shareholders’ equity and is amortized to expense over the vesting period of the stock award using the straight-line method.

6

The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:

	Thirteen Weeks ended						Thirty-nine Weeks ended
	November 1, 2003			November 2, 2002			November 1, 2003			November 2, 2002
	(in thousands except per share amounts)						(in thousands except per share amounts)
Net loss, as reported	$	(5,912	)	$	(14,761	)	$	(13,910	)	$	(40,638	)
Add: Stock-based employee compensation expense included in reported net loss, net of related income taxes	27			23			78			73
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related income taxes	(832		)	(1,136		)	(2,423		)	(3,044		)
Pro forma net loss	$	(6,717	)	$	(15,874	)	$	(16,255	)	$	(43,609	)
Loss per share:
Basic - as reported	$	(0.16	)	$	(0.37	)	$	(0.37	)	$	(1.01	)
Basic – pro forma	$	(0.18	)	$	(0.40	)	$	(0.43	)	$	(1.08	)
Diluted – as reported	$	(0.16	)	$	(0.37	)	$	(0.37	)	$	(1.01	)
Diluted – pro forma	$	(0.18	)	$	(0.40	)	$	(0.43	)	$	(1.08	)

Note 4. Recently Issued Accounting Standards

In June 2002, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities.  SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The Company adopted the provisions of SFAS No. 149 for derivative instruments and hedging contracts entered into or modified after June 30, 2003.  The adoption of SFAS No. 149 did not have an impact on the Company’s results of operations and financial condition.

In March 2003, the FASB’s Emerging Issues Task Force (“EITF”) reached consensus on Issue No. 02-16, Accounting by a Customer (including a Reseller) for Consideration Received from a Vendor relating to vendor allowances. The Company adopted EITF No. 02-16 effective from the beginning of fiscal 2002, resulting in a one-time non-cash charge of $13.7 million, which was net of income taxes of $8.9 million and was reported as a cumulative effect of a change in accounting principle in the first quarter of fiscal 2002. This new practice changes the timing of recognizing allowances in income and has the effect of reducing inventory and related cost of sales and increasing selling, general and administrative expenses. The Company’s results of operations for the thirty-nine weeks ended November 1, 2003 and November 2, 2002 reflect the adoption of EITF No. 02-16.

7

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.  SFAS No. 150 requires issuers to classify as liabilities (or assets in some circumstances) three classes of free standing financial instruments that embody obligations for the issuer.  Generally, SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003.  The adoption of SFAS No. 150 did not have an impact on the Company’s results of operations and financial condition.

Note 5. Acquisitions

On October 2, 2003, the Company acquired substantially all of the net assets of Wherehouse Entertainment Inc. (“Wherehouse”). Under the terms of the Purchase Agreement, the Company acquired 111 Wherehouse stores. Wherehouse, which was operating in Chapter 11 bankruptcy, is a specialty music retailer, and owned and operated 145 stores located primarily in the western United States. On completion of the sale, the Company retained 111 Wherehouse stores, and the remaining 34 stores were liquidated by a joint venture comprised of Hilco Merchant Resources, LLC, Gordon Brothers Retail Partners, LLC and The Ozer Group LLC.  The Company has the right for up to six months to close any of the acquired stores through the Wherehouse bankruptcy proceeding without obligation. The impact of such closings, if any, on the purchase price will depend on the timing and number of stores closed and as such cannot be estimated at the present time. The acquisition was accounted for using the purchase method of accounting.

The purchase price for the acquired Wherehouse assets was $34.7 million, of which $10.9 million was payable as of November 1, 2003, including acquisition-related costs. The total purchase price was allocated to the assets acquired and liabilities assumed based on their fair values as follows:

	($ in millions)
Current assets	$	47.8
Current liabilities	(7.2		)
Long term liabilities	(3.8		)
Extraordinary gain – unallocated negative goodwill	(2.1		)
Total purchase price, net	$	34.7

The unaudited financial information in the table below summarizes the combined results of operations of the Company and Wherehouse, on a pro forma basis as though the companies had been combined as of the beginning of each period presented. This pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition taken place at the beginning of each nine month period presented. The pro forma information also does not include one time items related to acquisition accounting, including the extraordinary gain arising from unallocated negative goodwill which is discussed later in this Note. The unaudited pro forma condensed consolidated statement of operations for the thirteen weeks ended November 1, 2003 combines the historical results of the Company for the thirteen weeks ended November 1, 2003 and the historical results of Wherehouse for the period

8

preceding the acquisition of August 3, 2003 through October 1, 2003.  The unaudited pro forma condensed consolidated statement of operations for the thirty-nine weeks ended November 1, 2003 combines the historical results of the Company for the thirty-nine weeks ended November 1, 2003 and the historical results of Wherehouse for the period preceding the acquisition of February 2, 2003 through October 1, 2003.  The unaudited pro forma condensed consolidated statement of operations for the thirteen weeks ended and thirty-nine weeks ended November 2, 2002 combines the historical results of the Company and Wherehouse for the periods as indicated. The following is the pro forma information, after giving effect to purchase accounting adjustments.

	Thirteen weeks ended						Thirty-nine weeks ended
	November 1, 2003			November 2, 2002			November 1, 2003			November 2, 2002
	in thousands, except per share amounts						in thousands, except per share amounts
Pro forma sales	$	294,533		$	291,210		$	893,890		$	926,567
Pro forma net loss before cumulative effect of change in accounting principle and extraordinary gain from unallocated negative goodwill	$	(8,580	)	$	(15,383	)	$	(18,015	)	$	(27,303	)
Cumulative effect of change in accounting principle, net of income taxes	—			—			—			$	(13,684	)
Extraordinary gain from unallocated negative goodwill, net of income taxes	$	945		—			$	945		—
Pro forma net loss	$	(7,635	)	$	(15,383	)	$	(17,070	)	$	(40,987	)
Pro forma net loss per basic and diluted share before cumulative effect of change in accounting principle, net of income taxes	$	(0.23	)	$	(0.38	)	$	(0.47	)	$	(0.67	)
Cumulative effect of change in accounting principle, net of income taxes	—			—			—			$	(0.34	)
Extraordinary gain from unallocated negative goodwill, net of income taxes	$	0.02		—			$	0.02		—
Pro forma loss per basic and diluted share	$	(0.21	)	$	(0.38	)	$	(0.45	)	$	(1.01	)

On October 6, 2003, the Company acquired substantially all of the net assets of CD World Inc. (“CD World”). CD World includes 13 free standing specialty stores in New Jersey and Missouri. The acquisition was accounted for using the purchase method of accounting. The cash consideration for CD World was $1.8 million. The total purchase price was allocated to the assets acquired and liabilities assumed, based on their fair values as follows:

	($ in millions)
Current assets	$	3.9
Current Liabilities		(0.2	)
Extraordinary gain – unallocated negative goodwill		(1.9	)
Total purchase price, net	$	1.8

9

The condensed consolidated financial statements include the results of operations of Wherehouse from October 1, 2003 and CD World from October 6, 2003. Pro forma results of operations including CD World results of operations have not been presented because the pro forma effect of the CD World acquisition would not be material to the Company’s results of operations.

In accordance with SFAS No.141, Business Combinations, an extraordinary gain from unallocated negative goodwill of $2.2 million (net of income taxes of $1.8 million), representing the excess of the fair value of the net assets acquired over the purchase price of the assets, was recognized in the condensed consolidated financial statements for the thirteen weeks ended November 1, 2003 in connection with the Wherehouse and CD World acquisitions. The unallocated negative goodwill was arrived at after adjusting the value of the acquired non-current assets to zero, in accordance with SFAS No.141. No intangible assets were acquired in connection with either acquisition.

The purchase price was allocated on a preliminary basis using information currently available. The allocation of the purchase price to the assets and liabilities acquired will be finalized in fiscal 2004. The allocation of the purchase price will be adjusted after obtaining more information regarding asset valuations and liabilities assumed.

Note 6. Depreciation and Amortization

Depreciation and amortization of fixed assets included in the condensed consolidated statements of operations is as follows:

	Thirteen Weeks Ended				Thirty-nine Weeks Ended
	November 1, 2003		November 2, 2002		November 1, 2003		November 2, 2002
	(in thousands)				(in thousands)
Cost of sales	$	615	$	582	$	1,829	$	1,726
Selling, general & administrative expenses	9,466		10,254		29,143		29,738
Total	$	10,081	$	10,836	$	30,972	$	31,464

Note 7. Loss Per Share

Weighted average shares are calculated as follows:

	Thirteen Weeks Ended		Thirty-nine Weeks Ended
	November 1, 2003	November 2, 2002	November 1, 2003	November 2, 2002
	(in thousands)		(in thousands)
Weighted average common shares outstanding – basic	36,625	40,139	37,838	40,470
Dilutive effect of employee stock options	—	—	—	—
Weighted average common shares outstanding – diluted	36,625	40,139	37,838	40,470
Anti-dilutive stock options	5,358	5,851	6,388	5,299

Stock options outstanding for the thirteen weeks and thirty nine weeks ended November 1, 2003 and November 2, 2002 were excluded from the computation of diluted loss per share as the impact would have been anti-dilutive.

10

Note 8. Legal Proceedings

On October 16, 2000, the United States District Court for the District of Delaware issued an opinion in favor of the Internal Revenue Service (“IRS”) in the case IRS vs. CM Holdings Inc., a wholly-owned subsidiary of the Company which was acquired in April 1999.  The case was brought against CM Holdings Inc. by the IRS to challenge the deduction of interest expense related to corporate-owned life insurance policies held by a subsidiary of CM Holdings Inc., for certain tax years that ended on or before February 1994.  As a result of the District Court decision, the Company accrued $11.0 million to income tax expense during fiscal 2000, which was reflected in other (long-term) liabilities in the consolidated balance sheets as of February 1, 2003 and November 2, 2002.  During the thirty-nine weeks ended November 1, 2003, the Company and the IRS agreed on final payment terms for an amount less than previously accrued, which resulted in the reduction of the accrued liability to $8.9 million and an income tax benefit of $2.1 million, recorded in the Company’s second fiscal quarter.

On March 3, 2003, the Company filed a complaint in the United States District Court in the Northern District of New York against Fullplay Media Systems, Inc (“Fullplay”). The action against Fullplay by the Company was for breach of contract and misappropriation of trade secrets in the design and development of its Listening and Viewing Stations (“LVS”). Under a non-disclosure agreement with the Company, Fullplay was obligated to keep confidential the Company’s proprietary information relating to the LVS and not make use whatsoever at any time of such proprietary information except for purposes related to Fullplay’s contractual obligations to develop the LVS for the Company. On March 7, 2003, Fullplay filed a complaint against the Company asserting breaches of two other agreements between the parties. On March 19, 2003, Fullplay filed a voluntary petition for a Chapter 11 bankruptcy in the United States Bankruptcy Court for the Western District of Washington. On June 24, 2003, Fullplay filed suit against the Company as part of its Chapter 11 bankruptcy filing claiming breach of contract. The Company reached an agreement with Fullplay on July 18, 2003 to resolve the disputes, whereby both parties will discontinue all legal actions without admitting or denying the merits of the other’s claims.

The Company is subject to other legal proceedings and claims that have arisen in the ordinary course of its business and have not been finally adjudicated.  Although there can be no assurance as to the ultimate disposition of these matters, it is management’s opinion, based upon the information available at this time, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the results of operations and financial condition of the Company.

11

Item 2 - 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 merchandise inventory, including the entry or exit of non-traditional retailers of the Company’s merchandise inventory to or from its markets; the release by the music and video industry of an increased or decreased number of “hit releases”; general economic factors in markets where the Company’s merchandise inventory is sold; and other factors as discussed in the Company’s filings with the Securities and Exchange Commission.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires that management apply accounting policies and make estimates and assumptions that affect results of operations and the reported amounts of assets and liabilities in the financial statements.  Management continually evaluates its estimates and judgments including those related to merchandise inventory and return costs, store closing costs, impairment of long-lived assets, goodwill, provision for income taxes, and accounting for vendor allowances.  Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates under different assumptions or conditions.   Note 1 of Notes to Consolidated Financial Statements on Form 10-K for the year ended February 1, 2003 includes a summary of the significant accounting policies and methods used by the Company in the preparation of its condensed consolidated financial statements. Management believes that of the Company’s significant accounting policies, the following may involve a higher degree of judgment or complexity:

Merchandise Inventory and Return Costs: Merchandise inventory is stated at the lower of cost or market as determined by the average cost method. Merchandise inventory valuation requires significant judgment and estimates, including merchandise markdowns, obsolescence and provision for inventory shrinkage. The provision for inventory shrinkage is estimated as a percentage of sales for the period from the last physical inventory date to the end of the period reported based on historical results and trends. Physical inventories are taken at least annually for all stores throughout the year, and inventory records are adjusted accordingly. The Company records inventory markdowns and obsolescence based on current and anticipated demand, customer preferences, and market conditions and the resulting gross margin reduction is recognized in the period the markdown is recorded.

The Company is entitled to return merchandise inventory purchased from major vendors for credit against other purchases from these vendors.   These vendors often reduce the credit with a merchandise return charge ranging from 0% to 20% of the original merchandise purchase price depending on the type of merchandise inventory being returned.  The Company records merchandise inventory return charges in cost of sales.

12

Store Closing Costs: Management periodically evaluates the need to close underperforming stores. For exit activities related to store closings subsequent to December 31, 2002, reserves are established at the time a liability is incurred for the present value of any remaining lease obligations, net of estimated sublease income, and other exit costs, as prescribed by SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities.  For exit activities prior to December 31, 2002, reserves were established for store closing costs at the date of the Company’s commitment to an exit plan in accordance with EITF No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). Two key assumptions in calculating reserves include the time frame expected to terminate lease agreements and estimates of other related exit costs. If different assumptions were used regarding the timing and potential termination costs, the resulting reserves could vary from recorded amounts. Reserves for store closing costs are reviewed periodically and adjusted.

Impairment of Long-Lived Assets: The Company accounts for fixed assets and other long-lived assets in accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset over its remaining useful life.  If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the excess of the carrying amount over the corresponding fair value of the assets.  Fair value is generally measured based on discounted estimated future cash flows.  SFAS No. 144 requires an entity to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less disposal costs.

Goodwill: Effective February 3, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, according to which goodwill is no longer amortized, but is subject to a periodic impairment test performed, at a minimum, on an annual basis.  If the carrying value of goodwill exceeds its fair value, an impairment loss is recognized.  The Company tested goodwill pursuant to SFAS No. 142 as of the end of 2002 and determined that all of its recorded goodwill was impaired. Accordingly, a non-cash goodwill impairment charge of $40.9 million was recorded in loss from operations during the fourth quarter of 2002.   As of November 1, 2003, the Company has no other recorded intangible assets, as defined by SFAS No. 142.

13

Income Taxes: Income taxes are accounted for using the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases and tax operating loss carryforwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date.

Accounting for income taxes requires management to make estimates and judgments regarding interpretation of various taxing jurisdictions, laws and regulations as well as the ultimate realization of deferred tax assets. These estimates and judgments include the generation of future taxable income, viable tax planning strategies and support of tax filings. Valuation allowances are recorded against deferred tax assets if, based upon management’s estimates, it is more likely than not that some or all of these deferred tax assets will not be realized.

Accounting for Vendor Allowances: In accordance with guidance issued by the FASB’s Emerging Issues Task Force in March 2003 regarding the accounting for vendor allowances (EITF No. 02-16), Accounting by a Customer (including a Reseller) for Consideration Received from a Vendor, vendor allowances are to be recognized as a reduction of cost of sales, unless the allowance represents the reimbursement of a specific, incremental and identifiable cost incurred to sell a vendor’s products.

The Company adopted EITF No. 02-16 effective as of February 3, 2002, resulting in a one-time, non-cash charge of $13.7 million, which was net of income taxes of $8.9 million, and was reported as a cumulative effect of a change in accounting principle in the first quarter of fiscal 2002.

In adopting the guidance of EITF No. 02-16, the Company changed its previous method of accounting for cooperative advertising and other vendor allowances. This new practice changes the timing of recognizing allowances in net earnings and has the effect of reducing inventory and related cost of sales and increasing selling, general and administrative expenses.

14

RESULTS OF OPERATIONS

Thirteen Weeks Ended November 1, 2003

Compared to the Thirteen Weeks Ended November 2, 2002

Sales.  The Company’s sales increased 6.9% to $268.5 million for the thirteen weeks ended November 1, 2003 compared to $251.2 million for the thirteen weeks ended November 2, 2002. The increase was due to a comparable store sales increase of 4.6% and the acquisition of 124 stores in October 2003 (see Note 5 of Notes to Condensed Consolidated Financial Statements). The increase was offset in part by the operation of an average of 63 less stores (not including the acquired stores) during the thirteen weeks ended November 1, 2003 as compared to the thirteen weeks ended November 2, 2002.

For the thirteen weeks ended November 1, 2003, comparable store sales in the mall stores increased 5.6% and in the free standing stores, increased 2.4%.  By merchandise category, comparable store sales decreased 2.1% in music; increased 16.7% in home video; decreased 4.7% in video games; and increased 4.9% in the combined electronics, accessories and boutique categories.

The decline in music sales during the thirteen weeks ended November 1, 2003 showed a marked improvement from the decline of 13.6% during the thirteen weeks ended August 2, 2003, reflecting better product and improving trends in the retail music industry. Video was driven by DVD sales which increased by 31.4% on a comparable store basis due to strong releases. Comparable store sales in the video games category declined by 4.7% due to a sales decline experienced by the entire games industry during the thirteen weeks ended November 1, 2003.

Gross Profit.  Gross profit increased to $96.3 million for the thirteen weeks ended November 1, 2003 compared to $91.1 million for the thirteen weeks ended November 2, 2002.  As a percentage of sales, gross profit decreased to 35.9% in the thirteen weeks ended November 1, 2003 from 36.3% in the thirteen weeks ended November 2, 2002.  The decrease in the gross profit percentage was due to a continued shift in the product mix to lower margin categories including DVD’s.

Selling, General and Administrative Expenses.  Selling, general and administrative (“SG&A”) expenses decreased $8.7 million to $109.2 million for the thirteen weeks ended November 1, 2003 as compared to $117.9 million for the thirteen weeks ended November 2, 2002. The decrease reflects a reduction in expenses arising from cost control measures in stores and corporate functions in the thirteen weeks ended November 1, 2003 and the Company’s write off of an investment of $5.5 million in Data Play, in the thirteen weeks ended November 2, 2002. SG&A expenses as a percentage of sales, decreased to 40.7% for the thirteen weeks ended November 1, 2003 from 46.9% for the thirteen weeks ended November 2, 2002.

Interest Expense.  Interest expense was $0.5 million for each of the thirteen weeks ended November 1, 2003 and the thirteen weeks ended November 2, 2002.

15

Income Tax Benefit.  The Company’s income tax benefit was $5.3 million for the thirteen weeks ended November 1, 2003, compared to an income tax benefit of $12.5 million for the thirteen weeks ended November 2, 2002.  This was due to a decrease in the effective tax rate to 39.7% for the thirteen weeks ended November 1, 2003 from 45.9% for the thirteen weeks ended November 2, 2002. The decrease in rate is due to reduced losses on non-deductible equity investments and the associated impact on the valuation allowance for deferred taxes and a decrease in the Company’s loss before income taxes in the thirteen weeks ended November 1, 2003.

Extraordinary Gain – Unallocated Negative Goodwill. The Company acquired 124 stores from Wherehouse and CD World (see Note 5 of Notes to Condensed Consolidated Financial Statements) in October 2003 resulting in an extraordinary gain of $2.2 million, net of income taxes of $1.8 million, related to unallocated negative goodwill. The gain represents the excess of fair value of net assets purchased over the purchase price of the acquired assets. The allocation of the purchase price has been adjusted since the Company's press release dated November 12, 2003 resulting in an increase in the previously reported extraordinary gain of $0.6 million.

Net Loss.  The Company’s net loss including extraordinary gain was $5.9 million for the thirteen weeks ended November 1, 2003 compared to a net loss of $14.8 million for the thirteen weeks ended November 2, 2002. Loss before extraordinary gain, net of income taxes, was $8.1 million for the thirteen weeks ended November 1, 2003. The lower net loss is due to expense reductions, the effect of an extraordinary gain resulting from unallocated negative goodwill in the thirteen weeks ended November 1, 2003 and the Company’s write off of an investment of $5.5 million in Data Play in the thirteen weeks ended November 2, 2002.

16

Thirty-nine Weeks Ended November 1, 2003

Compared to the Thirty-nine Weeks Ended November 2, 2002

Sales.  The Company’s sales decreased 1.2% to $788.7 million for the thirty-nine weeks ended November 1, 2003 compared to $798.2 million for the thirty-nine weeks ended November 2, 2002. The decrease in sales was due to the operation of an average of 54 less stores, not including the acquisition of 124 stores in October 2003 (see Note 5 of Notes to Condensed Consolidated Financial Statements) and a comparable store sales decline of 0.2%.

For the thirty-nine weeks ended November 1, 2003, comparable store sales in the mall stores increased 0.2% and in the free standing stores, decreased 0.7%.  By merchandise category, comparable store sales decreased 7.9% in music; increased 11.8% in home video; increased 4.8% in video games; and increased 6.8% in the combined electronics, accessories and boutique categories.

Comparable store sales in the music category continued to decline due to an industry-wide decline in CD sales associated with CD piracy. Video was driven by DVD sales which increased by 29.0% on a comparable basis due to strong releases. Comparable store sales increased 4.8% in the video games category as a result of expansion of this category.

Gross Profit.  Gross profit decreased to $290.4 million for the thirty-nine weeks ended November 1, 2003 compared to $293.3 million for the thirty-nine weeks ended November 2, 2002. As a percentage of sales, gross profit increased to 36.8% in the thirty-nine weeks ended November 1, 2003 from 36.7% in the thirty-nine weeks ended November 2, 2002.

Selling, General and Administrative Expenses.  SG&A decreased $21.0 million to $319.8 million for the thirty-nine weeks ended November 1, 2003 as compared to $340.8 million for the thirty-nine weeks ended November 2, 2002. The decrease reflects an overall reduction in expenses arising from cost control measures in stores and corporate functions in the thirty-nine weeks ended November 1, 2003, and the Company’s write off of an investment of $5.5 million in Data Play, in the thirteen weeks ended November 2, 2002. As a percentage of sales, SG&A expenses decreased to 40.5% for the thirty-nine weeks ended November 1, 2003 from 42.7% for the thirty-nine weeks ended November 2, 2002.

Interest Expense.  Interest expense was $1.1 million for the thirty-nine weeks ended November 1, 2003, as compared to $0.8 million for the thirty-nine weeks ended November 2, 2002.

Income Tax Benefit.  The Company’s income tax benefit was $14.3 million for the thirty-nine weeks ended November 1, 2003, compared to an income tax benefit of $21.3 million for the thirty-nine weeks ended November 2, 2002.  During the thirty-nine weeks ended November 1, 2003, the Company settled the payment terms of its COLI litigation with the IRS resulting in an additional tax benefit of $2.1 million (see Note 8 of Notes to Condensed Consolidated Financial Statements).

17

The Company’s effective tax rate for the thirty-nine weeks ended November 1, 2003 before the additional $2.1 million benefit previously discussed was 40.1%, as compared to 44.2% for the thirty-nine weeks ended November 2, 2002. The decrease in rate is due to reduced losses on equity investments and the associated impact on the valuation allowance for deferred taxes; and a decrease in the Company’s loss before income taxes in the thirty-nine weeks ended November 1, 2003.

Cumulative Effect of Change in Accounting Principle. The Company adopted a new method of accounting for cooperative advertising and certain other vendor allowances effective as of February 3, 2002, in accordance with EITF No. 02-16, Accounting by a Customer (including a Reseller) for Consideration Received from a Vendor, resulting in a one-time, non-cash charge of $13.7 million, net of income taxes of $8.9 million. This non-cash charge was reported as a cumulative effect of a change in accounting principle. In adopting the guidance of EITF No. 02-16, the Company changed its previous method of accounting for cooperative advertising and vendor allowances.

Extraordinary Gain – Unallocated Negative Goodwill.  The Company acquired 124 stores from Wherehouse and CD World (see Note 5 of Notes to Condensed Consolidated Financial Statements) in October 2003 resulting in an extraordinary gain of $2.2 million, net of income taxes of $1.8 million, related to unallocated negative goodwill. The gain represents the excess of fair value of net assets purchased over the purchase price of the acquired assets. The allocation of the purchase price has been adjusted since the Company's press release dated November 12, 2003 resulting in an increase in the previously reported extraordinary gain of $0.6 million.

Net Loss.  The Company’s net loss was $13.9 million for the thirty-nine weeks ended November 1, 2003, compared to a net loss of $40.6 million for thirty-nine weeks ended November 2, 2002.  The lower net loss is due to expense reductions, the effect of an extraordinary gain resulting from unallocated negative goodwill in the thirteen weeks ended November 1, 2003, the Company’s write off of an investment of $5.5 million in Data Play and the effect of the cumulative effect of a change in accounting principle in the thirty-nine weeks ended November 2, 2002.

18

LIQUIDITY AND CAPITAL RESOURCES

Liquidity. The Company’s primary sources of working capital are cash flows from operations and borrowings under its revolving credit facility.  The Company had cash balances of $19.8 million at November 1, 2003, compared to $197.0 million at February 1, 2003 and $20.6 million at November 2, 2002.

Cash used by operating activities was $136.0 million for the thirty-nine weeks ended November 1, 2003.  The primary uses of cash were a $49.6 million seasonal reduction of accounts payable and a $81.3 million seasonal increase in merchandise inventory.  The Company’s inventory and accounts payable are heavily influenced by the seasonality of its business, as further explained in Note 2 of Notes to Condensed Consolidated Financial Statements.   The reduction of accounts payable occurs annually in the fiscal first quarter, reflecting payments for inventory sold during the prior year’s holiday season.  Similarly, the increase in inventory occurs each year throughout the fall season and peaks during the holiday selling season.  These cash uses are offset by a significant cash source in the fiscal fourth quarter from the increase in accounts payable and sales of inventory during the holiday season.

Cash used by investing activities was $37.8 million for the thirty-nine weeks ended November 1, 2003. The primary use of cash was $25.6 million for the acquisition of 124 stores (see Note 5 of Notes to Condensed Consolidated Financial Statements).

Cash used by financing activities was $3.4 million for the thirty-nine weeks ended November 1, 2003.  The primary source of cash was $12.1 million in borrowings under the Company’s revolving credit facility. The primary use of cash was $14.8 million for the purchase of approximately 2.7 million shares of common stock under a stock repurchase program authorized by the Company’s Board of Directors.

The Company has a three year, $100 million secured revolving credit facility with Congress Financial Corporation that expires in July 2006 and renews on a year-to-year basis thereafter upon the consent of both parties. The revolving credit facility contains certain restrictive provisions, including provisions governing cash dividends and acquisitions, is collateralized by merchandise inventory and contains a minimum net worth covenant.  On November 1, 2003, the Company had $12.1 million outstanding in borrowings under the revolving credit facility and $87.9 million was available for borrowing.

Capital Resources.  During the thirty-nine weeks ended November 1, 2003, the Company made capital expenditures of $12.2 million.  The Company plans to spend approximately $20 million, net of construction allowances, for capital expenditures in fiscal 2003. During the thirty-nine weeks ended

19

November 1, 2003, the Company opened or relocated 22 stores, acquired 124 stores and closed 51 stores.

Item 4 – Controls and Procedures

(a)    Evaluation of disclosure controls and procedures.    The Company’s Chief Executive Officer and Chief Financial Officer after evaluating the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of November 1, 2003, have concluded that as of such date the Company’s disclosure controls and procedures were adequate and effective and designed to ensure that material information relating to the Company and its subsidiaries would be made known to such officers on a timely basis.

(b)Changes in internal controls.    There have been no changes in the Company’s internal controls over financial reporting that occurred during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

20

PART II - OTHER INFORMATION

Item 6 - Exhibits and Reports on Form 8-K

(A)  Exhibits -

Exhibit No	Description
10.18	Agreement dated September 19, 2003 by and between a joint venture composed of Trans World Entertainment Corporation, Hilco Merchant Resources, LLC, Hilco Real Estate, LLC Gordon Brothers Retail Partners, LLC and The Ozer Group LLC as Agent and Wherehouse Entertainment, Inc., as Merchant to acquire certain assets of Wherehouse Entertainment Inc.
10.19	Amendment No.1 dated October 1, 2003 to the agency agreement dated September 19, 2003.
10.20	Agreement dated October 6, 2003 between Trans World Entertainment Corporation and CD World Inc., to acquire certain assets of CD World Inc.
31.1	Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(B)  Reports on Form 8-K –

A Form 8-K was filed on September 16, 2003 incorporating by reference Trans World Entertainment’s September 14, 2003 press release announcing the Company’s agreement in principle to acquire substantially all of the assets of Wherehouse Entertainment, Inc.

A Form 8-K was filed on October 3, 2003 incorporating by reference Trans World Entertainment’s September 30, 2003 press release announcing that the U.S. Bankruptcy Court for the District of Delaware has approved the Company’s bid to acquire substantially all the asset of Wherehouse Entertainment, Inc and CD World Inc.

A Form 8-K was filed on October 29, 2003 incorporating by reference Trans World Entertainment’s October 27, 2003 press release announcing the addition of Mark A. Cohen to the Company’s Board of Directors.

A Form 8-K was filed on November 14, 2003 incorporating by reference Trans World Entertainment’s November 12, 2003 press release announcing the Company’s financial results for its third fiscal quarter ended November 1, 2003.

Omitted from this Part II are items which are not applicable or to which the answer is negative to the periods covered.

21

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

December 16, 2003	By:  /s/ ROBERT J. HIGGINS
	Robert J. Higgins Chairman and Chief Executive Officer (Principal Executive Officer)
December 16, 2003	By: /s/ JOHN J. SULLIVAN
	John J. Sullivan Executive Vice President and Chief Financial Officer (Principal Financial Officer)

22

EX-10.18

Exhibit 10.18

AGENCY AGREEMENT

by and between

a joint venture composed of

TRANS WORLD ENTERTAINMENT CORPORATION,

HILCO MERCHANT RESOURCES, LLC,

HILCO REAL ESTATE, LLC

GORDON BROTHERS RETAIL PARTNERS, LLC

and

THE OZER GROUP LLC

As Agent

and

WHEREHOUSE ENTERTAINMENT, INC.,

As Merchant

Dated as of September 19, 2003

TABLE OF CONTENTS

Section 1.	Defined Terms
Section 2.	Appointment of Agent
Section 3.	Assets to be Sold to TWEC or by Agent
3.1	Assets
3.2	Excluded Assets
3.3	Assumed Liabilities
Section 4.	Consideration to Merchant
4.1	Payments to Merchant
4.2	Time of Payment
4.3	Additional Merchandise
4.4	Adjustments to Guaranteed Amount
Section 5.	Sale and Assignment of Properties or Assets
5.1	Leased Properties
5.2	Covenants of Merchant Regarding Sale of Properties
5.3	Assets
5.4	Transfers to TWEC
5.5	Other Closing Date Transfers
5.6	Executory Contracts
Section 6.	Deliveries
Section 7.	Expenses of the Sale
7.1	Expenses
7.2	Central Office Expense
7.3	Other Expenses of the Sale
Section 8.	Expenses with Respect to Properties
8.1	Marketing Period Costs - Leases.
8.2	Limitation on Marketing Period Costs
8.3	Occupancy Expense Letter of Credit
Section 9.	Inventory Taking and Valuation.
9.1	Inventory Taking
9.2	Merchandise.
9.3	Valuation

i

Section 10.	Store Closing Sale Term; Marketing Period for Properties.
10.1	Term
10.2	Vacating the Stores
10.3	Marketing Period.
10.4	Gross Rings
Section 11.	Sale Proceeds.
11.1	Sale Proceeds
11.2	Deposit of Proceeds
Section 12.	Conduct of the Store Closing Sale.
12.1	Rights of Agent
12.2	Sales at TWEC Stores
12.3	Terms of Sales to Customers
12.4	Sales Taxes
12.5	Supplies
12.6	No Returns of Merchandise
Section 13.	Sale Reconciliation
Section 14.	Employee Matters.
14.1	Merchant’s Employees at Stores other than TWEC Stores
14.2	Termination of Retained Employees
14.3	Payroll Matters
14.4	Employee Retention Bonuses
14.5	Merchant’s Employees at TWEC Stores
Section 15.	Representations, Warranties, Covenants and Agreements.
15.1	Representations, Warranties, Covenants and Agreements of Merchant.
15.2	Representations, Warranties and Covenants of Agent
Section 16.	Covenants of the Merchant
16.1	Operations Prior to Closing Date
16.2	Operation of Business From and After Closing Date
Section 17.	Conditions Precedent to Effectiveness
17.1	Conditions Precedent to Obligations of Both Merchant and Agent
17.2	Additional Conditions Precedent to Obligations of Agent
Section 18.	Insurance; Risk of Loss.
18.1	Merchant’s Liability Insurance

ii

18.2	Merchant’s Property Casualty Insurance
18.3	Agent’s Insurance
18.4	Worker’s Compensation Insurance
18.5	Risk of Loss
18.6	Force Majeure
18.7	Non-Assumption of Liability
Section 19.	Indemnification.
19.1	Merchant Indemnification
19.2	Agent Indemnification
Section 20.	Events of Default and Remedies.
20.1	Events of Default
20.2	Remedies
Section 21.	Miscellaneous.
21.1	Notices
21.2	Governing Law; Consent to Jurisdiction
21.3	Entire Agreement
21.4	Amendments and Waivers
21.5	No Waiver
21.6	Successors and Assigns
21.7	Execution in Counterparts; Facsimile Signatures
21.8	Section Headings
21.9	Survival
21.10	Third Party Beneficiaries
21.11	Security Interest
21.12	Further Assurances; Power of Attorney
21.13	Joint and Several Liability of Partners
21.14	Authorized Representative of Partners

iii

LIST OF EXHIBITS

EXHIBIT 3.1	Leases
EXHIBIT 5.3(a)	TWEC Use Clause
EXHIBIT 5.4	TWEC Stores
EXHIBIT 8.2	Occupency Expenses
EXHIBIT 9.1	Inventory Taking
EXHIBIT 14.3	Payroll Matters
EXHIBIT 15.1(i)	Historic Sales
EXHIBIT 15.1(j)	Inventory Report
EXHIBIT 15.1(r)	Legal Proceedingst
EXHIBIT 16.1.	Promotional Calendar
EXHIBIT 17.1(a)	Order
EXHIBIT 17.3	Agent’s Insurance

iv

AGENCY AGREEMENT

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

RECITALS

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

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

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

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

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

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

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

Defined Term	Section Reference
Additional Merchandise	4.3
Agency Accounts	11.2(a)
Agency Documents	15.1(c)
Agent	Preamble
Agent Claim	18.5
Agent Indemnified Parties	19.1
Agreement	Preamble

1

Approval Order	5.3(a)
Assets	3.1
Assumed Liabilities	3.3
Bankruptcy Code	Recitals
Bankruptcy Court	Recitals
Benefits Cap	7.1(a)(iii)
Case	Recitals
Central Office	3.1(a)
Closing Date	17.1(c)
Cost Value	9.3
Defective Merchandise	9.2(a)
Display Merchandise	9.2(a)
Dropout Notice	5.2(f)
Events of Default	20.1
Excluded Assets	3.2
Excluded Benefits	7.1(j)
Expenses	7.1
Filing Date	Recitals
Gross Rings	10.4
Guaranteed Amount	4.1(a)
Inventory	4.4
Inventory Date	9.1(a)
Inventory Taking	9.1(a)
Lease Assumption Notice	5.2(b)
Leased Property Designee	5.2(b)
Leased Property Termination Date	10.3(c)
Leases	3.1(c)
Liens	15.1(x)
Marketing Period	10.3(a)
Merchandise	9.2
Merchant	Preamble
Motion	16.1(a)
Occupancy Expenses	7.1(a)(x))
Out-of-Date Merchandise	9.2(a)
Order	17.1(b)
Property	5
Property Sale Agreement	5.3(a)
Property Closing	5.3(e)
Property Closing Conditions	5.2(f)
Property Closing Date	5.3(e)

2

REA	5.3(a)
Rental Merchandise	9.2(a)
Retention Bonuses	14.4
Retained Employee	14.1
Revocation Notice	8.2(b)
Sale	Recitals
Sale Proceeds	11.1
Sales Taxes	12.4
Sale Commencement Date	10.1
Sale Term	10.1
Sale Termination Date	10.1
SC Stores	7.1(a)
Store Closing Sale	Recitals
Store Inventory Taking	9.1(a)
Stores	3.1(a)
Supplies	12.5
TWEC	Recitals
TWEC Store Employees	14.5
TWEC Stores	5.5
Warehouse	3.1(a)
Warehouse Inventory Taking	9.1(b)
Warn Act	14.1

Section 2.Appointment of Agent

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

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

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

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

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

3

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

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

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

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

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

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

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

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

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

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

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

4

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

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

Section 4.Consideration to Merchant.

4.1Payments to Merchant.

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

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

4.2Time of Payment.

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

5

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

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

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

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

6

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

5.1Leased Properties.

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

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

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

7

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

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

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

8

5.2Covenants of Merchant Regarding Sale of Properties.

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

9

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

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

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

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

10

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

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

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

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

11

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

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

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

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

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

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

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

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

12

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

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

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

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

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

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

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

13

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

Section 7.Expenses of the Sale.

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

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

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

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

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

(iv)costs of security personnel in the Stores;

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

(vi)costs and expenses of additional Supplies;

14

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

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

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

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

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

(c)  costs of armored car services;

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

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

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

(g)  Agent’s legal fees and expenses;

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

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

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

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

15

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

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

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

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

Section 8.Expenses with Respect to Properties.

8.1Marketing Period Costs - Leases.

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

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

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

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

16

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

Section 9.Inventory Taking and Valuation.

9.1Inventory Taking

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

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

9.2Merchandise.

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

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

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

17

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

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

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

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

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

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

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

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

18

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

10.3Marketing Period.

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

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

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

Section 11.Sale Proceeds.

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

11.2Deposit of Proceeds.

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

19

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

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

Section 12.Conduct of the Store Closing Sale.

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

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

(b)  to establish Merchandise prices and Store hours;

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

20

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

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

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

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

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

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

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

21

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

Section 14.Employee Matters.

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

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

22

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

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

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

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

Section 15.Representations, Warranties, Covenants and Agreements.

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

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

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

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

23

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

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

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

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

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

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

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

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

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

24

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

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

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

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

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

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

(q)  Title.

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

25

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

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

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

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

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

(u)  Leased Property.

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

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

26

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

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

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

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

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

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

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

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

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

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

27

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

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

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

Section 16.Covenants of the Merchant

16.1    Operations Prior to Closing Date.

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

16.2Operation of Business From and After Closing Date.

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

Section 17.Conditions Precedent to Effectiveness

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

28

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

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

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

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

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

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

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

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

29

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

Section 18.Insurance; Risk of Loss.

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

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

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

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

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

30

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

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

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

Section 19.Indemnification.

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

31

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

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

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

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

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

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

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

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

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

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

(d)  any Agent Claims;

(e)  the Assumed Liabilities;

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

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

32

Section 20.Events of Default and Remedies.

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

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

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

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

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

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

Section 21.Miscellaneous.

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

33

If to Agent:	Trans World Entertainment Corporation 38 Corporate Circle Albany, NY 12203 Attn:  John Sullivan Telecopy No. (518) 452-1242
	Hilco Merchant Resources, LLC One Northbrook Place 5 Revere Drive, Suite 206 Northbrook, IL  60062 Attn:  Jeffrey Linstrom Telecopy No. (847) 509-1150
	Gordon Brothers Retail Partners, LLC 40 Broad Street Boston, MA 02109 Attn:  Bradley Snyder
	The Ozer Group LLC 75 Second Avenue Needham, MA 02494 Attn:  David Peress Telecopy No. (781) 707-4255
With a copy to:	Skadden, Arps, Slate, Meagher & Flom (Illinois) 333 West Wacker Drive Chicago, IL  60106 Attn:  Timothy R. Pohl Telecopy No. (312) 407-0411

34

If to Merchant:	Wherehouse Entertainment, Inc. 19701 Hamilton Avenue Torrance, CA 90502 Attn:  Charles Fuertsch Telecopy No. (650) 965-8300
With a copy to:	O’Melveny & Myers LLP 400 South Hope Street Los Angeles, CA 90071 Attn:  Ben Logan Telecopy No. (213) 430-6407
	O’Melveny & Myers LLP 610 Newport Center Drive Newport Beach, CA 90071 Attn:  Suzzanne Uhland Vicki Nash Telecopy No. (949) 823-6994

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

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

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

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

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

35

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

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

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

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

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

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

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

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

[Signature Page Follows]

36

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

WHEREHOUSE ENTERTAINMENT, INC.

By:

Its:

TRANS WORLD ENTERTAINMENT
CORPORATION

By:

Its:

HILCO MERCHANT RESOURCES, LLC

By:

Its:

HILCO REAL ESTATE, LLC

By:

Its:

GORDON BROTHERS RETAIL PARTNERS,
LLC

By:

Its:

37

THE OZER GROUP LLC

By:

Its:

38

EXHIBIT 5.3(a)

TWEC Use Clause

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

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

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

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

EX-10.19

Exhibit 10.19

FIRST AMENDMENT TO
AGENCY AGREEMENT

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

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

RECITALS

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

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

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

Section 1.AMENDMENTS TO THE AGENCY AGREEMENT

1.1Amendments to Section 4: Consideration to Merchant.

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

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

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

1.2Amendments to Section 7: Expenses of the Sale.

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

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

1.3Amendments to Section 9: Inventory Taking and Valuation.

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

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

2

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

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

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

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

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

1.5Amendments to Section 17: Conditions Precedent to Effectiveness

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

1.6Amendments to Section 18: Insurance; Risk of Loss

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

3

1.7Modification of Schedules

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

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

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

Section 2.MISCELLANEOUS

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

If to Agent:	Trans World Entertainment Corporation 38 Corporate Circle Albany, NY 12203 Attn:  John Sullivan Telecopy No. (518) 452-1242
	Hilco Merchant Resources, LLC One Northbrook Place 5 Revere Drive, Suite 206 Northbrook, IL  60062 Attn:  Jeffrey Linstrom Telecopy No. (847) 509-1150
	Gordon Brothers Retail Partners, LLC 40 Broad Street Boston, MA 02109 Attn: Bradley Snyder
	The Ozer Group LLC 75 Second Avenue Needham, MA 02494 Attn: David Peress Telecopy No. (781) 707-4255

4

With a copy to:	Skadden, Arps, Slate, Meagher & Flom (Illinois) 333 West Wacker Drive Chicago, IL  60106 Attn:  Timothy R. Pohl Telecopy No. (312) 407-0411
If to Merchant:	Wherehouse Entertainment, Inc. 19701 Hamilton Avenue Torrance, CA 90502 Attn: Charles Fuertsch Telecopy No. (650) 965-8300
With a copy to:	O’Melveny & Myers LLP 400 South Hope Street Los Angeles, CA 90071 Attn: Ben Logan Telecopy No. (213) 430-6407
	O’Melveny & Myers LLP 610 Newport Center Drive Newport Beach, CA 90071 Attn: Suzzanne Uhland Vicki Nash Telecopy No. (949) 823-6994

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

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

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

5

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

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

6

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

WHEREHOUSE ENTERTAINMENT,
INC.

By:

Its:

By:

Anton Caracciolo, as Authorized
Representative of the AGENT

S-1

EX-10.20

Exhibit 10.20

October 6, 2003

Jack M. Zackin

Sills Cummis Radin Tischman Epstein & Gross

One Riverfront Plaza

Newark, NJ 07102

Re:Global Offer for CD World

Dear Jack:

This letter (this “Letter Agreement”) is submitted to you in your capacity as counsel for CD World, as debtor in possession (the “Debtor”) in a chapter 11 case (the “Case”), pending before the United States Bankruptcy Court for the District of New Jersey (the “Court”).

On behalf of Trans World Entertainment Corporation (“TWEC”) (or one of its subsidiaries), this letter constitutes an offer to dispose of certain assets, conduct certain sales and assume specified liabilities of the Debtor on and subject to the terms and conditions set forth below (including all exhibits and other attachments to this Letter Agreement, which are incorporated herein by reference).

1.(a)Guaranteed Amount.  TWEC will guarantee that the Debtor will receive the sum of $1.8 million as consideration for the disposition of the Assets (hereinafter defined), exclusive of those costs and expenses to be borne by the Debtor, as specified in this Letter Agreement (the “Guaranteed Amount”); provided, however, that the Cost Value (hereinafter defined) of the Debtor’s inventory to be sold in accordance with this Letter Agreement shall be no less than $5.4 million.  In the event that the Cost Value of the Inventory (hereinafter defined) is less than $5.4 million, then the Guaranteed Amount will be reduced in an amount equal to one-third of the difference between the Cost Value of the Inventory and $5.4 million.  “Cost Value” shall mean, with respect to inventory (the “Inventory”) physically located at the Debtor’s retail stores set forth on Exhibit A attached hereto (the “Stores”) or the Debtors distribution center that is salable in the ordinary course, the cost previously represented to TWEC by Debtor in the cost file submitted by item, except for damaged, defective, display, or rental Inventory where TWEC shall mutually agree upon Cost Value.  Prior to the date on which the transactions contemplated hereby are consummated (the “Closing Date”), a physical inventory (the “Physical Inventory”) shall be taken by an independent inventory service jointly designated by the Debtor and TWEC, and the costs of the Physical Inventory shall be paid equally by the Debtor and TWEC; provided, however, that in no event shall Debtor be required to pay in excess of $7,500 in respect of the Physical Inventory.  If, in the course of taking the Physical Inventory, any items of Inventory are determined to be non-saleable, such items will be assigned no Cost Value for purposes of calculating the aggregate dollar value of the Inventory.  In addition, to the extent that Debtor and TWEC

are unable to agree on a Cost Value for damaged, defective, display, or rental Inventory, the Cost Value of such shall be zero.  To the extent that the Debtor, with the prior Agreement of TWEC, receives additional Inventory on or before ten days after the Closing Date, such additional Inventory shall be valued in the same manner as the Inventory that was in the Debtor’s possession as of the Closing Date.

In addition, TWEC shall post an irrevocable letter of credit in the face amount equal to $139,900.00.  In the event that TWEC does not pay amounts due under a Lease as specified herein, Debtor shall be entitled to draw upon such letter of credit to satisfy Debtor’s obligations under such Lease.  Upon payment by TWEC of all amounts due under the Leases as provided herein, Debtor shall cooperate with TWEC in order to terminate the letter of credit required to be posted under this paragraph.

(b)Payment of the Guaranteed Amount.  No later than two (2) business days following the Closing Date, TWEC shall (i) pay 75% of the Guaranteed Amount in cash and (ii) deliver to Debtor an irrevocable standby letter of credit in the original face amount of 25% of the Guaranteed Amount.  Subject to the adjustments of the Guaranteed Amount described in paragraph 1(a) above, TWEC shall pay the unpaid and undisputed balance of the Guaranteed Amount in cash to Debtor no later than ten (10) business days following the reconciliation by TWEC and Debtor of the Inventory Taking.  Upon payment of the Guaranteed Amount, Debtor shall cooperate with TWEC in order to terminate the letter of credit required to be posted under this paragraph.  To the extent that the amount paid pursuant to clause (i) above is in excess of the Guaranteed Amount (after adjustment as described herein), Debtor shall pay to TWEC such excess within two (2) business days following the reconciliation by Debtor and TWEC of the Inventory Taking.

2.TWEC Return.  From and after the Closing Date, TWEC shall be entitled to all proceeds (the “Proceeds”) of the sale of the Assets.

3.(a)Assets .  The assets to be disposed of by TWEC shall consist of all of the Debtor’s right, title and interest in and to the assets set forth below (collectively, the “Assets”), which shall be conveyed by TWEC to third parties or affiliated designees free and clear of all liens, claims and encumbrances (except specifically assumed liabilities):

i.The Inventory, signage, supplies, parts, machinery, equipment, vehicles and goods located at any of the Stores, the Debtor’s headquarters office and its warehouses (including any third-party warehouses that the Debtor leases or rents), as well as in transit thereto or therefrom;

ii.The leases for the Stores (the “Leases”), including, without limitation, any deposits or other security given or made in respect of the Leases, which shall be assumed and assigned or rejected at the direction of TWEC pursuant to section 365 of the Bankruptcy Code in accordance with paragraph 4 hereof.  Any amounts received by the Debtor as consideration for the assignment of any Leases assigned after

2

the date hereof and without the involvement of TWEC (in each case net of expenses incurred in connection with such Lease assignment) shall be credited against the Guaranteed Amount;

iii.All furniture, store fixtures and improvements located at or related to the Stores, store warehouses, distribution centers and headquarters office, as well as all other fixtures;

iv.All other personal property, tangible or intangible, wherever located, including all intellectual property;

v.All guarantees, warranties, licenses and other governmental permits, approvals and permissions;

vi.All contracts that are to be assumed and assigned at the direction of TWEC pursuant to section 365 of the Bankruptcy Code; and

vii.All prepaid expenses, deposits (other than security deposits posted pursuant to the Leases), credits, notes, utility deposits and insurance refunds relating to the Stores, Leases or Owned Property.

(b).Excluded Assets.  Accounts receivable (inclusive of tax refunds), cash (other than deposits defined as Assets pursuant to section 3.a.vii), Debtor’s 2002 Ford E-150 Van, and causes of action shall be deemed “Excluded Assets,” and TWEC shall not acquire any rights thereto.

4.Contracts and Leases.

(a)Until January 31, 2004, TWEC shall have the right, which right may be exercised at any time and from time to time in its sole and absolute discretion, to request that Debtor, under section 365 of the Bankruptcy Code, assume and assign to a third party designated by TWEC, including TWEC, or an affiliate thereof (a “Lease Assignee”) any or all of the Leases at no additional cost or expense to TWEC.  Promptly following receipt of a written notice (the “Assignment Notice”) delivered by TWEC to Debtor, at any time and from time to time prior to January 31, 2004, directing the assumption and assignment of any Lease to a Lease Assignee, Debtor shall use its best efforts to obtain the entry of an order of the Bankruptcy Court approving the assumption of the Lease(s) identified in the Assignment Notice and the assignment of such Lease(s) to the Lease Assignee.(1)  It is understood and agreed that the term “reasonable commercial efforts,” as used in this subparagraph 4(a), shall require the Debtor to pay any and all cure amounts required under section 365(b)(1) of the Bankruptcy Code and expend or incur reasonable fees, costs and expenses for the payment of attorneys and other professionals whose services may reasonably be required in connection with the prosecution of any

(1)The Motion (the “Approval Motion”) filed by the Debtor upon receipt of an Assignment Notice shall comply in all respects with the requirements set forth in Exhibit B hereto.

3

motion seeking the entry of any such order.  The Lease Assignee shall provide adequate assurance of future performance with respect to any Lease assigned to it.  TWEC shall not be required to pay any cure amounts under section 365(b)(1) of the Bankruptcy Code in respect of any of the Leases TWEC elects to require the Debtor to assume and assign to a Lease Assignee.  The applicable Lease Assignee shall pay all amounts, liabilities, or other obligations due and owing under a Lease assigned to it from and after the date that the court order approving the assumption and assignment is entered (or otherwise allocable to the period on and after such date, including, without limitation, base rent, taxes, and percentage rent).  Notwithstanding anything contained herein, Debtor covenants and agrees to pay to the lessors under the Leases when due all amounts payable under the Leases through and including the earlier of January 31, 2004 and the date TWEC provides the designation of rejection for any such Lease, including, without limitation, base rent, taxes, and percentage rent, subject to TWEC’s reimbursement obligations hereunder.  The Debtor shall promptly reject, pursuant to section 365 of the Bankruptcy Code, any Leases so designated by TWEC, and all obligations of TWEC related to a Lease that TWEC has designated to be rejected shall terminate on the fifth business day following notification (each, a “Rejection Notification”) by TWEC that a particular Lease is designated to be rejected.

(b) (x)From and after the Closing Date, as consideration for TWEC’s right to use and occupy the premises covered by the Leases and designate the assumption or rejection of such Leases until January 31, 2004, TWEC shall pay when due, on behalf of Debtor, all amounts for the payment of rent, CAM, taxes, maintenance and repairs (as limited pursuant to subparagraph 4(c) below), all other amounts due and owing by Debtor under the Leases, and utilities and all other usual and customary operating costs incurred in connection with the Leases and consistent with Debtor’s prior practices (in all respects limited to the amounts set forth in the Occupancy Expenses attached as Exhibit C hereto); and (y) from and after the date hereof, Debtor shall not extend, reject or otherwise terminate (or assume and assign to a third party, without TWEC’s prior written consent) any of the Leases. TWEC’s obligations under clause (x) above, and the limitations on the Debtor under clause (y) above shall expire upon the earlier to occur of (i) five (5) business days following the delivery by TWEC to Debtor of written notice indicating that TWEC waives its right to require Debtor to assume and assign to it or a third party (and, if applicable, directing Debtor to obtain the entry of an order rejecting) any one or more of the Leases specified in such notice (provided that the terms of clauses (x) and (y) above shall then terminate only with respect to the specified Leases), provided that, such notice is received by the Debtor at least six (6) days prior to the date on which the next installment of rent becomes due with respect to such Lease and (ii) January 31, 2004.  Upon the occurrence of either of the events specified in clauses (i) or (ii) of the preceding sentences, (A) TWEC shall have no further obligation or liability of any nature for any amounts payable to the lessor under the applicable Lease(s), or for any costs associated with the Store(s) to which such Lease(s) relate; and (B) Debtor shall be solely responsible for all amounts payable or other obligations or liabilities that may be owed to the lessor under or in connection with such applicable Lease(s), including without limitation any damages resulting from the rejection of such Lease(s) under section 365 of the Bankruptcy Code or otherwise.  Notwithstanding any other provision of this Letter

4

Agreement, TWEC may not seek to terminate its liability in respect of a Lease (pursuant to this paragraph 4) that relates to a Store for as long as TWEC is continuing to conduct a Store Closing Sale in such Store (and until TWEC can deliver such Store’s premises in the condition contemplated by paragraph 6 below).  If TWEC fails to pay, on a timely basis, any of the amounts set forth in clause (x) of this subparagraph 4(b) (as limited pursuant to subparagraph 4(c) below) with respect to any Lease, then following the expiration of a five day cure period after receipt by TWEC of written notice from the Debtor or the landlord of such failure to pay, Debtor shall be entitled to revoke TWEC’s right to use and occupy the premises covered by such Lease and to reject such Lease.  This right of revocation shall be in addition to, and not in lieu of, any rights or remedies that may be available to the Debtor at law or in equity.  Regardless of whether TWEC directs Debtor to reject any one or more Leases at any time, the cost and expenses of the rejection at any time of any one or more Leases, including the filing and prosecuting of any motions or other papers with respect to the same, shall be borne solely by Debtor and its chapter 11 estate and paid for solely by Debtor and its chapter 11 estate.  The Debtor agrees to pay all amounts in respect of the Leases not payable by TWEC pursuant to this Letter Agreement.

(c)Notwithstanding anything contained in subparagraph 4(b) or elsewhere in this Letter Agreement, TWEC shall have no obligation to pay for extraordinary or structural maintenance and repairs.  The definitive agreement between the parties shall define specifically what constitutes an “extraordinary” repair.  By signing below, Debtor represents that it is not aware of any existing repair or maintenance problems with respect to any of the premises covered by the Leases or any of the furniture, fixtures, equipment and other personal property covered by the Leases.

5.Transfer of Assets.  The transfer and sale of any of the Assets by TWEC shall be effected by delivery by the Debtor to the designee of TWEC at any time TWEC so directs of such agreements, general warranty deeds, bills of sale, endorsements, assignments, and other good and sufficient instruments of sale, transfer, assignment, conveyance, and warrant and all consents of third parties necessary thereto as shall be, in the judgment of TWEC, reasonable and necessary to effectively vest in the designee of TWEC good, marketable and insurable title to the Assets, free and clear of all liens, claims, encumbrances and security interests of any nature or kind whatsoever (except for specifically assumed liabilities), pursuant to Court order under sections 363 and 365 of the Bankruptcy Code and other applicable bankruptcy law.  The Debtor will, to the extent required after the Closing Date, upon the request of TWEC, execute, acknowledge and deliver, or cause to be done, executed, acknowledged and delivered, all such additional documents as may reasonably be required by TWEC to effectuate the sale, conveyance, transfer, assignment and delivery by the Debtor of the Assets and the ownership by the members of TWEC of the Assets.

6.Cost of Store Closing Sales.  TWEC may, in its discretion, conduct “going-out-of business” sales of the Inventory at a portion of the Stores (the “Store Closing Sales”).  From the date the Store Closing Sales begin through the date the Store Closing Sales conclude at each Store, TWEC shall bear all direct costs and expenses

5

incurred in connection with the Store Closing Sales on a per diem, per store basis, limited to payroll costs and benefits actually accruing during the term of the Store Closing Sale, insurance, supervision costs (inclusive of fees, travel and bonuses) armored car services, mutually agreed upon central office costs, bank fees and chargebacks, telephone expenses, trash collection, security costs, advertising and promotional expenses and TWEC’s payroll expenses and costs.  TWEC’s obligations under this paragraph are Store specific and cease at each Store on a per diem basis upon vacation of the Store premises in broom clean condition.  Notwithstanding the foregoing, nothing herein shall prohibit TWEC from operating the Stores as going concerns.

7.Debtor’s Employees.  On the Closing Date, Debtor shall terminate those employees (“TWEC Store Employees”) employed at the Stores.  TWEC, in its sole and complete discretion, shall offer employment to such employees on terms and conditions substantially similar to those that existed as of the Closing Date.  Nothing herein shall obligate TWEC to hire any employee employed at a location other than a Store.

8.Entry of the Order.  The Closing Date shall occur as soon as practicable after the entry of a final order of the Court in the Case (i.e., an order that has not been reversed, stayed, modified or amended and as to which (a) the time to appeal or seek review, reargument or rehearing has expired and as to which no appeal or petition for certiorari, review or rehearing is pending, or (b) if appeal, review, reargument, rehearing or certiorari of such order has been sought, such order has been affirmed and the request for further review, reargument, rehearing or certiorari has expired, as a result of which such order has become final and nonappealable in accordance with applicable law), in form and substance satisfactory to TWEC, (i) approving this Letter Agreement, (ii) extending, if necessary, the time within which the Debtor may assume or reject those executory contracts or unexpired leases of real property that are Assets hereunder no earlier than January 31, 2004, and (iii) authorizing the Debtor to consummate the transactions contemplated hereby (the “Order”).  Notwithstanding the foregoing sentence, TWEC, in its sole discretion, may close the transactions contemplated herein prior to the Order becoming final; provided that the Court enters an order in form and substance satisfactory to TWEC approving this Letter Agreement and authorizing the Debtor to consummate the transactions contemplated hereby, in which order the Court finds that the transactions contemplated by this Letter Agreement were negotiated at arms-length and in good faith and TWEC acted in good faith in all respects, and such order is not stayed pending appeal.

9.Termination.  If the Order approving the transactions contemplated by this Letter Agreement is not entered by September 29, 2003, or the Closing Date has not occurred by October 7, 2003, TWEC may terminate this Letter Agreement or any agreements based upon this Letter Agreement.  Neither party shall have any obligation or liability to the other in respect of any withdrawal or termination of this Letter Agreement or any agreement based on this Letter Agreement pursuant to this paragraph 11.

6

10.Debtor’s Obligations.  The Debtor shall use its reasonable commercial efforts to obtain the entry of the Order and the consummation of the transactions contemplated hereby.

11.Material Adverse Change.  From the date hereof and through the Closing Date, the Debtor’s business shall be conducted in the ordinary course consistent with past practices, including, without limitation, with ordinary and customary mark-down policies; provided, however, that the Debtor shall not be permitted to enter into real estate contracts, renew Leases, enter into leases, terminate Leases, reject Leases, amend Leases, consent to the assignment of Leases or grant or terminate any other interests in the Stores without TWEC’s prior written consent.  If there has been, occurred or arisen (a) any damage or destruction in the nature of a casualty loss, whether covered by insurance or not, in an amount in excess of $100,000 affecting any of the Assets, or (b) (i) any material adverse change in the overall sale or liquidation prospects of the Debtor’s businesses or Store Closing Sales, or (ii) any event that has materially impaired or would reasonably be expected to materially impair the ability of TWEC to carry on the sale or liquidation of the Assets (including, without limitation, the Store Closing Sales), then, and in such event, TWEC may withdraw or terminate this Letter Agreement or any agreement based on this Letter Agreement.  In such event, neither party shall have any liability or obligation to the other in respect of the withdrawal or termination of this Letter Agreement and any agreement based on this Letter Agreement.

12.Conditions Precedent.  In addition to the usual and customary conditions precedent to be contained in the Agency Agreement, it shall be a condition precedent to any and all obligations of TWEC and the Debtor to consummate the transactions contemplated by this Letter Agreement that:

a.the Court shall have entered the Order;

b.the Order shall specifically authorize the Store Closing Sales contemplated hereby in a manner satisfactory to TWEC in its sole discretion; and

c.the Physical Inventory is performed by a recognized inventory service and the Cost Value of the Inventory shall have been agreed to by the parties.

13.Other Conditions.  The obligations of TWEC hereunder are subject to and conditioned upon TWEC’s satisfaction, in its sole discretion, that (a) there exist no material and adverse environmental conditions with respect to the Owned Property or the real property subject to the Leases, (b) there exist no violations of federal, state, or local laws, statutes, regulations or codes of any kind or nature whatsoever that, individually or in the aggregate, would constitute a Material Adverse Change pursuant to paragraph 11 above, (c) the Assets and the Inventory are in condition and the mix and balance of the Inventory is consistent with historical levels and (d) the Debtor has obtained an extension of its deadline to assume or reject all executory contracts and unexpired leases that to no

7

earlier than January 31, 2004.  If TWEC, in its sole discretion, is not so satisfied, then, and in such event, TWEC may withdraw or terminate this Letter Agreement, and in such event neither party shall have any further liability or obligation to the other.

13.Liabilities of TWEC.  TWEC shall not assume any debt, liability or obligation of the Debtor, including claims for unpaid taxes, except the obligations TWEC agrees to pay pursuant to the terms of this Letter Agreement.  Without limiting the foregoing, TWEC shall not have any obligation to employ (except those TWEC agrees specifically to employ), or in any manner be responsible for any compensation, pension or retirement, severance, termination or other benefit plan liability or other obligation relating to, any employee of the Debtor or to any labor organization under any labor or collective bargaining agreement.

*     *     *

If this Letter Agreements meets with your approval, kindly indicate such acceptance by having the enclosed copy of this letter executed and returned to the undersigned.

Very truly yours,

TRANS WORLD ENTERTAINMENT CORPORATION

By:

Its:

AGREED, ACKNOWLEDGED, ACCEPTED

AND CONSENTED:

CD WORLD

By:

Its:

8

Exhibit A

Stores

Store Number	City, State
12	Paramus, NJ
13	Union, NJ
14	Totowa, NJ
15	Cherry Hill, NJ
16	Menlo Park, NJ
17	Princeton, NJ
18	E. Hanover, NJ
19	Eatontown, NJ
26	Crestwood, MO
28	Kansas City, MO
31	University City, MO
32	Ferguson, MO
35	Columbia, MO
Warehouse	Plainfield, NJ

9

Exhibit B

Approval Motion Standards

An “Approval Motion” shall mean a motion served upon all affected parties (including, without limitation, landlords under Leases and any parties to reciprocal easement agreements or other similar agreements (each, an “REA”) affecting the applicable Property) for an order of the Bankruptcy Court (an “Approval Order”) (i) approving of the sale of the applicable Owned Property or the assumption and assignment of the applicable Lease to the proposed designee, (ii) confirming that the assumption and assignment of the Lease or transfer of the Owned Property to the proposed designee shall be free and clear of any claims of defaults and that Merchant shall be responsible for curing any and all monetary defaults accruing prior to the applicable Property Closing Date, and which may exist at the time of the assignment or transfer (as applicable), to the extent such cure is required pursuant to Section 365 of the Bankruptcy Code; (iii) ruling that, in accordance with the provisions of Section 363 of the Bankruptcy Code, the Owned Property or Lease, as applicable, shall be transferred and assigned to the proposed designee free and clear of all liens, claims, mortgages and encumbrances (with same to attach to the proceeds of the sale, transfer and assignment); (iv) permitting the proposed designee to perform alterations and remodeling to the extent necessary to operate its retail operations, and to replace and modify existing signage notwithstanding any provision in the Lease, any REA or local law to the contrary, (v) ordering that any extension or renewal option in the Lease or in any REA which purports to be “personal” only to Merchant or to be exercisable only by Merchant is an unenforceable restriction on assignment and, in fact, may be freely exercised by the proposed designee to its full extent, (vi) allowing Agent’s proposed designee to remain “dark” with respect to properties for up to an additional twelve (12) months after assignment despite any Lease restriction, REA restriction or local law to the contrary, (vii) ordering that if no objection to the assumption and assignment of a Lease or to the transfer of an Owned Property is timely made and filed with the Bankruptcy Court prior to the expiration of the applicable objection period, or such objection involves a “cure issue” (with it being deemed that any such objection regarding a “cure issue” will not affect the assumption and assignment), the assumption and assignment or transfer (as applicable) shall be deemed effective and binding upon the applicable affected parties and shall require no further order of the Bankruptcy Court to take place, (viii) ordering that any provisions contained in the Lease or any REAs which are, or would have the effect of being, provisions which restrict “going dark”, recapture provisions, provisions which impose a fee or a penalty or a profit sharing upon assignment, provisions which seek to increase the rent or impose a penalty or to modify or terminate a Lease or a REA as a result of going dark or upon assignment, provisions which directly or indirectly limit or condition or prohibit assignment, continuous operating covenants, and similar provisions contained in the Leases or REAs shall not restrict, limit or prohibit the sale and assumption and assignment of the Owned Property or Lease the proposed designee and are deemed and are found to be unenforceable anti-assignment provisions within the meaning of Sections 365(f) and (l) of the Bankruptcy Code,(ix) approving the proposed designee’s contemplated use of the Store governed by the Lease irrespective of whether such use is prohibited by the Lease,

10

including, without limitation, in the case of any Lease transferred to TWEC, the use clause attached hereto as Appendix 1, and (x) approving the tradename(s) that the proposed designee intends to utilize at the Store covered by such Lease, including, without limitation, in the case of any Lease transferred to TWEC, the following tradenames: Coconuts, Strawberries, Second Spin, FYE (For Your Entertainment), Planet Music, and Spec’s.

11

Appendix A

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

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

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

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

12

EX-31.1

Exhibit 31.1

CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES OXLEY ACT 2002

I, Robert J. Higgins, Chairman and Chief Executive Officer of Trans World Entertainment Corporation (the “Company”), certify that:

(1)I have reviewed this quarterly report on Form 10–Q of the Company;

(2)Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

(3)Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;

(4)The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e)) and we have:

(a)designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report was being prepared;

(b)omitted pursuant to Securities and Exchange Commission’s release No. 33-8238 dated June 5, 2003;

(c)evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

(5)The Company’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of the Company’s board of directors:

(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Dated:   December 16, 2003

/s/ Robert J. Higgins

Chairman and Chief Executive Officer
Trans World Entertainment Corporation

1

EX-31.2

Exhibit 31.2

CHIEF FINANCIAL OFFICER CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES OXLEY ACT 2002

I, John J. Sullivan, Executive Vice President and Chief Financial Officer of Trans World Entertainment Corporation (the “Company”), certify that:

(1)I have reviewed this quarterly report on Form 10–Q of the Company;

(2)Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

(3)Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;

(4)The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e)) and we have:

(a)designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report was being prepared;

(b)omitted pursuant to Securities and Exchange Commission’s release No. 33-8238 dated June 5, 2003;

(c)evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

(5)The Company’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of the Company’s board of directors:

(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Dated:   December 16, 2003

/s/ John J. Sullivan

Executive Vice President and Chief Financial Officer
Trans World Entertainment Corporation

1

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Trans World Entertainment Corporation (the “Company”) on Form 10-Q for the period ending November 1, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Robert J. Higgins, Chairman and Chief Executive Officer of the Company and John J. Sullivan, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of our knowledge:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/Robert J. Higgins	/s/John J. Sullivan
Chairman and Chief Executive Officer	Executive Vice President and Chief Financial Officer
December 16, 2003	December 16, 2003

1